Tax Connections Newsletter – Spring 2023
Robert Swenson

Who are your beneficiaries?

“Nonprobate assets” are those that bypass more traditional estate planning vehicles, such as a will or revocable trust. Instead, they are transferred to family members through beneficiary designations. Nonprobate assets can include IRAs and certain employer-sponsored retirement accounts, life insurance policies and some bank or brokerage accounts.

If you have designated beneficiaries for certain assets, it is critical to review your choices periodically. This is especially important after a major life change, such as a divorce or the birth of a child or grandchild.

Related Read: Value of an Estate Plan Review with a Second Marriage

Conduct your review

As you review your beneficiary designations, consider the following best practices:

Name a Primary Beneficiary and at Least One Contingent Beneficiary
Without a contingent beneficiary for an asset, if the primary beneficiary dies before you — and you do not designate another beneficiary before you die — the asset will end up in your general estate and may not be distributed as you intended. In addition, certain assets offer some protection against your creditors, which would be lost if they were transferred to your estate. To ensure that you control the ultimate disposition of your wealth and protect that wealth from creditors, name both primary and contingent beneficiaries and avoid naming your estate as a beneficiary.

Update Beneficiaries to Reflect Changing Circumstances
Designating a beneficiary is not a “set it and forget it” activity. Failure to update beneficiary designations to reflect changing circumstances creates a risk that you will inadvertently leave assets to someone you did not intend to benefit, such as an ex-spouse.

It is also important to update your designation if the primary beneficiary dies, especially if there is no contingent beneficiary or if the contingent beneficiary is a minor. Suppose, for example, that you name your spouse as primary beneficiary of a life insurance policy and name your minor child as contingent beneficiary. If your spouse dies while your child is still a minor, it may be advisable to name a new primary beneficiary — such as a trust — to avoid the complications associated with leaving assets to a minor (court-appointed guardianship, etc.). Note that there are a lot of nuances to consider when deciding to name a trust as a beneficiary.

Consider the Impact on Government Benefits
If a loved one — for example, a disabled child — depends on Medicaid or other government benefits, naming that person as primary beneficiary of a retirement account or other asset may render them ineligible for those benefits. A better approach may be to establish a special needs trust for your loved one and name the trust as beneficiary.

Keep an Eye on Tax Developments
Changing tax laws can easily derail your estate plan if you fail to update your plan accordingly. For instance, the SECURE Act, enacted in 2019, sounded the death knell for the “stretch” IRA.

Previously, when you left an IRA to a child or other beneficiary (either outright or in a specially designed trust), distributions could be stretched over the beneficiary’s life expectancy, maximizing tax-deferred savings. But the SECURE Act requires most nonspousal beneficiaries of IRAs to distribute the funds within ten years after the owner’s death. In light of this change, you should review the designated beneficiaries for your IRAs and other retirement accounts.

Align your estate planning goals

No matter how carefully you plan your estate, your objectives can easily be thwarted by inappropriate beneficiary designations for nonprobate assets. Avoid unintended consequences by reviewing your beneficiary designations regularly to make sure they are still appropriate and that they align with your overall estate planning goals. Contact your estate planning advisor to help you determine if you need to make any changes to your current estate plan.

SECURE 2.0: New tax benefits for retirement savers

The benefits of setting aside funds in tax-advantaged accounts just got even better. The long-awaited SECURE 2.0 Act, enacted at the end of 2022, expands on the improvements made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). Now you can save more and save longer for retirement, at a lower tax cost. Here are the highlights of the new law.

Saving more

Notably, the law contains provisions that enhance catch-up and matching contributions. Catch-up contributions are designed to help older retirement savers who did not set aside enough money earlier in their careers. For example, in 2023, you can contribute up to $22,500 to a 401(k) or similar employer-sponsored plan (up from $20,500 in 2022). Plus — if you are 50 or older — you can make a catch-up contribution of up to $7,500 (up from $6,500 in 2022). For IRAs, the maximum contribution is $6,500 (up from $6,000 in 2022) plus a $1,000 catch-up contribution.

