stretch IRA

Pending Legislation May Constrict Stretch IRA


By Beth Blecker

You may have recently heard about the “SECURE Act,” i.e., the Setting Every Community Up for Retirement Enhancement Act of 2019. While it has been passed by the House Ways and Means Committee, it may not be good news for anyone planning to utilize a stretch IRA – a very popular wealth-transfer/tax-minimization tool.

While presently a bill in Congress, the goal of the SECURE Act is to provide greater flexibility and access to 401(k) plans and improve retirement account availability, particularly for small businesses and their employees. This is a good idea as many Americans are woefully ill prepared for retirement.

The bill includes a host of provisions aimed at encouraging small businesses to provide private retirement benefits to employees. It is also one of the few proposals with a significant chance of becoming law by a fractured Congress as it seemingly has bi-partisan support – something of a rarity these days in Washington. However, passing the Secure Act would effectively spell the end of the Stretch IRA.

When utilizing a stretch IRA (Individual Retirement Account), instead of naming one’s spouse as account beneficiary, children, grandchildren or great-grandchildren can be named. This provides a means to limit required distributions on an inherited IRA, side-stepping a potentially formidable tax bill.

The SECURE Act, if passed, would change the rules for defined contribution plans and IRAs upon the death of the account owner. Under the proposed legislation, beneficiary distributions to anyone but the surviving spouse, with a few narrow exceptions, would be required to be distributed by the end of the tenth calendar year following the year of the account owner’s death. In other words, most beneficiaries would end up with a “10-year rule” when taxes would ultimately be paid. This may be appealing to our cash-strapped government.

The news however is not all bad. The SECURE Act includes several measures to strengthen retirement savings. Among other things it would remove the prohibition on traditional IRA contributions for those age 70 ½ and over. It would also allow penalty-free distributions for any “qualified birth or adoption distributions” and would increase the age when required minimum distributions must begin from age 70 ½ to age 72.

It is too early to say what the final version of the SECURE Act will be. Eastern Planning will be following this bill closely, especially how it pertains to the future of the stretch IRA. If you want more information about this and other retirement related information email to join our mailing list.