For years, Stretch IRAs have been used as estate planning tools to help pass on tax-deferred wealth even longer. By using a Stretch IRA, the IRA owner designates a younger-generation member of the family as the beneficiary of the IRA. Under current law, the beneficiary can elect to receive the RMD (required minimum distributions) based on his or her longer life expectancy. This method allows younger beneficiaries to potentially enjoy decades of tax-deferred (or in the case of Roth IRAs, tax-free) withdrawals.
Recently, however, the Senate has been discussing an idea that would eliminate the Stretch IRA provisions. Essentially, the proposed rule would make individual beneficiaries other than a spouse receive and pay taxes on IRA distributions within five years of the IRA owner’s passing. Despite the changes, spouses of heirs would continue to have flexibility under these changes, such as the ability to roll the account into their own name as well as the ability to postpone any withdrawals from a pre-tax account until they themselves turn 70 ½.1
Why Could the Stretch IRA End?
Support for this potential change to Stretch IRAs is growing as lawmakers look for new sources of tax revenue. According to Congress’ Joint Committee on Taxation estimates, this change to Stretch IRAs would raise $4.6 billion over 10 years.
The Senate isn’t the only one suggesting changes to Stretch IRAs. In a letter to the Senate and House tax writing committees, the American Bar Association’s Tax Section suggested overhauling rules governing RMDs from retirement accounts. They explained that RMD rules were originally intended “to prevent taxpayers whose retirement savings receive tax-advantaged treatment from using those savings for estate planning vehicles to provide wealth for subsequent generations. The RMD rules promote the use of these tax-favored benefits for retirement and limit the opportunity for excess accumulations.” Essentially, retirement funds were originally designed to be used during retirement and not be passed from generation to generation.1
What should you do if you were planning on using the Stretch IRA?Review and Possibly Change your Beneficiary Designations
Often investors name their spouse primary beneficiary and then their kids or grandkids as “contingent” or “alternate” beneficiaries. The advantage of this method is that upon your passing, your spouse can decide whether to take the IRA themselves or “disclaim” it, which allows it to go directly to your kids or grandkids. Your spouse can make the decision based on their financial situation at the time, leaving more options for the future.2
Think Carefully About Roth Conversions
Be cautious about doing a Roth conversion based solely on calculations assuming that the taxes paid now will pay off over decades for your kids or grandkids. Ask your financial advisor to run projections based on today’s current laws and also the proposed changes, which could take effect in the future.
Your financial advisor can help you to decide the best strategy for your retirement investments based on your personal financial and family situation and also the overall economic forecast.
For more information about Stretch IRAs, or to learn about any other wealth management strategies, contact one of our Wealth Managers at (800) 541-7774.
Sources:
1 Cannon Financial Insights
2 Forbes
