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Alternate Strategies for Stretch IRA

There are still moves that IRA owners can make to help ease the transfer of their legacy to their chosen beneficiaries and save some money from the taxman.

By Rachel L. Sheedy, Editor March 3, 2020

From Kiplinger's Retirement Report

Over the years, we lauded the stretch IRA as one of our favorite tax-saving moves, to help mitigate the tax bill when non spouse heirs inherit retirement accounts and build wealth for another generation. But all good things come to an end—starting this year, non spouse heirs who inherit IRAs are out of luck when it comes to using the stretch. The

SECURE Act, signed into law in late 2019, mandates that many non spouse heirs who receive inherited retirement accounts must empty the accounts within a decade.

The stretch strategy, which gave non spouse heirs the opportunity to take out inherited IRA distributions over their own life expectancies, was targeted by Congress as a loophole used by the wealthy. In reality, the strategy was also used by those people who just diligently saved in retirement accounts for years and wanted to pass on as much of the legacy as possible to their progeny.

Albeit not a perfect strategy, spreading out the tax bill through the stretched distributions kept heirs’ tax tabs in check and allowed more of the money to grow for a longer time. The younger the beneficiary, the more advantageous the stretch could be.

After wiping away the tears over the stretch IRA’s demise, it’s time to get down to b

rass tacks and search for alternative options to the stretch. Don’t assume your only option is to accept Uncle Sam’s forced accelerated payout schedule. There are still moves that IRA owners can make to help ease the transfer of their legacy to their chosen beneficiaries and save some money from the taxman.

None of the alternatives are quite as cheap—read “free”—as the stretch strategy was, but we’ll start with the cheaper options and move into some that will require more thought and expense. As the new rules get fully digested, more alternate strategies could crop up. But the alternate strategies we look at here offer attractive opportunities to make the most of inherited IRAs under the new rules.

One critical point: Anyone who inherited an IRA before 2020 can stop reading. They need not worry about the new rules as nothing changes for them.

Pre-2020 non spouse heirs can keep using the stretch strategy as it previously existed

, and they can keep taking required minimum distributions based on their life expectancies from inherited IRAs.

But people who inherit IRAs starting in 2020 and beyond are subject to the new rules. And the new rules can shrink the legacy left to your heirs, as the online calculator at securermd.comillustrates. Let’s say a 55-year-old heir receives a $1 million inherited traditional IRA, the money grows 6% a year, and the heir takes distributions every year for 10 years. (You can use the calculator to plug in your own numbers to compare


Under the old stretch rules, in year 10, the non spouse heir would take an RMD of about $57,000 and would have nearly $1.2 million left in the inherited IRA; he would have taken out about $445,000 in RMDs over the decade.

Under the new accelerated payout rules, in year 10, the heir zeroes out the inherited IRA as required with his last distribution of nearly $169,000 and would have taken more than $1.3 million in RMDs.

The heir who got to use the old stretch rules has about $331,000 more in total in year 10 with the combination of the total RMDs taken and the amount still left in the inherited IRA. The heir using the new rules not only has less money in total, but tops that off with a whopping $855,000 more in taxable RMD income by the end of the decade.

Clearly, there’s a cost for non spouse IRA heirs who have lost the stretch. If you want more of your IRA to go to your heirs instead of Uncle Sam, here are some of the best alternative tax-advantaged strategies available now to IRA owners who are adjusting their estate plans for their families.

Carefully Mull Beneficiaries

As the SECURE Act swept away the stretch for many non spouse heirs, the new law also created a new type of beneficiary: the eligible designated beneficiary. These b

eneficiaries “can still use the stretch rules as they previously existed,” says Lisa Featherngill, a certified public accountant and member of the American Institute of CPAs Personal Financial Planning Executive Committee.

If a named heir is a minor, disabled, chronically ill or not more than 10 years younger than the deceased owner, the heir qualifies as an eligible designated beneficiary. For instance, if the IRA owner has named a sibling two years younger as a beneficiary, that sibling could use the old stretch rules if she inherits the IRA, says Nancy Anderson, senior vice president and the head of wealth strategy and trust services at Calamos Wealth Management.

Note that only minors who are children of the deceased IRA owner fall in this EBD group, and once the minor reaches age of majority (18 or 21, depending on the state),

the 10-year rule kicks in. Minor grandkids, once a popular choice to be named as IRA beneficiaries because of their long life expectancies, are immediately stuck with the new 10-year payout rule.

Also in this category: surviving spouses. They also aren’t subject to the new rules; but unlike any other beneficiaries, surviving spouses can take an inherited IRA as their own. That flexibility for widows and widowers hasn’t changed under the new law.

As you consider who should get your IRA, “look at those beneficiaries and see who might have an exception to the rules,” says Christine Russell, senior manager of retirement and annuities at TD Ameritrade. If you have potential heirs who fall into this new category of eligible designated beneficiaries, you might consider naming one of them as a beneficiary of your IRA since they can make use of the old stretch rules.

When mulling beneficiaries, you might also consider the tax situation of your heirs. Say you have two children, one who has a high-paying job and the other who is barely scraping by. You might want to leave a taxable traditional IRA to the one in the lower income-tax bracket, while leaving a Roth IRA or highly appreciated stock to the child in the higher tax bracket.

Bequeath Other Assets

While under the old rules you might have wanted to preserve your IRA to pass on to your heirs to do the stretch, it could be worth rethinking such a plan. If you are in a lower tax bracket than your non spouse heirs, you might want to spend down your IRA and preserve other assets for your beneficiaries, such as highly appreciated stock or real estate, or Roth accounts.

Heirs who inherit capital assets, such as stock and real estate, that have appreciated will get a step up in basis to the assets’ value on the date of your death. Only appreciation after that date will be taxed if and when the heirs sell the asset. The higher basis would