There was a question, “Am I going to get to the SECURE Act?” I have to get to the SECURE Act because particularly for the people in this room, the SECURE Act is one of the worst things that ever happened to your kids.
And a lot of you don’t know it. And a lot of you―even if you do know it―you don’t know what to do about it. So, we’re going to talk about the SECURE Act that was just recently passed in 2020, and it is so miserable because in the old days, if you died with an IRA or a 401(k) or a 403(b) or something like that, and you left it to a non-spousal heir, that heir was able to take distributions over their lifetime.
Alright, so why don’t we use you as an example. Zena, right? So, let’s say that Zena dies with a 403(b). In the old days under the old law ― and let’s just say it was one million dollars (to pick a nice even number) ― and let’s say that her beneficiary was 50 years old at the time, the beneficiary then had an Inherited IRA or 403 (b), and they would be allowed to take distributions based on their life expectancy. So, what does that mean? Let’s just say for discussion’s sake ― and I don’t know the exact number ― but let’s just say that the life expectancy was 33%, alright? So, they would take the factor of their life expectancy, which is somewhere around 3%, divide that into the balance, and that was the required minimum distribution of the Inherited IRA. So, in effect, it was 1/33 x the balance, alright? Or let’s call it roughly 3%.
Then the next year, it was 1/32 x the balance, alright? Now by the way, if you’re taking out 3% and the investment is earning 6%, it’s actually growing even after you die. Then, it was, you know, 1/31, etc., etc.
So, in the early years, the Inherited IRA is growing over the child’s lifetime and then when the child is older and as the denominator gets smaller and smaller, the distribution was higher and higher, okay? And that worked out pretty well for people and frankly, I spent many years of my career planning for the inherited retirement plans of my clients. And the younger that the beneficiary was, the greater the value of the Inherited IRA. So, we were planning to have Roth IRAs going to grandchildren.
So, we really created tax-free empires for people. And that was a lot of fun. And then along comes the SECURE Act! No, no, no! None of this stuff! We’re going to make the beneficiary of the Inherited IRA or the Inherited Roth IRA take all that money out within 10 years after the death of the IRA owner…subject to exceptions.
So, this was just miserable, alright? And I’d like to show you how miserable it is. So, let’s say that you die with one million dollars. And let’s say that you died the day before this law took effect. And given certain reasonable assumptions that I won’t bore you with, this is where your beneficiary would be at age 86, alright? Given those identical assumptions, except that maybe you died one day after the effective date of this law, given the same tax rates, the same interest rates, the same everything else, your beneficiary would be here. So we’re looking at two million dollars versus your beneficiary runs out of money.
Okay, so there are some exceptions. Surviving spouse, alright? Thank goodness! They’re not going to accelerate the income taxes on the Inherited IRA or 403(b) for the surviving spouse, okay? That stays under the old rules―where the spouse can just take what most people call a rollover―technically it’s a trustee-to-trustee transfer from spouse to spouse.
If you have a qualifying charitable trust―which I’m not going to cover today, but by the way, most everything I am covering is in the book, but I don’t think she mentioned the bonus, but I think it was in the advertisement though―but we do have this book. This book is 500 pages, but it has a good Table of Contents. And if you’re interested, we talk about charitable remainder trusts as beneficiaries of the IRA. That is another exception.
If the beneficiary is less than 10 years younger than you, that is another exception. That is typically if you’re leaving money to a partner or if you are leaving money to maybe a sibling. So, that would be an example of unmarried but within 10 years. On the other hand, even that exception isn’t nearly as good as being married. Because with being married, the factor is not only the life expectancy of the beneficiary, it is the joint life expectancy of the beneficiary and somebody deemed 10 years younger.
So, let’s say that you’re leaving it to a beneficiary who has a life expectancy of say 17 years, well, then it would not be 1/17, but 1/27 if you’re married. This is another great benefit to being married.