Stretch IRA Changes & Other Estate Planning Strategies Outlined by Secure Act 2.
Think of a Stretch IRA as a financial relay race, where retirement savings could be passed down through generations, stretching the tax benefits over decades. But with the Secure Act 2.0, the rules of this race have changed significantly. Let's break down what these changes mean for your retirement and estate planning.
New RMD Rules: A Later Start to Required Distributions
Before we dive into the Stretch IRA changes, let's talk about an important update that affects everyone with retirement accounts. The Secure Act 2.0 has pushed back the starting line for Required Minimum Distributions (RMDs):
If you haven't hit 72 by December 31, 2022, you now get to wait until age 73 to start taking RMDs
Starting January 1, 2033, the age jumps again to 75
Still working? Most people can wait until April 1st of the year after retirement
If you delay your first RMD to April 1st following your 73rd birthday, remember you'll need to take two distributions that year
The End of the Stretch: A Major Shift in Estate Planning
Here's where things get interesting. The Secure Act 2.0 has essentially ended the traditional "stretch" benefit for most inherited retirement accounts.
Instead of being able to stretch distributions over a beneficiary's lifetime, most inherited accounts now face a new reality: the 10-year rule.
What's the 10-Year Rule?
Think of it as a countdown clock that starts ticking when you inherit a retirement account. Here's what you need to know:
The entire account must be emptied by the end of the 10-year period
You might not have to take annual distributions within those 10 years unless the original owner was taking RMDs - then, non-spouse beneficiaries must continue taking them
Good news for Roth IRA inheritors: Since Roths don't have RMDs, you get more flexibility within the 10-year window
The VIP List: Five Exceptions to the 10-Year Rule
Not everyone has to follow the 10-year rule. Here are the five groups that get special treatment:
Surviving Spouses: They maintain all previous rollover options
Minor Children (but not grandchildren):
Can stretch distributions until reaching the majority
May extend to age 26 if pursuing specified education
Must complete distributions by age 36
Beneficiaries Within 10 Years of Owner's Age: Age proximity has its privileges
Disabled Beneficiaries: Maintain lifetime distribution options
Chronically Ill Beneficiaries: Also keep lifetime distribution benefits
If your estate plan includes trusts for retirement benefits, the Secure Act 2.0 demands your immediate attention. The changes are significant and could impact your legacy planning in several ways:
Existing trust arrangements may need substantial revision to align with the new 10-year distribution requirement
"Conduit trusts" might no longer achieve their intended purpose, as they must now distribute all assets within 10 years
"Accumulation trusts" might offer more flexibility but require careful drafting to manage tax implications
Special needs trusts and trusts for chronically ill beneficiaries need particular attention to preserve their benefits
Consider whether your current trust structure still aligns with your wealth transfer and tax minimization goals
Review trust language to ensure it provides maximum flexibility under the new rules
The good news? Special provisions exist for trusts benefiting disabled or chronically ill beneficiaries, allowing these trusts to continue using life expectancy distributions. This exception provides valuable planning opportunities for families with special needs beneficiaries.
Next Steps
With these significant changes, it's crucial to:
Review your current estate plan
Evaluate your beneficiary designations
Consider whether your current retirement account structure still serves your goals
Consult with financial and legal professionals to optimize your strategy
The Secure Act 2.0 has transformed retirement account inheritance rules, potentially impacting your legacy planning strategy.
Contact us to schedule a consultation.