The Impact of SECURE Act 2.0

Key Points – The Impact of SECURE Act 2.0

How could the SECURE Act’s proposed regulations impact you?
The Three Retirement Plan Beneficiaries
What Are Hypothetical Retroactive Spousal RMDs?
Consult a Financial Professional About the SECURE Act’s Many Complicated Matters
21 minutes to read | 38 minutes to listen

Dean Barber and Bud Kasper joined hundreds of other financial advisors and CPAs at Kansas City’s Crown Center two weeks ago for Ed Slott’s Elite IRA Advisor Group^SM workshop, where they spent a lot of time reviewing the impact of SECURE Act 2.0. Dean and Bud share some of the biggest takeaways of the SECURE Act’s proposed regulations and how they could impact you.

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Show Resources:

Find links to the resources Dean and Bud mentioned on this episode below.

How Secure Does the SECURE Act 2.0 Make You Feel?

Dean Barber: Thanks so much to those who join us on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. How are you doing today, Bud?

Bud Kasper: I’m great. We’ve got a good topic to cover.

Dean Barber: Yeah. If nothing else, people are going to learn something. A couple of weeks ago, Bud and I sat in a big conference room at Crown Center with about 400-500 other financial advisors and CPAs from all around the country that are also part of Ed Slott’s Elite IRA Advisor Group^SM. Bud and I were a couple of the very first members of that.

Bud Kasper: Charter members.

Dean Barber: That was back in the early to mid 2000s.

Bud Kasper: 18 years ago is what they told us.

Dean Barber: It was long time ago. So, we spent a lot of time discussing the impact of the SECURE Act. They are some of the proposed regulations that surround the SECURE Act. SECURE stands for Setting Every Community Up for Retirement Enhancement. And as Ed Slott said, “Anytime you get an acronym like SECURE, you better watch your wallet.”

Bud Kasper: Exactly.

Dean Barber: I want to read a little bit of what the SECURE Act is. Then, Bud and I are going to dive in deep on this. Anybody that has an IRA, 401(k), 403(b), Thrift Savings Plan, 457 plan, Roth IRA, or Roth 401(k) will be impacted by the SECURE Act.

The Elimination of the Stretch IRA

One of the impacts of the SECURE Act was the elimination of the Stretch IRA. In other words, it eliminated the ability for a non-spouse beneficiary to inherit that IRA and then begin taking out Required Minimum Distributions based on their own age. It effectively allowed them to keep the corpus of that IRA in the IRA or Roth IRA for as long as they lived.

Bud Kasper: Yeah, typically.

Dean Barber: That was a great planning tool, but the SECURE Act took it away. The effective date for the elimination of the Stretch IRA and the application of the 10-year rule is generally for deaths after December 31, 2019. But that effective date is extended for two years for deaths after December 31, 2021, but that’s only for government plans, including certain 403(b) and 457 plans and the Thrift Savings Plan. It’s also extended for as long as two years for collectively bargain plans, depending upon the expiration date of the union contract.

That in and of itself can get confusing because some people might think, “Well, this is only for deaths after December 31, 2021.” But that doesn’t apply to 401(k)s, IRAs, and Roth IRAs. It only applies to the governmental plans.

Bud Kasper: It’s crazy how they need to subdivide these things into these different sleeves with different sets of rules. But you know what? That’s job security for us because it’s our job to understand this and apply it directly to those people who are impacted.

The Three Retirement Plan Beneficiaries

Dean Barber: Exactly right. So, here’s the deal now. This gets complicated. Under the SECURE Act, there are now three kinds of retirement plan beneficiaries for determining post-death payouts after 2019. You have a non-designated beneficiary, an NDB; you have a non-eligible designated beneficiary, an NEDB; or you have an eligible designated beneficiary, an EDB.

Bud Kasper: Clear as mud.

Dean Barber: Depending upon which type of beneficiary you have, whether it’s a non-designated beneficiary, a non-eligible designated beneficiary, or an eligible designated beneficiary, that’s going to determine how the money needs to come out of your IRA/401(k) when it passes to the beneficiary that is on your account.

