Stretch IRA Lives on For Some Beneficiaries

Monday, August 03, 2020

By Sarah Brenner, JD
Director of Retirement Education
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Last year the SECURE Act became law and eliminated the stretch IRA for millions of IRA beneficiaries. However, for some IRA beneficiaries the stretch lives on.

For most beneficiaries, the stretch is now replaced with a ten-year payout period. Beginning for deaths in 2020, the ten-year rule will apply to designated beneficiaries who are not eligible designated beneficiaries under the SECURE Act.  Eligible designated beneficiaries include spouses, minor children of the IRA owner, chronically ill and disabled individuals and beneficiaries who are not more than ten years younger than the IRA owner. Eligible beneficiaries can still use the stretch.

There is another often overlooked group of beneficiaries out there who also can still use the stretch. That would be beneficiaries who inherited IRAs prior to 2020. Anyone who inherited an IRA in 2019 or earlier would still be able to use all of the old rules for required distributions, including the stretch. These beneficiaries are grandfathered under the SECURE Act. This means that millions will be using the old rules and stretching distributions from their IRAs for years to come. The stretch will not be going away for these beneficiaries.

Example: Kendra, who is age 23 this year, is the beneficiary of her grandmother’s IRA. Her grandmother died in 2019. Kendra is not affected by the SECURE Act and can stretch RMDs over her life expectancy. Because Kendra is 23, her distribution period will last about 60 years.

There is one important limitation, however. While the SECURE Act allows beneficiaries who inherited IRAs prior to 2020 to continue using the stretch, any successor beneficiary who inherits after 2019 must use the ten-year payout rule. The old rules allowing a successor beneficiary to step into the shoes of the original beneficiary and continue the stretch are gone under the SECURE Act.

Example: Juan inherited an IRA from his uncle in 2015. He has been using the stretch and taking distributions over his life expectancy. His successor beneficiary is his son, Aiden. Juan dies in 2020. Aidan is subject to the ten-year payout rule.

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