In this second part of this series, we’ll cover some of the effects the SECURE Act stands to have on your financial plans and how you can make the most of the new legal landscape. (In the first part of this series, we covered the SECURE Act’s impact on estate and retirement planning.) How does the SECURE Act impact your financial plans for retirement? What strategies are there for maximizing your retirement account’s potential for growth? How can you minimize tax liabilities? and What other risks could arise in light of these legal changes?
The SECURE Act requires nearly all beneficiaries to receive all assets from an inherited retirement account within 10 years after the year of the participant’s death. Previously, the distribution could often be over the life expectancy of the beneficiary. As a result, under the new law, 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.
Tax Advantages of Retirement Accounts
If your retirement account assets are held in a traditional IRA, you received a tax deduction when you put funds into that 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.
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 tax deduction on investment with the lower tax rate on withdrawal makes traditional IRAs such an attractive option for retirement planning.
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.
Financial plans under the SECURE Act
With respect to your financial plans, you’ll want to consider the effect these new rules could have on the goal for your retirement account assets. 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, and you’ll want to ensure those assets are well managed both for yourself and future generations. Discussing these issues with your financial advisor will give you more clarity. If you don’t already have a financial advisor, we’ll be happy to recommend a few we trust most.
And if you meet with us for a Family Wealth Planning Session (or for a review of your existing plan), 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
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, but 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, or 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
While the SECURE Act has significantly altered the tax implications for retirement, estate and financial plans, there are options for managing your retirement account assets. But these options are only available if you plan for them.
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. To make sure this doesn’t happen, schedule a Family Wealth Planning Session or an existing estate plan review today.
We are happy to work with you and your financial advisor to analyze how SECURE Act will affect you. Together we can educate and empower you to choose the most suitable financial plans 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.