By H. Joseph Price Jr. 

September 27, 2019

What is the meaning of that cumbersome title? I’ll get to that in a minute. But first, let’s talk about what a shame it would be if the “Stretch IRA” is really dead, especially since it was (likely) going to provide a very significant contribution to your children’s financial lives. Now it looks like it will be snatched away from them before it ever had a chance to be useful.

How to create a Stretch IRA. So that you understand the mechanics of the Stretch IRA and why it is so valuable as a planning tool, let’s start by defining the term “Stretch IRA.” The Stretch IRA is not a special kind of IRA. Rather it is a beneficiary designation or a combination of beneficiary designations made by a husband and wife for an IRA, a 401(k), or any kind of qualified retirement plan. So if you name your children, your grandchildren or a trust for their benefit (we will refer to any of these as your “Descendants” in this article), you have created the potential* for a Stretch IRA. We will call this form of the Stretch IRA the “Direct Stretch.” You can also create the potential* for a Stretch IRA by naming your spouse as your beneficiary so long as your spouse rolls over your IRA after your death and names your Descendants as his or her beneficiary. This latter way of creating a Stretch IRA which we will call a “Spousal Rollover Stretch IRA” is the way that the majority of Stretch IRAs are created.

Caution: By the way, before you re-do your IRA beneficiary designations based on the last paragraph, wait until the next issue when we talk about other things you need to take into account in creating your beneficiary designations.

What benefits does the Stretch IRA provide? There are two primary benefits – a tax benefit and a lifestyle benefit for your Descendants. The tax benefit is “deferral;” that is, greater income tax deferral than would occur if the entire IRA was distributed to your Descendants in a lump sum or in a few installments after your death or the death of the second spouse. The deferral occurs because the investments held inside of the IRA are tax-exempt until they are distributed out of the IRA. The Stretch IRA “stretches” the tax-exempt period over the maximum length of time allowed by the IRS.

The “lifestyle” benefit of the Stretch IRA. The other reason to mourn the passing of the Stretch IRA is the lifestyle benefit. That is, the Stretch IRA’s built-in incentives encourage sensible financial planning by your Descendants. The minimum distribution that a Descendant may take after your (or the second spouse’s) death starts relatively small and increases every year over the distribution period. So the subliminal message that the Stretch IRA sends to your Descendant is “these distributions won’t be large enough for you to live on initially, so you are going to have to keep on working until retirement age. However, they will provide a nice, non-governmental-based fund for you to retire on later.” I will provide examples of the increasing distributions in a later installment.

Examples of the Stretch IRA’s deferral periods. To illustrate how long a Stretch IRA may last, let’s assume that your Descendant’s age at the time of your (or the second spouse’s) death is likely to be in the range of 45 to 75 years. The 45 year old may stretch his or her IRA distributions by 38.8 years. The 75 year old may stretch his or her distributions over 13.4 years.

What is endangering the Stretch IRA? In 3 words – the SECURE Act. SECURE is the acronym for “Setting Every Community Up for Retirement Enhancement.” By any measure, that is one of the lamest tax act names ever devised. The SECURE Act passed the House by 417-3 in May, and the sentiment at the time was that the vote was so overwhelmingly bipartisan that the Act would pass the Senate in nearly identical form after minimal deliberation.

What does the House version of the SECURE Act do? It limits to 10 years the period over which distributions may be made from a Direct Stretch IRA or a Spousal Rollover Stretch IRA to a Descendant. So that 45 year old daughter who could stretch her IRA Distributions over 38.8 years will now have to take them over no more than 10 years. The tax effect will be a lot less deferral by the Descendants, which is the reason that the House proposed the SECURE Act in the first place. The lifestyle effect will be a much smaller incentive to encourage your Descendants to engage in sensible financial planning with their distributions. The 45 year old daughter who would be able to stretch her distributions to nearly age 84 when she would have been well into retirement will receive her final distribution in her mid-50s under the House version.

What has breathed some life into the Stretch IRA? Recall that 2 paragraphs ago, I said that the House passed the SECURE Act by 417-3 and it was thought that the Senate would follow suit in short order. That hasn’t happened, and the chatter coming out of the Committee rooms is that the Senate is insisting upon some revisions to the Act including exemptions of a certain dollar amount or exemptions or partial exemptions for blood relatives. So presumably, some specific amount could be distributed over a ‘Stretch” period and the excess would have to be distributed on an accelerated timetable if the Senate proposal survives the Committee process.

Next Issue. In the next installment, I will talk about issues that arise when you name (1) a trust for your spouse as beneficiary or (2) your spouse as beneficiary and assume that he or she will name your descendants on his or her beneficiary designation if he or she survives you.

I will also talk about why I put an asterisk next to the word “potential” when discussing how to create a Stretch IRA.

For more information, contact H. Joseph Price Jr. at or (816) 931-2700.