Do Resuscitate: Stretch IRA Strategy Still Works for Some Clients

Do Resuscitate: Stretch IRA Strategy Still Works for Some Clients

It’s best to keep up with the trend – that’s what the people say.

Well, not quite everyone agrees. Sometimes, wise old birds remember when things were less crazy, or so they say. Did you know baseball games used to finish in a day? Vinyl records sounded better? Bricks ‘n boards were better than Ikea? It isn’t all trustworthy, but listen attentively and perhaps they’ll slip you a fiver.

Sometimes, they’re even right – trust me, NBA players were once far better ballhandlers. But there’s another sort of socio-cultural laggard who insists on doing things ‘trad’, and the word for them, we fear, is ‘pests’.

In Singapore, a few years back, I was friends with a senior lady named Annie Khoo. She’d been around, was up with the latest, and had a fine warbling mezzo-soprano, displayed on our karaoke nights. One day, fulfilling a dream I couldn’t fathom, she got the urge to record an album. I know what everyone says these days, but some dreams should be left to wither.

High-quality recording is easy now, and there are small studios everywhere. Pronto, Annie laid down her tracks– a mix of American standards, Elvis, and something by the Eagles that I can’t bear recalling. Next, the online music craze – she’d heard of it and wanted in. Annie wasn’t really deft with computers; would Tho-mas, so clever and dear, be willing to help?

Annie was just a bit older than me, a lovely companion, liked Chinese cinema and Sinatra, was sharp-tongued with a smile, laughed gaily at my off-key baritone, had delicate hands, and when she wore her hair up, the curve of her neck… Well – hope springs eternal, even in equity research editors. So, yes, I said yes.

One fact tells all: her laptop, otherwise respectable, ran Windows XP. Further, if you need it, she’d somehow picked up an AOL email account – it sat there on her desktop, giving off the jittery vibes of a Ford Model A. The apps needed to manage music files wouldn’t run on XP – obviously. When I told Annie she must buy a new computer and all the attendant jazz, she said: “Why? This one works just fine for me.” I insisted, to no avail, and she finally went with some Plan B or another, and I never got to hold her hand.

Does it ever work? I don’t mean love or Microsoft products; rather, when things change, do we always have to accept it and move on? Take the case of the stretch IRA strategy, which most folks believe was a casualty of the Secure Act of 2017. It’s lost, forget it – time to move on. True enough in most cases, but what about the exceptions?

Since that watershed legislation, we’ve written often on workarounds to replace this now lamented estate-planning tool. I worry sometimes that by focusing on the ‘now’, we’ve left a key matter unprobed: the five categories of people who own inherited IRA accounts and can still employ the stretch IRA. If there’s been a deficit in reporting, let’s correct it now, because this issue is confusing the best of us.

The Secure Act fouled the stretch IRA by introducing a 10-year rule. The old scheme allowed an heir to spread the minimum distributions over a lifetime and even beyond. Now, inherited IRA accounts must be emptied of funds within ten years.

If the IRA is sizeable, annual distributions can force recipients into a higher tax bracket. Uncleared accounts hitting the 10-year wire must be liquidated, potentially creating the bland-sounding ‘tax event’ that haunts everyone within earshot. A more appropriately worded ‘tax bomb’ is not the legacy most would entertain, and while crotchety clients might be tempted by a ‘beyond-the-grave retribution’ strategy, we do not explicitly offer this product.

It’s all about gaining an exemption from the 10-year stricture. Surviving spouses are among those happy few: they can roll the inherited IRA into their own account, if they own one, or simply enjoy the benefits of what they’ve gained, with the minimum distributions determined by their own life expectancy. Younger spouses, take heart.

If an heir is up to ten years younger than the grantor, the 10-year rule does not apply. I’m not entirely certain why Congress included this qualification, but there it stands. The recipient can be related to the original plan holder, or not. It doesn’t matter; they can enjoy the benefits of the stretch IRA strategy should they so desire. Dear Congress: it doesn’t matter why; if it helps our clients, you’re doing a great job.

Minors are exempt, but only the children of the original plan holder qualify, while grandchildren or unrelated minors do not. Annual distributions are determined based on the child’s life expectancy, not the original plan holder’s; this may or may not matter, depending on whether the child has other means of support. Once the barrier age is reached – 18 to 21, depending on the state, or 26 for those going for a college degree – application of the old rules ceases and the 10-year rule comes into play. This isn’t a case of the full-on stretch IRA, but the rules do treat minor children with appropriately soft hands, we feel, at least until graduation.

Disabled heirs are exempt from the Secure Act’s new regime, as are chronically ill persons. These two categories are closely defined by law. Disability is relatively easy to certify, but the chronically ill must prove they cannot perform two activities listed in the daily living list defined by the Tax Code and the Secure Act. These include ambulating, feeding, dressing, personal hygiene, continence and toileting. Inability to perform two of these actions without assistance qualifies an ill person for a 10-year rule exemption. In both cases, proof of condition must be medically certified.

Don’t ‘Die Without a Will’: Life Insurance for Your Partnership Estate-Planning Strategies to Fill the Void Left by Stretch IRA’s Extinction