At first sight, it appeared that the Setting Every Community Up For Retirement Enhancement Act, known as the SECURE Act, was primed for immediate passage after flying through the House with a 417-3 vote.
But progress slowed when the measure reached the Senate. Reportedly, only a few senators opposed the bill, but the original goal was to get 100 votes to avoid wasting floor time on a noncontroversial bill.
Shortly after its passage in the House and a momentary stall in the Senate, a few prominent articles in the Wall Street Journal attacked parts of the proposed bill. News outlets focused on two big pieces: the elimination of the stretch IRA and the favorable treatment given to annuities inside of retirement accounts.
The SECURE Act suffered some backlash from the negative media coverage and appears entangled in D.C. politics — it would be easy to say the bill’s future remains uncertain. I’ve spoken with a number of lobbyists and DC insiders, though, who believed the bill still had a strong chance of passing if it’s attached to some budget work that needs to be done this year in Congress. However, as December pushes on, it feels as if the bill might be dead for the year.
The goal is to see this bill attached to other legislation by the end of 2019. If it’s pushed off until 2020, it’ll be seen as a failure. A bill similar to the SECURE Act would still have a good chance of becoming a law in 2020. The failure lies in the fact that an all but done deal of a few months prior tanked.
Should this bill pass? Yes, but it falls far short of its title. A better name for the SECURE Act is the Messing with the Fringes of Retirement Act. Most of the bill revolves around making some commonsense but minimal impact changes. The biggest pieces of the bill are the removal of the stretch IRA for certain beneficiaries and positive provisions around annuities.
Stretch distributions under the SECURE Act
Why is the stretch IRA provision so important? Its removal is the big revenue generator of the bill. It would eliminate most beneficiaries’ ability to stretch distributions from IRAs and defined-contribution plans over their life expectancy — excluding spouses who can still take advantage of stretch strategies.
Instead of having nearly 30 years to take distributions, the SECURE Act would require all distributions to be taken by the end of the 10th year following the account owner’s death.
This is a big deal because it will do two things. First, it will shorten the time period tax-advantaged accounts can grow. Money in Roth accounts and traditional IRAs or 401(k)s will now have to come out faster, reducing the tax-deferred growth benefits of inheriting an account.
Second, because the account must be distributed over a 10-year period, it’ll be taxed at higher rates than if the distributions were spread out over 30 years. This is because many beneficiaries will be in their peak earning years when taking the distributions and adding large taxable distributions from IRAs onto their current income might bump them into a higher tax bracket.
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Another issue with removing the stretch IRA and expediting distributions is how it will impact pass-through or conduit trusts.
Many attorneys have used these trusts as a one-size-fits-all estate planning tool, often wrapping the IRA into the trust. The trusts fit some planning needs because they’ve allowed for favorable required minimum distribution rules in the past, as well as some creditor protections. According to the language in these trusts, beneficiaries receive an RMD each year.
But the RMD rules in the SECURE Act state that the beneficiary has to take a lump sum distribution by year 10 — there are no RMDs from years one to nine. Beneficiaries wouldn’t have access to any money from the IRA for more than nine years. Taking a lump sum distribution in one year would create a messy tax situation.
If the SECURE Act passes, RMD planning needs to be reviewed, estate plans need to be updated, trust language needs to be fixed, and some clients will need to buy more life insurance or do Roth conversions to help decrease taxes. At a minimum, the bill would fundamentally change retirement and estate planning.
Jamie Hopkins is director of retirement research and vice president of private client services at Carson Group.