How the SECURE Act Will Impact Your Retirement Plan

(Image credit: Jason York)

published 11 February 2020

Ryan Ermey: If you haven't heard of the SECURE Act, listen up. It could very well affect your retirement savings, and IRA expert Ed Slott joins the show to tell you how in our main segment.

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Sandy Block: One thing to look for if you really do want to do something on Valentine's Day is look for fun discounts. We've seen chain restaurants that offer buy one, get one free discounts to Valentine's Day dinner. And you're guaranteed to get good deals on desserts, Krispy Kreme and other doughnut shops will sometimes offer heart-shaped pastry freebies. Now I'm not sure that's really going to get you off the hook, "Here's a doughnut, honey," but it's a nice way to start the day.

Ryan Ermey: So this is coming out on Monday. It's the 10th so you have a little bit of time to make a restaurant reservation, but they really are going to be filled up. But a lot of times you're going to get a prefixed menu. It's going to be probably a little bit friendlier to your wallet if they have some kind of Valentine's promotion. However, our friends at DealNews, and this is advice from Michael Bonbright who is a consumer analyst there, he suggested avoiding traditional Valentine's Day presents this late in the game because essentially, you're paying surge pricing. So chocolates, stuffed animals, heart-shaped jewelry, all of this stuff is going to go on sale after Valentine's Day. So if you can convince your significant other like, "Hey, let's wait until ...," I mean, it's convenient this year.

Ryan Ermey: Yeah, just wait until Saturday, go to the grocery store, get some roses then. It's a Hallmark holiday, folks. If you can talk with your partner and figure this out, it shouldn't be too, too tough. And also he reminds us that we shouldn't forget that Valentine's Day overlaps with Presidents' Day sales this year, too. Be sure to go back to our last episode and check all of those out. We talked about those last week.

Sandy Block: Now Casey Runyan, the managing editor of Brad's Deals sent a few suggestions and we'll post these in the show notes because on Monday when this comes out, you'll still have time to get some of these things. Casey has a few suggestions that could actually land on Valentine's Day and, as I said, we'll post these in the show notes, but they've got a deal of 12 red roses plus vase $35 with free delivery.

Ed Slott: Well, there's a lot of changes, but only one big change really, the other stuff is all trimming around the edges. For example, it changed the date and they are big changes, because it changes the way people will have to react to this. So here's what I mean about trimming around the edges. For years, for decades actually, 70 1/2 was the magic age that you had to start taking your money out, RMDs -- required minimum distributions. Most people know about these things.

Ed Slott: So they changed the age beginning in 2020 to age 72, so that's what I mean. It went from 70 1/2 all the way up to 72. You know, Congress is crowing about it like they won "American Idol." But what I do like, I actually think this is the best single change in the whole act. Why? Because finally, after decades, they got rid of the half year. Do you know how confused seniors were about this? This went on for years. Am I 70? Am I 71? Am I 70 1/2? Which age do I use, 70 or 71, which table? When am I 70 1/2? This went on for years, so good riddance to the half year.

Ed Slott: And the other thing is, it's created some confusion because not everybody gets it. For example, if you turn 70 1/2 in 2019, you don't get it. You still have to continue while somebody else who turned 70 1/2, maybe a day later in 2020 can wait until they're 72. So anyway, that's a good rule. Generally, I said, it's not a big deal for most people, generally you can defer longer. The reason I say it's not as big a deal as they make out of it, the Treasury Department's own statistics say this only affects about 20% of the people. They say because 80% of the people take more than the minimum and take it early because they need the money. So the people who will benefit most from this are obviously people who don't need the money and only take the minimums. For those people, and the ones that qualify, they can wait until they're 72 to begin required minimum distributions.

Ed Slott: Yes, that's the big change in the act, that was a massive change of direction. Remember, people are very upset. I've done a lot of consumer programs on this and they're very upset. They feel like they played by the rules. They arranged their affairs based on the rules, not loopholes, based on the actual rules that applied for many years to leave a portion of their retirement savings. That was their choosing, some people said, "I didn't live lavishly because I wanted more of that money to go to my children and grandchildren, so they could have a legacy."

Ed Slott: Well, that's all gone now. In one stroke of the pen, almost under the cover of night at the end of December 2019, Congress eliminated what we call the stretch IRA, which was the ability of those people to leave an IRA to a child or grandchild, and that child could extend required distributions over their lives so they could go out 40, 50, 60, 70 years, or more. That's all gone and replaced with generally a 10 year rule for most beneficiaries. Now, who were the ones affected? This is where it happened so quickly. Anybody who dies in 2020 or later, which is now...

Ed Slott: ... they had about a week or two to change their plans, I guess 11 days maybe, to change their plans. If you inherited, if you're listening and you're a beneficiary who inherited in 2019, you are unaffected. But when you die your beneficiaries, in other words, your successor will be stuck with this 10 year rule. Now it's interesting, this 10 year rule takes a different tax, so there are opportunities here. Unlike the old rules where beneficiaries who could go out 30 and 40 years had to take a small amount each year, under the 10 year rule, there are no required minimum distributions during the 10 years as long as by the end of the 10th year after death, the entire inherited account is empty.

Ed Slott: So you can do some planning, you meaning the beneficiary, during those 10 years, maybe spread it over the 10 years to minimize the tax impact or maybe take more in a year that your income is lower. So you do have some planning flexibility, but at the end of the 10th year, that money's going to be taxed. And the problem is the beneficiaries who are more likely to inherit this money may be in their own peak earnings years. So they themselves may be at their own highest brackets. So it's going to cause an acceleration and a bunching of the income tax in those 10 years, which is exactly what Congress wanted. Congress felt that your retirement savings are supposed to be for your retirement and not to pass on to beneficiaries, but those were the rules that people played by.

