Last December, the imaginatively named Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law.
The SECURE Act was intended mainly to expand opportunities for individuals to increase their retirement savings and to simplify the administration of retirement plans. Fine. Good.
But the act also included a big unfavorable change that kneecapped the so-called stretch IRA estate planning strategy that was employed by well-off IRA owners.
Before covering this unfavorable development and what you can do in response, let’s first review some background information and how the stretch IRA strategy worked before the damage done by the SECURE Act. Here goes.
Effective date. The SECURE Act’s anti–stretch IRA change is generally effective for IRAs inherited by non-spousal beneficiaries from account owners who die after 2019. An IRA that was inherited from an original account owner (the person for whom the account was first established) who died in 2019 or earlier is unaffected and can still work as a stretch IRA, the same as before the SECURE Act.
The IRA Landscape
You may have big bucks in one or more traditional IRAs. Large traditional IRA balances are most often a result of rolling over money previously held in employer-sponsored retirement plans.
You may have built up substantial traditional IRA balances by making annual contributions over the years and successfully investing those dollars.
You may have substantial balances in one or more Roth IRAs, from converting traditional IRAs into Roth accounts. Or you may have rolled over distributions from qualified retirement plans into one or more Roth IRAs.
The Stretch IRA Strategy
The stretch IRA strategy involves keeping as much money as possible in your traditional IRA or Roth IRA while you’re still alive and then leaving the account to your spouse or a younger beneficiary, who keeps the inherited account rolling for as long as possible and keeps collecting the tax benefits. Thus, the term “stretch IRA.”
Stretch IRA Basics Before the SECURE Act
After a traditional IRA owner reaches age 70 1/2, or age 72 if you had not reached age 70 1/2 as of December 31, 2019, the federal income tax rules compel you to begin taking ... Log in to view full article.