The "SECURE" Act- Really?

The SECURE Act has made your IRA beneficiaries less secure!

The SECURE Act has made your IRA beneficiaries less secure!

Remember as a child, playing outside with neighborhood friends?  There was always that kid who seemed to win at every game.  He was usually older and more aggressive.  While he claimed superior skills, you knew it was because he had a habit of changing the rules, mid-game, to suit his fancy.  The passing of The “SECURE Act is a great example of changing the rules partway through the game.  Only now, it’s your IRA beneficiaries who stand to lose the most, not you.  

The massive budget bill enacted by Congress and signed into law by President Trump on December 20, 2019, called the SECURE Act (“Setting Every Community Up for Retirement Enhancement”) is a complete game changer and will have a negative impact on non-spouse IRA beneficiaries for generations to come.  It calls for over $1.7 trillion of spending- apparently to be paid for by accelerating the distributions of your tax-deferred retirement plans.  Talk about changing the rules mid-game!

As with most laws that come out of Washington, this one is very complex with timing rules, trigger dates, and those ever present ‘exceptions’.  Below is only one example of the most sweeping change and what it means to you and your non-spouse IRA beneficiaries.  Spoiler alert- it ain’t pretty… 

Sample Case Study
Widow, age 85, with a $1,000,000 IRA.  Single daughter, age 60, is sole beneficiary.

Before the SECURE Act
At mom’s death, daughter rolls mom’s IRA to an Inherited IRA and takes Required Minimum Distributions over her remaining life expectancy, or about 25 years.  This ‘stretches out’ payments and spreads out the taxes owed on annual distributions.  For many years, this has been the standard approach for tax-deferred retirement plans with non-spouse beneficiaries.  At an assumed 6% return, daughter’s total before-tax lifetime payments project to be about $2,200,000.  Not bad.  However, under the new SECURE Act the payout is now limited to a maximum of only 10 years after the death of the plan owner.  Ouch! 

After the SECURE Act
What effect will this have on her income taxes and lifetime payments?  Taxes double, payments decrease.  Daughter is now required to withdraw the entire balance over 10 years instead of 25, receiving $1,300,000 before-tax instead of $2,200,000- almost 40% less!  Interestingly, there are no Required Minimum Distribution rules to be met, only that the entire balance be withdrawn by the end of the 10th year.  Holding funds until that time and withdrawing the entire balance, however, would result in a significantly increased tax burden and isn’t recommended.  Either way, it appears, depending on individual circumstances, that the SECURE Act has reduced the value of a typical IRA to beneficiaries by about 40%.  Double ouch!  Even if the funds withdrawn over 10 years are held for another 15, the amount is still significantly less than what the previous law provided.

There is, however, one important thing to always keep in mind with any plan that attempts to defer taxes.  That is, when you postpone the tax, you also postpone the tax calculation!  Will tax rates be higher or lower in the future?  Past history would suggest higher.

So, what can be done about all of this?  For most professionals, the solutions to these IRA issues were to just kick the IRA tax can down the road using temporary fixes.  Never a good plan- we can see where that got us.  Einstein said “We can't solve problems by using the same kind of thinking we used when we created them.”  At Hood Financial, we are natural problem solvers and go beyond typical approaches using both creative and critical thinking to benefit our clients.  Call our office at 760-752-7848, email us here, or click on this calendar link to schedule a 10-15 minute “Get Acquainted” phone call so we can see how we might help you beyond your current level of planning.  Together, we just might be able to make the Secure Act far more secure for you and your IRA beneficiaries!