Factoring in retirement to an estate plan can be confusing, tiresome, and complex. In fact, this aspect is arguably the most difficult part of estate planning because you can never be positive about exactly how much money you will need in retirement. With the influx of new estate planning tools this year also came some changes in the way retirement planning should be approached. Here are five changes that could affect the way that you plan for retirement next year.
Decreased Creditor Protection in Inherited IRAs
This year, the United States Supreme Court ruled that creditors can gain access to the funds in an inherited IRA. As discussed in a previous post, the justices in Clark v. Rameker found that inherited IRAs are not considered retirement funds for the heir, and therefore they do not get the same protections as the original IRA holder under federal law.
This ruling could change how some people decide to give their assets to their heirs because of the lack of creditor protections in an inherited IRA. An alternative to an IRA could be certain types of trusts or instruments allowing for a spendthrift provision.
Qualified Longevity Annuities in 401(k)s
Annuities have always been part of retirement plans, and often they serve as the primary form of payment offered to married participants in a defined benefit plan is a qualified and joint survivor annuity. This year, the Treasury Department changed its rules to allow longevity annuities, which can be used to help pay for long-term care expenses and protect against outliving assets. You can now have a qualified longevity annuity contract (QLAC) inside of an IRA or 401(k), and it can be worth up to either 25% of the account balance or $125,000, whichever is less.
Reduction of IRA Rollovers
If you have an IRA you are allowed to either take a distribution, or roll the funds within sixty days to avoid taxation issues. Before this year, each IRA was individualized in this regard – if you had five IRAs, you had to make the decision five times. However, a tax court ruling this year held in Bobrow v. Commissioner that the twelve month, one rollover limitation now applies to all IRAs. This means that only one sixty-day rollover is allowed per twelve months regardless of how many IRAs you own.
Increased Access to Annuities in Target Date Funds
In addition to allowing QLACs, the Treasury Department also allowed expanded access to annuities within 401(k) plans. The new rules allow 401(k)s to offer “target date funds.” The target date fund can include annuities that begin payments at a certain date. This can be as early as retirement or at a much later age. In this way, it gives you another way to have guaranteed retirement income and protect from running out of money later in retirement.
Introduction of myRA
A new type of Roth IRA, the “myRA,” was also introduced this year. This new IRA will give individuals earning under $129,000 annually and married couples who are filing jointly earning less than $191,000 annually that have no access to an employer-sponsored retirement plan the ability to save for retirement.
The maximum contribution to the myRA every year will be the same as the annual Roth IRA contribution limits: $5,500 per year and $6,500 per year for people aged fifty and older. The myRA will be free for employers to make available for employees, and the employee’s contributions will be taken directly out of their payroll through direct deposit.