======Stretch IRA======
A Stretch IRA was a popular and powerful estate planning strategy that allowed a non-spouse beneficiary, such as a child or grandchild, to "stretch" out distributions from an inherited [[Individual Retirement Account (IRA)]] over their own lifetime. This clever tactic maximized the account's tax-deferred growth, allowing wealth to [[compounding|compound]] for decades longer than it otherwise would have. However, this financial planning gem was largely eliminated for most beneficiaries by a major piece of U.S. legislation in 2019. Think of it as a legendary investment tool that has now been placed in a museum—valuable to understand, but no longer available for general use. Understanding its rise and fall offers crucial lessons about how changes in tax law can dramatically alter long-term wealth-building strategies.
===== How the Stretch IRA Used to Work (The "Good Old Days") =====
Before 2020, the Stretch IRA was a cornerstone of multi-generational wealth transfer. The magic was in the math of [[Required Minimum Distributions (RMDs)]].
When someone inherited an IRA, they were required to start taking RMDs—small, mandatory annual withdrawals. Under the old rules, the size of that RMD was calculated based on the //beneficiary's// life expectancy. This was a huge advantage for a young beneficiary.
==== A Simple Example ====
Imagine 30-year-old Chloe inherited a $500,000 Traditional IRA from her grandfather. Based on her long life expectancy (perhaps another 55 years), her first RMD would be incredibly small (around $9,400). The remaining $490,600 would stay in the account, continuing to grow tax-deferred. Each year, she would take out a tiny sliver, allowing the vast majority of the nest egg to potentially grow into millions over her lifetime. It was the ultimate long-game strategy for passing on wealth.
===== The Game Changer: The SECURE Act of 2019 =====
The party came to a screeching halt with the passing of the [[Setting Every Community Up for Retirement Enhancement (SECURE) Act]]. To raise tax revenue, the U.S. government effectively dismantled the Stretch IRA for most beneficiaries.
It was replaced by the //10-Year Rule//.
Under this new rule, most non-spouse beneficiaries who inherit an IRA must withdraw the //entire balance// of the account by the end of the 10th year following the original owner's death. There are no required //annual// distributions within this 10-year window, but the account must be empty by the deadline. This forces the beneficiary to realize all the taxable income in a much shorter period, often pushing them into a higher tax bracket and dramatically reducing the potential for long-term, tax-sheltered growth.
===== Who Can Still "Stretch" an IRA? =====
The SECURE Act didn't eliminate the stretch for everyone. A special class of beneficiaries, known as "Eligible Designated Beneficiaries" (EDBs), can still use the old life-expectancy rules.
  * **Surviving Spouses:** A spouse who inherits an IRA has the most flexibility and can always treat it as their own, effectively continuing the stretch.
  * **Minor Children:** A minor child of the original account owner can stretch distributions until they reach the age of majority (typically 18 or 21), but the 10-year rule then kicks in.
  * **Disabled or Chronically Ill Individuals:** Beneficiaries who meet the official definitions of disabled or chronically ill can stretch distributions over their lifetime.
  * **Individuals Not More Than 10 Years Younger:** A beneficiary who is close in age to the decedent (e.g., a sibling or partner) can also use the old stretch rules.
For everyone else—like adult children or grandchildren—the 10-Year Rule applies.
===== What This Means for the Value Investor =====
The demise of the Stretch IRA is a classic example of how "rules risk" can impact even the most carefully laid plans. For the long-term value investor focused on building and preserving multi-generational wealth, this change requires a strategic pivot.
  - **Loss of a Compounding Supercharger:** The ability to let an investment portfolio compound tax-deferred for an extra 40, 50, or 60 years was an incredible gift. That gift is now gone for most.
  - **The Rise of the Roth:** Converting a Traditional IRA to a [[Roth IRA]] during your lifetime is now a more compelling strategy. While an inherited Roth IRA is also subject to the 10-year rule for most beneficiaries, all their withdrawals are **tax-free**. This can save your heirs a massive tax headache.
  - **Exploring Other Tools:** Investors must now look to other vehicles to pass on wealth efficiently. This may include [[life insurance]] policies, which provide a tax-free death benefit, or setting up specialized [[trusts]] (like a [[Conduit Trust]] or [[Accumulation Trust]]) as the IRA beneficiary to control distributions.
Ultimately, the story of the Stretch IRA is a powerful reminder: a successful long-term investment strategy isn't just about picking great assets; it's also about understanding the ever-changing legal and tax landscape you're operating in.