Who can still stretch an inherited IRA?
The SECURE Act of 2019 introduced many significant changes to retirement plans in the United States, including the elimination of the so-called “stretch” IRA for many non-spouse beneficiaries. It used to be that if you inherited, say, an IRA from a deceased parent, you could stretch the disbursements from that account over your lifetime. Doing so amplified the tax-advantaged growth potential of the funds in the account. Under the SECURE Act, you’re required (with certain exceptions) to take those distributions — and pay tax on them if it’s a traditional IRA — over a period of 10 years.
Like other aspects of the SECURE Act, this change has confused many retirees and beneficiaries. IRA expert Ed Slott (IRAhelp. com) regularly discusses the law’s implications on his website and in other venues. He has outlined the following implications of the
SECURE Act based on the Internal Revenue Service’s latest explanation of the rules associated with retirement accounts.
The SECURE Act eliminated the stretch IRA for most beneficiaries because Congress wanted to collect income taxes on IRA inheritances faster. Under the 10-year rule, a beneficiary can choose not to withdraw funds from the inherited IRA within the first nine years after the death of the IRA owner; however, by the end of the 10th year, they will have to withdraw all the funds remaining in the account and pay taxes on the distribution.
However, some beneficiaries, known as eligible designated beneficiaries (EDBs), can still use the stretch IRA. EDBs are allowed to extend the required minimum distributions (RMDs) over their expected life based on their age in the year after the death of the IRA owner. The withdrawals would be required yearly and would be determined by IRS’ actuarial tables. With a traditional IRA, that would result in tax due each year on the distributions.
If the account owner dies before the required beginning date, or RBD (which means the owner was not required to take RMDs yet), an EDB could elect the 10-year rule. (Some beneficiaries might find an advantage in not being required to take distributions for nine years.) However, upon making this election, the stretch option would no longer be available.
The following individuals are defined as EDBs: l Surviving spouses l Minor children of the account owner until age 21 (grandchildren don’t qualify)
l Disabled individuals, as defined by the IRS l Chronically ill individuals l Individuals not more than 10 years younger or older than the IRA owner
If you are a designated beneficiary (including of a qualified trust) and inherited prior to 2020, you are considered to be an EDB and can use the stretch option. EDB status is established on the date of the account owner’s death and cannot be changed.
An example: The IRA owner died in 2022 at the age of 80 (after the RBD). The beneficiary named is his brother, age 75. Because he is not more than 10 years younger, he can stretch the IRA over his life expectancy based on his age in 2023 (the year after death of the owner). He would use the life expectancy specified in the Single Life Expectancy Table to determine the RMD in 2023. In subsequent years, he would reduce the factor established in the prior year by one each year.
The brother should establish a successor beneficiary. When the brother dies, the successor beneficiary will be subject to the 10-year rule, and would have to withdraw all the remaining funds in the IRA by the 10th year after the original IRA owner’s death. In this case, the withdrawal would have to be taken by Dec. 31, 2032.