What Are My Options Now that “Stretch” IRAs Are No Longer Allowed?

You have probably read in the news about the “end of the stretch IRA.” You may not know what this refers to, or how it may affect your own retirement and estate planning. Here is a brief overview of what is going on.

There is actually no such thing as a “stretch IRA.” It referred to a loophole that previously existed in the federal statutes governing individual retirement accounts. Basically, if you left a traditional IRA to someone other than your spouse, such as a child or grandchild, that beneficiary could withdraw assets from the account over the course of their own lifetimes. This would also allow the beneficiary to spread out the tax burden, as taxes only become due when distributions are made.

With the passage of the SECURE Act last December, however, any non-spouse beneficiary who inherits a traditional IRA starting in 2020 must withdraw all of the assets within 10 years. This means the government is able to collect the full amount of taxes due quicker. And of course, it means the beneficiary can no longer “stretch” the distributions over their lifetimes, which in many cases is far more than 10 years.

So if you have a traditional IRA and are looking to minimize the potential tax burden for your beneficiaries, what options do you have now that the “stretch” loophole is no longer available. As with any major decision of this sort, you should seek out advice from a qualified estate planning attorney or financial advisor. But here are just a few options you may wish to consider.

• Convert your traditional IRA to a Roth IRA. With a Roth IRA, you pay taxes at the time you put money into the account, as opposed to a traditional IRA, where the contributions are tax-free and taxes are paid at the time of distribution; with this option, you would end up paying taxes upfront, but your beneficiaries would owe nothing when they make withdrawals.
• Use your IRA distributions to purchase life insurance. Instead of leaving the IRA to a beneficiary, you could instead use distributions from the IRA to purchase life insurance, either directly or by setting up an irrevocable life insurance trust.
• Establish a charitable remainder trust. You could also create and name a charitable remainder trust (CRT) as the beneficiary of your IRA. With this type of trust, you could name individual beneficiaries to receive periodic distributions from the trust, with the remainder going to a recognized charitable organization.
• Take no action. Depending on your situation, it may simply make sense to do nothing in response to the Secure Act. In many cases, it is difficult to predict what your future beneficiaries will end up owing in taxes. And given the time and expense of implementing one of the other options described above, you should not feel as if you need to take immediate action.

Once again, before you make any decisions regarding your IRA or other investments, you should speak with a qualified Westchester County estate planning attorney who can give you legal advice tailored to your specific situation. Contact Meyer & Spencer, P.C., today to schedule a consultation with a member of our estate planning team.

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