The SECURE Act – What You Need to Know

By Stephen J. Silverberg
New York Elder Law Attorney

While most of Washington is otherwise occupied, seven Republican Senators sent a letter to Senate Majority Leader Mitch McConnell, urging prompt passage of the SECURE Act (Setting Every Community Up for Retirement Enhancement).

The SECURE Act passed the House of Representatives with strong bipartisan support in May by a vote of 417 to 3. The Senate was poised to pass it before Memorial Day by unanimous consent. However, at the last-minute, Ted Cruz voiced his objections, and the bill has been languishing ever since.

The letter portrays the SECURE Act as a lot of sunshine and happy news for the middle-class, the reality is much different. It contains seismic changes to IRA distribution rules in effect for over 40 years. It also permits sponsors of 401(k) plans to expand the use of annuities to provide benefits under the plan and repeals the onerous Kiddie Tax provisions, which subjected the children of soldiers killed in action to confiscatory income tax rates.

To summarize, the major provisions of the SECURE Act include:

  1. Sets age 72 as the required beginning date for distributions from an IRA;
  2. Requires beneficiaries of IRAs (other than surviving spouses, children under twenty-one, disabled beneficiaries, and chronically ill beneficiaries) to withdraw the entire balance of the account within ten years. Previously, the beneficiary of an IRA could stretch the payment of the IRA over their life expectancy;

It is believed the primary motivation eliminating the ability to stretch IRA payments is to speed up the payment of income tax on the distributions. While this may be true in the short run, eventually, it appears to be counterproductive. Under the current law, a forty-year-old beneficiary can withdraw the account balance over the remaining life expectancy of 43.6 years. The SECURE Act requires complete distribution within ten years;

Using the above example, upon the death of the parent, the forty-year-old child is the beneficiary of the $500,000 IRA. Using the current rules, the child would receive over $3.42 million while paying income taxes of over $1.37 million. Under the SECURE Act, if the child waits ten years to withdraw the entire balance, they would receive $983,000 and owe $393,000 in income tax. It appears they are mortgaging the future to increase revenue now;

  1. The Tax Cuts and Jobs Act of 2017 (TCJA) increased the Kiddie Tax income tax rates to the same rates applied to trusts and estates. Gold Star children receiving benefits are subject to a federal income tax rate of 39.5% on income over $12,000. An adult taxpayer does not reach this level until the income exceeds $625,000.

The SECURE Act attempts to remedy the situation by repealing the increased Kiddie Tax rates enacted by the TCJA by repealing them. However, just like the TCJA, which is poorly drafted and contains many unintended consequences, the outright repeal may adversely affect Qualified Disability Trusts for children with special needs. The Senate passed a fix much simpler and has no unintended consequences;

  1. It makes it easier for plan sponsors to use commercial annuities to provide benefits in 401(k) plans. However, the Act relieves the plan sponsor from any liability if the annuity provider they select goes under, even if the plan sponsor did no due diligence, or was even negligent in selecting the annuity provider. Benefits in 401(k) plans have federal protection if a catastrophic illness occurs. Unless structured properly, the prospective annuities under the SECURE Act lose this protection and subject to a complete spend-down before any benefits are available;
  2. unless the regulations regarding distributions from IRAs It makes, there is an adverse effect on distributions to disabled beneficiaries, and those with chronic illnesses.

Since May, the SECURE Act has hovered over planners like the Sword of Damocles. Since 2001 estate planning has been a moving target. The estate tax exemption amount changed continually until 2010 when the repeal of the estate tax went into effect. In 2011 the estate tax was re-instituted retroactively until 2017 when Congress doubled the estate and gift tax exemptions. However, this increased estate tax exemption must be passed by Congress again in 2026 or will revert to the pre-2018 level. Factor in the upcoming 2020 election and even more uncertainty lurks. If the election results in the Democrats gaining control of the government, there will likely be cuts in the estate and gift tax exemptions.

The specter of the SECURE Act Practitioners handcuffs practitioners like me. We are now ten weeks away from year-end, a time when we typically meet with clients about a year and planning. If Congress intends to pass the SECURE Act, let it do it now, so at least we know what to tell our clients. Doing nothing will delay my ability to provide my clients with accurate planning advice (to the extent I can due to the fluctuating tax laws).

The letter (a copy of which follows) sent to The Honorable Mitch McConnell, Majority Leader of the United States Senate was signed by:

  • Tim Scott –(R) South Carolina
  • Rob Portman (R) Ohio
  • Thom Tillis (R) North Carolina
  • Joni K. Ernst (R) Iowa
  • Martha McSally (R) Arizona
  • Susan M. Collins (R) Maine
  • Cory Gardner (R) Colorado
Sen. Scott Letter on SECURE Act-1
Sen. Scott Letter on SECURE Act-2
About the Author
Stephen J. Silverberg is nationally recognized as a leader in the areas of estate planning, estate administration, asset preservation planning, and elder law. He is a past president of the prestigious National Academy of Elder Law Attorneys (NAELA), and a founding member and past president of the New York State chapter of NAELA.