Updated February 6, 2020
Inherited or “Stretch” Individual Retirement Accounts (IRAs)
and the SECURE Act
Background
owner, with a distribution period of 22 years and a year-end
Traditional and Roth Individual Retirement Accounts
account balance of $100,000, would have an RMD of
(IRAs) provide tax-advantaged ways for individuals to save
$4,545 the following year ($100,000 divided by 22). RMDs
for retirement. Traditional IRA contributions can be tax
are recalculated each year. Note that this example is based
deductible, but withdrawals are included in taxable income.
on IRS tables that were in place prior to the SECURE Act.
Roth IRA contributions are not tax deductible, but
The IRS has proposed updating these tables.
withdrawals are generally tax free.
Traditional IRA distributions are included in taxable
The Setting Every Community up for Retirement
income, except for the portion of any distribution derived
Enhancement Act of 2019 (SECURE Act, enacted as
from a contribution that was previously taxed. An
Division O of the Further Consolidated Appropriations Act
individual who fails to take an RMD generally will incur an
of 2020 [P.L. 116-94; December 20, 2019]) modified
excise tax of 50% of the amount that was required to have
distribution rules for certain designated beneficiaries
been withdrawn.
following the death of an IRA owner. Prior to the SECURE
Act, some beneficiaries continued to receive tax preferences
Roth IRAs, in which contributions are made on an after-tax
by deferring taxation on IRA assets for a number of years
basis, do not require account withdrawals during an
beyond an original owner’s death. This strategy was
owner’s lifetime. Qualified distributions—those that occur
sometimes referred to as a stretch IRA, in which the period
after age 59½ from accounts that are at least five years old
of asset accumulation of a retirement account was
and include earnings on contributions—are not taxable.
“stretched” past the lifetime of the original account owner.
Some stakeholders voiced concerns that inherited IRAs
IRA Inheritance Rules
could be used as a tool to promote intergenerational wealth
After an account owner’s death, IRAs are passed to a
transfers rather than to encourage retirement savings as
person or entity designated as a beneficiary. In the absence
originally intended. The SECURE Act modifies distribution
of a designated beneficiary, the estate generally becomes
rules for certain beneficiaries of account owners who die
the beneficiary. Rules for how to handle an inherited IRA
after December 31, 2019.
differ for (1) a designated spouse beneficiary, (2) a
designated nonspouse beneficiary, (3) an eligible
Required Minimum Distributions
designated beneficiary, and (4) a non-designated or estate
Traditional IRAs are subject to required minimum
beneficiary.
distributions (RMDs), which are minimum amounts that
must be withdrawn from the account annually when the
A Roth IRA’s original owner does not have to take an
account owner reaches a certain age. RMDs are designed to
RMD (and therefore has no required beginning date).
ensure that an individual uses the assets accumulated in a
Following the death of an initial account owner, a
tax-advantaged retirement account for retirement purposes,
beneficiary who inherits a Roth IRA must take an RMD
rather than as an estate planning tool or tax shelter. To
using the same rules that apply to traditional IRAs as if the
further encourage that these accounts be used primarily for
account owner had died before the required beginning date.
retirement, IRA withdrawals before age 59½ are generally
subject to a 10% penalty.
Designated Spouse Beneficiaries
A designated spouse beneficiary is allowed to (1) become
Traditional IRAs require an account holder to take RMDs at
the new account owner; (2) roll over the account to the
the required beginning date, which is April 1 following the
spouse’s own traditional or Roth IRA or qualified employer
calendar year during which an individual attains the age of
plan, such as a 401(k), 403(a), 403(b), or 457(b) plan; or (3)
72 (for individuals who reach the age of 70½ after
be treated as a beneficiary rather than account owner (in
December 31, 2019; the SECURE Act increased the age at
this case, see the rules for eligible designated beneficiaries
which distributions must begin from 70½ to 72). The RMD
below). (A nonspouse beneficiary cannot take ownership of
is calculated by dividing (1) the account balance at the end
an inherited account. Instead, the account becomes an
of the immediately preceding calendar year by (2) the
inherited IRA designated for the nonspouse beneficiary in
distribution period provided in the applicable Internal
the name of the deceased account owner.)
