Recent Changes Could Affect your IRA Planning

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The New Rules for Inherited IRAs: Protecting Your Family’s Nest Egg

For decades, the “Stretch IRA” was a cornerstone of retirement planning, allowing beneficiaries to stretch out distributions—and tax deferral—over their entire lifetimes. However, recent changes in the law have completely upended this strategy, creating significant new tax burdens and asset protection risks for your children and grandchildren.

The End of the Stretch: The SECURE Act’s 10-Year Rule

The most significant change is the elimination of the Stretch IRA for most non-spouse beneficiaries. Under the new rules, most children or grandchildren who inherit an IRA must withdraw the entire account balance within 10 years of the original owner’s death. This has two major consequences:

  • Accelerated Taxes: Forcing a full withdrawal within 10 years can push beneficiaries into their highest earning years and a much higher tax bracket, significantly reducing the net value of the inheritance.
  • Loss of Compounding Growth: The ability to let the funds grow tax-deferred for decades is now gone for most heirs.

The Creditor Protection Problem

In addition to the new tax rules, a landmark U.S. Supreme Court decision (Clark v. Rameker) ruled that inherited IRAs are not considered protected “retirement funds.” This means that once your child or grandchild inherits your IRA, those funds are exposed and can be seized by their creditors in a lawsuit or bankruptcy.

The Solution: Using a Trust to Protect Your IRA

Given these new challenges, simply naming a child as a direct beneficiary on your IRA may no longer be the best strategy. For those with significant retirement accounts or concerns about a beneficiary’s financial situation, the most powerful solution is often to create a specialized trust and name that trust as the IRA beneficiary.

A properly drafted “IRA Trust” can:

  • Provide Asset Protection: By holding the IRA in a trust, the funds can be shielded from a beneficiary’s future creditors, lawsuits, or a divorce settlement.
  • Control Distributions: The trust can control how and when the funds are distributed, protecting a beneficiary who may be a spendthrift or not ready to manage a large sum of money.
  • Manage Tax Consequences: A trust can be structured to manage the tax impact of the 10-year payout rule, providing more strategic control over the distributions.

The rules for retirement accounts are a critical and complex part of creating a modern estate plan. A simple beneficiary designation that worked years ago could now create significant problems for your family. Call our office at (919) 256-7000 to schedule a consultation.