Personal Finance column: Death of the “stretch” — four ways to optimize options
Do you have an IRA or employer sponsored plan? The recent changes made under the SECURE Act will have an impact on you. The Senate voted on the Secure Act “Setting Every Community Up for Retirement Enhancement Act,” and President Trump signed it into law effective Jan. 1, 2020. One element of the act is the death of the “Stretch IRA.” If you or someone you care about passes away after Jan. 1, 2020, many beneficiaries will feel the impact of losing this option.
The “Stretch IRA” allowed non-spouse beneficiaries of traditional or Roth IRAs or other qualified plans to stretch out the required minimum distributions over their own lifetimes. This was a powerful strategy to keep savings under a tax deferred umbrella and to minimize the taxation of income received from distributions.
With the changes in the Secure Act, non-eligible, designated beneficiaries are required to take the full amount out of the inherited retirement account by the end of the 10th year following the account owner’s death. This includes individuals who are beneficiaries of “conduit” or “see-through” trusts. The required minimum distribution has been eliminated.
With some foresight and planning, you can optimize your IRA potential to fit your life situation.
If you feel we are in a low tax rate environment and that tax policy will change in the future, consider a ROTH conversion. Depending on your ability to pay the taxes on IRA money converted over to a ROTH with non-IRA funds, and the length of time until your passing, your beneficiaries could benefit. They would be able to take their inheritance tax free over the 10-year time period. The Secure Act also pushed out the mandatory “RMD” to 72 instead of 70 ½, which gives folks a bit more time to undertake the conversion.
Utilizing Life Insurance
If you still have a life insurance policy, or are in a health position to get new coverage, you may want to utilize it to compensate for the taxation of your IRA and the opportunity cost of the lost “stretch.” Life insurance proceeds are received income tax free by your beneficiaries. If you own the policy, it will be considered part of your estate and may be subject to estate taxes (above the current $11.58 million in 2020), but there are no income taxes due from the recipients.
Skip a Generation
If your beneficiary children are in their prime earning years and would be pushed into higher tax brackets by taking the distributions out over 10 years, don’t necessarily need the inheritance, or could receive insurance proceeds, you may want to consider naming your grandchildren as beneficiaries. They will have to take the distributions over the 10 years, but many times, they will be in a lower tax bracket.
Inheriting an IRA post Jan. 1, 2020?
If you are a non-eligible, designated beneficiary of a traditional, Roth or other retirement plan, and are yourself nearing your own retirement in less than 10 years, you may want to delay taking any withdrawals until after you have stopped working. Since all distributions are taxable, you could avoid paying taxes on the IRA withdrawal on top of your earned income. Again, the RMD on inherited IRAs has gone away and you can arrange your distributions in any way, as long as they are taken out within 10 years.
Any of these strategies require discernment per your unique financial and life situation. The numbers are just one piece of the puzzle. Family or others will be impacted by your decisions — communication is key, and planning is paramount. Have you considered a Monetary Mission Statement? Employ wise counsel to walk alongside you to determine which tools and techniques best serve you and your family.
Danielle Howard is a CFP® and CKA® with Wealth By Design LLC in Basalt. Check out her retirement podcasts and blogs at daniellehoward4u.com.
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