Elimination of the Stretch IRA
What is a Stretch IRA? The term refers to your beneficiaries taking Required Minimum Distributions (RMD’s) from an Inherited IRA or 401k over extended periods of time. The rules allow you to name someone as the beneficiary of the retirement plan. Previously, that person took distributions based on their age, not the age of the deceased. People could have their children or grandchildren as the beneficiary as opposed to their spouse. These younger beneficiaries could receive retirement income for their lifetime which would normally be a longer period.
A stretch IRA was an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. Using the stretch strategy, an IRA could be passed on from generation to generation while beneficiaries enjoyed tax-deferred and/or tax-free growth.
The SECURE Act (Setting Every Community Up For Retirement Enhancement Act) became effective January 1, 2020. It has effectively eliminated the ability to take distributions from Inherited IRA or 401k retirement plans over extended periods of time. Now these funds must be withdrawn from the account within 10 years. There are exemptions for certain beneficiaries, however. The new rules would not apply to:
- a surviving spouse
- a minor child
- disabled or chronically ill individuals
- anyone within 10 years of age of the deceased account holder
Taxpayers can take equal amounts each year for ten years or they could take it all in one year or any other combination as long as all the funds are distributed in 10 years.
It is expected by the Congressional Budget Office that this will cost taxpayers around 16 Billion dollars due to the fact the distributions will be so much larger it will push many people into higher tax brackets.
Roth IRA’s do not have Required Minimum Distributions (though Roth 401k’s do). That has always been one of the benefits of the Roth IRA. However, Roth IRAs are also subject to this new 10-year distribution rule. Several tax advisors suggest the account holder may consider converting to Roth IRA’s now, so they will pay the taxes now instead of their heirs (over that 10-year period).
Keep in mind you should always discuss your tax-related questions with a professional and get their guidance.