Stretching an IRA is challenging but not impossible.
Not too long ago, your estate plan likely included a Stretch IRA.
This allowed your retirement funds to last for the lifetime of your non-spousal heirs (typically your children).
With the SECURE Act, this option is no longer on the table for wealth transfer.
According to a recent InsuranceNewsNet.com article titled “3 Strategies That Dry Your Stretch IRA Tears,” your estate planning should be updated to account for these changes in the law.
When it comes to a traditional IRA, your heirs will have a limit of 10 years when it comes to stretching an IRA.
All funds must be withdrawn within a decade of your death.
This could bring your heirs into a higher tax bracket due to required distributions.
Tax-efficient planning will require different strategies.
Popular options include using life insurance, a Roth IRA, and charitable contributions.
With a life insurance policy, you can purchase coverage for the gap between what the IRA would have provided had it been able to stretch across the lifetime of your heirs.
If you are in a lower tax bracket than your heirs, taking distributions from your IRA and purchasing insurance can be a smart move.
If you purchase a life insurance policy with long-term care protection, you can also benefit from this tool.
One means of stretching an IRA is to use Roth conversions.
You can make conversions from your traditional IRA to a Roth IRA.
Doing so over time can help ensure that your distributions do not take you into a higher tax bracket.
Although your Roth IRA will still need to be cashed out by your heirs within ten years, the withdrawals will be income tax free.
If you are at least age 70 1/2 and already supporting various charities, charitable giving can be another great estate planning strategy.
You can make a Qualified Charitable Distribution directly from your IRA to a qualified charity.
In fact, you can give up to $100,000 each year using this method.
This distributions must be received directly by the charity and cannot pass through a private foundation or a donor-advised fund.
If you are uncertain whether your desired charity qualifies, contact your estate planning attorney.
Another alternative to stretching an IRA is to use a Charitable Remainder Trust as an IRA Beneficiary.
For this, you will need to hire an experienced estate planning attorney, as this is not a DIY project.
Making mistakes could cost you significantly.
What are the benefits of a Charitable Remainder Trust?
It allows yo to avoid taxes on the remaining balance of the IRA when it is liquidated by the trust.
Until then, the income beneficiaries of the trust can receive these payments over their lifetime or over a time frame outlined by you.
Although there is a maximum time limit of 20 years from the date of your death, this is double the ten year limit for a traditional IRA under the SECURE Act.
Consider the financial situation of your beneficiaries because the payments will be taxable as ordinary income.
Although stretching an IRA is not what it once was, there are alternative options available under the right circumstances for effective estate planning.
Reference: InsuranceNewsNet.com (Oct. 28, 2020) “3 Strategies That Dry Your Stretch IRA Tears”