Loss of the "stretch" retirement account

December 29, 2019

One of the most significant changes made by the SECURE Act to impact retirement savers is the elimination of the ‘Stretch’ provisions for most non-spouse beneficiaries of defined contribution plans and IRA accounts.

Under current law for those who have already passed away (or do by the end of 2019), designated beneficiaries are eligible to stretch distributions over their life expectancy. This meant that the money could "dribble" out over many years in small amounts (for example, 5%).

As Jeffrey Levine writes on Kitces.com, "However, for most designated beneficiaries who inherit in 2020 (i.e., where the retirement account owner themselves dies in 2020 and beyond), the new standard under the SECURE Act will be the ‘10-Year Rule’.Under this 10-Year Rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Thus, designated beneficiaries will have some flexibility when it comes to timing distributions from the inherited account(s) for maximum tax efficiency… as long as the entire account balance has been taken by the end of the 10th year after death." This means that the tax bills for the beneficiaries will spike into higher tax brackets by needing to take out larger amounts over time (particularly by the 10th year).

So this rule change will create both larger tax bills for those who inherit taxable retirement accounts beginning in 2020 AND the loss of tax deferral past 10 years. This will make estate and tax planning even more important.

Look for some creative solutions from the investment community in the coming months and years!