Those who are not eligible for the stretch IRA are required empty the account within 10 years. Image: pogonici/Shutterstock.com

Let’e take a look at what constitutes an eligible designated beneficiary for the purposes of a “stretch IRA” under the SECURE ACT – Setting Every Community Up for Retirement Enhancement – of 2019.

In the pre-SECURE Act universe there were designated beneficiaries. These beneficiaries could be individuals (sometimes called named beneficiaries), institutions such as charities, or estates.

Any named beneficiary (i.e. a designated beneficiary who is also an individual) was able to stretch payments from an inherited IRA over their life expectancy.

The ability for every named beneficiary to take advantage of the stretch ended on January 1, 2020, when the Act was implemented. Those who are not eligible for the stretch (i.e., plain old designated beneficiaries) are required to totally empty out the IRA within a period of ten years.

But wait! Even after the implementation of the SECURE Act, some beneficiaries can stretch IRA payments out over their life expectancy; these are now referred to as eligible designated beneficiaries.

Before we go further, it is important to note that the SECURE Act did not change the rules for anyone who inherited an IRA prior to January 1, 2020. So, an individual who would not be considered eligible to stretch IRA distributions if they inherited an IRA today, can continue to stretch distributions from any IRA they inherited in 2019 or earlier.

Eligible designated beneficiaries (those who are able to take advantage of the stretch) are:

Spouses. This requires no further explanation.

Minor children of the deceased account owner. However, they don’t get the ability to stretch their payments forever. Once the reach the age of majority (exception for full-time students up to age 26), they must clean out the IRA within ten years.

Disabled individuals. The definition of disability for this purpose is a total disability definition that is almost identical to the definition used by Social Security. An individual must be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration”.

The chronically ill. The definition of chronically ill under the SECURE Act is hard to meet and is the same as the definition that is used by insurance companies to determine qualification for long-term care coverage. Our Federal Long-Term Care Insurance uses the same definition; that definition requires that an individual be certified by a physician, or other licensed health care practitioner, as being unable to perform at least two activities of daily living or need substantial supervision due to a cognitive impairment. Activities of daily living are: bathing oneself, dressing oneself, going to the toilet by oneself, feeding oneself, remaining continent and transferring (having some limited mobility).

Those who are not more than ten years younger than the deceased account owner. This includes any beneficiary, not just those who are related to the account owner. So why was this change made? Tax revenue of course.

RMDs Moved up to Age 72, Additional Contributions Allowed

TSP: Last Week Was the Fastest Market Correction in History

Becoming a TSP Millionaire: Don’t Try to Time the Market

TSP Investors Handbook, New 7th Edition