July 15, 2019, 3 Options to Consider Before “Stretch” IRAs Die Out

Woman using her flexibility to stretch arms while in a split

Written by Taylor Financial Group, LLC 

Where did the flexibility go in ‘Stretch’ IRAs?

Buried within the SECURE Act’s many benefits for retirement planners lies one of its pitfalls. A new provision that could limit the “stretchability” of an Inherited IRA to a ten-year distribution.

This limitation may not seem of particular consequence, especially if you’ve never heard of a “Stretch” IRA. But, if you anticipate leaving an IRA to your kids after your passing, this provision could create a significant tax liability for them.

So what even is a “Stretch” IRA?

A Stretch IRA is not a legal or official term, it isn’t even a particular type of savings account. A Stretch IRA describes a strategy used with inherited IRA accounts: taking distributions over the span of decades, or stretching out the account distributions, typically for the children of the deceased account holder. If you want to know more about why this strategy is used, see this article from The Motley Fool. But, basically, taking distributions over a long time horizon minimizes taxes, and maximizes tax-deferred growth.3

However, this new provision would greatly reduce the number of years over which money could be taken out of an inherited IRA, causing your heirs to hand over a larger slice of their pie to the IRS.

To mitigate any potential tax bites (or pie bites), you should consider these three options:

1. Converting Your Traditional IRA into a Roth IRA

The potential loss of “Stretch IRAs” only highlights the benefits of Roth IRAs. Converting to a Roth IRA depends on various factors, for example, what your current tax bracket is and what it will be in years to come.

However, if this conversion is done correctly, this can be a tax-savvy way to save money in the long-run.

  • You would have the potential for tax-free growth and tax-free withdrawals for you and your heirs.4
  • You would be exempt from RMD rules, which means you would be able to keep your money intact, and pass more of it onto your younger heirs!4

2. Naming a Charitable Remainder Unitrust (CRUT)

Another option may include naming a CRUT as the beneficiary of the IRA. Read more on CRUTs and how they work in this article from EstatePlanning.com.

Some benefits involve:

  • Converting appreciated assets into a lifetime income, while paying no immediate capital gains tax1
  • Reducing or eliminating your estate taxes1
  • And last but not least, making a meaningful gift to your favorite charity!1

3. Making Lifetime Qualified Charitable Distributions (QCDs)

If you have RMDs, make charitable contributions, and are over 70 ½ years old, you should consider using qualified charitable distributions. Read our blog “Have You Heard About QCD’s?”

QCDs may have certain tax advantages, depending upon your situation.

  • They may lower both your adjusted gross income and taxable income.2
  • They may be used to satisfy RMD requirements and decrease taxes.2
  • They would not trigger any additional taxes.2

Overall, these are all options one should consider when transferring wealth. Plus, we highly recommend you talk to us about these options. It is your hard-earned money, and you and your heirs should be paying the least amount of tax possible on it. There’s no more “stretching” inherited IRA’s but there are still some tax-saving options for you to explore! 

Have a question about retirement planning in Bergen County, New Jersey?

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Check out these blogs on related topics!

July 1, 2019, 3 Things to Know About the SECURE Act

June 24, 2019, There Could Be More Annuities in 401(k) Retirement Plans

Roths Rule! Consider a Conversion to Pay Less Taxes on Distributions


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