For many Californians, their retirement accounts make up a significant part of their estate. Pension plans, 401(k)s, and IRAs are some of the major accounts. When properly addressed in an estate plan, Californians can rest assured that their assets will pass into the right hands upon their death. That may sound simple enough, but the process of estate planning can actually be quite complicated, especially when the law is in a state of flux.
This may soon be the situation for IRAs that are part of an estate plan. The SECURE Act, which is awaiting passage in the U.S. Senate, seeks to impose a number of limitations on how the funds contained within an IRA can be inherited. For example, many IRAs are paid out to beneficiaries over the life of that beneficiary. This extends the IRA tax benefits well beyond the life of the individual who created the account. Congress is looking to limit the withdrawal of these assets to within 10 years of an IRA creator's death, which would subject them to more taxation. If passed, it is likely that inheriting spouses will be exempted from this restriction.
There are other changes that may affect IRAs, too. The age limit for making contributions may be lifted, and academic income, such as stipends and fellowship grants, can be used for IRA contribution purposes. These changes, if implemented, may make it easier for estate planners to generate wealth for their heirs and beneficiaries.
This Act has yet to pass into law, but it does mark a shift in how retirement accounts are viewed from an estate planning point of view. Those who have an estate plan or are thinking of creating one need to ensure that they are staying abreast of the law to ensure that statutory changes don't adversely affect how they want their estate distributed to their loved ones.