The Government is Eliminating the “Stretch IRA” in its Latest Spending Bill
One of the several retirement provisions changes that are found in a bipartisan $1.4 trillion spending package is the eliminate of a financial planning tactic called the “stretch IRA.”
The maneuver applies to beneficiaries of individual retirement accounts and certain workplace retirement plans like 401(k) plans. Current tax rules state that beneficiaries, such as children and grandchildren, who inherit retirement accounts when the account owner dies must take distributions from those accounts over a certain time period. Today, a 40-year-old inheriting a deceased parent’s IRA, could theoretically take distributions from the account over a period of more than 30 years.
The legislation passed the House of Representatives Tuesday afternoon. The measure now heads to the Senate and is expected to be signed into law by President Donald Trump by Friday. The new rules around the stretch IRA would require beneficiaries of 401(k) plans and IRAs to withdraw all the money from inherited retirement accounts over 10 years. Failing to withdraw funds within the 10-year period would result in a 50% tax penalty on assets remaining in the account.
New rules would cut tax benefits to consumers in two primary ways, according to Jamie Hopkins, the director of retirement research and vice president of private client services at Carson Group.
“For most people, that would push them into a higher tax rate,” Hopkins said, due to larger withdraws. Additionally, assets held in an inherited retirement account would have a shorter amount of time to grow on a tax-deferred basis.
The Congressional Budget Office projected in April that the elimination of stretch IRAs and workplace retirement plans would raise nearly $16 billion over a decade.
“In some cases it may be better to die on Dec. 31, 2019 than Jan. 1, 2020,” said David Levine, an attorney at Groom Law Group. (Taxpayers who inherit a retirement account from an account owner who dies after Dec. 31, 2019 would be subject to the new distribution rules. Accounts of those who die before the end of the year would be subject to the old distribution rules.)