What do you mean I need to update my estate plan?

What do you mean I need to update my estate plan?

Just before the end of the year, a little thing called the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed into law as part of the end-of-year appropriations bill. Most of the SECURE Act’s provisions went into effect on January 1, and most of us in the industry are still getting our clients up-to-speed on how the act affects their financial lives. In addition to having a snappy acronym for a name, the act significantly impacts retirees with IRAs, families with children (or those planning for children), and those who are inheriting IRAs. We’re covering all three groups in a series of short blog posts this February. 

For our final post in the SECURE Act series, we’re focusing on how the bill affects estate planning. 

In the past, if you inherited an IRA from anyone other than your spouse, your required minimum distributions (RMD) were calculated using your own age, and you could withdraw that RMD for the rest of your life (assuming the fund was large enough). Younger beneficiaries had smaller RMDs, meaning they could keep more money in the IRA and let it continue to grow while withdrawing those smaller distributions every year. This strategy was called a “Stretch IRA,” and it allowed families to pass on Traditional IRAs to younger generations without hitting the beneficiary with a big tax bill. 

Now, only spouses, minors, people with disabilities or chronic illness, and beneficiaries less than 10 years younger than the original owner are allowed to stretch out those RMDs. All other beneficiaries are required to withdraw all of the assets from an inherited IRA within 10 years. And—you guessed it—pay taxes on that money at their current tax bracket rate.

This switch significantly changes the way we think about IRAs and estate planning. It means that the people who commonly inherit IRAs, adult children and grandchildren of account owners, are going to be required to withdraw and pay taxes on the entire IRA within a single decade. 

We’re asking our clients to strongly consider two strategies 1) Use their IRAs for philanthropic giving. It’s a tax-free way to do some good in the world that we’ve promoted before, but now we’re doubling down in the face of that accelerated 10-year tax timeline for IRA heirs.  And 2) Systematically convert Traditional IRAs to Roth IRAs. Yes, non-exempt beneficiaries will still have to withdraw all of the IRA’s assets within 10 years, but Roth withdrawals aren’t taxed. Your beneficiary will be able to receive their Roth IRA inheritance tax-free. In effect, you are paying the taxes in advance for them when you convert from Traditional IRAs, at possibly lower tax rates. 

Need help sorting through your estate plan post-SECURE Act? We’d love to help. Schedule a session with one of our wealth advisors, who can walk you through your options. 

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