A key provision of the SECURE Act, which passed in late 2019, is the end of the “Stretch IRA.”
(I’ve been advising about the war on the Stretch IRA for several years, so my longtime readers should be well prepared for this.)
The Stretch IRA is an inherited IRA in which the beneficiary takes full advantage of the IRA’s tax-deferred compounding of income and gains.
For years, the beneficiary would distributions, taking RMDs based on his or her life expectancy (rather than taking distributions in one fell swoop).
The Upshot of the Stretch IRA
The IRA could last, or stretch, for decades before funding major life expenses — such as children’s college expenses or the beneficiary’s own retirement.
It could even pass to a third-generation owner.
That’s ended, unfortunately, with passage of the SECURE Act.
Most inherited IRAs now need to be distributed fully within 10 years.
The beneficiary can wait until the end of the 10th year to distribute the full account or can take distributions on any schedule over the 10 years.
The rule applies to both traditional IRAs and Roth IRAs.
The traditional IRAs will be fully distributed and taxed within 10 years.
The Roth IRA distributions still will be tax free, but the money will lose the tax-free compounding of future income and gains after 10 years.
Exemptions from the Rule
The anti-Stretch rule doesn’t apply to an IRA inherited by a surviving spouse, a disabled person, a chronically ill person, a minor child or someone fewer than 10 years younger than the original IRA owner.
When a minor child inherits an IRA, the 10-year clock starts running after he or she reaches the age of majority in his or her state of residence.
Note that grandchildren don’t qualify for an exception to the 10-year rule. Only children of the IRA owner qualify for the exception.
The SECURE Act is especially punitive when a trust is named as the IRA beneficiary.
That’s because trusts jump into the top tax bracket at a low income level.
The effective date is December 31, 2019. The anti-Stretch IRA rules apply to the IRA of anyone who passes away after the end of 2019.
If Congress had passed the law as initially intended more than a year ago, IRA owners would have had about six months to rearrange their IRAs and plan for the end of the Stretch IRA.
Now, there’s no planning or grandfather period.
You need to act immediately to adapt your plans to the SECURE Act.
I’ve identified a full range of options to achieve the equivalent of a Stretch IRA, or even better results, despite the SECURE Act. (My full findings are available to members of my newsletter, Retirement Watch.)
I’ll be exploring and explaining these strategies and some new ones in detail in future Center for Retirement Security posts.
It is important for anyone whose plans included at least giving your heirs the option of using the Stretch IRA to review these strategies and begin selecting your alternative.
Also, any IRA owner who named a trust as the IRA beneficiary needs to meet with an estate planner to revise the plan.