Should I Be Concerned About the Secure Act in Planning For My Grandchildren?


The SECURE Act of 2019 was recently passed by the US House of Representative.

It is expected to be considered by the U.S. Senate in the fall. The correct name for this proposed law is the Setting Every Community Up for Retirement Enhancement Act of 2019. Many believe that this bill will be passed by both branches of Congress before 2020. 

The SECURE Act will eliminate the current rules that permit non-spouse IRA beneficiaries to “stretch” required minimum distributions (RMDs) from an inherited account over their own lifetime and potentially allow the funds to grow tax-free for decades.

Instead, the SECURE Act will require that all funds from an inherited IRA generally must be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death.

The rule will apply to inherited funds in a 401(k) account or other defined contribution plans.

The required distribution from the deceased parent or grandparent’s inheritance within 10 years of his or her death will mean that the child or grandchild will receive this distribution at potentially his or her highest earnings capacity. This also means the child or grandchild will be in the highest income tax bracket when he or she receives these IRA distributions. 

Fortunately, the SECURE act will guarantee 401(k) plan eligibility for employees (grandchildren) who have worked at least 500 hours per year (rather than 1,000 hours) for at least three consecutive years. The participant would also have to be 21 years old by the end of this three years. The SECURE Act would also let a grandchild (IRA owner) withdraw up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. However, the owner will still owe income tax on the distribution, unless he or she repays the funds. If married, each spouse could withdraw $5,000 from his or her own retirement account, without a penalty.

We know this article may raise more questions than it answers for you. We encourage you to learn more about this topic together with how to best incorporate planning with IRAs into your existing estate planning. Do not hesitate to contact us to schedule a meeting to discuss this topic as well as the estate planning you need to create the legacy you want for both yourself and your loved ones.