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Impact of the Changes to the IRA Stretch Distribution Rules


On May 23, 2019 SECURE (Setting Every Community Up for Retirement Enhancement) Act was passed. This bipartisan bill accelerates IRA distributions and taxes on inherited IRAs for non-spouse beneficiaries.

Let’s talk about these changes and what they mean.

What Changed?

First, the age of Required Minimum Distributions (RMD) has been raised from 70 ½ to 72. SECURE also changes the stretch period to 10 years.

So, a beneficiary would have to collect the distributions, and pay taxes on the entire amount, within this time. These changes will greatly accelerate tax collection and can push beneficiaries into a much higher tax bracket.

There are exceptions to the rule for minor children, disabled or chronically ill beneficiaries and beneficiaries not more than 10 years younger than the deceased beneficiary.

These changes will go into effect on 12/31/2019 and will apply to any IRA of a person who becomes deceased after that date.

[Related: Protecting Your Inheritance]

How Much Does This Cost?

Bottom line, a lot. Changing from a stretch provision using life expectancy to a 10 year pay out will have significant financial impact and will likely cause ‘bracket creep’.

The beneficiary will pay a substantially larger amount in taxes as well as losing the tax deferred, or tax free, compounding interest during the stretch period. This can make a significant difference in the amount of distributions a beneficiary receives.

Does the Change Apply to Roth IRAs?

Yes, the rules apply to both Roth and Tradition IRA.

This means that, logically, it makes more sense to delay distribution as long as possible and accrete the balance tax-free.

This change will likely make Roth conversions much more relevant.

How Does the Change Affect Financial Planning?

This change will drastically affect planning. Financial plans will likely incorporate IRA distributions to the total estate plan with IRA dovetailing to the Revocable living trust.

This may also increase charitable giving and Charitable Remainder Trusts. Professionals are concerned over the broad impact that these changes will have.

Many people have been planning for years to use the stretch to prolong and accumulate more money. These changes mean that many people will need to completely rethink their financial plans.

[Related: Keeping Your Investments On Track]

How Does this Change Affect You?

Are you concerned about how this change will affect your financial plan? Contact us today and let our team of wealth advisors help you formulate a plan!