You’ve probably heard of 401(k) and Roth IRA accounts, but what is a Stretch IRA? The Stretch IRA definition was “an estate planning strategy that applied to an individual retirement account (IRA) inherited by a non-spouse beneficiary.” This allowed for certain tax advantages to continue for generations after generations. However, new legislation has made the Stretch IRA a thing of the past. Learn all about the rise and fall of the Stretch IRA with IntentGen.
What Did the Stretch IRA Do?
Unlike a traditional Roth IRA, the Stretch IRA was not an official account. Instead, it was a financial planning strategy utilized by savvy savers. It allowed people to “stretch” the life and tax advantages of a single account. In fact, some beneficiaries were able to stretch tax-deferred benefits for decades. Here’s how it worked:
- After the death of the original holder, the Stretch IRA account would be inherited by a younger, non-spouse beneficiary.
- The beneficiary would take distributions from the IRA at a rate based on their life expectancy, rather than the rate of the original holder.
- More funds would remain in the account and the younger beneficiary would only pay taxes on the smaller distributions, rather than the larger distributions of the original holder.
- This adds up to a larger fund that continues to grow, “stretching” the value over time.
What Happened to Stretch IRA Accounts?
In 2019, the SECURE Act was passed by the U.S. Senate. This put a new deadline on Stretch IRAs, forcing beneficiaries to withdraw all funds within 10 years from the death of the original account owner. This law went into effect for all IRA accounts inherited after December 31st, 2019. However, IRAs inherited before Dec. 31, 2019, can maintain their stretch status. Be sure to check with a qualified financial or tax advisor to learn more about your options if this applies to you.
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