The Not So Secure Act

The President signed a new law titled the SECURE ACT, short for “Setting Every
Community Up for Retirement Enhancement.” Catchy acronyms for laws can be deceiving. Critics might call it the GRABER ACT, or the Grabbing Retirement Accounts Back Earlier. The result is to severely reduce the amount children will inherit from parents by requiring them to pay income taxes on Iras and 401ks within ten years of the parent’s death. The law is effective January 1, 2020, and gives small businesses tax incentives to provide automatic enrollment in retirement plans for employees, and permits small businesses to join with other employers to offer retirement accounts to employees. Whether this is practical is very uncertain, and the part that allows states to establish such plans appears to have failed in Connecticut.

One positive is that people can contribute to an IRA at any age, instead of the  previous cutoff after age 70.5. Not many people are working at that age so few will have the “earned income” required to contribute. Also, people don’t have to start taking out required minimum distributions (RMD) until age 72.

But here is the grab back part. Under the old law, a person could name a child or other beneficiary to receive the IRA and that beneficiary could take the required minimum distributions over their expected lifetimes. This has been eliminated. Unless the beneficiary is a spouse or a disabled child, the child or other beneficiary must take the entire balance out and pay taxes on it within 10 years. The beneficiary can wait until the 10th year, but it all must come out.

This is hugely detrimental. First, given normal life expectancies, most children are
probably in their 50s or older when both their parents die, and those are the years when their earnings are usually the highest. Therefore they may be in higher tax brackets and have to pay more of the IRA to taxes than if the IRA stretched for their entire lives.

If a child or other non spouse beneficiary has already inherited an IRA before December 31, 2019, the new 10 year rule will not apply to them, and they can still take out the RMD over their lifetimes. Also, the 10 year rule does not apply to beneficiaries who are disabled. That means parents with a disabled child can leave the IRA either directly to that child, or more likely, to a special needs trust, and it can be taken over that disabled child’s life expectancy.

Since individual tax rates, and trusts for descendants can vary widely, it is very important to review the new rules with your CPA, investment advisor and estate planning attorney. That is advisable if a non spouse inherits an IRA after January 1, 2020, or for any person who has established a trust during one's lifetime and has an IRA, or 401(k) going into that trust after death. The trust should be reviewed to determine if it will be affected by the new law. This is a classic example of what the government giveth, it can taketh away.