Retirement account owners looking to lower tax bills for their heirs may be concerned that the opportunity to “stretch their IRA” is eliminated for most people now that the SECURE Act has passed.
With the most tax-efficient strategy for managing an inherited retirement account now limited, you may be wondering how you will provide income for future generations, or perhaps leave enough assets behind to support your favorite charities.
One alternative to the stretch IRA to consider—especially for those who do not need current income from their retirement plans—is life insurance.
Traditional thought suggests you should use unneeded required minimum distributions (RMDs 1) to pay premiums on the purchase of life insurance, in order to increase the wealth you are able to transfer to the next generation.
By not waiting until distributions are required, more IRA funds are available during the IRA’s prime withdrawal years (between ages 59½ and 72). During this period, RMDs are not yet required and distributions are not subject to early distribution penalties.
Removes tax acceleration concern
With life insurance, you remove the concern over tax acceleration resulting from elimination of the stretch IRA for most people, which now requires a maximum payout over 10 years. In addition, life insurance may provide more advantages to heirs if the
RMDs or withdrawals being used as premiums can purchase a death benefit greater than the value of the IRA—and are income tax free.
Another plus to this strategy is that if used in combination with trusts, you can help ensure insurance proceeds are distributed according to your wishes.
With the elimination of stretch IRAs for most people, IRAs are less desirable as estate planning vehicles and life insurance may become a more attractive consideration. Life insurance would work best when IRA funds are not necessary to supplement your retirement. It also allows you to pass as much to your beneficiaries as possible—with maximum control and minimum tax.
The purchase of a life insurance policy is a simple route if insurability is not a concern—some IRA owners may either be uninsurable or pay increased premiums due to medical conditions. If this is the case, consider a second-to-die that provides benefits (free of income tax) to the beneficiaries only after the last surviving person on the policy dies.
Use of life insurance in combination with trusts
If you want to replicate the benefits of stretch IRA payments more closely, consider an irrevocable trust. Here, the life insurance policy would be purchased inside a trust for the benefit of your family, and the trust would be funded with your IRA distributions.
At death, the proceeds of the policy may provide a regular income stream to the beneficiaries, and may do so for longer than the 10 years currently allowed under the SECURE Act.
Using a trust also gives you more distribution control—which provides more flexibility as well as an alternative to a lump sum payment. A trust also provides creditor protection, and may be distributed estate tax free as well as income tax free.
Working with Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations
on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences. Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
1Please note, RMDs from defined contribution plans under 401(a), plans described in 403(a) and 403(b), eligible (governmental) 457(b) plans, and IRAs are waived for calendar year 2020 due to the CARES Act.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.