The “Secure Act” has killed the “Stretch IRA”!
By Bruce Hosler EA, CFP®, AIF®, CEPA®, CDFA®
Technically the term “Stretch IRA is a made-up term used in the financial services industry to describe the distribution benefits that used to be afforded to the beneficiaries of an inherited IRA. That ended in 2019 when Congress passed the “Secure Act”.
The “Secure Act” killed the ability of IRA beneficiaries to take required minimum distributions over their remaining life expectancy period. The “Stretch IRA” allowed the beneficiary to only take a small RMD (Required Minimum Distribution) amount every year. Such a low required minimum distribution rate would generally permit an IRA beneficiary that was 20 or 30 years younger than their parent to make that IRA account last for 30, 40, or maybe even 50 years.
The “Secure Act” has replaced the “Stretch IRA” with the new “10-year rule”. The 10 year rule affects all IRA beneficiaries except for five special exceptions: Spouses , the chronically ill , those with disabilities , minors until they reach the age of majority , and those that are less than 10 years younger than the deceased IRA owner.
Roth IRA’s will also be subject to the “10-year rule”, but as you can imagine the planning for such accounts that are tax free federal and state requires special planning.
If you Leave a $1,000,000 IRA account to your son, over ten years it could double to $2,000,000. What if he waited until the 10th year and pulled it all out in one year? Can you imagine the tax rates federal and state on your life’s savings?
Don’t miss out on this time-sensitive planning for your beneficiaries.
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