Is the “Stretch” IRA dead?

Question

My partner and I have lived together for over 15 years. We are deeply in love but for various reasons we just don’t want to get married. We feel like it would unnecessarily complicate our relationships with our adult children from previous marriages and upset our current estate plan. We each have rather substantial IRAs due to 401k rollovers from our careers and have named each other and our adult children as primary beneficiaries. We are each named as 70% of the other’s IRA and each of us has listed our children on our separate IRAs to make up the other 30%. I’m 72 and my partner is 70. We had planned on the beneficiaries being able to “stretch” the distributions over their life expectancy upon the first death. A friend told us that with the new SECURE Act, anyone other than a spouse inheriting an IRA after 2019 will be required to deplete the IRA within 10 years. There isn’t much we can do about our children being subject to this new rule but we could get married and the survivor could then keep the stretch IRA option, which should help lower their tax liability. We really don’t want to get married because of the SECURE Act but if it makes sense to do so we are open to that action.

Answer

There are many reasons, financially and emotionally, to either get married or to stay single but in you and your partner’s situation the SECURE Act shouldn’t enter into this decision. Unfortunately for many IRA beneficiaries, probably including your children, the “stretch” IRA has come to an end. The stretch allowed a non-spousal beneficiary of a retirement account to take required distributions based on their own life expectancy. The SECURE Act which went into effect on January 1, 2020, killed the stretch for most non-spouse beneficiaries. Under this new rule, most non-spouse beneficiaries must take distributions whenever and however over a 10-year period and not over their own life expectancy. The entire account must be depleted by the end of the 10th year after the year of inheritance. Since distributions taken from a retirement account funded with pretax dollars will be taxed at the beneficiary’s ordinary income tax rate this accelerated distribution requirement may cause an adverse tax consequence, especially when large IRA or other retirement accounts are inherited.

There are five classes of eligible designated beneficiaries (EDBs) that may still use the stretch. These include: a surviving spouse, minor children of the account owner (not grandchildren), disabled individuals, the chronically ill and beneficiaries not more than ten years younger than the deceased IRA owner. So, you could be older than the account owner, the same age or not more than 10 years younger and still use the stretch under the SECURE Act. This EDB exception could easily apply to unmarried partners, siblings, friends, step-children and many others if they are close in age or older than the account owner.

A consultation concerning your estate planning with a knowledgeable financial, tax or legal professional may be advantageous.