13 Feb With SECURE Act, how can I preserve my heirs’ inheritance?

Q. With the SECURE Act, I can’t use a Stretch IRA for my kids anymore, and that was the plan. What else can I do to try to preserve the IRA accounts they will inherit so they can have that money for their own retirements?
— Parent

A. The new SECURE Act that was passed back in December 2019 changed several details of how retirement accounts function.

Before we get to what happened to so-called Stretch IRAs, let’s cover what else the new law changed.

One was a provision that IRA account owners can push back the required distributions to age 72 from age 71½, said Kenneth Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.

“This is great for people who can afford to let their retirement accounts grow for an additional year and a half,” he said.

Van Leeuwen said the major negative effect of the act was regarding how non-spouse heirs will be able to distribute funds from inherited retirement accounts.

You mentioned the Stretch IRA. Before the new law, non-spouse beneficiaries could “stretch” distributions from those accounts over their lifetimes.

But not anymore.

“Spouses can still inherit retirement accounts from each other and continue to stretch out the distributions over their lifetimes,” he said. “When money moves down a generation, or to any non-spouse, then the new rules require the inherited account to be exhausted after 10 years.”

One common misconception about this rule change is that the heir will have to take payments every year for 10 years, Van Leeuwen said.

“Actually, all that matters is that the account is exhausted and taxes have been paid by the end of the tenth year,” he said. “This means that a beneficiary can defer taking any payments and letting the retirement account compound over that time and take one big tax hit in the final year.”

While the rules are still new, there are some creative ways to help beneficiaries.

“One of the main planning opportunities comes from turning your required distributions from retirement accounts into premium payments on a life insurance policy on the retirement account owner,” he said. “The new changes did not affect insurance proceeds, and they still are tax-free to beneficiaries of the policy and beneficiaries are not required to take any payments.”

Van Leeuwen said one of the downsides of this strategy is that it needs to be planned in advance to get the best rates for the insurance policy.

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This story was originally published on Feb. 13, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.