The SECURE Act’s Impact On Estate and Retirement Planning—Part 2
On January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect, and the changes ushered in by the SECURE Act have dramatic implications for both your retirement and estate planning strategies. Some measures are taxpayer-friendly, boosting your ability to save for retirement, and some are potentially problematic for families who are using certain planning strategies previously viable for years. Truthfully, it represents the most significant retirement-planning legislation in decades.
Last week, we discussed three of the SECURE Act’s most impactful provisions, specifically at the SECURE Act’s new requirements for the distribution of assets from inherited retirement accounts to your beneficiaries following your death. With the new measures in place, your heirs could end up paying far more in income taxes than necessary when they inherit the assets in your retirement account. Moreover, the assets your heirs inherit could also end up at risk from creditors, lawsuits, or divorce, and this is true even for retirement assets held in certain protective trusts designed to shield those assets from such threats and maximize tax savings.
Here, we’ll cover the SECURE Act’s impact on your financial planning for retirement, offering strategies for maximizing your retirement account’s potential for growth while minimizing tax liabilities and other risks that could arise in light of the legislation’s legal changes.
Tax-advantaged retirement planning
You received a tax deduction when you put funds into you traditional IRA account and now the investments in that account grow tax free as long as they remain in the account. When you eventually withdraw funds from the account, you’ll pay income taxes on that money based on your tax rate at the time.
Because you typically have much less income in your retirement years, your tax rate will likely be quite low when you withdraw those funds during retirement. The combination of the upfront tax deduction on your initial investment with the lower tax rate on your withdrawal is what makes traditional IRAs such an attractive option for retirement planning.
As we discussed last week, thanks to the SECURE Act these retirement vehicles now come with even more benefits. Previously, you were required to start taking distributions from retirement accounts at age 70 ½. But under the SECURE Act, you are not required to start taking distributions until you reach 72, giving you an additional year-and-a-half to grow your retirement savings tax free.
Also remember that the SECURE Act eliminated the age restriction on contributions to traditional IRAs. Under prior law, those who continued working could not contribute to a traditional IRA once they reached 70 ½. Now you can continue making contributions to your IRA for as long as you and/or your spouse are still working.
Looking at these changes from a financial-planning perspective, you’ll want to consider the effects they will have on the goal for your retirement account assets. For example, will you need the assets you’ve been accumulating in your retirement account for your own use during retirement, or do you plan to pass those assets to your heirs? From there, you’ll want to consider the potential income-tax consequences of each scenario.
Your retirement account assets are extremely valuable, which is why you’ll want to ensure those assets are well managed both for yourself and future generations. In which case, you should discuss these issues with your financial advisor as soon as possible. If you don’t already have a financial advisor, we’ll be happy to recommend a few we trust most.
If you meet with us for a Family Wealth Planning Session or to review of your existing plan to discuss your options from a legal perspective, we can integrate your financial advisor into our meeting. Together, we can look at the specific goals you’re trying to achieve and determine the best ways to use your retirement-account assets to benefit yourself and your heirs.
Here are some things we would consider with you and your financial advisor:
Converting to a ROTH IRA
With the changes that the SECURE Act is making, you may want to consider converting your traditional IRA to a ROTH IRA. ROTH IRAs come with a potentially large tax bill up front when you initially transition the account, but all earnings and future distributions from the account are tax free.
Life insurance and trust options
We can also look at whether it makes sense to withdraw the funds from your retirement account now, pay the resulting tax, and invest the remainder in life insurance. From there, you can set up a life insurance trust to hold the policy’s balance for your heirs. By directing the death benefits of that insurance into a trust, you can avoid burdening your beneficiaries with the SECURE Act’s new tax requirements for withdrawals of inherited retirement assets as well as provide extended asset protection for the funds held in trust.
In the case that you have charitable inclinations, we can consider using a charitable remainder trust (CRT). When you pass away, the CRT would make monthly, quarterly, semi-annual, or annual distributions to your beneficiaries over their lifetime if you name the CRT as the beneficiary of your retirement account. Then, when the beneficiaries pass away, the remaining assets would be distributed to a charity of your choice.
The decision of whether to transition your traditional IRA into a ROTH IRA now, cash out and buy insurance, or use a CRT to provide for your beneficiaries is a solvable problem Using the specific facts of your life goals as the elements that go into the equation, we can team up with your financial advisor to help you do the math and find the right answer for you.
Adjusting your plan
As you can see, there are still plenty of tax-saving options available for managing your retirement account assets even with the significantly altered tax implications for tax and estate planning. But these options are only available if you plan for them because if you don’t revise your plan to accommodate the SECURE Act’s new requirements, your family will pay the maximum amount of income taxes and lose valuable opportunities for asset-protection and wealth-creation as well. To make sure this doesn’t happen, schedule a Family Wealth Planning Session or an existing estate plan review today.
As your Personal Family Lawyer®, we will work with you and your financial advisor to analyze all of the ways in which your retirement accounts are impacted by the SECURE Act and educate and empower you to choose the most suitable planning strategies for passing your assets to your loved ones in the most tax-advantaged and least risky manner possible. You’ve worked too hard for these assets to see them lost, squandered, or not pass to your heirs in the way you choose, so contact us right away.
This article is a service of Levi Alexander, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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