requirement that survivors will generally have only 10 years max to take the entire payout after the couple passes . ( This rule ended the so-called “ stretch IRA ” that allowed prolonged pretax growth .)
Finally , if the married couple take their IRA withdrawals earlier rather than later , they ’ ll see a step-up in basis for all the after-tax funds they ’ ve allowed to appreciate for the rest of their lives . That completely eliminates all income tax on the appreciation . This is an important income tax benefit you don ’ t get from IRA receipts after the death of the account owner , and it ’ s likely something Congress had in mind when it extended
Couples can now roll early withdrawals from their IRAs into nontaxable Roths longer than they previously could have .
the beginning date for RMDs ( not once but three times ). Alternatively , couples can now roll early withdrawals from their IRAs into nontaxable Roths longer than they previously could have , since the required distribution date has been extended until they reach 73 .
One might argue that singles , including widowed spouses , will see their IRAs grow more if they put off their distributions even longer , since the money isn ’ t being taxed yet . But that bigger amount may push individuals or their families into a higher income tax bracket later on , and the undistributed IRA amount would then not get a step-up in income tax basis when the account holders die . Also , the undistributed IRA amount can ’ t be rolled into a Roth IRA .
Note also that the “ tax bracket strategies ” outlined here can be improved if the couple takes withdrawals before they turn 70½ , as long as the couple is retired at that point and not in a significant income tax bracket . It ’ s important to remember that by taking increasing required distributions later in life , the couple will not only potentially increase their federal income tax bracket , but they will also trigger the single filer penalty on the widowed spouse .
Income taxes on Social Security benefits obviously also play a role here . For example , let ’ s assume the couple we discussed earlier waits until age 70 to begin withdrawing Social Security benefits , and that these work out to $ 40,000 a year . Because the couple is also receiving $ 27,700 in non-IRA income each year , they have $ 137,150 in so-called “ provisional income ,” which is equal to their outside income ( including the IRA receipts ) plus 50 % of their income from Social Security ($ 89,450 + $ 27,700 + $ 20,000 = $ 137,150 ). With tax on Social Security benefits taken into account , we have now reduced the tax advantage of the early withdrawals we took in our previous example by approximately $ 5,500 , or from approximately $ 8,000 to approximately $ 2,500 . If the couple in our example instead had approximately $ 30,000 more in non-IRA income ( or $ 57,000 total ), they would have already maxed out on how much of their $ 40,000 annual Social Security benefits are included in taxable income , so they would not be hurt by taking IRA distributions early . Under the initially assumed $ 27,700 number , however , the advisor might recommend that the couple take IRA withdrawals before the age 70 deferred Social Security beginning date , and then wait until after they are age 73 to begin taking larger-than-required RMDs .
Although the circumstances will obviously vary in each instance , the point for advisors to consider in each client ’ s case is that taking maximum advantage of the new SECURE Act 1.0 and 2.0 extensions in their clients ’ required minimum distribution beginning dates may not always make financial sense when the after-tax money is taken into account .
JAMES G . BLASE , CPA , JD , LLM , is a principal at Blase & Associates LLC . For more on the estate planning techniques described in this article , see Mr . Blase ’ s book entitled Estate Planning For The SECURE Act : Strategies For Minimizing Taxes on IRAs and 401Ks , available on Amazon .
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MARCH 2023 | FINANCIAL ADVISOR MAGAZINE | 27