Stretch IRA

SECURE Act Eliminates Stretch IRAs for Many Taxpayers

As part of the 2019 year-end legislation, Congress and President Trump passed the SECURE Act.  The SECURE Act was passed to “secure” individuals retirement plan accounts by making several, seemingly modest, changes, including:

1. Distributions from IRAs now can begin at 72 rather than 70 ½ years of age; 
2. Allowing penalty free withdrawals from an IRA for any qualified birth or adoption;
3. IRA owners can now contribute to their IRAs even after age 72; and
4. Expanding eligibility for part time workers to participate in employer retirement plans.

However, the biggest change that the SECURE Act affected was the modification or elimination of the STRETCH IRA for the recipients of a parent’s or grandparent’s IRA.  Here is what changed.

Let’s assume mom is 80 years old and has a $1.2M rollover IRA from when her husband died.  Upon her death under her plan, she is passing the IRA to 48-year-old Betty and 50-year-old Bob.

Under pre-2020 law, when mom died, the income tax liability could continue to be deferred because the distributions from her IRA could be paid (“stretched”) over her children’s, Betty’s and Bob’s, lifetimes.  If Betty or Bob died before mom, their share of the IRA could be paid out over the grandchild’s lifetime.

Under new law, when mom dies, her IRA must be paid out to Betty and Bob over a time period not to exceed 10 years, triggering the income tax liability much sooner.  Furthermore, if the IRA is subsequently passed to grandchildren, there is no additional 10-year time period.

This is a big change in the income taxation of the IRA on mom’s death.  Large IRAs had been very attractive assets for estate and income tax planning purposes.  With the enaction of the SECURE Act, Congress and the President have made IRAs and other qualified plans with large account balances potentially very unattractive planning assets.

As result of the passage of the SECURE Act, everyone with a large six or seven figure account balance should reconsider the beneficiary of those accounts under their estate plans.  If you would like to speak to an attorney in our office on this question, PLEASE CLICK HERE.

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