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The Stretch IRA Is Dead. Now What?


By Heidi Huiskamp, Founder and CEO of Huiskamp Collins Investments, LLC

I’ve been a licensed financial planner for about 20 years and it was pretty much a default that a married couple would name the other spouse as the primary beneficiary of their retirement money and then name their children as the contingent beneficiaries in the case of the death of both spouses. Beneficiaries loved this. When a loved one inherited an IRA, they were allowed to “stretch” the time they had to take distributions from the account over the actuarially-determined number of years that they had left to live, thereby maximizing the potential growth of the assets and minimizing the amount that must be withdrawn and taxed each year. Legislation is all about compromise and, in order to pay for the change that investors could put off Required Minimum Distributions (RMDs) from their tax-deferred IRAs to age 72, up from 70-1/2, the benefit of the stretch IRA to all but a very select group of beneficiaries was taken off the table when the SECURE Act went into effect at the beginning of 2020. For most beneficiaries other than spouses (still a protected class), the entirety of the retirement account must be distributed by the end of the 10th year after the year of the death of the original account owner. Pretty vague. There are no actuarial tables, no factors, no fractions, no carve-outs that give more guidance. Investors who carefully did estate planning with their financial advisors to provide long-term for children and grandchildren have had their preparations upended. Are beneficiaries other than spouses just “up a creek?”  The resounding answer is “no.” There are a number of strategies to make the most of your beneficiary IRA upon inheritance.

For some classes of heirs, the best policy is to wait as long as possible to withdraw your inherited IRA assets. If you are the beneficial new owner of a Roth or after-tax IRA, those dollars are 100 percent tax-free and, unless you need the cash to support yourself, you should allow those investments to grow tax-free in that vehicle for as long as possible. Once you withdraw them and, if not spent, re-invest them, they become taxable assets on which their growth can be taxed. Another group of beneficiaries who should wait as long as possible to withdraw their new assets are those in the highest tax bracket at present who anticipate being in a lower tax bracket in ten years (maybe when they retire). Lastly, if an heir inherits a small IRA and doesn’t need the proceeds, it might make sense to allow that account to grow tax-deferred if the owner doesn’t anticipate a potentially appreciated account to put them in a higher tax bracket in 10 years.

Just like high-earners might strategically put off distributions until they retire, new retirees might decide to manipulate timing to suit their circumstances. Let’s pretend that Barb has just retired at age 65 and inherited her widowed mother’s Traditional IRA. Her plan is to start taking social security at age 70 and then she will need to start taking RMDs from her own IRA rolled over from her company 401k at 72. Because Barb has two “spigots” of money that are going to be turned on before her 10 year window is up, she may decide to “front-load” her beneficiary IRA distributions and plan to have the bulk of the assets paid out before she hits 70 and particularly before she hits 72.

The last nifty trick is turning your 10 year distribution schedule into 11 years to gain an extra year over which to take distributions and pay the resulting taxes if the retirement account was tax-deferred. If Bob’s widowed father dies before the very end of the year, he can set up his own beneficiary IRA in that calendar year and take out a distribution before December 31st. Remember the definition: all assets must be distributed by the end of the 10th year after the year of the date of death. If Bob takes a distribution in the same year as the death, that is year zero. Then he has an additional 10 years on top of that first year to take out the rest of the assets as distributions. Presto, change-o!  11 years!  This may not sound like a big deal, but many IRAs represent a sizeable chunk of investors’ estates and the math of dividing up a large six-figure account into 11 portions rather than 10 portions may be significant.

I would love to be of assistance with your retirement and estate planning. Please get in touch if you would like to sit down, share a cup of coffee, and get some clarity around your questions and concerns. Please call me at 563-949-4705 or email me at heidi@hhcinvestments.net.

Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.