Planning Strategies for the End of the Stretch IRA

In my earlier blog, I covered the major new provisions of the SECURE Act. One of the biggest changes involved the curtailment of the time an inherited IRA could continue its deferral, raising the question- are there strategies that would optimize estate planning for IRAs in light of the change?

Prior to 2020, a non-spouse beneficiary1 could spread the IRA distribution over his or her remaining lifetime, which could be anywhere from 1 to 81 years, depending on the beneficiary’s age. The act now limits the deferral period for those beneficiaries1 to a maximum of ten years, though it also introduces more flexibility within those ten years. The old rules required minimum annual distributions, but the new act allows the beneficiary to distribute the entire balance anytime, and on any schedule, before the end of the ten years.

If you inherited an IRA before 12/31/19

If the death of the original account owner occurred before 12/31/19, then the new rules do not apply to you. You are grandfathered and do not need to change your distribution method.

For Beneficiaries who Inherit an IRA After 12/31/19

The most significant implication of this new law is that beneficiaries will want to engage in forward-looking tax planning as they think about how to distribute their inherited IRA- especially if it is not a Roth. Inheritors will have flexibility as to when they recognize income from the IRA, which could allow them to spread it evenly over ten years, or bunch it into a few years, or leave it all for the last year. Naturally, the plan should be to match the taxable IRA distribution to years when other income is low, or deductions are high. It would be advisable to consider fluctuations in income due to retirement or job changes, changes in compensation, timing of applying for college financial aid, and even when Medicare and Social Security might be started. On the flip side, matching income to tax deductions/credits such as charitable gifts, energy credits, or medical costs is desirable.

Roth Considerations

While careful tax planning is the order of the day for Rollover/Traditional IRAs and Employer plans, inheritors are going to want to follow a different strategy if it is an inherited Roth IRA or Roth 401(k). Since distributions from Roths are tax-free, no tax planning is required; rather, the strategy should be to leave the funds in the Roth as long as possible so as to maximize the tax-free deferral.

And remember, beneficiaries who have earned income should consider using any inherited distributions to boost their own IRA or Roth IRA or employer retirement plan. If you must take a distribution, why not simply turn around and contribute an equal amount to whatever retirement plan you or your spouse are eligible for? In this way, you can continue the deferral.

Choosing your Beneficiaries: Greater Complexity

For those who are planning their estate, and considering who to name as their beneficiaries, it can be argued that the SECURE Act makes this process more complicated.

Before discussing the ins and outs of estate planning for retirement plans post the SECURE Act, it is critical to recognize that a dollar inherited from different retirement and non-retirement plans are not equal in value due to their associated tax liability. Below we have developed a table to aid in understanding the differences.

*must meet Roth qualification rules to reach tax-free status.

While many factors will influence how you design your estate plan, it is generally fair to say that most individuals want to maximize the after-tax value for their heirs. All things being equal, a beneficiary will prefer to inherit “higher value” accounts (Roth, Roth 401k, after-tax savings) than “lower value” assets, because a dollar of IRA assets is worth less than a dollar of Roth assets or “stepped up” assets.

Strategies to consider

If you want to leave anything in your estate to charity, do it through your least sheltered retirement plan (IRA, Rollover IRA, Annuity). The charity will owe no tax, and the other taxable inheritors will benefit from receiving non-taxable assets. Sometimes it is good idea to segregate your IRA with charitable beneficiaries from those with non-charitable ones.

Consider the tax brackets of your beneficiaries and leave the more heavily taxed accounts to the lower tax bracket inheritors.
There are two pitfalls to this strategy. First, it might lead to bad feelings if you left more to one heir than the other based on a judgement about their tax rate. Moreover, their rate could change, their circumstances could change, and your estimate could be wrong. If you follow this route, it is advisable to explain to the beneficiaries ahead of time what your reasoning is.

Spread your retirement accounts among more beneficiaries. You may want to consider adding more beneficiaries because the 10-year required distributions will be spread across more individuals, presumably lowering the marginal rate being paid. It won’t work to name your son and daughter-in-law, but it might work to name your son and your grandchildren. Of course, you’ll need to explain to your son why you are doing so. If the grandchildren are subject to the kiddie tax (under age 19, or full-time students up to the age of 23), then it might not be quite as advantageous, though presumably they will ultimately age out of the kiddie tax, unless they are very young. Minors also are not subject to the ten-year rule, until they reach 18, but are subject to annual required distributions until then.

If you have named someone other than your spouse as your primary beneficiary, you may want to reconsider naming your spouse as primary. That’s because your spouse isn’t subject to the ten-year period, and it means that the ten-year payout period will be delayed until your spouse dies. The risk, of course, is that your spouse may alter your desired beneficiaries.

Once you are over 70 1/2, give your charitable gifts from your non-Roth retirement accounts using the Qualified Charitable Donation (QCD).2 By consistently doing this, you will be using pretax dollars to make the donation and will be lowering the value of your non-Roth plans while preserving your after-tax assets for your heirs.

If you have high medical costs or need long-term care, fund these expenses from your IRA so as to match deductions with income.

You may want to reconsider whether converting your IRA to a Roth makes sense, given your tax situation versus the tax situation of your heirs. For example, if a married couple lives in a no-tax state such as Florida and their single, high-earning son lives in California, they might want to evaluate the benefits of a conversion to a Roth in light of his total tax bracket versus theirs.

Take a Moment—when you inherit a retirement account- to consider your next step

There are some quirks to this new rule that might benefit you, but only if you figure it out at the outset.

In the past, inheriting a retirement account, while not completely straightforward, required few decisions. If the beneficiary form indicated you were a beneficiary, your portion of the account was distributed, and you were required to make annual distributions. The calculation of the required annual amount was admittedly obtuse (your remaining single life expectancy reduced by one every year), but it was well known by most advisors and financial institutions.

Starting in 2020, if you inherit an account from a person who has already begun RMDs (over 70 ½ or soon over 72), you’ll need to decide whether you want to “split” the IRA or not, meaning each beneficiary creates their own inherited IRA. If you don’t split the IRA, you may be able to stretch the distributions to the life expectancy of the decedent. In effect, this means that a decedent between 72 and 80 has a single life expectancy longer than 10, so using their life expectancy is a better strategy.

As you can see, this requires careful consideration and expert advice. Consulting with your tax or estate planner is highly advisable.


If you inherit an IRA in 2020 and beyond, you’ll need to figure out if you want to follow the “leave there as long as possible” strategy or strategically time your distributions for the lowest tax years. There are a whole host of factors to consider—anything impacting your income tax return, applying for student aid, a mortgage or starting Medicare.

If you are planning for your estate, you will want to discuss the new SECURE Act and how it impacts your choice of beneficiaries with your estate planner.


1 non-spouse beneficiaries may still qualify for a stretch over their lifetimes if they are disabled, minors or less than ten years younger than the decedent.

2 limited to $100,000 per year per account owner

Robin Sherwood, CFP®

With over twenty years of experience, Robin assists clients in maximizing their financial well-being. She counsels clients in the areas of retirement, taxes, investments and estate planning.

Robin is a CERTIFIED FINANCIAL PLANNER™ practitioner and a registered member of NAPFA. She has an MBA in Finance from the Wharton School at the University of Pennsylvania, and a BA from Colby College.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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