Updated October 24, 2019
Inherited or “Stretch” Individual Retirement Accounts (IRAs)
and Related Legislation in the 116th Congress
Background
from a contribution that was previously taxed. An
Traditional and Roth Individual Retirement Accounts
individual who fails to take an RMD will generally incur an
(IRAs) provide tax-advantaged ways for individuals to save
excise tax of 50% of the amount that was required to have
for retirement. Traditional IRA contributions can be tax
been withdrawn.
deductible, but withdrawals are included in taxable income.
Roth IRA contributions are not tax deductible, but
Roth IRAs do not require account withdrawals during an
withdrawals are generally tax free.
owner’s lifetime because contributions are generally made
on an after-tax basis. Qualified distributions—those that
Following an account owner’s death, a designated spouse or
occur after age 59½ from accounts that are at least five
beneficiary may inherit an IRA and continue to receive tax
years old—are not taxable.
preferences by deferring taxation on IRA assets for a
number of years beyond the original owner’s death. This
IRA Inheritance Rules
strategy is sometimes called a “stretch IRA,” in which the
After an account owner’s death, IRAs are passed to a
period of asset accumulation of a retirement account is
person or entity designated as a beneficiary. In the absence
“stretched” past the lifetime of the original account owner.
of a designated beneficiary, the estate generally becomes
Some stakeholders have voiced concerns that through
the beneficiary. Rules for how to handle an inherited IRA
inheritance, stretch IRAs can be used as a tool to promote
differ for a spouse and nonspouse. A spouse beneficiary is
intergenerational wealth transfers rather than to encourage
allowed to (1) become the new account owner; (2) roll over
retirement savings as originally purposed. Provisions in
the account to the spouse’s own traditional or Roth IRA or
several bills, including H.R. 1994, H.R. 397, H.R. 1007,
qualified employer plan, such as a 401(k), 403(a), 403(b),
and S. 972, would modify distribution rules for inherited
or 457(b) plan; or (3) be treated as a beneficiary rather than
IRAs.
account owner. A nonspouse beneficiary cannot take
ownership of an inherited account. Instead, the account
Required Minimum Distributions
becomes an inherited IRA designated for the nonspouse
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 are designed to ensure that an individual uses the
inherited IRA must determine the RMD using his or her
assets accumulated in a tax-advantaged retirement account
own life expectancy. A spouse who chooses to be treated as
for retirement purposes, rather than as an estate planning
a beneficiary rather than account owner, a nonspouse
tool or tax shelter. To further encourage that these accounts
beneficiary, or an estate beneficiary is subject to RMD rules
be used primarily for retirement, IRA withdrawals before
that depend on whether the original account owner dies
age 59½ 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
nonspouse 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 distributions are included in taxable
income except for the portion of any distribution derived
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Inherited or “Stretch” Individual Retirement Accounts (IRAs) and Related Legislation in the 116th Congress
Traditional IRA Owner Dies On or After Required
tax subsidy should be phased down for beneficiaries of
Beginning Date
inherited IRAs.
If an owner dies on or after the required beginning date, a
designated beneficiary’s RMDs are calculated based on the
These changes would apply to IRAs inherited from account
longer life expectancy of either the original account owner
owners who die after December 31, 2019. The Joint
or the beneficiary. For example, a 20-year-old designated
Committee on Taxation (JCT) estimates that modifying the
beneficiary would begin taking an annual RMD in the year
distribution rules would increase federal revenue by $16.4
after the account owner’s death based on the 20-year-old’s
billion from FY2020 through FY2029.
life expectancy, which is 63 years in the IRS’s Single Life
Expectancy Table. If there is no designated beneficiary or
Some stakeholders support the proposed changes because
the beneficiary is an estate, the distribution period is based
they believe that current law may compound wealth
on the deceased account owner’s life expectancy as of the
inequality. Others, however, have voiced concerns that
year of death. For each subsequent RMD, life expectancy is
amending distribution rules would be unfair to individuals
reduced by one year.
who intentionally chose to use IRAs as estate planning tools
instead of other methods, as well as to their would-be
Distributions for Inherited Roth IRAs
beneficiaries.
