Planning for Retirement Accounts – More Senate Action on the Stretch IRA

Last year in this Blog I wrote about the efforts of Sen. Max Baucus (D-Mont.) to limit the ability of non-spouse beneficiaries of IRAs to stretch out withdrawals over their lifetime.  Presently a non-spouse beneficiary can enjoy years, if not decades, of tax deferred or tax free growth on inherited IRAs (traditional or Roth).   Last week, the Senate took up this cause again in relation to its efforts to fund the extension of low interest rates on student loans.  Though it did not pass, 51 Senators voted in favor of a bill that would require, with limited exceptions, retirement accounts inherited by an individual other than a spouse to be completely distributed within five years of the death of the owner.  Distribution means the end of the tax deferral or in the case of Roth IRAs the tax free growth.  It is estimated that this limit would raise nearly $5 billion over the next decade.  This proposed limit was also found in President Obama’s 2014 budget as well as other proposals to simplify the tax code.  The proposals did not seek to limit the options that presently exist for spouses.All of this leads to the conclusion that the days of the stretch IRA may be numbered and the way we plan for retirement assets will have to change.  In the interim, there is still planning that can matter regardless of what happens with the stretch:1.  Review and Update Beneficiary Designations.  The most important thing you can do is regularly review and update your beneficiary designations with your advisors.  A misstep may result in even your spouse losing the roll over or stretch options.2.  Consider Charitable Giving.  If you are thinking about making a charitable contribution anyway, consider making it from your traditional IRA.  You or other non-charitable beneficiaries will pay tax on these distributions where the charity will not.3.  Consider Using Retirement Account Assets to Fund the Purchase of Life Insurance.  This technique allows you to leverage and replace dollars lost in taxes with an asset (life insurance) that will not be subject to income tax.4.  Consider a Retirement Plan Legacy Trust™.  While some of the benefits of mandating the stretch in such a trust may eventually be lost, a Retirement Plan Legacy Trust™ can still provide your beneficiaries with protection from creditors, predators, a divorcing spouse, etc.Retirement plans are an increasingly important part of every individual’s estate.  Careful planning is required to make sure that tax benefits are maximized and the desired results obtained.