Death of the Stretch IRA? – Part 2
We wrote about the death of the Stretch IRA as of January 1st, 2020 in our first blog (Read Part 1 Here).
A change in law usually means a change in plans.
Here’s more details as to how this change in the law may bring about other changes in your estate plans:
The Other Changes:
Traditionally you have to start taking the Required Minimum Distribution (RMD) for the tax year of the year you turned 70 ½ years old. Under the new distribution laws you do not have to start taking Required Minimum Distribution until you turn age 72. (However, if you turned 70 ½ in 2019, you are still required to take the Required Minimum Distributions (RMD). You have until April 1, 2020 to take the first RMD and then, remember you still have to take your 2020 RMD.)
Under the new law as long as you are still earning income you can continue to contribute to an IRA beyond the age of 70 ½.(Previously you were unable to).
What Other Exceptions Are There Under The New Rule?
You have to end your inherited IRA by the tenth year after the Account Holder’s death. (This reduces the Tax-Deferred Benefit of the Inherited IRA or Stretch IRA). This causes a larger tax consequence given the shorter window in which these taxable distributions must happen.
This New Rule only affects people who inherit a Retirement Account in 2020 or after. If you inherited a Retirement Account before 2020 the New Rules do not apply to that account!
Eligible Designated Beneficiaries:
There are also exceptions for “Eligible Designated Beneficiaries”. The primary one is the Spouse. The Spouse is the only one who can “Roll Over” the Retirement Account into their own name so that it is “Magically” treated as though they owned it originally.
Other “Eligible Beneficiaries” who can still inherit the IRA and take RMDs based upon their own age are those who are “Disabled”, “Chronically ill”, or “Individuals who are not more than ten (10) years younger than the Descendant”, and “Minor Children of the original Retirement Account Holder”. The Minor Children get to take the RMDs based upon their age until they reach the age of majority and then the New Ten (10) Year Rule kicks in.
Where this may have an impact is where someone who is not more than ten (10) years younger than the Descendent. In such a case where a fifty-five (55) year old man leaves his IRA to his fifty (50) year old brother, the brother can continue to take the RMD based upon his younger life expectancy.
What Can One Do From The Financial Side?
The Roth IRA
The death of the Stretch IRA will have a big financial impact. This will be especially true for the Grandparent who wanted to leave a large IRA to a child or a grandchild. The Owner of the IRA may want to make partial conversions to Roth IRAs each year. This keeps the amount of taxes they must pay on the distributions relatively low and turn them into Roth IRA assets that will not have ordinary income tax implication on the Beneficiaries when they later take the distributions. Clients may be hesitant to do this, as they do not like to voluntarily pay Income Taxes, but if they look at the numbers calculated over time, the Roth IRA conversions may be a great benefit and the best financial investment option for the Client wanting to leave large IRAs to a child or grandchild.
Life Insurance:
Another Financial Option for the client who has money to live on and wants to leave an inheritance to their child or grandchildren is to take the money out of their IRA, pay the Deferred Income Taxes, and then purchase Life Insurance for their loved ones.
Close to Retirement?
How one takes the Ten (10) Year distribution will also have an impact as it can be a situation where you may be close to retirement and therefore you want to wait until the final year, or later years of the Ten (10) Year Rule, so that you take the Inherited IRA Distributions after you retire when you are in a lower income tax bracket If you are not going to be retiring you may want to run the numbers and see what the tax implications may be for you now versus at a later time. Also remember Income Tax Rates are relatively low now and maybe increased after elections in 2020.
Legal Estate Planning with IRAs:
Previously IRAs may have been payable to a Trust for a Beneficiary who was a Squanderer of money, or in risk of divorce, and you wanted to make sure that the distribution of the IRAs came out over-time so that that Beneficiary did not have the opportunity to squander those funds or lose them in a divorce. There may be some change in the Estate Planning that needs to be done by the Estate Planning Attorney. The IRA and the Death Beneficiaries may need to be payable to a New Separate Trust that needs to be created. That New Separate Trust must still distribute the IRA within ten (10) year period inside that Trust. However the distributions made for the Beneficiary may be used in a protective way on behalf of that Beneficiary.
So What’s The Big Picture?
Financial Advisors and Estate Planning Attorneys are still looking at the consequences of these New Rules, but will continue to seek the best options for their Clients. Therefore it is important that you meet with your Financial Advisor to review your Death Beneficiaries under your Retirement Accounts and whether or not you want to keep those IRAs in their current format or look to convert them into Roth IRAs over time,
You also want to meet with your Estate Planning Attorney to look at the options your Beneficiaries have. They may have exposure from a impending divorce, law suit, or they are bad to squander money. That may require some modification to your Estate Plan that will relate to those Retirement Accounts.
Summary:
Your Financial Advisors and Estate Planning Attorneys will continue working together and with other professionals in their areas of Investments and the Law to come up with the best options for you in regards to these new changes in the Law.
At the Law Firm of Steven Andrew Jackson, Attorney and Counsellor at Law, we have helped hundreds of families protect themselves and their loved ones, avoid Estate Taxes and Probate Costs, and keep their Estate Plans current with the law through The Customized Protective Estate Planning Solution™.