TOP TIPS - How to Handle your Stretch IRA in the Light of SECURE
The stretch Individual Retirement Account (IRA) has long been used as an efficient estate planning strategy. However, with the passing into law of the new Setting Every Community Up for Retirement Enhancement (SECURE) Act, beneficiaries will no longer be able to stretch out required minimum distributions over the course of their lifetime.
Instead, beneficiaries who are not spouses must now exhaust their inherited IRAs within a decade – other exempt parties include under 18s and beneficiaries with certain disabilities. Quite simply, what was once a winning estate planning tool has now become a conundrum.
So, how do you solve this puzzle in order to serve the best interests of beneficiaries while simultaneously reducing exposure to any unnecessary tax burden?
In this post we offer some Top Tips for coping with a Stretch IRA in the post-SECURE future.
Convert to a ROTH IRA
Some people may derive benefit by converting their conventional IRA into a Roth IRA. However, this would come at a trade-off: it would incur a tax burden in the present but would prevent beneficiaries from incurring liability when they make withdrawals in the future.
Whether this approach might work for you will depend on your circumstances as well as those of your beneficiaries.
Furthermore, ROTH conversion would not have to take place in one fell swoop; it may be advantageous to diversify by making several smaller conversions.
Remember, the annual contribution for any IRA, including a Roth, is currently $6,000 ($7,000 if you are older than 49). Furthermore, you must earn less than $137,000 ($203,000 is the limit for married couples).
Consider life insurance
If you are a retired couple and have the financial capacity, you could use some of your required minimum distributions (RMDs) to fund a life insurance policy.
For example, if you have an IRA worth $1 million, you will be required to take around $39,000 each year in RMDs once you reach 70 ½. This could be divided in the following way – for example:
- $13,000 to pay deferred income tax.
- Approximately $20,000 to pay annual premiums on a $1 million second-to-die life insurance policy that may provide tax-free income to beneficiaries following the death of both spouses.
- Approximately $6,000 spending money.
Consider charitable gifts
Qualified charitable distributions allow retirees to make direct donations from their IRAs to suitable charities. These donated sums are then excluded from taxable income, thereby reducing tax liability and, ultimately, that of your beneficiaries.
However, this strategy only works for the philanthropically inclined retirement planner, so it is worth discussing in depth with your wealth manager.
Consider Sprinkle Trusts
Sprinkle trusts help to spread the tax burden between multiple family members across multiple generations. However, ensuring that sprinkle trusts benefit everyone – i.e. children, grandchildren and great-grandchildren – can be complicated and requires sophisticated financial planning.
Deplete your IRA and bequeath other assets
SECURE may mean that it makes sense to deplete your IRA and instead bequeath other assets to your heirs. For example, if you bequeath shares, the beneficiary should only pay tax on gains in the share and can time sales of these assets to mitigate their ultimate tax bill.
Seek independent financial advice
The demise of the stretch IRA does not need to mean the end of any plans you might have for your beneficiaries. The wealth management and retirement planning specialists at Blacktower in the US can help you plan effectively to meet your financial goals, taking account of all IRS and cross-border rules and regulations.
For more information contact Blacktower (US) LLC today.
Disclaimer: Blacktower (US) LLC is not a tax adviser and independent tax advice should be sought. The above does not constitute advice and Blacktower makes no recommendation as to the suitability of any products or transactions mentioned.