Congress Plans to Kill the Stretch IRA, But You Can Do An End-Around

We’re nearing a critical time for many Individual Retirement Account (IRA) owners. Advance IRA planning will be imperative if you want to maximize the after-tax value of your IRA for heirs and avoid the new tax burden Congress has in mind.

As I explained last month, despite the deadlock and division in Washington, the Setting Every Community Up for Retirement Enhancement (SECURE) act moved through the House of Representatives by a vote of 417 to 3 in May. A version of it is likely to pass the Senate and become law later this year. The SECURE Act and its Senate counterpart have a number of provisions designed to expand retirement savings opportunities and would delay required minimum distributions (RMDs).

To make up for the lost tax revenue, the SECURE Act and the Senate version would end the Stretch IRA. The Stretch IRA is a strategy in which children who inherit an IRA make maximum use of the tax code to minimize distributions for years. In many cases, the RMDs are less than the investment return of the IRA, so the IRA not only lasts for decades but increases in value. Under the SECURE Act, beneficiaries (other than minor children and a few other exceptions) would have to distribute and pay taxes on an inherited IRA within 10 years, even Roth IRAs.

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The War on Stretch IRAs is Back

There long has been a group in Congress determined to end the Stretch IRA, and this year they seem intent to have their way. I’ve reported in the past few years that many in Washington were targeting the Stretch IRA. The Obama administration called for an end to this valuable estate planning tool in its annual budgets. A bipartisan group in Congress agreed, and it appears that group is growing.

Their latest vehicles are two retirement bills working their way through Congress. The version in the House of Representatives is called “Setting Every Community Up for Retirement Enhancement” (the SECURE Act). The Senate version is titled “Retirement Enhancement and Savings Act” (RESA). The bills have a number of provisions, many beneficial to retirees and pre-retirees.

One goal is to give more workers, especially small business employees, access to employer retirement plans. Small businesses would receive a credit of up to $500 annually to defray the start-up costs of some retirement plans. Also, long-time part-time workers would be allowed to contribute to their employers’ plans.