Is the stretch IRA dead?
The era of stretch IRA as we knew it is over.
Good News, you still get a choice in When to Pay Tax!
The Stretch IRA is known by a few other terms you may be more familiar with though. When I say Stretch IRA, I am talking about the beneficiary IRA, or inherited IRA
The SECURE Act signed December 20th, 2019, is the law for 2020 and beyond. Savers are already investigating changes, especially those with large IRAs who had planned on a lifetime tax deferral for their heirs. We are receiving many questions on exactly how and when this major change will affect those who have saved.
TITLE IV: Revenue Provisions, Section 401.
The SECURE Act ends the stretch IRA. All of those plans have to be reviewed and probably revised. Under the now “old rules” (before 2020), an individual designated beneficiary could extend post-death “stretch IRA” required minimum distributions over his lifetime. A young grandchild might have a 70-year payout period.
But not anymore.
Why is this important?
The SECURE Act eliminates the stretch IRA and replaces it with a 10-year payout deadline for most beneficiaries.
The clients most affected are those with the largest IRAs who had planned on leaving the lion’s share of those accounts to extend over the lives of their children and grandchildren. This especially includes any clients who named a trust as their IRA beneficiary. These trusts will not work well under the new rules. These estate plans need to be readdressed immediately.
1- Are the current stretch IRAs for those who died before 2020 still good?
Yes, they are grandfathered.
2- Does this kill stretch IRAs for all beneficiaries?
No. The law carves out exemptions for certain beneficiaries now called eligible designated beneficiaries, or EDBs. Eligible designated beneficiaries are:
- Surviving spouses.
- Minor children, up to majority – but not grandchildren.
- Disabled individuals – under the strict IRS rules.
- Chronically ill individuals.
- Individuals not more than 10 years younger than the IRA owner (generally, siblings around the same age).
3- Do grandchildren qualify as minors for the EDB exemption?
No. The law is clear on this. The EDB exemption from the 10-year rule is only for the child of the IRA owner or the plan participant.
4- How do the RMDs work under the 10-year rule? Are there RMDs during the 10 years?
No. Under the 10-year rule, there are no annual specified Required Minimum Distributions (RMDs) during the 10 years. Instead, the entire IRA balance must be emptied by the end of the 10 years. Beneficiaries can withdraw any amounts they wish over the 10 years, so beneficiaries do have some planning flexibility during the 10 years to withdraw funds when it best fits their tax situation during that time.
Biggest Loser-
Highest impact negative news about for IRA / Roth
5- Do Roth IRAs still qualify for the stretch?
No. This is an unfortunate big deal for tax and estate planning. Until a few weeks ago, all money in a Roth IRA was able to grow tax-free for the lifetime of the saver AND the lifetime of each beneficiary of the Roth. Now, inherited Roth IRAs are subject to the same 10-year payout rule, except that the distributions will generally be tax-free. Savers will want to consider doing more Roth conversions to eliminate what could be a big tax bill within 10 years after death.
As Promised …
A- What you need to know-
- How will the inheritance of the IRA affect the Non-Eligible Designated Beneficiary’s income tax cost?
B- How it may or may not affect you-
- The beneficiaries of IRA accounts may be paying significantly more income tax in inheritance.
C- What to ask your CPA, Attorney, or Financial Professional-
- Should we be considering more converting more of your IRA to Roth to ease the tax burden for beneficiaries?
- Does our estate plan need updating with this change?
D- How to know if you are doing it right-
- Keep asking questions of someone you are comfortable is looking at the big picture AND all the little details of your plan.
Rest assured, as we further evaluate this new piece of retirement legislation, we will continue to give you insights on what you need to know to not miss out on the opportunities that you may benefit from going forward.
More to Come …
George Wells
Ps. As always, when you have specific questions or need specific application insights, drop us a line. Life is too short to not – Retire Happily!
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