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The Secure Act 2.0 has recently been introduced as a proposal in the United States Congress, and with it comes the potential return of the much-loved Stretch IRA.
For those who aren’t familiar with it, the Stretch IRA was a strategy used by some savers to pass on their retirement savings to their heirs in a tax-advantaged manner.
Until the original Secure Act was signed into law in 2019, beneficiaries of inherited IRAs could stretch out required distributions over their lifetimes – hence the name “Stretch IRA.” This allowed them to take smaller annual distributions while the remainder of the funds continued to grow tax-free.
However, the Secure Act eliminated this option for most non-spouse beneficiaries, instead requiring them to empty inherited IRAs within 10 years. This meant that beneficiaries had to take larger distributions, potentially pushing them into a higher tax bracket and eroding the value of the inherited account faster.
But now, the Secure Act 2.0 proposal includes a provision that would allow designated beneficiaries to again stretch out distributions over their lifetimes, albeit with some new restrictions.
First, the lifetime distribution option would only apply to beneficiaries who are more than 10 years younger than the account owner. This is intended to limit the use of the stretch IRA strategy to younger heirs with longer life expectancies, rather than those who are already retired and may not benefit as much from the tax deferral.
Additionally, the proposal includes a cap on the amount of tax-deferred funds that can be stretched – either $400,000 or the entire balance of the retirement account, whichever is less. This means that higher-net-worth individuals with large retirement account balances would still be subject to the 10-year distribution rule for any amounts over the cap.
While the Secure Act 2.0 is still just a proposal and may undergo changes before becoming law, the potential return of the stretch IRA is welcome news for many savers and beneficiaries who prefer the flexibility and tax benefits it offers. However, it’s important to keep in mind that strategies like the stretch IRA should always be assessed in the context of one’s overall financial plan, taking into account factors like tax rates, estate planning goals, and beneficiaries’ individual circumstances.
For Fed's (those with TSP), the surviving spouse MIGHT want to roll over some or all of it. The issue is if the surviving spouse then passes away, the TSP will pay ALL OF THE BALANCE OUT to the next beneficiary. The TSP allows no other option. So if there is $2m in that TSP Beneficiary Participant Account, TSP will cut a check to the surviving spouse's beneficiary. Tax BOMB!
This is how it has always been with TSP. I do not know if this new Secure Act 2.0 changes this old rule? I don't see anything specifically addressing it? It would be a fantastic change if it does.
Any thoughts Josh?
I didn't read very far into it and I wonder if a single parent (unmarried to a mother living or not) would be able to pass on their IRA's to their children to be used in a stretch manner? They really did a number on us with that Secure Act! Why can't they revert the Secure Act to it's original Form but allow single parents to pass their IRA to their kids! And stop digging in our pockets?
Have couples load up the younger spouses IRA first!
Josh, hope your home/neighborhood is free from the flooding I see reported around your area.
I don't understand the complexity of what they make these shifting RMDs. My wife inherited an IRA and we are now forced to take a distribution every year. Different rules that put 50s age beneficiaries at a disadvantage if they had made a choice to SEPP. Luckily we had a brokerage to span the early retirement years and not touch our IRAs.
We'd be screwed if we had locked into the SEPP payments, then her parent died and be forced to take both the SEPP and the forced distribution of the inherited IRA.
Just make some semblance of commonality to any inherited or surviving IRA. How frigging hard would that be?
Seems like a cool scenario but there’s a lot dominoes that need to fall a certain way.
In the secure act 2.0, did the RMD age increase from 72 to 75
Hey Josh, QUESTION: Do you know when Right Capital will update based on the changes in the law and limits? Thanks
My grandchildren could benefit nicely. Especially if they are under 21
My wife and her sister are beneficiaries of their parent's IRA. They just inherited it last year. They were told there was ten years to withdraw it all. Does this mean they can now wait until age 75 before begining withdrawals?
It looks as though one still has to an Eligible Designated Beneficiary in order to actually "stretch" the account.
That is crazy complicated/convoluted and would seem like the author of this portion of the Secure Act wrote this rule in specifically for himself/herself so as to be able to pass his/her IRA down to their kids and not have them be stuck with the 10 yr rule. Many of the rest of us will already have lost this option which seems somewhat unfair.
Calling it the secure act is like Calling Jack the ripper a surgeon! Bahaha!
This is our government for you. The favorite buzzword is "equity." And they set up a very unequitable system based on when you die. Some win by their loved ones dying early, and others lose by their loved ones living longer!!
Looks like an improvement but not as good as the original stretch rules
Somehow, I think your risk level is pretty low for myocarditis.