Bud Kasper: Right. That sounds really secure to me. There’s no way an individual can discern all this information, all these acronyms, and understand how it’s going to apply to them unless they’re working with somebody with credentials like a CFP® professional, CPA, etc.

Dean Barber: But even a lot of those people might not understand it if they’re not studying this. We had two different books that we studied with. This first one is 229 pages. The information in it on the SECURE Act goes from page 117 up to page 182. It’s very complicated.

Let’s review the three beneficiaries, starting with the non-designated beneficiary.

Non-Designated Beneficiary

A non-designated beneficiary isn’t a person. It can be a charity, an estate, or a non-qualifying trust, meaning the trust has a no-look-through provision within the trust. If somebody puts on their beneficiary form that they want this to go to the estate of Dean Barber. that’s not a person. If it’s a non-designated beneficiary, all the money needs to be out of the IRA within five years. You’re going to follow the five-year rule. There are no annual RMDs during that five-year window, but at the end of the fifth year, all the money needs to be out of the IRA.

Bud Kasper: And what’s the consequences if they don’t?

Dean Barber: Well, it’s a 50% excise tax.

Bud Kasper: There you go.

Dean Barber: Five, zero, 50%. OK?

Bud Kasper: Gotcha.

Dean Barber: It’s crazy. However, what if the owner dies on or after the required beginning date, the RBD? The required beginning date is the date in which you must start taking Required Minimum Distributions. And that is not at the age of 72, as most people think. It’s April 1 of the year following the year that you turned 72.

Bud Kasper: So, don’t you dare make a mistake.

The Government Wants More Money

Dean Barber: Because if you do, it’s a 50% excise tax. Almost every American has some money in either IRAs, 401(k)s, or Roth IRAs. It’s one of the main savings vehicles. With the way that the SECURE Act was put together, it’s almost like the government thinks that’s their money. They think it’s theirs and they want it faster than they got it before.

They’re changing the rules that basically came into effect in the Tax Reform Act of 1987. That was really the first tax act that discussed how to have people get money out of IRAs and 401(k)s. They put together a whole set of rules for that in the Tax Act of 1987, but now they’ve changed it all through the SECURE Act in 2019.

We were talking earlier that the SECURE Act basically eliminates the Stretch IRA and that there are three different types of beneficiaries: a non-designated beneficiary, a non-eligible designated beneficiary, and an eligible designated beneficiary. Each one of these beneficiaries has different rules for how they need to get the money out of the IRA or 401(k) when it passes through the beneficiary listed on your retirement account.

Complicated Matters Call for the Assistance of Hard-Working Financial Professionals

Bud Kasper: Even the experts that we were listening to at the Ed Slott workshop were saying this is so difficult. This is so exact in terms of its interpretation, but it’s hard to interpret.

There are going to be a lot of mistakes that are going to be made with that. By the way, mistakes usually lead to penalties.

Dean Barber: Yeah. My head was about to explode. I was telling Bud that I almost wanted to exit the business because this is going to become so complicated. You can’t make a mistake here, but there are going to be so many mistakes made because most financial advisors don’t take the time to truly understand this.

Bud Kasper: That’s right.

Dean Barber: Think about all the brokerage houses, custodians, company plans, banks that have IRAs, and things like that. They all are going to have to rely on the expertise of our good friend Ed Slott and the detail behind this.

Bud Kasper: Let me add to that as well. It’s so important to work with a CFP® professional. They must go through the rigors of passing all the exams to get that distinction. But more importantly, they’re required to keep up to speed on all the information that we’re talking about. And quite frankly, it’s even pressing for the CFP® professionals because this is so voluminous in terms of the content. You really need to focus and work with a firm and advisor who understands this. Otherwise, it’s going to do one thing—cost you and your family money.

Non-Eligible Designated Beneficiary

Dean Barber: A lot of money. All right. Let’s move on to the non-eligible designated beneficiaries. Here’s the definition. All designated beneficiaries who do not qualify as an eligible designated beneficiary.

