A Great Solution After The Secure Act’s Elimination of the “Stretch IRA”
The Secure Act eliminated the Stretch IRA option for beneficiaries to distribute inherited IRAs over their lifetimes. Now there’s a 10-year distribution maximum. If you’re close to retirement, have a lot of money in retirement plans, and want to maximize assets passed on to beneficiaries when you’re no longer here, there’s a great solution.
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My name is Cary Stamp, and this is a Principled Wealth Moment. I’d like to talk about The Secure Act and one of the major changes that happened at the end of 2019. See, we’ve been talking about COVID-19 and all of these other coronavirus issues in bills in the last few months and this one’s kind of gotten swept under the rug, but it’s really important, especially if you’re close to retirement, you have a lot of money in your retirement plans, you don’t like paying taxes and you want to maximize what’s going to go to your beneficiaries when you’re no longer here.
So here’s what happened. We used to have something called the Stretch IRA. The Stretch IRA allowed your beneficiaries to receive money from you into their IRA, it was a beneficiary IRA, and distribute that money out over their lifetimes. So if you had a 40 year old child that inherited your IRA, they got to spread that out over the rest of their lives. That was eliminated. Now we’ve got what’s called the 10 year rule. So every IRA that’s not inherited from your spouse has to be distributed over a 10 year period of time. There’s no requirement that it all be done on an equal basis, but by the end of 10 years, all of the money in an IRA has to come out, and the taxes have to be paid on the money that comes out of the IRA. This is a really bad deal for most people that have significant retirement savings.
So what can we do? Because there is a workaround and it’s something that most of our folks are thinking about right now. And the answer is, that we can set up an outside annual investment. This is an account where we take a little bit of money out of the IRA while you are alive, every single year, and we put it into this outside account. And into this outside account: let’s say I’ve got a $1 million IRA account, I’m going to take out somewhere around $30,000 a year in this example. Take out $30000 a year, I put it into this outside account. This outside account, when I pass away, is going to pay to my beneficiaries and my heirs, guaranteed $1.5 million tax free. No taxes by taking out $30,000 a year.
What’s this outside account called? It’s called life insurance. It’s a tax free asset that allows us to take a problem that we have, because we’ve lost the ability to use a Stretch IRA, take a little bit of money out every year from a regular IRA, pay a tiny amount of taxes and create a significant tax free bequest for our beneficiaries and for our heirs. If you have a substantial retirement plan, you don’t necessarily need to use all of that money for your retirement and you want to maximize what’s going to your beneficiaries, this is a strategy that you should seriously consider. My name is Cary Stamp. This has been a Principled Wealth Moment.