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How the SECURE Act May Change Your Estate and Financial Planning Approach

 

One of many key planning areas that

encompasses estate planning, financial

planning, and income tax planning is

distribution planning for retirement plan

assets. With the passing of the SECURE Act

in 2020, required distributions generally must

commence at age 72, rather than age 70 ½

as it was under prior law. For a taxpayer who

reaches age 72 in or after 2020, the first

required distribution must be taken

by April 1st of the year after you reach 72.

While this new triggering age of 72 is a positive development to be sure, the passing of the Secure Act is a game changer in that inherited IRAs, 401ks, and similar accounts are subject to a much more accelerated distribution requirement. Under prior law, in the case of an inherited account, many non-spousal beneficiaries could elect to take distributions over life expectancy. Now, the entire account must be distributed by the end of the tenth year following the death of the original IRA owner.  For a surviving spouse and for certain other designated beneficiaries, such as a disabled child, there is potential to use life expectancy. Given that the IRS has very recently clarified the rules for these groups of beneficiaries to eliminate some promising planning options, there are clear disadvantages to selecting a non-spousal beneficiary in your estate plan.

Here are three areas of your financial plans that may need to be revised due to the passing of the SECURE Act:

  • If you are the recipient of an inherited IRA, distribution planning becomes more important. If you have ten years after year of death to withdraw all the funds, that gives you plenty of time to come up with a thoughtful plan to optimize tax efficiency. Be sure that your strategy considers your likely marginal tax rates in the years to come.
     

  • In the context of your estate plan, your beneficiary designations take on more significance. If you had intended to leave retirement plan assets to children and leave other assets to your spouse, think again! Talk to your attorney to see if there is a better approach.

 

  • Reconsider how you are allocating retirement plan contributions. Roth contributions may be more attractive if available. Income tax deferral that in past years was expected to potentially stretch for 30 to 40 years after your death may now be a ten-year duration. You should check in with your financial advisor to determine if it makes sense to reconsider.
     

Retirement plan distribution strategy is important both during your lifetime and at your death. These  issues often receive the most attention as individuals and couples approach normal retirement age for social security as well as when they begin to see age 72 on the horizon. Think about this: retirement  distribution planning should start long before these milestone dates. Talk to your financial advisor and your tax advisor regularly about how you are saving for retirement in order to minimize income tax burdens during your lifetime and to create the best possible outcome for your loved ones after you are gone.

Image by Zdeněk Macháček