Labor Day is celebrated on the first Monday of September, and to many, it is known as the unofficial end of summer. This holiday, derived from the labor movement, is a day to celebrate all hardworking families who are striving to enjoy the wonders of life and eventually leave a legacy for the next generation.
When retirement finally rolls around, many of our clients have accumulated a substantial amount of wealth in retirement accounts, such as IRAs and 401(k)s. However, under the new SECURE Act, Congress has changed the rules to discourage using retirement plans for wealth transfer to younger generations. The new regulations emphasize that retirement plans are meant to benefit and support employees during their retirement years. Ultimately, the SECURE Act encourages the account holder to use the funds before passing away rather than pass them on to their offspring.
One of the biggest impacts of the SECURE Act is the significant change in the treatment of retirement plan beneficiaries. The SECURE Act provides that if the retirement plan’s beneficiary is a spouse, a disabled individual, a minor child, or someone not more than 10 years younger than the plan participant, that beneficiary can withdraw funds over their life expectancy.
Before the SECURE Act, if your child was the beneficiary of your IRA, and you had, for example, $1 million in the account at your passing, your child, at age 50, could withdraw the funds over their life expectancy. This allowed the $1 million to be distributed gradually over many years.
Now, if the beneficiary doesn’t fit into one of those categories, they must withdraw the ENTIRE amount within 10 years. This shifts the distribution period from potentially 30–40 years to just 10 years, with withdrawals subject to ordinary income tax. For a child still in their prime working years, this means combining their regular income with the additional income from the inherited IRA, which will result in a potentially tremendous tax consequence.
During our working years, we labor tirelessly to build a secure nest egg. We strive to build enough wealth to not only go on nice vacations and have a nice home, but also eventually leave a legacy for our family. However, due to changes in tax laws, a significant portion of it may be diminished by taxes, reducing the legacy you had hoped to leave behind.
An estate planning attorney can help you with available strategies to manage the SECURE Act changes optimally. Depending on your specific goals, we can structure your estate plan to minimize the impact of recent tax changes. Also, coordinating beneficiary designations with your estate plan is crucial. In some cases, naming a trust as the beneficiary might be the best option, while in others, it may be more beneficial to name individual people.
Contact us today to discuss your customized plan and ensure you preserve your legacy