Saying bye, bye to stretch IRAs?

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As you may know, Congress passed, and the President signed, a new tax law near the end of 2017 that changed many provisions of the tax code for individuals and businesses. While many people and businesses have benefitted from the changes, they came at a cost – the annual budget deficit of the Federal government has risen from about $500 billion on average to about $1 trillion on average. Some of the increase has been offset by higher tax revenues resulting from increased employment, greater business profits and tariffs on imported goods. However, there is a concern inside the beltway that $1 trillion-plus annual deficits cannot continue without wrecking the economy.

Enter the SECURE Act. SECURE stands for Setting Every Community Up for Retirement Enhancement Act of 2019. 

Wow, quite a mouthful. Basically, this proposed legislation — it has NOT passed yet — would (a) delay when required minimum distributions would need to be taken from IRA accounts,

(b) provide more flexibility in handling retirement funds and, hopefully, (c) provide some greater comfort to those entering retirement. Please understand that all the proposed provisions of the Act are still being negotiated.

However, there are also provisions intended to increase tax revenues. One provision that appears to have widespread support is the abolishment of the “stretch IRA.” As a reminder, there are presently two distribution methods which can be used by non-spousal beneficiaries of an IRA account — one is to cash it out within five years of the year of death of the IRA owner and the second is to stretch the distributions from the IRA over the lifetimes of the non-spousal beneficiaries. The latter approach is often used as a tax-favorable distribution/estate planning strategy.

 

The SECURE Act would replace the stretch strategy with a 10-year mandatory payout for essentially all non-spousal beneficiaries, thus effectively destroying the estate planning strategies that many people have put in place regarding their

pre-tax accounts. There are a variety of exceptions to the new rule which may exist, but my take on it is that the planning we’ve done to minimize taxes on these accounts will largely be eradicated. 

What can you do if this act becomes law?

Assuming you have traditional IRA accounts that are unlikely to be spent during your lifetime, you need to rethink how you pass these assets. If you are contemplating converting traditional IRA accounts to Roth IRA accounts, you may also want to reconsider as Roths will be treated under the Act using the same 10-year distribution schedule (no tax effect but the earnings on Roth funds, once distributed, are taxable). Finally, using trusts, including IRA trusts, to handle these funds may be less advantageous under the provisions of the Act. One strategy continues to be life insurance — buying a life insurance policy on the IRA owner using annual distributions from the IRA. The death benefits paid by the policy are income tax free, although earning on the funds, once received, are taxable.

As is always the case, each situation must be studied in the context of whatever ultimately passes Congress and gets signed into law. I recommend that you track what happens to this proposal and, if something passes, contact your financial advisor or estate planning attorney to determine what changes might be appropriate in your estate plan. Remember that we cannot change what Congress might do, but we certainly can change our plans based on new circumstances. Stay tuned.

 

 

Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Florida. Ric is president and founder of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Ric Schilling is a Certified Financial Fiduciary (CFF). You may contact Ric at 904-371-3302 or 888-891-3381 Please visit: www.seniorguardian.com

This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered Broker-Dealer & member FINRA & SIPC. Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), a SEC Registered Investment Advisor. Schilling and Associates (d/b/a Senior Guardians of America) and CSA are independent of CSS.

 

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