[Editor's Note: Ed Slott will be hosting a complimentary webcast on this topic with Financial Advisor on July 30. Click here for more information.]
The SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) recently passed overwhelmingly in the House, but as of this writing it sits in Senate limbo.
This bill includes numerous retirement-related provisions, but buried at the end of the bill, under Title IV are the “Revenue Provisions” where Congress tells us how they plan to pay for them. It’s by essentially eliminating the so called “Stretch IRA.” Under current law, the “Stretch IRA” means that after the death of an IRA owner a designated beneficiary can extend distributions, and the tax deferral over their lifetime.
For example, a 30-year old beneficiary can stretch distributions on an inherited IRA over 53.3 years. A designated beneficiary means an individual with a life expectancy (not an estate, charity or most trusts) who is named on the IRA or company plan beneficiary form. Certain trusts can also qualify as a designated beneficiary if the trust qualifies as a “see-through” trust under the tax code.
The SECURE Act would change all of this. The stretch IRA would be eliminated and replaced with a 10-year payout for most IRA or plan beneficiaries (but the current rules are grandfathered for deaths before 2020—those beneficiaries could still do the stretch).
Under the SECURE Act, there would be exceptions for a group that would be known as “Eligible Designated Beneficiaries” which include the surviving spouse, a minor child (but not a grandchild), a disabled beneficiary (subject to the strict IRS requirements), a chronically ill person, or an individual who is 10 or less years younger than the deceased IRA owner.
So now what?
Which clients are most affected?
What should advisors be telling their clients with IRAs and other company plans?
First, even though these are only proposals at this point, advisors must begin planning as if this will be enacted, because it will be at some point. Congress believes that retirement accounts should be for retirement, and not be employed as an estate planning vehicle for future generations. They have a point there and that’s why this provision has been coming up for years.