Extended IRA

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 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generally after age 59-1/2, the person who opened and funded the account must pay ordinary income taxes on any money withdrawn from the account.If the person who owns the account dies, taxes are still owed on the withdrawal of these assets even when the account is inherited by the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 beneficiary subsequently dies, their designated beneficiary is the second-generation beneficiary.

Required minimum distributions for traditional IRAs and 401(k)s were suspended in 2020 due to the March 2020 passage of the CARES Act, a $2 trillion stimulus enacted amid the economic fallout from the COVID-19 pandemic.

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 72. 

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 life expectancy or the life expectancy of the deceased; if they were over age 72, they must begin taking RMDs within a year of inheriting the IRA. Another option was to fully withdraw from the account 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 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 for 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 beneficiaries and those in a few other special groups were excepted.

IRAs inherited before Dec. 31, 2019, can maintain their extended status.