Table of Contents
Table of Contents

How Stretch IRAs Work

What Is or Was a Stretch IRA?

The stretch IRA was an estate planning strategy that formerly allowed owners of Individual Retirement Accounts (IRAs) to pass along the assets in the account from one generation to the next while taking advantage of prolonged tax-deferred growth of the assets. The strategy was essentially disallowed in 2019 although current beneficiaries of stretch IRAs kept the benefit.

Under current law, beneficiaries of IRAs other than the spouse of the deceased must withdraw all of the funds in the account within 10 years of the death of the original account owner. This applies to IRAs inherited after Dec. 31, 2019.

There are strictly-defined exceptions. If the beneficiary is a minor child, disabled or chronically ill, or is less than 10 years younger or older than the original account holder, a stretch IRA is still permitted.

The spouse of the deceased follows different rules. The spouse must begin taking RMDs by the end of the year after the owner's death or the year the owner would have reached the age for RMDs, which is 73 as of Jan. 1, 2023.

Key Takeaways

  • A stretch IRA was an estate planning strategy that extended the tax-deferred benefits of an IRA inherited by a non-spouse beneficiary.
  • The beneficiary had to take distributions from the IRA—but at a rate based on the beneficiary's life expectancy and not the original account owner's.
  • 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.
  • IRAs inherited before Dec. 31, 2019, can maintain their stretch status.

How a Stretch IRA Worked

A stretch IRA was not actually a type of IRA. Rather, it was a financial strategy, used mainly on traditional IRAs, that allowed people to greatly extend the period of time during which taxes on an IRA were deferred in order to benefit their heirs.

With a traditional IRA, the account owner must begin taking the required minimum distribution (RMD) by April 1 of the year after turning age 73. (The age was raised from 72 on Jan. 1, 2023.)

Calculating RMD

The RMD is calculated by taking the account balance on Dec. 31 of the previous year and dividing that number by the number of years left in the owner's life expectancy, as listed in the IRS "Uniform Lifetime" table. Each year thereafter, the RMD is calculated by dividing the account balance by the remaining life expectancy.

Under the old rules, non-spousal beneficiaries had to start withdrawing funds from the IRA too—even those who inherited Roth IRAs, which don't carry RMDs for the original account holder.

But here was the good part: The heirs could base the RMDs on their own life expectancy. The younger the beneficiary, the lower the annual RMD.

So, a stretch IRA reset the clock on required minimum distributions.

By allowing more funds to remain in the IRA—"stretching" the account over time, in effect—this strategy provided the opportunity to grow the funds significantly for future generations. It also cut the income tax due on the RMD from a traditional IRA. (A younger beneficiary would most likely be in a lower tax bracket, and in any case would be withdrawing a much smaller amount.)

In general, the stretch IRA strategy was used by wealthy retirees who wanted to pass along a portion of an estate

It should be noted that the beneficiaries of inherited Roth IRAs are required to take RMDs, even though the original account holder did not have to. In any case, the distributions generally remain tax-free, while traditional IRA distributions are treated as ordinary income.

What Is the Point of a Stretch IRA?

The stretch IRA was used primarily by wealthy individuals who wanted to pass along a portion of an estate to the next generation, or even the generation after that. The minimal requirements for withdrawing money meant that the inheritance could remain intact and grow for many years.

A stretch IRA can still be used to leave money to a dependent person, such as a minor child or a disabled person. The assets can provide a sum of money for living expenses with minimal taxes.

What Is the 10-Year Rule for Inherited IRAs?

The 10-year rule requires that most people other than spouses who inherit the assets of an IRA must withdraw all of the money in the account before the end of the 10th calendar year after the death of the original account holder.

A spouse who inherits an IRA must begin taking required minimum distributions RMDs by the end of the year after the owner's death or the year the owner would have reached the age for RMDs. That age is 73 as of Jan. 1, 2023.

The stretch IRA, which allowed a non-spouse beneficiary to take RMDs based on that person's own life expectancy, has been disallowed in most cases. The exceptions are for beneficiaries who are minors, disabled, chronically ill, or within 10 years of the age of the original account holder.

The Bottom Line

The stretch IRA strategy is no longer in the toolbox for estate planners and their clients. Non-spouse beneficiaries of IRAs must now claim the entire balance in the account within 10 years of the death of its original owner.

However, non-spouses who inherited IRA assets before Dec. 31, 2019, are grandfathered in. They can follow the old rule, which only requires them to withdraw an RMD based on their own life expectancy, not that of the original account holder.

The younger you are, the better that deal gets.

Note that it's best to consult with a financial professional when dealing with RMDs. The penalty is steep for withdrawing too little or not at all.

Article Sources
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  1. "H.R.1994 - Setting Every Community Up for Retirement Enhancement Act of 2019."

  2. Internal Revenue Service. “Retirement Plan and IRA Required Minimum Distributions FAQs.”

  3. Internal Revenue Service. "Retirement Topics - Beneficiary."

  4. Wisconsin Department of Employee Trust Funds. "Required Minimum Distribution."

  5. Internal Revenue Service. "Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs)."

  6. Wisconsin Department of Employee Trust Funds. "Required Minimum Distribution."

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