SECURE Act Causing Unnecessary Insecurity
Amid the turmoil of President Trump’s impeachment, Congress passed the Further Consolidated Appropriations Act, 2020, which the President signed into law on December 20, 2019. Congress attached a stunning 49 bills to the Appropriations Act, among which was the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), which is summarized here.
By concocting the acronym “SECURE,” Congress attempted to bury a tax increase in the form of a retirement security bill. To be sure, the SECURE Act makes some changes to the retirement savings laws that benefit American workers. For example, the maximum age for contributions to IRA accounts has been eliminated (contributions can now be made after reaching age 70 ½) and the age at which distributions from IRAs must commence has been raised from 70 ½ to 72. However, by far the most significant feature of the SECURE Act is the elimination of the “stretch” IRA, the colloquial name by which inherited IRAs have come to be known.
With so much of American workers’ savings being held in the form of tax-deferred retirement accounts such as IRAs, it is becoming increasingly common for retirement savings to outlive the worker who did the saving. When that happens, the excess savings pass to the beneficiary designated to receive the balance upon the worker’s death. When the savings are in the form of an IRA, the person designated to receive the excess savings receives what has come to be referred to as an “inherited” IRA.
Under prior law, a person who received an inherited IRA had to commence making withdrawals right away (rather than being able to defer withdrawals until age 70 ½). However, the inheritor could use his or her own life expectancy to compute the minimum amount that he or she was required to withdraw from the inherited IRA each year. Therefore, younger inheritors could “stretch” the withdrawals over many years and defer the income tax reporting of the withdrawals to minimize the rate at which the withdrawals would be taxed.
The SECURE Act has eliminated this ability to stretch the withdrawal of inherited IRAs. Under the new law, inherited IRAs must be entirely withdrawn within ten years of the original account owner’s death. Accelerating the withdrawals accelerates the income tax reporting—hence the tax increase buried in the SECURE Act. The Congressional Research Service estimates that the SECURE Act will raise an additional $16.4 billion in tax revenue over the next ten years.
Most commentators have fixated on the loss of the stretch provisions and have characterized the SECURE Act as an estate-planning catastrophe. That anxiety may be unwarranted. Under the new rules, the inheritor of an IRA need not take any distributions at all until the tenth year following the original account owner’s death. The new rules require all of the account to be withdrawn within ten years following the original account owner’s death, but they do not specify when or at what pace the withdrawals must occur within that ten-year period. This means that all of the income of the account can grow entirely tax-deferred for a decade following the original account owner’s death. Under the older rules, some portion of the account would have had to be withdrawn during each of those ten years (even if the withdrawals could potentially have been stretched over more than ten years in the aggregate). The benefit of the extra decade of 100% deferral needs to be factored into the analysis of the impact of the new law. At least one commentator’s preliminary review of that math indicates the impact may be minimal.
The SECURE Act is a complex law with many facets. We will be writing more as the SECURE Act becomes better understood.