The majority of many people’s wealth is in their IRAs or retirement plans that are saved from a lifetime of work. Their goal is to leave their retirement plans to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act. This accelerates taxation and ultimately reduces wealth passed to beneficiaries. As a result, clients are seeking stretch IRA alternatives.
Now, this blog won’t address all of the details of the SECURE Act, it is instead going to focus on what I’m calling stretch IRA alternatives as a way to pass more wealth to your beneficiaries under the new rules. Mary Galligan from our office did an excellent webinar on the SECURE act itself as well as an overview which you can find here https://www.galliganmanning.com/-the-secure-act-/ You can also review my past blogs on the topic here https://www.galliganmanning.com/how-the-secure-act-impacts-your-estate-plan/.
That said, keep in mind that existing beneficiaries of stretch IRAs will not be affected by the change in the law. But for retirement plan holders who die January 1, 2020, most retirement plan beneficiaries, —with a few exceptions, including spousal beneficiaries for example—will have to take their withdrawals within a ten year period of time instead of over their life expectancy.
The estate planning legal and financial community is currently scrutinizing the law and looking for strategies will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners as stretch IRA alternatives.
Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.
There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.
Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy. It also assumes the retirement plan holder is insurable, which might not be true given their health and age. Life insurance also works well with all variety of beneficiaries, including trusts for your loved ones.
Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. A Charitable Remainder Trust allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions. This also also a potentially much longer stream of income to beneficiaries compared to a 10 year payout.
If you plan to leave retirement assets to your loved ones and want to maximize their legacy, please contact of office to schedule an appointment and discuss with your financial advisor about what options may work best in your unique situation.
Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”