The “Stretch IRA” is not dead; neither is the stretch TSP. Many financial writers are lamenting the passing of the stretch IRA, which allowed IRA beneficiaries to stretch the payments received from an inherited IRA over their lifetimes. These writers claim that the Setting Every Community Up for Retirement Enhancement (SECURE) Act should be indicted for murdering the stretch IRA. (By the way, the acronym SECURE was a real stretch and should be a top contender for the “worst acronym of 2019” award).
Is the SECURE Act guilty of murder? Not so fast folks; the stretch IRA is still available for certain classes of beneficiary. Let’s call the charge either “attempted murder”, or assault with a deadly weapon (i.e., Congress).
While it is true that beneficiaries such as adult children and grandchildren will no longer have the ability to stretch inherited IRA payments over their lifetime, the following categories of “eligible designated beneficiary” will still be able to enjoy the stretch:
1) surviving spouses;
2) minor children;
3) disabled individuals;
4) chronically ill individuals; and
5) any beneficiary who is not more than ten years younger that the IRA owner.
If your IRA beneficiary is not in one of the categories listed in the above (i.e., not an eligible designated beneficiary), you might want to consult with an estate planner who is familiar with federal tax law to see if any changes should be made in your beneficiary designation(s).
So, what happens if your beneficiary is unable to stretch the payments out over their lifetime (e.g., an adult child)? They are not required to take any distributions at all from the inherited IRA until the end of the tenth year after the death of the IRA owner – and then they are required to withdraw the entire IRA balance.
In the case of a designated beneficiary who is eligible by virtue of being a minor; the ten-year period begins when they reach the age of majority. If your beneficiary was going to cash out the IRA in any event, the elimination of the stretch has no adverse effect. On the other hand, if a beneficiary wanted to stretch the payments for more than ten years, he or she is out of luck.
Why this change in rules? Simple: uncle wants his tax revenue sooner rather than later. With its spending addiction, the government needs a revenue “fix” and is unwilling to let tax deferral continue for generations. Look for more attempts by Congress in the future to limit tax deferral of retirement investments.
What’s the Thrift Savings Plan doing about this? They’re updating their rules to include this and other provisions of the SECURE Act. Like the TSP on Facebook, or follow them on Twitter, and you’ll be kept in the information loop.