One of the major changes under the SECURE Act is the elimination of the “stretch” distribution strategy for inherited IRAs and retirement plans. If an IRA owner or retirement plan participant passes away in 2020 or after and leaves the assets to a non-spouse beneficiary, the non-spouse beneficiary must generally have the inherited account fully distributed by December 31 of the 10th anniversary of death and may have RMDs throughout the 10 years (known as the 10-year rule). This rule change impacts all IRAs (including Roth IRAs) and Qualified Retirement Plans.

Prior to 2020, non-spouse beneficiaries had the option of “stretching” that inherited account over their life expectancy by taking minimum distributions each year. This “stretch strategy” maximized the amount of time those assets could stay in a tax-deferred account and minimized taxation each year. Here’s an example of how long beneficiaries could potentially stretch distributions prior to 2020:

As you can see, the 10-year rule (instead of life expectancy) significantly speeds up the inherited asset payout and thus typically makes the assets taxable for the beneficiary sooner. The taxable income over the 10-year period may also bump beneficiaries into higher tax brackets. While the 10-year payout impacts most beneficiaries, there are a few exceptions:

• Spouses
• Minor children of the IRA or retirement plan account owner
• Disabled or chronically ill individuals
• Non-spouses who are no more than 10 years younger than the deceased

These beneficiaries may generally still take minimum distributions each year over their life expectancy. For minor children, they may stretch the inherited account over their life expectancy until they reach the age of majority in their state. At that point, the 10-year rule will apply.

With such an impactful change on how inherited IRAs are paid out, let’s examine some potential planning strategies that you may be able to implement to minimize taxes for you and your beneficiaries: