Did you know that a new law that could affect your retirement and estate planning took effect on January 1, 2020? It’s true. The SECURE Act (short for Setting Every Community Up for Retirement Enhancement) is the first law since the Pension Protection Act of 2006 to cause major changes to retirement legislation, so it’s understandable that you are searching for answers.
Before making any adjustments to your retirement or estate plan, keep reading to see how the law might affect you.
How the New Law Affects Retirement
First, let’s look at how this law changes retirement.
Before the new law was in place, those with IRAs, 401(k)s, 403(b)s, were required to begin taking distributions from their accounts at age 70 ½. With the new law, the age for required minimum distributions is now 72. Additionally, including annuities in 401(k) plans is now easier because some of the fiduciary requirements that were used before were eliminated. Finally, if you have an IRA and you are still working and earning an income, you can continue to contribute to your IRA past the previous 70 ½ age cap.
The most significant change brought about by the SECURE Act, however, is the elimination of the Stretch IRA. Previously, if you inherited an IRA from someone who was not your spouse, you could stretch out your withdrawals based on your life expectancy. Many people used to pass on their IRAs to their children so that they could provide them with an income.
Now, non-spouse beneficiaries must drain the account within 10 years of the IRA owner’s death. For adult beneficiaries who are not close to retirement, this can have huge tax implications.
How the SECURE Act Affects Estate Planning
If you include a Stretch IRA as part of your estate plan for any non-spouse beneficiaries, then you need to speak with your estate planning attorney as soon as possible.
There are many different strategies that you can use to protect your retirement account from being taxed. Of course, the one that you and your estate planning attorney choose will depend on your situation and intentions.
Here is one example.
One strategy that you might consider using is to create and fund a trust with your retirement account. Your trust could then take out an insurance policy on you, the original owner of the retirement account. Using the distributions from the retirement account to pay for the premiums, you could then ensure that any beneficiaries of the trust would receive the policy benefits through the trust.
While this strategy will not work for everyone, it does illustrate some of the strategies that an estate planning attorney can use to help your beneficiaries get the most out of their inheritance.
If you are concerned with how the SECURE Act is going to affect your retirement or estate plan, don’t hesitate to contact us. We are always happy to answer your questions.