Is Your Retirement Account Secure?
By Bernard A. Krooks, Certified Elder Law Attorney
You may recall our article from a couple of years ago which discussed changes to the requirements for taking money out of your retirement accounts. The changes were part of the SECURE Act which affected anyone who owns an IRA or other retirement account.
While there have been significant changes to the estate tax over the last several years, those changes likely won’t affect most Americans since less than 1 percent of us have estates large enough to be subject to the federal estate tax. Conversely, most people have money in retirement accounts and over the next two to three decades there will be the largest inter-generational transfer of wealth in history, with much of the money being transferred being held in retirement accounts.
Retirement accounts allow you to put away money, which grows tax-free, and not pay taxes on it until you take the money out. Thus, it is a way to defer paying taxes, not avoiding taxes. Nevertheless, there is great value in being able to defer taxes. Given the choice, you are usually better off paying taxes later, instead of now; unless perhaps you expect to be in a higher tax bracket later. Moreover, the assets in retirement accounts continue to grow tax-free, without diminution for payment of taxes along the way. Unfortunately, the deferral doesn’t last forever, and the IRS has rules that require minimum distributions (RMDs) be taken, depending on the type of retirement account you have and your age. Roth IRAs do not have RMDs while you are alive; but there is no tax deduction for contributions you make to Roth IRAs.
The most important change made by the SECURE Act was the elimination of the “stretch” option for most IRAs. Previously, if you inherited an IRA from someone, you were able to take those benefits over your life expectancy if proper planning was done. This allowed IRAs to grow in amount tax-free without having to be depleted by larger mandatory withdrawals since the beneficiary was typically younger than the original IRA owner. Under the SECURE Act, the entire account must be distributed within ten years of the account owner’s death, unless certain exceptions apply. The purported rationale for this change, was that the IRA rules were originally intended to provide for the owner’s retirement and not intended to be a wealth creation vehicle for the beneficiaries.
Certain beneficiaries are not subject to the new 10-year rule, including surviving spouses, minor children (but not grandchildren), individuals with disabilities or those who are chronically ill, and individuals who are not more than 10 years younger than the IRA owner. If you qualify under these rules, you can still use the life expectancy tables and stretch out the retirement benefits.
The SECURE Act also changed the date that individuals have to start taking required minimum distributions from their retirement accounts from age 70 and ½ to age 72. In addition, IRA contributions may now be made for those still working regardless of age. Previously, 701/2 was the age limit for those still working.
When the SECURE Act was enacted, there were a lot of unanswered questions concerning how the new rules were to be interpreted and implemented. Over the past couple of years, it has been confusing and, in some cases, extremely complicated to compute the proper amount of RMD. The stakes are high, since there is a 50% excise tax if you don’t take out enough money from your IRA each year. In fact, this rule continues to apply to your IRA beneficiaries after your death.
Recently, in an attempt to clarify and provide additional guidance on the SECURE Act, the IRS has finally issued proposed regulations. This IRS publication is more than 270 pages long and we certainly can’t explain all the nuances in this article. Suffice to say, there are probably provisions in the new proposed regulations that will affect you and your IRA.
While having a modern estate plan includes documents such as a will, trust, financial power of attorney and health care directives, it absolutely makes sense to give proper attention to your retirement accounts. Oh, and don’t forget that your will typically does not determine who receives your IRA at death, since that is covered by your beneficiary designation.
Bottom line: In light of the new proposed regulations regarding the SECURE Act, it probably makes sense to take a fresh look at how your retirement accounts are treated in your estate plan.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP. He was named 2021 “Lawyer of the Year” by Best Lawyers in America® for excellence in Elder Law and has been honored as one of the “Best Lawyers” in America since 2008. He was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils (NAEPC). Krooks is past Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.elderlawnewyork.com.