Stretch IRA is about to break under the Secure Act

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A new retirement bill passed by the House of Representatives last May has many benefits for IRA owners, but presents a major drawback for wealthy investors: the IRA's "extensible death" ".

Investors who do not need their IRA savings to finance their retirement have long been using a tax-efficient way to bequeath this money to their heirs, thereby extending the withdrawal period for account holdings. Investors are required to take a minimum distribution (RMD) once they reach the age of 70 and a half years, and any IRA money left to the heirs must also be withdrawn into a certain delay – but with a little advanced planning, you can allow this money. to grow with tax deferral for several more decades.

Because RMDs are based on life expectancy, a young beneficiary can currently reset them to a much lower distribution rate. The wealthy owners of the IRA, some that their spouses, and often their children, would not need this money, can leave the IRA to their grandchildren. A 20-year-old beneficiary could, for example, extend the withdrawal period by 63 additional years, according to the IRS life expectancy tables: This significantly reduces the taxable RMDs compared to 39, a 70-year-old beneficiary with a 17-year life expectancy would be due.

But that may not be true for long. The IRA has lost momentum due to the need to recover lost tax revenue to pay for some of the benefits of the so-called Secure Act Act, such as increasing the age of RMD for IRAs from 70 to 72 years old. Ed Slott, retired expert and founder of the website IRAHelp.com, says the anti-stretching momentum began in 2012 when the press discovered that presidential candidate Mitt Romney had $ 102 million in his IRA. "I think it was the critical point," says Slott. "When Congress saw [Romney’s IRA]they said, "There is something wrong with that. The IRAs were intended for retirement. They should not be an estate planning tool. "

The security law would require beneficiaries to withdraw all assets from the IRA 10 years after the death of their benefactor. That would wreak havoc on many estate plans, says Slott. Many wealthy IRA holders leave their IRAs at so-called fiduciary trusts, which allows them to maintain safeguards as to how the money is spent even after their death. This advantage will disappear with the 10 year law calendar.

Although the Senate has yet to approve the law on security, Slott says it's only a matter of time before extensive IRAs are killed. For this reason, he advocates safer alternatives. One is to convert traditional tax-deferred IRAs into Roth IRAs tax-free. This will result in a hefty short-term tax bill, in that you will have to pay income tax for any amount you withdraw from a traditional IRA and place in a Roth IRA. But the benefits are huge: the Roth IRAs do not have the minimum distribution required for the owner, so they can grow indefinitely. Beneficiaries can inherit Roth's tax-free assets, regardless of their growth.

Another strategy is to withdraw some assets from your IRA, use that money to buy life insurance and put the contract in trust for your beneficiaries. Beneficiaries pay no tax on the value of the policy. "When life insurance goes to the trust, there are no complicated tax rules," he says. "There is no DMC, no worries about payments for each beneficiary. You can do what you want.

These alternative strategies mean that the $ 15.7 billion that Congress expects to collect from the removal of the IRA stretch is at risk, Slott said. "In fact, this bill could push people to plan more efficiently and more efficiently in terms of taxation than they have always done," he says. "So is the projection of Congress revenues."

But finding new, more creative ways to avoid paying taxes is not new to the rich. The government is still trying to catch up.