The Stretch IRA is an estate planning strategy that allows non-spouse IRA owners to extend the tax-deferral benefits of IRAs over multiple generations.
Under current tax law, spousal beneficiaries can inherit IRA accounts and treat them as their own. Thus, Required Minimum Distributions would be calculated based on the new surviving spouse’s age. For a surviving spouse, he or she can delay RMDs as late as their 70.5 birthday.
When a non-spouse beneficiary inherits an IRA account, he or she must start RMDs the year after death, regardless of their age. Since the RMDs are calculated using actuarial tables based on the age of the new owner, a younger owner could potentially “stretch” the IRA and tax-deferral over many years or even decades.
This powerful estate planning strategy allows current and future IRA owners to structure their investments to provide long-term tax-deferred growth while keeping the tax implications to a minimum.
The SECURE Act proposes to end the benefits of the Stretch IRA by limiting the period that non-spouse beneficiaries can stretch the IRA distributions. While there are many exceptions and details to the proposed plan, the general rule is that non-spouse beneficiaries must distribute 100% of the IRA within 10 years.
This new rule, if passed, could have a significant impact on many of the financial planning strategies that are used today. It may require a review of current IRA balances, beneficiaries, tax brackets, and long-term financial goals.