Both of these acts include removing the ability of non-spousal heirs to stretch the tax-deferred condition of an inherited IRA. Given the enormous number of retirement accounts, this change will impact many American households.
Congress is considering two different acts, SECURE and RESA, both of which eliminate the ability for heirs, who are not spouses, to keep funds in an IRA account and take minimal distributions over the course of their lifetime. Losing this tax-deferred growth option will upset many wealth distribution plans.
If a parent doesn’t need her Required Minimum Distributions, does it make sense to do a gradual Roth IRA conversion and use the RMDs to pay taxes on the conversion? Or should the parent invest the RMDs in a brokerage account?
There are several options in this situation, according to nj.com’s recent article, “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”
Congress is considering legislation with the SECURE and RESA Acts, that would eliminate the ability of children to create a stretch IRA, one that would let them to stretch distributions from the inherited IRA over their lifetimes.
Under the proposed SECURE and RESA Acts under consideration, the maximum deferral period will be 10 years. If the beneficiary is a minor, the period would be 10 years or age 21.
The best planning strategy for a parent would depend on her overall finances and what she wants for her children’s inheritance.
The conversion to a Roth may be a good planning move, depending on her tax bracket. Putting the money in a brokerage account is also an option.
A parent may also want to think about using the RMD proceeds to purchase a life insurance policy held by an irrevocable trust for the benefit of her children.
Because every family’s situation is different, it is recommended that a concerned parent contact an experienced estate planning attorney, who will be able to create a plan for the taxes and for the transfer of assets to the next generation.
Reference: nj.com (October 15, 2019) “With Stretch IRAs on the way out, how can I plan for my children’s inheritance?”