What Happens When You Can't Stretch Anymore
The SECURE Act has taken away the ability to stretch an inherited IRA out over someone’s lifetime. What happens when you lose your flexibility?
In the case of inheriting a Traditional IRA, you are required to concentrate your tax liability. The new law requires you to distribute all assets from the inherited account within 10 years.
Losing your flexibility on the back end generates an opportunity to look at these accounts again and consider your options from this new angle:
Let’s say you are in retirement and living comfortably in the 24% tax bracket. You are not taking any withdrawals from your sizable IRA or are only transferring the RMD to your taxable account. If it is reasonable to assume this will be the case throughout your retirement years, you should meet with your advisor and tax professional to discuss a proactive strategy.
If you plan to pass this asset to your children and they are also financially successful (let’s say 32% bracket) the forced liquidation of your IRA you pass to them could drive them into the 35% or 37% tax bracket in a number of years. There is a chance this is avoidable, and these dollars could be taxed at your 24%. How?
If you proactively make partial Roth conversions in your 60’s.
If you are in your 70’s and taking an RMD, those dollars can’t go to a Roth, but additional conversions over and above the RMD could be converted to a Roth. Dollars converted to a Roth would grow free of tax while you are living.
Then when you pass a Roth to your child, the dollars could continue to compound tax free for 10 more years before they would be required to transfer the funds to their taxable account. But that transaction would be free of tax.
This strategy is more complex than these few hundred words and is more like putting together a puzzle to ensure the most efficient distribution. Your situation will not exactly fit the picture I paint above, but it will be well worth your time to sit-down with your trusted financial professionals and explore these new exercises in flexibility. It could mean 13 cents on every dollar like the example above. Do you want that going to the government or your children & grandchildren?