In December 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, with the intention of facilitating the creation and use of retirement accounts, including individual retirement accounts (IRAs) and 401(k) plans. Whether intentional or not, the bill has eliminated a popular tool used in estate planning known as the “stretch IRA,” which allowed people to convey an IRA to their heirs while minimizing tax liability. Some options may still be available, though, and our Los Angeles tax advisors can explain them.
What Was a Stretch IRA?
A stretch IRA was a way of passing both the value of a retirement account and its tax deferrals from generation to generation. The term does not describe a type of account, but rather a strategy used to maximize the returns on a retirement account passed down through a will with a minimal tax bill. It was most commonly used with traditional IRAs, which defer income taxes on contributions until the money is distributed to the owner or other beneficiary.
Under new rules found in the SECURE Act, owners of traditional IRAs must begin taking required minimum distributions (RMDs) by a certain date. The amount of the RMD is based on the account owner’s life expectancy, using IRS tables. The remaining balance of the account is divided by the number of years left in the owner’s life expectancy.