Stretch IRAs – First Quarter 2015 Report

It has been a long, long harsh winter but hopefully it is just about behind us. The up-and-down first quarter of 2015 marked the ninth successive quarterly rise for the S&P500, albeit a small one at .04%. The US dollar continued to reign supreme in the foreign exchange market. This quarter brought a surge in demand for the dollar and the beginning of quantitative easing in the eurozone. The US economy continued its tepid, slow recovery while the rest of the world continued to be an economic problem, as it is mostly in recession. Despite this, US exports and imports increased and hopefully, the imports will bolster the international economy. Investors continue to wait for an indication of when the Fed will start raising interest rates. The American consumer continues to be the silver lining as confidence increases. This is understandable as income adjusted for taxes and inflation jumped 7.7% this quarter.

Once again, the budget proposal put forth by President Obama for the 2016 fiscal year once called for the elimination of the “stretch IRA”. This is a wealth transfer method that allows non-spouse beneficiaries of IRAs to take Required Minimum Distributions (RMD) over the course of their lifetime, allowing more funds to remain in a tax-sheltered account for longer and income to be kept low.

The elimination of the stretch IRA may not happen this year, but it’s demise seems inevitable. Besides the obvious reason of the US government wanting new revenue from the taxation of these accounts, there are other factors that put stretch IRAs at risk. IRAs were never meant to last beyond a person’s lifetime, allowing for wealth transfer across generations. Recently, the Supreme Court ruled that beneficiary IRAs are no longer considered a retirement fund, and therefore are not subject to bankruptcy protection. So if the Supreme Court does not consider stretch IRAs to be retirement accounts, it will be easier for Congress to eliminate them.

Under the latest proposal, the stretch IRA payout period would be limited to five years. On the one hand, this is a devastating loss for IRA owners and estate planning purposes. There may be unintended consequences, though. There may be a marked decrease in IRA owners converting IRAs to Roth IRAs. It won’t make sense to convert and pay a large tax bill just so a children or grandchildren can make withdrawals over a five year period. It is also possible that IRA dollars will be shifted to life insurance policies that would allow tax-free distributions to beneficiaries, no RMD rules and the ability to incorporate trusts into an estate planning strategy. So clearly, there will be other options available upon the elimination of the stretch IRA. Until then, we will just have to watch the President and Congress closely.

As always, if you have any questions or wish to discuss your portfolio, please contact our office.

Warm regards,

Olivia A. Mussett, CFP®


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