A Stretch IRA historically served as a potent estate planning tool that let beneficiaries of an Individual Retirement Account (IRA) extend the withdrawal period of inherited funds. This allowed the money to continue tax-deferred growth over many years or decades, typically using the beneficiary’s own life expectancy to calculate Required Minimum Distributions (RMDs).
The Original Purpose and Advantage of the Stretch IRA
Prior to the SECURE Act of 2019, non-spouse beneficiaries—such as adult children—could take RMDs based on their own life expectancy instead of a compressed timeline. A 30-year-old inheriting an IRA could spread distributions over 50-plus years, enabling the remaining funds to grow tax-deferred for an extended period. This strategy was a significant advantage for long-term wealth accumulation and estate planning.
Additionally, trusts—when properly drafted—could qualify to stretch distributions, though rules were more complex. Spouses enjoyed the most flexibility; they could roll an inherited IRA into their own account, avoiding immediate distributions.
How the SECURE Act Changed the Rules
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in late 2019, introduced major changes effective for deaths occurring on or after January 1, 2020. The hallmark change for inherited IRAs was the introduction of the 10-year rule, which requires most non-spouse beneficiaries to fully distribute the inherited IRA within 10 years of the original owner’s death.
This eliminated the extended lifespan-based distribution period for most beneficiaries, effectively ending the classic Stretch IRA strategy for these accounts.
Who Still Qualifies for Stretch Distributions?
The SECURE Act defined a category called Eligible Designated Beneficiaries (EDBs), who retain the ability to stretch distributions over their lifetimes:
- Surviving spouses
- Minor children of the IRA owner (until they reach the age of majority; then the 10-year rule begins)
- Disabled individuals, as defined by the IRS
- Chronically ill individuals, according to IRS criteria
- Individuals not more than 10 years younger than the deceased IRA owner
Beneficiaries outside these categories are subject to the 10-year distribution rule.
Post-SECURE Act Distribution Rules
Spousal beneficiaries still have significant flexibility. They may roll the inherited IRA into their own, treat it as their own, or keep it as an inherited IRA and take RMDs based on life expectancy. They can delay RMDs until age 73 (or age 75 for those turning 74 after December 31, 2032), just as with their own IRAs.
Non-spouse beneficiaries generally must empty the account within 10 years. If the original account owner died before starting RMDs, the beneficiary may take distributions at any pace within those 10 years, without annual RMD requirements. If the owner had started RMDs, the beneficiary must continue taking annual RMDs based on the deceased’s remaining life expectancy for years 1-9, with full distribution by year 10.
Strategic Considerations for IRA Owners and Beneficiaries
IRA owners should review beneficiary designations regularly, adjust for the SECURE Act’s implications, and consider strategies such as Roth conversions to reduce future tax burdens on heirs. Roth IRAs offer tax-free growth and tax-free withdrawals, though the 10-year payout still applies for non-EDBs.
Beneficiaries must understand their status (EDB or subject to the 10-year rule) to plan distributions efficiently and minimize tax impact. Consulting financial and tax professionals is critical.
Common Questions
Q: Can you still stretch an inherited IRA? A: Only if you qualify as an Eligible Designated Beneficiary. Otherwise, the 10-year rule applies.
Q: Are inherited IRA distributions taxable? A: Traditional IRA distributions are taxable as ordinary income to the beneficiary. Roth IRA distributions are generally tax-free if qualified.
Q: What happens if the original owner died before 2020? A: The old stretch rules still apply to IRAs inherited before January 1, 2020.
Additional Resources
For more details, visit the IRS official site on inherited IRAs: https://www.irs.gov/retirement-plans/inherited-irs
Sources:
- IRS Publication 590-B (2024)
- SECURE Act of 2019
- FinHelp.io editorial analysis