By Andy Ives, CFP®, AIF®
The stretch IRA is on a stretcher and paramedics just loaded it into an ambulance. It is on life support. Prognosis: negative. For most new beneficiaries, the stretch will not survive. The SECURE Act is the perpetrator, and it gives no quarter. The Act stood defiantly over the stretch after inflicting its damage and made no effort to run when the sirens wailed.
But all is not lost. Despite its injuries and overall dire shape, prone in a hospital bed, the stretch may still help some needy heirs.
Preceding this assault, essentially two classes of beneficiaries existed. There was the all-encompassing “Beneficiary” term that comprised everyone and everything. Charities, spouses, grandkids, estates, nieces, nephews, trusts, etcetera all fell under this enormous umbrella. Additionally, there was a further subdivision dubbed “Designated Beneficiaries.” This group included living, breathing people with life expectancies – no estates and no charities. Prior to the SECURE Act, only these designated beneficiaries could stretch IRA required minimum distributions (RMDs) over their life expectancy. (Makes sense, since neither charities nor estates have a heartbeat.)
The SECURE Act further slashed the number of people allowed to stretch IRA RMD payments. A new subclass of beneficiaries was christened: “Eligible Designated Beneficiaries,” or EDBs. Beginning for deaths on or after January 1, 2020, only EDBs can maximize the stretch. This includes:
- Surviving spouses
- Minor children of the account owner until age of majority – but not grandchildren
- Disabled individuals
- Chronically ill individuals
- Beneficiaries not more than ten years younger than the IRA owner
If a beneficiary is not on this list, they are stuck with the new SECURE Act provision requiring the inherited IRA be emptied by December 31 of the tenth year after the year of death, i.e. the 10-year rule. Of course, there are nuances and curveballs. There are outliers and there are circumstances when a person is an EDB but then is not an EDB and the 10-year payout springs forward. (Think a minor child who is no longer a minor.)
Regardless, the once powerful stretch, in its wounded state, is now severely limited. As it is, the five groups listed above (along with grandfathered heirs who inherited prior to 2020) are the only people who can stretch IRA RMDs over their life expectancy.
Did you name a trust as your IRA beneficiary prior to the SECURE Act? Better review that trust to see if it still meets your wishes. Did you name your grandchild as a beneficiary in hopes of allowing the little tyke to stretch IRA payments over the next 70 years? You may want to reconsider. In fact, every beneficiary form should be reevaluated, because the ambulance just sped away, and the feeble stretch can only help so many.