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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 Under the 10 year rule, the entire inherited IRA must be withdrawn by the end of the 10th year following the year you inherited the money.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  • For those who must withdrawn by the end of the 10th year, this means they are required to take the money out faster than they might have done if this rule did not exist, resulting in a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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5 Comments


RetirementGuy
RetirementGuy
Jun 20, 2020

Thanks for the comments and corrections. I will post a correction with the updated laws next week when I return from my trip. Apologies and thank you.

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When looking at this, another thing I became aware of was that people inheriting an IRA may be able to disclaim the inheritance.


I don't know if a posting about reasons and procedures for disclaiming an inherited IRA would benefit enough site readers to make it beneficial-just mentioning the idea for consideration.

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Thanks for that comment. Really important current information for non-spouse beneficiaries to be aware of.

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The SECURE Act changed Stretch IRAs for Non-Spouses to a new 10-Year Rule: From the Internet: With the passage of the SECURE Act, and for distributions from retirement plans or IRAs of individuals dying in 2020 or later, the ability for some beneficiaries to stretch the distributions has been rescinded and replaced with a requirement to withdraw all the funds by the end of a 10-year period beginning the year after the plan owner’s death.

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"nonspousal beneficiary"

"Unlike the old rules, such distributions no longer must continue to be based on the owner's original life expectancy calculation, but may now be stretched out over the life expectancy of the beneficiary, significantly extending the potential benefits of tax deferral."


Could you double check that for 2020 correctness please? I had reason to do some reading about that recently and am not sure it is still true.

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