A fantastic tax savings opportunity may be going away in 2014, as the Obama budget is looking to eliminate the Stretch IRA wealth transfer planning tool. This planning concept became possible in 2001, but it appears that this tool is on the chopping block as the government searches to increase revenues.
The stretch IRA refers to a wealth transfer method that allows you to stretch your individual retirement account over many generations. It allows beneficiaries to stretch the proceeds from an inherited retirement account over their lifetime. If changed, non-spouse beneficiaries of retirement plans and IRAs would have to take full distribution of their inheritance within five years of the account holder’s death. If beneficiaries are forced to take distribution of large sums of money early, they will be taxed at a higher rate than they would be if they could leave the funds in the participant’s account and take money out gradually.
This would be a huge tax revenue producer for the US Government considering that the largest financial asset for the average American is their retirement account.
POSSIBLE SOLUTION: If you plan on leaving funds to charity at your death, then consider changing your beneficiary designation (Partial or All) on retirement accounts to a charity. Charities are exempt from income tax, therefore if this change comes to pass it is better to give your heirs taxable assets and leave your tax-deferred assets (retirement accounts) to charity.
IMMEDIATE PLANNING OPPORTUNITY: If you are over 70.5 and give money to charity…. DON’T give cash, instead use your IRA to make the gift thereby ridding your heirs of future tax liability. A qualified charitable distribution (QCD) is an otherwise taxable distribution from an IRA which is owned by an individual who is age 70½ or over, and is paid directly from the IRA to a qualified charity. The IRA owner can exclude from gross income up to $100,000 of a QCD made for 2013, in addition, a QCD can be used to satisfy any IRA Required Minimum Distributions (RMDs) for 2013.
NOTE: This may not apply to you if you are not 70.5, however it may be worth a mention to your parents/grandparents… to increase your after-tax inheritance!
Subscribe to LANDMARK Financial Advisors
Keep up to date on our latest thoughts—subscribe below.