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The SECURE Act and its Impact on Retirement Account Beneficiaries

SECURE Act Changes for Retirement Account Beneficiaries

Last month, we discussed the passing of the Setting Every Community Up for Retirement Enhancement, or SECURE Act. In the article, we reviewed many of the changes this legislation made to the retirement planning landscape. There are many positive aspects of the bill. However, it has presented new challenges as well, especially regarding estate planning. Specifically, the bill has dramatically changed the rules for retirement accounts and their beneficiaries. As of January 1, 2020, many beneficiaries of retirement accounts like 401ks, 403bs, or IRAs are required to distribute the entire account balance within 10 years of the original account owner’s death, with a few exceptions.

Pre-SECURE Rules

Under the old rules, when the owner of a retirement account died, his/her beneficiaries would inherit the assets and had to make annual required minimum distributions (RMD). These distributions were usually calculated on the beneficiary’s life expectancy, which allowed for a payout option over their lifetime. For younger individuals, the annual distributions tended to be smaller and could be “stretched” over a longer time frame.

This was beneficial because it allowed the bulk of the funds to continue to grow tax-deferred, and it minimized the annual tax burden on the beneficiary. As a reminder, all distributions from tax-deferred accounts are taxable as ordinary income.

For example, let’s imagine an elderly mother passes away leaving her IRA to her two adult children. Each adult child is in their mid-50’s and inherits 50% of the IRA assets. Under the old rules, they each would be able to spread the annual RMDs across their 20-30-year life expectancy. These distributions are taxable to the adult children each year, but the size of the distributions is (typically) smaller because they are being spread over a longer time horizon. However, with the passing of the SECURE Act, the rules for beneficiaries such as these have changed significantly.

What SECURE Changes

The SECURE Act still provides the opportunity to use the lifetime payout method for inherited retirement accounts. However, it only applies to individuals who meet the “eligible designated beneficiary” requirements. There are five categories of people who are considered “eligible” under the new rules, including:

  • The surviving spouse of the deceased retirement account owner. The survivor can transfer the inherited retirement assets into a retirement account of their own, much like they could under the old rules. The required minimum distributions (RMD) are based on their life expectancy. However, once the surviving spouse passes away, his/her beneficiaries are subject to the new 10-year distribution rule.


  • Minor children of the deceased retirement account owner may continue the lifetime payment option until they reach their home state’s age of majority (usually 18 or 21). Once they reach the age of majority, any remaining tax-deferred assets are subject to the new rules and must be distributed over the next 10 years.


  • Disabled beneficiaries may continue the lifetime payout option. Upon their passing, their beneficiaries are subject to the new 10-year rule. A person is typically considered disabled if they suffer from a medical condition that is terminal or limits their ability to do substantial activity for an indefinite period of time.


  • “Chronically ill” individuals who inherit retirement assets may continue the lifetime payout option. When they die, their beneficiaries are subject to the new 10-year rule. A person is typically considered chronically ill whenever they are unable to perform at least two activities of daily living.


  • If a beneficiary is less than 10 years younger than the deceased account owner, they may continue the lifetime payout option. Upon their death, the new 10-year rule applies to their beneficiaries.

The SECURE Act places narrow limitations on those who may continue to stretch inherited IRA distributions over their lifetime. Any beneficiary who does not meet these requirements will be required to distribute inherited retirement assets over a 10-year period. However, the new rule no longer requires that an annual distribution be made; rather, the assets must be completely removed from the tax-deferred inherited account within 10 years of the original owner’s death. Thus, a beneficiary could take equal distributions over 10 years, distribute all assets upfront, or wait until the 10th year to fully distribute the account.

As you can see, these new rules can create a significant tax burden on beneficiaries who no longer meet the requirements for the lifetime payout option. In our experience, beneficiaries – often the account owner’s adult children – inherit these retirement assets while in their peak earning years. Having to now distribute these tax-deferred assets over a much narrower period will likely push them into high tax brackets and increase their overall tax liability. It also limits these assets from growing tax-deferred for longer, as they would have under the old rules.

What Can You Do?

Given these changes, a top priority is reviewing your current estate plan. It’s important not to panic whenever new changes like this happen. For many people, their current estate documents may still work. For those who have not completed their estate plan, this is a great opportunity to do so. Additionally, if you plan to leave retirement assets to a trust, it is important to discuss SECURES’s changes with your estate attorney to make sure the terms of the trust still work with the new law. The goal is to confirm that your assets will continue to be distributed according to your original wishes when you die.

In addition to reviewing your estate plan, determine whether the beneficiaries of your retirement accounts are eligible for the lifetime payout option under SECURE. If your beneficiaries do not meet the new requirements and you wish to limit their future tax burden, consider doing Roth conversions.

A Roth conversion allows an individual to transfer tax-deferred retirement assets from a 401k, 403b, or IRA to a Roth IRA. The amount that is “converted” is taxable to the account owner at the time of the transfer. The goal is to spread these transfers – and the corresponding taxes – over several years. The funds are deposited into the Roth IRA and enjoy tax-free growth. Additionally, Roth IRAs do not have required minimum distributions while the account owner is alive.

When the account owner dies and if his/her beneficiaries do not meet the requirements for the lifetime payout option, these beneficiaries will still be subject to the new 10-year distribution rule. However, all distributions from Roth IRAs are tax-free. As we mentioned earlier, the new rule does not require the beneficiary to take an annual distribution. It only requires that the assets be removed from the Roth IRA within 10 years. Thus, the beneficiary could keep these funds within the Roth IRA and enjoy 10 years of tax-free growth. If they do not need these funds for their day-to-day living, they may consider investing the inherited Roth more aggressively to maximize the potential for long-term growth.

Ultimately, the original account owner has systematically transferred tax-deferred assets to a Roth, which benefits from tax-free growth during their lifetime and for up to 10 years after their death. They have also absorbed the tax burden on behalf of the beneficiaries, who again may be in high tax brackets at the time those assets are inherited.

While the SECURE Act does bring some much-needed changes to retirement planning, it does significantly alter the way certain beneficiaries will inherit retirement assets in the future. It is important to understand these changes and how they may impact your long-term plans. This a prime example of how financial planning is not a “one-and-done” thing. It’s an ongoing process that must adjust to both changes that are within your control and those outside of it.

If you have questions or wish to review your current financial plan, please contact us. We are here to help ensure your financial plans remain on track.


Will Goodson

Will is a senior advisor who designs financial plans and investment strategies for clients. He is a University of Texas graduate and a CERTIFIED FINANCIAL PLANNER™ professional. Additionally, Will has obtained the National Social Security Advisor (NSSA®) designation and works closely with wealth management clients to determine the most optimal strategies for taking Social Security and Medicare. Read Will’s Profile HereRead More Articles by Will

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