The SECURE Act and Planning for Your Retirement Accounts

How you plan for your retirement accounts may have changed due to the passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act became effective January 1, 2020. While it has changed several aspects of retirement planning, perhaps the most significant change will affect the beneficiaries of your retirement accounts. Why? Because the SECURE Act requires most designated beneficiaries (other than spouses) to withdraw the entire balance of an inherited retirement account within ten years of inheriting the
retirement account.

What changed with the SECURE ACT?

Under the old law, all beneficiaries of inherited retirement accounts could stretch out distributions over their individual life expectancy. That meant a beneficiary could grow the asset for their own retirement, taking smaller distributions usually over a long time period, resulting in lower taxes over time. Under the SECURE Act, most beneficiaries must withdraw the entire IRA over a period of ten years.

That shorter ten-year time frame for taking distributions will result in the acceleration of income tax due. It means the beneficiaries may be bumped into a higher income tax bracket, thus receiving less of the funds contained in the retirement account than you may have originally anticipated, and certainly paying more in taxes.

What are the exceptions to the ten-year withdrawal rule?

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule. First and most important for married couples: your spouse may still rollover your IRA. Your minor children may stretch the distributions based on their life expectancy until they reach the age of majority. After that, they too are subject to the ten-year withdrawal time frame. Disabled or chronically ill individuals also may stretch withdrawals over their life expectancy.

What the SECURE Act means for you and your estate plan

What does this mean for you and your estate plan? First, it’s clear that a proper analysis of your estate planning goals and planning for your intended beneficiaries is imperative to be sure your goals are still going to be accomplished and that we have properly planned for your beneficiaries.

Parents with minor children often make the trust for their children the beneficiary of retirement plans. The same is true for people whose beneficiaries are not responsible adults, have special needs, or are otherwise unable to handle their own finances. For anyone in this category, it is imperative to have a trust review and evaluate the options for their beneficiaries. A trust created while the old law was in place took into account the ability to stretch the distributions out over a beneficiary’s lifetime. Those trust provisions could now result in a tax disaster, or in large distributions to beneficiaries ill-equipped to manage the funds.

What steps you should take next

If your trust is one of the beneficiaries of your retirement plan, we should meet to determine whether your trust needs to be amended and discuss your beneficiary designations for your retirement accounts. If you have a Standalone Retirement Trust, get an appointment promptly, as we will need to amend that trust. For those who don’t have a Standalone Retirement Trust, you may now wish to create a Retirement Trust in place to preserve the distributions from your IRA for your beneficiaries.

For those who have adults designated as their trust beneficiaries, the passage of the SECURE Act may still affect your overall estate planning. For instance, if you have charitable contributions in your plan, we may wish to change how the charities receive their share. If your grandchildren are receiving some share of your estate, then we may shift the assets from which we pay their gifts.

Just as important, if your situation has changed at all, you should come in for a review. We recommend a review at least every three years. If you aren’t sure what changes might require a revision in your estate plan, please look over our other article “When to Review and Renew Your Estate Plan.”

If your situation requires a prompt review of your trust and retirement beneficiaries, please call us for a 15-minute phone appointment to discuss your options.

Make your 15-minute phone appointment here: https://calendly.com/libbybanks/review-call