Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes. This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week. The stretch IRA is not completely gone.
A quick refresher: the SECURE Act—Setting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).
However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch IRA option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.
However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:
- Surviving Spouses.
- Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the IRA within ten years. The only exception is for full-time students, which ends at age 26.
- Disabled individuals. There is a high bar to qualify for a stretch IRA. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
- Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
- Those who are not more than ten years younger than the deceased account owner. That means any beneficiary may utilize the stretch IRA, not just someone who was related to the account owner.
What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? While the stretch IRA is not completely gone, the limitations placed on it are real and need to be discussed with your estate planning attorney and financial advisor.
If you would like to learn more about IRAs and how they can be managed within your estate planning, please visit our previous posts.
Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”