A Roth IRA’s original owner does not have to take RMDs
(and therefore, has no required beginning date). Following
H.R. 1007, Retirement Enhancement and Savings
the death of an initial account owner, a Roth IRA
Act of 2019
beneficiary must take RMDs using the same rules that
Section 501 of H.R. 1007, the Retirement Enhancement and
apply to traditional IRAs when an account owner dies
Savings Act of 2019, would modify distribution rules so
before the required beginning date.
that following an account owner’s death, any amount that
exceeds $450,000 in an inherited IRA would have to be
Legislation in the 116th Congress That
distributed within five years. Amounts up to $450,000
Would Amend Distribution Rules for
would be used to determine a beneficiary’s RMD.
Inherited Traditional and Roth IRAs
Exceptions would apply for certain eligible designated
H.R. 1994, Setting Every Community Up for
beneficiaries (defined similarly to those in H.R. 1994). An
Retirement Enhancement Act of 2019, and H.R.
eligible beneficiary would take distributions over his or her
397, Rehabilitation for Multiemployer Pensions Act
own life expectancy regardless of the account’s amount. A
of 2019
surviving spouse would not have to begin taking
Section 401 of H.R. 1994, the Setting Every Community
distributions until the date on which the original account
Up for Retirement Enhancement (SECURE) Act of 2019,
owner would have attained age 70½. Distributions for a
as received in the Senate, and Section 9 of H.R. 397, the
beneficiary who is a minor child would be calculated based
Rehabilitation for Multiemployer Pensions of 2019, as
on the child’s remaining life expectancy through the year
received in the Senate, are nearly identical provisions that
that the child reaches the age of majority, after which any
would amend the rules governing inherited IRAs. A
amount that exceeds $450,000 would have to be distributed
designated beneficiary would generally have to withdraw
within five years.
the entire account balance within 10 years of the original
account owner’s death, regardless of whether the account
S. 972, Retirement Enhancement and Savings Act
owner died before, on, or after the required beginning date.
of 2019
Nondesignated beneficiaries would continue to be subject
S. 972, the Retirement Enhancement and Savings Act of
to the 5-year rule.
2019, would modify distribution rules similarly to H.R.
1007 for any amount in an inherited IRA that exceeds
Exceptions to the 10-year rule would apply for certain
$400,000, rather than $450,000.
eligible beneficiaries. These include any individual who, at
the date of the account owner’s death, is the surviving
For Further Information
spouse, disabled, chronically ill, 10 or fewer years younger
See the following for further information on these issues:
than the account owner, or a minor child of the account
owner. An eligible beneficiary would be able to take
 Internal Revenue Service, IRS Publication 590-B:
distributions based on his or her own life expectancy rather
Distributions from Individual Retirement Arrangements
than adhere to the 10-year rule. Distributions for a
(IRAs) (2018), at https://www.irs.gov/pub/irs-
beneficiary who is a minor child would be calculated based
pdf/p590b.pdf.
on the child’s remaining life expectancy through the year
that the child reaches the age of majority, after which the
Joint Committee on Taxation, Estimated Budget Effects
10-year rule would apply.
of H.R. 1994, the “Setting Every Community Up for
Retirement Enhancement “SECURE” Act of 2019,
In providing a rationale for this legislative change, H.Rept.
Scheduled For Consideration By the House of
116-65 (H.R. 1994) states that an IRA’s goal is to
Representatives On May 22, 2019, JCX-23-19.
incentivize individuals to save for expenses in retirement.
Some individuals may save more than necessary to support
Elizabeth A. Myers, Analyst in Income Security
themselves (and a surviving spouse, if applicable) during
retirement, in which case the committee contends that the
IF11328
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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 4 · UPDATED

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