A popular estate planning strategy has died a quick death at the hands of Congress. Yes, the stretch IRA is dead. It has been replaced by a 10-year post-death payout rule, but how does that work? Who is subject to it? When does it start, and when does it end?
Until 2020, designated IRA beneficiaries could keep funds in an inherited IRA and were required only to take minimum annual distributions over their life expectancy. So, if a child or grandchild inherited an IRA, he or she might enjoy decades of tax-deferred growth in the IRA.
Under the new law, most people other than spouses who inherit individual retirement accounts will be subject to a 10-year payout rule. Under that rule, all the assets in the inherited IRA or Roth IRA must be withdrawn by the beneficiary by the end of the 10th year after the account holder’s death. The only good news is that there are no annual required minimum distributions during the 10 years, leaving that period open for withdrawals that the beneficiary can plan out according to his or her personal tax situation, as long as the account is emptied by the end of the 10th year.
John has an IRA and dies in 2020. His beneficiary is Bill, his 40-year-old son. Bill does not get the stretch IRA, as he would have if he had inherited it in 2019 or earlier. Instead, he is subject to the 10-year rule. Bill can withdraw any amounts he wishes in the first nine years, but he must withdraw the entire remaining balance by the end of the 10th year after his father’s death, which in this example would be by Dec. 31, 2030.
Some beneficiaries still qualify for the stretch IRA, the same as under the old rules. These beneficiaries are now called “eligible designated beneficiaries,” or EDBs. This group includes surviving spouses, minor children up until they reach their majority (at which time the funds must be distributed to them) – but not grandchildren, disabled or chronically ill individuals, or those who are not more than 10 years younger than the IRA owner. Anyone who inherited before 2020 is automatically grandfathered into this group.