Recent changes signed into law at the end of 2019 through the Secure Act regarding 401(k) and IRA distributions may not only affect your retirement planning, these changes may create a need to review your estate planning as well. Barron’s (New Rules for Stretch IRAs and RMDs Have Raised Many Questions. Barron’s’ Found Answers) and The Cleveland Jewish News (How will IRA and 401K changes impact estate planning?) offered details on these changes.
Retirement Planning: You can now add deductible contributions to an IRA at any age (from wages or earnings) because the age limit on these contributions has been lifted.
Previously, you had to start taking minimum distributions from traditional IRAs and 401(k)s once you reached the age of 701/2 (and if you reached that age in in 2019 or before, you are still subject to that rule). With the new law, the age for required minimum distributions has increased to 72.
Estate Planning: With the changes to the law, distributions from an IRA or 401(k) must to paid out within 10 years and this 10-year period begins the year after you die. As The Cleveland Jewish News points out this is major change since:
“Under the old law if a child or grandchild inherited your IRA, they could take minimum annual distributions based upon their life expectancy rather than yours. This allowed decades of income tax-deferred (or income tax free if a Roth) distributions from the IRA.” Hence the term Stretch IRA.
Barron’s notes that this advantage wasn’t just for descendants, “The new rules also upend a strategy surrounding inherited IRAs. Old rules allowed beneficiaries to stretch out RMDs over their lifetime, providing them with years to reap tax-advantaged gains.” And while there are exceptions (including the underage children of the deceased) it is quite a change if someone was expecting to take RMDs (required minimum distributions) over many years.
We should add: “The good news is that people who were already taking distributions from an inherited IRA may continue to do so under a stretch IRA strategy. The new rules apply for people who would inherit an IRA from someone who isn’t their spouse and are not subject to other exemptions.”
If these new rules will alter your estate planning, consult with a Fee-Only financial planner who can help you strategize ways make the most of your resources.