For most Americans, a retirement account is the largest asset they will own when they pass away. For that reason, you should be paying attention to the ever evolving SECURE ACT. On December 29, 2022, President Biden signed the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act).
The previous 2020 SECURE Act made several changes to retirement planning including:
increasing the required beginning date for required minimum distributions from your individual retirement accounts from 70 ½ to 72 years of age.
eliminating the age restriction for contributions to qualified retirement accounts.
requiring that most designated beneficiaries withdraw the entire balance of an inherited retirement account within 10 years of the account owner’s death. Those excluded from the 10 year rule include: Spouses, minor children, beneficiaries 10 years younger than the account owner,and disabled and chronically ill individuals
New Provisions in the SECURE 2.0 Act
The SECURE 2.0 Act made quite a few enhancements to clarify the original legislation. Several of the key enhancements are summarized below:
It raises the required beginning date age for required minimum distributions to 73 in 2023 and 75 by 2033.
It decreases penalties for not taking required minimum distributions to 25% of the required amount and 10% of IRAs if corrected timely. With exceptions that include: Qualified births and adoption expenses, Terminally ill individuals, Federally declared disasters, Emergency personal expenses, and Domestic abuse victims
Employees are automatically enrolled in 401(k)/403(b) plans (opt out within 90 days)
Higher catch-up contributions are allowed for participants over 50 ($7,500 in 2023).
Early distributions are permitted for long-term care contracts without penalty.
Qualified charities can be named as remainder beneficiaries after the death of a disabled or chronically ill beneficiary without disqualifying the trust as a see-through trust.
Plan sponsors may match contributions made on student loan repayments on the same vesting schedule as elective deferrals, effective 2024.
529 plans maintained for at least 15 years may be rolled over into a Roth IRA with a $35,000 lifetime limit, effective 2024.
Effect of SECURE 2.0
The new provisions and exceptions in the SECURE 2.0 Act may change the decisions you have made for your intended beneficiaries and alter the path to achieving your long-term goals. Under the old law, beneficiaries of inherited retirement accounts could take distributions over their individual life expectancy. Under the SECURE Act and SECURE 2.0 Act, the shorter 10-year time frame for taking distributions will accelerate income tax due, possibly bumping your beneficiaries into a higher income tax bracket and causing them to receive less of the funds in the retirement account than you may have originally anticipated. Eligible designated beneficiaries exempt from the 10-year rule may still have the opportunity to benefit from future retirement plan growth. Your estate planning goals likely include more than just tax considerations. You may also be concerned with protecting a beneficiary’s inheritance from their creditors, future lawsuits, and a divorcing spouse. In order to protect your hard-earned retirement account and the ones you love, it is critical to act now.
What to do in Light of the Changes:
1. Review Your Revocable Living Trust or Standalone Retirement Trust
Your estate plan may already address the distribution of your retirement accounts. For example, your trust most likely includes a conduit provision requiring that retirement distributions be immediately distributed to or for the benefit of the beneficiaries. However, with the SECURE Act’s passage, a conduit trust structure may not be the best choice any longer because the trustee will be required to distribute the entire retirement account balance to most types of beneficiary within 10 years of your death, causing an income tax headache for the beneficiary.
2. Consider Additional Trusts
It also may be beneficial to create a separate trust to handle your retirement accounts. While many accounts offer simple beneficiary designation forms that allow you to name an individual or charity to receive funds when you pass away, this form alone does not take into consideration your estate planning goals and the unique circumstances of your beneficiary. A trust is a great tool to address the mandatory 10-year withdrawal rule under the SECURE Act, providing continued protection of a beneficiary’s inheritance.
3. Review Intended Beneficiaries
Whichever estate planning strategy is appropriate for you, it is important that your beneficiary designation is filled out correctly. Whether your intention is for the retirement account to go into a trust for a beneficiary or you want the primary beneficiary to be an individual, you must properly name and list the beneficiary on a beneficiary designation form. You should ensure that you have listed contingent beneficiaries as well. If you have recently divorced or married, you will need to ensure that the appropriate changes are made to your current beneficiary designations. At your death, in many cases, the plan administrator will distribute the account funds to the beneficiary listed, regardless of your relationship with the beneficiary or what your ultimate wishes might have been. If you are charitably inclined, now may be the perfect time to review your planning and possibly use your retirement account to fulfill your charitable desires. By giving retirement to charity, you avoid SECURE act tax consequences and may benefit from the tax charitable deduction.
Although these new laws may be changing the way we think about retirement accounts, we are here and are prepared to help you properly plan for your family and protect your hard-earned retirement accounts. We can explore different strategies with your financial and tax advisors to infuse your estate with additional cash upon your death. Give us a call today to schedule an appointment to discuss how your estate plan and retirement accounts might be impacted by the SECURE Act and how to best adjust your plan.