The elimination of the Stretch IRA that resulted from passage of the Setting Every Community Up for Retirement Enhancement (Secure) Act is a game changer for wealth advisors, estate planners, and those parents who were considering bequeathing savings in individual retirement accounts to their kids.
“For a lot of people, the bulk of their wealth has been established in their IRAs,” said Michael Repak, vice president and senior estate planner with Janney Montgomery Scott.
“This law, even though it didn’t get the publicity of the Tax Cuts and Jobs Act, will have an equal impact on estate planning,” he added.
The Secure Act is the most comprehensive retirement bill to pass in a decade and a half. Many of its provisions are designed to stimulate more and better options in the workplace defined contribution market.
While the policy prescriptions in the new law enjoyed vast bipartisan support, the fact that it comes close to revenue neutrality — at least by the standard’s of today’s Washington — no doubt helped get it across the finish line.
The bill will add $428 million to the federal budget over 10 years. Of its $16.2 billion in revenue provisions, $15.7 billion is accounted for by elimination of the stretch IRA.
Existing beneficiaries of stretch IRAs will not be affected by the change in the law, noted Repak. But going forward, most heirs of IRAs other than the spouse of the benefactor will have to spend down the assets in 10 years. (There are a few exceptions, including minor children, but not grandchildren, of the benefactor, and disabled individuals.)
“Any time a change like this comes along it forces the profession to revisit the arithmetic of their planning techniques,” said Repak. “Truth be told, we’re all in the same boat and trying to evaluate it all.”
Alternative estate planning approaches will emerge to fill the stretch void. Here are three that Repak thinks will garner attention.
1. Roth Conversions
“This will force people to take a hard look at Roth conversions,” said Repak.
Traditional IRA owners who had intended to leave their retirement assets to their children may be passing on negative tax consequences now that the stretch has been eliminated.
If the beneficiaries are high earners, a Roth conversion may make sense; under the traditional IRA model, the distributions would be taxed as ordinary income at a high tax rate.