If you are creating a new estate plan, or looking to update your pre-existing plan, it is important to understand the available strategies to avoid drawbacks of the new SECURE Act that may impact how your pass on your retirement account proceeds.
On January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect, and it could have big implications for both your retirement and estate planning strategies—and not all of them are positive.
In Part One of this two part series, I discussed three of the SECURE Act’s most impactful provisions. I looked at the SECURE Act’s new requirements for the distribution of assets from inherited retirement accounts to your beneficiaries following your death.
In Part Two, below, I take a deeper look into additional strategies you may want to consider in light of the new legislation. Specifically, I cover the SECURE Act’s impact on your financial planning for retirement. In addition, I discuss 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.
Let’s jump right in!
Tax-advantaged retirement planning
If your retirement account assets are held in a traditional IRA, you received a tax deduction when you put funds into that account. 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 will pay income taxes on that money based on your tax rate at the time.
If you withdraw those funds during retirement, your tax rate will likely be quite low because you typically have much less income in your retirement years. 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.
Benefits of the SECURE Act
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.
The SECURE Act also 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.
From a financial-planning perspective, you will want to consider the effect these new rules could 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 will want to consider the potential income-tax consequences of each scenario.
Consult with a financial advisor
Your retirement account assets are extremely valuable, and you will want to ensure those assets are well managed both for yourself and future generations. As such, you should discuss these issues with your financial advisor as soon as possible. If you do not already have a financial advisor, I will be happy to recommend a few I trust most.
If you meet with me for a Family Wealth Planning Session (or for a review of your existing plan) to discuss your options from a legal perspective, I can integrate your financial advisor into our meeting. Together, we can look at the specific goals you are trying to achieve and determine the best ways to use your retirement-account assets to benefit yourself and your heirs.
Here are some things I would consider with you and your financial advisor
Converting to a ROTH IRA – In light of the SECURE Act’s changes, 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. However, all earnings and future distributions from the account are tax free.
Life insurance and trust options – Given the new distribution requirements for inherited IRAs, 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.
If you have charitable inclinations, we can consider using a charitable remainder trust (CRT). By naming the CRT as the beneficiary of your retirement account, when you pass away, the CRT would make monthly, quarterly, semi-annual, or annual distributions to your beneficiaries over their lifetime. 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 “math problem.” Using the specific facts of your life goals as the elements that go into solving the problem, we can team up with your financial advisor to help you do the math and solve the equation.
Adjusting your plan to avoid drawbacks of the SECURE Act
While the SECURE Act has significantly altered the tax implications for retirement planning and estate planning, there are still plenty of tax-saving options available for managing your retirement account assets. These options are only available if you plan for them!
If you do not revise your plan to avoid the drawbacks of the SECURE Act and it’s new requirements, your family could pay the maximum amount of income taxes and lose valuable opportunities for asset-protection and wealth-creation.
To make sure this does not happen, schedule a Family Wealth Planning Session or an existing estate plan review today.
As your Personal Family Lawyer®, I 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. Moreover, I can 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 work too hard for your assets to be lost, squandered, or not passed to your heirs in the way you choose, so contact me right away!