Another SECURE Act Surprise for Inherited IRAs

The IRS recently issued an interpretation of the SECURE Act that surprised most, if not all, professionals who have reviewed the law.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019, contained a number of provisions related to retirement and estate planning. One of those provisions eliminated the Stretch IRA by establishing the so-called 10-year rule.

Before the SECURE Act was enacted, beneficiaries who inherited IRAs could choose to take only the required minimum distributions (RMDs) from the IRAs each year. That allowed the tax-deferred compounding of investment returns to continue for years.

The IRA would increase in value until the beneficiary needed or wanted to take larger distributions. In other words, the beneficiary could stretch the life of the IRA.

The SECURE Act abolished the Stretch IRA for most IRA beneficiaries who inherit IRAs after 2019. It required most inherited IRAs to be fully distributed within 10 years after the original owner died.

Professional advisors who read the act interpreted it as allowing the beneficiary to decide how the money was to be distributed during the 10 years. The beneficiary could take no distributions until the end of the 10-year period or could take distributions in any pattern during the period.

The planning community was shocked recently when the IRS released its 2021 revisions to IRS Publication 590-B. This is the IRS’s guide to taxpayers on the rule for taking distributions from IRAs.

On pages 11 and 12 of Publication 590-B, and especially in an example on page 12, the IRS indicated that the old rules carry over and the SECURE Act’s 10-year rule is in addition to the old rules.

According to the publication, beneficiaries of IRAs have to begin taking RMDs after inheriting and continue to take them each year until the IRA is fully distributed. The IRA has to be fully distributed by the end of the 10 years, but in the meantime, the beneficiary has to take annual RMDs until the IRA is fully distributed.

The interpretation wasn’t announced or highlighted by the IRS. Instead, tax professionals discovered it after reviewing the newly revised 2021 edition of Publication 590-B.

In the IRS’s view, this rule applies to most beneficiaries who inherited IRAs in 2020, though they weren’t aware of the rule.

But most advisors say there’s no hurry for beneficiaries who inherited IRAs in 2020 or inherit them in 2021 to take RMDs. The IRS publication doesn’t have the force of law.

In fact, a few years ago the IRS won a court case in which it argued that taxpayers couldn’t rely on statements made in IRS publications and that the IRS was free to enforce a contradictory interpretation of the law.

Beneficiaries might want to wait until the IRS issues its official regulations on the SECURE Act changes. Until the regulations are issued, taxpayers have a reasonable cause to ask for a waiver of any penalties imposed for not taking the RMDs, especially if the beneficiaries received an opinion from a tax advisor that RMDs aren’t required during the 10-year period.

Lessons from Audrey Hepburn’s Estate

For many years, I’ve said that most estate disputes and arguments occur over the personal items and items that often seem to be trivial or at least not worth a lot. They have more emotional and sentimental value than monetary value.

That’s proved to be true in the long-running dispute over actress Audrey Hepburn’s estate. Hepburn died in 1993, and the estate wasn’t settled until 2017.

Hepburn had two sons who are half-brothers. In her handwritten will, Hepburn left most of the estate equally to the two sons. But she didn’t specify how they were to share in her possessions, only that they were to share equally. Hepburn left it to the two sons to decide how to divide the assets.

The brothers disputed the division of the estate for many years. The major disputes were over the memorabilia from Hepburn’s career.

The memorabilia included posters, costumes, gloves, scripts with handwritten annotations, awards and photos that Hepburn kept in a storage locker in Hollywood.

The brothers worked on the division until 2015 when they filed a court suit over the issue. After that dispute dragged on, the two finally reached a settlement in 2017 under which most of the items would be sold at auction and the proceeds split equally between the two.

An estate plan should anticipate disputes over such items and not leave it up to siblings to work out an agreement. That’s especially true with personal items whose monetary value is unknown and can only be determined by an auction or other sale.

In past issues of Retirement Watch, I’ve detailed different ways in which an estate plan could handle the division of personal items. The best choice for an estate depends on the items and personalities involved, but it rarely is to say simply that the heirs should figure out how to divide the items equally.

Stock Returns Never Have Been So Concentrated

Six stocks account for more than 25% of the S&P 500’s market capitalization.

If you invest in an S&P 500 Index fund or another fund that follows one of the major stock indexes, your returns and volatility are closely tied to these six stocks: Facebook, Amazon, Apple, Microsoft, Netflix and Google, sometimes known as the FAAMNGs.

