SECURE Act And Estate Planning

Retired couple estate planning

SECURE Act And Estate Planning

Many older Americans heading into retirement worry about not having enough to live comfortably for the rest of their lives. The SECURE Act, officially the Setting Every Community Up for Retirement Enhancement Act of 2019, addresses some of those concerns. This act increases access to tax-advantaged accounts for retirees. If you would like to learn how the SECURE Act and estate planning can work together, contact the team at Loughlin Law, P.A. Schedule an appointment with our Florida estate planning and probate attorneys by calling (561) 677-8384.

Why Was the SECURE Act Created?

With Americans living longer and many not having funds set aside for retirement, Congress acted with the SECURE Act. Signed in 2019, this bipartisan effort addresses several important aspects of retirement savings, including:

  • Encouraging more employers to offer retirement plans
  • Making it easier for small businesses to set up and maintain these plans
  • Providing retirees with guaranteed lifetime income options
  • Changing the rules for beneficiaries of retirement accounts

The SECURE Act modernized retirement laws to reflect current life, work, and savings realities.

What Does the SECURE Act Cover?

The SECURE Act changed the rules governing tax-advantaged retirement accounts. For starters, the safe harbor cap for all retirement plans has been raised from 10% to 15%. With that, small businesses are able to set up 401(k)s and automatically enroll their employees. Employers who offer these plans with automatic enrollment can receive an annual tax credit of $500. The “stretch IRA” provision has been removed. This rule previously allowed non-spouses inheriting retirement accounts to stretch out the disbursements over their lifetime. The new rule mandates a full distribution of inherited IRA funds within 10 years of the original account holder’s passing.

The SECURE Act provides a pathway to retirement for part-time employees who work 1,000 hours throughout the year or who have three consecutive years of 500 hours of service by allowing these workers to qualify for retirement plans. The required minimum distribution (RMD) age has been pushed from 70½ to 73. Any tax-advantaged 529 accounts can now be put toward $10,000 for yearly student loan repayments. Additionally, withdrawals of up to $5,000 from 401(k) accounts can now be made without penalty to cover the expenses of having or adopting a child.

How Does the SECURE Act 2.0 Affect Estate Planning?

The SECURE Act was updated to the SECURE Act 2.0 in 2022 as part of an ongoing effort to improve retirement savings plans and expand access for more Americans. The new legislation introduced 92 new conditions to promote savings, incentivize businesses, and offer more retirement flexibility. If you have questions about the SECURE Act and estate planning, consider reaching out to Loughlin Law, P.A.

Changes to the 10-Year Rule

The original SECURE Act replaced the “stretch IRA” with a 10-year rule. This new rule requires most non-spouse beneficiaries of qualified retirement accounts to withdraw all funds within 10 years of the account owner’s death. This change impacts the ability to transfer wealth from one generation to the next. Additionally, the 10-year rule can push the beneficiary into a higher tax bracket.

Impact on Tax Planning

The new 10-year rule reduces the ability to defer taxes over many decades. As a result, more tax dollars must be paid to the IRS because of the higher account balances. In turn, that could erode the value of the inherited retirement accounts.

Need for Continuous Planning

With the SECURE Act, these plans may need to be reviewed and updated regularly to reduce the impact of these changes. Some individuals may need to rethink their beneficiary designations and consider the tax implications of the new rules.

Potential Strategies

Anyone affected by these changes may need to pivot to other strategies. For example, some people have turned to a Roth IRA. Unlike traditional IRAs, Roth IRAs allow for tax-free withdrawals, which can get around the tax implications of the 10-year rule. While converting a traditional IRA to a Roth IRA might be beneficial, it could be taxable. Another strategy is to use life insurance as a way to pass an inheritance without worrying about taxes.

What Is the SECURE Act for Estate Beneficiaries?

While the SECURE Act made it easier for Americans to save for retirement, it also changed a few rules for estate beneficiaries. For those who inherited IRAs or 401(k)s, this act eliminated an individual’s option to extend any taxable distributions and their related tax payments over the retiree’s lifetime. Instead, the account balance must be withdrawn no later than the 10th anniversary following the calendar year of the IRA owner’s death.

Now, beneficiaries have three possible ways to receive those funds:

  • Withdrawing the assets in equal increments for the next 10 years
  • Delaying withdrawals until the end of the 10-year period and then withdrawing all assets remaining in the account
  • Making staggered withdrawals over the 10-year period

Exceptions exist to the updated withdrawal requirements. Some individuals who inherit an IRA or 401(k) from their spouse can stretch out their required minimum distributions (RMDs) throughout their lifetime. The SECURE 2.0 Act expanded on the benefits for which retirees’ spouses may be eligible. The updated provisions allow beneficiaries to be treated, at their own discretion, as the original employee, opening for the use of more advantageous RMD tables. Some beneficiaries may be able to extend the maximum time range for distributions if they fall into one of three other common types of eligible designated beneficiaries (EDBs):

  • A minor child of the original owner (grandchildren are expressly excluded)
  • Someone less than 10 years younger than the original owner
  • Someone disabled or chronically ill

If you are the owner or inheritor of an IRA or other qualified retirement plan, your own retirement accounts and beneficiaries could be affected.

Reach Out to Our Florida Estate Planning Attorneys

The SECURE Act was meant to help many Americans have better access to retirement plans. However, it has added some complications to how individuals transfer their wealth to the next generation. If you would like to learn more about the SECURE Act and estate planning, schedule a consultation with Loughlin Law, P.A. by calling (561) 677-8384.

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