Under existing laws, the owner of an IRA can make a child the beneficiary of the account instead of a spouse. Because the younger beneficiary will have a longer life expectancy than the spouse, the required minimum distribution will be less and the IRA can continue to grow. This has been referred to as the 'Stretch IRA" concept. The Setting Every Community Up for Retirement Enhancement Act of 2019 is poised to change that.
SECURE has overwhelmingly passed the House and appears to have no opposition in the Senate. Currently, a non-spouse beneficiary can withdraw the funds in the IRA account in one lump sum, take only the RMD under the stretch option or cash in the account over a five-year period. The new law, according to retirement and pension analysts, will eliminate the stretch option but allow for the distribution to occur over a 10-year period. In addition, the elimination of the stretch option also applies to all qualified plans with balances, such as a 401(k) and the like.
There are exceptions. A spouse will continue to be permitted to roll the decedent's IRA into their own and withdraw over their lifetime. Additionally, there are provisions for children under the age of majority, beneficiaries with disabilities and beneficiaries within 10 years of the decedent's age.
The stretch IRA has been a valuable tax-saving tool for high-asset estates to pass on wealth to future generations. In anticipation of the SECURE act's passing and being enacted into law, an estate planning lawyer can provide counsel and review different options for moving forward under the new restrictions.