The elimination of the Stretch IRA is a game changer, especially for parents who were considering bequeathing savings in IRAs 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.”
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 — with a few exceptions — will have to spend down the assets in 10 years.
Alternative estate planning approaches will emerge to fill the stretch void. Here are three that Repak thinks will garner attention.
1. Roth Conversions 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.
There are also political implications in the short and near term. A change in administrations next fall may result in tax rates going up. That, too, could influence whether to convert a traditional IRA to a Roth before it is passed on.