The SECURE Act of 2019 has changed IRA and retirement plan distributions for the year 2020 and beyond.

Tax advisers are rushing to explain these changes to clients, especially farmers, who typically defer their plan distributions as long as possible and minimize the deferred tax liability, giving their younger beneficiaries the option to “stretch” the remaining taxable balance over the life expectancies of their children and grandchildren beneficiaries in an inherited IRA.

There are two major changes to the previous law that you should be aware of:

1. Required Minimum Distributions now start at age 72. This may not seem significant, but if the RMD started at age 70 and the IRA balance was $100,000, two years of not requiring a distribution could allow an additional $9,000 in the account at age 85 (assuming a 6% growth rate).

2. The more significant change is the end of the “stretch” IRA over life expectancy in exchange for a 10-year payout for most beneficiaries.

Death of stretch IRAs

Under the “old rules” (before 2020), an individual designated beneficiary could extend post-death “stretch” IRA required minimum distributions over their lifetime in a beneficiary IRA.

As an example, if a 25-year-old grandchild inherited a $100,000 IRA, with an assumed rate of return of 6%, by that grandchild’s age 75, the beneficiary account would have still been worth over $340,000 after taking more than $515,000 in distributions.

The SECURE Act has eliminated this stretch IRA and replaced it with a maximum 10-year payout. There are no required minimum distributions during that 10-year period after death, but the account balance must be zero after the 10th year.

That same $100,000 inherited IRA under the new rules would pay distributions over 10 years to the 25-year-old of $25,000 (unrequired), but would require a balloon payment of $170,000 at the end of the 10-year period (with an assumed 6% return).

Current beneficiaries who already are taking distributions of inherited IRAs from benefactors who passed away previous to 2020 can still withdraw the required minimum distributions over their life expectancy.

The rule does not apply to spousal beneficiaries, as well as disabled beneficiaries and those who are less than 10 years younger than the IRA owner (a younger sibling, for example).

Minor children are also exempt, but only until they reach majority age (typically 18). After that, they will have 10 years to withdraw the assets in an inherited account (by age 28).

This change should especially concern clients who have named a trust as their IRA beneficiary. Those “conduit” trusts may not work well under the new rules as they use schedule minimum distributions and would inadvertently create a balloon tax payment in the 10th and final year of the shortened “stretch” period.

Roth vs. IRA

There has been a debate since the introduction of Roth IRAs in 1998 whether an IRA or Roth IRA is a better vehicle for retirement savings.

Is it better to deduct an IRA and pay tax in the end (now stretched over 10 years after your death) or to pay the tax on the investment and not pay tax on the growth of the Roth IRA (also now stretched tax-free over 10 years after your death)?

There are no age restrictions for contributions into a Roth IRA. You may convert a Traditional IRA to a Roth IRA without income limitations, but the taxpayer will recognize income tax on the conversion amount.

You may not contribute to a Roth IRA if your income is over $206,000 (joint taxpayers for 2020).

If this is your situation, you may consider a “back-door” Roth IRA — contributing to a Non-Deductible IRA (no income limitation) and later converting to a Roth IRA.

Seed or harvest?

If given the choice, would you rather pay tax on the “seed” or on the “harvest”?

Consider that same $100,000 IRA that is invested at 7% return (the rule of 72 tells us that a 7% return will double the account value every 10 years).

For a 50-year-old IRA owner, that account will double twice with a 7% assumed return over 20 years ($100,000 will double to $200,000 and double again to $400,000 by age 70). And if the account holder’s beneficiary holds onto it for 10 more years during the new required distribution period, it will double a third time to $800,000.

Simply put, would you rather pay tax on $100,000 today and have $800,000 tax free to your beneficiaries or would you rather continue to defer the tax and have the same $800,000 be income taxable to your beneficiaries in the future?

Losing the life expectancy “stretch” option for the IRA now brings the decision to consider converting IRA to Roth IRA to the forefront.

Lead the horse to water

When I use this example, almost every client agrees they would much rather pay the tax on the seed than the harvest, but nearly the same number will be reluctant to pay the tax. You can lead a horse to water, but you cannot make it drink.

Converting an IRA to a Roth IRA does not have to be an all-in-one-year decision, but sometimes we have to get creative in finding a way to help the client feel comfortable in paying the tax (even if they agree it is the right thing for them to do).

Here are eight possible options to help you reduce the tax on a Roth IRA conversion. As always, consult your tax advisor to review your individual situation before taking any action:

  • Use a carryover loss or current loss on farm Schedule F.
  • Use section 179 to create a loss on a single-purpose building or equipment purchase.
  • Use excess depreciation created by a basis step up of an inherited asset.
  • Use cash reserves to pay the tax to “invest” in future tax-free growth.
  • Use deductions for medical expenses if the account owner is in a long-term care facility.
  • Use life insurance to pay the tax on a Roth IRA conversion for a surviving spouse.
  • Create a land transition plan to deduct rent paid on your Schedule F and use the savings in self-employment tax to pay the tax on Roth IRA conversion.
  • Fill up the 12% tax “bucket” each year. For a married couple, this is $80,000 of taxable income. If you have less than $80,000 of taxable income, you are leaving an opportunity on the table to convert at 12% federal tax rate. This could prove to be a poor decision if at age 72 you pay tax at a much higher rate on your required minimum distributions.

My sincere hope is that you will be able to consider the taxation of your own retirement plans and structure a plan to put yourself in a position to enhance your after-tax retirement income while at the same time making it easier for your heirs who now have fewer options with your IRAs.  


For 27 years, Steve Bohr has been a partner in the farm continuation firm of Farm Financial Strategies, Inc. For additional information on farm continuation issues or if you have a question please contact Steve via email at Bohr@FarmEstate.com or by phone at 1-800-375-4180.