Please say it isn’t so, Joe, but if lawmakers get their way the outstanding estate transfer tool called the “stretch IRA” is doomed. In the latest transportation funding bill, language is buried deep within that would kill the stretch IRA for most non-spouse inheritors.
Yes, you read that correctly; the ability to select an option to delay taxes on inheriting your parent’s IRA or even the ability to “disclaim” the inheritance and pass it down the line to kids and grandkids is in jeopardy. If you’re forgotten exactly what the stretch IRA is or how it works, here is a very brief refresher:
Typically when the owner of an IRA dies, the spouse will hopefully inherit the IRA as a named beneficiary (read my previous blog about the horrors of naming the estate as beneficiary of your IRA). And as such, the spouse can either rollover the entire IRA into their own IRA and if much younger than the deceased spouse, can push back paying the taxes for many more years. It is also extremely wise to name contingent beneficiaries even if the primary beneficiary is likely to want to inherit the IRA. Naming contingent beneficiaries is just a smart thing to do.
The stretch IRA is so valuable an option because when the children or grandchildren are able to inherit the IRA, their age and current life expectancy will push back paying the taxes for a crazy amount of time. But this is about to all change, unless you contact your Washington, D.C. delegate and give them a piece of your mind and before they take a piece of your future net worth.
Under the new proposal unless the deceased person’s IRA is converted fully to a Roth, no more stretch. Thus, if your parents or grandparents left an IRA to you, the entire amount of the IRA would have to be received within five years of the death and 100 percent of the income taxes will be due and payable. This really stinks. Currently, most IRAs are taxed when money is taken out of the IRA wrapper and at age 70-and-a-half the owner is forced to remove money and thus forced to pay taxes. Pushing back the requirement to take money out of the IRA wrapper is the key to having your money explode to the upside due to the phenomenal power of compounding interest.
No good thing ever lasts forever and this is one that is slated to end.