Death of the Stretch IRA

New changes to the law have come, some are good and some are not good from a tax perspective. Today’s post discusses how the new changes affect various aspects of retirement and estate planning.

Background of Legislation

Congress passed the SECURE Act at the end of 2019. This Act is designed for setting Every Community Up for Retirement Enhancement. The new law is getting mixed reviews, however. It does enhance the 401(K) plans. Small business employers are incentivized to offer retirement plans in their company. Additional tax credits are available if an employer uses an automatic enrollment in the company 401(K) plan. Annuities are now allowed as an investment choice in 401(K) plans. Annuities can be adapted for 401(K) plans to address surrender charges a person leaves employment. Required Minimum Distributions are delayed until age 72 instead of 70.5. This is effective for people turning 70 ½ in 2020. If you turned 70 ½ in 2019, you will continue your RMD disbursements.

Charitable Donations

Qualified Charitable Donations can still be made directly from your IRA to the charity at 70 ½. This tax strategy is still available. Reducing your income by your charitable contribution from your IRA may also reduce your taxable social security. Ultimately, using your RMD to make charitable donations reduces your tax liability.

70 Can Now Contribute to IRA

If you are 70 or older and still working, you may now contribute to a Traditional IRA. You are no longer restricted by age. You are limited to a maximum contribution/deduction of $7,000—same as younger taxpayers that are over 50.

Death of the Stretch

Death of the Stretch IA is the most controversial portion of the SECURE Act. Up until 2020, a beneficiary of an IRA could rollover the assets into an inherited IRA. They were allowed to receive those benefits over their life expectancy, often drawing out the payments for 30 to 40 years.

This all changed with the SECURE Act. Now non-spouse beneficiaries need to pay out the income by the end of the 10th year after the IRA owner dies. For example, if the IRA owner dies in 2020, a child-beneficiary must empty the IRA by the end of 2031. A beneficiary can draw from the IRA equally over the years, do large disbursements randomly, or take no disbursements until the last year.

A challenge can become if you have a career or other taxable income, the IRA disbursements are additional income. It can move you into a much higher tax bracket. If you were a beneficiary of a $100,000 IRA under the old law—a 50 year old minimum withdrawal is $2924 for the year. You could stretch the distributions over a 35+ year period. The new law requires you to drain the $100,0000 in 11 years including the year of death. This is a much bigger tax burden. If you have an inherited IRA from 2019 or earlier, the old rules still apply. You may continue to stretch out your IRA disbursements over your life.

If the beneficiary of the IRA is a trust, the trust documents may need to be reviewed. One planning option used in the past is for the trust to control the disbursements to beneficiaries. A trust may have allowed the pass through of the disbursements from a stretch IRA for each individual beneficiary. The death of the stretch IRA changes how effective the trust may be. Consult your estate planning attorney.

Retirement Accounts Valued at $1 Million or More

With IRAs and other retirement accounts valued at a million dollars or more, the new SECURE Act can come with a hefty tax bill. What are the options to minimize this bill? It’s not an easy and more of a discussion than a finite answer. Many talented attorneys and CPAs are searching for solutions. Some solutions may impact the IRA owner’s taxes currently. Others leave the tax bill to the beneficiary.

Some options under consideration are:

  • Roth conversion of existing IRA accounts. This increases the current taxes for the IRA owner. Roth IRAs are still subject to the 10-year payout rule, but the disbursements are tax free.
  • Draw down heavily from IRA accounts. Possibly beginning before your required minimum distribution amounts. Leave other more tax friendly benefits to your beneficiaries.
  • If you are charitably inclined, you may leave your tax burdened IRA to charity. They receive it tax free.
  • Create a charitable remainder trust (CRT) and make it the beneficiary of your retirement accounts. THE CRT is a conduit of income to beneficiaries. Once the beneficiaries have died, the “remainder” goes to charity.

These a just a few of the possibilities. You need to decide what is a good fit for you. Contact your attorney and CPA. I am happy to be a part of those conversations.


Securities and advisory services offered through
KMS Financial Services, Inc.
Member FINRA, SIPC and an SEC registered investment adviser



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