One of the reasons why we always emphasize the fact that estate planning should be viewed as an ongoing process is because laws are subject to change. Some of them are relevant to estate planning either directly or indirectly.
As a layperson, you are probably not going to be plugged into the possible inheritance significance of every legal step that is taken. This is our job, and when you come into the office for an estate plan review, we can look at your existing plan in light of any changes that may have been implemented.
With this in mind, we will look at a recent piece of legislation that could impact your existing plan.
Individual Retirement Accounts
Before we get into the specifics of this law, we have to share some general information about individual retirement accounts. Though there are some lesser used variations, there are essentially two different types of accounts: traditional individual retirement accounts, and Roth IRAs.
With either type of account, you can begin to take penalty free withdrawals when you are 59.5 years of age. There are some exceptions, including the utilization of funds for the purchase of your first home, unpaid medical bills, and college expenses.
The main difference is the timing of the taxation. You contribute assets into a traditional individual retirement account before you pay taxes on the income. This is positive in the near term, because you have less taxable income.
On the other side of the coin, when you take distributions, they are subject to regular income taxes. The situation is reversed with a Roth individual retirement account. You would make after-tax contributions into this type of account, so there would be no taxes on the distributions.
The tax situation is the same for the primary account holder and non-spouse beneficiaries.
SECURE Act Changes
The SECURE Act became law in December of 2019, and it is a legislative measure that has change the playing field with regard to individual retirement accounts.
With a traditional individual retirement account, there is an age at which mandatory minimum distributions are required. This is because the IRS wants to start getting some tax money eventually.
Prior to the enactment of the new law, this age was 70.5. This was also the age at which all contributions into a traditional account had to cease. Now, mandatory minimum distributions are required when you reach the age of 72, and you can continue to put money into your account without any age ceiling.
There was never a mandatory minimum distribution requirement or a contribution age ceiling with a Roth IRA.
When it comes to the beneficiaries of these accounts, there has been a huge change that affects the estate planning community. Previously, a beneficiary of either type of IRA was required to take mandatory minimum distributions, but they could be spread out for an open-ended period of time.
This would allow the beneficiary to stretch the individual retirement account to take full advantage of the tax-free or tax-deferred growth. Now, all of the assets in the account must be taken out within 10 years of the death of the original account holder.
Schedule a Consultation!
If you would like to discuss your individual retirement account or any other estate planning detail with a licensed attorney, our doors are open. We would be more than glad to gain an understanding of your situation and make the appropriate recommendations.
You can set up an appointment right now if you give us a call at 310-337-7696, and you can send us a message through our contact page if you would prefer to reach out electronically.
Cesar has received his Masters of Science in Integrated Design, Business and Technology from the University of Southern California.
