In the heart of this already HOT summer of 2019, the heat may only be beginning for your IRA. Under the seemingly friendly title of the “SECURE Act” Congress is considering plans to over-reach in the form of future taxes on IRA accounts.
There are several positive and constructive elements of the bill recently passed by the House of Representatives and currently in review in the Senate. These include provisions to lower the threshold for small employers to offer 401k plans to their employees. However, a key part of the bill would do away with one of the most popular and widely used aspects of current IRA rules: the “Stretch IRA” for beneficiaries.
Currently, and dating back to the 1990’s, the Stretch IRA favors longevity by allowing a beneficiary to stretch inherited IRA monies over a lifetime, or until the IRA (or rolled over 401k) monies are depleted. This feature has come to be a popular and inexpensive long-term planning tool. The “Stretch” also aids in managing the tax consequences of becoming an inheritor of IRA monies.
Under the bill, your IRA beneficiaries – or YOU as a beneficiary of an IRA – would be penalized in the form of much greater and much earlier taxes on the inherited IRA monies. The rule imposes a 10-year deadline (as opposed to a lifetime) for the beneficiary or inheritor to remove the IRA monies – which are taxed as ordinary income by the beneficiary.
Take the case of a $500,000 Inherited IRA. A beneficiary could possibly have $50,000 or more per year of additional taxable income for the 10-year period… as opposed to under the current rules of possibly lower than $14,000-$15,000 annually over a lifetime or until the monies are depleted, depending on the beneficiary’s age and the ongoing value of the inherited IRA. The tax consequences vary – and for, say, the parents of college age children who inherit an IRA from a parent, grandparent or other, could include ineligibility for financial aid.
One of the scariest parts is that annuities have been presented in the bill as mandated elements of future IRA investments as one of the only ways to maintain the concept of the “stretch”. As opposed to current rules which allow the stretch without the cost and underlying hidden fees of annuities.
Simply put, the Stretch IRA as it currently stands would go away. If that doesn’t make you heat up in an already hot summer, I don’t know what will. Stay tuned.
**Disclaimer to Readers: this edition of TGIF 2 Minutes is not meant to be making a political statement. I am eager as always to hear your thoughts and comments on these issues of importance to your long-term financial planning.