Stretching IRA Beneficiary Payments

When inheritance comes in the form of an IRA, beneficiaries have a unique option available to them that not only spreads out the tax liability of their inheritance but allows the inherited IRA assets to continue growing. By taking only the minimum “life expectancy” payment from their inherited IRA each year, beneficiaries can “stretch” the growth potential of their inheritance over their lifetime. Any growth in the IRA will be tax deferred, and in the case of a Roth IRA, tax free. Beneficiaries always have the option to take out more than the minimum payment each year, but under the stretch IRA strategy, most beneficiaries elect to take only the minimum amount. This strategy also maximizes the amount of IRA assets available to future generations.

Life Expectancy Payment Basics

The tax laws generally require beneficiaries to withdraw inherited IRA assets within a certain number of years to get the tax-deferred savings into the tax stream. One of the payment options is to take minimum annual payments over the course of the beneficiary’s life expectancy. (If the IRA owner died after reaching age 70½ and is younger than the beneficiary, the remaining life expectancy of the IRA owner must be used to calculate the annual payments).

Each year’s payment amount is determined by dividing the prior year’s IRA balance as of December 31 by a life expectancy factor. For example, the single life expectancy factor for a 45-year old is 38.8. Tables containing the applicable life expectancy factors can be found in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Spouse vs. Nonspouse Stretch Strategies

Spouse beneficiaries have the option of waiting to begin taking life expectancy payments until the IRA owner would have been age 70½ if death occurred prior to that age. A spouse beneficiary may also choose to roll the inherited IRA assets to their own IRA. If the surviving spouse is younger than the IRA owner, rolling the assets to the spouse’s own IRA will delay the start of required payments even longer, until the younger spouse reaches age 70½. The RMD payments from the IRA will be based on the life expectancy of the surviving spouse and a minimum payment will be required each year beginning with their 70½ year. The surviving spouse may also name a beneficiary for the IRA, such as a child. Upon the spouse beneficiary’s death, their beneficiary may take life expectancy payments of the inherited IRA assets based on the beneficiary’s own life expectancy.

Nonspouse beneficiaries who use the life expectancy payment option must begin payments by December 31 of the year following the year of the IRA owner’s death. If they die before depleting the assets, any subsequent beneficiary will be required to continue taking payments at the same rate as the nonspouse beneficiary.

Stretch IRA Concept vs. the Five-Year Rule

The potential for growing inherited assets can be illustrated by comparing the distribution amounts a beneficiary would receive if they choose to take payments under the five-year rule vs. life expectancy payments. The five-year rule is a distribution option available to beneficiaries when the IRA owner dies before reaching their required beginning date for taking age 70½ RMDs. Under this option, the beneficiary must withdraw all assets from the IRA by the end of the fifth year following the year of death. Distributions may occur at any time during the five years, including a single lump sum payment on December 31 of the fifth year. (See our blog, “Don’t Lose Your IRA Inheritance to Taxes or Penalties” for more information about beneficiary distribution options and timing.)


Assume an IRA owner dies in 2019 at age 70 with an IRA balance of $300,000. The IRA owner’s son, who is age 35, is the beneficiary of the IRA. The IRA assets earn an annual rate of return of 4%. Here are the projected results of the beneficiary’s distribution options of taking distributions under the five-year rule vs. taking life expectancy payments.

To keep the illustration simple, we have not factored in the tax impact of the distributions and are reflecting gross distribution amounts.

Payment Option Payment Timing Total Amount Distributed1
5-year rule Lump sum distribution at end of 5 years $364,995
Life expectancy payments Minimum annual payments for 47 years $911,742

Stretch Concept May Be Eliminated Soon

Because this strategy can result in a lengthy deferral of taxes, Congress has proposed eliminating stretch IRAs to offset the costs of certain retirement plan reforms. If pending legislation passes Congress this summer as proposed, the life expectancy option would be reduced to a 10-year maximum payout term for non-spouse beneficiaries (who are not disabled, chronically ill, or more than 10 years younger than the IRA owner).2 This change is proposed to apply to beneficiaries of IRA owners who die after December 31, 2019. If you have current IRA beneficiary clients who haven’t yet elected a payment option, you may want to consider introducing them to this concept while it’s still available. You’ll also want to follow the status of this pending legislation, Setting Every Community Up for Retirement Enhancement Act of 2019, because it contains enhancements for retirement savers in addition to the changes to the beneficiary rules.2

IRA beneficiaries should consult with their tax advisors to ensure any stretch IRA payment stream meets the requirements of the tax laws.

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1, Retirement Savings & Planning calculators,

2 Setting Every Community Up for Retirement Enhancement Act of 2019 (H.R. 1994)

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