Revenue Service (IRS) Life Expectancy Table. The IRS
publishes three RMD tables that differ based on the account
A spouse who takes ownership of an inherited traditional
owner’s marital status and, in the case of inherited
IRA must determine the RMD using his or her own life
accounts, on the account owner’s relationship with any
expectancy. A spouse who takes ownership of an inherited
beneficiary. For example, a 76-year-old unmarried account
Roth IRA does not have to take an RMD. A spouse who is
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Inherited or “Stretch” Individual Retirement Accounts (IRAs) and the SECURE Act
the sole beneficiary and chooses to be treated as beneficiary
SECURE Act did not change distribution rules for non-
(rather than as owner) may postpone distributions until the
designated beneficiaries.
original owner would have reached the age of 72. This rule
applies to both traditional and Roth IRAs.
Rationale for the Change and Revenue
Estimate
Designated Nonspouse Beneficiaries
In providing a rationale for modifying distribution rules for
Under the SECURE Act, a designated nonspouse
inherited IRAs, H.Rept. 116-65 (H.R. 1994) stated that an
beneficiary of an account owner that dies after December
IRA’s goal is to incentivize individuals to save for expenses
31, 2019, must distribute the entire account balance by the
in retirement. Some individuals may save more than
end of the 10th calendar year following the account owner’s
necessary to support themselves (and a surviving spouse, if
year of death (the 10-year rule), regardless of whether the
applicable) during retirement, in which case the House
original account owner dies before or after the required
Committee on Ways and Means contended that the tax
beginning date. Beneficiaries may choose the frequency and
subsidy should be phased down for certain beneficiaries of
timing of distributions, so long as the account is depleted
inherited IRAs.
within the 10-year period.
The Joint Committee on Taxation estimated that modifying
Eligible Designated Beneficiaries
the distribution rules would increase federal revenue by
The SECURE Act allowed for exceptions to the 10-year
$15.7 billion from FY2020 through FY2029.
rule for an eligible designated beneficiary, including (1) a
surviving spouse, (2) a child of the account owner who has
Some stakeholders supported the changes because they
not reached the age of majority, (3) an individual who is
believe that prior law contributed to wealth inequality.
disabled, (4) a chronically ill individual, and (5) an
Others, however, voiced concerns that amending
individual who is not more than 10 years younger than the
distribution rules was unfair to individuals who
account owner. These eligible designated beneficiaries
intentionally chose to use IRAs as estate planning tools
generally may take distributions over their remaining life
instead of other methods, as well as to their would-be
expectancy rather than adhere to the 10-year rule. A minor
beneficiaries.
child of an account owner who is a beneficiary may
calculate distributions based on his or her remaining life
For Further Information
expectancy until reaching the age of majority (18 in most
See the following for further information on these issues:
states), at which point the remaining account balance must
be distributed within 10 years. Beneficiaries may choose to
Internal Revenue Service, IRS Publication 590-B:
take distributions faster than the life expectancy method
Distributions from Individual Retirement Arrangements
(e.g., in a lump sum distribution or within five years).
(IRAs) (2018), at https://www.irs.gov/pub/irs-pdf/
p590b.pdf.
Non-designated or Estate Beneficiaries
If the account owner dies before the required beginning
Internal Revenue Service, “Updated Life Expectancy
date and does not designate a beneficiary or designates a
and Distribution Period Tables Used for Purposes of
trust as beneficiary, the account balance must be distributed
Determining Minimum Required Distributions,” 84
within five years (the five-year rule). Non-designated and
Federal Register 60812, November 8, 2019.
estate beneficiaries of a Roth IRA must take distributions as
if the account owner died before the required beginning
Joint Committee on Taxation, Estimated Budget Effects
date (i.e., within five years). If the account owner dies after
Of The Revenue Provisions Contained In The House
the required beginning date, the account balance must be
Amendment To The Senate Amendment To H.R. 1865,
distributed at the same rate or faster than the original
The Further Consolidated Appropriations Act, 2020,
account owner was taking distributions (i.e., the distribution
JCX-54R-19.
period is based on the deceased account owner’s life
expectancy as of the year of death; life expectancy is
Elizabeth A. Myers, Analyst in Income Security
reduced by one year for each subsequent RMD). The
IF11328
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Inherited or “Stretch” Individual Retirement Accounts (IRAs) and the SECURE Act
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https://crsreports.congress.gov | IF11328 · VERSION 6 · UPDATED