Stretch IRAs Under Seige?

What’s a stretch IRA, you say? Well, it’s not a new type of IRA, rather it’s a strategy to preserve the value of an inherited IRA, to defer the tax on as much of the IRA as possible for as long as possible. As the law now stands, the owner of an IRA has to begin taking required minimum distributions (RMDs) for his or her IRA at 70 1/2. Those RMDs are based on the person’s life expectancy at that time.

Should the IRA owner die, the beneficiary of the IRA must then take RMDs based on the beneficiary’s life expectancy–regardless of how old the beneficiary is at the time. Typically, beneficiaries are spouses, people of roughly the same age as the owner, so their RMDs will be more or less the same as the IRA owner’s.

To “stretch” the tax deferral benefits of an IRA, some advisors suggest their clients change the beneficiary designation on their IRA from their spouse to their children, that is, if their spouse has other income and will have no need for the income from the IRA. Though the children beneficiaries will have to take RMDs as well, those RMDs will be “stretched” out over a longer life expectancy and therefore will be much smaller and therefore more dollars will remain in the IRA for a longer period, safe from the tax man–for now.

Got that?

Well apparently stretch IRAs are under attack, according to a piece at Here’s the first paragraph, with a teaser at the end. Yes Virginia, there are some possible solutions to the problem.

The stretch IRA is under siege.

If it’s eliminated, a non-spouse beneficiary of an IRA will be required to pay income taxes on the entire inherited IRA within five years of the IRA owner’s death. Here are two promising solutions using tax-free income that your clients can act on before the law changes. Let’s discuss Roth IRA conversions and life insurance.

There’s much to talk about with regard to IRAs, so check back later.

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