The Impending Death of the Stretch IRA?

by BakerHostetler

It can, at times, seem like a fool’s errand to focus too closely on specific provisions contained in proposed legislation. As any casual observer of Congress can attest, committee proposals frequently die unenacted or undergo significant change before they are considered by the full House or Senate. Joint conference committees provide yet further opportunities for additional changes, as competing bills are melded together for consideration by both houses.

Nevertheless, for individuals with sizable IRA or qualified plan account balances who are engaging in wealth and estate planning activities, it would be prudent to be aware of the existence of the Retirement Improvement and Savings Enhancements (RISE) Act of 2016, which was introduced before the Senate Finance Committee this fall. Along with a number of changes intended to increase retirement savings opportunities for younger individuals and for working and middle-class families, the RISE Act would eliminate a common estate planning technique: the “Stretch IRA.”

IRAs and qualified retirement plan accounts are subject to minimum required distributions, which are generally required to commence when an account holder or participant attains age 70-1/2. Annual distributions thereafter must be made during the lifetime of the account holder, based on the life expectancy of the accountholder or, if applicable, upon the joint life expectancy of the accountholder and the designated beneficiary. Following the death of the accountholder, remaining amounts may be rolled over into an “Inherited IRA” held for the benefit of the designated beneficiary. Amounts held in an Inherited IRA are also subject to minimum required distributions. However, minimum required distributions from the Inherited IRA are calculated based on the beneficiary’s life expectancy. Thus, by naming a child (or other younger individual) as the beneficiary of his or her IRA or retirement plan account, an individual may be able to “stretch” the period during which amounts may be kept in the tax-deferred retirement account and delay the taxation upon distribution to his or her heirs.

As proposed in the current version of the pending legislation, this ability to stretch distributions from Inherited IRAs would be significantly curtailed by requiring the distribution of the entire Inherited IRA account within five years of the accountholder’s date of death unless the designated beneficiary is within 10 years of the age of the accountholder, an individual with special needs, a minor, or the accountholder’s surviving spouse. Depending on the age of the Inherited IRA designated beneficiary, this change could result in the loss of several decades of tax deferral opportunity. The change would be applicable to all minimum required distribution calculations with respect to accountholders who die after December 31, 2016. Accordingly, the change would not impact those Stretch IRAs currently in place that are already paying out survivor benefits to a designated beneficiary based on that individual’s life expectancy. However, subsequent beneficiaries of the Inherited IRA would be subject to the accelerated distribution requirement even where the original accountholder died on or prior to December 31, 2016.

As noted above, this is only a pending bill before the Senate Finance Committee. The specific provisions of pending legislation can, and frequently do, evolve between introduction and enactment. However, because of the potential impact of such a change, individuals interested in distributing retirement plan assets in a most tax-efficient manner (and their financial advisers) would be well served to keep an eye on the RISE Act as it progresses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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