Secure Act Update

The Secure Act was attached to the continuing resolution to keep the government funded and therefore will be signed into law and take effect 1/1/2020

For me this changes my Roth conversion schedule. Originally I was converting about $250K/yr. This year I converted $214K to keep my Medicare costs under better control. Medicare is an ongoing nightmare of arcane rules. My $250K MFJ conversions doubled my Medicare cost. For 2020 my Medicare cost will drop to 1.28 x the basic cost or $185/mo. Next year with the Secure act in effect I should be able to drop that back to a basic rate of $144/mo since my conversions are going to be less. I will also save on taxes. My regularly scheduled conversion bill was about $41K/yr on my AGI but will drop to about $17K/yr. This allo ws me to convert the same total amount in smaller aliquots over a longer period of time which improves the cash flow in any given year. The savings over 5 years pays for 1 free year of retirement and my net projected Roth account will be 1.5M over the 5 year to age 72 conversion vs just under 1M in the account using the larger 2 year to age 70 conversion.

Secure hoses up wealth transfer. All those articles you’ve recently read about creating “generational wealth” are now crap. You won’t be funding your grand-kids but the national debt. It is what it is, so take advantage where of the code as it will exist in 2020 instead of kvetching. You never step in the same river twice and we are stepping into a new river.

I funded my conversions for the next 4 years by selling stocks high this year and not waiting for the necessity to sell in a down market. Locking in 90 – 100% of the gains gives me a 100% war chest to use while converting as opposed to playing the odds of making an extra 5% by not selling, in the face of a possible 50% loss. Life is about the analysis of probabilities and then ordering the probabilities from most likely to least likely. Since they are probabilities there is no guarantee, but given my druthers I’d rather own the most likely scenario rather than the long shot.

The Secure Act will likely force wealth transfer to funnel through insurance products. Elsewise you could start funding your progeny over the course of your life. Instead of RMD take out RMD + 10% and slip the kiddo the 10%. You could slip the 10%/yr into BRK.B in a taxable account and it would have no tax consequence for owning it, but step up in basis when you croak. Better than paying some damn insurance company.

15 Replies to “Secure Act Update”

  1. It does seem the Secure act will help the first generation but not subsequent ones.

    I do like the idea of putting money in assets that will have a step up (real estate and stocks like BRK are great ones to consider).

    1. Hey XRAY

      It can actually hurt first gen. You will be required to empty the accounts in 10 years including Roth. If you have a 3M account that’s 300K/yr beside any interest. If your heir makes 100K that’s 400K of ordinary income so a 12% MFJ bracket wage earner becomes a 35% tax payor taxes on 100K MFJ are 8739 taxes on 400K are 83699 nearly 1000% more tax for a 300% increase in income. There’s nothing gentle about going into that good night! It bears some thinking about.

  2. The Secure Act is certainly an inconvenience but it doesn’t really change my plans, just makes it more important that I accomplish the task. My most important goal has always been to reduce my pretax account through Roth conversions. I’ll get a couple extra years to accomplish this before RMDs hit but will have to monitor any post 2025 tax bracket changes. In the best of circumstances I will never personally need the Roth funds, it’s my bad luck insurance fund that turns into my estate upon passing. Right now I’m about 2:1 pretax:Roth so I definitely need to flip that ratio. Best case scenario upon my passing is minimal to no pretax left, remainder Roth or taxable. Since our lawmakers are unpredictable I’m sure It will be necessary to revisit and modify these plans again in the future.

    1. hey GF
      The problem is the Roth will also be taxed when your heirs acquire it and it also will require to be completely dissolved within 10 years. I’ve been thinking about it and think you may be able to use the gift tax of 15K/parent per kid as a means of transfer. So if you have 2 kid and 1M to give away over 20 years and the 1M grows at 5% you can legally give away 60K/yr from the 1M over 20 years that’s about 2.3M you can give away and there will still be 500K left in the account. This would mean upon your and your spouses deaths the kids would only need disburse 500K over 10 years and that 500K would get split so it would make a minimal dent in your kids tax bill. You would have to pay the taxes on the 60K however but a much smaller bite than the 35% bracket your kids might get sucked into. I wrote the spread sheet tonight so I really haven’t figured all the why fores but it beats the hell out of paying an insurance company in terms of flexibility

      1. I fully agree. My first thought was now Roth>>>trad and the delta between stretch and 10 yr distribution was the “tax”. I look forward to your analysis on how much improvement you get from periodic gifting.

        1. The improvement comes in the taxes your kids don’t pay. Taxes still need to be paid at some level so the strategy is to optimize the tax bracket and to use the power of compounding to make your kids wealthy, and also use the power of a stepped up basis on a brokerage account, since the brokerage does not have an expiration limit and has a different capital gains tax structure which allows for tax loss harvesting.

