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Due to recent tax law changes, primarily from the SECURE Act of 2019, a recent popular topic of conversation was the amended rules on inheriting a retirement account. For decades, non-spouse beneficiaries (adult children) have been able to take advantage of rolling over a deceased parent’s IRA into their own Beneficiary or Inherited IRA. This provided a way to take annual RMDs (Required Minimum Distributions) over the beneficiary’s life expectancy, therefore spreading out paying taxes on these funds sometimes for decades. It became known as the “Stretch IRA” by stretching out distributions and taxes over their life expectancy.
One of the few disadvantages that came about in 2020 from this Act was the elimination of this provision, now requiring any IRA funds that are inherited to be spent down within 10 years. So, you can still “Stretch” for up to 10 years, but by the end of the 10th year, it has to be fully liquidated. This is a creative way to generate more tax revenue, without technically raising taxes.
In many cases it may not be, but if you’re like many savers we meet with, the majority of you or your parent’s retirement savings has been in the form of the 401(k)s and IRAs that eventually get passed down.
At what age are most people likely to be when their parent’s pass? Typically, between ages 50-70, or potentially their highest earning years. Now, if you inherit say a $500k IRA and had to distribute it over 10 years, it is adding those distributions to your taxable income each year and could bump you into a higher tax bracket, which are scheduled to increase in 2026.
One solution we’ve used for future planning, surprisingly, is permanent life insurance. Since life insurance death benefit proceeds are tax-free (up to the high estate tax limit), we’ve found certain policies could be funded from current unused RMDs or current low interest savings to be inherited and continue to be stretched out past the 10-year rule.
An example of this may be someone in their 60s or early 70s funding a policy with $50k annually from an IRA to purchase a $2 or $2.5 Million permanent insurance policy to leave behind, tax-free. If they believe there will be IRA funds left to their children regardless of their spending needs, they can pay some of the taxes now at an assumed lower rate, leave it to their children without affecting their taxes, and they can decide how long to stretch out the distributions and have more control and flexibility. Even at age 90, we are seeing the taxable equivalent yield typically between 5-8%, depending on insurable health ratings.
We’ve seen it become a popular strategy to help shield against rising tax rates and retain more flexibility planning a future estate. If you’ve saved a lot of your retirement in IRAs or 401ks, or are worried about a parent’s IRA/401k inheritance, this is a simple solution that may help make those funds last longer and potentially losing less of your hard-earned savings to Uncle Sam.
For a complimentary financial planning evaluation, reach out to Douglas Marion with Advanced Wealth Strategies, conveniently located in Cornelius at 19520 W. Catawba Avenue. Feel free to call or text (704) 765-3653 or email [email protected]. As fiduciaries, their independent firm will prioritize your best interests.
Douglas Marion manages Advanced Wealth Strategies. He meets with clients interested in investment management, income planning, and creative insurance services.
Investment Advisory Services offered through AlphaStar Capital Management, LLC., a SEC Registered Investment Adviser. AlphaStar Capital Management, LLC and Advanced Wealth Strategies, Inc. are independent entities. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level or skill or ability. Insurance products and services are offered through Advanced Wealth Strategies by individually licensed and appointed agents in various jurisdictions.
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