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The Stretch IRA Is Dead. Now What? Thumbnail

The Stretch IRA Is Dead. Now What?

Doug Garrison, CFP, MBA - Senior Wealth Advisor



Did the death of the "stretch" IRA hit your estate planning like a sucker punch to the rib cage?

What seemed to have happened suddenly in the final weeks of 2019 shouldn't have been all too surprising. The U.S. House passed the bill overwhelmingly in May, 2019. We issued a "head's up" to our clients about the proposed bill in late August in our then-weekly newsletter. There has been talk for some time in Washington, D.C. about forcing non-spousal IRA beneficiaries (e.g., children or grandchildren) to empty inherited IRAs within as few as five years (not the ten years we just got!). And in 2014, the Supreme Court ruled in Clark v. Rameker that non-spousal inherited IRAs are not asset-protected retirement accounts.

Perhaps it's not surprising then that a Congress looking for tax revenues would take years of tax-deferral away from most non-spousal IRA beneficiaries.

So, it's gone. The stretch IRA no longer exists for non-spousal beneficiaries (not within 10 years of your age) inheriting in 2020 or later. They have to empty the account no later than the end of the tenth year after the death of the IRA owner.

With the legislation so fresh, estate attorneys and wealth managers are exploring alternatives. We're thinking through ways to mitigate what otherwise likely will be higher taxes and an earlier receipt of inherited dollars for your kids or grandkids. In the meantime, we have the following suggestions for IRA owners:

1) Review your IRA beneficiary forms. Do you actually know how your IRA is to be distributed when you and perhaps your spouse die? Are your beneficiaries those who will be impacted by the end of the stretch IRA?

2) Consider whether there is enough money to worry about. With your level of spending and your anticipated remaining lifetime, will a consequential amount of money remain for non-spousal heirs? If not, maybe it's not such a big deal after all.

3) Think through whether your heirs would have issues if they had to deplete your IRA in 10 years. They may be able to handle it all in stride. But it's a worthwhile exercise to imagine how your heirs might deal with the money you leave behind and the taxes they might incur. Will they deplete the account all at once? Think through a few "what-ifs." Where might they go for advice on what to do? Are your concerns about all your heirs, or just one or two of your children? Prescription without diagnosis is malpractice. Before you search for a "solution," try to identify what problem(s) you want to address.

4) Reconsider your savings strategy. The oft-touted advantages of tax-deferral for before-tax 401(k) contributions are less significant once you realize that your heirs may only enjoy tax-deferred earnings on an inherited IRA for 10 years. Your unique situation needs to be evaluated as to what's best for you and your heirs. It's possible that you may want to shift some of your before-tax savings to a taxable investment account that could receive "step-up" tax treatment at your death. Or you may want to do a Roth conversion if your current tax rate is lower now than what you think your heirs will face. You may also want to start taking money from your IRA, even ahead of age 72. You could preserve tax-paid dollars, take advantage of a possible lower tax rate, and reduce the eventual balance of the IRA your non-spousal beneficiaries may inherit.

We recommend you think through the issues you're concerned about. Then schedule time with your Investec Wealth Advisor to discuss your specific situation and an appropriate approach for you and your heirs.

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Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.