Getting SECURE: Part 3

Personal Money Planning |

By Gary Silverman, CFP®

This is the third article in my series about the SECURE Act. Last week we looked at how the Required Minimum Distribution (RMD) trigger age went from 70-1/2 to 72. Today I want to look at the 10-Year Rule. This is where Beneficiary IRA RMDs went from being spread over a lifetime to needing a full liquidation within the first 10 years.

First, let’s see why this is a big deal. Let’s say it’s 2019 and you inherit an IRA from your rich uncle that’s worth $400,000. You are 48 years old, married, and have $65,000 of taxable income. This still keeps you in the 12% tax bracket and has you emptying the IRA over 37 years. You’re okay with this as you are still working, and the extra money will allow you some much needed wiggle room in your budget. You’ve been way behind on your retirement savings, and this nest egg will do well to catch you up.

Oh, but what if your rich uncle passed away this year instead of last? Now, instead of being able to stretch your withdrawals across almost four decades, the IRA has to be empty in 10 years. Assuming you take out 10% a year, that would have about half of the distribution taxed not in the 12% tax bracket but the 24%. Ouch.

One nice thing is that the new law isn’t really an RMD because you don’t have to take money out each of the 10 years. You could take none out until year 10 and then take it all. But that would throw you in the 35% tax bracket. So likely spreading the tax pain out will be less taxing on you.

If you are astute, you’ll note that my example is very simplified. After all, you’ll (hopefully) be investing that $400,000 and earning some money on it. I’m ignoring the fact that going from the 12% to the 24% tax bracket causes any capital gains taxes to go from 0% to 15%. If you are closer to retirement than my 48-year-old example the distributions can also affect Social Security taxation and Medicare premium payments.

Still, it’s not like you have to pay 100% to Uncle Sam, so your rich uncle’s inheritance is still a blessing.

Some other things about this new rule. First, it does not affect any Beneficiary IRAs inherited prior to 2020. You still get to use the old rules for those. Widows and widowers can still roll over their spouse’s IRA into their own and avoid all of this. And for the following groups who have a Beneficiary IRA, they can stay under the old rules:

  • Spousal beneficiaries
  • Certain disabled persons
  • Certain chronically ill persons
  • Beneficiaries who are within 10 years of age as the deceased
  • Certain minor children until they reach the age of majority (then the 10-year rule kicks in)

Confused? As I’ve warned you before, you’ll need to do further research or get professional advice to see how this affects your current or potential situation. We continue our SECURE Act discussion next week.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.