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The SECURE Act May Significantly Change Your Retirement and Estate Plan Regarding Stretch IRAs


The U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 in a 417 to 3 vote. If the U.S. Senate passes The SECURE Act in its present form, the consequences could change the retirement plans and estate plans for many individuals. One of the issues that has some people concerned is the elimination of the “stretch” IRA. The stretch IRA was not used for retirement, but was used by some individuals as an estate planning tool.

What is the Stretch IRA?

A stretch IRA refers to an owner’s ability to “stretch” out the required minimum distributions (RMDs) of an inherited IRA, which could result in the potential for significant tax savings for some individuals who inherit an IRA.

Wealthy individuals who do not need IRAs for their retirement income bequeath the IRAs to their grandchildren. Under the current rules, a non-spouse beneficiary of an inherited IRA can “stretch out” the RMDs based on the IRS life expectancy tables for the beneficiary. Because the money in the inherited IRA does not need to be withdrawn immediately, the money can remain in the IRA to grow tax-deferred for several decades, depending on the age of the beneficiary and the life -expectancy of the beneficiary when the IRA was inherited.

However, SECURE eliminates the stretch provision for IRAs and other qualified retirement plans, such as defined contribution plans, ESOP, profit-sharing plans, and Cash Balance Plans.

Eliminating the Stretch IRA

Many advocates of eliminating the stretch IRA argue that IRAs were not intended for estate planning. They believe that IRAs should be used for retirement savings and not as a way to reduce taxes on large sums of money inherited by younger heirs. Proponents also want to eliminate the stretch IRA to offset some of the tax revenue that will be lost because of various benefits in the SECURE Act.

Under the provisions of the SECURE Act, mot individuals who inherit an IRA must withdraw the entire balance in the IRA with 10 years of the IRA owner’s death. There are some exceptions to the 10-year rule:

  • A spouse can roll over the inherited IRA into the spouse’s IRA to stretch the RMDs over the spouse’s lifetime;
  • Minors who inherit an IRA have 10 years from the date they attain majority (in Michigan that is 18 years of age) to draw out the funds in the inherited IRA;
  • A beneficiary who is chronically ill or disabled; and,
  • A beneficiary who is within 10 years of the age of the decedent.

If the stretch IRA is eliminated, many individuals may need to revise their estate plans and retirement plans.

Review Your Retirement Plan and Estate Plan with The Castle Wealth Group

The Castle Wealth Group can help you re-evaluate your estate plan and retirement plan in light of the upcoming changes for inherited IRAs.

There are several options you might want to consider that allow you to leave large sums to younger beneficiaries while protecting the assets and reducing the tax liability for the beneficiaries. You may want to consider transferring your current tax-deferred IRA to a tax-free Roth IRA before the reduced income tax brackets under TCJA phase out. You might also want to consider converting money currently held in IRAs into life insurance policies held in trusts for beneficiaries.

With tax-efficient estate planning strategies, you can avoid the problems that eliminating the stretch IRA could potentially mean for your children and grandchildren.

Call (844) 885-4200 to speak with a knowledgeable representative and schedule an appointment to discuss recent and upcoming changes in laws related to taxes and retirement accounts to could significantly impact your current estate and retirement plans.

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