That’s not bad as long as these companies continue to grow rapidly, earn high profit margins and generate a lot of cash.

But the danger of this situation was apparent recently when Netflix (NFLX) issued its first-quarter earnings. After rocketing higher during the pandemic, the company’s subscriber growth slowed during the first quarter. The stock declined from around $550 to below $510 in one day and brought the major indexes down with it.

Many analysts believe NFLX’s growth will continue to slow as we enter a post-pandemic economy, and the company faces more competition in the streaming market.

There are a lot of parallels between today and the period before the tech stock crash in 2000 (though there also are important differences). At that time, the high-flying tech stocks had significant weightings in the stock indexes.

But when the tech stocks crashed and brought the major indexes down with them, a lot of stocks generated positive returns.

The FAAMNG stocks and the indexes will continue to appreciate as long as the companies meet or exceed the expectations of investors. But if, like NFLX recently, the growth or profit margins of the companies falls, their stock prices also will fall and weigh down the indexes with them. But they might not drag down the price of the many stocks that lagged the indexes over the last year.

The Data

New unemployment claims announced last week declined to 547,000 from 576,000 the previous week. That was a new low since the beginning of the pandemic.

About 17.4 million people are receiving some form of unemployment benefits. Plus, about eight million fewer Americans are employed than before the pandemic.

Consumer Confidence, as measured by The Conference Board, increased substantially for the second consecutive month. It stood at 121.7 in April, following a 109.0 reading in March. The Consumer Confidence Index is at its highest level since February 2020.

The Present Situation Index increased to 139.6 from 110.1 in March, while the Expectations Index rose modestly.

Home prices saw their largest 12-month increase in 15 years in February, according to the S&P CoreLogic Case-Shiller Home Price Index.

Prices increased 1.2% in February, following a 1.2% increase in January. The 12-month increase is 11.9%. The 12-month increase was in double-digit-percentages in all U.S. regions.

The Federal Housing Finance Agency (FHFA) House Price Index had similar results. In February, prices climbed 0.9%, following a 1.0% increase in January. The House Price Index jumped 12.2% over 12 months.

Total existing home sales in March were 3.7% lower than in February, according to the National Association of Realtors (NAR). That’s the second-consecutive month of declines. Over 12 months, sales increased 12.3%.

This was the highest sales rate for March since 2006 and the fourth-highest sales rate for March since NAR began compiling the data.

New home sales for March were 20.7% higher than in February and 66.8% higher than 12 months earlier. Also, sales for the three previous months were revised sharply higher.

The March 2021 new home sales were the highest monthly sales rate since 2006.

The Leading Economic Indicators index from The Conference Board surged by 1.3% in March. But the increase announced last month for February was revised down to a 0.1% decrease.

Durable Goods Orders increased by 0.5% in March, following a revised 0.9% decline in February. Excluding the volatile transportation sector, orders increased 1.6% in March.

Core capital goods orders, which is a good measure of business investment, rose 0.9% in March following a 0.8% decline in February.

The Kansas City Fed Manufacturing Index continued to indicate manufacturing is growing rapidly in the Midwest. The index for April jumped to 31 from 26 in March.

Manufacturing still is expanding in Texas, according to the Dallas Fed Manufacturing Survey. The production index developed from the survey declined to 34.0 in April from 48.0 in March. But 34.0 still indicates above-average growth.

The general activity index increased to 37.3 from 28.9 in March.

The Richmond Fed Manufacturing Index was unchanged at 17 in April, indicating solid growth in manufacturing for the mid-Atlantic region.

The services sector continues to rebound, according to the PMI Composite Flash Index for mid-April. The services index increased to 63.1 from 60.4 while the manufacturing index climbed to 62.2 from 59.7. The composite for the economy advanced to 62.2 from 59.5.

The Markets

The S&P 500 rose 1.30% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.51%. The Russell 2000 surged 5.18%. The All-Country World Index (excluding U.S. stocks) added 1.66%, while emerging market equities gained 1.79%.

Long-term treasuries lost 0.62% for the week. Investment-grade bonds increased 0.03%. Treasury Inflation-Protected Securities (TIPS) added 0.31% and high-yield bonds gained 0.23%.

On the currency front, the U.S. dollar declined 0.37%.

Energy-based commodities increased 2.67%. Broader-based commodities rose 4.40%, while gold dipped 0.06%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.