Stretch IRAs were effectively ended by the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”), signed into law December 20, 2019. They allowed funds to potentially compound income tax-deferred for decades for children and grandchildren (tax-free with a Stretch Roth IRA). Now, non-spousal beneficiaries must liquidate all accounts within 10 years (with some exceptions, below). Eliminating the Stretch IRA will create $15.7 billion in new tax revenue over next decade, according to the Congressional Research Service. Solutions: meaningful tax savings and control can still be achieved when planning with IRAs and retirement accounts, even considering the new rules.
What is a Stretch IRA?
A Stretch IRA is not a type of IRA; it is an estate planning strategy that allowed people to stretch out the duration — and therefore the tax advantages — of an IRA when it is passed to a non-spouse beneficiary, typically children and grandchildren. It allowed for continued tax-deferred growth of the IRA over the lifetimes of those younger beneficiaries; a very young beneficiary could stretch out distributions for decades.
How Does the SECURE Act Impact Stretch IRAs?
Who is Exempt from the SECURE Act?
Who Will the SECURE Act Impact the Most?
The SECURE Act will generally impact owners of IRAs and qualified retirement plans (QRPs), with balances of $1 million more, who have other assets to live on and will not need the IRA assets for themselves.
What are the Potential Solutions?
According to Ed Slott, CPA, Elite IRA Advisor Group: “Life insurance moves to the top of the list as an estate and tax planning vehicle for the largest IRAs. IRA trusts will move to the bottom of the list (or possibly become extinct) under the tax rules.”
Why is life insurance, especially when owned by an irrevocable trust, such an ideal planning vehicle for large IRAs under the SECURE Act? Again, Ed Slott summarizes it well when he writes:
With these benefits of life insurance in mind, please consider the following solutions:
Gradually Draw Down Taxable IRA to Fund Tax-Free Life Insurance
Rescue Taxable IRA/QRP Funds with Discounted Life Insurance Transfer
Leave IRA Directly to Charity, Replace with Life Insurance for Family
What are the Next Steps?
1 Elite Advisor Network Newsletter, Ed Slott, December 17, 2019.