This tax savings strategy for massive IRAs could be endangered

Legislation that will help workers save for retirement may also be a deterrent to a strategy to transfer individual retirement accounts to their heirs.

The bill, known as the Secure Act, was pbaded in the House of Commons on May 23. Legislators on both sides of the aisle voted for, 417 against 3.

This legislation makes it easier for small employers to pool resources to sponsor 401 (k) plans and repeals the maximum age of 70 for contributions to traditional IRAs.

However, these improvements have a cost.

The bill contains an income provision that would require most unscrupulous beneficiaries to eliminate inherited ARI within 10 years of the original owner's death.

This cools a tactic that wealthy owners use to transfer large retirement accounts and save taxes, known as "IRA stretch".

In this strategy, younger heirs – your children and grandchildren, for example – can get the required minimum distributions of inherited IRA based on their longer life expectancy.

As a result, these heirs can "stretch" the IRA's growth with deferred tax for many years while taking these small distributions.

"These efforts have brought you benefits without compromising," said Jeffrey Levine, CPA and CEO of BluePrint Wealth Alliance in Garden City, NY. "The question now is: are we comfortable with everything in this IRA going to children in a 10-year period?"

Under current legislation, if you inherit an IRA from someone who is not your spouse, you usually have to start receiving the minimum distributions calculated based on your life expectancy. no later than December 31 of the year following the death of the original account holder.

The bill in the House would require a breakdown of the value of the account within 10 years.

A similar bill that was pbaded by the Senate, the 2019 Law on the Improvement of Retirement and Retirement Savings, would split the account in five years if the beneficiary is not a spouse and if the value of the account exceeds $ 400,000 on the date of death.

The two bills are exceptions if the beneficiary is the surviving spouse, a disabled person or a person suffering from chronic illness, a person who is not more than 10 years younger than the account holder or minor child of the account owner.

The IRA section is the most advantageous for young heirs of key accounts. These people have years of growth sheltered from income tax and need only a small distribution each year.

For example, under current law, a 22-year-old who inherits a $ 1 million IRA as a non-modest beneficiary would be charged a RMD of $ 16,400. or 1.64% of the value of the account the first year, said Levine.

This distribution is subject to income tax.

If you are 18 years old, the beneficiary is 40 years old. That year, he is responsible for distributing 2.32% of the value of the IRA, Levine said.

"We are still talking about an exceptionally low percentage of the account that has to be distributed every year," he said.

On the other hand, an accelerated distribution of the account over a much shorter period would result in a heavy tax grab, Levine said.

Tax experts are studying some alternative strategies that IRA owners might consider to minimize taxes while transferring the account to an unscrupulous heir, if the bill is pbaded.

• Charitable residual trusts: These trusts allow investors to leave their badets to a charity and a beneficiary.

Your beneficiary would collect a revenue stream from the badets for a specified period. At the end of this period, the charity collects all that remains.

"Distributions are made during the life of the trust to the individual, and you can get the benefit extended," said Suzanne Shier, chief tax strategist at Northern Trust in the Chicago metropolitan area.

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"It's for people who have charitable motives, a motivation that minimizes taxes and an appetite for the complexity of charitable trusts," she said.

For this to work, you must name the trust as a beneficiary of the IRA, which can constitute a minefield for taxes if it is poorly done. Be sure to coordinate with a CPA and estate planning lawyer if you are considering this route.

• Life insurance: "With life insurance, you can get more tax-free money without any RMD or complexity, and simply bypbad the system as a whole," said Ed Slott, CPA and founder. Ed Slott and Co. at Rockville Center, New York.

As a rule, the death benefit of a life insurance contract is excluded from the gross income of the beneficiary. Your dollar bonus also goes further.

"If you have $ 100,000 in an IRA, it's just $ 100,000," Slott said. "But if you spend $ 100,000 on life insurance, it could be worth $ 500,000 in death benefits."

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