It’s been reported that the Stretch IRA is dead for eternity (or at least until Congress changes the rules again). A Stretch IRA, of course, is the strategy of delaying required minimum distributions from an inherited IRA for decades if not generations. Before the SECURE Act of 2019, the Stretch IRA strategy was highly effective when children or grandchildren were named as beneficiaries of an IRA.

  • At the death of the IRA’s original owner, required minimum distributions could be stretched over the child’s or grandchild’s life expectancy.
  • The decedent’s IRA continued to pile up tax-deferred growth for as long as 70 years or more in grandchild-as-beneficiary inherited IRAs.

Regrettably, there’s a new sheriff in town - the SECURE Act. Our new sheriff has effectively killed the multi-generational Stretch IRA. Why?

  • The U.S. Treasury Department estimates that the other, generous taxpayer benefits from the SECURE Act will cost $16B in lost tax revenues over the next 10 years.
  • Killing the Stretch IRA pays most of that cost and will, according to U.S. Treasury projections, generate an estimated $15.7B in new tax revenue over the next 10 years.

As an American taxpayer, the author applauds this fiscal conservatism. As a financial professional, the author cannot help but wonder if we could have found the money somewhere else.

Who is going to bear the brunt of this $15.7B in new taxes? Or, asked another way, who will be impacted by the new rules?

  • Most natural persons (the IRS term for “living human beings”) other than a surviving spouse must accelerate taxable income from inherited IRAs.
  • Specifically, such beneficiaries must take 100% of an inherited IRA balance by the end of the tenth year after the year of the original owner’s death.
  • Generally, this applies to inherited IRAs in which the original owner died on or after January 1, 2020.

But here’s a ray of hope. The following beneficiaries are exempt from the now-infamous 10-year rule:

  • A surviving spouse beneficiary may generally take RMD over their own or the decedent’s life expectancy at the decedent’s death
  • A chronically ill or disabled beneficiary may generally take RMDs over the decedent’s life expectancy at the decedent’s death.
  • A minor child of the original IRA owner is an exempt beneficiary until the child reaches the age of majority. Thereafter, the 10-year clock starts ticking.

Noticeably absent from this list of exemptions is…grandchildren! Sadly, the Stretch IRA that we once knew and loved is effectively out or reach for all beneficiaries except grandfathered beneficiaries.

Hello Grandfather! Beneficiaries who commenced a Stretch IRA before January 1, 2020, related to an original owner’s death before that date are generally grandfathered in under the older, more generous Stretch IRA rules.

While we have used IRAs to describe the new rules, be aware that the 10-year rule applies to qualified plans and certain other retirement plans.

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide financial advice to clients. The IRS may issue clarifications that modify the provisions of the act. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.