Stretch IRA’s May be Gone Forever

One of the greatest tax and estate planning tools ever allowed by Congress may be gone forever. The “SECURE ACT” passed the house on May 23rd by a vote of 417-3 and is expected to pass the Senate. This new act was largely designed to make 401k and other retirement plans more accessible to small businesses. But as usual – when one hand giveth the other taketh away.  Congress slipped in a little provision that eliminates what is referred to as the “stretch provision”. Stretch means allowing a non-spouse IRA beneficiary to take distributions of the IRA over his or her lifetime. With that provision gone, these non-spouse beneficiaries are forced to deplete the accounts in 10 years or less. While the Senate and House versions differ in a few ways, both effectively end the stretch.  

By some estimates, this one change alone is expected to produce $17B to the IRS’ coffers in the next ten years. The idea has been floated before and most advisors knew someday Congress would do away with the stretch.  The potential consequences of this change in the law are enormous. 

In addition to losing the ability for some to spread their tax liability over 20 to 40 years or more, it completely alters the tax situation of those affected. First of all, IRA distributions are taxed at one’s highest marginal bracket. In addition to being taxed at the highest rate, there is a multitude of tax rules that are triggered by adjusted gross income, like Medicare part “B” premiums, and the % of social security that is taxed, losing the ability to obtain financial aid or deduct certain items. The planning opportunities that remain appear limited. Roth conversions and the use of charitable trusts funded with IRAs may become much more attractive. 

One thing that did not change is the ability for spouses to leave each other IRA’s without the requirement that they are distributed any differently than before. Only a spouse may treat an inherited IRA as their own. This means that a spouse may choose to use their own life expectancy (defined by the IRS) to determine how much to take out each year. The new law also raises the age to start distributions from 70 ½ to 72, not that anyone is going to celebrate. We’ll take any bone they throw us. 

Estate Planning Update

IRAs have always been a tricky wicket when It comes to estate planning. For non-IRA assets, a trust/will combination allows for precise planning as to who gets what and when. These tools prevent heirs from harming themselves and help prevent disinheriting heirs unintentionally. IRA accounts pass according to beneficiary designations and any provision in a will regarding retirement accounts is ignored and inoperable. An IRA trust is a tool that collects IRA proceeds, and makes the required distributions but can prevent the beneficiary from exhausting the assets or naming their own beneficiary (i.e., their new spouse you haven’t met). If the changes take effect, one of two things will happen: 1) The trust will be required to pay taxes on the forced distributions at trust rates (much higher than personal rates), or 2) The trust will be required to distribute the money out of the trust in ten years or less. Either way, the ability to direct the timing and amount of IRA distributions for future generations appears to be much more difficult. We will provide updates as we have them. In the meantime, talk to your CPA or tax attorney. 

For more information call 512-464-1110, email, or book a call.