Stretch IRAs Out with SECURE Act

Posted on: Friday, December 27th, 2019

The so-called “SECURE Act” recently passed by Congress and signed by the President makes several changes to the laws which direct the way retirement plans operate.  For estate planners, the big change is the elimination of “stretch” rules for most IRA beneficiaries.

Under the prior law, people who were named beneficiaries of an IRA that passed to them at the death of the account owner, could (under common circumstances) draw the money in that account out over the years they had left to live according to approved life-expectancy tables.  That meant that people who were young when they inherited funds from an IRA could defer the receipt of those funds for years or decades (aka “stretch” the IRA over their own life), and by doing so, continue to enjoy the tax free growth of those accounts. 

Because so many people have so much of their wealth tied up in retirement accounts, these rules have been really important.  For decades it has been a critical part of estate planning to make sure that a client’s plan is drawn up to allow for their beneficiaries to be able to maximize the potential tax benefits of using these generous stretch rules.

But these stretch rules are complicated, sometimes bizarrely so.  As a result, for estate planning lawyers, the process of advising clients about how select beneficiaries and the act of drafting corresponding trusts has required great delicacy. 

The big change is that now… wait for it ….  all inherited IRAs can only be stretched for a maximum of ten years (unless you are the surviving spouse of the account owner, in which case the rules have not been changed).  With this change, planning for retirement assets will be much less complicated.  Good for the lawyers.  Maybe not so great for clients with big retirement plans. 

There are several other important changes in the SECURE Act, including that the age at which mandatory required distributions begins is now 72 (up from a date related to your 70 ½ birthday).  Also, people who work later in life can continue to save money in their retirement accounts after they reach age 70 ½.