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The End of the Stretch IRA – and Ways to Compensate

12 October 2022

In our last post, we talked about the 2022 limits on contributions to qualified retirement accounts and plans.

This time, we are going to take a more in-depth look at the end, for most beneficiaries, of the “stretch” IRA, which we’ve previously touched on here and here, and the ways savvy financial planners are finding around the consequences of this change to protect their clients’ assets.

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), signed into law in December of 2019 and effective as of January 1, 2020, eliminated the option of most individuals who inherit an IRA from taking distributions over the course of their lifetimes, and instead requiring full distribution within 10 years of the inheritance’s date.

Exceptions – those beneficiaries for whom the lifetime-distribution rule remains in force:

  • The deceased account owner’s spouse.
  • A disabled beneficiary.
  • A chronically ill beneficiary.
  • A beneficiary not more than 10 years younger than the deceased account owner.
  • A minor beneficiary who is the child of the deceased account owner (the 10-year distribution rule will only become effective when the beneficiary reaches the age of majority).

For all other individual beneficiaries, the new 10-year distribution rule will apply.

This has thrown a monkey wrench into a great number of retirement/estate plans, as many owners of IRAs have planned to leave their retirement assets to adult children as a vehicle for transferring tax-deferred assets with a long timeframe for distributions to their heirs. The longer time-frame allowed the inherited assets to grow (often) over several decades.

But CPAs and financial planners have been busy devising creative strategies to work around this new rule, preserving as large a portion of the assets as possible for the intended heirs.

These include:

  • Converting the IRA into a Roth IRA. When an IRA owner converts to a Roth IRA during his/her lifetime, s/he will be responsible for income tax on all assets converted. However, those assets will accumulate tax-free through the account owner’s lifetime, and Roth IRAs are not subject to the RMD rules – the original owner of a Roth IRA can pass the account in entirety to a beneficiary or beneficiaries. An adult beneficiary ineligible for the “stretch” distributions can allow the assets to accumulate if s/he chooses, but must withdraw the entire account balance within 10 years of the original account owner’s death.
  • Purchasing additional life insurance. Wealthier retirees and near-retirees who do not need the income from their qualified retirement accounts’ required minimum distributions (RMDs) can use these funds to pay the premiums on a life insurance policy of roughly the value of their qualified retirement account(s). If structured properly, the proceeds of life insurance policies can be excluded from the insured’s estate and the proceeds will be tax-free to the life insurance policy’s beneficiary or beneficiaries.
  • Taking the life insurance strategy a step further, an irrevocable life insurance trust (ILIT) can be set up to own and hold the policy until the insured’s death, and distribute the proceeds thereafter. For 2022, this is probably of greatest benefit to individuals whose estates may exceed the current tax exemption of $12.06 million (per individual), as using an ILIT means the value of the policy is not included in the valuation of the decedent’s estate. But it’s important to remember that without Congressional action, the estate tax exemption will revert to $5 million per individual, adjusted for inflation, at the beginning of 2026.
  • Speaking of trusts, another vehicle for transferring retirement and other assets might be a charitable remainder trust (CRT) to hold the IRA. These are irrevocable, split-interest trusts, providing income to the original account holder and designated beneficiaries for up to 20 years or the beneficiaries’ lifetimes. Remaining assets must be donated to charity – these must represent at least 10% of the trust’s original value. The charity in question will distribute the IRA on the account owner’s death, and the portion of the assets which will go to charity provide the estate with a charitable deduction in that amount. The retirement assets held in trust continue to grow, with taxes paid by beneficiaries on their distributions.
  • Investing RMDs in a taxable brokerage account. There’s the potential for higher growth from the RMDs if properly invested and allocated in a brokerage account according to the account owner’s needs. In addition, heirs pay capital gains taxes on withdrawals on a stepped-up basis, i.e., the value of the assets at the time of the account owner’s death or as of the alternative valuation date, which is six months following that death, rather than the valuation at the time of purchase.

There are other strategies, but these are the ones which will be of greatest use to most.

Which one, or ones, are right for you? We encourage you to consult your CPA/financial planner, to devise an individually tailored plan – one that is designed with your goals for your lifetime and beyond in mind, to protect the assets you’ve worked so hard to accumulate for yourself and those loved ones you want to benefit from them. S/he is uniquely equipped to perform this service for you, and will listen and understand your needs and your unique vision.

If you think your retirement/estate plan may have been impacted by the SECURE Act, please click here to email us directly – let us know how we can help.

Until next time –



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