SECURE Act – “Stretch” Elimination

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which became law on December 20, 2019, drastically changed a very powerful financial and estate planning tool. For many, the ability to leave a Traditional or Roth IRA to the next generation as an inherited IRA is a valuable planning technique. Pre-SECURE Act, withdrawals from these types of inherited retirement accounts could be “stretched” over the lifetime of the beneficiary. The SECURE Act eliminated the stretch option for most IRA’s.

The SECURE Act establishes three distinct groups of beneficiaries for IRA’s and employer sponsored defined contribution plans:

  • Eligible Designated Beneficiaries
  • Non-eligible Designated Beneficiaries
  • Non-designated Beneficiaries

Eligible Designated Beneficiaries include:

  1. Spouse of the decedent
  2. Disabled individual (as defined by IRC Section 72(m)(7))
  3. Chronically ill persons (as defined by IRC Section 7702B(c)(2)
  4. Individuals who are not more than 10 years younger than the decedent
  5. Minor children of the decedent (until the child reaches the age of majority). 

This group will continue to be able to stretch distributions from inherited retirement accounts. These distributions can begin no later than one year after the account owners death and are calculated using the beneficiaries Single Life Expectancy. 

Non-eligible Designated Beneficiaries include:

  1. Anyone who is not an eligible designated beneficiary, as outlined above.
  2. See-through trusts. 

This group is subject to the new 10-year rule created by the SECURE Act. To reiterate, these beneficiaries must withdraw the balance of the inherited account within 10 years of the account owner’s death. Required Minimum Distributions are not required during this 10-year period. 

Non-designated Beneficiaries include:

  1. Charities
  2. Estates
  3. Non-see-through trusts

The SECURE Act did not make any changes for this group. 

  • If the IRA or plan participant died prior to their Required Beginning Date (age 72), these beneficiaries must continue to distribute all the funds from the inherited retirement account by the end of the fifth year after the year of death (the “5-Year Rule”). 
  • If the IRA or plan participant died on or after their Required Beginning Date the beneficiaries must distribute the inherited funds over the remaining life expectancy of the decedent. 

As you can see the SECURE Act has limited the ability to stretch an inherited IRA’s tax-deferred status to a maximum of 10 years for most beneficiaries. However, in a post-SECURE Act world, it is still valuable to keep assets in an IRA to leave to the next generation since the tax deferral of IRA’s continues to be a powerful tool.  Advanced strategies are available to address specific client goals and objectives surrounding charitable giving, non-charitable giving, and estate tax exemption utilization.

As always, if you have questions specific to your personal circumstances, please do not hesitate to contact your advisor.


*This article is for informational purposes only and should not be considered investment advice.