Stretch IRA Rules May Change – Retirement Planning

Kent Forsey, CFP® Inheritances, IRA's, Taxes

A widely used method to defer taxes and benefit your children or grandchildren with your unused retirement funds is about to change as new rules are being imposed on distribution of funds from Inherited IRAs, also known as Stretch IRAs.

Both the House of Representatives and the Senate have drafted their own versions of the new rules.  The House has named the legislation the Secure Act, which stands for Settling Every Community Up for Retirement Enhancement Act. Both versions essentially accelerate the distribution and taxation of Inherited IRA funds going to non-spouses.

A current rule that will remain the same is allowing a spouse to rollover their deceased spouse’s IRA to a spousal IRA and take Required Minimum Distributions (RMDs) based on their life expectancy.  Inherited IRA rules will be modified by the newly imposed rules, affecting non spousal beneficiaries such as children and grandchildren, the most common types of Inherited IRA beneficiaries.

For years, legislation has allowed inherited IRA beneficiaries to distribute funds over the course of decades based on the beneficiary’s life expectancy.  Revised legislation will require inherited IRAs to be distributed entirely within 10 years.  The distribution could be taken as intervals, at the end of the period, or whenever desired, as long as the entire account is disbursed within 10 years.  Both versions do allow distribution exceptions for minor children, disabled beneficiaries, and beneficiaries not more than 10 years younger than the deceased IRA owner.

A challenge for inherited IRA beneficiaries is the tax implication of accelerated distributions over a much shorter time period.  Some beneficiaries may also run the risk of falling into a higher tax bracket especially if they are working.

The Senate version allows for a stretch on the first $400,000 of IRA assets with the exceeding balance distributed within 5 years.  Both versions would apply to inherited IRAs with the original owner’s death occurring after December 31, 2019.

Kent G. Forsey, CFP®

Sources:  OneBlueWindow, LLC©;