How the SECURE Act Impacts Naming a Retirement Plan Beneficiary | Lord Abbett
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Retirement Perspectives

The new law marks the end of the “Stretch IRA” strategy for almost all beneficiaries, and creates new estate planning opportunities. 

Read time: 6 minutes

The Setting Every Community Up for Retirement Enhancement (SECURE) Act contains the most comprehensive retirement account legislation in more than a decade. By now, most retirement account holders are aware of the favorable provisions, including increased RMD age, tax-favored distributions to cover expenses for a birth of a  baby or qualified adoption, expanded traditional IRA eligibility, etc. The changes in the Act are mostly positive, with one glaring exception – elimination of the “Stretch IRA” for almost all designated beneficiaries.

The SECURE Act has completely altered the estate, beneficiary, and legacy planning landscape for those individuals looking to leave their retirement benefits to their heirs. Except for a few categories of beneficiaries, the post death life expectancy (“stretch”) payout has been supplanted by a less friendly 10-year post-death payout rule.. Therefore, beneficiaries, instead of having the option of taking distributions based on their life expectancy, for most, a 10-year post-death payout rule will apply. The new post-death payout rules went into effect on January 1, 2020. Thus, most beneficiaries that inherit a retirement account on or after January 1 2020 will follow the new 10-year payout rule.

For decades, the individual retirement account (IRA) has been a key element for retirement planning, and for those who did not need the income, they could take advantage of the “Stretch IRA” strategy that allowed designated non-spouse beneficiaries to take required minimum distributions (RMDs) over their life expectancy, as determined by the IRS Single Life Expectancy Table and thereby leave a legacy for their heirs. For example, an 18-year-old inherited an IRA from her grandfather; she could, under pre-SECURE Act rules, take withdrawals (i.e. stretch payouts) over 65 years while the remaining account value continues to grow tax-deferred.  In the case of an inherited Roth, all income (over the same 65-year period) would be tax-free to the beneficiary!

The SECURE Act’s changes to the post-death rules for retirement account owners (IRA, 401(k), 403(b), etc.) will impact many beneficiaries who will have to distribute funds from their inherited account(s) within 10 years after the year of the account owner’s death. This is much quicker than what was previously allowed under the Stretch IRA option, which offered beneficiaries to spread distributions out based on their own life expectancy.

When it comes to leaving a legacy, one size does not fit all. This is especially true when it comes to bequeathing a retirement account to heirs. Different beneficiaries have different situations and needs, making flexibility a desired feature. A Stretch IRA potentially provided flexibility while helping beneficiaries avoiding large tax distributions.

For the last few decades, the Stretch IRA strategy served as the estate plan tool for countless retirees that owned tax-deferred retirement accounts. Implementation was straightforward; simply name an individual (spouse, child, grandchild, friend, or trust, etc.) as your IRA or 401(k) beneficiary. Upon the passing of the IRA account owner, the beneficiary could leave the account in its tax-deferred status for years, taking income steadily; annual minimum distributions were usually determined based on the beneficiary’s life expectancy.

Example (pre-SECURE Act)

  • Marie, 75, dies on December 29, 2019
  • Margaret (daughter), age 50, is the sole beneficiary of Marie’s IRA.
  • Per IRS tables, the life expectancy of a 50-year-old is 34.2 years
  • Margaret could “stretch” payouts from her inherited IRA for more than 34 years

The SECURE Act has eliminated this option for almost all beneficiaries. What has changed? The post-death beneficiary payout schedule. Let’s say Marie passed a few days later, on January 1, 2020.  Margaret has lost the ability to “stretch,” payouts from 34.2 years to a maximum payout period of 10 years under the SECURE Act rules.

However, the longstanding, pre-SECURE Act rules for Designated Beneficiaries (i.e. individuals with a life expectancy) still apply. The Act created a new category or class of beneficiaries—“Eligible Designated Beneficiaries” (EDBs)—who can still “stretch” post death payments. But any Non-Eligible Designated Beneficiary (i.e. any beneficiary that is not an Eligible Designated Beneficiary) is forced to use the new 10-year payout rule. 

Eligible Designated Beneficiaries Under the SECURE Act

Eligible Designated Beneficiaries are exempt from the 10-year post-death payout rule and can still stretch RMDs over their life expectancy. EDBs include: (1) surviving spouses, (2) Certain minor children and only until they reach age of majority, (3) disabled individuals, (4) chronically ill, and (5) beneficiaries not more than 10 years younger than decedent.