Bud Kasper: Yeah. How do you come up with that sentence?

Dean Barber: Well, that’s it.

Bud Kasper: I know.

Eligible Designated Beneficiary

Dean Barber: Okay. So, what is an eligible designated beneficiary? An eligible designated beneficiary is exempt from the 10-year rule. However, if the account owner dies before the required beginning date, an eligible designated beneficiary can elect the 10-year rule.

Five Classes of Eligible Designated Beneficiaries

There are five classes of eligible designated beneficiaries.

A surviving spouse
A minor child of the account owner under the age of 21 but not grandchildren
Disabled individuals under strict IRS rules
Chronically ill individuals
Individuals that are not more than 10 years younger than the IRA owner

A chronically ill individual is going to be exempt from the 10-year rule… Why do you think that is? Because they’re going to die… They’re chronically ill…

I also want to give an example of an individual that isn’t more than 10 years younger than the IRA owner. Let’s say that you had a brother or a sister who you named as your beneficiary, but they’re not 10 years younger than you. They’re not a surviving spouse, but they’re not more than 10 years younger than you. They would qualify as an eligible designated beneficiary and be exempt from the 10-year rule. The Stretch IRA would still exist for that person, surviving spouses, and minor children under the age of 21.

Here’s the deal, though. If you have a minor child under 21, they are exempt from the 10-year rule until they turn 21. And then the 10-year rule applies.

The SECURE Act Received Overwhelming Bipartisan Support

Bud Kasper: I mean, it’s so obvious that the motivation behind all this is money.

Dean Barber: It is to get the trillions of dollars that are in retirement accounts, out of the tax-deferred or tax-exempt status and into the hands of the federal government. They can raise taxes here without ever increasing the marginal tax brackets.

Bud Kasper: That’s right.

Dean Barber: They’ll increase the revenue flow to the United States Government…

Bud Kasper: Which, of course, is political.

Dean Barber: Of course, it is. It’s why the SECURE Act passed with overwhelming bipartisan support.

Bud Kasper: Yeah. As a sidebar of this, I have people ask me all the time if they’re going to take away the Roth IRA. Do you remember what Ed Slott said?

Dean Barber: Never.

Bud Kasper: Never. Why? Because when you do a Roth conversion, you’re having to pay taxes to get that money over into a tax-free Roth account.

Dean Barber: Right. The SECURE Act impacts Roth IRAs too. It’s not a tax issue, but you’re going to lose the tax-exempt status.

Bud Kasper: Right.

Circling Back to Non-Eligible Designated Beneficiaries

Dean Barber: Let’s go to back to non-eligible designated beneficiaries. Remember, non-eligible designated beneficiaries are all designated beneficiaries who do not qualify as an eligible designated beneficiary. Examples of that would be grandchildren, older children, and some look-through trusts. The post-death payout rules for the non-eligible designated beneficiary depends on whether the death occurs before or after the required beginning date.

When the 10-Year Rule Comes into Play

So, what are the rules if the owner dies before the required beginning date? There are no annual RMDs during that 10-year window. So, if somebody dies before April 1 of the year following the year they turned 72, then the non-eligible designated beneficiary still has to follow the 10-year rule. They don’t have any required minimum distributions during that 10-year period, though. In other words, they can pick and choose when they want to take money out. But all of it needs to be drained out of the IRA at the end of the 10th year, following the year of death.

Bud Kasper: Yes. Ed Slott said the reason they put the SECURE Act in is because you’re never secure. He’s right.

Dean Barber: Yeah, no doubt. If the account owner dies on or after the required beginning date, the annual stretch IRA RMDs must be taken for years one through nine and the entire account must be emptied by the end of the 10th year after death. That’s the 10-year rule.

Reviewing the Beneficiaries

Again, the three types of beneficiaries are non-designated beneficiaries, non-eligible designated beneficiaries, and eligible designated beneficiaries. All have different rules on how the money comes out of the account.

Bud Kasper: Right. I want to make a point here as well. How many people in the business of helping people retire are going to know any of this?

