Will Your Beneficiaries Remain “SECURE” with New Bill?
By Paul F. Ciccarelli CFP®, CHFC ®, CLU®

2019 has maintained its status as a year of tumultuous political and economic change, and there may be more developments just around the corner. On May 23, 2019, the House of Representatives approved a bill, which if passed into law, could change the face of retirement savings and how inheritance is passed to your beneficiaries.
The SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement Act of 2019” was introduced to the House of Representatives on March 29, 2019. Some have called the SECURE act the most important piece of tax legislation for IRA owners in a generation. If passed, among other changes, it could have a profound impact on non-spouse beneficiaries when it comes to inheriting large IRA assets. This could be the end of the “Stretch IRA” era. Many experts share the opinion that the SECURE Act will pass, in part because it does not affect the current IRA owner or their spouse during their lifetimes. However, at death, it could raise significant taxes from your children.

The bill would modify the current requirements for employer-provided retirement plans, individual retirement accounts (IRAs), and other tax-favored savings accounts. The aim of this modification is to encourage greater retirement savings in the general population. There has been a concern by some economists and lawmakers that the U.S. retirement savings gap could become a crisis by 2050. Reports on the size and severity of the U.S. retirement gap vary, but the fear that today’s workers will outlive their assets prompted policymakers to create legislation to address perceived shortcomings in our current retirement system.
The bill includes 29 provisions aimed at increasing access to tax-advantaged accounts and preventing elderly Americans from outliving their assets. Some of the provisions in the Secure Act include:
- Repeal of the maximum age for traditional IRA contributions
- Increase of the required minimum distribution (RMD) age for retirement accounts to 72 (up from 70 ½)
- Provide a maximum tax credit of $500 per year to employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment
- Allow long-term part-time workers to participate in 401(k) plans
- Allow more annuities to be offered in 401(k) plans
- Parents can withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses
- Parents can withdraw up to $10,000 from 529 plans to repay student loans
To many, these provisions sound like the ideal solution to the retirement savings problem. There are, however, two sides to every coin. Many of these modifications to the current tax code, such as the increase in the RMD and the tax credit, would require that funding comes from another source. To do this, the SECURE Act would do away with the “stretch IRA”.
The stretch IRA is an estate-planning tool that allows non-spouse heirs to inherit an IRA and “stretch” withdrawals over their life expectancy. This could allow the money in the account to continue to grow tax-deferred for potentially decades. It is a popular planning option for parents or grandparents hoping to provide greater security for their heir’s lifetime.
The change to the stretch IRA would make it a requirement for non-spouse heirs to withdraw funds from inherited IRAs within 10 years of receiving it. There are some exemptions to this rule and they include: if the heir is no more than 10 years younger than the account owner, a minor child, and those who are chronically ill or disabled. In the case of the minor child exemption, the 10-year countdown would still come into effect once they reach the age of majority.
The Senate may add an additional provision on to the bill so that the limitation on inherited IRAs only applies to individual account balances of over $450,000. Overall, the change could most likely impact individuals in their middle ages inheriting an account from their parents while at the height of their career, earning their highest income. Being forced to withdraw money from the account could have noticeable tax consequences for those individuals.
The bill has not yet been signed into law. It has thus-far only passed through the House of Representatives but has been stalled in the Senate. Senate leaders attempted to have it pass via unanimous consent but it was blocked. At this point, it will have to go through the Senate floor and be debated and voted on again. Lawmakers may attach it to one of several spending bills in order to pass it before the 2020 election. However, as it stands, the SECURE Act remains in legislative limbo until further notice.
Those worried that the SECURE Act will upend their beneficiary’s lifetime security may have to consider other options to protect their family’s wealth. In the event that you are passing on significant IRA assets to children and grandchildren, you may have to rethink your estate planning strategy.
There are two possible alternatives that are being discussed among financial planning experts. One idea would be to convert as much of your traditional IRA assets during your lifetime and pay the taxes on them under the current tax rate. The theory behind this strategy is that you will take advantage of the current tax rate since many experts feel the rate might increase in the future.
When a Roth IRA is inherited by a child or grandchild, there is no tax liability associated with the asset. The 10 years maximum withdrawal period is still in effect, but there are no taxes on Roth IRA withdrawals for the beneficiary. The SECURE Act would require non-spouse beneficiaries to empty inherited Roth IRA accounts within 10 years of your passing. In order to optimize the benefits of your Roth IRA conversions over the next 4 years, significant tax and income planning may need to be undertaken. In the long run, a tax of 24% paid today may be significantly lower than what your beneficiaries could pay later.
Another alternative plan combines charitable giving by keeping the assets in the family. In the event you are leaving assets to your favorite charities, you could consider leaving IRA assets to the charity and non-IRA assets to your family.
Some individuals may consider creating their own private “Family IRA STRETCH” that would pay income to beneficiaries over their lifetimes and provide the remainder to the family’s favorite charity after the death of the last survivor. This technique may not affect the original account holder and their spouse during their lifetime, but instead would “turn on” upon the death of the survivor. This technique could also lower the taxable estate value if the estate is taxable at the time of the survivor’s death.
Since the SECURE Act is not yet law, we can only estimate and prepare for any potential impact it may have. Our advisory team remains up-to-date on legislation that could affect your estate plan and will maintain a vigilant eye on any upcoming changes. We will also be discussing the SECURE Act at our 2020 Wealth Symposium if you are interested in learning more about the topic. Please CLICK HERE for event details.
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.