Estate PlanningTax Planning

Major Tax Law Changes May Impact Clients with Retirement Accounts

Tax Changes To Retirement Plans

With the passage of the SECURE Act, the Diamond Law Firm recommends that clients with retirement accounts schedule a meeting to review their beneficiary designations and discuss the impact of these new tax changes on their estate plan.

With this time of great uncertainty have come significant changes to our federal tax laws. These changes are important to you – our clients who have worked hard to accumulate wealth and have thoughtfully planned to pass it on to your children, grandchildren, or other beneficiaries. For those of you who own retirement accounts, these changes are especially important.

Our associate, tax attorney Rachel Oliver, recently shared an overview of the changes made to the tax rules governing retirement accounts under the CARES Act, the large rescue package Congress passed at the end of March. As she explains in her recent blog, the Act waives the requirement that individuals take a required minimum distribution this year. If you do not need a distribution this year, you can keep more of your money invested in your IRA. If you do need an early distribution (before age 59 1/2), you can withdraw up to $100,000 from your retirement plans and IRAs without any penalty if you meet certain eligibility requirements. In the CARES Act, Congress sought to provide greater flexibility in how you can manage and access your retirement accounts.

But other changes Congress made to our tax laws effective January 1, 2020 made estate planning with retirement accounts more challenging. Previously, a beneficiary could “stretch” distributions from an inherited retirement account or IRA over the beneficiary’s lifetime. This was an important tool that allowed you to transfer more of your wealth to your children and grandchildren. While a beneficiary would be required to take the minimum distribution each year, only that required minimum distribution would be taxed to the beneficiary as income. The principal balance of the inherited IRA, including any growth, could remain invested, and the tax deferred. With this in mind, we often talked with our clients about designating grandchildren or even great-grandchildren as beneficiaries of a retirement account. These younger beneficiaries would have smaller required minimum distributions than a spouse or child, and a longer time to “stretch” theIRA, allowing the principal to grow.

The SECURE Act basically eliminated this “stretch” planning for IRA and retirement accounts. Now, if you leave your IRA or retirement account to anyone who is not your spouse, the account must in most cases be completely withdrawn by your beneficiary within ten years.

What does this mean? It means that your children or grandchildren, if they are the beneficiaries of your retirement account, will be paying income tax much sooner. There will be a significantly shorter period for tax deferred growth. This requires new considerations – such as how we might best plan to assist that child or grandchild with the income tax liability they will incur a result of an inherited retirement account. It may mean that you will want to give consideration toward using your IRA to build a charitable legacy. Fundamentally, it means that all of our clients with IRAs and other retirement accounts should review with us their account beneficiary designations. It is important that we help you understand how these new tax laws may impact your estate plan, and whether you need to make changes to either your beneficiary designations or other estate planning documents.  

The SECURE Act did include some modest, good news: it raised the beginning date for required minimum distributions from 70 ½ to 72. Americans are living longer, and therefore Congress pushed out the age at which RMDs must begin. However, for those who sought to transfer their IRA or retirement accounts to non-spouse beneficiaries, the changes passed in the SECURE Act are significant, and should be considered. Please contact us to schedule a meeting so that we can review your beneficiary designations and discuss these issues with you in greater detail. We are happy to meet with you by phone or by Zoom. We hope you and your loved ones are staying safe during this difficult time, and we look forward to hearing from you.