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The SECURE Act’s Impact On Estate and Retirement Planning—Part 2

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, we discussed three of the SECURE Act’s most impactful provisions. Specifically, we looked at the SECURE Act’s new requirements for the distribution of assets from inherited retirement accounts to your beneficiaries following your death. 

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. 

In this post, 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 be quite low because you typically have much less income in your retirement years. The combination of the upfront tax deduction on your initial investment with the 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.

It is important for you to discuss your options from a legal perspective with your attorney, and that your attorney and financial advisor are both on board with the plan. Together, your legal, financial, and tax team can look at the specific goals you’re trying to achieve and determine the best ways to use your retirement assets to benefit yourself and your heirs. 

Here are some things we would consider with you and your financial advisor:

Converting Your Traditional IRA 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 and 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.

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. To make sure this doesn’t happen, schedule a Family Wealth Planning Session with us to set up your plan or review your existing estate plan today.

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The Law Offices of Tyler Q. Dahl

At the Law Offices of Tyler Q. Dahl, we’re not just a law firm. We’re your trusted advisor for your business and family from beginning to end. As your family and business grow, we will be there by your side. Our passion is providing you with peace of mind and protection through personalized estate and business planning. Attorney Tyler Q. Dahl is one of less than 100 attorneys in the nation who is also a Certified Tax Coach.

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