When you’re planning your financial future, individual retirement accounts (IRAs) often emerge as an invaluable tool. But what happens to your IRA when you’re no longer here? Does it go through probate, the often cumbersome and expensive legal process of estate administration?
Let’s unravel the complexities surrounding IRA transfers, probate, and how the law shapes your options.
The Role of Beneficiary Designations
Whether your IRA goes through probate hinges on the beneficiary you’ve designated. If you name an individual like your spouse, child, or friend, the account will skip probate entirely. But there’s a caveat: if the beneficiary predeceases you and you haven’t updated your estate plan, the IRA might end up in probate court. To prevent this, always name an alternate beneficiary.
If you choose to name your estate as the IRA beneficiary, expect the funds to wade through the probate process. While not ideal, some people deliberately make this choice for various reasons.
The SECURE Act: A Game Changer
Let’s pivot to crucial legislative updates that affect IRAs. The Setting Every Community Up for Retirement Enhancement (SECURE) Act went live in 2020 and transformed several IRA rules. For example, it extended the required minimum distribution (RMD) age for traditional IRAs from 70.5 to 72 and allowed for unlimited contributions as long as you have earned income.
However, the most seismic shift impacted estate planning. Before the SECURE Act, non-spouse beneficiaries could “stretch” RMDs over their lifetime, optimizing tax benefits. Now, beneficiaries must deplete the IRA funds within 10 years, potentially generating higher taxes.
SECURE Act 2.0
Passed by the House Ways and Means Committee in May 2021, the Securing a Strong Retirement Act (informally known as SECURE Act 2.0) was finally signed into law by the president in December 2022. It went into effect this year and includes some additional changes to the IRA parameters.
First, the RMD age for traditional account holders is now 73; it will eventually rise to 75. Employers are now required to enroll all eligible employees into their retirement savings plans.
Speaking of employers, under the terms of SECURE Act 2.0, they can choose to provide retirement account matches of qualified student loan payments that are made by employees.
The saver’s credit for low to middle-income account holders has been expanded and simplified. In addition, the catch-up contribution for savers that are between the ages of 60 and 63 will increase. In 2025, it will go from $7,500 annually to $10,000.
Consult an Estate Planning Attorney
Clearly, the intersection of IRAs, probate, and legislative updates creates a nuanced landscape you can’t afford to navigate blindly. Whether it’s selecting the right beneficiary to sidestep probate or adapting to legislative changes, professional guidance is indispensable.
When you work with our firm, we will be in a position to guide you based on the current circumstances from a legislative perspective. Your personal situation is the other piece of the puzzle, and we will provide recommendations based on your unique circumstances.
At the end of the process, you will go forward with a carefully constructed plan that is ideal for you and your family.
As time goes on, things may change in your own life, and there can be new laws that impact your estate plan. After your first plan has been created, we will always be available to adjust your plan if and when it becomes necessary.
If you are ready to get started, you can schedule a consultation at our Phoenix, AZ estate planning office if you call us at 888-222-1328. There is also a contact form on this site you can use if you would prefer to send us a message.