IRA Planning Update: The SECURE Act

by Ryan Broedlin, Esq.

It’s no secret that Individual Retirement Accounts (“IRAs”) make up a material portion of the average American’s retirement plan.  As a result, the attorneys at The Murray Firm pay close attention to legislation impacting IRAs and their utility as planning tools.  Recently, Congress took aim at making IRAs a more valuable retirement tool for those who are so reliant upon them to fund life after leaving the workforce.  Specifically, the Setting Every Community Up for Retirement Enhancement Act – a/k/a the SECURE Act – was passed by the House of Representatives earlier this year and is currently working its way through the Senate.  The proposed law would yield immediate, up-front benefits for IRA owners.  As discussed below, however, those benefits come at a cost of reducing the utility of IRAs as wealth transfer tools.

                Let’s start with the good news.  The SECURE Act, as currently drafted, will enhance the value of IRAs as retirement tools in at least two meaningful ways.  First, IRA owners would get to wait longer before taking their Required Minimum Distributions (“RMDs”) from their accounts.  Instead of starting at 70.5, RMDs could be postponed until age 72, providing an additional 18 months of tax deferred growth for investments.  Second, the SECURE Act would eliminate the age cap – currently 70.5 – for making contributions to an IRA.  These changes make clear that Congress recognizes that many Americans are working past standard retirement to grow their nest eggs and will allow IRA owners to do just that. 

In addition to funding retirement, however, IRAs have also become an important wealth transfer and estate planning tool.  This is due to the ability of recipients of an inherited IRA to “stretch” the RMDs over their own life expectancy, rather than the life expectancy of the original owner.   Using this feature, distributions from the IRA get taxed at lower marginal income tax rates than they would if taken over a shorter period of time or a lump sum, allowing the tax avoidance features of the IRA to be prolonged, sometimes for decades after the death of the original owner of the IRA.  Unfortunately, the SECURE Act has taken direct aim at this feature of IRAs and, if signed into law, would limit the ability to “stretch” an inherited IRA to a period of 10 years resulting in a substantially higher tax bill than if the IRA could be stretched over an individual’s entire life expectancy. 

There are, of course, exceptions to this rule: IRAs inherited by spouses, minor children, and disabled or chronically ill individuals will not be subject to the 10-year limitation.  Given these exceptions, IRAs will certainly not lose their status as a favored wealth transfer tool.  If, however, the SECURE Act becomes the law of the land, adult children and other relatives may no longer make sense as the proper beneficiaries of IRAs.  Instead, it will be incredibly important to review your estate plan, especially your beneficiary designations on IRAs, to determine whether you are taking the steps necessary to continue the tax preferred status of your IRAs for as long as possible. 
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We at The Murray Firm will continue to monitor the progress of the SECURE Act and will provide an additional update if and when it becomes law.  In the meantime, we offer a free one-hour consultation for clients in New Jersey, New York, and Pennsylvania to review your estate plan, including IRA beneficiary designations, to make sure that your planning makes sense in light of the current legal landscape.  Please reach out to us today to schedule an appointment at 908.204.3477.