Who Can Still Do a Stretch IRA after the SECURE Act: Explaining the Exceptions to the Rule

Many beneficiaries who inherit IRAs lost a major tax break recently, but five types of people still qualify for this “stretch IRA” benefit. Are you among them?

A mom and daughter stretch on a football field.
(Image credit: Getty Images)

Much has been written about The Secure Act since it went into effect on Jan. 1, 2020. One popular topic has been the exceptions to one of the act’s primary changes, eliminating the use of so-called stretch IRAs for most non-spouse beneficiaries.

IRA owners are allowed to name anyone they desire as recipients of separate shares of their IRAs. Before Jan. 1, each of these beneficiaries was required to take a minimum distribution each year that was designed to exhaust the IRA share over his or her life expectancy.

Typically, such beneficiaries would exhaust that IRA much sooner, but as an income tax strategy, it did allow for lengthy income tax deferral if the beneficiary were so inclined. Now, the Secure Act eliminates that option, except for persons designated as “Eligible Designated Beneficiaries.” Instead, it requires complete distribution of the inherited IRA within 10 years, which means fewer years for tax-deferred growth and likely higher tax bills.

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The exceptions to the “10-year rule” are complicated, and qualifying for them may be difficult for many beneficiaries.

If a trust is the designated beneficiary of an IRA at the plan participant’s death, it must still meet the requirements as a designated beneficiary under the old rules, and it may divide the IRA among separate share trusts, but the “life expectancy rule” no longer applies absent the same exceptions. Now, the 10-year rule applies and requires that all IRA assets be distributed from the IRA/plan to the trust(s) no later than Dec. 31 of the 10th calendar year following the plan participant’s death.

The tax ramifications of waiting until the 10th year to withdraw substantial funds from the IRA may be severe. All distributions from a traditional IRA, unlike a Roth IRA, are taxed as ordinary income. Therefore, beneficiaries should be encouraged to make withdrawals of some amount every year, although they may benefit from measuring those annual withdrawals against their other income to better manage the tax liability.

Who are eligible designated beneficiaries?

There are five categories of eligible designated beneficiaries who are exempt from the 10-year rule:

1. A surviving spouse

A surviving spouse may roll over the IRA/plan to his or her own IRA or treat the IRA/plan as an inherited IRA. Doing either option will mean that withdrawals are calculated over the spouse’s life expectancy, with annual recalculation, as under past law. This stretches out the IRA distributions and the benefits of tax-deferred growth for potentially decades.

2. A person who is not more than 10 years younger than the plan participant

This person also must withdraw the required minimum distributions based on his or her life expectancy. This exception was a congressional concession made to differentiate beneficiaries of the same generation as the plan participant from his or her descendants. Notably, the beneficiary need not be related in any way to the plan participant to qualify.

3. A minor child of the plan participant

If a minor child is the sole designated beneficiary of a separate share of the IRA/plan, in a trust or outright, then the required annual withdrawal is based on the child’s life expectancy until the child reaches the age of majority, which varies from state to state but is usually 18 or 21, or, if still in school, up to age 26. The last such distribution must be withdrawn the year of such age attainment. Then, the 10-year rule applies, and the entire remaining IRA must be withdrawn by the end of the next 10 years.

4. A disabled person

According to IRS Tax Code Section 72(m)(7), a person may qualify as disabled under the SECURE Act if he or she is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or to be of long, continued and indefinite duration. This beneficiary need not be related to the plan participant to qualify.

5. A chronically ill person

This beneficiary also need not be related to the plan participant to qualify. Under Tax Code Section 7702B(c)(2) and under the SECURE Act, the term “chronically ill” is defined as being unable to perform (without substantial assistance) at least two activities of daily living (ADL) for at least 90 days or require substantial supervision due to a severe cognitive impairment. The basic ADL include the following categories:

● Ambulating: The extent of an individual’s ability to move from one position to another and walk independently.

● Feeding: The ability of a person to feed oneself.

● Dressing: The ability to select appropriate clothes and to put the clothes on.

● Personal hygiene: The ability to bathe and groom oneself and to maintain dental hygiene, nail and hair care.

● Continence: The ability to control bladder and bowel function.

● Toileting: The ability to get to and from the toilet, using it appropriately, and clean oneself.

A note for those qualifying based on disability or illness: Proof is required. On the date of death of the plan participant, a chronically ill or disabled beneficiary must provide certification by a licensed health care provider that he or she meets the SECURE Act requirements for one of these categories to avoid the 10-year rule. It is unclear whether a current government determination of disability will be sufficient, or what qualifies as a medical certification, since no regulations have yet been issued.

Have a special needs trust? Watch out

If a disabled beneficiary, chronically ill beneficiary or a beneficiary who is less than 10 years younger than the plan participant is the sole designated beneficiary of a separate share of the IRA/plan — in a conduit trust or outright — then the required annual withdrawal is based on the beneficiary’s life expectancy. A conduit trust requires that the trustee distribute all trust income annually, including IRA required minimum distributions. There is a clear advantage for disabled and chronically ill inherited IRA beneficiaries in being able to defer an IRA’s income tax liability by stretching out the minimum required distributions over more than 10 years and also enjoy greater protections afforded IRAs from creditors and bankruptcy.

However, this same exception to the 10-year-rule does not apply to an accumulation trust. An accumulation trust allows the trustee to make distributions of income as it sees fit usually under an ascertainable standard, such as for health, education, maintenance and support. Before the SECURE Act, a special needs trust — which allows a disabled trust beneficiary to qualify for means-tested government benefits, like Medicaid and Supplemental Security Income (SSI) — would be a suitable designated beneficiary of a separate share inherited IRA. The trust could accumulate the annual required minimum distributions and limit the use of those funds so the beneficiary would not lose valuable government assistance.

Under the SECURE Act, a special needs trust must be set up as an accumulation trust to avoid the retirement plan benefits being paid directly to the beneficiary and disqualifying him or her for public assistance. A qualified special needs trust beneficiary must meet the SECURE Act’s statutory test for a disabled or chronically ill person and be the sole beneficiary under the trust to meet the requirements for long-term deferral and avoid the 10-year payout rule. However, it must be noted that although the SECURE Act’s definition for a disabled and chronically ill person is similar to the requirements for public assistance due to disability, they are not the same. A person need not be permanently disabled to qualify for public assistance, only totally disabled, and therefore is subject to periodic review of that disability and may be deemed to have recovered.

Special needs trustees would be advised to obtain independent documentation of disability under the SECURE Act if the beneficiary’s condition is not permanent. It is unclear what effect recovery would cause to the use of long-term deferral for a person who is later determined to have recovered. There is a significant benefit to deferral, since the tax brackets for trusts are severely compressed compared to tax brackets for individuals, with the highest federal marginal income tax rate of 37% applying to all income over $12,950 in 2020.

The bottom line

Whatever your situation, whether you have a trust or other plans involving an inherited IRA or other qualified retirement plan, everyone needs to do new planning in light of the SECURE Act.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Timothy Barrett, Trust Counsel
Senior Vice President, Argent Trust Company

Timothy Barrett is a Senior Vice President and Trust Counsel with Argent Trust Company. Timothy is a graduate of the Louis D. Brandeis School of Law, past Officer of the Metro Louisville Estate Planning Council and the Estate Planning Council of Southern Indiana, Member of the Louisville, Kentucky, and Indiana Bar Associations, and the University of Kentucky Estate Planning Institute Committee.