MoneyDo: The End Of “Stretch” IRAs
Over the last 6 months there has been a significant amount of legislation that has impacted IRAs, including the permanent law changes of the SECURE Act and the temporarily relief under the CARES Act. It’s important to understand how these reforms impact your personal financial plan and your estate plan.
The SECURE Act was passed in December 2019 and made 29 different changes, many of which significantly affect retirement plans and IRA’s. Here are two big impact changes:
1) Permanently changing the RMD age from 70.5 to 72 and
2) Eliminating the “Stretch” IRA for most beneficiaries
The CARES Act, passed to provide relief during the COVID-19 pandemic, temporarily eliminated RMDs for 2020.
The RMD changes are important to review within the scope of your financial plan as there may be additional planning opportunities you can take advantage of during the one-year reprieve from RMDs. Additionally, you may now have an additional year or two before you are required to start taking RMDs, leading to even more potential planning opportunities.
The elimination of the Stretch IRA can have some unintended consequences when a non-spouse inherits an IRA. Prior to the SECURE Act, a non-spouse beneficiary of an IRA had the option of rolling the funds into a “Stretch” IRA, whereby the beneficiary could “stretch” out the income tax consequences over their life expectancy with small RMDs.
The SECURE Act eliminated the “stretch” option for all but a few classes of individuals. As such, if you inherit an IRA from someone who died in 2020 or later and are a non-spouse, you are likely going to fall under the new “10-Year” Rule. The “10-Year” Rule still allows you to roll over the inherited IRA funds into a tax deferred IRA, but instead of having your lifetime to spread out the income taxes, you have to fully drain the IRA
funds within 10 years after you inherit the funds, thereby accelerating the income tax recognition.
There are 5 categories on individuals that may still be eligible for the “Stretch” IRA:
1) Surviving Spouses
2) Chronically Ill Individuals
3) Disabled Individuals
4) Individuals that are not more than 10 years younger than the account owner, and
5) Minor Children of the account owner, but only until the age of majority.
In addition, if you previously inherited an IRA from someone who died prior to 2020 and have an inherited IRA, those accounts are grandfathered and will continue as “Stretch” IRAs.
Knowing these changes are important to individuals who stand to inherit IRA funds, as proper tax planning for those individuals has become more important than ever before.
For those of us who have IRA’s and want to pass them along to our family members, it is important to have be aware of these new rules as well. Be sure to review your beneficiary designations. If you are leaving IRA’s to any trusts as part of your estate plan, talk to your estate planning attorney to make sure you are doing so in the most tax efficient manner possible.