One of the major places many of my clients save is in retirement accounts. This may be in a 401k, IRA, 401a, or 403b, among others. Unless set up as a Roth account, when money is taken out of these accounts, income tax will have to be paid. Because this is one of the largest tax implications my clients will see in their estate plans, it’s an important subject.
I’m writing about this now because the Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE ACT, went into effect January 1, 2020. This act brings many changes for retirement plans and if you have a significant amount of money in retirement accounts, it will affect your estate plan.
If you inherited a retirement account prior to January 1, 2020, you were able to rollover the inherited money into your own Inherited IRA. However, every year the IRS requires you to take out a small amount of money from the account which you would pay taxes on. The benefit here is that it is based on your age and could be taken over your lifetime. Thus “stretching” the money and taking out a smaller amount each year, and ultimately paying less on taxes.
However, under the new law, retirement accounts inherited after January 1, 2020 will now have to distribute entire account within 10 years of the year of death of the owner of the account. There are some exceptions to this new rule, but the important aspect of this law is that it is a major tax change. Because it is such a large change, we sent out letters to our clients letting them know about this change.
Even before this law went into effect, we often recommended clients keep retirement money away from trusts, which are taxed at higher rates. Every client we see gets a personalized recommendation on how to list beneficiaries on retirement accounts. Now, with this tax change, we are recommending all our trust clients to review how their retirement account beneficiaries are listed. In addition, for our clients that list their trust as the beneficiary on retirement accounts, we are recommending updating their trusts to account for these changes.
So, do you know how you have your beneficiaries listed on your retirement accounts?