Alive and Kicking: SECURE Act Provisions Still Tripping Up Clients

Alive and Kicking: SECURE Act Provisions Still Tripping Up Clients

The Stretch IRA stratagem: in the old days, I wrote about it so often, I often wished it would vanish.

I’ll take anything else, so long as it’s new. I owe some of you an apology, I suppose – but I didn’t know anyone was listening.

Congress killed Stretch in 2019. The instrument of public execution, in self-important caps, wears the cognomen SECURE. It’s full name, as arcane as we get in the US of A, is the Setting Every Community Up for Retirement Enhancement Act. If you practiced Stretch IRA, ‘enhancement’ is not the word you might choose, unless you’d call a guillotine an ‘enhanced height-reduction system’.

SECURE passed Congress with broad support from both aisles. Old Stretch now molders in his grave. We dust off our hands and get on with what’s left – luckily, quite a lot, and – surprise! – our friend Stretch may be pulling an undead routine.

Background first: in the pre-SECURE days, if you inherited an IRA, you could run the Stretch. Many inheritors didn’t bother, using IRA largesse to pay off mortgages, buy a nice ride, sort out a fishing shack for retirement – cashing it in quick to get hands on big-ticket items. Such folks aren’t interested in stratagems.

People who’ve provided big for retirement, though, or those young enough not to need major cash yet – although a regular supplement via the required minimum distributions (RMD) might be appealing – liked the Stretch IRA idea. Most of us need to learn to forget, though some still live the Stretch dream. Lucky souls?

Stretch worked this way: in the first few years, the beneficiary would take only the RMD. This bought time for IRA to keep on growing, tax-deferred. Some beneficiaries made this approach permanent, keeping the IRA intact by taking the minimum, then passing the account on to heirs. It was sweet, if you could manage it. Well, take a pinch of sugar now to salve any bitterness.

SECURE demands that one must empty an inherited IRA within ten years of receiving it. You can take the RMDs, withdraw the funds in equal portions year by year; go lump-sum should you please, or mix and match as your needs demand or your demands need – whatever you wish, so long as IRA’s pantry is empty at deadline. If you don’t, there’s a penalty on laggardly funds – 50%.

My Byzantine ancestors hated Athens, if you please, because they conquered our backsides and demanded a tax – 25 fully armed men, every annum. Take a look again at what Uncle Sam will take if you don’t dump out that IRA in a decade. If it happens, you’ll be wishing they were asking for hoplites.

A curiosity: SECURE’s dictates apply to Roth IRAs, too, despite the proceeds being untaxable. That’s a key rationale behind the Act: more taxes. I recall no oration on taxes during debates on SECURE, yet I can’t feign surprise. They need drachmas – we’ve got ‘em. It’s eternal, but so is complaining; indulge.

Roth IRA got caught in the frenzy, I think, as did 401(k)s, and 10-year withdrawal rules apply for inheritors. I’m unsure of the aim; it encourages spending, some say – a roundabout way to boost tax-take. It all sounds Athenian to me.

Never mind; get ready. If you’re planning to leave an IRA to heirs, or you’re in line for such largesse, you’ll need to know the basics. That way, you can talk knowingly later on with an expert advisor.

First, good news: you only need fear the 10-year rule if the original IRA holder died after 2019. If you inherited an IRA earlier on, the old rules apply and you can Stretch, if desired. Grandfathering saved the day for locked-in Stretch IRA practitioners; for agents, a point worth driving home to clients. The matter’s complexity has confused many otherwise savvy customers.

Warning: if you’re holding an IRA you intend to pass on, name an individual – repeat that to yourself, please – as a beneficiary, post-haste. Individuals are the sole allowable beneficiaries under law: neither trusts nor corporations or charities can be named beneficiaries, with arcane exceptions. Please don’t die with this simple task undone, lest your gift become a millstone for heirs.

If an IRA holder dies before reaching the required beginning date (70½ years of age for those under the pre-SECURE rules; 72 for those in the new regime) for RMDs, a 5-year rule rears up: the IRA holdings must be completely distributed within that handful of years. This could be tax-ugly for the inheritors. If the IRA owner thoughtfully passed away after the required beginning date, all is as well as can be under the circumstances.

Good news again – lend me more ears. Surviving spouses who inherit an IRA don’t have to deal with the 10-year rule: the pre-SECURE rules apply. The survivor can employ the Stretch IRA, if wanted. A ‘fresh start’ is available, too, done by rolling the inherited IRA into the survivor’s own IRA. The old IRA effectively disappears, while the survivor’s enhanced IRA is treated as normal, its status unchanged under law. ‘Fresh start’ is a wonderful alternative for IRA inheritors.

The SECURE Act designates other parties who can inherit IRAs similarly to surviving spouses. These include minor children of the deceased IRA holder; disabled or chronically ill designated beneficiaries; and beneficiaries who are no more than a decade younger than the fallen IRA gift giver. Minor children are only exempt from SECURE rules until they reach majority age. Keep in mind that grandchildren are not eligible beneficiaries under this exception – a common mistaken assumption, we’ve found.

Stretch never befriended many people in his time, but those who knew him –they kind of loved him. For some, his strategy’s benefits are intact to enjoy. For the rest of us, the dead pass on and life is for the living, as a Russian proverb says, apt for our condition. We don’t lack for alternatives: life insurance, trusts, the Roth IRA despite it all, and myriad others. Good advice is an email away.

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