The SECURE Act: Is It Good For You Or Bad For You?

The Bad News About The SECURE Act

Now let’s get down to the stinking pig.

The SECURE Act contains provisions about workplace retirement plans that I’m not convinced will be all that good for employees.  Those provisions pale in comparison, though, when compared to the worst part of the SECURE Act – and believe me, it’s bad. That provision requires Traditional and Roth IRAs that are inherited by a non-spouse beneficiary to be distributed within 10 years.  (There are some exceptions for minors and children with disabilities, and IRAs that you leave to your spouse are not subject to the rule at all.)  Withdrawals from Inherited Roth IRAs are not taxable to your beneficiary, so the cost of the SECURE Act to them will be limited in the sense that they will eventually lose the tax-free earnings on their inheritance.  Roth IRAs, however, haven’t been around that long.  They weren’t established until 1997 (as part of the Taxpayer Relief Act), and the amount that you can contribute to them is limited.  Even if you were smart enough to jump on the Roth bandwagon twenty years ago, the big problem that everyone seems to be overlooking is that most of America’s retirement money still lies in taxable Traditional accounts.

The existing law allows owners of Inherited IRAs to “stretch” their RMDs over their lifetimes.  The SECURE Act requires that Inherited Traditional IRAs be distributed within 10 years of the original owner’s death. The SECURE Act essentially means the Death of the Stretch IRA.   Since your heirs will no longer be able to “stretch” the distributions from your IRA over their lifetimes, there will be a massive income tax acceleration for them.  And the younger your heirs are, the worse that acceleration will be.

I talked about the consequences of that tax acceleration in my earlier post.  This provision in the SECURE Act betrays those conscientious savers who socked money away for years under the assumption that they would be able to pass it on to their children in a tax-efficient manner after their deaths. To me, the SECURE Act is particularly egregious because this change comes very late in the game for many IRA and retirement plan owners.  It will be devastating to people who have worked hard their entire lives, played by the rules, and accumulated significant amounts of money in their IRAs and retirement plans. It will be even more devastating for retirees whose IRA and/or retirement plan constitutes the biggest asset in their estate because it potentially means a difference of millions of dollars for their children and grandchildren.

There are some things that you can do to help mitigate the consequences of this bill, and I will cover those in a later post.  Thank you for reading.

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James Lange