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The SECURE Act of 2019 (for individuals)

| February 17, 2020

As 2019 came to a close, the President signed into law a sweeping series of changes that will affect how we save for retirement. Officially entitled the Setting Every Community Up for Retirement Enhancement Act, but more commonly known as the SECURE Act, the new law includes both welcome changes and controversial elements.

One of the changes made, and one we’ll spend some time discussing, is about the rules that govern inherited IRAs, or so-called “stretch” IRAs. Before we get to that, let's quickly review the major changes created under the new bill.

Major changes occurring:

  1. If you turned 70½ on January 1, the initial required minimum distribution (RMD) for a traditional IRA is being raised from 70½ to 72.
  2. You may continue to contribute to a traditional IRA past the age of 70½, as long as you are working and have earned income.
  3. Through the first year of an adoption or birth, parents can withdraw up to $5,000 without penalty from a traditional IRA or employer-sponsored retirement plan, such as a 401(k).
  4. Annuity options improve within a 401(k).
  5. Part-time employees will receive greater access to 401(k) plans, and several provisions make it easier for small businesses to offer retirement plans.
  6. Up to $10,000 in assets held in a 529 plan may now be used to repay student loans. In addition, tax free distributions from 529 plans can now be used to cover registered apprenticeships.
  7. The new law requires the Department of Labor to propose rules that will illustrate the participant’s projected monthly income in retirement based on current retirement assets.
  8. A plan participant will no longer be able to access 401(k) funds for loans with a credit card.
  9. The “kiddie tax,” which is a tax on the unearned income above $2,200[6] for children, has new rules which revert to prior law where the net unearned income of a child will be taxed at parents’ tax rates (if the parent’s rates are higher than the rates of the child).
  10. Taxable non-tuition fellowship and stipend payments will now be treated as compensation for IRA contribution purposes.

Inherited IRAs

Previously, if you inherited an IRA, you were allowed to take distributions from the retirement account over your life expectancy. That is to say, a healthy 40-year-old person who inherited an IRA from his or her mom or grandfather could withdraw the funds over several decades.

While there are exceptions for spouses, minor children (until they reach the age of majority), disabled individuals, the chronically ill, and those within 10 years of age of the decedent, the new law requires that you withdraw the assets within 10 years if the decedent passed away after December 31, 2019. There are no changes to inherited IRA accounts for those who died prior to 2020.

In addition to the initial tax bite and the implications for estate planning, you may lose out on the tax deferred benefits that accrue from sheltering assets in an IRA account over an extended period of time.

Listed below are several strategies to help reduce the tax bite and an example for each one.

Delaying within the 10-year window. Tom is 63 years old, plans to retire when he is 68, and inherits an IRA from his uncle valued at $300,000. Recognizing that his income will decline at retirement, Tom may decide to delay withdrawals until he reaches 69, when he expects to be in a lower tax bracket.


Accelerating within the 10-year window. Cindy, who is 22 years old, inherits an IRA. She may decide to accelerate withdrawals if she expects to be in a lower tax bracket during the front-end years of the ten-year required distribution period.


Wealth replacement trust. Susan is age 50 and desires to maximize what she will eventually leave to her adult daughter Amy. Susan decides to purchase a life insurance policy on her life owned by an irrevocable trust. Upon Susan’s death, the insurance proceeds are held in trust and invested until the 10th anniversary when the retirement plan balance must be distributed and the tax is due.[1]


Low income beneficiaries. Nancy is 77 years old and has two adult children, Maggie and Paul. Maggie is in a high tax bracket whereas Paul is in a low tax bracket. Nancy decides to name Paul as the sole beneficiary of her IRA and bequests an amount of “tax efficient” assets to Maggie that leaves the inheritance equalized among the two children[2]. In this manner, the total tax liability across both children is minimized.


For those charitably inclined. Bob is 74 years old and wants to leave a portion of his IRA to charity, but also provide for his adult daughter. Instead of naming both his daughter and a charity as beneficiaries, Bob chooses to establish a charitable trust and name it as the sole beneficiary of his IRA. The charitable trust is set up to provide an income stream to his daughter while she’s living with the remainder passing to charity upon his daughter’s death.

Alternatively, Bob could name a charity as the sole beneficiary of his retirement plan and purchase a life insurance policy for the benefit of his daughter with a death benefit equal to the value of the retirement plan assets. In this example, no taxes would be due (the qualified charity is excluded from owing tax on the retirement assets and life insurance death benefit proceeds are income tax free).[3]

It’s worth noting that the charitable beneficiary in both these examples can be a donor advised fund which can provide more flexibility to adjust and recommend ultimate grants.

Roth conversions. Carl is 65 and desires to leave his IRA balance to his two adult children. Carl is retiring next year and has plenty of after-tax money to live off of. Early in retirement, before Social Security begins and while his income is near zero, Carl converts his pre-tax retirement savings to a Roth IRA.

While traditional retirement accounts are subject to ordinary income tax, Roth IRAs are income tax free. Carl’s children may still be subject to the 10-year rule, but they will not owe any tax on the Roth distributions[4]


Trusts as beneficiaries—changes are coming

It’s always a good idea to periodically review beneficiaries whether or not the tax laws change.

That said, when it comes to trusts as the beneficiary of an IRA, generally speaking there are two types of trusts: conduit and discretionary (accumulation trusts).

With a conduit trust, we may be facing a situation that doesn’t allow the beneficiary to receive a distribution until the tenth year. Needless to say, this would create a very large tax bill when the distribution is received.

With an accumulation trust, the distributions from the inherited IRA are paid to the trust and the trustee has greater discretion as to whether the funds will be held within the trust or paid to the beneficiary.

While this provides greater control, it may come at the cost of much higher taxes. As you may already be aware, the tax rate applied to funds in a trust is much steeper than individual tax rates, i.e., income over $12,950 in the trust is taxed at 37% while it takes $518,400 of individual income to reach the same tax bracket.[5]

Direct gifts from IRAs to charity

One final comment on the ability to make contributions to IRAs past 70½ and QCDs, or qualified charitable distributions. You may continue to directly transfer up to $100,000 per year to a qualified charity directly from your IRA at 70½. You may also decide to wait until you are 72 to donate via a QCD, which will satisfy the RMD rule.

Going forward, however, IRA contributions made after age 70½ cannot also be part of a QCD.

This means that if you contribute $6,000 to a traditional IRA after 70½ and later donate $50,000 in a QCD, you will lose the deduction for $6,000 of that QCD. The remaining $44,000 of your donation will still qualify as a QCD.

As you may be finding, there is some complexity that surrounds this recent legislative change. While this abstract covers some of the main points in the legislation as it pertains to individuals, it is by no means intended to be comprehensive. As always, we encourage you to consult with your own independent tax and legal advisors before taking action on any items outlined herein.

[1] Estate Planning New Year’s Resolutions: Resolve To Plan Better, Martin Shenkman

[2] Financial Advisor Magazine, A Tax-Smart IRA Beneficiary Plan For The SECURE Act, JANUARY 9, 2020, JAMES G. BLASE

[3] Estate Planning New Year’s Resolutions: Resolve To Plan Better, Martin Shenkman

[4] Financial Advisor Magazine, Estate Planning Options Under The SECURE Act, JANUARY 20, 2020, JEREMIAH H. BARLOW