Under SECURE 2.0, starting next year, the catch-up amount for IRAs, which has stalled at $1,000 for many years, will be adjusted for inflation. In addition, starting in 2025, participants in 401(k) and similar plans who are 60 through 63 will be allowed to make catch-up contributions up to $10,000 (adjusted for inflation) or 150% of the regular catch-up amount, whichever is greater. Using the 2023 numbers for purposes of illustration, that would equate to a catch-up contribution of up to $11,250 ($7,500 x 150%).

Beware: Starting in 2024, catch-up contributions by highly-compensated participants in employer plans will be required to make those contributions to a Roth account. In other words, these participants will not be allowed to make catch-up contributions on a pre-tax basis. For purposes of this limitation, a highly compensated participant is one who earned more than an inflation-adjusted $145,000 from the plan sponsor in the previous year.

SECURE 2.0 also makes improvements to employer matching contributions. If permitted by the plan, employees may: 1) Receive matching contributions in a Roth account; and 2) starting in 2024, treat certain student loan payments as contributions for matching purposes. This second provision allows employees to receive employer matches without having to decide between contributing to their retirement accounts and paying down student debt.

Saving longer

From a tax perspective, the longer you leave funds in an IRA or employer-sponsored retirement plan, the better. That is because they continue to grow tax-deferred (or tax-free in the case of a Roth account), allowing your savings to multiply more quickly. Plus, for tax-deferred accounts, such as traditional IRAs or non-Roth employer plans, the longer you wait to withdraw the funds, the more likely you are to be in a lower tax bracket.

SECURE 2.0 allows you to save longer by increasing the age at which you must begin taking required minimum distributions (RMDs) from IRAs and employer-sponsored qualified retirement plan accounts. You may recall that the SECURE Act increased the RMD starting age from 70½ to 72, for taxpayers who turn 70½ after December 31, 2019. SECURE 2.0 raises the RMD starting age even further, first to 73 (for taxpayers who turn 72 after December 31, 2022) and later to 75 (for taxpayers who turn 73 after December 31, 2032). The following table shows the applicable RMD starting age according to your date of birth.

If you were born:

Your RMD starting age is:

Before July 1, 1949


From July 1, 1949, through December 31, 1950


From January 1, 1951, through December 31, 1959


On or after January 1, 1960


If your 72nd birthday is in 2023, you may have previously scheduled a distribution for this year based on prior law (which would have required an RMD by April 1, 2024). However, SECURE 2.0 gives you a one-year reprieve: Your first RMD will not be due until April 1, 2025.

Other notable changes include:

  • Reducing the penalty for a missed RMD from 50% to 25% of the amount that should have been withdrawn and to 10% for taxpayers who correct the mistake on a timely basis; and
  • Eliminating RMDs, beginning in 2024, for Roth accounts in employer-sponsored plans.

Related Read: What is Your Required Minimum Distribution Age?

Saving for college

Section 529 college savings plans are a great tool. However, if you do not need all the funds for qualified educational expenses, withdrawals are subject to taxes and penalties.

SECURE 2.0 allows you to roll over unused 529 plan funds, tax- and penalty-free, into a Roth IRA for the same beneficiary. Rollovers are subject to annual limits on IRA contributions and a lifetime cap of $35,000 per beneficiary. In addition, the 529 plan must be at least 15 years old, and rollovers cannot be made from funds contributed within the previous five years (or earnings on those contributions).

Revisit your plan

These are just a few of the many tax benefits offered by SECURE 2.0. Your tax advisor can review your plan to ensure that you are making the most of these benefits and maximizing your retirement savings.

Related Read: How will SECURE 2.0 Affect Your Retirement Plan Administration?

Sidebar: Technical corrections required

It is common for complex laws to contain mistakes, and SECURE 2.0 is no exception. As a result of apparent drafting errors in the law, there is some ambiguity over when the starting age for required minimum distributions increases to 75. Although it seems clear that Congress intended it to apply to people who reach age 73 after December 31, 2032, the law says it applies to “an individual who attains age 74 after December 31, 2032.” Another apparent drafting error prohibits any catch-up contributions to employer-sponsored plans in 2024.

Congress is expected to make technical corrections to these provisions to ensure that the law works as intended. As of this writing, no corrections have been made.

For more information, contact Rob Swenson at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Tax Services.

Forward Thinking