Secure Act Threatens 'Stretch' IRA Rules That Benefit Heirs

The Secure Act is languishing in the Senate, and some retirement savers are hoping it withers away. The bill, which would overhaul retirement plans, is waiting for a vote by the Senate after receiving a near unanimous vote out of the House in early summer.

But since that House vote, we’ve heard from readers of Kiplinger’s Retirement Report who are alarmed about the bill’s revenue provision, which would take effect in 2020 and essentially kill the “stretch IRA” by requiring many nonspouse heirs to empty inherited retirement accounts within 10 years. For older seniors with established estate plans, “this proposed law would be similar to changing the rules of a baseball game in the eight[h] inning,” one longtime Retirement Report reader wrote.

Under current law, a designated nonspouse beneficiary of an IRA can stretch out required minimum distributions over his or her own life expectancy. The nonspouse heir must retitle the inherited IRA to include both the heir’s name and the deceased owner’s name, and the heir must start RMDs the year following the original owner’s death. That allows the heir to minimize the tax bill by taking withdrawals over his or her lifetime, and it allows more of the money to stay in the account to grow tax-deferred. (To learn more, read How Heirs Can Maximize an Inherited IRA.).

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Under the proposed Secure Act, many nonspouse heirs would instead have to drain their inherited IRAs within a decade. Accelerating inherited IRA payouts diverts thousands of dollars from heirs to Uncle Sam—a disaster in the eyes of the original owners who saved and invested to provide for themselves and their progeny. Forcing nonspouse heirs to make larger taxable withdrawals over 10 years could drive up the tax bill not only on the inherited money but also on heirs’ earned income, too. (To read more about the IRA provisions in the Secure Act, read Secure Act Calls for Changes to IRAs, RMDs).

It’s not just the potential upending of carefully laid out estate plans that worries these readers—it’s the effect on their families. Continued tax-deferred growth of inherited money helps create a sound financial foundation for the next generation. The younger the heir, the more powerful the stretch IRA is because the benefits of compounding increase over time. Another reader lamented the bill would upend his father’s wishes in passing his IRA to his young grandchildren, with his father “anticipating that they would have this money to help with college, perhaps the purchase of a home, and if they only took the required RMDs, eventually their retirement.”

While there are helpful provisions in the bill, such as raising retirement accounts’ required minimum distribution age to 72 from 70½ and repealing the age cap for traditional IRA contributions, a number of Retirement Report readers hope the Senate reconsiders how the Secure Act pays for itself. For other taxpayers who feel the same, share your thoughts with your Congressional representatives in the coming days to ensure your voice is heard before a Senate vote moves forward.