Commentators appear to be almost uniform in proclaiming the demise of so-called stretch IRA and other defined contributions plan benefits (including 401Ks) after the Further Consolidated Appropriations Act of 2020 (FCAA). Whereas prior to 2020 designated beneficiaries could defer receipt of IRA and other defined contribution plan benefits over their lifetimes, the new rule places a ceiling of 10 years on this deferral.

For example, with certain exceptions including a surviving spouse, a designated beneficiary having a 30-year life expectancy, who previously could have deferred receipt of the IRA or plan benefits over 30 years, must now fully withdraw the benefits within 10 years of the plan participant’s or IRA owner’s death. Note that under the new law there is no requirement that the IRA, etc., funds be withdrawn under any set schedule during the 10 years, as long as they are all withdrawn within 10 years. [See new IRC Section 401(a)(9)(H)(i)].

Nature Of The Problem

The two-fold concern created by the new tax law is that not only must all of the tax on the IRA, etc., be paid much earlier than in the past, but the tax rate on the receipts will likely be much higher than in the past, due to the bunching of income during a period when the recipients are likely to be in their peak earning years.

Take, for example, this typical fact pattern involving the new tax law versus the old:

• Assume a $1,000,000 IRA at the time of the account owner’s death.

• Assume a 5% growth/income rate.

• Assume a 60-year-old designated beneficiary, who lives the expected 25 more years.

• Assume a 40% combined federal and state income tax rate on a lump sum IRA distribution in year 10 after the owner’s death, under new law.

• Assume a 35% combined income tax rate if the designated beneficiary elects to take equal IRAs distributions over years 1 through 10 after the account owner’s death.

• Assume a 30% combined income tax rate on annual IRA distributions, under the old law, I.e., because the designated beneficiary will typically not always be in his or her peak earning years, and because the benefits are paid over 25 years.

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