retirement

Death of ‘Stretch’ IRAs Would Mean Loss of Flexibility for Beneficiaries

If part of your estate plan is to leave a hefty IRA to your children or anyone else other than your spouse, you may want to start thinking about backup strategies now.

Finding a way to leave a legacy to your loved ones without increasing their tax burden has always been a complicated matter.

And, unfortunately for those planning to use a sizable IRA or qualified-plan account as part of their estate plan, it may become even more difficult if the Retirement Enhancement and Savings Act of 2016 eventually becomes law. The proposed legislation, which the Senate Finance Committee passed in September 2016, calls for the elimination of the so-called “stretch” provisions currently afforded non-spouse beneficiaries of IRAs and 401(k)s.

As it is now, designated beneficiaries who inherit one of these accounts take minimum required distributions based on their own life expectancy (not that of the original account holder), and they can stretch out those payments for as long as they like – extending the tax-deferral period dramatically.

If the legislation moves forward as written, however, most beneficiaries (there are some exceptions) will be required to empty inherited accounts of all but $450,000 within five years of the account holder’s death.

Everything else must go. And depending on a beneficiary’s age and/or tax bracket, this would mean a significant change in tax liability.

Which is the point. Uncle Sam needs money, and he wants to get his hands on some of the cash that conscientious Baby Boomers have been stashing away in their qualified retirement plans (those funded with pretax dollars) for decades. Part of the bill’s appeal to legislators is that it would generate an estimated $3.18 billion in revenue from 2017 to 2026.

It’s important to note that although the legislation sailed through the Senate Finance Committee, it still has a long way to go. We’ve been down this road before with similar proposals, and none has become law. For example, the Highway Investment, Job Creation and Economic Growth Act of 2012 recommended a provision that would limit the use of so-called stretch IRAs unless those accounts were converted to a Roth. That provision, of course, did not come to fruition.

Still, if a stretch IRA is or might be a part of your estate plan, it’s probably a good idea to start looking at some alternative strategies just in case. Here are a few things you can do now:

  1. Consider purchasing life insurance with your IRA money. If you have a large IRA balance, you could make withdrawals over time, pay any applicable taxes and use the rest to pay the premiums on a life insurance policy. Your beneficiaries will receive the death benefit payout free of federal income taxes.
  2. Talk to your financial adviser about a Roth IRA conversion. You can do small conversions from your traditional IRA to a Roth, which could save the beneficiaries who inherit that money when it comes to future taxes. But (here we go again, getting complicated) there are rules that apply, so you may want to run this option by your tax professional if you have questions about whether it’s a good fit for you.
  3. Review your beneficiary designations. If you’re married, the best approach may be to name your spouse as the primary beneficiary on any IRAs, Roth IRAs and 401(k)s you have. Or name your children, but with that $450,000 limit in mind. Otherwise, make your children or grandchildren contingent or alternate beneficiaries. At your death, your spouse can decide – based on need and the current rules – what to do with your account.

Proposals such as this are another reason why it’s wise to work with a trusted advisory group on a comprehensive retirement plan. It’s your financial professional’s job to keep an eye on any changes that could affect your plan, and to be ready with suggestions that can help you hold onto your hard-earned savings.

Kim Franke-Folstad contributed to this article.

SEE ALSO: A Good Game Plan on Roth IRAs Can Take the Bite Out of Tax Day

About the Author

Scott M. Dougan, RFC, Investment Adviser

President & Founder, Elevated Retirement Group

Scott M. Dougan is the president and founder of Elevated Retirement Group . He is a Registered Financial Consultant, an Investment Adviser Representative and a licensed insurance agent.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Most Popular

Don’t Be Tricked Into Voluntarily Paying Higher Taxes on Your IRA
IRAs

Don’t Be Tricked Into Voluntarily Paying Higher Taxes on Your IRA

Traditional IRAs are set up in a way that basically incentivizes you (and your heirs) into paying the highest tax bill possible. Don’t fall for it. Co…
July 4, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill
Tax Breaks

Retirees, Make These Midyear Moves to Cut Next Year's Tax Bill

Save money next April by making these six hot-as-July tax moves.
July 1, 2022

Recommended

Has Bad Economic News in 2022 Hurt Your Retirement Plans?
retirement

Has Bad Economic News in 2022 Hurt Your Retirement Plans?

How the right plan now can get you back on track and reduce the risk going forward.
July 6, 2022
With High Inflation and an Uncertain Stock Market, Do I Have Enough to Retire?
retirement

With High Inflation and an Uncertain Stock Market, Do I Have Enough to Retire?

If you’re at all concerned then it’s time to do some analysis, either with a financial professional or even just on your own. Answering a few question…
July 6, 2022
Should I Hire an Estate Planning Attorney Now That I Am a Widow?
estate planning

Should I Hire an Estate Planning Attorney Now That I Am a Widow?

Many estates are simple enough where no help is needed, but there are several situations where anyone would be much better off getting some profession…
July 5, 2022
How to Go to Cash
investing

How to Go to Cash

What exactly does it mean to 'go to cash,' and what should you do once you have?
July 5, 2022