In 2019, the SECURE Act became law and enacted a slew of changes to retirement plan provisions, including raising the required starting age for required minimum distributions (RMDs) to 72 from 70 ½ and mostly eliminating the “stretch IRA.” For the most part, these changes were effective on January 1, 2020.
Elimination of the stretch IRA
Prior to the SECURE Act, IRA beneficiaries were exempt from having to take RMDs from inherited accounts for years (or even decades) and instead could take periodic payments over their life expectancy. This was a great strategy for reducing their tax bills and protecting wealth for future generations.
This strategy was popularly called the stretch IRA—because the payments were stretched out over the beneficiary’s lifetime.
The SECURE Act did away with the ‘stretch’ provision for nearly all types of beneficiaries. Now, only the following people, called Eligible Designated Beneficiaries (EDBs), may continue to take life expectancy payments from inherited retirement accounts:
- A beneficiary who is not more than 10 years younger than the deceased account owner
- A beneficiary who is disabled or chronically ill
- The deceased account owner’s minor child (but not a grandchild)
Any retirement account beneficiary who does not fall into one of the above categories must receive a full distribution of the assets in the inherited account by the end of the tenth year following the deceased account owner’s death.
The SECURE Act affects beneficiaries who inherited a retirement account after January 1, 2020. If a beneficiary (such as an adult child or a grandchild) inherited the account in 2019 or earlier, they may still rely on the stretch IRA provisions and take life expectancy payments. However, when the original beneficiary dies, their beneficiary will no longer be able to stretch.
Proposed change for 2023
In February 2022, the IRS issued proposed regulations that update the list of eligible designated beneficiaries (EDBs), which would be effective until January 1, 2023.
These proposed regulations add an additional type of eligible beneficiary: beneficiaries of a deceased account owner who died prior to January 1, 2020.
For now, there is a public hearing scheduled for June 15, 2022 to address comments on the proposed regulations. Even if the regulations are not finalized until early in 2023, the IRS may look to taxpayers to exercise reasonable, good-faith compliance in this tax year.
The IRS’s proposed regulations also include quite a few other provisions that we’ll explore soon in another post. For now, if you have questions about taking RMDs or if you’ve inherited a retirement account that you’re not sure how to handle, our advisors can help. Click here to schedule a free meeting with one today.