          It’s a tax minimization strategy that crosses at least 2 generations. It’s not as good as the stretch was, but if you don’t do anything, the government will loot the funds.

          I just got interviewed by the Wall Street Journal on this strategy for a story being done on stretch and it’s effects on wealth transfer.

      2. Gasem, can you please point to the part of the law that reads that Roth will be income taxed when inherited. I understood that did not change from today (not income taxed when inherited). Only the RMD cadence changed. Your kids can wait for 10 years then cash your Roth (no income tax).

        1. Looks like the Roth missed the cut in the final law. It makes Roth conversion even more mandatory. The government loves Roth conversion since they get the tax revenue NOW. Your heir will still have to clean out the Roth in 10 years and then what is left will be subject to tax if you somehow invest it.

  3. Look forward to the WSJ interview.

    It’s amazing how many people are going to get hosed on this one. I’ll have to map out how many years ahead to begin gifting in order to disburse funds in time.

    What are your thoughts on transfer of generational wealth through investment real estate? Did your ever consider the asset class directly or indirectly?

    1. Real Estate might be a good place to hide. My impression is the revenue losses due to the loop holes, as long as they remain small potatoes, will be ignored. If the revenue losses add up to something significant, the loopholes will be closed. There was a time when everyone thought it prudent to own race horses and oil well leases because of the tax game you could play. Then one day the universe changed. The government is not benevolent. I wouldn’t get into anything unless you had a well defined and completely executable exit strategy. I also wouldn’t place a lot of credit in the “Uncle Joe did this and managed to make a mint!” kind of reasoning. Because it worked yesterday doesn’t mean it will work tomorrow. The reason we are in this fix is the government decided to do a money grab and nobody has a well thought out exit strategy. In my business life I never made a move based on tax consequences alone. I consider that the tail wagging the dog.

  4. Have you considered using options to stay in the market and protect your gains? I would like to hear your thought on that strategy.

    1. I’ve actually started trading actively as a way to manage risk. Not entirely with my portfolio, but with enough money that I can go flat and protect some of my gains. I also have been selling high on the way up locking in my gains. I don’t mind taking 85% of the gain in the face of an increasing catastrophic risk. You can do this mechanically by just re-balancing to a fixed allocation but I’ve been reducing the risk profile of my portfolio as I sell equities and turn that into cash. I’ve also been increasing diversity across non correlated assets as well decreasing my concentration in stocks and therefore my risk.

      I’m presently trading gold cocoa coffee oil energy and currency as well as a few countries like Russia which have accelerating GDP. I am also trading duration in bonds. The USA has a decelerating GDP so I am less long USA but still own USA. Fidelity recently allows commission free trading of some ETF’s so I can trade as often as I like and not incur fees and since I’m trading a Roth account I don’t incur taxes either. I’m making good money, as good or better than “stocks” but I’m not concentrated in stocks and so when stocks crash, I have less to crash. I’m not entirely out of “buy and hold” but I am no longer entirely hostage to that narrative. When the crash hits, I will get hit, but not creamed and if it takes 2 years to hit I’m still exposed. One example is I invested in the ETF CNQ 5 weeks ago and it’s up 15%, much more than the S&P or the QQQ. I have a risk management system I am trading so I’m not just flopping around in the dark, but one downside is it takes a lot of daily engagement to track and trade. I can’t just sit around and pick lint out of my navel anymore but so far I’m up for the challenge. Overall my diversified portfolio is up over 10%/yr for the past 2.5 years despite spending the portfolio down just under 500K for living expense and Roth conversion taxes. In other words I have more money than I retired with despite a increased burn rate due to Roth conversion.

      I have successfully traded options in the past but those cost you money to own for down side protection or can stop you out and cost you taxes if you sell covered calls beside the cost of trading. I like this free ETF deal better. Big ERN has an option strategy in his portfolio but I think he’s trading spreads. Thanks for the inquiry though, if you understand how to manage the risk and the drag options are a good idea. If you don’t they’ll eat you alive.

  5. Nice play on the Medicare Part B premiums, a lot of people overlook that. I wonder if someone could jump on a premium-free Medicare Advantage plan during a conversion year to avoid the Part B hit. Maybe a strategy there? I am wondering how much longer Part A will stay “premium-free”

    Take care,


    1. Hey Max

      You can do the Medicare Advantage but I don’t like it because it’s essentially a HMO with limited Dr choices and limited travel proscriptions. Sometimes least cost is not always balanced with most return. Not sure what they are going to do with Medicare. Like everything else it’s effective;ly bankrupt

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