Stretch Affect from SECURE Act | Is the stretch IRA dead? | Part 1/4

Is the stretch IRA dead?
The era of stretch IRA as we knew it is over.
Good News, you still get a choice in When to Pay Tax!

The Stretch IRA is known by a few other terms you may be more familiar with though. When I say Stretch IRA, I am talking about the beneficiary IRA or inherited IRA.

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Secure Act 2019/2020 overview details explained.
The SECURE Act signed December 20th, 2019, is the law for 2020 and beyond. Savers are already investigating changes, especially those with large IRAs who had planned on a lifetime tax deferral for their heirs. We are receiving many questions on exactly how and when this major change will affect those who have saved.

TITLE IV: Revenue Provisions, Section 401.

The SECURE Act ends the stretch IRA. All of those plans have to be reviewed and probably revised. Under the now “old rules” (before 2020), an individual designated beneficiary could extend post-death “stretch IRA” required minimum distributions over his lifetime. A young grandchild might have a 70-year payout period.

But not anymore.

Why is this important?
The SECURE Act eliminates the stretch IRA and replaces it with a 10-year payout deadline for most beneficiaries.

The clients most affected are those with the largest IRAs who had planned on leaving the lion’s share of those accounts to extend over the lives of their children and grandchildren. This especially includes any clients who named a trust as their IRA beneficiary. These trusts will not work well under the new rules. These estate plans need to be readdressed immediately.

1- Are the current stretch IRAs for those who died before 2020 still good?

Yes, they are grandfathered.

2- Does this kill stretch IRAs for all beneficiaries?

No. The law carves out exemptions for certain beneficiaries now called eligible designated beneficiaries, or EDBs. Eligible designated beneficiaries are:

Surviving spouses.
Minor children, up to majority – but not grandchildren.
Disabled individuals – under the strict IRS rules.
Chronically ill individuals.
Individuals not more than 10 years younger than the IRA owner (generally, siblings around the same age).
3- Do grandchildren qualify as minors for the EDB exemption?

No. The law is clear on this. The EDB exemption from the 10-year rule is only for the child of the IRA owner or the plan participant.

4- How do the RMDs work under the 10-year rule? Are there RMDs during the 10 years?

No. Under the 10-year rule, there are no annual specified Required Minimum Distributions (RMDs) during the 10 years. Instead, the entire IRA balance must be emptied by the end of the 10 years. Beneficiaries can withdraw any amounts they wish over the 10 years, so beneficiaries do have some planning flexibility during the 10 years to withdraw funds when it best fits their tax situation during that time.

Biggest Loser-

Highest impact negative news about for IRA / Roth

5- Do Roth IRAs still qualify for the stretch?

No. This is an unfortunate big deal for tax and estate planning. Until a few weeks ago, all money in a Roth IRA was able to grow tax-free for the lifetime of the saver AND the lifetime of each beneficiary of the Roth. Now, inherited Roth IRAs are subject to the same 10-year payout rule, except that the distributions will generally be tax-free. Savers will want to consider doing more Roth conversions to eliminate what could be a big tax bill within 10 years after death.

George Wells
Retire Happily!
https://retirehappily.net/

Contact us: https://retirehappily.net/15-minute-phone-call-with-a-financial-advisor/

All insights-
Part 1: Stretch Affect from SECURE Act – https://retirehappily.net/stretch-affect-from-secure-act-part-1-of-4/

Part 2: Rule for 72nd Birthday – SECURE Act - https://retirehappily.net/rule-for-72nd-birthday-secure-act-part-2-of-4/

Part 3: Show Me the Money! – from SECURE Act - https://retirehappily.net/show-me-the-money-from-secure-act-part-3-of-4/

Part 4: How to Get Your Money! – from SECURE Act - https://retirehappily.net/how-to-get-your-money-from-secure-act-part-4-of-4/