Will the Stretch IRA be Extinct Soon?

A popular estate planning strategy utilized by affluent investors may soon be disappearing. This past September, the Retirement Enhancement and Savings Act of 2016 passed in the Senate Finance Committee. If signed into law in the future, this bill would kill the popular stretch IRA strategy that allows investors to pass along large IRA accounts to their children and grandchildren.

Also known as the multigenerational IRA, account balances in inherited IRAs are allowed to be distributed over the heir’s lifetime, provided the heir takes the required minimum distribution (RMD) annually. This means heirs can enjoy decades of tax-deferred growth in inherited IRAs, as well as having the possibility of passing the inherited IRA along to the next generation. Without the stretch IRA provision, IRA or 401(k) assets passed along to a non-spouse heir would revert to old distribution rules requiring that IRA or 401(k) assets be completely distributed within five years.

The ruling still has some hurdles to overcome: it must first pass the Senate and House, and then signed into law by the President. There is one important reason the elimination of the stretch IRA provision has some appeal to lawmakers: it would generate an estimated $3.18 billion in tax revenue from 2017 to 2026. Under current rules, tax revenue from inherited IRAs may remain at reduced levels for several decades to come.

It may seem a little perplexing that the stretch IRA could be eliminated under a Republican presidency. Traditionally, Republicans have been in favor of keeping stretch IRA provisions intact and keeping taxes lower in general. With the U.S. national debt rapidly approaching $20 trillion, attacking the debt will likely be a priority with Republicans in control of Congress and the White House. The stretch IRA may be a point of negotiation and compromise in the effort to slash the nation’s debt.

One bright spot in the Retirement Enhancement and Savings Act of 2016 is the provision in the bill that allows beneficiaries to exclude up to $450,000 from the five-year rule. Amounts above $450,000 would be subject to the faster distribution rules. Amounts below the $450,000 threshold would still be permitted to be stretched, potentially over the lifetime of the inherited IRA’s owner.

It is important to remember that the stretch IRA has been under assault before; most recently, President Obama included the elimination of the stretch IRA in his 2016 budget proposal with no success. Nevertheless, it is always prudent to keep your finger on the pulse of economic and legislative developments that could affect your financial planning efforts. For the time being, the stretch IRA remains a powerful estate planning tool.

If you would like to find out more about utilizing the stretch IRA for your financial plan, please call our office at 419-878-3934 to schedule a time to discuss your financial situation.