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The “Stretch” IRA Provision Was Not Eliminated From all Inheritors!

The “Stretch” IRA Provision Was Not Eliminated From all Inheritors!

| March 16, 2021
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Longstanding retirement account rules underwent several substantial updates with the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act. One of the major changes was the replacement of the “Stretch” provision for non-spouse beneficiaries of inherited retirement accounts with a new 10-Year Rule.  As a result, if you received an unexpected inheritance comprised of retirement account(s) at the beginning of 2020, this may result in an unanticipated increase in income and taxes under the new 10-Year Rule, depending on how and when distributions are taken.  Bear in mind, Eligible Designated Beneficiaries (i.e., spouse) are not impacted by the 10-Year Rule which is addressed below.  Owners or inheritors of an IRA or other qualified retirement plans may want to consult a financial advisor to consider implications to their retirement plan and beneficiaries.

Before the SECURE Act reforms, beneficiaries of inherited retirement accounts were able to stretch out distributions based on their life expectancy, thereby “stretching” taxable distributions and related tax payments.  Accounts inherited prior to January 2020, continue to be subjected to annual required minimum distributions (known as RMDs) that must be taken every year.  RMD calculations are based on numerous factors, including beneficiaries’ age, life expectancy and the account balance at the end of each year.  Now, most non-spouse beneficiaries will be required to empty their inherited IRA accounts within ten-years.  The new 10-Year Rule is flexible on when distributions are taken out and do not have annual RMD requirements.  These assets can be withdrawn from the qualified retirement accounts in any amount, at any time, over the ten-year term, so long as the account balance is zero after the 10th year.

Other notable changes made by the SECURE Act is the identification of three groups of beneficiaries: 

  1. Eligible Designated Beneficiaries – surviving spouse of account owner, individuals who have a disability or chronic illness, those not more than 10 years younger than the account owner, minor children of account owner.
    1. This group is subject to the “Stretch” provision and not the new 10-year rule.
      1. “Stretch” over their life expectancy.
      2. The 5-year-or-decedent’s-life-expectancy Rule (an optional distribution choice)
    2. Non-Designated Beneficiaries – non-person entities such as trusts and charities (with few exceptions).
      1. This group is subject to the “Stretch” provision and not the new 10-year rule.
        1. “Stretch” over their life expectancy.
        2. The 5-year-or-decedent’s-life-expectancy Rule (an optional distribution choice)
      2. Non-Eligible Designated Beneficiaries – any individual who qualifies as a designated but are not on the list of Eligible Designated Beneficiaries.
        1. This group is subject to the new 10-Year Rule.

These changes are disruptive for retirement account owners who may wish to revisit Roth conversions and who they name as their beneficiaries. The devil is in the details and a discussion on distribution options, tax implications, estate planning and retirement planning with a professional financial advisor may prove time well spent. 

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC, nor any of its representatives may give legal or tax advice.

 

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