BECAUSE THE STRETCH IRA can be such a financial bonanza for beneficiaries, there’s been talk in Washington of forcing nonspouse beneficiaries to empty inherited retirement accounts within five or 10 years of the original owner’s death. These proposals haven’t become law, but the idea appears to be gaining currency and, indeed, it’s included in legislation that’s now being debated in Congress.
Even if the stretch IRA is eliminated, there’s no need for drastic action—but you may want to make four financial tweaks. First, you might draw more heavily on your traditional retirement accounts to pay your retirement living expenses, while setting aside taxable account investments for your heirs. Those taxable account investments would still benefit from the step-up in cost basis that will occur upon your death. That means your heirs would inherit your taxable account with no capital gains taxes owed.
Second, you might convert part of your traditional retirement accounts to a Roth IRA, and then leave the Roth to your heirs. If the stretch disappears, a Roth would also have to be emptied within five or 10 years—but your beneficiaries wouldn’t have to pay taxes on it. By contrast, withdrawals from an inherited traditional retirement account would be on top of the other income that your heirs already earn, and thus those withdrawals could push them into a much higher tax bracket.
Third, you might name more beneficiaries for your traditional retirement accounts. That way, the withdrawals would be less per beneficiary—and hence less likely to force them into a significantly higher tax bracket.
Finally, if you plan to leave money to charity upon your death, you might leave your traditional retirement accounts, while saving your Roth and your taxable account for your children and other family members.
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