Got Retirement Savings? Must Read…

The SECURE Act 2.0 introduced some of the most significant changes to retirement planning we’ve seen in decades. Many individuals believe it only pertains to their retirement accounts, or they might not even be aware of these changes at all. However, the SECURE Act 2.0 has a direct effect on how your family members will access your retirement accounts after you pass away and the taxes they will incur, which could significantly reduce their inheritance if not addressed now.

In this article, you will discover what the law has changed, how these updates influence your beneficiaries, the common mistakes families make as a result, and how a thorough estate plan with regular reviews can help ensure your loved ones avoid unnecessary taxes, delays, or stress when they need assistance the most.

Let’s simplify the changes so you can make informed decisions for those you care about.

Why the SECURE Act 2.0 is Important for Your Family

Before we get into the specifics, it’s crucial to recognize that retirement accounts function differently than other types of assets. These accounts are governed by strict regulations regarding taxes, timing, and withdrawals. When Congress modifies these regulations, the inheritance for your family can be significantly affected – sometimes positively, and at other times with unexpected outcomes.

The SECURE Act 2.0, which was enacted in 2022, introduced several important updates to the original SECURE Act from 2019. Many of these modifications alter who benefits from your retirement accounts and the speed at which your beneficiaries are required to withdraw funds. The House Ways & Means Committee states that this legislation signifies “the most significant expansion of retirement savings opportunities in over 15 years” (source: U.S. House Ways & Means Committee).

However, opportunities only arise if your planning is in accordance with the law. This is where families frequently encounter challenges, particularly when older estate plans were created based on regulations that are no longer applicable.

As you will discover, neglecting to revise your plan could lead to increased taxes for your beneficiaries, quicker depletion of retirement accounts, and confusion that complicates an already challenging time.

Key Changes You Need to Know

The SECURE Act 2.0 introduced numerous updates, but the following changes are the ones that most significantly impact you and your family.

1. Required Minimum Distributions (RMDs) Begin Later

The age at which you are required to start taking money out of your traditional IRA or 401(k) has been raised. This change will occur in stages:

● Age 73 for individuals born between 1951 and 1959

● Age 75 for those born in 1960 or later

This adjustment allows you more time for your investments to appreciate before you need to make withdrawals. However, postponing RMDs could also result in larger account balances down the line, which may lead to bigger required withdrawals and higher tax liabilities for your heirs unless your plan addresses this.

Why this is important:

A larger account balance translates to larger taxable withdrawals for your beneficiaries. If your plan does not incorporate strategies to minimize taxes, they might encounter unnecessary tax burdens at a critical moment.

2. The 10-Year Rule for Most Beneficiaries Still Applies

According to the original SECURE Act, the majority of beneficiaries who inherit a retirement account are required to deplete it within a decade, with certain exceptions.

The SECURE Act 2.0 did not eliminate this requirement.

This implies that if your child or another cherished individual inherits your IRA or 401(k), they might have to increase their withdrawals, which could push them into higher tax brackets. The IRS has confirmed that beneficiaries who do not qualify as eligible designated beneficiaries (as outlined in the tax code) must adhere to the 10-year withdrawal rule.

Why this is important:

Your child could forfeit a considerable portion of what you intended to leave for them simply because the withdrawals are mandated to occur more quickly (and thus taxed at a higher rate) than anticipated.

3. Changes Affecting Trusts as Retirement Account Beneficiaries

Many individuals designate a trust as the beneficiary of their retirement accounts, often believing it provides control or security. However, due to the SECURE Act and SECURE Act 2.0, this can lead to unintended consequences if the trust language hasn’t been revised.

Outdated trust provisions might inadvertently:

● Trigger immediate taxation

● Hinder your beneficiaries from accessing necessary funds

● Mandate distributions that contradict your wishes

Given the intricate tax regulations regarding trusts and retirement accounts, outdated planning has become a primary reason for unexpected tax issues for families.

Why this is important:

If your trust was established prior to 2020, or even before 2023, it may not function as you had planned. Your family members could end up facing a tax dilemma instead of receiving a gift.

Here’s a real-life example of how this situation unfolds: Many trusts established prior to 2020 were designed to distribute retirement funds gradually—just a small portion each year according to IRS regulations. This approach made complete sense back then. However, the recent legislation has removed those annual distribution requirements for the majority of individuals.

Now, here’s the issue: if your trust stipulates that it can only distribute ‘the required amount each year,’ and there is no longer a required amount, your trustee is left with no options. They are unable to access the funds for nine years. Then, in the tenth year, when the law mandates that the entire account be emptied, everything is released at once.

Rather than your child receiving manageable sums over time, they are faced with a hefty tax bill all in one year—potentially forfeiting hundreds of thousands of dollars that you dedicated your life to saving for them.

How These Changes Impact Your Loved Ones

You may observe a recurring theme here: although the SECURE Act 2.0 offers advantages for your retirement, it frequently imposes new duties and tax obligations on your beneficiaries.

This is precisely why thorough estate planning goes beyond just paperwork. It’s about providing genuine clarity for your loved ones.

Even minor errors can leave your family:

● Entangled in legal proceedings

● Incurring unnecessary taxes

● Confused about how to access funds

● Experiencing delays that lead to financial pressure

And when they need assistance the most, they will have to navigate everything on their own, unless you have a detailed plan and a reliable advisor who understands your family, your assets, and your intentions.

The Significance of Revising Your Plan Now

Whenever there are changes in federal law, your estate plan needs to adapt accordingly. This is particularly crucial for retirement accounts, as they often constitute a large part of a family’s wealth.

Many traditional estate plans fall short because they remain unchanged. The SECURE Act 2.0 has made this necessity even more pressing. A plan that was established just a few years back might not be effective today.

When we collaborate, we assist you in:

● Reviewing your retirement account beneficiaries

● Identifying tax pitfalls introduced by the 10-year rule

● Updating your trust provisions

● Aligning every account with your objectives

● Creating a thorough and up-to-date asset inventory

● Ensuring your loved ones are fully informed about what to do in the event of an incident

You don’t need to wonder if your plan is effective. You can be certain.

Why Comprehensive Estate Planning Addresses the Issues Created by the SECURE Act

In contrast to traditional planning, which typically concludes with a signed document, a comprehensive plan encompasses:

● A thorough, updated inventory of your assets

● Coordination of beneficiaries across all accounts

● Regular reviews every three years

● A reliable advisor your family can consult when needed

● Assistance for your loved ones after your passing, ensuring they aren’t left feeling overwhelmed

These measures provide the safeguards that keep your family out of court, away from conflict, and free from unnecessary tax complications.

The SECURE Act 2.0 serves as a reminder that laws evolve, and when they do, your plan must adapt accordingly. A static plan is ineffective. A relationship-focused plan is beneficial when your loved ones require it the most.

How to Gain More Knowledge

To ensure that the SECURE Act 2.0 doesn’t impose any undue financial or emotional strain on your family, starting with a Life & Legacy Planning Session is a great idea. In this session, you will clarify your assets, understand how the law impacts your family, and identify the necessary steps to make sure everything aligns with your wishes.

Your family deserves clarity, not unexpected events.

Book your 15-minute discovery call to find out how we can assist you.

Schedule a complimentary 15-minute consultation to learn more.

This article is a service of Kristen Wong of Seasons Estate Planning, APC, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.