The Setting Up Every Community for Retirement Enhancement Act, or SECURE Act as it's popularly known, was attached to the omnibus spending legislation enacted in late 2019.
Taxpayers, lawmakers and investment advisers generally supported most of the measure's changes to how we stash and ultimately access our retirement funds.
One SECURE provision, however, is causing some concerns, especially among those who have accumulated large IRA holdings and who had planned to leave the bulk of that money to heirs.
They and, more importantly, their heirs no longer have access to what used to be known as a stretch IRA.
Ending extended inherited benefits: Under this inherited IRA plan, the retirement account's designated beneficiary could extend, or stretch, post-death required minimum distributions over his/her lifetime.
This could mean, for example, that a young heir might have a 70-year payout period.
No longer, pun intended.
The SECURE Act eliminates the stretch IRA. Instead, IRA beneficiaries now, effective with the 2020 tax year, must deal with, in most cases, a 10-year payout of the IRA.
The SECURE Act did carve out some exceptions
The legislative and fiscal reasoning is obvious. The sooner the IRA money is taken out, the sooner Uncle Sam gets his cut.
Remember, even if the IRA is invested in a stock account, the payouts are taxes not at typically lower capital gains rates, but at ordinary income tax rates.
Making bequest changes: Folks most affected by the change also are obvious.
They tend to be those with large IRAs who had planned on leaving most of the accounts to young beneficiaries, such as children and grandchildren, who could extend the account payouts over their lifetimes.
The change also affects IRA owners who named a trust as their IRA beneficiary.
So what's the owner of a big IRA bequest to do now that the SECURE Act has, from their perspectives, undermined some of the financial security of their heirs?
Today's Saturday Shout Out items are a couple of articles that look at stretch IRA alternatives.
First, there's the Barron's article by Cheryl Winokur Munk that looks at 5 alternatives to the stretch IRA. (You should get a preview of the piece before the financial website asks you to subscribe to read more.)
Roth IRA options: A brief spoiler to both articles. To reduce the inherited IRA tax bite, both authors suggest, among other things, that the owners of the regular (traditional) IRAs convert them to Roth IRAs before bequeathing them.
The SECURE Act also requires the 10-year withdrawal of inherited Roth IRAs.
But unlike traditional IRAs, Roth IRA withdrawals aren't taxed. That means the compressed decade distribution period won't pose added tax burdens, at least as far as levies on the money withdrawn from the IRA, for the next 10 years.
Note, though, that the added income could push the heir into a higher tax bracket.
Secure bequests with proper planning: The wise words of Roseanne Rosannadanna remain as applicable today as when she first uttered them decades ago: It's always something.
That inevitability means that you need to consult with your tax and financial advisers before making any changes to your bequests.
It's also probably a good idea to talk with those whom you plan to leave some funds, either in an IRA or otherwise, so they, too, won't be caught off guard financially during what will already be a trying time.
You also might find these items of interest:
- Ways to pay Roth IRA conversion taxes
- Retirement plan tax inflation adjustments for 2020
- Traditional IRA contributions can be made and claimed as late as April 15