Question

From the perspective of those who are planning for their retirement, The SECURE Act of 2019 includes many provisions that individuals who are planning for their retirement will find helpful. However, one of the provisions of the SECURE Act will not be helpful to many of these individuals. This provision has to do with the elimination of what is called the stretch IRA. (A) What is a stretch IRA? (B) Why does the SECURE Act include the elimination of the stretch IRA? This elimination of the stretch IRA could impact the future use of Roth IRA conversions, the future use of sprinke trusts, the future use of permanent life insurance, and future charitable giving. (C) Discuss how two of these four things might be impacted by the elimination of the stretch IRA. You answers to part A, B & C should be completed in the blue text box below.

Answer 1

ANSWER A

A stretch IRA was an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. It allowed for continued tax-deferred growth of an Individual Retirement Account (IRA).

ANSWER B

Secure Act eliminates stretch IRA because --

By using the stretch strategy, an IRA could be passed on from generation to generation while beneficiaries enjoyed tax-deferred and/or tax-free growth. The term "stretch" is a financial strategy that allowed people to stretch out the life—and thus the tax advantages—of an IRA. A very young beneficiary could stretch out distributions for decades. Under secure act, non-spouse beneficiaries will have to take the funds in the inherited IRA within 10 years from the death of the original account owner.

ANSWER C

For a Roth IRA, it may now seem intuitive to delay distribution as long as possible to accrete the balance tax-free. The inherited IRA RMD rules do apply to Roth’s so the five or 10-year payout will apply to inherited Roth IRAs as well as traditional IRAs (and Qualified Plans) .

Further this change may create new demand for life insurance that would provide tax free benefits. Also the charitable remainder trusts become more attractive as IRA beneficiary trusts would now be modified to become ‘toggle’ trusts to modify cash flows in the distributions to inherited IRA beneficiaries.