What Was an Extended IRA?

An Extended IRA allowed a second-generation beneficiary of an individual retirement account (IRA) to take distributions of assets at a rate based on the life expectancy of the first-generation beneficiary, thereby extending the IRA. Also known as a stretch IRA, it was pretty much ended by the 澳洲幸运5官方开奖结果体彩网:SECURE Act, which applied to IRAs inherited after Dec. 31, 2019.

Understanding an Extended IRA

The extended IRA wasn't exactly a specific type of account. Rather, it was merely a provision that allows a second-generation beneficiary, and subsequent beneficiaries, to continue taking distributions based on the life expectancy of the first-generation beneficiary.  

In most IRAs (except the Roth IRA), pre-tax dollars are used to fund the account, up to certain limits. During the distribution phase, generally after age 59-1/2, the person who opened and funded the account must pay ordinary 澳洲幸运5官方开奖结果体彩网:income taxes on any money withdrawn from the account.If the person who ow🦹ns the account dies, taxes are still owed o🍨n the withdrawal of these assets even when the account is inherited by the first-generation beneficiary.

An individual who inherits IRA assets from the original IRA owner is referred to as the first-generation beneficiary. This individual was able to distribute the assets over their life expectancy or the remaining life expectancy of the original IRA owner. If the first-generation 澳洲幸运5官方开奖结果体彩网:beneficiary subsequently dies, their designated beneficiary 𓆉is the second-generation beneficiary.

However, this first-generation beneficiary could spread out the taxes owed by taking distributions based on their life expectancy. Keep in mind that spouse and non-spouse beneficiaries are treated differently when it comes to IRAs. A spouse who inherits an IRA can either roll over the funds to their own IRA or wait to take required minimum distributions (RMDs) until the late spouse would have been age 73. 

Non-spouse beneficiaries had three choices, including taking an immediate payout of the full amount of the account and paying the IRS taxes. They could also begin taking RMDs based on their 澳洲幸运5官方开奖结果体彩网:life expectancy or the life expectancy of the deceased; if they were age 73 or older, tജhey must begin taking RMDs within a year of inheriting the IRA. Another option was to fully withdraw from the aꦓccount over five years. 

The End of the Extended IRA

This type of IRA was used by those who no longer needed—or wanted—to take all of their IRA assets at the same time. Extended IRAs had extensive tax benefits because second-generation beneficiaries were allowed to continue 澳洲幸运5官方开奖结果体彩网:distributions over the life expectancy used by the first-generation beneficiary, thereby spreading the tax burden from distributions over a long period. They also provided the opportunity to grow the funds significantly ඣfor future generations.

This estate planning strategy was effectively ended by the SECURE Act of 2019. The act mandated that inherited IRAs be emptied within 10 years after the death of the original account holder, regardless of the beneficiary's age. The law applied to non-spousal beneficiaries; spousal 💙benef❀iciaries and those in a few other special groups were excepted.

IRAs inherited b🌜efore Dec. 31, 2019, can maintain their extended status.

The Bottom Line

An extended or stretch IRA was a tax-deference strategy that allowed a beneficiary to inherit the favorable tax treatment received by the original IRA owner. The strategy gave beneficiaries more flexibility in their tax and estate planning as it allowed for tax-free growth over an IRA's lifetime. Due to changes put in place by the SECURE Act, a stretch IRA is now no longer permitted after an original account holder dies, effective December 31, 2019.