October 3, 2019
Inherited or “Stretch” Individual Retirement Accounts (IRAs)
and Related Legislation in the 116th Congress
Background
fails to take an RMD will generally incur an excise tax of
Traditional and Roth Individual Retirement Accounts
50% of the amount that was required to have been
(IRAs) provide tax-advantaged ways for individuals to save
withdrawn.
for retirement. Traditional IRA contributions can be tax
deductible, but withdrawals are included in taxable income.
Roth IRAs do not require account withdrawals during an
Roth IRA contributions are not tax deductible, but
owner’s lifetime because contributions are generally made
withdrawals are generally tax free.
on an after-tax basis. Qualified distributions—those that
occur after age 59½ from accounts that are at least five
Following an account owner’s death, a designated spouse or
years old—are not taxable.
beneficiary may inherit an IRA and continue to receive tax
preferences by deferring taxation on IRA assets for a
IRA Inheritance Rules
number of years beyond the original owner’s death. This
After an account owner’s death, IRAs are passed to a
strategy is sometimes called a “stretch IRA,” in which the
person or entity designated as a beneficiary. In the absence
period of asset accumulation of a retirement account is
of a designated beneficiary, the estate generally becomes
“stretched” past the lifetime of the original account owner.
the beneficiary. Rules for how to handle an inherited IRA
Some stakeholders have voiced concerns that through
differ for a spouse and non-spouse. A spouse beneficiary is
inheritance, stretch IRAs can be used as a tool to promote
allowed to (1) become the new account owner; (2) roll over
intergenerational wealth transfers rather than to encourage
the account to the spouse’s own traditional or Roth IRA or
retirement savings as originally purposed. Provisions in
qualified employer plan, such as a 401(k), 403(a), 403(b),
several bills, including H.R. 1994, H.R. 1007, and S. 972,
or 457(b) plan; or (3) be treated as a beneficiary rather than
would modify distribution rules for inherited IRAs.
account owner. A non-spouse beneficiary cannot take
ownership of an inherited account. Instead, the account
Required Minimum Distributions
becomes an inherited IRA designated for the non-spouse
Traditional IRAs are subject to required minimum
beneficiary in the name of the deceased account owner.
distributions (RMDs), which are minimum amounts that
must be withdrawn from the account annually, generally
Distributions for Inherited Traditional IRAs
beginning when the account owner reaches a certain age.
A spouse beneficiary who chooses to take ownership of an
RMDs ensure that an individual uses the assets accumulated
inherited IRA must determine the RMD using his or her
in a tax-advantaged retirement account for retirement
own life expectancy. A spouse who chooses to be treated as
purposes, rather than as an estate planning tool or tax
a beneficiary rather than account owner, a non-spouse
shelter. To further encourage that these accounts be used
beneficiary, or an estate beneficiary is subject to RMD rules
primarily for retirement, IRA withdrawals before age 59½
that depend on whether the original account owner dies
are generally subject to a 10% penalty.
before, on, or after the required beginning date.
Traditional IRAs require an account holder to take RMDs at
Traditional IRA Owner Dies Before Required
the required beginning date, which is April 1 following the
Beginning Date
calendar year during which an individual attains age 70½.
If an owner dies before the required beginning date, a
The RMD is calculated by dividing (1) the account balance
spouse who chooses to be treated as a beneficiary and a
at the end of the immediately preceding calendar year by
non-spouse beneficiary have two options in taking
(2) the distribution period provided in the applicable
distributions. He or she can choose either to withdraw the
Internal Revenue Service (IRS) Life Expectancy Table. The
entire account balance by the end of the fifth year following
IRS publishes three RMD tables that differ based on the
the account owner’s year of death (the 5-year rule) or to
account owner’s marital status and, in the case of inherited
take distributions based on the beneficiary’s single life
accounts, on the account owner’s relationship with any
expectancy. A spouse beneficiary who is the sole
beneficiary. For example, a 76-year-old unmarried account
beneficiary is subject to a special rule that allows him or her
owner, with a distribution period of 22 years and a year-end
to postpone distributions until the original owner would
account balance of $100,000, would have an RMD of
have reached age 70½. The 5-year rule applies if there is no
$4,545 the following year ($100,000 divided by 22). RMDs
designated beneficiary or the beneficiary is an estate.
are recalculated each year.
