When you think about your future and protecting your loved ones, changes in retirement rules might seem confusing. We know it can be a lot to take in, especially with new laws such as the SECURE Act and SECURE Act 2.0 affecting retirement accounts and estate plans.
In California, where estate rules have their own twists, it’s important to keep your plan up to date. We’re here to help you work through what these changes mean for you and your family.
What the SECURE Act is All About
The SECURE Act, short for Setting Every Community Up for Retirement Enhancement Act, was designed to update retirement account rules. One major change is the ending of the “stretch IRA” for most non-spouse beneficiaries. In the past, beneficiaries could take distributions slowly over their lifetime. Now, most must empty the account within 10 years after the account holder’s death. This shift changes how retirement funds pass on to your heirs and may affect your tax bill.
The 10-Year Rule for Inherited Retirement Accounts
Under the new rules, if you inherit a retirement account from someone who was not your spouse, you now only have 10 years to withdraw all the funds. Here’s a quick look at what that means:
- No More Lifetime Stretch: Instead of drawing money slowly, the entire amount must be withdrawn within a decade.
- Tax Impact: Because withdrawals are treated as ordinary income, beneficiaries might face a higher tax bill if they withdraw a lot in one year.
- Exceptions: There are some breaks for certain groups, such as surviving spouses, minor children (until they reach adulthood), disabled or chronically ill individuals, and those close in age to the original owner.
Key Changes Introduced by SECURE Act 2.0
The follow-up law, SECURE Act 2.0, builds on the original act by adding new features that change how retirement savings work. Let’s break down some of the changes:
Higher Required Minimum Distribution (RMD) Age
One of the big updates is the increase in the age when you must start taking RMDs from your retirement accounts.
- Starting Out: The required age has moved from 72 to 73 as of 2023.
- Looking Ahead: In 2033, this age will be raised to 75.
This change allows more time for your retirement savings to grow before you must start making withdrawals.
Changes to Catch-Up Contributions
If you are aged 50 or older, you can add extra money to your retirement plans. SECURE Act 2.0 increases these “catch-up” contributions for older workers.
- New Limits: For employees between 60 and 63, the catch-up contributions will soon be higher than before.
- For High Earners: There are rules for those earning more than a set amount; any extra contributions might need to be made after tax.
Reduced Penalties and New Options
The updated law also reduces penalties for missing required distributions.
- Penalty Reduction: Instead of a steep penalty if you miss an RMD, the fine is lower. If you fix the mistake quickly, the penalty drops even more.
- Roth Choices: There are more options now for contributing to Roth accounts within employer-sponsored plans, which can be an appealing way to handle taxes.
How These Changes Affect Estate Plans in California
These federal changes have a direct impact on how you might want to plan your estate in California. Here are a few areas where the new rules can make a difference:
Beneficiary Designations
With the changes to inherited retirement accounts, it is wise to review and possibly update your beneficiary designations. If you have not updated these in a while, it might be time to make sure your current wishes are clearly reflected.
Tax Planning
The move to require the full withdrawal of non-spousal inherited accounts within 10 years can lead to a larger tax hit in a short time. This may mean that your heirs could face a bigger tax bill. By working with professionals, you can consider strategies such as:
- Staggered Withdrawals: If possible, plan for withdrawals over several years to help spread out the tax impact.
- Roth Conversions: Converting a traditional IRA to a Roth IRA might help reduce future tax burdens, even though the conversion itself is taxable.
Adjusting Asset Distribution
The new rules might prompt you to think about how you divide your assets. For instance:
- Review Trusts: If you have a trust in your estate plan, you may need to adjust how retirement accounts are handled.
- Special Needs Trusts: These trusts, often used to support a loved one with disabilities, might need to be set up differently so that they can continue to receive benefits from a retirement account over time.
Real-Life Family Examples
Consider a family with young adult children. With the 10-year rule, if one parent passes away, the adult child may need to withdraw the entire inherited account in a decade. This could mean higher taxes during what might be a peak earning period. In contrast, a family with a disabled child might be able to benefit from provisions that allow them to stretch out the distributions over the child’s lifetime. These examples show why it is so important to review your estate plan when these laws change.
Estate Planning Strategies to Consider
There are several practical steps you can take in light of these new rules:
- Update Beneficiary Forms: Make sure that all your retirement accounts, insurance policies, and other assets have the correct beneficiary information.
- Consider Alternative Tools: Besides direct inheritance, you might use trusts or other estate planning tools to help manage how and when your assets are distributed.
- Plan for Taxes: Work with your financial and tax professionals to coordinate withdrawals and plan for the tax impact of inherited accounts.
- Life Insurance: In some cases, life insurance can help make up for the rapid distribution of retirement accounts, ensuring your heirs have enough funds available.
- Multi-Generational Plans: Think about spreading distributions over more than one generation, which can help manage taxes and provide long-term support.
A Few Points to Remember
- Review Regularly: Life changes and laws change. Make it a habit to look over your estate plan every few years.
- Stay Informed: Keep up with the changes in retirement rules so you can adjust your plans accordingly.
- Personal Touch: Your estate plan should reflect your personal goals and family needs. It is not a one-size-fits-all document.
Why a Personalized Estate Plan Matters
At Vistas Law Group, we believe that your estate plan should reflect your family’s needs and goals. With over 20 years of experience in trust and estate litigation right here in California, we have seen how a well-thought-out plan can help avoid surprises down the road. When you work with us, you get a plan that considers your unique situation and adjusts as your life changes.
We understand that dealing with legal matters can sometimes feel overwhelming. That’s why we aim to keep things simple and straightforward without confusing jargon. We work with you to set up your estate plan so that it fits your wishes and provides a clear path for your loved ones. Whether it’s making sure your retirement accounts are distributed in the most tax-friendly way or planning for unexpected events, we are here to help you work through each step.
Ready to Secure Your Future?
We invite you to get in touch with us if you need help adjusting your estate plan in light of the SECURE Act and SECURE Act 2.0. Our team is ready to listen to your goals, answer your questions, and help set up a plan that protects what matters most to you. Give us a call at 213-745-8747 (Los Angeles) or 951-307-9154 (Inland Empire) or visit our website to schedule a consultation. Don’t leave your future to chance—let’s work together to keep your legacy safe for the people you care about.