The “stretch” IRA generally no longer exists. But with a substantial balance in a traditional IRA, a properly-designed charitable remainder trust (CRT) can replicate many of its benefits.

The SECURE Act’s effects on the stretch IRA

A stretch IRA was an effective tool allowing beneficiaries to stretch inherited IRA savings over their life expectancies. An advantage there was that funds continued to grow and compound on a tax-deferred basis for decades. However, the SECURE Act generally killed the stretch IRA, beginning on January 1, 2020. Most beneficiaries of inherited IRAs are now required to withdraw all of the funds within ten years.

Withdrawing IRA funds quicker means paying income taxes on those funds when taking distributions out, whether they need the money or not. It may also result in pushing them into higher tax brackets.

Note that these rules don’t apply to spouses who inherit IRAs. As before, they may roll the funds into their own IRAs and defer distributions until they reach age 72. The SECURE Act designates other potential beneficiaries for which a stretch IRA is still an option, such as:

• A person who isn’t more than ten years younger than you (whether related to you or not)
• A disabled or chronically ill person (as defined by the SECURE Act)
• A minor child, provided they are the sole beneficiary of a separate share of the IRA, either outright or in trust

For a minor child, annual distributions may be based on the child’s life expectancy until reaching the age of majority (usually 18 or 21). After which, they must distribute the remaining IRA funds within the next ten years.

The charitable solution

Leaving your IRA to a CRT may come close to duplicating the benefits of a stretch IRA. And even though the trust must preserve some of its assets for charity, the tax savings enjoyed by your heirs often make up for the loss of principal.

Here’s how it works:

You provide in your estate plan that on your death your IRA will be transferred to a CRT. This is an irrevocable trust that pays out a percentage of its assets to your children or other beneficiaries for life (or for a term of up to 20 years) and then distributes its remaining assets to one or more charities. A CRT is a tax-exempt entity. So, any assets you contribute to the trust — including IRAs — aren’t subject to tax unless they’re distributed to noncharitable beneficiaries.

The longer distributions can be stretched out, the closer a CRT comes to replicating a stretch IRA. It’s important to note, however, that it depends on the age of your beneficiaries when you die. Contact our RRBB accountants and advisors for more information.

© 2022