February 12, 2020 - Published by IAG Wealth Partners

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Within the last week I have had several articles cross my path which involved stretching (or lack thereof).

The first stretch came from the Mayo Clinic which updated its article describing all of the benefits of stretching. In summary, stretching is good for flexibility.

By far the most frequent stretch references referenced the SECURE Act’s impact on “stretch” IRAs. In summary, the SECURE Act is not good for the flexibility of non-spousal retirement account beneficiaries.

Under prior law most nonspousal beneficiaries of a retirement account had three flexible options for inheriting a retirement account:

  1. Take a lump sum distribution and close the account.
  2. Close the account within five years of the previous owner’s passing.
  3. Stretch the account over their lifetime by taking annual Required Minimum Distributions as proscribed by the IRS.

The SECURE Act which was signed into law on December 19, 2019, eliminated the third option for most (not all) nonspousal beneficiaries of any account owner that passes away after December 31, 2019. Yes, Congress only gave us 12 days’ notice of this significant change.

Instead of a flexible lifetime stretch, the SECURE Act limits most nonspousal retirement account beneficiaries to a mini-stretch. Nonspousal beneficiaries now must empty an inherited retirement account within 10 years. They can take equal payments over 10 years, take a lump sum distribution in the first year, take a lump sum distribution in the last year, or anything in between. As long as the inherited retirement account is empty by December 31 of the calendar 10 years after the original owner’s passing the IRS will be satisfied.

For small retirement accounts this change will not matter, but it will make a significant difference for large retirement accounts – especially those that are tax-deferred instead of tax-free.

Inheriting a $500,000 tax-deferred retirement account could force your beneficiary to realize an additional $50,000 of taxable income every year for 10 years after your passing.

If you have a large pre-tax retirement account, you should evaluate the best strategy to limit the tax liability during your lifetime and after you pass away. There are several tax-minimizing strategies that you may wish to consider in consultation with your tax and legal professionals:

  1. Convert portions of your pre-tax retirement account to a tax-free retirement account over several years. If you are in a lower tax bracket than your heirs will be, it may benefit your family to voluntarily pay taxes at your tax rate instead of your beneficiary’s inflated tax rate due to the 10-year rule. While tax-free retirement accounts must be empty after 10 years, they are still tax-free!
  2. Consider using your IRA for Qualified Charitable Distributions (QCD) after you turn age 70.5. QCD rules permit each taxpayer to donate up to $100,000 per year directly from their IRA to a qualifying charity without paying income taxes on the distribution.
  3. Name charities as your tax-deferred retirement account beneficiaries while leaving other more tax-friendly assets to your heirs. This could include establishing a family donor-advised fund for your heirs to manage as a charitable legacy.
  4. Name a Charitable Remainder Trust as the beneficiary of your tax-deferred retirement accounts. This trust can be designed to pay out income to your beneficiaries over their lifetimes with any remaining assets flowing through to charities of your choosing.
  5. Take withdrawals from your tax-deferred retirement account to purchase a life insurance policy. Life insurance death benefits are transferred income-tax free to your heirs.

If you inherit a large pre-tax retirement account, in consultation with your tax professional, consider using the following strategies that could maximize your after-tax inheritance:

  1. Fill your current tax bracket by taking withdrawals from the inherited account. Try not to cross into the next federal tax bracket.
  2. Take withdrawals from the inherited account to maximize your tax-deferred retirement account contributions through your employer’s retirement plan and personal retirement account. The taxable withdrawals may be offset with your retirement plan contributions.
  3. If you are over age 70.5, use Qualified Charitable Distributions to draw down the account value without paying income taxes.
  4. Establish residency in a state without state income taxes.

As always, each person’s circumstances and goals are unique. As you adapt your inheritance strategy for the anti-stretch SECURE Act be sure to consult with qualified legal and tax professionals. They can help you develop the best strategy for your family.



Quote of the week: Richie Norton: “Nothing new or innovative is created without a stretch of the imagination. Reach your goals by reaching for the sky with some brain stretches of the imagination every day.”

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

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