Update on SECURE Act

There hasn’t been much activity in Congress, so the Stretch IRA has survived a little longer.

The Stretch IRA is on the verge of being eliminated by the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The bill rolled through the House of Representatives by a 417 to 3 vote in May. Since then, a few senators stalled it in the Senate. It might be enacted in the last weeks of 2019, but that’s not clear as I write.

Make no mistake, the SECURE Act or something very similar to it will become law soon. If it doesn’t pass Congress this year, a version will pass in the next year or two. There are many beneficial provisions in the SECURE Act.

Retirement plans would more available, especially to small business employees, because the Act will make it easier and less expensive for employers to offer plans. The Act also would delay required minimum distributions to age 72 instead of 70½. But the SECURE Act would re-quire that most inherited IRAs be fully distributed and taxed within 10 years after the original owner passes away. That provision also would apply to 401(k) plans and Roth IRAs.

The Roth IRA distributions still would be tax-free, but Congress wants the money out of the tax-free accounts. There are exceptions when the beneficiary is a surviving spouse or minor child and in a few other cases.

In general, though, your beneficiaries would not be able to take advantage of the current tax code that allows them to minimize distributions for years and let the IRA compound tax deferred for a long time. The Stretch IRA is the goal of many people with substantial IRAs and other income and assets to help fund their retirements, but it’s a target of a large bipartisan coalition in Congress.

An early version of the Tax Cuts and Jobs Act included a provision eliminating the Stretch IRA. It was deleted before the Act became law in 2017. Before that, elimination of the Stretch IRA was proposed in the President’s budget for about five years, and bills along that line were introduced in Congress.

Financial services industry lobbyists are not fighting to preserve it.

You must assume the Stretch IRA won’t be available to your heirs and alter your plans accordingly. Some people named trusts as their IRA beneficiaries. This is done primarily to protect the assets from creditors of the beneficiaries. A trust also can ensure the assets are well-managed and aren’t quickly spent.

You need a carefully written trust to avoid forcing the IRA to be distributed and taxed within five years after the original owner’s passing. With passage of a version of the SECURE Act likely, however, these trusts need to be rewritten or eliminated. Meet with your estate planning attorney to determine the best method to meet your goals.

There are other steps you can take if you want the wealth in the IRA to survive years after you while minimizing the tax burden. As I already discussed, converting a traditional IRA to a Roth IRA won’t help. Under the SECURE Act, the Roth IRA still would have to be distributed within 10 years after being inherited. But there are other actions that will help meet your goals.

You can empty the IRA early. Distribute all or most of the traditional IRA and pay taxes on it. To minimize your tax burden, you can distribute the IRA and pay the taxes over a period of years. Then, you can transfer the after-tax amount to a taxable account or, better yet, a trust. The trust will ensure professional management and protect the principal from creditors. The trust also allows money to be distributed over an extended period.

Naming a charitable remainder trust (CRT) as beneficiary also is a good strategy if charitable giving is part of your estate plan.

CRTs are flexible. One often-used strategy is to have the trust agreement drafted as part of your will. Name the CRT as the beneficiary of your IRA. After you pass away, the IRA is distributed to the trust, and no income taxes are due. The trust makes distributions each year to beneficiaries you named, such as your children. You set the amount of the distributions. The distributions can be for the beneficiaries’ lives or a period of years, whichever you set.

After annual distributions to the beneficiaries end, charities you named receive the balance of the trust.

There are several other strategies in which you use the after-tax value of the IRA to fund permanent life insurance. These strategies can have several advantages. The amount received by your heirs will be tax-free and guaranteed. It won’t fluctuate with the investment markets.

The amount of the insurance benefit will equal or exceed the current pre-tax value of the IRA in many cases. In some strategies, you will have tax-free access to the insurance cash value the rest of your life. So, in an emergency, you have a source of cash.

I discussed these strategies in more detail in the July 2019 issue.