On January 1, 2020, the SECURE Act became law. The new law will affect most retirement plan and IRA participants.
SECURE Act Changes Affecting You Now
The age limit is removed for contributions to traditional IRAs.
Before the SECURE Act, you were required to stop making contributions at age 70½. However, now you can continue to make contributions as long as you meet the earned-income requirement.
Also, as part of the SECURE Act, you are mandated to begin taking required minimum distributions (RMDs) from a traditional IRA at age 72. This RMD is an increase from the prior age of 70½. Consequently, allowing money to remain in a tax-deferred account for an additional 18 months (before needing to take an RMD) may alter some previous projections of your retirement income.
The SECURE Act’s rule change for RMDs only affects Americans turning 70½ in 2020. For these taxpayers, RMDs will become mandatory at age 72. Therefore, if you meet this criterion, your first RMD won’t be necessary until April 1 of the year after you reach 72.
SECURE Act Changes Affecting Your Estate Plan
Before the new law, a non-spouse beneficiary could stretch out the payments over their expected lifetime. Now the full distribution must be made by the end of the 10th calendar year following the year of the account owner’s death. There are limited exceptions:
- A beneficiary who is the participant’s spouse
- A child under the age of majority (18)
- A disabled or chronically ill person
- A beneficiary that is within ten years of the participant’s age
This new distribution rule is especially crucial for you if the beneficiary of your defined contribution plan is your Living Trust, and your ultimate beneficiary in your Trust does not fall into one of the above exceptions.
For instance, your intention might have been to shield your child or another beneficiary by securing the beneficiary funds in your trust after your death for a specified time for creditor protection. On the other hand, you may wish to ensure that the beneficiary does not withdraw all the funds at once. However, now payments must be made within ten years of your death.
Insurance as an Option
If you wish to leave funds in Trust for the benefit of your children and are beyond the age of 28, you should consider naming your Living Trust as the beneficiary in a tax-free insurance policy.
For example, you could accomplish this by using the withdrawals from your deferred comp or IRA to purchase the insurance policy. Consequently, you can detail the specific use/distribution of the proceeds in your Living Trust.
What You Should Do Now
You should review your primary and contingent beneficiary designations in your defined benefit plans and your estate plan/Living Trust. Importantly, evaluate the reasons you named your Living Trust as beneficiary. Above all, consult your attorney, your accountant, and your financial planning advisor.
Advanced planning can make all the difference.
At the end of your life, or if you become incapacitated, if you have property or bank accounts in your name, you are at risk of Probate.
- A Will must be filed in Probate Court. The rule is no one can legally sign your name. Therefore, at your death, or incapacity, all assets in your name are subject to the full probate process, which averages 18 months and is costly.
- Living Trust completely avoids probate.
- A Living Trust estate plan includes both Health Care and Financial Power of Attorney documents and a Last Will and Testament for guardianship of minor children and to “pour over” any assets still in your name at your death, out of probate.
- Your life insurance policies and deferred compensation accounts can name your Living Trust as beneficiary, subject to essential tax considerations.
Contributing to this article: Ryan Nietert, CFP; OakCrest Capital.
This blog entry was created for information and planning purposes. Therefore, it is not legal advice. Please do not use this blog as legal advice, which turns on specific facts, as well as laws in specific jurisdictions. No reader of this blog should act or refrain from acting on the basis of any information included in, or accessible through, this blog without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the reader’s state, country or other appropriate licensing jurisdiction