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.
If you have been contributing pre-tax dollars to a traditional IRA, you may be able to convert that money into a Roth IRA, which allows you to take tax-free distributions before and during your retirement and your named beneficiaries to take tax-free distributions from those inherited accounts after you pass away. While these Roth conversions make perfect sense in the current environment of historically low interest rates, account owners should recognize that they will likely lead to an immediate tax liability on the converted amount.
Investors have many options to support their favorite charities and preserve their philanthropic legacies long after they have passed away. They may reduce the size of their IRA accounts and the future tax liabilities they pass to heirs by donating annual required minimum distributions (RMDs) to qualified charities after they reach age 72. Alternatively, they may name a charity as the beneficiary of their IRAs, or they may 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 them make distributions to heirs over a period of more than 10 years.
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 cash value of the policy itself. When you pass away, your beneficiaries will receive a lump-sum, tax-free death benefit that had the potential to be larger than your IRA balance.
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. Rather, 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 and chief compliance officer with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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Lee F. Hediger is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
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