The SECURE Act has eliminated the stretch IRA for all but a handful of exceptions:
- Surviving spouses
- Minor children (not grandchildren), but only up to the age of majority (18 in most cases or up to 26 if still in school)
- Chronically ill or disabled beneficiaries (as defined by Social Security)
- An individual who is not more than 10 years younger than the deceased (think siblings and domestic partners)
Unless a named beneficiary qualifies for one of the exceptions, he or she is required to liquidate the account fully within a 10-year period. This can be done over time or all at the end of the 10th year. There is no systematic RMD requirement.
It’s important to note that beneficiaries of a participant who died in 2019 still have the stretch option available, as do beneficiaries already in a stretch strategy.
Qualified money such as IRA’s typically is the most highly taxed money upon the death of a client. With the loss of the stretch, one of the great planning tools for clients just disappeared. Tax deferral over 20, 30, or 40 years was a huge benefit.
Families accumulating large RIA’s and 401K’s were able to leave a legacy plan that would have benefited their grandchildren, but that tool is now gone. The IRS allowed RMD’s to be delayed until 72 but they took away the lifetime stretch provision! Not even close who got the short end of that stick!
So as a planner we now must be creative to help our clients continue to create the legacy plans they have built within the new guidelines.