Strategies After The Death of The Stretch IRA
Today we're going to talk about IRA's and what to do with them now that the Stretch IRA is gone. Hello, tax bomb.
We have talked about the Secure Act and the passing of that and what it means to a lot of our clients. Today, we're going to dig a little bit deeper and into how do we deal with it. Specifically the biggest part of the secure act, losing the stretch IRA As a reminder, we could stretch an IRA, meaning when you die, or pass it on to your child.
Non spousal beneficiary, and they could continue that on through their lifetime. A great estate planning tool, very tax efficient. But with the secure act, you've got lump sum or 10 years. So this is really changing the ballgame.
Let's talk about a couple of things we should consider first. Number one, let's check those beneficiaries. You do not want to have the trust as a beneficiary anymore. Now, with the trust, they are going to take the oldest child and they're going to base distribution on their age. No matter what age, even if it's 10 years. If you have four children, three children, whatever the case might be.
Make sure each of them are now named as a beneficiary. So if you have four kids, You have 10 years, that's 40 years of distributions. Still a tax hit if it's a meaningful IRA, but it will reduce that tax bill.
So let's talk about strategies here. When I meet with clients and go through my financial planning process, we get to a point where we talk about life insurance long term care.
Now, with that, I generally talk about hybrid products. But basically in most cases, I'll ask a client, what's more important at this point, the long term care or life insurance. In a lot of cases we would do hybrid life policies, with a long term care rider. Now, the conversation is different because you're not going to get that death benefit that you would on that.
So does a true life insurance product make more sense? Or still do the hybrid based on what you need to cover taxes and LTC? So think about this from a life perspective. If you have a pretty sizable IRA, we've got clients 1, 2 million dollar IRA's, you could put your distributions into a life policy that would help pay the premium over time.
Then when you pass those dollars, it would be tax free to your beneficiaries, which will hopefully offset some of that tax bill. Big changes here from a planning perspective. What makes more sense? What can you afford? How do we do this? For now, these are the new rules, we had stretch IRA's for 20 years and now they are gone.
How about another idea? Roth Conversions, not a new idea. I generally don't do those because of the tax consequence. But again, if you have a super IRA or an IRA over a million dollars, it probably makes sense to look at this as an option. Disclosure- Talk to your CPA Make sure you come up with a tax plan. But the idea, of course, is to be able to take that money out, put it in a Roth. Now that Roth goes tax free. Depending on your tax bracket when you're doing that, that definitely makes a lot of sense.
Keep in mind, you don't have to do required minimum distribution until age 72. You can start a little bit early, utilize that money to fund a life insurance policy. Not so bad, what if you're one of our younger viewers? What do you do? Well, if you still qualify for a Roth IRA. Depends on if you are Married, single, how much you make, etc. You should put as much as you can in your 401K that will get your match if you have that from your employer. Then put money into a Roth. I would recommend that anyways. Just for the simple fact that a lot of our clients when they get older, they've done a great job at saving. But if all their money's in an IRA that of course comes out at ordinary income the. you need it, the highest tax number. So, that is definitely a good strategy for some of our younger viewers.
Let's bring this all back together. A lot to think about here, planing has changed in a big way. It's a good time to speak with, me or your financial advisor. As always, thank you for reading !