How New Tax Rules for IRAs and 401(k)s Could Impact Your Estate Planning

posted by Judith Ellenthal March 19, 2020

By Judith Ellenthal, Esq.

IRAs and 401(k)s were designed as a way to save for retirement, rather than as a means of transferring wealth. But traditionally, these accounts have also been good estate planning tools.

That’s because people can pass along the balance of their IRA and 401(k) retirement accounts to spouses, children, grandchildren or anyone named as a beneficiary. Previously, required minimum distributions from an inherited IRA or 401(k) could be spread out over the beneficiary’s own lifetime, over years and even decades, all the while funds continued to grow tax-deferred.

However, the SECURE Act signed into law in December of 2019 brought about significant changes to the IRS requirements for distribution of funds from an inherited retirement account. Most significantly, the new law sets a time limit for required minimum distributions to a non-spouse beneficiary, potentially accelerating the tax impact.

With these new rules taking effect as of January 1, 2020, it’s a good time to evaluate how these tax changes may impact your retirement accounts and estate planning.

Three Things to Evaluate Now When Choosing IRA & 401(k) Beneficiaries

In taking stock of how your 401(k) and IRA beneficiary designations are impacted by the new tax laws, here are three things to consider:

  1. Will your surviving spouse be a sole beneficiary? That surviving spouse can treat an inherited IRA as his/her own, and simply designate themselves as owner of the existing account. He or she can continue to take distributions over their lifetime, or roll over funds to an existing personal retirement account.
  2. How will a non-spouse beneficiary be impacted by the new accelerated withdrawal requirements? Under the SECURE Act, non-spouse beneficiaries must transfer retirement assets into a new account designated as an “inherited IRA,” and cannot roll over assets into an existing personal retirement account. And all monies must be withdrawn from an inherited IRA within 10 years of the account owner’s death, potentially increasing the beneficiary’s tax bracket. Beneficiaries already receiving distributions from an IRA or 401(k) owner who passed away prior to January 1, 2020 are not subject to this 10-year distribution requirement.
  3. Is your non-spouse beneficiary exempt from the new rules? The 10-year distribution limit does not apply to non-spouse beneficiaries who are chronically ill or disabled; or who are less than 10 years younger than the plan owner. Additionally, for minor children, the clock does not begin ticking on the 10-year withdrawal limit until the child turns 18.

The SECURE Act also includes provisions to increase access to retirement savings. For instance, plan owners who turn 70 ½ in 2020 or later can now wait until age 72 to begin taking the required minimum distributions, helping to ensure that funds last throughout retirement.

To make the most of your retirement savings and mitigate the impact to your beneficiaries under these new tax law changes, consult with a qualified estate planning professional. If you are interested in a review of your existing beneficiary designations or require up-to-date advice on asset preservation, the Estate Planning & Probate Group at Cacace, Tusch & Santagata would be pleased to assist.

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