Bid adieu to stretch IRAs! A new tax law was passed at the end of 2019 that removed this strategy for passing on your IRAs to the next generation while minimizing the amount that goes to Uncle Sam.
If you previously planned to enable your IRA beneficiaries – this does not include your spouse – to inherit your IRA and stretch out distributions over their lifetime, your plan for minimizing the tax impact to heirs has been greatly reduced.
To be clear, if you die after 2019 and your children are your IRA beneficiaries, you’ll need to rethink your plan for minimizing their tax payments. The new law requires your IRA to be distributed by your heirs over 10 years instead of their actuarial life expectancy.
For example, if you previously set up a conduit trust for your IRA beneficiaries, it is important to amend your plan, or your 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 makes it wise for more individuals to convert to a Roth IRA and employ other tax planning strategies that require individual advice to minimize your taxes in passing IRA accounts to the next generation.
Kim Scott, CFP®
DIRECTOR OF Financial PLANNING