Ed Slott: Don't know what you mean. But first, let me go back on that stretch because when I said most beneficiaries will be stuck with the 10 year rule, but not all. Spouses are exempt. So if you're listening and you're a spouse, you can still do the spousal rollover. So in most cases, most people leave their IRAs to their spouse if you're a couple. But once a single person dies, then generally most beneficiaries will be stuck with the 10-year rule, unless the beneficiary is a minor, but not a grandchild, people have been confused with that.

Ed Slott: There's special classes of beneficiaries that still get the stretch, minor children, anybody who's disabled, chronically ill, or a beneficiary that's not more than 10 years younger than you. But these are odd cases. Even the minor, people might say, "Well, I'll leave it to a minor child." Well, think about it. If somebody dies at their normal age, say 80, what are the odds of that 80-year-old having a 12-year-old child?

Ed Slott: No, no. So it's more likely anybody who dies with a 12 year old child's probably in their 40s and they don't have that much accumulated anyway. So that's why I say, generally most beneficiaries other than the spouse will be stuck with that 10 year rule. So now you ask what do they do about it? Well, one of the best solutions right now is to look at converting to a Roth IRA. Remember I said in that 10 years, if you inherit a traditional IRA, all the tax will have to be paid within the 10 years at some point, at that time, or if they do nothing by the end of the 10 years. If you convert today into a Roth IRA, this way when the beneficiary inherits, they will still be stuck with the 10 years, but at least when they take the money out, there won't be any tax.

Ed Slott: If the beneficiary doesn't need the money, once they inherit the Roth, they can leave it alone for the full 10 years, let it grow and accumulate and compound. And then on the last day of that 10th year after death, take it all out tax free. So it's not a stretch IRA, but it's not a bad deal either. But now let's look what you have to do to get there. You'd have to pay the tax now to convert, which may not be a bad deal given today's very low tax rates. Maybe the best option is not to push you in a higher bracket, plan out a series of smaller annual conversions over the years, and over time move more of your IRA to a Roth IRA. If your plan is to help your children and grandchildren, whoever gets it, receive that money tax free.

Ed Slott: Absolutely. It's interesting you brought that up. Whenever I do consumer programs, when I talk about the Roth just like I'm talking about it here... because one of the things I like about the Roth, once you convert everything it earns is tax free forever. You never have to share that income with the government ever again. And during your lifetime, there are no required minimum distributions, so you can just let it accumulate. So when I talk about that, people always ask the question, I think I get it in every seminar, and it usually goes something like this, "Can I trust the government to keep their word that Roths will always be tax free?"

Ed Slott: And now we know the answer is absolutely not, but it's here now and I would take advantage of it now when you can push a lot of money into a Roth and get it building tax free before next time the government needs money. But they did with the stretch, they grandfathered people, as I said, when they eliminated the stretch. I think they would do the same thing with Roths. So otherwise people would be double taxed, that won't happen. But that's why I say get in on the Roth for that reason because Congress could change their mind down the road and because it's cheap. It's very cheap to buy the Roth IRA, pay the taxes at today's low rates now. And you're paying at low rates and building tax free.

Ryan Ermey: We're back and before we go, more tales of our wackiest PR pitches. And mine wasn't sent to me, it was sent to our colleague Kaitlin Pitsker who writes a lot of our tech coverage. But this is some tech that I'm skeptical of and that it's the world's first air-conditioned baseball cap. Now I went to this website to make sure that it was real, and it seems to be legit, like it's not a joke, it's not a prank. It's like a big white hardhat looking thing with a brim. And it claims to cool your head down, whether you're out for a run, or what have you. It's from the makers, you know, I was really ... because the site looks like it's from 1999, so I was worried about it. But they're sending out PR pitches, and I guess the original invention at least got picked up by the Los Angeles Times. So if we're getting fooled, so are they.

Sandy Block: Well, this is one of several pitches that I and other personal finance people have received... that try to connect personal finance planning with the trials and tribulations of Harry and Meghan because certainly we can all relate to them, right? And this one in particular says, "The road to financial independence could be a long one for Harry and Meghan if they purchase a $36 million Canadian mansion and keep their lavish tastes." You the readers can learn from the royal couple, by becoming more cognizant of the things they truly need and developing budgeting habits, both of which can help them towards a financially independent future.

Sandy Block: There is nothing that we can learn from... the only thing we can learn from Harry and Meghan is, it's good to be king or good to be related to the king. I don't think that this particular pitch came from somebody who helps you scrutinize your cell phone bill. I don't think Harry and Meghan are spending their nights or Valentine's Day going over their cell phone charges, their overcharges and that sort of thing. So this is a common PR tactic. Whenever somebody really famous dies, we immediately get lots of pitches about estate planning. And I understand, this is in the news. I believe that personal finance affects everything. But I think it's a real stretch to say the least to suggest that Harry's and Meghan's problems have anything to do with those of us who really do have to worry about our cell phone bills, our heating bills or anything else.

Ryan Ermey: That's it for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit Kiplinger.com/links/podcasts. You can stay connected with us on Twitter, Facebook or by emailing us at podcast@kiplinger.com. And if you like the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.

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Block joined Kiplinger in June 2012 from USA Today, where she was a reporter and personal finance columnist for more than 15 years. Prior to that, she worked for the Akron Beacon-Journal and Dow Jones Newswires. In 1993, she was a Knight-Bagehot fellow in economics and business journalism at the Columbia University Graduate School of Journalism. She has a BA in communications from Bethany College in Bethany, W.Va.