Stretch IRAs for Estate Planning: Limited Relevance in SECURE Act Era

The “stretch IRA,” as it was traditionally understood, is largely a concept of the past, significantly curtailed by the SECURE Act of 2019. However, understanding its original purpose and the nuances of current regulations is still relevant for advanced estate planning, particularly when considering retirement accounts. Historically, a stretch IRA strategy revolved around naming younger beneficiaries, often children or grandchildren, as beneficiaries of retirement accounts like traditional IRAs or 401(k)s. This allowed these beneficiaries to “stretch” out distributions over their own life expectancies, rather than being forced to withdraw the entire balance shortly after the account owner’s death.

The primary advantage of the stretch IRA was maximizing tax-deferred growth and minimizing immediate income tax liability. By taking Required Minimum Distributions (RMDs) based on the beneficiary’s longer life expectancy, smaller annual withdrawals were mandated. This meant more of the inherited IRA assets remained sheltered from taxes, continuing to grow tax-deferred for a longer period. For example, a grandchild inheriting an IRA could potentially stretch distributions over 70+ years, drawing out a relatively small percentage each year while the bulk of the account continued to compound tax-free. This strategy was especially attractive when the beneficiary was in a lower tax bracket than the deceased account owner or anticipated being in a higher tax bracket in the future.

However, the SECURE Act fundamentally altered these rules for most beneficiaries inheriting accounts from individuals who died after December 31, 2019. The Act replaced the “stretch” with a 10-year rule for most “designated beneficiaries.” This means that while beneficiaries can still take distributions over a period of time, the entire inherited IRA must be fully distributed by the end of the tenth year following the account owner’s death. This significantly accelerates taxation and eliminates the multi-generational stretch that was previously possible for many.

Despite these changes, there are still limited situations where the concept of extending tax deferral and income streams, albeit not precisely a traditional “stretch IRA,” remains relevant within estate planning:

1. Eligible Designated Beneficiaries (EDBs): The 10-year rule does not apply to certain categories of beneficiaries known as Eligible Designated Beneficiaries (EDBs). These include:
* Surviving spouses: Spouses can still roll over inherited IRAs into their own accounts and defer distributions until their own RMD age.
* Minor children: Minor children of the account owner can stretch distributions over their life expectancy until they reach the age of majority (typically 18, but can vary by state). After reaching the age of majority, the 10-year rule then applies.
* Disabled beneficiaries: Individuals who meet the IRS definition of disabled can stretch distributions over their life expectancy.
* Chronically ill beneficiaries: Individuals who are chronically ill, as defined by the IRS, can also stretch distributions.
* Beneficiaries not more than 10 years younger than the account owner: These beneficiaries can also stretch distributions over their life expectancy.

For these EDBs, the traditional stretch IRA concept remains largely intact. If your estate plan involves leaving retirement assets to an EDB, the strategy of maximizing tax-deferred growth and creating a long-term income stream through life expectancy distributions is still highly relevant.

2. Trusts as Beneficiaries (with EDBs): While trusts are often used in estate planning for various reasons (control, asset protection, etc.), using a trust as a beneficiary of an IRA adds complexity, particularly post-SECURE Act. However, if the beneficiaries of the trust are EDBs, it may still be possible to achieve some form of extended tax deferral. This is highly nuanced and requires careful drafting to ensure the trust qualifies as a “see-through” trust under IRS rules and that the EDB status is properly considered for RMD calculations. In these cases, the trust can act as a conduit for distributions to the EDB beneficiary over their life expectancy, potentially mimicking some aspects of the old stretch IRA.

3. Pre-SECURE Act Inheritances: For beneficiaries who inherited IRAs before January 1, 2020, the old stretch IRA rules may still apply. These beneficiaries are generally grandfathered under the pre-SECURE Act regulations and can continue to take distributions based on their life expectancy.

4. Smaller IRA Balances: While the stretch IRA was most advantageous for larger retirement accounts, for smaller balances, the 10-year rule might be less burdensome. In these cases, estate planning might focus less on stretching and more on simply ensuring efficient and tax-aware distributions within the 10-year window, perhaps strategically timing withdrawals to minimize tax impact.

In conclusion, while the traditional stretch IRA is largely a relic of pre-SECURE Act estate planning for most beneficiaries, the underlying principles of tax deferral and long-term income streams remain important. For individuals with EDB beneficiaries, or in specific trust situations, the concept of extending distributions and maximizing tax-deferred growth can still be strategically incorporated into estate plans. However, the landscape is complex, and navigating these rules effectively requires expert financial and legal counsel to ensure compliance and optimize outcomes in the post-SECURE Act environment.