‘Stretched’ Out: Adjusting to SECURE Act’s New 10-Year Rule

Stretch IRA
With the “death of the stretch” comes new estate planning challenges for advisors

As of January 1, 2020, the “Stretch IRA” is officially dead as an estate planning tool as a result of the SECURE Act becoming the law of the land.

The elimination of the Stretch IRA resulting from the implementation of the new “10-year rule”—the provision of the SECURE Act that will pay for virtually all of its other provisions—is expected to bring in an estimated $15.7 billion to the Treasury over the next 10 years. The Joint Committee on Taxation estimates the various provisions of the legislation will reduce federal revenue by $16 billion over a decade.

These new rules apply to most types of retirement assets, including 401k plan accounts, individual retirement accounts, individual retirement annuities, qualified trusts, certain annuity contracts, and certain defined compensation plans.

For most beneficiaries (other than spouses and a few other exceptions mentioned below), the totality of the retirement assets must now be taken within 10 years of the date of death of the owner of the retirement account. That means, whether the account is payable to a trust or to a specific beneficiary, the total account must be distributed no later than December 31 of the year that contains the tenth anniversary of the owner’s death.

Prior to the new law, retirement account assets could be stretched out over beneficiaries’ lifetimes, providing decades of powerful tax-deferred (or tax-free in the case of Roth IRAs) compounding.

It is important to note that existing inherited IRAs are grandfathered under the previous rules, so beneficiaries of these accounts will still be allowed to spend them down over their lifetime. However, if those beneficiaries die before the complete distribution of the account, the subsequent beneficiaries will be subject to the 10-year limitation.

Advisor “to-do” lists

“Advisors will want to talk to their individual clients as well as their small plan employers who may have used the ‘Stretch’ IRA tax rules for estate planning purposes. They will need to be aware of the changes and perhaps pivot to other estate planning strategies,” says Melissa Kahn of State Street Global Advisors.

Frederick Brackin, an Associate in Gunster Law Firm’s Tax Law and Private Wealth Services practices, tells 401k Specialist that advisors should work with clients to try to minimize the impact of this change to payouts after death by first reviewing a client’s current beneficiary designations and determining where this new rule may create issues.

Frederick Brackin
Frederick Brackin

“For instance, if the client has named a conduit trust as a beneficiary, then that should immediately be discussed because under the new rule the payments to a conduit trust would flow through to the beneficiary of that trust over the 10-year period instead of over the beneficiary’s life expectancy under the prior rule,” Brackin says. “The client may not want the beneficiary of that trust to receive such a substantial amount outright and therefore it may be necessary to amend the trust to provide for an accumulation trust instead of a conduit trust.”

There will also be income tax issues since presumably the 10-year rule will cause the retirement plan assets to be distributed out quicker than under the previous life expectancy rules, Brackin adds.

“Therefore, advisors should work with clients to determine if a full or partial Roth conversion may make sense in that client’s specific situation. A Roth conversion will not be recommended under all circumstances, but where the correct circumstances exist, for instance if the account owner can pay the income tax on the conversion with funds that are outside of the retirement account, then the Roth conversion may be a way to work around some of the income tax issues created by the new 10-year rule,” Brackin says.

The key will be looking at each client’s individual situation and working to implement a strategy to help resolve the issues created by the elimination of the Stretch IRA.

Steve Parrish
Steve Parrish

Steve Parrish, Co-Director of the Retirement Income Center at The American College of Financial Services, notes the SECURE Act’s improvements in Required Minimum Distributions and takeaways involving IRA stretch rules will cause alterations in asset allocation planning for the affluent and wealthy in two areas:

  • There may be a different pattern to follow for when to convert IRAs to Roth IRAs [remove the following clause: “and how much to make qualified versus after-tax”].
  • Once the person retires, creating the pattern of which accounts to draw from will also change.

“Inherited IRA trusts will have to be completely redrafted,” Parrish says. “Some new planning may come where the inherited IRA is deferred for 10 years after death and then paid out as a lump sum.”

Exceptions to the 10-year rule

Per a Dec. 31 Pierce Atwood LLP alert, here are the exceptions to the 10-year rule:

  1. A surviving spouse may still roll over inherited assets into the spouse’s own IRA. A conduit trust for the surviving spouse will still preserve life expectancy payouts for the surviving spouse. The remaining assets in the IRA or retirement account must be distributed within 10 years after the death of the surviving spouse.
  2. A minor child as beneficiary—the assets can be distributed on a slower schedule until the minor reaches majority, and then the 10-year rule applies, which requires the remaining assets be distributed within 10 years.
  3. A disabled person as beneficiary—while the disability exists, the 10-year requirement is suspended and the old rules apply; once the disability ceases or the disabled person dies, the remaining assets must be distributed within 10 years.
  4. A chronically ill individual as beneficiary—who has provided the applicable certification that the illness is indefinite and reasonably expected to be lengthy in nature—the 10-year rule is suspended until the death of the individual.
  5. A person who is not more than 10 years younger than the owner of the assets—the 10-year rule is suspended until the death of that beneficiary.

More SECURE Act coverage:

Brian Anderson Editor

Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.

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