What if Stretch IRAs are Lost?
Categories
Stretch IRAs have been a popular tool for preserving wealth for future generations as distributions are tax-deferred. However, the Obama Administration has proposed disallowing stretch IRAs.
Anchor The stretch IRA makes sense for many Americans. IRA account holders who chose to name children or grandchildren as beneficiaries were making a wise choice: Their retirement accounts could grow longer and the limited distributions required would defer taxes. They could stretch their investments for their descendants’ benefit.
Why the change? The government is suggesting changes because these retirement accounts were intended simply for that—retirement. People have been using these retirement accounts as estate planning tools and the Administration is hoping to push individuals toward using IRAs for retirement and rely on other investment tools to preserve wealth for their heirs.
The proposed regulations affecting stretch IRAs set forth new requirements:
- Inherited retirement accounts must be distributed within five years of the account owner’s death. (Exceptions for spousal heirs who can take advantage of a spousal rollover.)
- Heirs who are under the age of 18 upon inheritance would be permitted to wait until the age of 26 to distribute funds.
- Disabled heirs retain the original freedoms of the stretch IRA and may take withdrawals as they wish throughout their lives with no deadline.
What if you already have a stretch IRA? What can you do to protect your savings?
- Postpone Roth conversions. Roth conversions are beneficial because they allow pre-tax dollars to be converted into an after-tax Roth account. However, if stretch IRAs are eliminated, non-spousal heirs will be required to draw all funds within five years, so these tax benefits would be moot.
- Update beneficiary designations. Ensuring a spouse is a primary beneficiary can help preserve the money since a surviving spouse can take advantage of a spousal rollover and not be required to take distributions until they reach the age of 70 ½.
- Schedule an estate plan review. There are still valuable tools and a variety of trusts available for both retirement planning and for preserving wealth for heirs.
- Stay updated on laws affecting IRAs. Follow our Chapel Hill estate planning lawyers on Facebook and Twitter for real-time updates
