The Stretch IRA: A Bygone Era
For those who have been with us for some time, you may recall discussions about the “stretch IRA” as a cornerstone of estate planning. This strategy allowed younger beneficiaries, such as your children or grandchildren, to stretch out the required minimum distributions (RMDs) over their longer life expectancies. It was a win-win, offering a long-term income stream for the beneficiary while maximizing the tax-deferred growth of the IRA.
The SECURE Act: A New Landscape
However, the SECURE Act has fundamentally altered this landscape. The stretch IRA is now largely a thing of the past, replaced by a 10-year payout rule. This mandates that the entire inherited IRA balance must be distributed within 10 years of the original IRA owner’s death. The implications are significant and necessitate a reevaluation of your estate planning, particularly if you are contemplating naming a minor as a beneficiary.
For Your Children: A Special Consideration
Let’s take an example to illustrate. Imagine Emily, age 10, inherits an IRA from her mother in 2020. Under the SECURE Act, Emily qualifies as an “eligible designated beneficiary” (EDB) because she is the child of the IRA owner. She can take RMDs based on her life expectancy until she turns 21. After that, the 10-year rule kicks in, compelling her to empty the inherited IRA by December 31, 2041.
For Your Grandchildren: A Different Scenario
On the other hand, consider Robert, age 75, who passes away in 2023, leaving his traditional IRA to his 10-year-old grandson, William. William does not qualify as an EDB because he is not Robert’s child. Consequently, William must adhere to the 10-year rule immediately, taking annual RMDs from 2024 to 2032 and depleting the inherited IRA by December 31, 2033.
Time for a Strategic Reassessment
Given these changes, it’s imperative to revisit your estate planning if you’re considering naming a minor as your IRA beneficiary. Here are some alternative strategies:
Trusts: Establishing a trust as the IRA beneficiary can offer more control over how the assets are distributed.
Roth Conversions: Converting a traditional IRA to a Roth IRA can provide tax advantages for your beneficiaries.
Charitable Remainder Trusts: These can serve as a win-win for both your beneficiaries and your favorite charities.
Conclusion
The SECURE Act has introduced complexities that necessitate a comprehensive review of your estate planning, especially when considering minor beneficiaries for your IRA. While the law aims to simplify retirement savings, its impact on estate planning is far from straightforward. I strongly recommend consulting with your financial advisor to navigate these intricate rules effectively.
As always, my team and I at Advanced Wealth Management stand ready to assist you in making the most informed decisions for your financial future.
Knowledge is Power!
Tony Gomes
Founder, Advanced Wealth Management
Author, “Life Integrated Financial Freedom, Advanced Holistic Retirement Planning“
MBA, University of Texas in Austin
BBA, University of Massachusetts in Amherst
Executive Business Management Experience from IBM, Quaker Oats, Gatorade, and Tropicana
Over 20 Years of Experience in Comprehensive and Integrated Wealth Management
Fiduciary to My Clients
Active Sports Enthusiast and Student of Healthy Aging
Content Disclosure -This content is primarily for educational enrichment. It’s not a substitute for professional accounting, legal, tax, insurance, or investment counsel. While we believe the information shared is both accurate and reliable, we don’t guarantee its completeness or precision. The insights might include forecasts, opinions, and discussions about economic conditions, market scenarios, or investment strategies. However, these are subject to change, and there’s no assurance they’ll prove accurate. Always consult a qualified expert to address your unique situation and to stay informed about current applicable laws and rules.