SECURE Act rewrites the rules on stretch IRAs

See 3 different strategies to handle taxes on inherited IRAs over the next 10 years.

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Key takeaways

  • For many who inherit IRAs or 401(k)s starting in 2020, the SECURE Act eliminated the ability to "stretch" your taxable distributions and related tax payments over your life expectancy.
  • If you've inherited an IRA on or after January 1, 2020, and you cannot stretch your distributions, you may need to withdraw the balance of the account no later than the 10th anniversary following the calendar year of the IRA owner's death.
  • There are 3 possible strategies to consider based on your situation: (1) withdraw the assets as evenly as possible over the 10 years, (2) wait until the end the of the 10-year period and then withdraw everything, and (3) make irregular withdrawals over the 10-year period.

In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act includes many reforms that could make saving for retirement easier and more accessible for many Americans. But there is one potential downside: If you inherit an IRA or 401(k) from someone other than your spouse, the SECURE Act could impact your retirement savings plans or strategies to transfer wealth to future generations.

Prior to the act, if you inherited an IRA or 401(k), you could generally "stretch" your taxable distributions and tax payments out over your life expectancy. Many people have used "stretch" IRAs and 401(k)s as a reliable lifetime income source.

Now, for IRAs inherited from original owners that passed away on or after January 1, 2020, the new law requires most beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder.

The IRS' proposed regulations on required minimum distributions published on February 24, 20221 would require distributions to be made on a "at least as rapidly" basis during the 10-year period and then a complete distribution in year 10, provided the deceased employee or IRA owner was over the age of 72 (or 70½ if born before 7/1/1949).

The exceptions

Generally speaking, people who inherit an IRA or 401(k) from their spouse can stretch out their required minimum distributions (RMDs) over the course of their lifetime. You may also able to stretch distributions if you fall into one of 3 other common types of eligible designated beneficiaries (EDBs):

  1. A minor child (not grandchild) of original owner2
  2. Someone less than 10 years younger than original owner
  3. Someone disabled or chronically ill (as defined under the applicable sections of the Internal Revenue Code)

If you’re eligible, stretching distributions makes sense because doing so maximizes the value of tax deferral.

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3 scenarios to consider

If you're not a spouse or an EDB, then you must distribute all assets from the inherited IRA within 10 years of the original owner's death. How should you do this? In general, it depends on which of 3 scenarios below best describes your situation.

Scenario 1: You inherit a traditional IRA or 401(k), need the income to live on in retirement, and expect your tax status or taxable income to remain constant over the next 10 years

How to withdraw

In this scenario, it's often advantageous to withdraw assets from the inherited IRA or 401(k) in equal installments over the entire 10-year period. The strategy is designed to smooth out the impact of additional taxable income and help lower the risk of bumping you into a higher marginal tax bracket by mistake.

How to invest

If you have assets other than the inherited account dedicated to the same goal, and you're willing to complicate things a bit in order to potentially reduce your total tax bill, it may be smart to invest the inherited account more conservatively than the other assets.

For example, say you inherited a traditional IRA worth $100,000 and you've decided to use it for your retirement goal. The assets are currently held in a mutual fund with a balanced (50/50) asset allocation, which is generally aligned with the asset allocation of your other assets earmarked to fund your retirement.

Assuming you are comfortable operating within your current risk profile (and won't change it as you edge closer to retirement), you might consider investing the inherited IRA in a relatively conservative fashion (with more bonds, CDs, or other fixed income vehicles). By holding more conservative assets in your inherited IRA, you could invest remaining assets in non-inherited retirement accounts relatively more aggressively (with more stocks or stock ETFs and mutual funds) such that your total asset allocation remains 50/50. That way, you could potentially defer paying ordinary income taxes on a relatively large portion of the growth in your assets assigned to the goal for a longer period of time, as the assets in the non-inherited retirement accounts don't need to be withdrawn within the 10-year window.

Tip: If you are in this scenario, consider purchasing a 10-year period certain immediate annuity which invests assets conservatively and automatically distributes them in equal installments over the 10-year period.3

Scenario 2: You inherit a Roth IRA or Roth 401(k) and expect your tax status or taxable income to remain constant over the next 10 years

In this case, the better withdrawal and investment strategy is likely the opposite of that in Scenario 1.

How to withdraw

Generally, keeping assets in inherited Roth accounts for as long as possible may help you earn your highest returns because qualified withdrawals are tax-free.

How to invest

If you have non-Roth assets dedicated to the same goal and you're willing to complicate things a bit in order to potentially reduce your total tax bill, it may be smart to invest the inherited account more aggressively—and the remaining assets more conservatively. That way, you can reduce your total tax bill by generating more growth in the Roth account, which is not taxed.

Scenario 3: You inherit a Roth account and expect a significant change in your tax status or taxable income

What might be a significant change? Here are 3 examples:

  1. You plan to retire over the next few years and you anticipate your income declining
  2. You are planning to move from a high income tax state (like California, New York, or New Jersey) to a low income tax state (like Florida, Texas, New Hampshire, or Washington), or vice versa.
  3. Your taxable income is expected to increase; for example, you expect to start receiving additional taxable income from rental real estate, business consulting, Social Security, or other sources.

How to withdraw

In this case, it may make sense to make irregular withdrawals over the 10-year window, in order to smooth out your taxable income and tax liability as much as possible. For example, if you plan to move from New York to New Hampshire when you retire (and are no longer receiving a salary) in 5 years, the bulk of your withdrawals could be planned to take place in years 6 to 10, after your income is lower and you've moved to a state without income taxes.

How to invest

As in Scenario 2, if you have non-Roth assets dedicated to the same goal, it may be smart to invest the inherited account more aggressively—and the remaining assets more conservatively.

Talk to us

If you are the owner or inheritor of an IRA or other qualified retirement plan, you may wish to take some time to consider how the SECURE Act may impact your own retirement accounts along with your beneficiaries and reevaluate your retirement, estate planning, and gifting strategies.

Work with your financial professional to help clarify your personal and financial goals. Remember, your plans should evolve as you do.

Next steps to consider



Inheritor checklist


Learn what actions you should take after you inherit money.



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