What to Do When You Cannot Stretch (IRAs) Like You Used to, and Yoga Won’t Help

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Laws constantly change. Some changes are of no consequence to a client’s estate plan. Other changes make a comprehensive review of a client’s estate plan appropriate. The Setting Every Community Up for Retirement Enhancement Act, or “SECURE Act,” is an example of the latter.
 
Last month, Chuck Lax prepared an excellent summary of the SECURE Act. This article focuses on the most important element of the Act for estate planning – the reduction (or near elimination depending on one’s perspective) of the “stretch IRA.”
 
Prior to the Act, retirement plan participants and IRA owners could structure their accounts to allow deferring the recognition of income after the participant’s/owner’s death. Beneficiaries were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life expectancy (even more favorable rules were available for spouse beneficiaries). Although nonspouse beneficiaries were required to take annual required minimum distributions, consider the deferral that could be achieved with a 50-year-old child as beneficiary (34 years) or 25-year-old grandchild as beneficiary (58 years). This stretch has been severely limited by the Act.
 
For deaths of plan participants and IRA owners beginning in 2020, distributions to nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant’s or IRA owner’s death. More specifically, all amounts must be distributed from the account no later than December 31 of the year containing the tenth anniversary of the participant’s/owner’s date of death. As a consequence of the Act, the payout period for our 50-year-old child has been reduced by 24 years and the payout period for our 25-year-old grandchild has been reduced by 48 (!) years.
 
There are no other distributions that beneficiaries must take during this time, although it may not be preferable from an income tax perspective to distribute the entire account balance in the final year. This is especially true if the account is payable to a “conduit” or “accumulation” trust, given the income tax rates and brackets applicable to trusts.
 
Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached the age of majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).
 
For some clients, the Act will necessitate changes to the estate plan. Contact a Maddin Hauser attorney if you or someone you know has significant savings in a retirement plan or IRA.