The Secure Act (Setting Every Community Up for Retirement Enhancement) was signed into law on December 20, 2019 became effective January 1, 2020. The Act has been kicked around since 2016 and was rushed through as part of a compromise spending package. The Act was billed as one intended to strengthen retirement security for Americans by expanding retirement plan coverage for small businesses and allowing part time employees to participate in 401(k) plans. Here’s a sampling of some of the provisions that are enhancements that most people should be aware of:

  1. Contributions to IRA’s now allowed after age 70 ½
  2. Annuity options encouraged inside defined contribution plans. The Insurance Industry lobbied hard for their inclusion.
  3. Penalty free withdrawals allowed up to $5000 for childbirth or adoption expenses. These withdrawals may also be repaid – details pending.
  4. Required minimum distributions age changes from 70 ½ to 72 for those who reach age 70 ½ after December 31, 2019. Someone born prior to June 30th 1949 is still required to begin RMD’s in 2020. Born July 1st or after can delay until 2022! There is also pending legislation that may allow for a lower RMD due to increases in life expectancies since 1986.
  5. Qualified Charitable Distributions can still be made at age 70 ½
  6. Plus, there are many provisions for small employers

However, here’s the kicker… To pay for all these enhancements some beneficiaries of an IRA have to empty the account within ten years after the of death of the IRA holder! Yes, stretch IRA’s are now gone for anyone who dies after January 1, 2020. That ten day period between passage and effective date sure doesn’t give us planners much time to prepare, did it?

Pre-Secure ACT rules for eligible beneficiaries remain in effect for the following:

  • Surviving spouses
  • Children younger than the age of majority (18 or 26 if in college). RMD’s must be made until reaches the age of majority.
  • Beneficiaries totally or partially disabled
  • Beneficiaries not more than ten years younger than the account owner

Distributions can be taken over the life expectancy for these folks.

But, for everyone else (i.e. most children and grandchildren) must now empty the IRA account no later than the end of the 10th calendar year after reaching the age of majority. RMD’s must be taken for minor children until the age of majority is reached offering a temporary reprieve. But for those who have reached the age of majority, there is no longer a required minimum distribution after death. Rather, the funds must be removed within TEN YEARS! This is a huge change from the prior law.

If one passes away before their own required beginning date (age 72) non-eligible beneficiaries (i.e. children and grandchildren) must empty the IRA by the end of the 5th calendar year after the account owner’s death. No change here.

So, what can owners of large IRA accounts do to prevent large sums of taxable distributions for their heirs after death? Three potential strategies:

  1. Roth conversions and tax bracket management. Perhaps you consider paying the tax on IRA’s in low tax year years while you are living, especially until the lower tax rates sunset in 2025. So, IRA owners need to look at their own rates vs the tax rates of their children/grandchildren in an attempt to minimize the tax hit. Remember, if your 50 year old child is the beneficiary of your IRA during their peak earnings years, they could pay as much as 40% tax on the distributions! Roth accounts grow tax free after the tax has been paid which can now offer enhanced legacy planning.
  2. Charitable strategies can be used to minimize taxes for those who are charitably inclined.
  3. Use life insurance to pay the tax until the remaining pre-taxed IRA dollars have been removed from the account. Or, annuitize your IRA account to extend the period of time beyond the ten year mandatory withdrawal period.

These are all quite complex solutions, but, could be worthy of considering with the help of a financial advisor. Now is the time to reevaluate your IRA legacy strategies. It’s certainly not as simple as it was before January 1, 2020!