The SECURE Act’s elimination of stretch IRAs poses a challenge to many high-net-worth account owners who had hoped to pass their savings to the next generation and allow inheritances to continue growing tax-free over beneficiaries’ lifetimes.
Under the law, non-spouse IRA beneficiaries must withdraw the entirety of inherited IRA accounts within 10 years of the original owner’s death and pay the taxes due. Without the ability to spread out distributions beyond ten years, beneficiaries of sizable IRAs may be pushed into higher tax brackets and liable for significantly higher tax bills. To help prevent this scenario and allow account owners to leave behind the lasting legacies they intended, it is important to review existing estate plans now and consider several alternative strategies.
Roth IRA Conversions
If you have been contributing pre-tax dollars to a traditional IRA, you may be able to convert that money into a Roth IRA and allow you and your named beneficiaries to take tax-free distributions in the future. The one caveat account owners must remember is that they will have an immediate tax liability on the converted amount.
Donate IRA Assets to Charity
Investors have many options to support their favorite charities and preserve their philanthropic legacies long after they pass away. They may reduce the size of their IRA accounts and the future tax liabilities they pass to heirs by donating their annual required minimum distributions (RMDs) to qualified charities after they reach age 73. Alternatively, they may name a charity as the beneficiary of their IRAs or create a charitable remainder trust (CRT) or charitable lead trust (CLT) to receive IRA assets without incurring tax liabilities. When you pass away with a CRT in which your heirs are named beneficiaries, your IRA assets will pass to the CRT, which can then distribute assets to heirs.
Buy a Cash-Value Life Insurance Policy
Depending on your age and the value of your estate, you may take early withdrawals from your IRA (and pay income tax on those amounts) to purchase life insurance for the benefit of your heirs. While you are alive, policy premium payments will spend down the value of your IRA account while increasing the policy’s cash value. When you pass away, your beneficiaries will receive a lump-sum, tax-free death benefit that has the potential to be larger than your IRA balance.
Divide IRA Assets Strategically Among Several Beneficiaries
Rather than leaving all your IRA assets to one or two beneficiaries, consider naming several beneficiaries to receive the value of your assets and reduce the risks that any one beneficiary will be forced into a higher tax bracket over the 10-year post-death account maintenance period.
There is no one solution that will yield the same benefit for all investors. Instead, IRA account owners should meet with experienced financial advisors to determine which strategy works best for their unique circumstances, including the size of their estates and retirement accounts, the tax rates for themselves and their heirs and their specific estate planning goals.
About the Author: Lee F. Hediger is a co-founding director with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Lee F. Hediger is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the preceding material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Updated June 7, 2024