Extended IRA

What Was an Extended IRA?

An Extended IRA allowed a second-generation beneficiary of an individual retirement account (IRA) to take distributions of assets at a rate based on the life expectancy of the first-generation beneficiary, thereby extending the IRA. Also known as a stretch IRA, it was pretty much ended by the SECURE Act, which applied to IRAs inherited after Dec. 31, 2019.

Key Takeaways

  • An extended IRA was an estate planning strategy that extended the tax-deferred benefits of an IRA inherited by a non-spouse beneficiary.
  • It allowed a second-generation beneficiary of an individual retirement account to receive distributions of assets at a rate based on the life expectancy of the first-generation beneficiary.
  • The tactic was ended by the SECURE Act of 2019, which mandated that inherited IRAs be emptied within 10 years after the death of the original account holder, regardless of the beneficiary's age.
  • IRAs inherited before Dec. 31, 2019, can maintain their extended status.


Understanding an Extended IRA

The extended IRA wasn't exactly a specific type of account. Rather, it was merely a provision that allows a second-generation beneficiary, and subsequent beneficiaries, to continue taking distributions based on the life expectancy of the first-generation beneficiary.  

In most IRAs (except the Roth IRA), pre-tax dollars are used to fund the account, up to certain limits. During the distribution phase, generally after age 59-1/2, the person who opened and funded the account must pay ordinary income taxes on any money withdrawn from the account.If the person who owns the account dies, taxes are still owed on the withdrawal of these assets even when the account is inherited by the first-generation beneficiary.

An individual who inherits IRA assets from the original IRA owner is referred to as the first-generation beneficiary. This individual was able to distribute the assets over their life expectancy or the remaining life expectancy of the original IRA owner. If the first-generation beneficiary subsequently dies, their designated beneficiary is the second-generation beneficiary.

Required minimum distributions for traditional IRAs and 401(k)s were suspended in 2020 due to the March 2020 passage of the CARES Act, a $2 trillion stimulus enacted amid the economic fallout from the COVID-19 pandemic.

However, this first-generation beneficiary could spread out the taxes owed by taking distributions based on their life expectancy. Keep in mind that spouse and non-spouse beneficiaries are treated differently when it comes to IRAs. A spouse who inherits an IRA can either roll over the funds to their own IRA or wait to take required minimum distributions (RMDs) until the late spouse would have been age 73. 

Non-spouse beneficiaries had three choices, including taking an immediate payout of the full amount of the account and paying the IRS taxes. They could also begin taking RMDs based on their life expectancy or the life expectancy of the deceased; if they were age 73 or older, they must begin taking RMDs within a year of inheriting the IRA. Another option was to fully withdraw from the account over five years. 

The End of the Extended IRA

This type of IRA was used by those who no longer needed—or wanted—to take all of their IRA assets at the same time. Extended IRAs had extensive tax benefits because second-generation beneficiaries were allowed to continue distributions over the life expectancy used by the first-generation beneficiary, thereby spreading the tax burden from distributions over a long period. They also provided the opportunity to grow the funds significantly for future generations.

This estate planning strategy was effectively ended by the SECURE Act of 2019. The act mandated that inherited IRAs be emptied within 10 years after the death of the original account holder, regardless of the beneficiary's age.The law applied to non-spousal beneficiaries; spousal beneficiaries and those in a few other special groups were excepted.

IRAs inherited before Dec. 31, 2019, can maintain their extended status.

What Is a Current Alternative to an Extended IRA?

One current alternative is to possibly convert a traditional IRA into a Roth IRA during the original account owner's life. When that owner passes away, a beneficiary won't owe taxes on the account because Roth IRA withdrawals are not taxable income.

What Is the 10-Year Rule for an Extended IRAs?

The IRA required that the assets of an IRA be paid out before the end of the 10th calendar yar following the death of the IRA owner. This 10-year rule applies to inherited IRAs from an owner who died after 2019.

What Is the 5-Year Rule for Extended IRAs?

Not to be confused with the 10-year rule, the 5-year rule states that an IRA must have been open for at least five years prior to the time of death of the original account holder. To make distributions from an inherited IRA, the IRA must be at least this old.

The Bottom Line

An extended or stretch IRA was a tax-deference strategy that allowed a beneficiary to inherit the favorable tax treatment received by the original IRA owner. The strategy gave beneficiaries more flexibility in their tax and estate planning as it allowed for tax-free growth over an IRA's lifetime. Due to changes put in place by the SECURE Act, a stretch IRA is now no longer permitted after an original account holder dies, effective December 31, 2019.

Article Sources
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  1. Morningstar. “New Retirement Law Throws IRA Heirs a Curveball.”

  2. IRS. “Traditional and Roth IRAs.”

  3. IRS. “What if I Withdraw Money from my IRA?"

  4. Fidelity. “Inheriting IRAs from Someone Other Than Your Spouse.”

  5. United States Congress. "H.R. 2617."

  6. Charles Schwab. “Inherited IRA Withdrawal Rules.”

  7. Internal Revenue Service. "Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs)."

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