704-593-9695 [email protected]

Stretch IRA strategy curtailed under new law

Last month, in the midst of all the impeachment proceedings, Congress quietly passed legislation that would make significant changes to the tax laws governing retirement plans.

The most significant provision would require many beneficiaries of inherited IRAs to take out distributions over 10 years rather than their life expectancies.  This would significantly accelerate the taxation of these benefits and prohibit IRA owners from deferring taxes for long periods of time by leaving their accounts to young beneficiaries – the so-called Stretch IRA.  There would be exceptions to these distribution rules for surviving spouses, minor children, and heirs within 10 years of age of the original IRA owner.  IRAs inherited before 2020 would remain under the old law but the new law takes effect for IRA owners who die after December 31, 2019.

Here are some of the other highlights of the new legislation:

  • Starting in 2024, part-time employees would be allowed more access to 401(k) plans. Employers would be required to offer these plans to employees who work at least 500 hours per year for three years.
  • The age for making required minimum distributions from IRAs or 401(k) plans would increase from the current age 70 ½ to age 72. The new age limit would only apply to individuals who turn 70 ½ after December 31, 2019.
  • The age cap for making IRA contributions would be removed. This would allow workers to continue making retirement plan contributions after age 70 ½.
  • The bill would make it easier for employees to convert their retirement savings into a lifetime stream of income by purchasing annuities in a 401(k) plan. Employers would also be required to report to participants on an annual basis how much of an income stream that their retirement account balance represents.
  • In a move to assist families, the bill would allow penalty-free distributions of up to $ 5,000 from retirement plans if made within one year of the birth or adoption of a child.

This new legislation presents some tax planning opportunities.  With the Stretch IRA losing some of its punch, this may be a good time to review your beneficiary selections on IRA accounts.  Also, the new law does not require annual withdrawals during the 10-year payout period.  This would allow Roth IRA heirs, for example, to wait the full ten years before taking a withdrawal, which would allow for maximum tax-free growth.

As always, I am here to answer your questions about how these tax laws will affect you personally.

David K. Raye, CPA                  704-887-5298                          [email protected]

*The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation.