President Trump signed a new law in December that has taken effect this month called the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). It includes a wide array of changes to retirement accounts that both individuals and business owners should know.
For individuals, here are a few highlights:
(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of
daily living for a period of at least 90 days due to a loss of functional capacity,
(ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in
consultation with the Secretary of Health and Human Services) to the level of disability described in
clause (i), or,
(iii) requiring substantial supervision to protect such individual from threats to health and safety due
to severe cognitive impairment.
Business owners should be aware of the following:
A financial adviser would be the best person to contact if you have any questions about how the SECURE Act affects your retirement, and a CPA would be a good person to contact regarding business credits. However, if you want to discuss how eliminating the IRA lifetime stretch might affect your estate plan, give Jesson & Rains a call.
Retirement accounts can be one of the largest assets that someone passes on to a loved one. However, these assets are treated differently if they are tax-deferred. If you leave a standard 401K to a beneficiary, they will pay income tax when they withdraw the money.
A surviving spouse will be required to take Required Minimum Distributions (RMDs) once they turn 70.5 years old. For non-spouse heirs, the beneficiary will have to take RMDs every year if the original account owner passes away after reaching age 70.5. But if the original account owner was under the age of 70.5 when they died, the RMDs will be based on the beneficiary's age instead. This is called a “stretch out” because the RMDs are stretched out over the beneficiary’s life, based on the beneficiary’s life expectancy as dictated by the IRS.
Not all plan administrators will allow a beneficiary to stretch out the payments. It may be worthwhile for the beneficiary to rollover the inherited 401K to their own IRA because, if you do not stretch out RMDs, the RMDs might be taxed at a higher income tax bracket!
Additionally, because 401Ks are distributed according to life expectancies, sometimes they are not the best asset to pass along to multiple beneficiaries through a trust. The IRS will force RMDs based on the life expectancy of the oldest beneficiary.
Finally, deferred tax assets should not be left in a supplemental needs trust for the benefit of a disabled beneficiary. If the trustee accumulates the RMDs instead of distributing them to the beneficiary (which oftentimes is necessary to keep the beneficiary qualified for government benefits), the IRS will tax the RMDs at the trust income tax rate, which can be as high as 37%!
As you can see, estate planning is so much more than simply drafting a will. Please contact Jesson & Rains if you would like to consult with a professional.
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