New limits are now being considered by Congress for IRA beneficiaries who are children (who are no longer minors) and grandchildren. The limits would not apply to beneficiaries who are surviving spouses, disabled or chronically ill, beneficiaries who are close to the IRA owner’s age, and minor children.
“Stretch” IRAs for Non-Spouse Beneficiaries are Targeted
A “stretch” IRA is not a specific type of IRA. It is an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. It allows for continued tax-deferred growth of an Individual Retirement Account (IRA). This strategy is particularly beneficial for Roth IRAs that provide distributions that are generally tax-free. This provides more time for the investments to remain sheltered in the IRA and continue growing in value, sometimes for decades, for future generations.
IRA account required minimum distributions (RMDs) must start after you reach 70.5 years of age. The annual amount of this RMD is based on your age and the government’s table for average life expectancy. Upon your death any undistributed funds in the IRA will go to your designated beneficiary, which is most often a spouse. The calculation of the RMD will enable a decrease in the required distribution when the spouse’s age is less than the deceased spouse. This will permit more of the IRA funds to remain in the IRA for a longer period providing additional tax-sheltered compounding growth.
Some legislators in Congress feel that the ability to spread IRA payments over an extended period of time was being abused by some wealthy taxpayers, who were using this approach as a strategy to minimize future taxes and to maximize benefits for heirs by allowing money to grow tax-deferred for very long periods of time. Congress noticed that it was primarily wealthier retirees, with spouses who already had sufficient retirement funds, who were utilizing the “stretch” IRA strategy to maintain family wealth for as long as possible. This was often being accomplished by naming the youngest child or grandchild as the IRA’s beneficiary to stretch payments over the longest possible time.
An example: a 76-year-old has a 22.0-year life expectancy, while a 23-year-old’s life expectancy is 63 years providing a much longer to receive IRA benefit payments.
The SECURE Act
In May 2019 the House passed its version of the SECURE Act. The Senate is now considering the House’s bill and is now drafting their own version. The proposed changes would take effect for 2020. There are some differences between the House and Senate versions, but both allow IRA benefit distributions to be “stretched” for “eligible” heirs (see this article’s first paragraph).
For IRA owners who die after December 31, 2019, the House version would not require annual minimum withdrawals for beneficiaries of inherited IRAs until the end of a 10-year period. However, the full remaining amount would have to be distributed at that time.
The Senate’s version (that has not yet passed) would impose new limitations that would permit continuation of “stretch” IRAs from owners that do not exceed a cumulative $400,000 in total value to beneficiaries. Any amounts over that must be distributed within 5 years.
A comprehensive review of the SECURE Act’s provisions will be found on this site by searching for the article titled “Cheers and Jeers for the SECURE Act of 2019”.
Grandfathering is a Question
At this time, it is not known whether any changes made in the final legislation will apply only to future contributions and not to already accumulated values. We will likely have that answer and know the details of any final legislation by year’s end.
Greg Tinaglia
Last Updated: 10/10/2019