On January 1, 2020, the Setting Every Community Up for
Retirement Enhancement Act (SECURE Act) went into effect, and it could have big
implications for both your retirement and estate planning strategies—and not
all of them are positive.
Last week, I gave you a general overview of the SECURE Act’s most impactful
provisions. 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.
Here, we’ll cover the SECURE Act’s impact on your financial planning for retirement, offering strategies for maximizing your retirement account’s potential for growth, while minimizing tax liabilities and other risks that could arise in light of the legislation’s legal changes.
Tax-advantaged retirement planning
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 (but not always) be lower than it is now. The combination
of the upfront tax deduction on your initial investment with the likely lower
tax rate on your withdrawal is what 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.
From a financial-planning perspective, you’ll want to consider the effect these new rules could have on the goal for your retirement account assets. For example, 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, so you should discuss these issues with your financial advisor as soon as possible. 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 Estate Planning Session (or for a review of your existing plan) to discuss your options from a legal perspective, 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 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.
Charitable trust options
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 planning and estate
planning, as you can see, there are still plenty of tax-saving options
available 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 and wealth-creation as well. 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 put this planning at the top of your new year’s
resolution list.
Dedicated to empowering your family, building your wealth and defining your legacy,
