First, what is a STRETCH IRA? Simply it allows the beneficiary of an IRA to take a required minimum distribution (RMD) over the beneficiary’s lifetime. The value is allowed continued tax-free growth potential which can result in hundreds of dollars more money.
Last December the “Setting Every Community Up for Retirement Enhancement Act” (SECURE ACT) became Law.
The ACT –
The SECURE Act intended to expand our ability to increase our retirement savings and to simplify the administration of retirement plans. However, the act also included a major change that ended the so-called stretch IRA provision for beneficiaries of IRAs and qualified retirement to take an RMD over their lifetime. This was an effective state planning strategy to pass along tax savings to beneficiaries. The SECURE now requires all beneficiaries of an IRAs, Roth IRAs, and Qualified Retirement Plans such as 401(k)s, 457 plans, etc. Inherited as of January 1, 2020, to redeem all assets from these accounts within 10 years or pay a 50% IRS penalty.
EXCEPTIONS to the TEN-YEAR RULE –
There are a few exceptions to the redemption requirement of all assets within 10 years which are:
the SECURE Act’s does not affect RMD’s taken by original IRA and Qualified Retirement Plan owners. Roth IRA owners need not take any RMD’s for as long as they live. Beneficiaries who want to quickly drain their inherited accounts are unaffected as they should be the 10-year rule.
The SECURE Act’s 10-year account liquidation rule does not affect accounts inherited by so-called eligible designated beneficiaries, as.
* Surviving spouse of the deceased account owner,
* A minor child of the deceased account owner till age of majority which is 18 and most states were 21.
* A beneficiary who is no more than 10 years younger than the deceased account owner, or
* A disabled or chronically ill individual.
Under the exception for eligibility designated beneficiaries RMDs generally can be taken from the inherited account over the life expectancy of the eligible designated beneficiary, beginning with the year following the year of the account owner’s death if an RMD not been required by the original owner. If it had then the.
Other non-spouse beneficiaries, whom we will call “affected beneficiaries”, will be slammed by the 10-year account rule and the account balances must be distributed within 10 years. Remember, account balances for a child inheriting must be distributed after a child reaches age of majority, usually 18 in most states or 21.
10-Year Account Liquidation Rule Specifics-
this rule applies for “affected beneficiaries” inheriting an IRA, Roth IRA, or qualified as of January 1, 2020 regardless whether the original account owner, died before or after your RMD required date which is now 72 if you were not 70 ½ at the end of 2019.
Remember – failure to comply with the 10-year account liquidation rule may expose the beneficiary to a 50% IRS penalty of the remaining balance. Also, the liquidation rule only applies to the “affected beneficiaries” from the original account owner who died after 2019
Warning: Retirement accounts held in a “Conduit or Pass-Through” Trust should check with their estate attorney.
Explore “Tax-Savvy” Estate Planning Alternatives to the Stretch IRA for those with larger Retirement Plans:
*Consider generous gifts of up to $75,000 to fund section 529 college savings plans for a child or grandchild as well as $15,000 per person per year (30,000 if married) and claim a federal gift tax exclusion for the full amount.
*Prepaid college tuition or medical bills for a loved one direct to the college or medical service provider.
*Help a loved one with the down payment on a home
*Life insurance to transfer tax-free.
These issues may prompt a visit to your estate attorney.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Waddell & Reed and its representatives do offer tax or legal advice. Please consult with the appropriate professionals regarding your personal situation prior to making any financial related decisions. (12/20)