Dean Barber: Not many.

Bud Kasper: I’m going to say the percentage is very low.

Dean Barber: It’s very low.

Bud Kasper: We’re not saying this just to brag that we understand this. We are sharing this with you so you can understand the complexity of it. It’s the risk involved of not understanding it that people that to be aware of.

Dean Barber: Yeah. If you want to secure your family’s financial future, you need to make sure that you’re working with somebody who thoroughly understands all these rules. The game has changed. And trust me on this. Congress is going to change the game again and again and again.

Tune in to Hear Ed Slott on The Guided Retirement Show

There’s no possible way that Bud and I sit for six full days a year in these conferences with Ed Slott pouring through hundreds of pages of updates to regulations, as it surrounds your retirement accounts. We dove deep into the impact of the SECURE Act’s proposed regulations. While Ed Slott was in town, he came to our studio and participated in our podcast, The Guided Retirement Show. Ed’s podcast will be the finale of Season 6 and come out on June 7.

Bud Kasper: For the purpose of America’s Wealth Management Show, we try to make it educational and be the teachers. But in the Slott conference, we’re the students.

Dean Barber: We are the students.

Bud Kasper: Ed Slott has been in so many different publications: The Wall Street Journal, USA Today, or whatever. I’m not exaggerating when I say he’s considered to be America’s IRA expert. He just has an amazing amount of information. Dean and I have been at his side learning things that can be applied to our financial planning to mitigate as much of the tax liability our clients would have in any given year.

Dean Barber: It’s been 18 years that we’ve been studying with Ed. That’s unbelievable.

Bud Kasper: Yeah. One of these days I hope we get a diploma.

Hypothetical Retroactive Spousal RMD

Dean Barber: As we continue to discuss the impact of the SECURE Act, there’s a new proposal for it called a Hypothetical Retroactive Spousal RMD that I want to talk about.

Bud Kasper: Gosh.

Dean Barber: If you want to go read the SECURE Act, you’ll find information on the Hypothetical rector Retroactive Spousal RMDs on pages 67-69, 75, pages 241-244, and 254-255. That’s where the Hypothetical Retroactive Spousal RMD is discussed.

Here’s the deal. The surviving spouse can elect to do a spousal rollover. It can be done anytime after the death of the first spouse. Even if the spouse beneficiary first chooses to be treated as a beneficiary and does not do a rollover, the spouse still has an option to do a spousal rollover at a later date. And that is if the person who owns the IRA, Roth IRA, or 401(k) passes away before the required beginning date.

The Perceived RMD Loophole

The IRS is concerned about the perceived RMD loophole, where RMDs could be avoided when a spouse elects the 10-year rule at its core. This rule closes the loophole, which would otherwise allow a surviving spouse to choose the 10-year payout rule, avoid RMDs for most of that period, and then do a spousal rollover in year nine.

Let me see if I can explain that in layman’s terms. If an IRA owner dies before their required beginning date, which is April 1 following the year of death, then the surviving spouse can choose the 10-year rule as opposed to the spousal rollover.

Let’s say that spouse is 70. They’re not at their required beginning date. They can essentially defer any Required Minimum Distributions by choosing the 10-year rule all the way up to 79 and then do the spousal rollover. Then, at 79, they will need to start doing RMDs.

That’s the loophole that the IRS is proposing to change with this Hypothetical Retroactive Spousal RMD.

Bud Kasper: That is such a mouthful. If you were to ask any member of Congress these questions, they wouldn’t answer them.

Dean Barber: I guarantee you most of them never read it.

Bud Kasper: No, but their staff did and said, “Here are the five talking points on this.”

A Hypothetical Retroactive Spousal RMD Example from Ed Slott

Dean Barber: Yeah. Here’s the example that Ed Slott gave in our conference. Ken and his wife, Linda, are both 70. Ken dies with Linda as the primary beneficiary. As an eligible designated beneficiary spouse, Linda has several beneficiary options available to her. So, she elects the 10-year payout rule since he died before his required beginning date.

