Smart Estate Planning: The Demise of the Stretch IRA

{3 minutes to read}  Today, I want to talk about the new legislation called the SECURE Act. As we reported in an earlier blog, the SECURE Act was signed into law recently and one of the major components of the Act is to reform the stretch IRA, which allowed people who inherited an IRA to take their required distributions based upon their life expectancy. So, if someone died and their child inherited that IRA, they wouldn’t have to take all of the money, which is taxable income, right away. They could take a minimum amount each year for the rest of their lives. With the SECURE Act, all IRAs that are inherited now have to be paid out within 10 years.

Removing the stretch IRA strategy has a negative effect on anybody who is looking to leave their qualified retirement plan IRA assets to their children for legacy value. By utilizing smart estate planning, however, there are some great strategies that we can offer to individuals to help them recreate the wealth that they would have created by using a stretch IRA.

When someone dies with a qualified plan, that asset is taxable to their beneficiaries as ordinary income. Now beneficiaries have to pay the tax on the entire amount plus ending earnings, over a 10-year period, significantly reducing the amount of the inheritance. Let’s say you have a $5 million IRA. If you’re in a federal and state tax bracket of 40%, for example, $2 million out of the $5 million would be taxable, so you would lose 40% of that IRA.

If we know that this is the case and you are not necessarily interested in utilizing that asset for retirement income, we could use it to purchase $2 million in life insurance on an individual or second-to-die basis, which would be received income and estate tax-free if structured correctly. So, now you are in a position where you can recreate that $5 million: $3 million after-tax from the IRA and the other $2 million from the life insurance. This gives the individual peace of mind, knowing that the legacy value of this very large account will not be negatively impacted by this new law. 

If you’d like to learn more about estate planning with large qualified plans or IRA assets, please give us a call. We would be happy to help you.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

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