Chris On The Hill: Planning for the Future

Chris Burroughs | Transportation Intermediaries Association

I am so blessed to have three healthy and amazing children, ages five years, three years, and 4-months old. Since they are all less than six years of age and obviously not dating or driving yet, the most pressing issue that keeps me up at night is doing my best to build some inheritance. I utilize several retirement tools including a traditional 401(k) and a Fixed Index Life Insurance Policy to protect my wife and I when we retire as well as grow our inheritance for our children. At this very moment, Congress is getting ready to pass legislation that would drastically change the game for “stretch” IRAs commonly used for retirement planning.

A stretch IRA is an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. This allows for continued tax-deferred growth over the inheritor’s lifetime and potentially over several generations. Under current law, non-spouse heirs can “stretch” or extend the taxable distributions of an inherited IRA over their lifetime, allowing them to continue earning passive income on the IRA while also spreading out the tax they must pay.

On May 23, 2019, the House of Representatives passed the Setting Every Community Up for Retirement (SECURE) Act (H.R. 1994). The bill includes a section on stretch IRAs that could have severe consequences for people who plan to leave their IRA as an inheritance to their loved ones.

Specifically, the SECURE Act would limit the stretch period to 10 years, meaning the account must be distributed within 10 years and the individual who inherited the IRA would have to pay tax on the entire IRA when it is taken out. A similar bill in the Senate, the Retirement Enhancement and Savings Act (RESA) (S. 972), would allow the first $400,000 of an inherited IRA to stretch, while the remainder would need to be distributed within five years.

Both bills amount to a tax increase on hard-working people who plan to leave their children with an inheritance through an IRA. They also significantly reduce the amount of potential investment income those inheritors can earn while increasing their upfront tax burden.

The driving force behind this legislation are insurance companies. They envision that if stretch IRAs are not as appealing, people will naturally gravitate toward an annuity. In talking with many industry experts, this may not be the case as costs associated with annuities are generally much higher. These experts believe if these changes were to occur, people would shift to living wills or other similar retirement planning tools that continue to protect the value of the money being left for their beneficiary.

In November TIA held a webinar for our members that discussed the impacts from this provision in great detail. TIA has also prepared a fact sheet and other collateral to help our members be aware of the pending changes.

If you have any questions or want to learn more about TIA’s Advocacy efforts, please contact Chris Burroughs at [email protected]

Image credit: Transportation Intermediaries Association