Changes to “Stretch” Provisions for Beneficiaries of IRAs and Defined Contribution Plans Under the SECURE Act

The passage of the SECURE Act, which went in to effect on January 1, 2020, is changing retirement. The SECURE legislation, which stands for “Setting Every Community Up for Retirement Enhancement,” puts into place numerous provisions intended to strengthen retirement security across the country.

One area of change is in regard to “stretch” provisions for beneficiaries of IRAs and defined contribution plans. Many people have historically used “stretch” IRAs and 401(k)s as reliable income sources. However, one important aspect of the passage of the SECURE Act is the removal of so-called “stretch” provisions for beneficiaries of IRAs and defined contribution plans, like 401(k)s.

In the past, if a traditional IRA was left to a beneficiary, that person could, in many cases, stretch out the RMDs over his or her own life expectancy, essentially “stretching” out the tax benefits of the retirement account. But with the new law, most beneficiaries of an inherited IRA or 401(k) plan (from original owners who have passed away on or after January 1, 2020) will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner/account holder.

Exceptions under the SECURE Act to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.

So, due to the changes in the law brought by the SECURE Act, it is now very important to review the beneficiary designations of your retirement accounts to make sure they align with the new beneficiary rules. If you have an IRA, 401(k) or other defined contribution plan, that you planned to leave to beneficiaries based on prior rules, please strongly consider contacting your estate planning attorney, as this change may require you to reevaluate your retirement and estate planning strategies. If you do not have a current relationship with an estate planning attorney, the attorneys of Stanko, Senter & Mitchell, LLC would welcome the opportunity to be of assistance.