The Stretch IRA and the SECURE Act

(Binghamton, NY • March 13, 2020)

The SECURE Act, signed into law on December 20, 2019, offers much to IRA and 401(k) investors: Required Minimum Distributions (“RMDs”) delayed until age 72; elimination of the age limit for contributions to a traditional IRA, and more. But for wealthier individuals, it also has one drawback­—the elimination of the “Stretch IRA” concept for traditional IRAs.

Prior to the SECURE Act, when someone died, they had the ability to pass a traditional IRA on to younger family members, who had the ability to “stretch” the RMDs over their lifetimes. The Stretch IRA was a commonly used strategy that could extend the tax-deferred status of an inherited IRA for many years. It allowed the tax-deferred growth of an IRA to be passed on to the next generation after the initial investor had died. The beneficiary, who didn’t rely upon the inherited IRA, now had additional assets to pass to his or her family—another generation.

Under the SECURE Act, a new 10-year rule has replaced the Stretch IRA. From now on, an inherited, non-spousal IRA must be liquidated in 10 years or less with limited expectations. A non-spouse beneficiary inheriting the IRA is merely required to withdraw the full amount in 10 years. There is no required annual distribution. The beneficiary could elect to simply let the account accumulate for 10 years and then withdraw 100 percent just before the 10-year due date.