The Stretch IRA Is Dead. Long Live The Ten-Year Rule.

The Stretch IRA Is Dead. Long Live The Ten-Year Rule.

The Setting Every Community Up For Retirement Enhancement (SECURE) Act, passed by Congress in December 2019, changed long-standing retirement account rules substantially—one could say, most notably—by removing the ‘stretch’ provision for certain designated beneficiaries who are not spouses of inherited retirement accounts, as well as by introducing a 10-year rule requiring those beneficiaries to deplete the entire balance of the inherited retirement account within a decade of the original owner’s death.

Still, not all beneficiaries will see an impact from this new rule. The SECURE Act defined and established three discrete beneficiary groups: non-designated beneficiaries (i.e., non-person entities, e.g. trusts and charities), eligible designated beneficiaries (i.e., the spouses of account holders, those who have a disability or chronic illness, those not more than a decade younger than the decedent, and minor children of decedents), and non-eligible designated beneficiaries (any individual or see-through trust qualifying as a designated beneficiary but not an eligible designated beneficiary). Non-designated beneficiaries and eligible designated beneficiaries are normally subject to the same rules that were in place prior to the SECURE Act, but non-eligible designated beneficiaries are now subject to the new 10-year rule.

Many strategies are available to advisors for helping their clients impacted by the new more-restrictive stretch rules, whether they be the non-eligible designated beneficiary of an inherited retirement account or the original account owner still planning for the future (to minimize the tax burden of account distributions in what is now a non-stretch world).

Some options available to non-eligible designated beneficiaries include spreading distributions out for as long as possible in order to reduce annual income from the account, strategically timing withdrawals with the aim of making larger distributions in years with lower taxable income (e.g., after retirement), or simply leaving the account balance alone for as long as possible, and then withdrawing everything at the end of the tenth year, when required to do so.

Account owners can avail themselves of options for mitigating the tax impact for their heirs, including increasing the number of beneficiaries on their accounts in order to spread out and therefore decrease taxable income received by each beneficiary, and strategically allocating account shares based on beneficiaries’ anticipated income tax brackets, so as to maximize those distributions’ tax efficiency. Alternatively, lifetime partial Roth conversions of tax-deferred retirement accounts can reduce or eliminate altogether the tax burden on beneficiaries. A careful analysis should accompany this strategy to determine how much of the original accounts should be converted to begin with, and to avoid causing an even-higher tax burden today. Charitable remainder trusts can also be used to provide a potentially steady income stream for the beneficiaries while providing a gift to a qualified charity at the end of the trust’s term.

Ultimately, while non-eligible designated beneficiaries must now take into account the new SECURE Act 10-year rule for inherited retirement accounts, advisors are free to use several strategies to help clients minimize the tax impact of distributions from those accounts. Some may be implemented for the beneficiary after they inherit the account, while others may be used by the account owner him- or herself before the account transfers to the beneficiary. Still, in some cases, the best strategy may be simply to accept the 10-year rule as is, then leave the account alone for as long as possible, and finally liquidate the inherited retirement account as required at the end of the 10-year time frame.

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For more information, please read:
Strategies To Mitigate The (Partial) Death Of The Stretch IRA | Kitces

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