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Financial Planning > Trusts and Estates > Estate Planning

3 Stretch IRA Alternatives After IRS' Secure Act Surprise

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What You Need to Know

  • Recent IRS guidance on the Secure Act wrings out most of the remaining tax deferral benefits associated with the stretch IRA.
  • Even under the new regulations, any Roth IRA beneficiary can wait until year 10 to empty the account.
  • Clients who are taking RMDs may buy life insurance to pre-fund the beneficiary’s tax liability.

The Secure Act fundamentally changed the required minimum distribution rules for inherited IRAs and 401(k)s for tax years beginning in 2020 and thereafter. The law is perhaps best known for gutting the stretch IRA’s tax deferral benefits for most beneficiaries. Now, the IRS has released proposed regulations interpreting those new RMD rules

For most clients, a surprise twist in the regulations further reduces any remaining tax deferral benefits associated with the post-Secure Act stretch IRA — leaving clients to wonder whether any tax-efficient estate planning strategies exist to replace the stretch IRA. Those clients should know that options do exist, but each has its own set of tax rules that must be understood before taking action.

Secure Act Background

Prior to the Secure Act, individuals who inherited an IRA could stretch the tax deferral benefits over their own life expectancy. Today, only eligible designated beneficiaries (EDBs) have that option. EDBs include (1) surviving spouses, (2) disabled or chronically ill beneficiaries, (3) beneficiaries who are not more than 10 years younger than the original owner and (4) the original owner’s minor children (until they reach age 21). 

All other beneficiaries must empty the account within 10 years of the original owner’s death — and pay the associated tax bill during that period. Prior to the regulations, most experts believed that the beneficiary wouldn’t have to take RMDs in years one through nine, leaving the option of deferring taxes until year 10.

A surprise twist in the new regulations changed that for beneficiaries of accounts in “pay status.” If the original owner died after their required beginning date (the date RMDs began), the beneficiary will also be required to take annual RMDs during years one through nine after death. Any remaining amounts must be distributed in year 10.

Increased Importance of Roth Conversions

The new regulations make the Roth conversion strategy even more appealing. The Secure Act also changed the rules for Roth IRA beneficiaries. If you inherit a Roth, you’ll be required to empty the account in 10 years if you don’t qualify as an EDB. 

Roth IRAs, however, aren’t subject to the RMD rules during the original account owner’s life. Individuals who inherit Roth IRAs must take RMDs after the original owner’s death — but that owner will always be deemed to have died before the account went into “pay status.” Essentially, that’s because a Roth can never go into pay status because there is no required beginning date — because the original owner didn’t have to take RMDs during life in the first place.

So, even under the new regulations, any Roth IRA beneficiary can wait until year 10 to empty the account — allowing the funds to grow tax-deferred for another 10 years. Of course, those funds are nontaxable because the original account owner paid taxes on Roth contributions during life.

It’s possible to minimize the original owner’s tax liability by executing Roth conversions after retirement, when the taxpayer may have entered a lower income tax bracket. But clients will want to pay close attention to proposed changes that could limit the availability of Roth conversions for higher-income taxpayers in future years.

Charitable Remainder Trusts

Some taxpayers might wish to consider establishing a charitable remainder trust and naming the CRT as IRA beneficiary. 

The CRT is an irrevocable structure that will provide income to the beneficiary each year — either for life or over a predetermined term of years. The amount of income is based on the value of the assets passed to the CRT (the amount is re-determined each year). At the end of the term, the remaining value is paid to a qualified charity (the CRT must be structured so that the charity receives at least 10% of the donor’s contribution).

The account owner’s estate will receive an estate tax deduction for the charitable gift. The CRT distributions to beneficiaries are taxed as ordinary income. On the other hand, using the CRT to distribute funds over the beneficiary’s lifetime gives the assets more time to grow — meaning that the heir’s overall inheritance may be larger in the end.

The Life Insurance Pre-Funding Option

If the client has already passed their required beginning date and is taking RMDs, the client may be interested in purchasing life insurance to pre-fund the beneficiary’s tax liability. Life insurance proceeds are received income-tax-free by the beneficiary. While they may be included in the owner’s estate, the estate tax exemption in 2022 is $12.06 million per individual — meaning that most won’t have to worry about federal estate taxes (state inheritance and estate taxes may apply).

Those life insurance proceeds can help younger generations fund the tax bill that will apply during the period in which inherited IRA distributions must be taken.


New planning strategies can add complications to any client’s estate plan. But Congress and the IRS have made it clear that the stretch IRA will no longer provide the same (relatively simple) tax deferral option as it did in the past — meaning that now is the time to review the client’s estate plan and develop alternative strategies for the future.


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