The SECURE Act as passed by Congress in 2020, dramatically changed the way retirement distributions from IRAs and qualified pension plans are distributed to plan beneficiaries. Without getting into details, essentially unless you were an Eligible Designated Beneficiary as narrowly defined, all plan assets would be required to be distributed within 10 years, not over life expectancies.
Spouses, minor children under the age of majority, defined as age 25 (deferral to that age, then 10 years), and certain disabled or chronically ill beneficiaries, would be allowed life expectancy distributions with a spouse being able to do a spousal rollover to be governed by his or her required beginning date (age 72). Also, there was a special exception if the beneficiary was not more than 10 years younger.
What this essentially means is that income taxes will either be due for amounts withdrawn over that period or for lump sum distributions if deferred to the 10 year maximum. Old rules still apply if you don’t designate a natural person as a beneficiary which could be as little as 5 years if the owner died before the required date (RMD) of age 72 to start taking account balances.
Individuals reviewing these new rules may want to gift other assets to help make beneficiaries whole or they may want to start converting traditional IRA accounts to a Roth IRA. With a Roth, taxes are immediately paid on the amount converted but the opportunity is that there would be no required distributions or income taxes to the original owner (if held for 5 years). Also, the Roth beneficiary would not be required to pay taxes on distributions although they would be required to start taking lifetime RMDs.
Although passing legacies on to a Non-Eligible Designated Beneficiaries is now compromised, current estate tax laws have made it much easier to pass on wealth as the current Federal estate tax exemption in 2021 is $11,700,000 with any unused credits at the first death being allowed to carry over to the surviving spouse. Also, property held until death is automatically stepped up to the to market value at that time to reduce or possibly eliminate capital gain taxes depending on when the property is sold.
Life insurance as an asset class is now being used to enhance legacy gifts and/or to equalize an estate if one individual may be getting more (example of a business) than another beneficiary. Life insurance cash values are exempt from creditors, the death benefits are tax free, and the gain over premiums can be substantial. Also, any build-up of cash values is not subject to current taxation during the time of accumulation
Finally, to address all of these issues, a proper estate plan and a retirement plan need to be in place. Most Americans are well behind on savings and asset accounts necessary to have sustained retirement. Also, many have not addressed beneficiary designations or how to best use wills and trusts.
In retirement and estate planning I would encourage all readers to seek out a qualified financial wealth advisor. Look for designations of CFP, ChFC, CLU or CPA/PFS. Also, an individual within the legal, financial, or accounting community that has a designation of an Accredited Estate Planner (AEP) would be highly qualified. Good knowledge and resource information is important in your own decision making and the earlier you start your planning, the more options you will have.