It’s the End of The Stretch IRA as We Know It.

BY JAMES E. HALL Jr., CFP®

With the December passing of the Secure Act, an important estate and tax savings technique, ‘The Stretch IRA’, has been eliminated for most non-spousal beneficiaries.  Beginning with deaths in 2020, the stretch IRA rules are replaced with a 10-year rule for most retirement plan beneficiaries.  The new rule requires the account to be emptied within 10 years following the date of the decedent’s death. Unlike the current rule, which required a minimum distribution beginning the year after the date of death, RMDs will not be required under the new rule.

While these new rules will affect most beneficiaries, there are several exceptions. The following beneficiaries will still have the ability to stretch over their lifetime:

1)      Surviving spouse
2)      Minor children until they reach the age of majority
3)      The chronically ill
4)      Disabled individuals
5)      Beneficiaries who are not more than 10 years younger than IRA owner

It is important to note that the rule for minor children only refers to children of the retirement plan or IRA owner and only provides a delay until they reach the age of majority.

The new 10-year rule will cause planning challenges for many and will have us rethinking our current strategies.  For instance, those that have named a conduit trust, or a discretionary trust beneficiary of a retirement plan, may find the new rules in conflict with the provisions in their trust document.  This could create unintended consequences such as disruption of income from the trust, unintended distributions to the trust beneficiary, and potentially higher taxes paid on the distributions. 

Under the 10-year rule, retirement plans will be distributed much sooner and perhaps at a higher tax rate than was expected under the old rules.  With the stretch rule, beneficiaries could defer the distribution over their life expectancy and therefore manage the tax burden.  Under the 10-year rule, the ability to manage the tax burden is significantly diminished.  With the potential increase in tax on retirement plan assets, ROTH IRA conversions may become a more viable option for many.  Paying tax at your marginal rate now may be more beneficial than paying at your beneficiary’s future rate.

With the passage of the Secure Act, it is important to review your financial strategies with your advisor to determine what course of action, if any you should take.