New IRA Distribution Rules

Dear Len & Rosie,

My financial advisor told me that my children won’t be able to stretch out my IRA after I die. Is this true? What happened?

Bob

Dear Bob,

Your financial advisor is correct, mostly. Persons with IRA’s and other defined contribution accounts such as 401k’s who died before January 1, 2020, collect under the old rules, in which any beneficiary may roll their share of a retirement account they inherit into an “Inherited IRA,” sometimes referred to as a Stretch IRA in which they may take distributions over their own life expectancy, subject to annual required minimum distributions.

All this was changed by the SECURE Act that was signed into law on December 20, 2019 and which came into effect at the beginning of this year. Beneficiaries of retirement accounts of persons who die on or after January 1, 2020 must now fully cash in the account within 10 years of the participant’s date of death, unless the beneficiary counts as an “Eligible Designated Beneficiary” under the new law. Eligible Designated Beneficiaries who may still stretch out retirement account distributions include:

Surviving Spouses, who may continue to do spousal rollovers.

Children under age 18 who will still have to fully cash in the account by age 28.

Chronically ill and disabled persons.

Beneficiaries who are less than 10 years younger than the participant. This helps when you name siblings as beneficiaries or unmarried couples who leave retirement accounts to one another, except for those May-December romances.

Beneficiaries of retirement accounts that are already invested in commercial annuities.

While your children and other non-spouse beneficiaries who don’t qualify as Eligible Designated Beneficiaries may no longer stretch out distributions over their entire lives, they still get 10 years to continue to earn tax-deferred income.

As for you, your required minimum distributions (RMD) now start after you turn age 72 instead of age 70.5, as before.

Len & Rosie