RIP: The Stretch IRA

This way of leaving money to your IRA beneficiaries is no longer permitted

When looking into retirement investing options, you may have come across the term "stretch IRA." This is actually not a category of IRA, such as a traditional, Roth, SEP, or SIMPLE IRA. Instead, a stretch IRA is more like a financial-planning or wealth-management concept that acted as a provision of the IRA. Because it was a key concept in estate planning, it's worth knowing what the concept was. And if you already have one, you are still covered by the provisions.

The reason we say "acted" is because the stretch provision was outlawed by the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was signed into law on Dec. 20, 2019, as part of two year-end spending bills. If you have done estate planning based on this concept, you will need to review it with your attorney and tax advisor.

If you are or will be the non-spouse beneficiary of an IRA account, know that stretch IRAs are no longer permitted unless the original account holder was deceased by Dec. 31, 2019. This article discusses the stretch concept and the factors that determined whether an IRA could include a stretch provision. If you are already the beneficiary of a stretch IRA, it will remain relevant.

Key Takeaways

  • The stretch IRA allowed beneficiaries of inherited IRAs to spread out the distributions over their life expectancy.
  • The stretch provision allowed beneficiaries to defer paying taxes on the account balance and prolong the tax-deferred or tax-free growth.
  • The stretch provision was outlawed by the passage of the SECURE Act, which was signed into law on Dec. 20, 2019.

The Stretch Concept

While the basic intent of having a retirement account is to save for and finance retirement years, many individuals have other financial resources and prefer to leave the tax-deferred (or tax-free, in the case of a Roth IRA) assets to their beneficiaries. Whether the beneficiaries can continue to enjoy tax-deferred or tax-free growth on the retirement assets, however, depends on the provisions stated in the IRA plan document.

Some IRA provisions may require the beneficiary to distribute the assets soon after the IRA owner's death. Some allowed the beneficiary to take distributions over his or her life expectancy as provided by the Internal Revenue Code.

Others allowed the beneficiary to distribute the assets over a life-expectancy period and also allowed them to designate a second-generation beneficiary of the inherited IRA. This provision allowing a beneficiary to designate a second-generation beneficiary (and even a third, fourth, and so on) is the one that determined whether the IRA had the stretch provision. It allowed the IRA to be stretched (passed on) from generation to generation, if life expectancy allows for it. This concept is no longer permitted by law.

How the Stretch Concept Worked

As we stated, the stretch concept allowed an IRA to be passed on from generation to generation. However, in doing so, the beneficiary had to follow certain rules to ensure they didn't owe the IRS excess-accumulation penalties, which are caused by failing to withdraw the minimum amount each year. Let's explore this further with an example that falls well before the legal end date of the stretch IRA concept.

An Example

Tom's designated beneficiary is his son Dick. Tom dies in 2008 when he is age 70, and Dick is age 40. Dick's life expectancy is 42.7 (determined in the year following the year Tom died, when Dick is age 41). This means that Dick is able to stretch distributions over a period of 42.7 years. Dick elects to stretch distributions over his life expectancy, and he must take his first distribution by Dec. 31, 2009, the year-end following the year Tom died.

To determine the minimum amount that must be distributed, Dick must divide the balance on Dec. 31, 2008, by 42.7. If Dick withdraws less than the minimum amount, the shortfall will be subject to the excess-accumulation penalty. To determine the minimum amount he must distribute for each subsequent year, Dick must subtract one from his life expectancy of the previous year. He must then use that new life-expectancy factor as a divisor of the previous year-end balance.

The IRA plan document allowed Dick to designate a second-generation beneficiary, and he designated his son Harry. If Dick were to die in 2013, when his remaining life expectancy is 38.7 (42.7 – 4), Harry could continue distributions for Dick's remaining life expectancy. It is important to note that only the first-generation beneficiary's life expectancy is factored into the distribution equation; therefore, Harry's age is not relevant.

In this example, Tom could have chosen to designate Harry as his own beneficiary, resulting in a longer stretch period. In such a case, Harry would be the first-generation beneficiary, and his life expectancy instead of Dick's would be factored into the equation.

Primary Benefits of the Stretch Concept

Tax Deferral

The primary benefit of the stretch provision is that it allowed beneficiaries to defer paying taxes on the account balance and to continue enjoying tax-deferred and/or tax-free growth as long as possible. Without the stretch provision, beneficiaries may be required to distribute the full account balance in a period much shorter than the beneficiary's life expectancy, possibly causing them to be in a higher tax bracket and resulting in significant taxes on the withdrawn amount. In fact, under the SECURE Act, beneficiaries must withdraw the entire account within 10 years from the date of the death of the original account holder.


Generally, the stretch option was not a binding provision, which means the beneficiary may have chosen to discontinue it at any time by distributing the entire balance of the inherited IRA. This allowed (and still allows) the beneficiary some flexibility if the person needed to distribute more than the minimum required amount.

Benefits for Spouses

A spouse beneficiary is allowed to treat the inherited IRA as his or her own. When the spouse elects to do this, the stretch concept is not an issue, as the spouse beneficiary is given the same status and options as the original IRA owner. However, should the spouse choose to treat the IRA as an inherited IRA, then the stretch rule would have applied.

The Bottom Line

Starting with beneficiaries of those who died on Jan. 1, 2020 or later, the stretch concept no longer applies. In light of these changes, be sure to consult your tax and financial professional for assistance with making beneficiary designations that suit your financial profile, your wealth management goals, and the new legislation.

For education only, these are the questions that would have enabled you to tell whether the stretch concept applied to any of your IRAs: Will the beneficiary be allowed to take distributions over a life-expectancy period? Will the beneficiary be allowed to designate second- and subsequent-generation beneficiaries? If the answer to these questions was yes, then you would have been able to use the stretch concept with the IRA.

With the stretch IRA provision removed from retirement options, persuading an IRA provider to incorporate the permission to have one into an IRA's documents is no longer an issue.

Article Sources
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  1. 116th Congress, 2nd Session. "H.R.1865 - Further Consolidated Appropriations Act, 2020."

  2. Internal Revenue Service. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)."

  3. Congressional Research Service. "Inherited or “Stretch” Individual Retirement Accounts (IRAs) and the SECURE Act," Page 1.

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