The House of Representatives voted in favor of the Secure Act 417-3, and the bill is now on a fast track to vote in the Senate. The bill would do away with the tax-planning strategy for inherited IRA commonly referred to as the “stretch IRA.” “Stretching” an IRA allows beneficiaries to take required minimum distributions (RMDs) from an inherited IRA based on their own, longer life expectancies. The Secure Act proposes that beneficiaries must deplete inherited IRAs within 10 years of the original owner’s death. This could cause a bigger tax burden on beneficiaries and cause them to lose the advantage of continued tax-deferred growth. However, there will be exceptions to the proposed new rules, and alternatives to a stretch IRA.
The Secure Act would do away with the stretch IRA option for everyone except surviving spouses, an owner’s child who is still a minor, a beneficiary who is chronically ill or disabled, or a beneficiary no more than 10 years younger than the original owner. So, instead of leaving an IRA to a young grandchild, leaving it to a family member who fits on of the above categories could be a better choice.
If you want to prepare your legacy for your loved ones, you know that it’s not just important to consider taxes at the present, but also taxes in the future that will affect your heirs. One way to decrease your beneficiary’s tax burden is to convert a traditional IRA into a Roth IRA. After you pay tax on the amount you transfer, the funds in a Roth IRA can continue to grow tax-free throughout your lifetime. Then, a nonspouse beneficiary can take RMDs from a Roth without being taxed.
A charitable remainder trust allows you to leave money to an heir and a charity. Over a specified period of time, a beneficiary will receive a stream of income from your assets, and at the end of that period the charity will get the rest. This involves setting up a trust to be beneficiary of the IRA, and choosing a qualified charity.
The professionals at Epstein & White know how important estate planning is to many retirees. If you’re interested in learning how to pass on your wealth in the most tax-efficient way possible, click here to schedule your complimentary financial review.