How New Federal Retirement Laws Affect Your Estate Plan
Federal retirement laws can affect more than when you retire. They can also influence how your savings are taxed, how long your beneficiaries have to withdraw inherited retirement funds, and how much of your estate ultimately reaches your loved ones. For Bay Area residents with substantial retirement accounts, understanding these rules is an important part of estate planning.
The SECURE Act of 2019 and the SECURE 2.0 Act of 2022 changed several rules governing retirement accounts, including individual retirement accounts (IRAs) and employer-sponsored retirement plans, such as 401(k)s. These changes make it important to review your estate plan, particularly if you intend to leave retirement savings to children, grandchildren, or other beneficiaries.
Understanding the SECURE Act’s Inheritance Rules
One of the most significant changes under the original SECURE Act concerns how beneficiaries inherit retirement accounts. For account owners who pass away after December 31, 2019, many non-spouse beneficiaries who inherit an IRA or 401(k) after the account owner’s death must withdraw the entire balance within 10 years following the account owner’s death.
Previously, certain beneficiaries could stretch withdrawals over their own lifetimes, potentially spreading income taxes over several decades. The 10-year rule can accelerate taxable income, particularly when an adult child inherits a substantial traditional IRA and must withdraw funds during their peak earning years.
Exceptions exist for certain “eligible designated beneficiaries,” including surviving spouses, minor children of the account owner, and individuals who meet specific disability, chronic illness, or age requirements. The rules depend on the beneficiary and the circumstances of the account owner’s death.
How SECURE 2.0 Changes Retirement Planning
The SECURE 2.0 Act introduced additional changes that affect retirement savings and distributions.
One important provision raised the age when most retirement account owners must begin taking required minimum distributions (RMDs) from traditional IRAs and many employer-sponsored retirement plans to 73. Under current law, that age is scheduled to increase to 75 beginning in 2033 for individuals born in 1960 or later.
The law also eliminated lifetime RMDs from designated Roth accounts in employer retirement plans beginning in 2024. Roth IRAs already did not require lifetime RMDs for their original owners.
These provisions may affect your retirement income strategy, the timing of taxable withdrawals, and the amount remaining for your heirs. Coordinating retirement account decisions with your broader estate plan can help you evaluate how these rules apply to your circumstances.
Review Beneficiary Designations and Trusts
Your will or living trust does not automatically control who inherits your IRA or 401(k). These accounts generally pass according to their beneficiary designations, which can override instructions in your other estate planning documents.
Review your designations after major life events, such as marriage, divorce, the birth of a child, or a significant change in your financial circumstances. If you intend to name a trust as a retirement account beneficiary, consult an estate planning attorney about the potential tax consequences and distribution rules.
Keep Your Estate Plan Current
Federal retirement laws can change how your assets pass to beneficiaries, but the right approach depends on your family, finances, and goals. An estate planning review can help identify outdated beneficiary designations, evaluate trust provisions, and coordinate retirement assets with your overall plan.
LPEP Law helps individuals and families in the Bay Area with estate planning, trusts, and related matters. Contact us today to schedule your free consultation.
Disclaimer: This article does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.
Virginia Lively
Virginia Lively joined Lonich Patton Ehrlich Policastri in 2016, and has practiced family law exclusively since 2012. In 2018, Ms. Lively became a Family Law Specialist as certified by The State Bar of California Board of Legal Specialization. Her work with clients throughout the Bay Area has demonstrated her expertise in divorce, domestic violence, and spousal and child support as well as tax planning and litigation.
