Big Changes on the Horizon When Planning for Retirement Accounts
An often over looked asset in estate planning is retirement accounts. Whether it is a Roth IRA, Traditional IRA, 401(k) or some other qualified retirement plan, these accounts increasingly make up the bulk of a family’s wealth. While making a beneficiary designation may seem like a simple proposition, the rules governing these accounts after death are incredibly complex. Now it appears that those rules may be changing – dramatically. In a rare bi-partisan effort, the House of Representatives has overwhelmingly (417-3) passed what is known as the SECURE Act (Setting Every Community Up For Retirement Enhancement).
This bill makes comprehensive changes meant to boost the efforts of Americans to save. If the bill ultimately becomes law, three of the most noteworthy changes are:
The current age cap of 70 ½ for making contributions to a traditional IRA would be eliminated.
The year in which you must begin taking required minimum distributions (RMDs) from your retirement account is extended from the year you turn 70 ½ to the year you turn 72. This provision does not benefit individuals who will have reached age 70 ½ by December 31, 2019.
The ability of a beneficiary who is not the spouse of the account owner to stretch distributions over their own life is eliminated. With some limited exceptions, the account must be fully distributed and taxes paid within ten years.
The loss of the ability of a non-spouse beneficiary to stretch IRA distributions over their own life could have a significant effect on a beneficiary’s income tax situation, it may also have a significant negative effect on the estate planning of the account owner.
While retirement accounts can be complex assets to address in your estate plan, there are several important questions to ask when planning for your IRA or other qualified retirement account:
Have you identified a beneficiary? A review of beneficiary designations should be undertaken annually to ensure that you have properly named beneficiaries.
What are the Tax Consequences of Your Designations? Even under current law, the tax consequences differ for different categories of beneficiaries. The goal is to allow for tax deferral or tax free growth to continue for the longest time possible.
Will Your Beneficiary Have Asset Protection? When it comes to beneficiaries, many courts, including the U.S. Supreme Court, have held that the protections available for IRAs do not extend to inherited IRAs.
Are there Minor or Disabled Beneficiaries? The general rule is that an individual is eligible to receive their inheritance outright at age 18. Do you want your minor children to inherit their share outright at that age or would older be better? If you have a disabled child, how would such an inheritance affect his or her benefits?
What if a Beneficiary Dies Before You? If the named beneficiary dies before you, the rules established by the brokerage or plan will govern who is next in line. Is it their children? Is it their spouse? Does the share just go to the other beneficiaries? What are the rules?
It appears that the Senate and the President support the SECURE Act in principal and that it will eventually become law in some form.
We will continue to monitor these changes and will reach out to Clients once it becomes law to discuss any necessary changes to their estate plans. If you have questions about the impact of your retirement plan decisions on your estate plan, we encourage you to reach out to a qualified attorney to discuss the same.