Inherited IRA Strategies Post-SECURE Act

Many people in the financial planning world referred to the SECURE Act as the “death of the stretch IRA” because of the new 10-year rule. The 10-year rule requires most non-spouse owners of inherited IRA’s to spend down the balance of their Inherited IRAs by the end of the 10^th year. Beneficiaries may be forced to recognize income from Inherited IRAs in their peak earning years, which may come with a sizeable tax bill. Here are five alternative strategies to consider if you have questions about leaving behind a pre-tax inheritance:

 

Roth Conversions– If the future beneficiaries are in a higher tax bracket than the current account owner, it would make sense to convert pre-tax dollars to a Roth IRA. Doing so would allow the current account owner to pre-pay the taxes at a lower rate for the eventual beneficiaries to inherit. The Roth IRA would still need to be withdrawn over 10 years, but there would be no tax consequences for doing so. This strategy also makes sense if tax brackets are equal, if you assume tax rates will increase over time.

 

Split Beneficiaries– If a couple ultimately believes they won’t spend all of their pre-tax assets, and the eventual beneficiary (usually a child) will be subject to the 10-year rule, then you should consider naming the eventual heirs as primary beneficiaries of all pre-tax accounts. This strategy would provide the non-spouse beneficiaries a 10-year window at the death of the first spouse and another 10-year window at the death of the second spouse, ultimately spreading out the tax costs over a 20-year period.

 

IRA to Brokerage Assets– Similar to Roth conversions, this strategy shifts pre-tax assets to after-tax accounts. If the owner of an IRA is in a low tax bracket, they could take withdrawals from their IRA above and beyond their own spending needs and then reinvest the excess in a brokerage account. Under current tax law, the beneficiary would receive a full step-up in basis at the time of death. The beneficiary would have no tax due (at that time) and would have no withdrawal requirements, allowing the assets to grow until needed. The beneficiary would also have a smaller pre-tax inheritance to which the 10-year rule applies.

 

Personally Owned Life Insurance– If the owner of an IRA does not need the assets for their living expenses, they could take withdrawals from the IRA to fund a personally owned life insurance policy. Ultimately, the beneficiary would receive the life insurance death benefits tax-free.

 

Charitable Trust– For IRA owners who are charitably inclined, but also want to see their heirs receive income over their lifetime, this could be a great strategy. Putting IRA assets into a charitable trust would allow the beneficiaries to receive income (interest and dividends) generated by the trust assets, and the principal balance would eventually be distributed to charities at the beneficiaries’ death.

 

The above strategies are designed to get the most out of your pre-tax assets and reduce the overall tax burden on your heirs.  If you have any questions about these strategies, don’t hesitate to reach out to your advisor to schedule a call.