Skip to main content
Publish date:

Key Changes to IRAs Under the SECURE Act

Two years into the SECURE Act becoming law, what do you need to know?

You might think that everyone knows all that there is to know about the SECURE Act. After all, it became the law of the land in December 2019. But that's not the case according to Denise Appleby, CEO of Appleby Retirement Consulting, who spoke at the recent 2021 National Association of Personal Financial Advisors Conference in Boston.

The reason? The COVID-19 pandemic. Like most everything else, financial planning for these changes was put on hold during the pandemic.

“It's almost like that was a gap year and here we are learning about the SECURE Act and the steps that we need to take to ensure that our clients are operating within the provisions,” Appleby said.

So what is left to say about the law that raised the RMD age to 72, allowed workers to contribute to traditional IRAs after turning 70½, and eliminated the stretch IRA for non-spouse beneficiaries of inherited IRAs?

One of the most important changes in the SECURE Act was a new type of beneficiary was created: Eligible Designated Beneficiaries. An eligible designated beneficiary would be either:

  1. The survivor spouse of the participant
  2. A child of the participant who is not yet the age of majority
  3. A person who is disabled or chronically ill
  4. Someone who does not fall into any of these categories but is not more than 10 years younger than the participant.

Because of the specific wording, there is nothing stopping someone from naming a beneficiary who is older than the participant. This creates opportunities for older beneficiaries.

However, all of these types of beneficiaries would be held to the 10-year rule. The 10-year rule states that the beneficiary of an inherited IRA is generally required to liquidate the assets by the end of the 10th calendar year following the owner’s death. However, the beneficiary can decide whether they would like to take distributions from year one through year 10, as long as the account is liquidated by the end of the 10 years.

According to Appleby, an adviser helping a client plan how they want to take distributions needs to ask two important questions: When did you inherit the account? Did you inherit the account from the owner or another beneficiary? The answers to these questions can change the distribution strategy because, in some cases, the “successor” beneficiary could qualify to take distributions using the stretch IRA.

Appleby also called attention to what spouses can do if they are a beneficiary. Spouses can either establish an inherited IRA, or do a spousal rollover. Keeping assets in a beneficiary or inherited IRA account is necessary to avoid the 10% early distribution for those under the age of 59½. Spouses can transfer a beneficiary IRA to a spousal IRA at any time but it can’t be transferred back, she said.

Appleby cautioned against using your IRA for short-term loans by using the 60-day rollover rule. According to the IRS, you - with some exceptions - have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA or back into the IRA from which it was distributed.

But trying to take advantage of that rule can backfire according to Appleby who shared the experience of one of her clients who wanted to buy a house while selling their current home. The client’s realtor recommended that they borrow from their IRA to make the downpayment on the house, and just roll over the money once the original house had sold. Unfortunately, the house was not sold within the 60-day deadline. They were no longer able to do the rollover and had to pay taxes and penalties on the distribution.

Your IRA is not a bank, said Appleby. So using the money for personal expenses is not consistent with the intent of them. “When it comes to IRAs, you are a custodian, no one has to tell you,” she said.