January 2020 Monthly Insight – Securing the SECURE Act

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Jan 1, 2020


“I am prepared for the worst, but hope for the best.”

– Benjamin Disraeli, British statesman and novelist

On May 23, 2019, the U.S. House of Representatives, in a near-unanimous vote of 417-3, passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act.  The SECURE Act contained significant changes to retirement accounts, required minimum distributions (RMD), and inherited IRAs.

A few days later, on June 3, 2019, the House submitted the legislation to the Senate, where it languished until December 19, when the Senate passed the SECURE Act as part of a “must pass” year-end $1.4 trillion funding bill funding the U. S. government through fiscal year 2020.

One of the most significant changes in the SECURE Act is the elimination of the “stretch IRA” for non-spouse beneficiaries.  Effective January 1, 2020, any non-spouse beneficiary, such as a child or grandchild who inherits on IRA must fully distribute the IRA by December 31 of the 10th year after death.  This is a major change for late baby boomers and their kids who were hoping to stretch an inherited IRA over the life expectancy of a younger beneficiary.

For example, let’s say Dave passed away last year (2019) at age 84, leaving his 60-year-old daughter, Diane, a $500,000 IRA.  Diane, at age 60, can stretch the IRA by taking only the yearly RMDs over her life-expectancy of 25.2 years.  Thus, she can preserve long-term tax deferred growth and provide herself life-time income.

The scenario is different now.  Under the SECURE Act, if Dave passes away this year or later, Diane must take all distributions from the IRA by the end of the 10th year after Dave passed away.  There are now no annual RMDs, but just one BIG one: 100% of the balance at the end of 10 years.  She loses the ability to have life-time income, enjoy long-term tax deferral, and efficiently manage income taxes over her working and retired years.  Under both rules, however, beneficiaries can always accelerate distributions and take the money out sooner.

Fortunately, there are several classes of beneficiaries that will not be subject to this new 10-year rule.  These beneficiaries, referred to as “Eligible Designated Beneficiaries,” are (1) spousal beneficiaries, (2) disabled beneficiaries, (3) chronically ill beneficiaries, (4) individuals who are not more than 10 years younger than the decedent, and (5) certain minor children (of the original retirement account owner), but only until they reach the age of majority. For these Eligible Designated Beneficiaries, the same rules that applied to them before the SECURE Act will continue to apply after the SECURE Act.

It’s important to remember these rules do not affect current inherited IRA beneficiaries.  The rules to follow are the ones that were in place on the date of death of the original IRA owner.  So, the 10-year rule will affect only beneficiaries inheriting from a decedent who dies after January 1, 2020.

Another change affecting owners of qualified plans and/or traditional IRAs is an 18-month extension to the age that RMDs must start.  That age is now 72.  It’s a more straightforward approach to start RMDs at 72, rather than trying to figure out when you turn 70½ and what age factor to use for the first RMD.  However, this change applies only to individuals who turn 70½ in 2020 or later.  If you, turned age 70½ last year and regardless whether you took your initial RMD, you will continue under the old rules and must take an age-71 RMD this year and every year thereafter.

Many people over age 70½ say they are retired but continue to work part-time, consult, or have some sort of retirement gig that they enjoy doing.  In the past, folks over 70½ who had compensation but didn’t have access to a work place plan could not contribute to an IRA because contributions were not allowed if over age 70½.  That prohibition is not longer in place. If you otherwise qualify, anyone over age 70½ can now contribute to an IRA, including those with a spouse that is still working and are contributing under the IRA spousal rules.

The new rules will mean a new landscape when it comes to retirement and estate planning. How will they affect you? You may have some new opportunities to make IRA contributions or be able to access your retirement funds without penalty. You may be able to delay taking RMDs a little bit longer. You should give some serious consideration to how the elimination of the stretch will affect you. Reviewing your beneficiary designation form is a good place to start. 

If you have any questions about how the SECURE Act will affect you, your family, your estate plan, or anything else, please reach out to us.  We appreciate you and enjoying working for you.  We wish you and your family a very happy New Year.