The primary article a couple of Stretch IRA was printed on this weblog inside its first two months, again in July 2011. Fourteen years later, any individual commented that it was outdated, and I noticed I had by no means written one other article with “Stretch IRA” within the title (though we had definitely lined the topic in articles like this one on RMDs on inherited IRAs).
So, I up to date this text in July 2025.
What Is a Stretch IRA?
“Stretch IRA” is a time period largely used earlier than the Safe Act was handed in late 2019. Loads of articles at the moment referred to the “Dying of the Stretch IRA.” Previous to the Safe Act, cash in an IRA, whether or not conventional or Roth, may very well be left largely inside that account, the place it may proceed to get pleasure from tax-protected development. Required Minimal Distributions (RMDs) did apply, however they had been calculated primarily based on age. So, should you left the IRA to somebody very younger, they could solely need to withdraw 1% or 2% of it a yr. If it then grew at 5%, 10%, or extra a yr, the precise stability of the IRA would climb. Even after a long time of RMDs, that inheritor could have a stability that’s 10 occasions as massive because it was on the time of inheritance. With the Safe Act, Congress indicated that it thought this tax therapy was too beneficiant, so it put guidelines in place limiting how a lot these IRAs may very well be stretched.
Extra info right here:
Generational Wealth vs. Sufficient
7 Issues Rich Individuals Don’t Need to Fear About (and seven They Do)
The ten-12 months Rule
The principle change was to implement a 10-year rule, which required the stability of most IRAs inherited after the Safe Act handed to be withdrawn inside 10 years. No extra stretching an IRA for 30, 50, and even 90 years.
Extra Sophisticated RMD Guidelines
Sadly, the principles had been made much more difficult than simply implementing the 10-year rule. For instance, if the decedent was already of RMD age and died earlier than the Safe Act handed, you, because the beneficiary, are required to additionally take RMDs. Even when the decedent wasn’t taking them as a result of that they had a Roth IRA (which does not have an RMD requirement), the inheritor nonetheless should take the RMDs as a result of as soon as Roth IRAs are inherited, RMDs change into required. Fortunately, there are some very nice calculators on the market, akin to this one from Vanguard, that enable you decide your RMD necessities.
Listed here are the fundamental guidelines:
- When you inherited the IRA previous to the Safe Act passing, the previous guidelines apply, and you may stretch the account for many years.
- When you inherited the IRA after the Safe Act handed, the 10-year rule applies (i.e., your complete stability should be distributed by the top of the tenth yr after loss of life).
- If the heir is a particular individual, referred to as an “Eligible Designated Beneficiary” (EDB), there are much more distinctive guidelines. EDBs embody:
- The partner of the decedent
- The minor baby of the decedent (however solely till they flip 18)
- Somebody no more than 10 years youthful than the decedent
- A disabled or chronically ailing particular person, as outlined by the IRS
- EDBs can use the lifetime distribution guidelines in place previous to 2020. That’s to say, they get a real “Stretch IRA” as a result of the IRS figures they will not have the ability to stretch it for all that lengthy.
- If the heir shouldn’t be an individual (akin to a belief or property), a five-year rule applies (i.e., your complete stability should be distributed by the top of the fifth yr after loss of life).
- Along with the 10-year (or five-year) rule, there are additionally RMDs required throughout that interval if the decedent would have been sufficiently old to have been required to take them on a standard IRA, whether or not the inherited account is conventional or Roth.
Belief me, that is difficult. Use the linked calculator to kind out your RMD requirement.
Stretch IRAs aren’t as accessible as they as soon as had been, however the ideas nonetheless apply. Tax-protected development is effective, and should you do not want the cash, you need to typically lengthen the time that cash spends in a tax-protected account for so long as you possibly can.
What do you assume? Are you stretching your inherited IRA for so long as you possibly can? Why or why not?
[This updated post was originally published in 2011.]
