SECURE Act brings changes to IRA laws
Because of recent changes in federal law related to retirement accounts, now is a good time to revisit your estate plan and retirement accounts with your attorney and financial advisor. The SECURE Act (Setting Every Community Up for Retirement Enhancement) took effect January 1, 2020. The new law changes withdrawal timing for inherited retirement accounts and affects lifetime withdrawal rules for some account owners.
One significant change of the SECURE Act is that “stretch” IRAs are eliminated, except for certain exceptions. In the past, most beneficiaries who inherited an IRA could stretch withdrawals over their individual life expectancy and gain additional tax deferred growth. Now, the new law requires beneficiaries of inherited IRAs to withdraw the entire account within 10 years. This can cause IRA withdrawals to be taxed at higher tax brackets, especially if the IRA pays to a trust. When certain exceptions apply, beneficiaries may still be able to stretch withdrawals over their lifetime. Exceptions to the 10-year rule include spouses, minor children, beneficiaries who are disabled or chronically ill, and individuals who are not more than 10 years younger than the account owner.
As a result of the SECURE Act changes, you may need to update your estate plan and your IRA beneficiary designations. Factors to consider when reviewing how the new law applies to you include the amount in the IRA, the number of beneficiaries, the relationship of the beneficiaries to the IRA owner, and whether beneficiaries fit an exception to the 10-year rule. Options for updating your plan may include amending existing trust language (in the special circumstances when an IRA is payable to a trust), amending an estate plan as it relates to IRAs, converting a traditional IRA to a Roth IRA, or purchasing life insurance to cover the additional income tax liability for an estate or beneficiaries. Each person’s situation is different, so no single answer is right for everyone.
Trusts are an important planning tool for many people, so the full effect of the new law needs to be incorporated into their updates. For example, planning for beneficiaries with disabilities often involves special needs trusts. A trust may manage assets for beneficiaries who are minors or young adults. Furthermore, if a beneficiary has financial issues, then a trust is an excellent tool to protect assets from the beneficiary’s creditors. In all these cases, it is critically important to understand how the new law applies to retirement accounts paid to trusts.
Other features of the new law apply to the account owner during his or her lifetime. These changes include the ability to make contributions after the age of 70½, if the IRA owner is still working; a wider range of investment options for 401(k) plans to include annuities; and a later mandatory beginning date for required minimum distributions (age 72 instead of 70½). Even though these features may help IRA owners during their lifetime, additional advice from a financial advisor or attorney may be beneficial for understanding the complete tax picture for withdrawals, whether by the owner during life or by beneficiaries from an inherited IRA.
Contact the attorneys at Johnson Teigen, LLC to review your estate plan in light of the SECURE Act, to consider possible tax planning options, and to confer with your financial or tax advisor so that your planning is complete and coordinated.
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