The SECURE Act Kills the “Stretch” IRA
Written by Craig Wisnom
In surprising bipartisanship, the recently passed spending bill signed by the President includes a dramatic change for retirement plans, like IRA’s and 401ks. Referred to as the “SECURE Act,” the House approved the basics of the bill 417-3 in early 2019, and the final version was passed with overwhelming majorities by Congress in December 2019. Despite that level of political support, the law will have some drastic and unwelcome changes for IRA beneficiaries after the death of a loved one.
SECURE does not change the taxation of retirement plans per se, but it changes the rules as to when withdrawals must be made. On the positive side, as it relates to an owner’s own IRA while they are alive, the required starting age is pushed back from 70.5 to 72 (unless the IRA owner turned 70.5 before December 31, 2019, in which case the old rules apply). The downside is that SECURE generally ends what is commonly known as the “Stretch IRA” for beneficiaries after the IRA owner’s death.
Under prior law, if you named an individual as the beneficiary of your IRA at your death, that beneficiary was required to start taking distributions from the account spread out over that individual’s own life expectancy. For instance, if the beneficiary was 45 years old, the beneficiary would have had to start withdrawals from the IRA based on a 39 year life expectancy. A beneficiary could always withdraw more than the minimum, but money is taxed whenever it is withdrawn. In the above example in the first year, the beneficiary would have to take out about 2.5% of the IRA value.
Under SECURE, all money must be withdrawn from the IRA within 10 years of the owner’s death. There is no annual distribution requirement – it can be taken out all at the end or spread out in any manner over those 10 years – but that’s it. Therefore, this change significantly accelerates the taxable income on retirement accounts.
There are exceptions to the new requirement, the most common is naming a spouse as the beneficiary. A spouse has always had special benefits under IRA rules, and now it is even more important to consider the benefits of naming your spouse as a primary beneficiary. The other exceptions include delays to the required distribution for minor children, and also for a disabled or chronically ill beneficiary or a beneficiary no more than ten years younger than the IRA owner.
With the loss of the “Stretch IRA” beneficiary designations may become simpler because the IRA owner won’t need to worry about all the required rules to allow for the stretch. Overall, this change won’t necessarily change your estate plan or the recommended beneficiary designations. While there is no such thing as a easy change, if the accelerated income tax impact is serious enough, there are some complex planning options like Charitable Remainder Trusts that can be considered. No matter what, these changes make it a good time to review all your beneficiary designations to ensure they are accurate, and to meet with your attorney to review the provisions of your estate plan that address retirement plan assets.