For many people, their retirement savings is one of their largest assets, and the rules for how these assets are passed to beneficiaries has changed significantly with the passing of the SECURE Act at the end of 2019.
An IRA or 401(k) typically does not pass through an individual’s Will. In most cases, it passes to a beneficiary designated at the time the account was opened. These accounts may have been set up years ago, and haven’t been reviewed since. It is good to review these plans, especially the beneficiary designations, every few years to confirm they still reflect your wishes. Beneficiaries designations can be updated very easily and they can be allocated on a percentage basis. It is important to remember that these beneficiary designations supersede what is set forth in a Will.
The beneficiary designation should include at least one primary and one contingent beneficiary. Extra consideration should be paid to naming minors as contingent beneficiaries. This will give the minors direct access to retirement assets when they turn 18. If you would like that access to be limited over time or at the discretion of a trustee, the beneficiary designation should be a trust for the benefit of your child or children and should contain specific language that allows for the continued benefit of tax deferred status in compliance with the tax code.
Most retirement assets include pretax savings therefore distributions from these accounts are subject to income taxes upon withdrawal. If charitable bequests are part of your estate plan, it often makes sense to include these charities as a percentage of your retirement assets because the charities will not be required to pay income tax on the distribution, thereby allocating more non-retirement assets to beneficiaries who are able to receive them tax free.
While surviving spouses are still able to rollover an inherited IRA or an inherited 401(k) into their own tax deferred account and are still able to stretch payments over their own life expectancy, for most non-spouse beneficiaries, such as adult children, the ability to stretch payments over their own life expectancy is no longer an option. The SECURE Act requires non-spouse beneficiaries (other than a minor child, a disabled beneficiary or a beneficiary who is less than 10 years younger than the original IRA account owner or 401(k) participant) to withdraw all the assets from the inherited IRA or 401(k) plan by December 31st of the 10th year following the original IRA owner’s death. Beneficiaries of inherited IRAs still need to adhere to the Required Minimum Distribution rules and careful planning with a tax advisor is recommended to strategize how to maximize the benefit of this inheritance.
At Rucci Law Group we assist clients in reviewing beneficiary designations and discussing how best to allocate this important asset category among your beneficiaries as part of your estate planning.
If you have any questions about this or any aspect of your estate planning, we would be happy to assist you. Please contact Michele Gartland or Marianne Cirillo directly with any questions or email us at firstname.lastname@example.org.