Will New Legislation Kill the Stretch IRA?

Retirement and wealth strategies expert Matt Sommer explains what financial advisors need to know about how retirement-related legislation currently circulating Congress could impact clients.

In late May, the House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. If it is approved by the Senate and passed into law, the proposed legislation will bring much-needed relief to plan sponsors who wish to participate in a multiple employer pension (MEP) plan, offer participants a guaranteed income alternative, and increase the cap on automatic enrollment deferral rates. Further, the legislation will also “uncap” the IRA contribution eligibility age and raise the age for required minimum distributions to 72 from 70½.

Many of these provisions are welcome changes. However, there is one provision in the SECURE Act that will effectively eliminate the Stretch IRA. Following is a quick summary of what financial advisors need to know about how this change could impact clients who are taking annual distributions from Stretch IRAs.

  • New 10-year Period for Non-Spouse Beneficiaries. Under the SECURE Act, rather than having their annual distributions based on their single life expectancy, non-spouse beneficiaries would have 10 years to draw down an inherited IRA.
  • Existing Stretch IRAs Are Grandfathered. The new rules would only apply to IRA owners who pass away after December 31, 2019. In other words, existing Stretch IRAs will be grandfathered.
  • The Legislation Still Needs to Pass the Senate. The Senate has its own version of new retirement legislation called the Retirement Enhancement and Savings Act (RESA) that will also eliminate the Stretch IRA on inherited balances in excess of $400,000. This cap means that the stretch would be permitted on the first $400,000 of an inherited IRA, but the balance would need to be distributed within five years. It is not clear at this point which version will ultimately be part of any final legislation.
  • Both Bills Provide Exceptions to the New Rules. Both bills would provide relief from the regulations outlined above to beneficiaries who are minors, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner. Further, spousal beneficiaries will still be eligible to take annual distributions based upon their single life expectancy – a handy provision for spouses under age 59½ who may need income.

Existing clients who may be taking annual distributions using a Stretch IRA may have questions regarding the proposed legislation. For the time being, neither of the bills would impact their current distribution schedule. Nonetheless, financial advisors should monitor future developments closely, as changes may still be made to the language of the proposals.