Congress Appears to Be Seriously Considering Bill That Would Greatly Impact Inherited Retirement Account Payout Terms

Update: Shortly after this article was posted, the House voted 417-3 to pass the SECURE Act with the Kiddie Tax fix described in this article. The Wall Street Journal indicates that a GOP aide informed them that the Senate plans to vote on this just passed House version of the Bill, rather than vote on the similar bill that chamber was considering.[1]

It’s always risky to put much stock in a bill in Congress that hasn’t yet passed a single chamber, but it’s beginning to look like the SECURE Act (“Setting Every Community Up for Retirement Enhancement” - Congress is back to full word acronyms...) might actually move forward at this point, with something similar to it being enacted into law. 

When the §529 provisions were pulled it looked like that might cause Republican support to go away (and thus kill any chance in the Senate), but the addition of a full Kiddie Tax fix (roll back the provision to the pre-TCJA version now that unintended consequences are coming out of the woodwork outside of just the Gold Star families problem) and the apparent endorsement of ranking minority member and previous Ways & Means Chair Kevin Brady seem to have gotten both sides on board.

Specifically, Rep. Brady is quoted as saying the following:

“This represents years of really good, solid, constructive bipartisan work on retirement savings. I’m excited about a number of those provisions,” Brady told reporters before adding that he was “disappointed” because the measure “should not have been hijacked on the way to the floor.”[2]

Why is this important?  Well while the bill has a lot of “good” items for qualified retirement plans (we can first adopt a plan up to the extended due date of the return, simplified multiple employer plan constructs, raising the requirement minimum distribution (RMD) age to 72, changing the 5 year payout on inherited balances to 10 years, no maximum age for making a contribution to an IRA, etc.) there are some offsets that could be troubling.

The big one will involve pretty much wiping out the “stretch IRA” planning option for those inheriting an IRA for a death following December 31, 2019.  As currently drafted, the 10-year method is now made to apply to all inherited interests (so even if past the required beginning date) and the use of the life expectancy payouts are limited to the following beneficiaries:

  • Surviving spouse

  • Disabled individuals (per Section 72(m)(7))

  • Chronically ill individuals (if condition is an indefinite one reasonably expected to be lengthy in nature)

  • Individuals not more than 10 years younger than the decedent

Minor children also get the lifetime payout, but only until reaching the age of majority.  At that point, a new 10 year payout period starts.

If a designated beneficiary dies before the payout period is complete, the succeeding beneficiary will only have access to the 10-year rule.

In the past, advisers would discuss the option of “stretching” the payout of an IRA by leaving the account to a substantially younger beneficiary.  In some cases, to insure the payout really only took place over that longer term, a conduit trust would be made the beneficiary of the IRA so that a trustee (rather than the person inheriting the IRA) had control over the amount of distribution taken each year.

Now that same conduit trust in most cases could only hold the balance in the retirement account for a period that would end 10 years after the later of the year following the year of death of the original owner of the account or when the designated beneficiary attains the age of majority.

While the Senate passed a simple Kiddie Tax fix by unanimous consent, it only solves the problem for Gold Star families.  The problem occurs when a child with excess unearned income has parents who are not in the highest tax bracket.  Due to the narrow trust tax brackets that the revised Kiddie Tax uses, those children quickly end up in the 37% bracket, resulting in a much higher tax liability.

In addition to children of those who died in the armed services receiving benefits, certain taxable aid providing to students attending college is also being swept up by this provision, resulting in much greater tax liabilities.  Concern that additional sets of affected children might end up being discovered has now lead to many in Congress wanting a fix that is broader than just the simple patch to correct the issue for Gold Star families.

The version that is being attached to the SECURE bill would simply restore the prior version of the Kiddie Tax rules to the law, tying the child’s tax to parents’ tax brackets rather than using the trust rates.

There’s nothing to do right now but watch the bill’s progress in the Congress.  Similarly, you might want to hedge a bit if you are working on any long term plans that involve retirement accounts, so that you have flexibility should Congress pass this into law.

The full bill (as it stands right now without the Kiddie Tax proposed amendment) can be viewed at:

The Senate has been working on a similar bill and there will likely be some different ideas incorporated in a bill that emerges from the Senate, but for the moment this looks like a bill that has a reasonable chance of being enacted this session.

[1] Anne Tergesen, “House Passes Bill Making Big Changes to U.S. Retirement System,” Wall Street Journal website, May 23, 2019, (subscription required)

[2] Bernie Becker, “Passing bills,” Politico Morning Tax, May 23, 2019,