Traditional IRA Owner Dies On or After Required
Traditional IRA distributions are included in taxable
Beginning Date
income except for any distribution derived from a
If an owner dies on or after the required beginning date, a
contribution that was previously taxed. An individual who
designated beneficiary’s RMDs are calculated based on the
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Inherited or “Stretch” Individual Retirement Accounts (IRAs) and Related Legislation in the 116th Congress
longer life expectancy of either the original account owner
Some stakeholders support the proposed changes because
or the beneficiary. For example, a 20-year-old designated
they believe that current law may compound wealth
beneficiary would begin taking an annual RMD in the year
inequality. Others, however, have voiced concerns that
after the account owner’s death based on the 20-year-old’s
amending distribution rules would be unfair to individuals
life expectancy, which is 63 years in the IRS’s Single Life
who intentionally chose to use IRAs as estate planning tools
Expectancy Table. If there is no designated beneficiary or
instead of other methods, as well as their would-be
the beneficiary is an estate, the distribution period is based
beneficiaries.
on the deceased account owner’s life expectancy as of the
year of death. For each subsequent RMD, life expectancy is
H.R. 1007, Retirement Enhancement and Savings
reduced by one year.
Act of 2019
Section 501 of H.R. 1007, the Retirement Enhancement and
Distributions for Inherited Roth IRAs
Savings Act of 2019, would modify distribution rules so
A Roth IRA’s original owner does not have to take RMDs
that following an account owner’s death, any amount that
(and therefore, has no required beginning date). Following
exceeds $450,000 in an inherited IRA would have to be
the death of an initial account owner, a Roth IRA
distributed within five years. This dollar amount would be
beneficiary must take RMDs using the same rules that
excluded from the amount used to determine a beneficiary’s
apply to traditional IRAs when an account owner dies
RMD.
before the required beginning date.
Exceptions would apply for certain eligible designated
Legislation in the 116th Congress That
beneficiaries (defined similarly to those in H.R. 1994). An
Would Amend Distribution Rules for
eligible beneficiary would take distributions over his or her
Inherited Traditional and Roth IRAs
own life expectancy regardless of the account’s amount. A
surviving spouse would not have to begin taking
H.R. 1994, Setting Every Community Up for
distributions until the date on which the original account
Retirement Enhancement Act of 2019
owner would have attained age 70½. Distributions for a
Section 401 of H.R. 1994, the Setting Every Community
beneficiary who is a minor child would be calculated based
Up for Retirement Enhancement Act of 2019, or
on the child’s remaining life expectancy through the year
“SECURE” Act, would amend the rules governing inherited
that the child reaches the age of majority, after which any
IRAs. A beneficiary would generally have to withdraw the
amount that exceeds $450,000 would have to be distributed
entire account balance within 10 years of the original
within five years.
account owner’s death, regardless of whether the account
owner died before, on, or after the required beginning date.
S. 972, Retirement Enhancement and Savings Act
In addition, the 5-year rule would be expanded to a 10-year
of 2019
rule—lengthening the timeframe for situations that were
S. 972, the Retirement Enhancement and Savings Act of
previously subject to the 5-year rule.
2019, would modify distribution rules similarly to H.R.
1007, but would expedite the distribution timeframe for any
Exceptions to the 10-year rule would apply for certain
amount in an inherited IRA that exceeds $400,000, rather
eligible beneficiaries. These include any individual who, at
than $450,000.
the date of the account owner’s death, is the surviving
spouse, disabled, chronically ill, 10 or fewer years younger
For Further Information
than the account owner, or a minor child of the account
See the following for further information on these issues:
owner. An eligible beneficiary would be able to take
distributions based on his or her own life expectancy rather
 Internal Revenue Service, IRS Publication 590-B:
than adhere to the 10-year rule. Distributions for a
Distributions from Individual Retirement Arrangements
beneficiary who is a minor child would be calculated based
(IRAs) (2018), at https://www.irs.gov/pub/irs-
on the child’s remaining life expectancy through the year
pdf/p590b.pdf.
that the child reaches the age of majority, after which the
10-year rule would apply.
 Joint Committee on Taxation, Estimated Budget Effects
of H.R. 1994, the “Setting Every Community Up for
In providing a rationale for this legislative change, H.Rept.
Retirement Enhancement “SECURE” Act of 2019,
116-65 states that an IRA’s goal is to incentivize
Scheduled For Consideration By the House of
individuals to save for expenses in retirement. Some
Representatives On May 22, 2019, JCX-23-19.
individuals may save more than necessary to support
themselves (and a surviving spouse, if applicable) during
 U.S. Congress, House Committee on Ways and Means,
retirement, in which case the House Ways and Means
Setting Every Community Up for Retirement
Committee contends that the tax subsidy should phase
Enhancement Act of 2019, report to accompany H.R.
down for beneficiaries of inherited IRAs.
1994, 116th Cong., 1st sess., H.Rept 116-65.
These changes would apply to IRAs inherited from account
Elizabeth A. Myers, Analyst in Income Security
owners who die after December 31, 2019. The Joint
Committee on Taxation estimates that modifying the
IF11328
distribution rules would increase federal revenue by $16.4
billion from FY2020 through FY2029.
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Inherited or “Stretch” Individual Retirement Accounts (IRAs) and Related Legislation in the 116th Congress


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https://crsreports.congress.gov | IF11328 · VERSION 1 · NEW

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