The New “SECURE Act” and Its Impact on IRA Beneficiaries

Italian Abacus

Changes coming in 2020

Heads-up everyone – President Trump signed the SECURE Act into law on December 20, 2019.  Its effective date is . . . . tomorrow – January 1, 2020. So, what IS the SECURE Act and why are so many estate planning attorneys nervous, or insecure about its ramifications? First off, that friendly sounding but vague acronym stands for Setting Every Community Up for Retirement Enhancement Act.  The Act was passed as part of the larger year-end spending package. What I’m looking at in particular are a couple big changes it will have on traditional IRAs and adult child or other non-spouse beneficiaries. So let’s have a look at the big picture.

Death of the Stretch IRA as We Have Known It

What exactly is “retirement enhancement” as envisioned by the Act?  Well, it depends upon your perspective!  What gets an estate planner’s nervous attention is a “small” provision with big repercussions.  The soon-to-be obsolete longstanding IRS rules regarding inherited IRAs have traditionally allowed non-spouse beneficiaries of those inherited IRAs to take distributions over their lifetimes, which is a big deal if a beneficiary is motivated to spread out those distributions which must otherwise be declared as income.  This was known as the “stretch IRA” – but all that changes in the SECURE Act.  A Forbes magazine article on the House’s bill referred to it as a “hidden money grab.”   Bottom line is that there are big tax dollars that the IRS will otherwise be collecting from the elimination of the old stretch rules.  This means it will be time for many folks to rethink their strategies. Why?

What will be required now is that the most of those inherited (non-spousal) IRAs (where the named beneficiary is more than 10 years younger than the owner) – which many older adults were using to augment their adult children’s paltry options for their own retirement savings – can no longer be “stretched” over the child beneficiary’s lifetime but must be liquidated within 10 years of the IRA account owner’s death. Ouch! There are some limited exceptions to this of course… Here’s a link to the Congressional Research Service’s two-page memo about the House Bill, updated October 24, 2019.  But it’s not all bad.

A Bit of Good News

You might also like to read MarketWatch’s article about the new law, as it discusses an upside to the SECURE Act, namely the removal of the age restriction (70 ½ years of age) after which a contributor could not add to their traditional IRA. Starting with the 2020 tax year, an IRA contributor can continue to make contributions – so that’s a bit of good news.  Also of note is that the old required minimum distribution age – which was also 70 ½ – has been raised to 72.

Security Is Like Beauty, It’s In the Eye of the Beholder

I have previously blogged about the precarious nature of what we Americans call “retirement security” – I don’t think this SECURE Act will allow many of us to feel more “secure” about the precarious state of retirement and planning for it.

Bottom line – who is feeling more secure about this Act? Not too sure at this point…. It seems likely that those well-heeled retirees will be spending more on their tax planning strategies for their IRA beneficiaries!

©2019 Barbara E. Cashman, www.DenverElderLaw.org