She will have no RMDs during the 10-year window. She will simply have to empty the account by December 31 of the 10th year after the year of Ken’s death. At that time, she will be 81 and completely avoid RMDs on these inherited dollars. That’s the loophole that the IRS is closing with the Hypothetical Retroactive Spousal RMD.

Using the Single Life Expectancy Table to Calculate Hypothetical RMDs

So five years later, let’s assume that Linda decides she’d like to combine the inherited IRA with her own IRA through a spousal rollover. However, because of this provision, Linda can’t rollover the full amount. Before completing the rollover, Linda must calculate Hypothetical RMDs for each year that she was 72 and older. These Hypothetical RMDs are not eligible for rollover. She would need to calculate hypothetical RMDs for four years, 72-75, using the Single Life Expectancy Table to calculate her Hypothetical RMDs.

Let’s assume that she had a balance of $250,000 in that inherited IRA and there was there no growth on it. The Hypothetical RMDs over those four years would’ve been $57,049. She would only be able to do a spousal rollover with $192,951. The other $57,049 remains in that IRA with the 10-year rule. That $57,000 needs to come out at the end of the 10th year, following the year death or her age of 81.

The IRS Usually Isn’t Forgiving with This

Bud Kasper: Right. And of course, Linda knows how to do this, so it won’t be a problem at all. I mean, this is almost embarrassing that Congress is doing this, isn’t it? They are people that represent us, the people we voted in. Yet, they’re making this incredibly complicated. And by the way, there are damages if it’s not done right.

Dean Barber: If it’s not done right, you have the 50% excise tax.

Bud Kasper: It’s absolutely appalling. I’m not trying to be political here, and Trump wasn’t the first one to say this, but there ought to be a front page and a back page that you need to complete on your tax returns and nothing more than that. But we make these things so darn complicated that it really becomes dangerous. I would say this is a non-friendly act that has been put in front of people now, and they’re daring you to screw it up.

Dean Barber: And there will be plenty of mistakes. In the Ed Slott conferences, one of the things that we go through is examples of people who have made mistakes and then challenged the IRS on the mistakes. Most of the time the IRS is not forgiving.

Bud Kasper: That’s right.

Dean Barber: They say, “The rules are clear. They were written. It’s your job to understand them.”

Bud Kasper: You can do something called a private letter ruling, but…

Dean Barber: It’s $10,000.

Bud Kasper: That’s right. That’s what it costs just to initiate it.

This Isn’t a Do-It-Yourself Situation

Dean Barber: First, it’s imperative that you get the beneficiaries correct on your IRAs and 401(k)s. But then if you’re going to be the inheritor of an IRA or a 401(k), you need to know these rules because it’s really going to be on you. This is not a do-it-yourself type of a scenario. This is where a good CERTIFIED FINANCIAL PLANNER™ Professional working alongside CPAs is going to be able to help.

It’s all complicated stuff. You need professional assistance when it comes to your retirement accounts. If you’ve got parents that you’re expecting to inherit IRAs from, you better work with somebody to understand these laws.

In what may be the craziest impact of the proposed SECURE Act regulation is a situation where an eligible designated beneficiary can use the life expectancy of another individual to calculate their RMDs. But at the same time, they would need to monitor their own life expectancy to determine when the inherited account would need to be emptied.

Bud Kasper: Let’s see, how do you monitor your own life expectancy? Well, I’m still breathing this morning.

Another Example of How the Impact the SECURE Act Could Have on You

Dean Barber: By the way, this is on pages 48 and 143 of the SECURE Act proposed regulations. Let me give you an example of how this works. Robert dies at age 75, which is after his required beginning date. And remember, the required beginning date is April 1 following the year that you turned 72. Robert’s beneficiary is his older sister, Sally. She’s 80.

Since Sally is not more than 10 years younger than Robert—in fact, she’s older—she is an eligible designated beneficiary and can stretch the RMD payments. However, since Robert died after his required beginning date, Sally is permitted to use Robert’s single life expectancy to calculate her RMDs. That would lower the RMDs.

