SECURE Act: IRA and Retirement Savings Contribution and Payout Periods Changed – “Stretch” IRAs Dramatically Limited

The SECURE (Setting Every Community Up for Retirement Enhancement) Act (the “Act”) was enacted as part of the massive December 2019 appropriations bill.  The inclusion of the Act was a surprise, since most thought that it had been taken off the table earlier in that year.  For the most part, the new rules are effective for IRAs of owners who die after 2019.  This discussion addresses the Act provisions dealing with owners’ and participants’ interests in account-type retirement plans (not affecting pension-type plans). The Act has good parts and bad parts. (Unless otherwise stated, this discussion applies to both IRAs and Qualified Plan defined contribution interests – e.g., profit sharing, 401(k) and 403(b) plan interests – and to traditional and Roth IRAs and Plan interests.)


First, the good parts of the SECURE Act:

  1. The Required Beginning Date is now age 72. The Act helps by delaying the date when the IRA owner must begin withdrawing from his or her IRA (the required beginning date – the “RBD”) his or her minimum required distributions (“RMD”). Instead of requiring distributions when the owner is 70 ½, the required beginning date is now April 1 following the year in which the owner is 72.  BUT, if the owner was 70 ½ or older in 2019, the new age 72 rule DOES NOT APPLY TO HELP even if the owner who was 70 ½ in 2019 elected to delay the 2019 payment until April 1, 2020.  It appears that, like before, the IRA owner can still elect to delay the first year distribution until April 1 of the next calendar year, but then two RMDs must be paid and taxed in that year.
  2. IRA otherwise deductible contributions can now be made no matter what the age of the owner, but those contributions can limit tax free IRA gifts to charities. Prior to 2020, the owner could not make deductible contributions in the year or years in which or after he or she attained age 70 ½.  Now they can be made, but be careful to note the following:a. The Act did not change the date an IRA beneficiary can begin making a tax free Qualifying Contribution Distribution (QCD”) from an IRA (not from a qualified plan interest) to a qualifying charity, which remains the date the owner attains age 70 ½. But the Act reduces (dollar for dollar) the aggregate QCD income exclusion to the extent the taxpayer made deductible IRA contributions in years in or after he attained age 70 ½. This was done to prevent using the law change to create above the line charitable deductions.
  3. There are new and better life tables to determine and reduce RMDs. This change is not part of the Act, but results from recent regulations. The new tables are effective for distributions beginning in 2021. They are beneficial because they project longer lifetimes.  This causes the RMDs to be lower, which permits delaying distributions and reducing current income tax.  This permits more tax free buildup of value in IRAs, and is especially valuable for Roth IRAs, which are never income taxed.Example: an owner who is 75 with a $1,000,000 IRA balance at the end of the prior calendar year would be required to distribute $40,650 under the new tables, when the owner would have had an RMD of $43,466 under the old tables.  At an assumed 36% combined state and federal marginal income tax rate, the tax savings every year is about $1,000.

Second, the bad parts of the SECURE ACT:

  1. Quicker IRA and Plan payout and tax liability. Before the Act, when an owner died, all individuals named as beneficiaries of IRAs would have distribution periods for determining RMDs based on their lives under IRS tables. This permitted very long payouts and tax free build up inside the IRAs (these are called the “old rules” in this discussion and apply to beneficiaries of owners who died before 2020). Remaining unchanged as before, unless an exception applies, at the death of the IRA owner after 2019, the entire IRA must be paid out within 5 years of death.  However, the ability to stretch out IRA and plan distributions has be severely limited.There remain important exceptions to the 5 year rule, even after the Act:

    A. If the beneficiary is an “eligible designated beneficiary“ (“EDB”), being a specially protected group comprised of: (a) the spouse, or (b) a child of the owner who is a minor or a student under the age of 26 who “has not completed a specified course of education,” or (c) a disabled person or the chronically ill person or (d) a person no more than 10 years younger than the owner, then the very beneficial old rules described above continue to apply (meaning the lifetime payout rules) but limited in duration as described in the below Paragraph 2.

    B. If an individual or one of certain types of trusts (see-through trusts) is the successor beneficiary (a “designated beneficiary” but not a specially protected group of “eligible designated beneficiaries,” discussed above), then at death of the IRA owner the IRA must be paid out no later than the end of the 10th calendar year after the death of the ownerThis is still not even close to the benefit the old rules provided. The old rules permitted all designated beneficiaries to be permitted to use the lifetime payout tables now only reserved for EDBs (and designated beneficiaries who became such because the owner of the IRA died before 2020).

