Take-Away: The SECURE Act is a Bill now being considered by Congress. The Bill has considerable bipartisan support, which means that parts of it might actually become law in the next couple of years. If adopted, the SECURE Act would have a dramatic impact on retirement planning (both contributions and distributions.) If some of the following provisions sound a bit familiar that is because several of its provisions were in the former Retirement Enhancement and Savings Act Bill, that was unanimously voted out of the Senate Finance Committee a couple of years ago, but was never adopted.

SECURE Act Summary:

The Good:

  • IRAs: An individual over the age 70 ½ would be eligible to continue to be able to make tax deductible contributions to an IRA. [effective after 2020.]
  • RMDs: The attained age when required minimum distributions (RMDs) must be taken would increase from age 70 ½ to age 72 years. [effective after 2019]
  • 10% Penalty for Early Distributions: New exceptions would be added to the existing rules where a 10% penalty would otherwise be imposed on a distribution from an IRA prior to age 59 ½. These new exceptions would permit a $5,000 distribution for the expenses associated with childbirth or adoption. [effective after 2019]
  • Qualified Plans: The date by which a qualified plan sponsor would must have adopted the qualified plan would be extended from December 31 to the due date for the plan sponsor’s income tax return. [effective after 2019]
  • 529 Accounts: While historically the tax-free distributions from such accounts were limited to higher education expenses, we have seen recent incursions to permit tax-free distributions for other educational purposes. These proposals would expand the permissible tax-free education expenses paid from a 529 account to include: distributions to pay for registered apprenticeships, home schooling, and the repayment of up to $10,000 qualified student loans (including the student loans of the beneficiary’s siblings.) [effective after 2019]

The Bad:

  • Stretch IRAs: The Act would curtail the current stretch IRAs for an inherited IRA. Under the proposal, rather than take taxable distributions from the inherited IRA over the beneficiary’s lifetime, the inherited IRA would be distributed to the non-spouse beneficiary over a period of 10 years after the IRA owner’s death. [effective in 2019]
  • Under the prior Retirement Enhancement and Savings Act Proposal Congress looked at a couple of years ago, this curtail the stretch proposal is arguably an improvement. Under that earlier proposal, the mandatory distribution period was 5 years, and not 10 years. Also under the prior proposal, there was a ‘carve out’ of $450,000 of the IRA that would not be subject to the mandatory 5-year payout. However, that carve-out would have been unwieldy to monitor if there were more than one IRA beneficiary; the carve-out amount is abandoned in the SECURE Act proposal.

Planning Consideration: As I suggested a couple of years ago when the Retirement Enhancement and Savings Act was first announced, there is a mitigating ‘work-around’ if, in fact, the stretch IRA opportunity is dramatically curtailed. Consider designating a charitable remainder annuity or unitrust (CRT) as the beneficiary of the decedent’s IRA. The IRA assets paid to the CRT would not be subject to immediate erosion in the payment of income taxes because the CRT is a tax exempt entity; all IRA assets could then be reinvested, not just after-tax assets. Under current CRT rules the CRT must pay to the beneficiary at least 5% of its assets each year, which functions much like an inherited stretch IRA that is subject to RMDs. The IRA assets invested in the CRT grow tax deferred until actually distributed to the CRT beneficiary. When the distributions are made from the CRT to its beneficiary, those distributions will be subject, at least in initial years of the CRT, to tax as ordinary income, just as would all of the RMD distribution from the inherited IRA. The only drawback to naming the CRT as beneficiary of the decedent’s IRA is that 10% of the initial value of the IRA must ultimately be paid to a charity. Obviously all of these attributes of naming a CRT as IRA beneficiary will have to be weighed with the 10% mandatory remainder to a charity.

As noted, there is growing bipartisan support in Congress [which sounds something like an oxymoron these days] for the SECURE Act. Whether it becomes law is another thing, but as we head towards the 2020 elections, it is possible that both Republican and Democrat legislatures might rally around this piece of legislation just to be able campaign that they are capable of working with members of the other party.