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The Stretch is Gone….

The “Setting Every Community Up for Retirement Enhancement Act”, or the SECURE Act, began impacting individuals on January 1, 2020.   One of the major changes brought on by this Act is to eliminate, for most individuals, the ability to take required minimum distributions from an inherited non-spouse IRA over the beneficiary’s life expectancy. 

A beneficiary of an inherited non-spousal IRA is required to take minimum distributions.  One strategy that has often been used is to “stretch” these distributions over the beneficiary’s life expectancy.  This tax-deferral strategy for traditional IRAs (known as a “stretch” IRA) permits beneficiaries to minimize the amount of required distributions each year, thereby minimizing the tax impact, while allowing the remaining balance to continue to accumulate tax-deferred.  Provided the IRA owner passed away prior to January 1, 2020, beneficiaries can continue to take distributions based on their life expectancy.    

With a few exceptions, however, the “stretch” strategy is eliminated for non-spousal IRAs inherited from owners who pass away on or after January 1, 2020.  The SECURE Act requires that an IRA (including Roth IRAs) be fully distributed to the non-spouse beneficiary by December 31 of the year that contains the 10th anniversary of the owner’s death.  Yearly minimum distributions are no longer required – in fact, no distributions are required to be taken until the end of the 10 year period.  Although beneficiaries have some flexibility as to the amount they want to take from the IRA each year, the requirement that the account must be fully distributed in 10 years may result in beneficiaries paying income taxes on an accelerated basis, possibly at higher rates.  IRA owners who are in a lower income tax bracket than their named beneficiary may also want to consider a Roth conversion during their lifetime to help reduce the income tax impact resulting from the shortened 10 year payout. 

The Act provides exemptions for certain beneficiaries or eligible designated beneficiaries (EDBs), who include surviving spouses, minor children (up to the age of majority under state law), disabled individuals, chronically ill individuals and individuals not more than 10 years younger than the IRA owner.  The old “stretch” strategy will apply to these beneficiaries, but only while they qualify as EDBs.  For example, when a minor child reaches the age of majority, the remaining account balance must be distributed within 10 years after that date.  Note that grandchildren are not EDBs. 

Now may be the time to revisit your beneficiary designations and review your estate planning strategies.  We invite you to contact us at Stephano Slack should you like to discuss this further. 

Jill Zoghby, CPA

jzoghby@stephanoslack.com

302-777-7400

February 4, 2020