February 26, 2020

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019. It is one of the largest pieces of retirement legislation to be approved into law in over a decade, and it changes rules that have been in effect for well over 30 years.

The SECURE Act tackles several enhancement areas for retirees, which could have a significant impact on long-term estate plans. It makes some interesting changes to existing retirement rules including:

  • A new exemption to the 10 percent early distribution rule that allows for a $5,000 penalty-free withdrawal for a birth or adoption
  • New tax credits for small businesses that adopt auto-enrollment in retirement plans and for establishing retirement plans such as a 401k, SEP IRA, or 403(b)

The two changes most likely to impact Clifford Swan clients are:

  • The change in the age to begin required minimum distributions (RMDs) from 70 ½ to 72
  • The elimination of the “stretch” provision in IRAs for nearly all non-spouse beneficiaries

Required Minimum Distributions Now Begin at Age 72

If you were born on or after July 1, 1949, you can now wait until age 72 to take your first RMD. If you were born before July 1, 1949, the previous rules apply (you must take your first RMD by April 1 of the year following the year you turn 70 ½). As more individuals postpone retirement and prefer to delay their RMDs, this is a welcome change in the law.

You may always pull money out of your IRA without penalty after age 59 ½, but many choose to defer withdrawals as long as possible in order to defer unnecessary income tax. Under the new law, once you reach age 72, you must take your first RMD by April 1 of the year following the year in which you turn 72. Therefore, if you turned 72 on January 1, 2020, you may take your first RMD as late as April 1, 2021 (keep in mind that a second RMD would also need to be distributed in 2021).

Unfortunately, if you turned 70 ½ in 2019, the SECURE Act changes do not apply, and you need to follow the old RMD  schedule.


Sally was born on June 12, 1950 and will turn 70 ½ on December 12, 2020. Because of the SECURE Act, Sally can wait until 2022 to take an RMD.


Steve was born on June 30, 1949 and turned 70 ½ on December 30, 2019. Despite the changes in the SECURE Act, Steve is still required to begin his RMDs before April 1, 2020. He cannot wait until age 72 to begin taking RMDs because he turned 70 ½ before December 31, 2019.

The Elimination of the "Stretch IRA"

In order to offset the decrease in tax revenue from the change in RMD age, our lawmakers chose to make a significant change to inherited IRAs. Before the SECURE Act, you could name a beneficiary to an IRA, and upon your death, that beneficiary could “stretch” RMDs over the length of their lifetime. For younger beneficiaries, the law allowed tax-deferred growth to continue for decades.


John’s IRA was worth $1 million upon his death at age 85. He named his daughter (age 50) the beneficiary of his IRA. Under the old law, his daughter would only be required to make RMDs based on her life expectancy (which according to the IRS was 34 more years).

Many estate plans capitalized on this rule and named younger beneficiaries to prolong the life of the IRA. In fact, these accounts had the ability to continue for generations if the owner named a beneficiary that would be prudent with the funds and only withdraw the minimum.

“Now, beneficiaries of inherited IRAs must withdraw all funds from the account within 10 years.”

The SECURE Act changed the rules that were in place for many years. Now, beneficiaries of inherited IRAs must withdraw all funds from the account within 10 years.

There are no annual distribution requirements during the 10-year window; the only requirement is that the account must be completely depleted by the tenth year. For beneficiaries who are still working and inherit an IRA, the 10-year withdrawal requirement could push them into a higher tax bracket.

If you were planning to use the “stretch” strategy to extend the life of an IRA, now is an opportune time to review your IRA beneficiary information with your investment counselor to determine whether the current beneficiary information is still accurate. There are multiple financial planning opportunities to consider for the 10-year window.


On March 3, 2020, Alex’s father passed away, leaving Alex his $400,000 IRA. Alex (age 60) is still working and earns roughly $150,000 per year. He plans to retire in five years (at age 65). Given that Alex’s income will substantially decrease when he retires, it might make sense for him to avoid taking any distributions from the inherited IRA while he is still working. Since the 10-year window does not require any annual distributions, Alex could wait until he is retired and opt to distribute the funds during years six to 10, when he expects his income to be much lower.

There are some exceptions to the 10-year rule window:

  • Spouses
  • Disabled beneficiaries
  • The chronically ill
  • Individuals who are no more than 10 years younger than the decedent
  • Minor children (until they reach the age of majority, which in California is 18 years old)

If an IRA beneficiary falls into one of these five categories, then the old rules apply, and the 10-year window does not. This is good news for most people who designate their spouse as the beneficiary of their IRA.

“It is important to remember that tax law isn’t written in stone (more like pencil).”

It is important to remember that tax law isn’t written in stone (more like pencil). As laws change, it is prudent to review your estate plans, just as you would if your personal circumstances change (e.g., death, divorce, lottery win, etc.).

We Can Help

For those of you looking to react to these recent changes, we are exploring ROTH conversions under certain circumstances. In addition, because of our expertise in charitable remainder trusts (CRTs), we know that CRTs could be used in specific situations to stretch an IRA and prolong the distributions over the lifetime of the beneficiary.

“For those of you looking to react to these recent changes, we are exploring ROTH conversions under certain circumstances.”

At Clifford Swan, we seek to provide exceptional investment and wealth management advice; doing so includes considering your estate plan and the tax code. Should you have any questions about how the SECURE Act affects you, we urge you to contact your investment counselor.

Download Article: New Tax Law Could Benefit You

The above information is for educational purposes and should not be considered a recommendation or investment advice. Investing in securities can result in loss of capital. Past performance is no guarantee of future performance.

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