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The SECURE Act & “Stretch IRAs”


By Heidi Huiskamp, Founder and CEO of Huiskamp Collins Investments, LLC

At the end of 2019, Congress abolished a time-tested wealth legacy strategy called the “Stretch IRA” with the passage of the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The rationale was that they were closing a “loophole” used mostly by “millionaires and billionaires,” but the reality was that regular people like you and me had been using this estate planning tool to pass their hard-earned life savings on to their kids and their grandkids and they suddenly had the rug pulled out from under them. Formerly, a Stretch IRA was an IRA inherited by a beneficiary who was able to use the IRA’s tax-deferred nature to “stretch” the distributions of that account over their lifetime. Many grandparents successfully left other assets to their spouses and children and then named their much younger grandchildren as beneficiaries to maximize the earning power of the IRA over a longer period of time.

The SECURE Act put an end to that tactic. The rule now, with some exceptions we’ll discuss in a moment, is that inherited IRAs must be completely distributed by the 10th year after the year of the original owner’s death. If the new owner fails to do that, the penalty is steep: that heir will owe the IRS 50 percent of the amount that should have been distributed, but wasn’t. This rule and the accompanying penalty applies to Traditional and Roth IRAs along with 401ks and other retirement defined contribution plans that the deceased failed to roll over into an IRA. Please note that the 10-year distribution plan that the heir must adhere to is not dictated by any rule. That new account owner should empty the account in equal or unequal amounts in any manner they see fit as long as the balance is zero by the end of the 10th year after the end of the year of the original account owner’s death.

There are three exceptions to this change. The first is for IRA beneficiaries who inherited an account prior to January 1, 2020. Those descendants are “grandfathered” in and can continue taking scheduled benefits based on their life expectancies (they can always choose to take more if life happens and a need arises). The second exception to the new restrictions is if the surviving spouse is named as the beneficiary. That spouse has two choices. First, she or he can roll over that inherited IRA into their own IRA, either existing or new, which is called a “fresh start” IRA. They can name their own primary and contingent beneficiaries and start taking Required Minimum Distributions (RMDs) based on their age. The second option a spouse has is to treat the inherited IRA like a Stretch IRA and take RMDs immediately on a schedule that reflects that spouse’s life expectancy. The last of the three exceptions allowed to the SECURE Act is that of Eligible Designated Beneficiaries or EDBs. There are three types of EDBs. One is a minor child (not a grandchild) of the deceased. That child does not have to adhere to the 10-year rule of distribution with an important caveat: once the minor reaches the age of majority in the state where she or he resides, the 10 year clock for full distribution starts ticking. Another type of Eligible Designated Beneficiary is a chronically ill or disabled named beneficiary. The last exception is a named beneficiary who is not more than 10 years younger than the original account owner. If, for example, you wanted to leave a bequest to a sibling or a dear friend as part of your estate planning, you could very intentionally spend down your IRA during your lifetime, leave your spouse, children or grandchildren other specified assets and name your sibling or friend as your IRA beneficiary if they are close to you in age.

As you can see, tax laws can greatly impact your estate planning and sometimes hiring a professional who “knows her stuff” can be worth every penny spent. I have over 40 years of investment experience and would be honored to walk with you as your trusted advisor.

Please call me at 563-949-4705 or email me at heidi@hhcinvestments.net to schedule a complimentary, “no pressure” consultation. Next month, please tune in as we discuss alternatives to Stretch IRAs in this column.

Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.