Helping clients with bankruptcy, estate planning, and tax resolution.
Amendments to the IRA Laws How Is Your Estate Protected?
Last December, Congress passed one of the biggest changes in retirement planning in the last 30 years — the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). This law can have dramatic implications for both your retirement and estate planning. While the bill includes tax-friendly measures that boost your ability to save more for retirement, it also contains provisions that impact estate planning strategies. The three biggest changes are as follows. First, it increases the age for required minimum distribution (RMD). Before the SECURE Act, the IRS required you to start making withdrawals at age 70 and a half. But for those who weren’t 70 and a half by Dec. 1, 2019, the act allows you to postpone the RDM until age 72. Second, it repeals the maximum age for contributions. Under the old law, you couldn’t contribute to your IRA account once you reached 70 and a half. However, the SECURE Act removes that cap, so you can continue to make contributions as long as you and your spouse are still working. Third, it eliminates provisions for inherited retirement accounts. This is where the SECURE Act may have a significant adverse impact on your retirement and estate planning since it ends the “stretch IRA”. Under the previous law, the beneficiaries of your retirement account could choose to stretch out distributions and the income tax owed on those distributions over their life expectancy. For example, a 30-year-old beneficiary expecting to live another 45 years could inherit an IRA and stretch out its distribution over 45 years, paying a small income tax on it every year. Under the SECURE Act, though, a beneficiary has to withdraw all the assets from the account and pay income taxes over the next 10 years after the death of the inheritance provider. If they don’t, the government requires them to pay a 50% penalty on the assets remaining in the account. “If you have significant assets, you should meet with your estate planning attorney and financial advisor to discuss changes you may wish to make to your retirement plans.”
There are, however, some exceptions that may benefit certain beneficiaries. A surviving spouse who is named as the beneficiary can still roll the benefits over to his or her own IRA or take distributions based on the surviving spouse’s life expectancy. Second, beneficiaries who are less than 10 years younger than the inheritance provider can receive their distributions based on their life expectancy. Three, minor children who are under 18 don’t have to access the account until their 28th birthday. At that point, the 10-year distribution rule goes into effect. Four, disabled or chronically ill people can take a distribution on their life expectancy. Apart from these exceptions, the ability to stretch out an IRA is no longer available. Most of my clients are concerned about ensuring their spouse has the right to stretch out the IRA but less concerned about their children’s’ ability to stretch out the IRA distributions. I have also found that children tend to spend their inherited IRAs quickly anyway. But, if you have significant assets, you should meet with your estate planning attorney and financial advisor to discuss changes you may wish to make to your retirement plans. As always, stay safe over the Fourth of July, and note that I am still maintaining office hours but ask that you call ahead and schedule a time to see me, and please wear a mask.
-Robert L. Firth Helping clients with bankruptcy, es ate planning, and tax resolution.
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