Carl Garner, CPA | Mauldin & Jenkins, LLC
On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (Secure) Act. This legislation was first introduced in March 2019 and passed the House in May, but it sat untouched in the Senate the rest of the year. To fast track its progress, Congress tacked the SECURE Act onto the 2019 year-end spending bill. Now ratified, this law overhauls retirement plans for Americans of all ages, and the most significant change may be the repeal of the stretch IRA.
Overview of the Stretch IRA
Stretch IRA is a misnomer; it is not truly an IRA. Rather, it is a method used to “stretch” IRA wealth beyond the owner’s lifetime.
IRAs, or individual retirement accounts, were intended to benefit – you guessed it – single individuals. To ensure plan earnings get utilized in the owner’s lifetime, the tax code requires individuals to take minimum distributions each year once they reach a certain age, which the SECURE Act raised from 70½ to 72. These required minimum distributions (RMDs) are calculated based on the individual’s life expectancy, and if there is any wealth remaining at death, it could be transferred to the account’s beneficiary.
Non-spousal recipients of inherited IRAs must continue to take annual distributions, but the stretch IRA philosophy permits RMDs to be recalculated based on the recipient’s life expectancy. If these beneficiaries are a generation or two younger than the account owner, IRA wealth can be stretched over a much longer period giving the plan even more time to grow tax deferred.
Goodbye, Stretch IRA
This change to the SECURE Act is prospective, which means that taxpayers currently receiving benefits under an inherited stretch IRA can continue to do so. But, the benefits stop with them. If they die with stretch IRA wealth, the successor beneficiaries must abide by the SECURE Act’s rules for inherited IRAs.
Beginning with deaths on or after January 1, 2020, most IRA beneficiaries must withdraw inherited funds within 10 years of the date of death. The beneficiaries will not have RMDs, but the IRA balance must get depleted by the end of the 10-year period.
The law did not remove stretch IRAs for everybody, though. Certain eligible designated beneficiaries (EDBs) can continue to stretch wealth in this manner. EDBs include:
- Surviving spouses
- Minor children until they reach majority
- Disabled individuals
- Chronically ill individuals
- Individuals not more than 10 years younger than the account owner
New Estate Plans Under the SECURE Act
Individuals whose estates plans relied on the power of stretch IRAs will need to consider alternative strategies for their inheritance. Designating IRAs for inheritances may still work, but the full consequences must be considered. If non-spouse beneficiaries receive the inheritance at a young age, the 10-year deadline may come at a time when their taxable income is at its highest marginal tax rate or when they are working full time and not in need of the cash.
There are other wealth transfer options to consider, including:
Roth Conversions
Roth IRAs are bound by the same 10-year requirement as traditional IRAs, but beneficiaries will not be taxed on the distributions. And because there are no RMDs during this 10-year period, the account can continue to grow tax-free during that time. Just remember that you will have to pay taxes on the converted funds, so work with a tax advisor to prepare for the additional income.
Charitable Gifts
Consider assigning a charitable remainder trust (CRT) as your IRA’s beneficiary and then naming your kids and grandkids as the trust’s beneficiary. Your loved ones will receive income from the trust well past the 10-year mark, and after the trust’s designated time period, the remainder will be donated to charity.
Another option for assigning your IRA balance is to make annual charitable distributions directly from your retirement account as you age. These qualified charitable distributions (QCDs) will count toward your RMD without raising your taxable income.
Life Insurance
Life insurance as estate planning tools is nothing new, but life insurance policies may be the solution for you now that stretch IRAs are limited. Your first step is to make withdrawals from your traditional IRA and then use that wealth to pay into a life insurance policy. These withdrawals will be taxable, but tax rates are at a record low until the year 2026, so the tax hit will be minimal. With that life insurance policy, you can direct payouts to go to your chosen beneficiaries (including trusts), and there will be no RMDs or 10-year deadlines to contend with.
Manageable Changes
The SECURE Act threw us a curveball, but there are great solutions out there for individuals hoping to control their IRA wealth even past their lifetime. If you have any questions, contact us today. We look forward to hearing from you.