  1. Spousal Beneficiaries. Eligible to make a spousal rollover and receive minimum distributions over their life expectancy. Surviving spouses are the only category of EDB who have certain options available only to them, including:
  •   Tax-free Rollover of an IRA into their own IRA.
  •   Choose an inherited IRA for a certain period, generally until (surviving spouse) attains age 59½ and then thereafter do a spousal rollover (into their own IRA)
  1. Disabled Beneficiaries. Can stretch distributions of an inherited IRA by receiving minimum distributions over their life expectancy. A disabled beneficiary is defined in Internal Revenue Code (IRC) §72(m)(7), an individual “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”
  2. Chronically Ill Beneficiaries. Can stretch distributions of an inherited IRA by receiving minimum distributions over their life expectancy. A chronically ill beneficiary is defined by IRC §7702B(c)(2) an individual that (i) is unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity; or (ii) requires substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.
  3. Individuals Not More Than 10 Years Younger Than Account Owner. Can stretch distributions of an inherited IRA by receiving minimum distributions over their life expectancy.
  4. Minors. Can stretch distributions of an inherited IRA by receiving minimum distributions over their life expectancy until the minor reaches the age of majority (generally age 18). However, upon reaching the age of majority (18), the person will be subject to the 10-year rule. Notably, this rule, applies only to the account owner’s children.  For example, minor grandchildren would not qualify as an EDB and therefore will be required to receive the entire inherited account within 10 years. Unless a grandchild is chronically ill or disabled, the 10-year payout rule will apply.

A beneficiary, per the SECURE Act, is determined to be an Eligible Designated Beneficiary as of the date of death of the employee.

How does the new 10-year payout rule work?

For deaths that take place on or after January 1, 2020, Eligible Designated Beneficiaries are the only beneficiary class that can still stretch inherited IRA RMDS over their life expectancy.  All remaining (i.e. non-eligible designated beneficiaries) are now forced to completely liquidate the inherited IRA by the end of the 10th year after the year of death of the original IRA owner. Importantly, there are no annual RMDs. Instead, the entire account must be liquidated by the tenth year after the year of death. Therefore, the beneficiary could leave the assets in the inherited IRA (traditional or Roth) for up to 10 years or take income as needed over a decade. However, in the tenth year following the year of death, any funds remaining in the inherited IRA would then become the RMD. If the funds are not taken on time, a hefty 50% penalty tax would be owed (by the beneficiary).


Roth IRA beneficiaries are also subject to the 10-year rule under the SECURE Act.


Example: A non-eligible designated beneficiary inherits an IRA in 2020; the account must be emptied by December 31, 2030. Importantly, should a non-eligible designated beneficiary die during their 10-year payout schedule, their beneficiary (known as a successor beneficiary) can only extend payments for the duration of the original beneficiary’s 10-year timeframe.

While the 10-year schedule may not be ideal, it does offer flexibility. For example, during the 10-year period, the beneficiary may choose to take no distributions during a particular year, and then take large distributions in others, or simply take distributions ratably across the 10 years.  Any distribution method is permitted as long as the account balance is emptied by the end of the 10 years. This income flexibility offers tremendous tax planning opportunity. Distributions can be structured in a way to minimize the tax hit. For example, the beneficiary conceivably could take larger distributions in years the person is in a lower tax bracket, and take smaller distributions (or nothing) in the years that the beneficiary is in a higher tax bracket.

The 10-year payout also provides an incredible opportunity for beneficiaries of inherited Roth IRAs. Distributions from inherited Roth IRAs are almost always tax-free. A beneficiary could take no distribution until the tenth year, leaving all the earnings in the inherited Roth IRA to grow tax-free. The account could then be emptied in the tenth year after years of tax-free growth without tax liability! While the Stretch IRA will be missed by many, the SECURE Act’s 10-year rule allows for new planning opportunities for those willing to think outside the box.

Practice Tip! A surviving spouse is the only beneficiary that can convert an inherited IRA to a Roth IRA. Therefore, for all non-spouses’ beneficiaries, the account owner (while alive) would need to make the conversion and thus be subject to the tax liability.

One notable rule that was not changed by the SECURE Act is the payout schedule that applies when the estate, charity, or non-qualifying trusts is the named beneficiary of a retirement account. The rule remains that the RMD depends on whether the retirement account owner dies before or after their “required beginning date” (RBD). The RBD is April 1 after the year in which the owner attains age 72 (SECURE Act increased the RMD age to 72 from 70½). If the owner dies before their RBD, the entire account must be paid out by December 31 of the fifth year following death. Conversely if the account owner dies on or after their RBD, beneficiary RMDs must be made over the remaining life expectancy of the deceased owner’s— sometimes referred to as the “ghost” rule.

Advisors, if you have additional questions, please contact your Lord Abbett representative at 888-522-2388.


To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.


Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 70½. Roth IRAs do not require withdrawals until after the death of the owner.



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