The Stretch Rules for Inherited IRAs – Changes on the Horizon

There’s new legislation working its way through Congress right now concerning retirement savings. The SECURE Act, passed by the House in May of this year and now under consideration by the Senate, will make mostly positive changes but also a significant negative change to the laws governing our ‘nest eggs’.

For many of us, traditional IRAs, 401Ks, and similar ‘qualified plans’ have become the primary way to save money for retirement. These plans are familiar to us. They allow us to set aside pre-tax earnings for retirement, which are often matched by our employer, and not pay income taxes on the earnings until we take distributions from the accounts. Under current laws, this can be as early as 59 1/2 or as late as 70 1/2. Funds in a qualified retirement account also grow tax-free until the money is withdrawn.

In addition to setting aside a nest egg for our later years, deferring taxes is another objective for this type of retirement savings. We hope to pay less in income taxes on the earnings from our working years because we will more likely be in a lower tax bracket and taxed at a lower rate during our retirement years.

A few positive changes in the law under the proposed SECURE Act are that the upper age limit for making contributions to a retirement fund would be eliminated; the age at which we must start taking withdrawals from our retirement savings would be increased from 70 1/2 to 72 (called required minimum distributions (RMDs)); and other changes that would make it easier for small businesses to offer a 401K plan to their employees.

The SECURE Act would also make a significant negative change in the law, and this change in the law concerns payments to our beneficiaries and what are commonly known as the ‘Stretch IRA Rules’.

One primary benefit to traditional IRAs, 401Ks, and the like is that we can name beneficiaries for these accounts. Unlike a traditional pension, these retirement accounts do not end when we pass away. The savings can be passed on to our spouse, kids, or other individuals by way of a beneficiary designation.

Under the current laws, if a spouse is named as the beneficiary on a retirement account, the surviving spouse has the option to convert the retirement account into his or her own. The benefits of a ‘spousal beneficiary rollover’ are that the transfer is made tax-free, RMDs are determined by the surviving spouse’s lifespan, and the surviving spouse can name new beneficiaries. Payments to be taken as RMDs may be stretched out over more years and taxes deferred longer. The ability to stretch out payments depends on the age of the deceased spouse at time of death and other factors, but if a surviving spouse is able to use it, the stretch can provide real tax advantages.

If a non-spouse individual is named as the beneficiary on a retirement account, it becomes an ‘inherited IRA’ or also known as a ‘beneficiary IRA’. Generally, a non-spouse beneficiary may take RMDs over their own life expectancy based on the IRS table. Again, the ‘stretch’ can offer some real tax advantages to the person named as the beneficiary. Taxes on the original earnings and growth can be further deferred and lower than they would be if the beneficiary had to take the full amount as a lump sum payment in one year. Grandma’s IRA passed on to a grandchild could provide income, continue to grow and spread out the tax burden over many years if not decades.

Under the SECURE Act, the laws governing spousal beneficiary rollovers remain unchanged. This is good news for spouses. Non-spouse beneficiaries, however, will be impacted by the new laws. If the SECURE Act passes, non-spouse beneficiaries will be required to withdraw and pay taxes on the full amount in the inherited retirement account within 10 years. So, the ‘stretch’ and the resulting benefits could be much shorter. Our federal government needs those taxes to be paid sooner rather than later, apparently.

It will be important to watch how this proposed legislation makes its way through the Senate this year. Retirement accounts and the laws that apply are important components to estate planning. Be sure to talk to your estate planning attorney, tax advisor, and financial advisor about the proposed changes in the laws and how they may impact you.

Any requests for topic suggestions may be sent to  Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.