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Stretching IRA Withdrawals (under the SECURE Act)

Updated: Jun 24, 2020

The primary concern of some traditional Individual Retirement Account (IRA) holders who are approaching the mandatory distribution age (April 1 of the year after the year they reach age 72) may be stretching their account assets over their lifetime and that of their spouse. Maximizing tax deferral and/or passing these assets to their heirs may be of lesser importance. Others, however, who are fortunate enough to enjoy sufficient retirement income from other sources, may wish to extend the tax deferral as long as possible.

The SECURE ACT recently enacted has changed the ability for many to stretch their IRA out in perpetuity. There is now a 10 year rule for those non-spousal beneficiaries and other exceptions listed below. Under the 10 year rule, the entire inherited IRA must be withdrawn by the end of the 10th year following the year you inherited the money. During those 10 years you can make as many or as few distributions as you want but again, the balance must be zero by the end of the 10 years.

Exceptions to the 10 Year Rule

  • Spouses

  • Chronically Ill

  • Disabled

  • You are NOT more than 10 years younger than the original account owner.

If you meet one of these exceptions you can stretch out the IRA exactly as you did prior to the SECURE ACT.

What does this all mean?

  • For those who must withdrawn by the end of the 10th year, this means they are required to take the money out faster than they might have done if this rule did not exist, resulting in a higher tax bracket and thus more taxes are taken from any distributions made.

  • It also can impact your retirement plan because you are now required to take those monies out, they will now be taxed at the initial distribution and subject to further capital gains, dividend income, and bond interest income taxation if reinvested in a taxable brokerage account. You will want to built a spend down plan as to which accounts you should pull from first in order to maximize your savings in retirement. Hint, usually taking from a taxable account first makes the most sense but that is not always true.

  • If you are required to take the money out within 10 years, your best bet is to plan ahead and take distributions in years your income is lower. Planning on retiring soon? If so then wait to take the distributions once retired when your income is less.

EDIT - This article was edited to account for new legislation. Edit date 06/24/2020

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