Is The New Secure Act Too Good To Be True? Eligible Designated Beneficiaries Not Affected By New Law Signing
The president recently signed into law the Secure Act, which goes into effect on January 1, 2020, and which is an acronym for Setting Every Community Up for Retirement Enhancement Act. As the name suggests, the focus of the secure act is on retirement planning, but has several provisions. These provisions include raising the age for required minimum distributions of IRAs and 401Ks from 70 ½ to 72; allowing working individuals to make contributions to IRAs after age 70 ½; allowing small businesses to join group 401K plans; allowing 401K plans to include annuities; and allowing 529 plans to repay up to $10,000 in student loans.
The biggest positive changes are that you now no longer have to start taking minimum distribution from an IRA at age 70 ½, but can wait until you reach age 72 and also that if you are still working, you can continue to make contributions into an IRA after age 70 ½. These changes are meant to address the reality that the general population is living longer than ever before and working into ones’ latter years more than ever before. While these changes sound wonderful, there must be a way to offset the lost income tax of these tax deferments. That is where the hit to the beneficiaries comes in.
What happens if one inherits an IRA?
The new law does not affect eligible designated beneficiaries, which includes surviving spouses, minor children, chronically ill individuals or beneficiaries who are no more than 10 years younger than the decedent. These individuals can still take required minimum distributions over their lifetimes.
What about beneficiaries who are adult children, nieces nephews, grandchildren, etc.?
Previously the beneficiary could roll over the IRA into a “stretch” IRA and take minimum required distributions over the beneficiary’s lifetime, allowing the beneficiary to keep the IRA open over many years and get the tax advantages over those many years. Now, under the Secure Act, a beneficiary who does not qualify as an eligible designated beneficiary must completely liquidate and close the IRA within 10 years of the original owner’s death. Thus, your 35 year old beneficiary child, who before could string out the required minimum distribution over 50 years or so must now completely liquidate the account by age 45. According to the Congressional Research Service, this could generate around $15.7 billion in tax revenue over the next decade.
The New Secure Act – What should we learn from all of this?
One, if something seems to be too good to be true, it probably is. Two, one may want to consider converting a traditional IRA into a Roth IRA. It will mean an immediate tax hit for the IRA owner, but none for the beneficiary after the owner’s death. This is something that you may want to look into with your financial advisor. Finally, if you hear someone say the new secure act is good for avoiding paying tax and another say that the secure act is bad for avoiding paying tax, they are both right.
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Joseph E. Balmer
Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.