    C. If the owner dies after his or her RBD (April 1 following the year in which the owner is 72), and the beneficiary was not a designated beneficiary or eligible designated beneficiary, the RMDs can be paid out over the remaining distribution period for the deceased owner, but only if in a manner that fails designating “designated beneficiaries,” such as by naming the owner’s living trust instead of the child directly.

    For those deeply following this discussion, this failed designation might be a benefit if the owner is less than age 82 when deceased, because the RMD distribution period could be longer than the 10 year period if given directly to adult children.  However, that longer period requires annual RMD distributions, whereas no distributions are required until the last day of the calendar year in which the 10 year period ends.  The longer period could be achieved simply by designating the IRA to one’s estate or living trust rather than outright to children, or modifying a trust that otherwise would be a see-through trust to longer so qualify.

    Example: If the owner dies at age 74 in 2021, the distribution period of the owner will be 16.3 years, instead of 10 years. So if the estate was named as beneficiary of the IRA instead of the children, the distribution period would be 15.3 years beginning in 2022, instead of 10 years.

  1. Stretch IRA (if it was available) ends at death of beneficiary: all must be paid out within 10 years. Once anybody who is an EBD dies, the balance of the IRA must be distributed in 10 years after the death of that beneficiary (likely as late as the nearest calendar yearend). An additional tougher rule applies to minor children: Once the child of the deceased owner that is an “eligible designated beneficiary” is no longer a minor, or, if later, a student under the age of 26 who “has not completed a specified course of education,” then the child is no longer an EBD and the balance of the IRA must be distributed by the 10th anniversary of that date (likely as late as the nearest calendar yearend). Carefully drafted trusts can hold IRA interests and still take advantage of these longer pay outs. They are conduit trusts, described far below in this article.  Their drawback is that when a child beneficiary ceases to be an EDB because he or she is has attained “majority,” then the entire IRA must be distributed and taxed 10 years later, which could be as early as when the child is 28, or as late as 36.
  2. Surprise: Quicker trust distributions possible. Many so-called “conduit trusts” not revised to address the new rules of the SECURE Act might now be required to pour out high amounts of IRA distributions to descendants to qualify for the 10 year payout or possibly the long term lifetime stretch out of IRA RMD distributions for eligible designated beneficiaries described the paragraph 1.A above. Many trusts that were designated as IRA beneficiaries were written to qualify for the IRA stretch over the life of a child beneficiary.  This required IRA distributions to be promptly distributed to the child when received by the trust. This made sense when the distributed amounts were relatively small because they were designed when anticipating long and relatively low annual RMD payments over the lifetime of the beneficiary.  This also assisted in greater effective asset protection from creditors.  Now hundreds of thousands or perhaps millions of dollars may have to be paid out from the trust directly to a child when he or she may be as young as 28, or other beneficiaries after only 10 years after the owner’s death, which may be unacceptable to the parent who settled the trust.Solution:  The solution is to change the trust to an accumulation trust from a conduit trust when the 10-year payout available to designated beneficiaries is desired. Then there is essentially no limit to the length IRA distribution can remain in trust.  Eligible designated beneficiaries are also designated beneficiaries, so this route is available for them as well.
  1. Locked in slow IRA and Plan payout lost if inheriting IRA beneficiary dies. There is another bad consequence of the SECURE Act that can happen regardless of whether the owner died before 2020: Before the Act, if a person inherited an IRA, then generally the distribution period and RMD for the beneficiary was determined from tables based on the age of the beneficiary at the death of the owner, even if the beneficiary thereafter died, the RMD would continue to be computed under the fixed schedule, no matter who or what succeeded to the IRA interest. In other words, the RMD distribution schedule was “locked in.”  This is no longer the rule.  Under the Act’s new rule, at the end of the 10 year period following the death of the beneficiary who inherited the IRA prior to 2020, the entire remaining balance of the IRA must be distributed and, if not a Roth IRA, fully taxed to the beneficiary.

ACTION NEEDED. Planning for this law change is very important to many.  Trust amendments and IRA and Qualified Plan beneficiary designation changes should be made in many cases.

For more information on this week’s Tax Tip and important estate and tax planning opportunities available, please feel free to contact Les Raatz at x5022 (602-285-5022) or the other estate planners and tax people at this firm.