When did the stretch IRA end?

If you have heard about the stretch IRA, you likely know that it was recently phased out. Find out what a stretch IRA is and when it ended.

3 min read

If you inherited an IRA, you have various options with the money depending on your relationship with the deceased IRA owner. Before the SECURE Act came into effect, non-spouse beneficiaries had the option of using the stretch IRA strategy to spread distributions over several generations. However, the stretch IRA strategy is no longer available to non-spouse beneficiaries.

The stretch IRA ended when the SECURE Act was signed into law on December 20, 2019. The act replaced the stretch IRA with the 10-year rule, which requires IRA beneficiaries to take the full distribution within 10 years following the IRA owner’s death. You can make a lump sum withdrawal or take multiple distributions spread over the required period, as long as there is zero balance by the 10 anniversary of the IRA owner’s death.

How the Stretch IRA worked

The stretch IRA is a financial strategy that non-spouse beneficiaries used to stretch required minimum distributions over several generations. Stretching distributions allowed the money more time to compound tax-free, and young beneficiaries could stretch IRA distributions over several decades.

Generally, RMDs are determined by the IRA owner's life expectancy, and young beneficiaries were able to reset the time used to calculate IRA distributions. These beneficiaries could base the RMDS according to their life expectancy, which helped lower the required distributions. Critics of the Stretch IRA strategy argued that the strategy helped wealthy families avoid paying taxes, hence were able to accumulate large family wealth.

When the SECURE Act was passed into law in December 2019, the act eliminated the stretch IRA option available to non-spousal beneficiaries. The new law introduced the 10-year rule for inherited IRAs, which requires beneficiaries to empty the inherited IRA within 10 years following the IRA owner’s death. However, spouses, minors, and disabled beneficiaries are exempted from the 10-year rule.

Who used Stretch IRAs?

Stretch IRAs were commonly used by wealthy families to spread distributions over several generations. Generally, most IRA owners designate their spouse as the primary IRA beneficiary, while children and grandchildren are designated as contingent beneficiaries.

However, naming the spouse as the primary beneficiary means that they will be required to withdraw more money from their IRA over a shorter period and still pay taxes. Hence, the best alternative was to name the youngest person in the family, possibly a child, grandchild, or great-grandchild, as a beneficiary of the IRA.

The younger beneficiary still had to take RMDs from the account each year, but the distributions would be based on their age, not the age of the original account holder. The amount that the beneficiary would be required to withdraw would be much lower than what the spouse or other older family member would be required to take, which allowed them to stretch the IRA assets over a longer time.

When did Stretch IRAs end?

The stretch IRA was eliminated when Congress passed the SECURE Act on December 19, 2019, followed by its signing on December 20, 2019, by President Trump. One of the changes that the SECURE Act made is adjusting the age for required minimum distributions from 70 ½ to 72.

The headline change made by the SECURE Act was the phasing out of the stretch IRA provision. The act replaced this provision with the 10-year rule that required beneficiaries to distribute funds from the inherited IRA by the 10th year following the IRA owner’s death.

Inherited IRA Options for Surviving Spouse

A surviving spouse of a deceased IRA owner who is designated as the primary beneficiary of an IRA is not restricted to the 10-year rule. The IRS allows spousal beneficiaries to transfer the inherited IRA into their own IRA. This type of rollover allows the spouse to treat the inherited IRA assets as their own, and they can take RMDs based on their life expectancy.

If the surviving spouse was younger than the deceased spouse and is below age 72, he/she is not required to start taking RMDs until when they are 72. Also, if the surviving spouse is below 59 ½ and wants to make a withdrawal from the IRA, he/she will owe income taxes and a 10% early withdrawal penalty on the distribution.

What is the 10-year rule for inherited IRAs?

After the SECURE Act eliminated the stretch IRA act, the act required IRA beneficiaries to take the full distribution by the 10 year after the original account owner's death. The 10-year rule applies to non-spouse beneficiaries of the deceased IRA owner, who may include a child, grandchild, parent, brother, sister, or other relatives.

The beneficiaries must make withdrawals from the inherited IRA, either by taking a lump sum distribution or multiple distributions, as long as the balance is zero by the 10 year. The distributions taken from a traditional IRA are considered an income, and you will owe income taxes on the money.

If you inherited a Roth IRA, you won't pay taxes if you make a qualified withdrawal. If you are below 59 ½ or the Roth IRA is less than 5 years old when you make a withdrawal from the Roth IRA, you will owe income taxes on the money.

If you fail to empty the inherited IRA by the 10th year of the original account owner's death, the IRS will impose a 50% penalty on any funds remaining in the account.