T H E S E C U R E AC T
WHAT THE SECURE ACT MEANS IF YOU’RE DIVORCED
CHRIS SCHIFFER
Senior Vice President, Financial Advisor
Although the SECURE Act is often discussed as one of the largest retirement-focused legislative reforms in decades, it included a number of implications for individuals who are divorced or facing a divorce. While the law isn’t directed specifically to divorcing spouses, it’s important to understand these changes given that retirement accounts are a significant consideration in most divorce matters. Some of the SECURE Act provisions that will most likely impact divorcing spouses are as follows.
“10-Year Rule” for Non-Spouse Heirs Perhaps one of the most significant impacts the SECURE Act has on divorcing or divorced individuals is the elimination of the so-called “stretch IRA.” This allowed beneficiaries to stretch RMDs over their lifetimes on inherited Traditional IRAs, Roth IRAs and qualified retirement plans. Under the new “10-year rule,” non-spouse beneficiaries who inherit one of these accounts in 2020 or later are now required to withdraw all assets from the inherited account within 10 years following the death of the original account owner. EXCEPTIONS TO THE 10-YEAR RULE INCLUDE: 1. Surviving spouse 2. Minor children—only until the child reaches the age of majority; then, the 10-year rule applies 3. Disabled individuals—the beneficiary must meet the strict definition from the tax code stating that an individual is unable to work for a long or indefinite period and prove long-term disability 4. Chronically ill—the beneficiary must meet the definition from the IRS tax code which requires certification by a professional that the individual is unable to perform at least two activities of daily living for at least 90 days or requires “substantial supervision” due to cognitive impairment 5. Similar age individuals—the beneficiary is not more than 10 years younger than the IRA or retirement plan owner (e.g. siblings)
Usually, individuals select their spouse as the primary beneficiary and their children as contingent beneficiaries. However, in a divorce situation, the children are often named as primary beneficiaries. Distributions may be made in any amount over the 10-year period, as long as the IRA or retirement account is entirely depleted by the end of the tenth year. Compressing distributions into a 10-year period creates tax implications for the non-spouse beneficiaries, since withdrawals from Traditional IRAs and other retirement plans are taxed at the beneficiary’s ordinary income tax rate.
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