User:Fyre4ce/Stretch IRA

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See also: Inheriting an IRA and Inheriting a Roth IRA

A Fyre4ce/Stretch IRA refers to the financial planning concept of designing an IRA (Traditional IRA or Roth IRA) for the maximum, tax efficient distribution of its assets as the account is inherited by succeeding generations. The SECURE Act of 2019 changed the rules for distribution for inherited IRAs. Prior to the SECURE Act, beneficiaries could distribute Inherited IRAs over their life expectancy with annual Required Minimum Distributions (RMDs) according to IRS Distribution Table I, and these were referred to as "Stretch IRAs." Following the SECURE Act, most Inherited IRAs have no annual RMDs, but must be completely distributed by the end of the tenth year following the owner's death.

It remains to be seen whether these Inherited IRAs will also be referred to as "Stretch IRAs" by the financial planning community. For clarity, IRAs governed by the pre-SECURE Act distribution rules will be referred to as "pre-SECURE Act Stretch IRAs" and IRAs governed by the new ten-year rule will be referred to as "post-SECURE Act Inherited IRAs."

Pre-SECURE Act Stretch IRAs

IRAs inherited before January 1, 2020 (excluding those inherited by a surviving spouse who elects to treat the IRA as their own) still follow the pre-SECURE Act Stretch IRA rules. However, the SECURE Act offers several exceptions (see below) to the ten-year rule, in which case Stretch IRA rules also apply.

Pre-SECURE ACt Stretch IRAs have Required Minimum Distributions (RMDs) for the beneficiary that begin the year after the owner died, regardless of the beneficiary's age. However, the life expectancy for which the RMDs are calculated will be at least several decades for most beneficiaries, so RMDs will initially be small. See the RMD page for details on this calculation.

SECURE Act Inherited IRAs

IRAs inherited on or after January 1, 2020 do not have any annual Required Minimum Distributions (RMDs), but must be completely distributed to their beneficiaries by December 31 of the tenth year after the death of the owner. Beneficiaries may potentially make withdrawals in eleven tax years, if the owner died early enough in the year. The SECURE Act excepts the following beneficiaries from the new ten-year rule, in which case the pre-SECURE Act Stretch IRA rules govern:

  • Surviving spouses who elect to treat the IRA as an Inherited IRA rather than their own (surviving spouses still have the option to treat Inherited IRAs as their own)
  • Minor children of the decedent, until the child reaches the age of majority (at which time the ten-year rule begins with a fresh clock)
  • Any beneficiary not more than ten years younger than the decedent
  • Chronically ill beneficiaries
  • Permanently disabled beneficiaries

There can be complexity and/or legal ambiguity surrounding the details of some of these definitions[1].

Post-SECURE Act strategies for beneficiaries

Roth IRA

Roth IRA withdrawals are tax-free, so unless the beneficiary has an urgent need for the funds, the best strategy will generally be to leave the funds inside the Inherited IRA as long as possible, and withdraw a lump sum toward the end of the tenth year after the owner's death. This will maximize tax-free growth. Reasons for deviating from this strategy could include:

  • The beneficiary is not able to maximize contributions to their own tax-advantaged accounts, for example, by having access to a large Solo 401(k) or Mega Backdoor Roth limit. Withdrawing distributions from an Inherited Roth IRA to make these contributions would be trading one tax-advantaged space for another, but the beneficiary's own accounts do not need to be closed down in ten years or less, and so provide much longer-term tax-advantaged growth potential than the Inherited IRA.
  • The beneficiary has debt with a higher interest rate than the expected tax-free return of investments available in the IRA. While the debt probably should not have been taken out in the first place, withdrawing Inherited IRA money to pay it off may be the best solution, along with addressing the problems that led to the debt in the first place.
  • Attractive taxable investments (real estate, private equity, etc.) are available that have higher return potential than the investments inside the Inherited IRA.

Traditional IRA

Traditional IRA withdrawals are taxable (or at least partly taxable if the IRA has any non-deductible basis) so substantial withdrawals can have severe tax consequences. In deciding the best withdrawal strategy, an investor should first understand their tax situation, particularly their marginal tax rate for various sizes of withdrawals, including federal and state income tax rates, phase-outs of deductions and credits, and other income-based effects such as IRMAA, student loan interest subsides, and financial aid. This information can be obtained from a professional tax preparer, tax software, or other tools such as the Personal Finance Toolbox. This information should be estimated, as best as possible, for the next ten years. Factors that affect future income and tax rates could include:

  • Planned start or stop of working, for you or your spouse
  • Fluctuations in income, including certain career paths that have large changes in income when milestones are reached
  • Planned moves between low-tax and high-tax states
  • Planned large charitable gifts
  • Expected start of Social Security or pension payments
  • Possible future leaves of absence (eg. connected to a new child)
  • Expiration of Tax Cuts and Jobs Act reduced individual income tax rates in 2025 (if not modified by new legislation), and possibly other future tax law changes

Note that beneficiaries may be able to spread withdrawals over 11 tax years, rather than 10, if the owner died early enough in the year for the beneficiary to make a withdrawal before December 31.

