You may have heard about the SECURE Act that brings changes to retirement and estate planning. If you haven’t spoken with your estate planner yet, it may be time to schedule that appointment.
The formal name is the Setting Every Community Up for Retirement Enhancement Act of 2019 and became effective on January 1, 2020. While the Act opens up more options for employees and those contributing to their retirement, other changes can impact your estate planning.
Some of the highlights of SECURE include:
- Leftover 529 account funds can be used to pay off student loans as well as pay for some apprenticeship programs.
- Changes to 401(k) programs that allow small businesses to not only offer plans but join with other small businesses to create one that suits their needs and allows part-time employees to participate
- Allow employees to continue contributing to traditional IRA programs after the age of 70½
- Moves the required minimum distribution age to 72.
- Individuals can borrow up to $5,000 penalty-free from their retirement for:
- Birth or adoption of a child
- Purchase of health insurance following a job loss or expensive medical emergency
Estate Planning Changes
Under the previous rules, beneficiaries who inherited IRAs could “stretch” the distributions throughout the rest of their lifetime. This would allow beneficiaries to receive distributions for the rest of their lives, ensuring that the account would continually earn tax-deferred investment returns.
Changes under SECURE have eliminated that “stretch” option for most beneficiaries except for:
- A surviving spouse of the plan participant
- Minor children of the participant (until they reach the age of maturity)
- A beneficiary who is disabled or chronically ill
- A beneficiary who is less than ten years younger than the participant, such as a sibling
These beneficiaries must use careful planning to ensure that the distributions are “stretched” according to their needs.
Other beneficiaries are required to take a full withdrawal within 10 years of the death of the plan participant, leading to a higher income and income tax during those ten years. Whether you withdraw the money all at once or over the 10-year period is your choice. However, taking a major withdrawal at the end of the time period may lead to taxing all of the money at once, and at the individual’s current tax rate.
Most people would not like to leave their beneficiaries in a bind, so there are a few options to consider to avoid the ten-year withdrawal scenario.
When taking required minimum distributions, plan holders can purchase life insurance. This effectively spends down the assets and puts the money into another vehicle, and avoids both income and estate taxes.
Roth conversions are also an option to convert traditional IRAs into Roth IRAs, which are used for after-tax dollars. This option works best for beneficiaries who are in the same tax bracket or higher as the owner of the original account. There is some tax payment involved, but the owner will not be required to take those required minimum distributions. Therefore, the balance can grow free of any income tax payments.
Accumulation trusts are also available to help minors, financially inexperienced or vulnerable beneficiaries. Managed by a trustee, the funds from an inherited IRA can be transferred whether or not the ten-year distribution rules apply.
Before making these or any changes, make sure to consult with your estate planning attorney first to ensure that you’re making the changes that will benefit your estate and will work with your own wishes.
Questions About SECURE? Call Provenza Law Today
If you haven’t reviewed your estate planning in a while, it’s time to take a look at it. Tax law changes can render your current plan unworkable after a few years. If you’re considering making changes to any part of your estate plan, it’s important to work with someone who can help your plan become compliant under new tax laws.
James C. Provenza is an Illinois estate planning attorney with years of experience helping clients with their estate planning to make sure their wishes are carried out. Call our firm today at (847) 729-3939, or use our online contact form.