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SAY GOODBYE TO STRETCH IRAs: BUT SOLUTIONS REMAIN!

By James J. Holtzman, CFP®, Legend Financial Advisors, Inc.® and

EmergingWealth Investment Management, Inc.®

 

It seems stretch IRAs are on their death bed due to a new proposed income tax law widely expected to be instituted by the end of 2019.  This new law will kill the strategy of passing one’s IRAs to the next generation while minimizing the amount that goes to Uncle Sam.  Adoption of the legislation is not guaranteed, but is highly likely, making it wise to plan now for the demise of the stretch technique.

 

If a taxpayer previously planned to enable their IRA beneficiaries — this does not include spouses — to inherit their IRA and stretch out distributions over their lifetime, their plan for minimizing the tax impact to their heirs is likely to become obsolete on January 1, 2020.

 

In plain English, if a taxpayer dies after 2019 and their children are their IRA beneficiaries, the income taxpayer will need to rethink their plan for minimizing their tax payments to their children.  The new income tax law will require the taxpayer’s IRA to be distributed to their heirs over 10 years instead of their actuarial life expectancy.

 

If the income taxpayer has previously established a conduit trust for their IRA beneficiaries, it will be important to amend the plan, or their beneficiaries may face an unexpected tax bill and sudden cash drain.

 

Exceptions are carved out in the new law for the disabled and minors as well as surviving spouses.  However, the new tax bill will make it wise for more individuals to convert to a Roth IRA and employ other income tax planning strategies that require individual specific advice to minimize taxes in passing IRA accounts to the next generation.




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