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Updated February 6, 2020
Inherited or Stretch Individual Retirement Accounts (IRAs)
and the SECURE Act
Traditional and Roth Individual Retirement Accounts
(IRAs) provide tax-advantaged ways for individuals to save
for retirement. Traditional IRA contributions can be tax
deductible, but withdrawals are included in taxable income.
Roth IRA contributions are not tax deductible, but
withdrawals are generally tax free.
The Setting Every Community up for Retirement
Enhancement Act of 2019 (SECURE Act, enacted as
Division 0 of the Further Consolidated Appropriations Act
of 2020 [P.L. 116-94; December 20, 2019]) modified
distribution rules for certain designated beneficiaries
following the death of an IRA owner. Prior to the SECURE
Act, some beneficiaries continued to receive tax preferences
by deferring taxation on IRA assets for a number of years
beyond an original owner's death. This strategy was
sometimes referred to as a stretch IRA, in which the period
of asset accumulation of a retirement account was
stretched past the lifetime of the original account owner.
Some stakeholders voiced concerns that inherited IRAs
could be used as a tool to promote intergenerational wealth
transfers rather than to encourage retirement savings as
originally intended. The SECURE Act modifies distribution
rules for certain beneficiaries of account owners who die
after December 31, 2019.
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Traditional IRAs are subject to required minimum
distributions (RMDs), which are minimum amounts that
must be withdrawn from the account annually when the
account owner reaches a certain age. RMIDs are designed to
ensure that an individual uses the assets accumulated in a
tax-advantaged retirement account for retirement purposes,
rather than as an estate planning tool or tax shelter. To
further encourage that these accounts be used primarily for
retirement, IRA withdrawals before age 5912 are generally
subject to a 10% penalty.
Traditional IRAs require an account holder to take RMIDs at
the required beginning date, which is April 1 following the
calendar year during which an individual attains the age of
72 (for individuals who reach the age of 7012 after
December 31, 2019; the SECURE Act increased the age at
which distributions must begin from 7012 to 72). The RMD
is calculated by dividing (1) the account balance at the end
of the immediately preceding calendar year by (2) the
distribution period provided in the applicable Internal
Revenue Service (IRS) Life Expectancy Table. The IRS
publishes three RMD tables that differ based on the account
owner's marital status and, in the case of inherited
accounts, on the account owner's relationship with any
beneficiary. For example, a 76-year-old unmarried account
owner, with a distribution period of 22 years and a year-end
account balance of $100,000, would have an RMD of
$4,545 the following year ($100,000 divided by 22). RMDs
are recalculated each year. Note that this example is based
on IRS tables that were in place prior to the SECURE Act.
The IRS has proposed updating these tables.
Traditional IRA distributions are included in taxable
income, except for the portion of any distribution derived
from a contribution that was previously taxed. An
individual who fails to take an RMD generally will incur an
excise tax of 50% of the amount that was required to have
been withdrawn.
Roth IRAs, in which contributions are made on an after-tax
basis, do not require account withdrawals during an
owner's lifetime. Qualified distributions-those that occur
after age 591/2 from accounts that are at least five years old
and include earnings on contributions-are not taxable.
After an account owner's death, IRAs are passed to a
person or entity designated as a beneficiary. In the absence
of a designated beneficiary, the estate generally becomes
the beneficiary. Rules for how to handle an inherited IRA
differ for (1) a designated spouse beneficiary, (2) a
designated nonspouse beneficiary, (3) an eligible
designated beneficiary, and (4) a non-designated or estate
beneficiary.
A Roth IRA's original owner does not have to take an
RMD (and therefore has no required beginning date).
Following the death of an initial account owner, a
beneficiary who inherits a Roth IRA must take an RMD
using the same rules that apply to traditional IRAs as if the
account owner had died before the required beginning date.
A designated spouse beneficiary is allowed to (1) become
the new account owner; (2) roll over the account to the
spouse's own traditional or Roth IRA or qualified employer
plan, such as a 401(k), 403(a), 403(b), or 457(b) plan; or (3)
be treated as a beneficiary rather than account owner (in
this case, see the rules for eligible designated beneficiaries
below). (A nonspouse beneficiary cannot take ownership of
an inherited account. Instead, the account becomes an
inherited IRA designated for the nonspouse beneficiary in
the name of the deceased account owner.)
A spouse who takes ownership of an inherited traditional
IRA must determine the RMD using his or her own life
expectancy. A spouse who takes ownership of an inherited
Roth IRA does not have to take an RMD. A spouse who is
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