Some of the Benefits of Inherited IRAs Could Soon Disappear
The Setting Every Community up for Retirement Enhancement Act of 2019 (the “Secure Act”) that recently passed the House of Representatives effectively kills the “stretch IRA” option of inherited IRAs. This estate planning option allows the non-spousal beneficiaries to inherit an IRA but stretch the required minimum withdrawals over their life expectancy, thereby allowing the funds in such IRA accounts to grow tax-free for a longer period of time. Under the Secure Act, however, younger beneficiaries would have to withdraw their money within ten years of inheritance. Thus, non-spousal beneficiaries of IRAs would be denied the benefit of long-term growth opportunities in their inherited IRAs.
Lawmakers apparently believe that IRAs are supposed to be used for the retirement of their owners, not as an estate-planning tool for the owners’ children or other beneficiaries.
Beneficiaries of the Inherited IRAs
If signed into law, the new rules would affect non-spousal beneficiaries who inherited IRAs starting next year. The new rules would not affect spouses or beneficiaries who are currently drawing from stretch IRAs.
The new rules also exempt beneficiaries if they are no more than 10 years younger than the account owner, minor children, or are chronically ill or disabled. Once minors reach the age of majority, however, typically 18, the 10-year withdrawal requirement kicks in.
Strategies to minimize the effect of the new law
Other strategies to minimize the effect of the new Secure Act may include:
- Switch to a life insurance policy – funds can be gradually withdrawn from a traditional IRA and used to buy a permanent life insurance policy, the benefits of which would not be taxable to the beneficiaries.
- Change beneficiaries – change the primary beneficiary to a spouse or designate more than one beneficiary, thereby reducing the dollar amount of minimum required distributions and the associated tax liabilities.
- Convert to Roth IRA – if future tax rates are expected to rise, consider gradually converting money from a traditional IRA into a Roth IRA. Although you may be required to pay taxes on the conversion, the overall tax liability may be lower as withdrawals from Roth IRAs are tax-free.
- Use charitable remainder trust – such trusts would pay a regular income to named beneficiaries during their lifetimes or certain other periods. Once the beneficiaries die, the remaining money would go to the chosen charities.
You can find the full text of the Secure Act by downloading it at the following link: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf.
Disclaimer: This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is it a substitute for, qualified legal advice. Your receipt of this article from Lexern Law Group, Ltd. (“LLG”) or any of its attorneys does not create an attorney-client relationship between you and LLG. The opinions expressed in this article are those of the authors of the article and do not reflect the opinions of LLG.
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By: Oleg Feldman
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