WrapManager's Wealth Management Blog
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The “Never Ending” Story of the Stretch IRA

Posted by WrapManager's Investment Policy Committee

June 15, 2016

At least we hope it’s a never ending story. About two years ago, we wrote an article about the government potentially ending the Stretch IRA. Back then, there was a proposal being floated that would require non-spousal beneficiaries to receive and pay taxes on IRA distributions within five years of the IRA owner’s passing. The law never materialized, and Stretch IRAs are still a great potential tool for preserving wealth over generations.

But here we are two years later, and the proposal is back again—this time as part of the 2017 White House budget. The administration is seeking to accomplish the same thing it couldn’t accomplish back in 2014, to “require non-spouse beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years.”  

In layman’s terms, it means that if you inherit an IRA from someone you weren’t married to, you have to distribute all of the funds within a 5-year period, and possibly be responsible for all the associated taxes. Today, a non-spouse person that inherits an IRA can “stretch” out their distributions over a lifetime, in hopes of reaping the long-term growth benefits of a tax-deferred IRA.

In the proposed law’s defense, IRAs were never designed to be “legacy” accounts – they were designed to give people the opportunity to save for retirement in a tax advantaged way, and then use that money for retirement. Once the retiree passes away, the tax break should theoretically end – and the concept of a Stretch IRA runs counter to that.

As long as it remains on the table, however, investors who have inherited an IRA would be wise to consider it as part of their investment plan. It’s difficult to argue against leaving assets in a tax deferred growth account for as long as possible.

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