SECURE Act Eliminates Stretch IRA

January 23, 2020 | Josh Zorger, CFP®, Fortitude Private Wealth

The Setting Every Community Up for Retirement Enhancement Act, knows as the SECURE Act, was signed into law on December 20, 2019. The changes from the law became effective on January 1 of 2020. One of the major changes created by the law are that Required Minimum Distributions (RMDs) will now start at age 72, instead of at age 70 ½.

Another major change is that most non-spouse beneficiaries who inherit a Traditional IRA or Roth IRA will no longer have the option to stretch required minimum distributions over their lifetime. This specifically includes most non-spouse beneficiaries who inherit a Traditional IRA or Roth IRA after January 1 of 2020. This new law does not affect IRA’s that were inherited prior to 2020.

The removal of the lifetime stretch option was replaced by a 10-year payout for most non-spouse beneficiaries. This new 10-year rule does not require that required minimum distributions are made during the first 10 years. Instead, it simply requires that the IRA balance be completely withdrawn from the account by the end of the 10th year. This allows for some flexibility with tax planning, so that the beneficiary can either withdraw the funds when it is most tax advantageous or allow the funds to grow tax-deferred with no withdrawals for the first 10 years.

The removal of the stretch option should motivate IRA owners, especially those with large balances, to effectively plan for how those assets will be taxed when passed on to future generations. One strategy may be for the IRA owner to begin converting their Traditional IRA assets into Roth IRA accounts. These conversions may help eliminate potentially large future tax bills for their beneficiaries.

This information should be used for educational purposes only and is not intended to be specific investment planning, retirement planning or tax planning advice. We recommend that you consult with a professional tax advisor or qualified plan consultant before implementing any of the options presented. 

Josh Zorger, CFP®, is the founder and president of Fortitude Private Wealth in Carmel, IN.

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