Lump-sum withdrawal

A lump-sum withdrawal in the final year maximizes tax-deferred growth, but also concentrates taxable income in a single year, possibly causing the highest average tax rate on withdrawals. This strategy could be optimal in the following situations:

  • The IRA balance is small enough such that the lump sum does not push the taxpayer into a higher bracket (eg. as of 2020, the federal 24% married bracket is over $150,000 from bottom to top)
  • High-income taxpayers who are already in the top (37%) tax bracket, and are not affected by other factors that would increase the tax rate on the lump sum
  • Taxpayers who are just below large spikes in tax rate (eg. due to taxation of Social Security benefits or phase-out of Section 199A deductions) with lower rates above may pay a lower average tax rate by taking a large withdrawal in a single year instead of paying a spiked rate for many years

Level withdrawals

Level, or approximately level, withdrawals minimize the greatest taxable income in any given year. This strategy could be optimal in the following situations:

  • A lump-sum withdrawal would raise the taxpayer into a higher marginal tax rate than 10 or 11 level withdrawals
  • The taxpayer is not able to fully contribute to tax-advantaged accounts without annual withdrawals. Withdrawing from the Inherited IRA and contributing to personally-owned accounts is either tax-neutral (for traditional contributions) or has the effect of a Roth conversion (for Roth contributions), but moves funds into an account without a ten year limit.

The following table gives the approximate percentages of the inherited amount that should be withdrawn in the first year to produce level taxable income. This table assumes tax brackets are indexed for inflation, so the first year amount should be increased each year with inflation.

Real Growth Ten Years Eleven Years
-3% 8.72% 7.57%
-2% 9.23% 8.02%
-1% 9.76% 8.49%
0% 10.30% 8.98%
1% 10.86% 9.48%
2% 11.43% 9.99%
3% 12.02% 10.51%
4% 12.63% 11.05%
5% 13.24% 11.60%
6% 13.88% 12.16%
7% 14.53% 12.73%
8% 15.19% 13.31%
9% 15.86% 13.90%
10% 16.27% 14.50%

Irregular withdrawals

Irregular withdrawals are the preferred strategy when you expect your tax situation to be significantly different years within the ten year withdrawal period, due to any of the factors listed above. Larger withdrawals should be timed to occur in years where the marginal tax rate is lowest.

Post-SECURE Act Strategies for Owners

The SECURE Act may dramatically change estate planning for those expecting to bequeath substantial IRAs. Prior to the SECURE Act, distributions of Inherited IRAs could be spread over many decades, so the ten-year rule is a dramatic acceleration of required distributions. In response, more complex inter-generational tax planning may be needed to maximize the after-tax value of your estate. Not only will you need to consider your own tax situation, but also the likely tax situation of your prospective heirs. The following strategies should be considered by account owners expecting to leave substantial pre-tax funds in IRAs.

Spreading out Traditional IRAs over many beneficiaries

Before the SECURE Act, it may have been advantageous to prefer leaving IRAs to younger heirs, to maximize the time period of the stretch. Now, all heirs will need to distribute their Inherited IRAs over roughly the same time period, so distributing pre-tax IRA assets roughly equally among all heirs may now be a better strategy.

Further optimization can be achieved by tax-adjusting the values of each heir's inheritance based on their expected tax rate. For example, pre-tax assets may be left predominantly toward low-tax heirs, taxable assets to middle-tax heirs, and Roth assets to high-tax heirs. While this was also advisable prior to the SECURE Act, the shorter distribution period for younger heirs will change the effective tax rate calculation. You should consider that this could cause consternation among heirs. For example, lower-income heirs might not fully understand why the nominal value of their share of the inheritance is smaller than their higher-income siblings, or high-income heirs may not understand why the nominal value of pre-tax assets left to lower-income heirs is greater than the value of their Roth assets.

Roth conversions

Partial Roth conversions of pre-tax assets during your lifetime will effectively add years to the period of time over which they must be distributed, and will lower the taxable income in any given year. If the average tax rate of a Roth conversion is less than the marginal tax rate of withdrawals by your heirs, then the Roth conversion will save taxes.

Bypassing the spouse

A married couple may be able to extend the window over which their heirs will need to distribute pre-tax assets by partially bypassing the surviving spouse. Each spouse would leave some or all of their pre-tax assets directly to their younger heirs, as opposed to their spouse. When the first spouse dies, the ten-year clock begins on those withdrawals. When the surviving spouse dies and bequeaths the remaining pre-tax asses, those accounts get a fresh ten-year clock. This strategy can broaden the effective distribution period to up to 20 years.

Advanced strategies

For large IRAs, advanced strategies using a Charitable Remainder Trust may be able to artificially create similar rules to the Stretch IRA[2], albeit with additional cost and complexity. If you think this may be an appropriate strategy for you, consult a competent estate planning attorney in your state.


  1. The (Partial) Death Of The Stretch IRA: How The SECURE Act Impacts Inherited Retirement Accounts, Jeffrey Levine CFP, Kitces Nerds Eye View, February 12,2020.
  2. Strategies To Mitigate The (Partial) Death Of The Stretch IRA, Jeffrey Levine CFP, Kitces Nerds Eye View, February 19,2020.

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