Posted by Editor's note: In a report by the American Life Insurance Guide in April last year, with the "SECURE Act (Security Law)The adoption and implementation of "will force to be called"Stretch IRAs"ofTraditional tax saving strategyMeans are suppressed.This will directlyParents who want to leave their retirement wealth to their childrenhave a huge impact.
The new problem of leaving property for children
For many years, the use of "Stretch IRA (Stretch IRA)" is a popular industry financial planning strategy. By allowing the next generation of beneficiaries to allocate the IRA account, it can be extended to extend the non-spouse beneficiary's IRA account deferral. Among them the income tax.
As the tax law changes after 2020, the future heirs will "extend individual retirement accounts" (Stretch IRAs) No longer has the effect of reducing income tax for a long time. This article will be shared and introduced by financial expert Jim.Under the new IRA account asset inheritance regulations, what problems will be faced when passing on IRA assets to children? At the same time, in the following column, what solutions do we provide?
What is Stretch IRA?
Stretch IRA, sIRA for short, is one of the most advantageous ways for children to inherit large accounts.
BecauseIRA (Individual retirement account) Has tax advantages, and young children and heirs have more sufficient time to enjoy the tax advantages of the account, at the cost of having to withdraw a small part of the amount each year.
For example, under the law before 2019, ifAmerican Life Insurance GuideThe reporter is 22 years old this year, and as a beneficiary inherited a $1 million IRA account from his elders, then my RMD this year ( Rrequired Mminimum Distribution, the minimum withdrawal amount) is $16,400, or 1.64% of the account amount. RMD is subject to personal income tax.
At this time, we skip 18 years. This year, assuming that I am 40 years old, how much money do I have to withdraw this year?Only 2.32% of the current IRA account amount.
Considering the account income in 18 years, it is not difficult to see that this method has both tax advantages and capital accumulation advantages.
The impact of the new bill on saving money for children
However, with the passage of the "Security Law" at the end of 2019, this is very popular for non-spouse IRA beneficiaries.The frequently used income tax extension and reduction tools have been basically eliminated from 2020.
According to the new law, non-spouse beneficiaries* who inherit an IRA must withdraw all undrawn assets held by the IRA at the end of the 10th year after the death of the IRA owner.
Before, Non-spouse beneficiaries can extend the distribution period (and the taxes that must be paid for these distributions).For young beneficiaries it may be extended for decades, butNow.Such beneficiaries must distribute within 10 years and pay the necessary taxes all at once.
This means that assets must now be allocated on a shorter runway, resulting in larger allocations than every time, or allocations that are not originally required. Therefore, the impact of income tax on assets will also increase.
As a result, many non-spouse IRA beneficiaries will suffer a greater tax hit than the original plan.
How will they spend a sum of money to pay taxes?This is the problem that the heir needs to face now.
case study:
The first generation: John's father, 1 years old. The second generation: John, 68 years old. The third generation: John's children, 2 years old, 45 years old.
Goal: To prepare for the ten-year distribution storm, to ensure that the assets earned during the lifetime are reserved for the next generation
John is a 45-year-old father of two children, and he is the sole beneficiary of his 68-year-old father's IRA.Over the years, John's father has accumulated a large amount of retirement assets in various company and personal retirement accounts and IRAs.
According to the new law, John's father will no longer need to start allotment withdrawals from his IRA before he turns 72.In addition, his father continued to work until the normal retirement age.
According to the "Security Law", as long as his father is still working, his father can continue to contribute to his personal retirement account, thereby further increasing the balance of the personal retirement account.but,His father's health has been declining recently.
Taking all these factors into consideration, if John’s father dies before the "Minimum Distribution Required" (RMD) required by the tax law, John will most likely inherit an IRA with a large account balance or transfer from another retirement account to the first generation. Funds on the IRA.
In the past, this inherited IRA was a huge asset for John's second generation, which can be used to obtain additional and perhaps higher income from account investment in John's life.
but,Now under the new law, John will have to accept all distributions within 10 years after his father's death. Based on the amount John must withdraw to empty the account every year for 10 years, this may put John in a higher income tax rate range, and he may owe more income taxes.
Faced with this new situation after 2020,When parents and elders want to leave IRA to the next generation of young people, what common structures and solutions are there to maximize the inheritance and distribution of IRAs will be the subject of our next article.
