Serving Clients Throughout Wisconsin & Illinois 

Stretch IRA May be Disappearing Soon

Piggy bank that says "inherited IRA"If Congress gets its way, you’re going to lose the opportunity to help your children build wealth, and at the same time, they could end up in higher tax brackets for years.

Short of calling your representatives in Congress and hollering, there’s not much any of us can do about a proposed change to the rules that govern IRAs, and allowing the stretch IRA for your loved ones, reports nj.com in the article “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress.”

For years, non-spouse beneficiaries who inherit IRAs have had the ability to stretch out required distributions over their lifetimes. That meant that inherited IRAs could say safe and sound out of the IRS’s reach, except for annual distributions that were quite small. If a grandchild inherited the IRA, the wealth stretched even further.

Depending on the final details of the legislation, the only people who will be able stretch an IRA will be spouses.

Current rules require non-spouse beneficiaries to take required minimum distributions (RMDs) every year over the course of their life expectancy, as per the IRS life expectancy tables. Because they are taken over the lifetime of a younger beneficiary, they can be small. This means the impact of the distribution on the individuals’ income taxes are minimal and the IRA can grow tax deferred over a long period of time.

Congress is looking for revenue, and the wealth of Americans in IRA accounts is in their sight lines.

First, the House passed the SECURE Act, which says that beneficiaries must completely empty their inherited IRAs within 10 years of ownership. The Senate then passed the RESA Act, which is a little different. It would allow a stretch for the first $450,000 of aggregated IRAs, then anything over that would have to be distributed within five years.

Both bills call for changes to apply to inherited IRAs and inherited Roth IRAs for deaths after December 31, 2019. What’s the bottom line? The Joint Committee on Taxation expects that these changes, if they become law, will yield $15.7 billion—with a “B”—in additional tax revenue through 2029.

The government would eventually get this money anyway, but this speeds things up considerably.

Let’s compare and contrast. An 80-year old woman has a traditional IRA worth $1 million. She dies and her 55-year-old daughter is the primary beneficiary. Under the current rules, the daughter’s first RMD is roughly $35,000. If the 25-year-old granddaughter was the beneficiary, the RMD would be roughly $18,000.

If the account earns an average of 5% annually, under the current rule, the granddaughter would have distributions of some $220,000 over ten years. If she had ten years to take the money out, she’d have about $1.3 million in distribution. Under the current rule, the account would have a $1.3 million balance after ten years, since the principal would continue to appreciate. Under the proposed rules, after ten years, it would be zeroed out.

The forced larger distributions will push heirs into higher tax income brackets. That will be followed by increased Medicare premiums, as heirs retire with higher income. Add to that: higher capital gains rate, from as low to zero to as high as 20%. If that’s not bad enough, it could also trigger the 3.8% net Investment Income tax.

One option is to move funds from a regular IRA to a Roth IRA, assuming the investor meets all the requirements to do so. The Roth IRA distributions would not be taxable (unless those laws change) but that also requires the current owner to pay taxes on funds moved to the Roth IRA.

Another option is to consider a Charitable Remainder Trust (CRT) that names a charity as the IRA beneficiary. Upon the death of the owner, the IRA is distributed to the CRT, and the IRA owner’s heir would receive a fixed percentage of the CRT’s value for the remainder of their lives. When the heir dies, the money in the CRT goes to a charity or charities designated by the IRA owner, when the trust was created.

For now, these are proposed pieces of legislation, but chances are good they will be passed soon. Now is a good time to meet with our estate planning attorneys to do what you can to protect your IRA and your children’s inheritance. You can request a consultation by submitting our online form.

Reference: nj.com (June 10, 2019) “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress”
Categories

Quality Counsel

Experience You Can Count On

What Sets Us Apart?

Our Philosophy
  • Cutting Edge
  • Authentic
  • Respect
  • Empathy

The Stories That Matter

Read Our 5 Star Reviews
    She was very responsive and always made sure to answer any questions we had.

    “Our experience with Danielle was very professional and efficient even with having to do everything through zoom due to Covid. She was very responsive and always made sure to answer any questions we ha ...”

    - Shannon
    [Matt] was very engaging and rephrased any questions we didn't udnerstand.

    “Matt was able to answer my questions without all the legal mumbo jumbo. He was very engaging and rephrased any questions we didn't udnerstand. Due to COVID pandemic, we were limited to a phone ...”

    - Steven
    [Matt] was very helpful...

    “He was very helpful in answering our questions and providing guidance that we understood.”

    - Troy
    He took the time to understand our goals and our family situation. He was friendly, thorough, and very knowledgeable.

    “What a great attorney! He explained everything to us in plain English, with no legal jargon. He took the time to understand our goals and our family situation. He was friendly, thorough, and very ...”

    - Mark
    He was wonderful...they asked all the right questions, were patient with our back and forth, and everything was wrapped up successfully.

    “My husband and I needed a will and turned to this firm for their help after the firm had invited us to a "what is estate planning all" about dinner/meeting. Having a will was something we knew we ...”

    - Kris
/

Take the Next Step

Schedule Your Consultation Today
  • Please enter your first name.
  • Please enter your last name.
  • Please enter your phone number.
    This isn't a valid phone number.
  • Please enter your email address.
    This isn't a valid email address.
  • Please enter your address.
  • Please enter your city.
  • Please make a selection.
  • Please enter your zip code.
    This isn't a valid zip cide.
  • Please make a selection.
  • Please make a selection.
  • Please enter a message.