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The IRA Stretch Distribution Isn't Gone for Everyone

The IRA Stretch Distribution Isn't Gone for Everyone

December 09, 2021

What are your options if you have inherited an IRA?


The “stretch IRA” was an estate planning strategy that let you extend IRA distributions over future generations, allowing that IRA to continue to grow tax-free.

The strategy worked because IRA beneficiaries could take required minimum distributions based on their own age. This was an amazing benefit to grandchildren and great-grandchildren because a stretch IRA could potentially provide a lifetime of income to a young beneficiary.

Stretching the IRA distributions also gave the assets more time to grow tax-free which increased the amount beneficiaries received in the long run. Additionally, the total tax paid may be lower due to smaller distributions over an extended period of time rather than a lump sum.

At the end of 2019, the SECURE Act, which was signed into law, set a mandatory 10-year period to empty IRA, Roth IRA, 401(k), 403(b), and 457(b) accounts inherited. While this put an end to the ability for most beneficiaries to stretch inherited IRA distributions, it does allow eligible designated beneficiaries to continue to do so.


So, who can still stretch inherited IRAs?

At this point, the SECURE Act recognizes five types of eligible designated beneficiaries (EDBs) that can still choose to stretch inherited IRA distributions. Anyone who inherits an IRA and does not qualify under the circumstances listed below must take regular distributions that empty the accounts within 10 years.

  • SURVIVING SPOUSE – A spouse who inherits an IRA from a deceased partner can choose to roll the IRA into their own IRA.
  • DISABLED OR CHRONICALLY ILL – A beneficiary who is disabled or chronically ill can choose to take distributions over their lifespan instead of emptying the account within 10 years according to the SECURE Act.
  • A NON-SPOUSE LESS THAN 10 YEARS YOUNGER – If the beneficiary is not a surviving spouse and is not more than 10 years younger than the deceased owner of the IRA, then the beneficiary can use the life expectancy distribution plan.
  • MINOR CHILD – A child of the original IRA owner, but not a grandchild, who is under 18 can take the distributions using the life expectancy standard until the age of 28, at which time the 10-year rule becomes effective.
  • SOME TRUSTS – Trusts must follow a special set of rules to be considered eligible designated beneficiaries.

Fortunately, people who have already inherited an IRA before 2020 are grandfathered in and the old rules still apply. This means they can continue to take distributions over their lifespan instead of emptying the account within 10 years.


Bottom Line…

IRA beneficiaries still have several options to choose from when deciding what to do with the account, but the rules for these options can be complicated. If you’ve inherited an IRA from a loved one who passed away, CONTACT US today before making any decisions about how much to withdraw from an inherited IRA. We can help you weigh your options to pursue your financial goals.