The SECURE Act’s Impact on IRA Distributions

by Troy Harkey | Feb 11, 2020

What to Tell Your Clients Now 

How To Pass The State Insurance ExamThe Setting Every Community Up for Retirement Enhancement (SECURE) Act is the

most sweeping set of changes to retirement plan and policies since the Pension Protection Act of 2006. The SECURE Act was signed into law by President Trump on December 20, 2019 and most of its provisions went into effect on January 1, 2020. Financial planners and advisers should be aware of some dramatic changes in the retirement planning landscape that affect many, if not most, of their clients.

The SECURE Act has three main purposes:

    (1) make it easier for employers to provide retirement vehicles for their employees,

    (2) provide incentives for employees to participate in saving for retirement, and

    (3) raise revenue for the Treasury by accelerating inherited IRA distributions.

As with any new law, there are winners and losers. In this case, the winners are retirement savers and the United States Treasury. The losers are non-spouse IRA beneficiaries.

While this article addresses the impact of the Act on IRA distributions, it should be noted that there are a significant number of new provisions that encourage small employers to set up, and employees to participate in, workplace retirement plans. Similarly, certain restrictions on IRA contributions have been relaxed; notably, the maximum age for contributing to an IRA has been eliminated.

Key IRA Distribution Provisions:  What Changed?

Increased Age for First RMD

One of the more significant changes the SECURE Act brought about was an increase in the age at which required minimum distributions (RMDs) must begin, from 70½ to 72. As before, the first RMD can be delayed until April 1 following the year an IRA owner turns 72, but then RMDs must be taken by December 31 of every year.   

It is important to note that IRA owners who had turned 70½ in prior years and were already taking their RMDs must continue to do so; the change does not affect them.  Likewise, those who reached 70½ in 2019 must still take their first RMD (for 2019) no later than April 1, 2020.  (Another RMD for the year 2020 will be due by December 31, 2020). These dates must be met in order to avoid the 50 percent penalty on the amount not taken by the required date.

Those who turn 70½ in 2020 do not have an RMD for 2020. 

Reduction in “Stretch” Distribution Period for Beneficiaries

Another notable change for IRAs due to the SECURE Act is the reduction in the “stretch” distribution period for non-spouse beneficiaries.  Upon an IRA owner’s death, any funds remaining in the IRA must be distributed and subject to tax.  Previously, non-spouse IRA beneficiaries could elect one of the following options for the distribution of funds from an inherited IRA:

  • Take an immediate lump-sum distribution. Taxes would be due on the lump-sum.
  • Take the funds by the end of the fifth year following the year the owner died.  Taxes would be due as distributions are received. 
  • Take the distributions over the beneficiary’s life expectancy.  This would effectively “stretch” the distributions – and their associated taxes – over the beneficiary’s lifetime.   It would also enable the funds remaining in the IRA to continue to accumulate tax deferred. 

The SECURE Act simplified the rules on distributions from inherited IRAs, and not necessarily in a good way. IRA funds inherited by individuals other than a spouse must now be fully distributed by the end of the 10th year following the year the original owner dies. 

The new rule applies to IRAs inherited after December 31, 2019.  IRA beneficiaries who were already taking distributions before that date are not affected. They must continue to take these required distributions, but they can do so based on their own life expectancy. 

Those Not Affected

Certain "eligible designated beneficiaries" may continue to take advantage of the "stretch" IRA concept by taking RMDs based on their life expectancy. They include

  • a surviving spouse,
  • a minor child,
  • any beneficiary who is no more than ten years younger than the deceased owner, and
  • any beneficiary who is deemed disabled or chronically-ill

Note that in the case of a minor child, the inherited IRA must be distributed within ten years after the child reaches age of majority for the state in which the child resides.

The Congressional Research Office estimates that the Act's limitation on "stretch" IRAs alone will generate nearly $16 billion in tax revenue over the next ten years.

What You Can Do

  • This is a good time to go over all of your IRA accounts. Pay particular attention to the ages of both the owners and their beneficiaries. If the client turned 70½ prior to January 1, 2020, nothing has changed. They must start or continue RMDs under the old rules. A call from you advising them of this fact would likely answer some questions these clients have.    
  • Clients who will turn 70½ on or after January 1 have the option of deferring the start of their required minimum distributions until April 1 following the year they turn 72.  Again, notifying these clients about the new extended RBD date – and answering any other questions that might arise -- would most likely be appreciated
  • Just as importantly, review all of your clients' IRA beneficiary designations. Where the beneficiary is a trust or a non-spouse, the elimination of the lifetime stretch option must be considered.  One option is to rename the beneficiary to be the spouse.  The surviving spouse could then use the required IRA distributions to make gifts over his or her lifetime to the "disinherited" individuals, who would otherwise be faced with the 10-year distribution deadline.
  • Another strategy might involve using the spouse using the IRA distributions to purchase individual securities in a taxable account. At the surviving spouse's death, the account would pass essentially tax-free, due to the step-up in basis.
  • Finally, it might make more sense than ever to convert a traditional IRA to a ROTH. While the ROTH would still need to be distributed within ten years following death of the owner if the beneficiary is not the spouse, at least the distribution would be tax-free to the beneficiary or beneficiaries.

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