This is where things go off the rail. This is from an explanation in the provisions of the proposed regulations on page 48. “These proposed regulations require a full distribution of the IRA owner’s remaining interest in the plan in the calendar year in which the life expectancy factor would have been less than or equal to one, if it were determined using the beneficiary’s remaining life expectancy, even though the life expectancy factor for determining the required minimum distribution is based on the remaining life expectancy of the employee.”

What? This is crazy.

Again, the Government Wants Our Money

Bud Kasper: The people who come up with this have some perverted minds. Obviously, all this comes out of Washington, D.C. Then, it’s put before the House of Representatives or the senators or whatever, who of course have their people who are reading this stuff and interpreting it to them. Then, they try to talk as intelligently about it as possible. But what’s the takeaway on this? They want your money.

Dean Barber: Yeah. And there’s an even bigger one, but my sticky note on this page says something that I can’t say on radio or in an article.

Bud Kasper: Commentary.

Clearing Up Confusion About Trusts

Dean Barber: If you want to go through and read the SECURE Act, go to pages 28-38 and then pages 118-133. What it’s saying is that trusts are downgraded as a planning strategy after the SECURE Act. The new SECURE Act regulations don’t change that. Most trust beneficiaries will need to empty the inherited IRA in 10 years.

However, the regulations do clear up some of the confusion that the SECURE Act created in trusts. They also helped attempt to answer some longstanding questions regarding trusts that have come up in many private letter rulings over the years.

We don’t have time to go into all the impact on trusts, but I know there are so many people that have trusts where they have the trust as the beneficiary of the IRA. The scenario just got far more complicated for them.

Again, I think you could say the SECURE Act is a full employment act for CPAs, attorneys, and CERTIFIED FINANCIAL PLANNER™ professionals because the complexities of what Congress has created. There are dire consequences if you don’t get it right.

Bud Kasper: I just wrote down that note that you mentioned a moment ago about downgrading the trust. It basically says that your trust isn’t any good from the perspective of getting the best results out of what this distribution would be on an inherited IRA.

See-Through Trusts Remain

Dean Barber: The see-through trusts do remain. To be a see-through trust, the trust needs to be valid under state law. It needs to be irrevocable. The trust language becomes irrevocable upon the death of the IRA owner or the plan participant.

The beneficiaries of the trust, who our beneficiaries with respect to the trust and interest in the IRA owner’s plan or plan participant, are identifiable. And then the required trust documentation has been provided to the trustee of the trust, the custodian or planned administrator, no later than October 31 of the year following the year of the IRA owner’s death.

The Huge Liability with Trusts

Let’s say that this is your parents and you’ve been named a successor trustee on their trust. Their trust is the beneficiary of the IRA, and then the trust is responsible for passing the Required Minimum Distributions down to the beneficiaries of the trust. The required trust documentation needs to be provided by the trustee of the trust to the custodian or plan administrator no later than October 31 of the year following the year of the IRA account owner’s death. I guarantee you that most people who are going to be successor trustees for their parents’ trusts don’t know this.

Bud Kasper: No. And you know what that brings up in my mind? Liability. If they screw it up as the trustee, that could cause a tax event, Then, the beneficiaries are going to say that the trustee messed this thing up. And by the way, when’s the last time you reviewed your trust?

Dean Barber: In addition to the requirements I just outlined, all trust beneficiaries must be individuals. In other words, your trust can’t say 10% is going to a cancer foundation, arthritis foundation, etc. All of it needs to be individuals. This really complicates the use of trusts as beneficiaries on IRAs.

Ask Us Your Questions About the Impact of the SECURE Act

You can talk to us about the impact of the SECURE Act and how it affects you. You can schedule a 20-minute “ask anything” session or a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ professionals here.

We know what we’re doing here. We’ve got the rules and we have Ed Slott in our back pocket. We can ask him questions anytime to make sure that you do everything exactly right.

We appreciate you joining us here on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. We’ll be back with you next week. Same time, same place. Everybody stay healthy and stay safe.

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