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StonebridgeFOCUS - Funding SECURE(d)

Those that follow Elon Musk on Twitter might be familiar with the above tweet that garnered the attention of the SEC (Securities and Exchange Commission) in August of 2018. Fortunately for Musk, he would only need to wait a year until Telsa's share price hit his $420 target on December 23rd of last year. While the Tesla CEO may have had his own issues securing funding, those in Washington have had no such problem as Congress moves to pass a bipartisan appropriations bill which would avert another government shutdown.

Attached to the bill itself, is a piece of bipartisan legislation called the Setting Every Community Up for Retirement Enhancement, or SECURE, act. The bill passed by Congress and signed by President Trump in December as part of a larger spending bill, has managed to stay off the radar of most major news outlets.


One of the more notable provisions of this bill is the removal of the stretch RMD (Required Minimum Distribution) provision, which is effectively a tax increase on many Americans. The stretch RMD provision focuses primarily on the life-expectancy rules for Required Minimum Distributions. Most IRA owners name their spouse as the primary beneficiary, with their children as the contingent, or next in line. To the extent your spouse or children won’t need the income, IRA owners can elect to skip a generation or two and name their grandchildren or great-grandchildren as beneficiaries.

A third or fourth generation beneficiary will have a much higher life expectancy, which means small RMDs each year. Smaller RMDs mean that the account balance can continue to grow in a tax-deferred vehicle. Stretch IRAs are commonly used by those who wish to tax-efficiently pass on a legacy to their heirs. Assuming an IRA with a $500,000 balance on December 31st, 2019, you can see the impact between naming various beneficiaries:


The removal of the RMD provision for Stretch IRAs poses significant obstacles for those beneficiaries, as well as those utilizing “pass-through trusts” as part of their overall estate plan. Instead of stretching out the RMDs over a beneficiary’s life time, many will have to take all the RMDs by the end of year 10 after the IRA owner has passed. In all likelihood, beneficiaries should expect to face a higher tax bill for RMDs that are pushed into their prime working years. Those naming either conduit or accumulation trust as a beneficiary for an IRA will also need to review the trust document for compliance.

Despite the hurdles that come with revamping the RMD provision, the SECURE Act does include some common sense rules to make retirement planning more flexible.

Other proposed changes include:

  • Ability to contribute to an IRA for those working past age 70½.
  • Start date for RMDs pushed back from 70½ to age 72.
  • Allow 529 plan assets to be used for qualified student loan repayments (up to $10,000/yr).

The passage of this bill provides a unique opportunity for business managers, advisers, and estate planning attorneys to collaborate and ensure that their clients avoid any pitfalls that may result now that the SECURE Act has become law. Proactive planning is critical to ensure that client's wishes are met and estate planning documents are updated accordingly.


Tyler Martin, CFP®
Director of Financial Planning

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