Estate planners have been watching Congress closely, waiting to see what will happen with the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The legislation, designed to boost Americans’ retirement savings, has implications for individual savers and for those planning to pass an inheritance to the next generation.
The SECURE Act passed the House of Representatives in May with a nearly unanimous margin of 417-3. The bill is considered to have strong bipartisan support and advocates are optimistic it will pass by year-end. If it doesn’t pass via a unanimous consent vote in the fall, pundits suggest it will be attached to a year-end spending bill.
Eliminating the stretch
The bill eliminates the stretch provision for inherited IRAs, which means beneficiaries will no longer be able to stretch out over their lifetimes distributions from inherited IRAs.
If enacted, the SECURE Act would require inherited IRAs to be dispersed within 10 years following the original owner’s death. The change eliminates the ability to shelter cross-generation inheritance income for decades, making taxes due much sooner on inherited IRAs.
A few exceptions remain. Spouses will still be able to use the stretch provision, as will beneficiaries who are disabled, chronically ill or minor children. However, once a minor child reaches the age of majority, the 10-year clock would kick in.
This change would have a detrimental impact on high-net-worth individuals who had intended to pass sizable IRAs to children or grandchildren. The SECURE Act would significantly reduce the long-term benefits of such gifts.
Critics say such retroactive changes amount to a breach of promise to savers who stored money in IRAs intending to create lifelong benefits for their heirs. Some critics suggest that such a move also opens the door for Congress to make other retroactive changes, such as taxing certain Roth IRAs in the future or eliminating the stretch for spousal IRAs.
Benefits for younger and older workers
The SECURE Act includes provisions designed to make it easier for small businesses to offer retirement plans. Under the bill, tax credit incentives are available for businesses that set up new retirement plans and for those that switch to automatic enrollment.
For older workers, the SECURE Act would push the required minimum distribution age to 72 (up from 70 ½) and eliminate age restrictions on IRA contributions.
For younger workers, the bill would allow penalty-free withdrawals of up to $5,000 in the year following a birth or adoption.