With so many changes constantly taking place in the financial industry, at CJM we are dedicated to always staying ahead of anything that might impact our family of clients. One of the most recent changes is the end of the Stretch IRA.
Thanks to the recently passed SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019), the Stretch IRA will be eliminated to help pay for new retirement revenue provisions.
According to Investment News, the Stretch IRA is simply defined as “an individual retirement account that’s inherited by a non-spouse beneficiary.” As an estate planning strategy, the Stretch IRA allows tax-deferred growth of an Individual Retirement Account (IRA) to be stretched out over the remaining life expectancy of non-spousal heirs. Depending on the age of the heir(s), this can allow the IRA to grow significantly, without having to take Required Minimum Distributions (RMDs) in the same way as a traditional IRA.
It’s likely that smaller IRAs will not be impacted. We’re living longer, healthier lives, so the owner of a small Stretch IRA will probably consume much of the money during their RMDs. Any smaller accounts that end up being passed on to beneficiaries will likely be used up within the new, 10-year payout period that is replacing the lifetime rule of the Stretch IRA.
Larger Stretch IRAs (with $1 million or more) will be much more impacted by the new ruling. Without proper action, the tax implications for your heirs will be substantial. If you already own a very large tax deferred qualified plan, stop contributions immediately, and read through some of the different options outlined below that might help you during this transition.
- One solution is to consider naming a discretionary trust as the IRA beneficiary. This offers post-death control, and protection, as well as the ability to spread RMDs over the lifetime of the oldest beneficiary – but this strategy may come with a high tax cost.
- An irrevocable trust with a life insurance policy is another strategy. Although the growth would not be tax-deferred, the distribution amounts can be flexible, and the payments can be stretched over multiple decades.
- Creating a Charitable Remainder Trust allows distributions to the heir(s) over a certain amount of time, or even over their lifetime.
- Funding a deferred annuity would imitate the tax deferral and steady payment of a Stretch IRA.
- Take a traditional or Roth IRA and consider a Roth conversion. This would have a much shorter distribution time frame, but the distributions would be tax-free.
There are many different factors to generational planning, and it’s important that current Stretch IRA owners discuss these options with a trusted financial advisor to find out the best plan of action for their unique financial situation.
If you’re interested in learning more about the end of Stretch IRA’s, or generational planning, contact CJM Wealth Management at 631.777.1030 or simply click here to send us a message.