ira accounts – – Tradingsim

An IRA, whether a Roth or a traditional one, can be a great asset to an investor. However, if you change jobs, you may need to move that IRA to another account. If a person has a rollover IRA, they can move their older IRA to the new IRA. This TradingSim article will help readers learn how to roll over an IRA. This article will also help find the best stocks in an IRA.

What is a rollover IRA?

A rollover IRA is an IRA that can accept funds from an older IRA. Most rollovers happen when a person changes jobs, especially a self-employed person with a SEP. If they want to transfer their IRA, they can roll over their funds to another account.

How can you rollover an IRA?

There are many ways to rollover an IRA. Certified financial planner Marguerita Cheng from Blue Ocean Global Wealth says that while an IRA rollover seems easy, it involves more details.

“People think it’s straightforward. They retired, or they left their job, so they think they should do a rollover,” said certified financial planner Cheng.

However, Cheng warns that IRA holders can make mistakes with the rollovers.

“But there are mistakes that can happen,” said Cheng.

Cheng says account holders shouldn’t ask for a direct check payout from their previous IRA accounts. If an account holder receives a direct payout, the IRS taxes the funds at 20%. Cheng advocates that an account holder should specify that an old IRA should go to a new one.

“Make sure you’re specifying that you want to do a direct rollover,” said Cheng.

IRA to HSA rollovers are possible

A possible way to rollover IRA’s is to convert them to an HSA (health savings account. An HSA is a type of savings account that lets a person set aside money for health expenses.

Roy Ramthun is president of HSA Consulting Services. He says it’s important to make arrangements to rollover an IRA account to a HSA ( health savings account).

“I think it is better to make new contributions so you can take the tax deduction rather than using the IRA to HSA rollover, but if money is tight or you have large expenses, the rollover is a good way to take care of that situation,” said Ramthun.

Rita Assaf is a vice president of retail health savings accounts for Fidelity Investments. She said that HSA contributions can help people who want to convert their IRA’s.

“If you cannot afford to make new HSA contributions and need money for qualified expenses right away, then this funding method could help. This is especially helpful in the first year of owning an HSA and you need to access funds for a qualified medical expense early in the year before you’ve accumulated much in your HSA,” said Assaf.

Young people are at an advantage with IRA rollovers

Steven Hamilton is an enrolled agent who owns Hamilton Tax and Accounting in Grayslake, Illinois. He said that young people have an advantage in rolling over their IRA’s.

“Personally my favorite is to do the rollover at a very young age when they may not be able to make the contribution otherwise,” says Steven Hamilton, “This allows the funds to grow in the most advantaged way possible.”

In this COVID-19 economy with great uncertainty despite the stock market performing well, Raythun made an observation. He noted that a rollover from an IRA to an HSA could be helpful for unemployed account holders.

“This might be most helpful for someone who recently lost their job and is now on unemployment or facing COBRA premiums or large out-of-pocket expenses,” says Ramthun. “If cash is hard to come by, transferring money from an IRA to an HSA might be just the ticket.”

How to Roll Over a 401k to an IRA

Dominique Henderson, certified financial planner (CFP) and founder of DJH Capital Management said that 401k holders have options when they convert a 401k to an IRA. In the 401k plans, they are employer-provided plans. In contrast, IRA’s are individual retirement accounts.

“Often you have between six and 24 fund choices in a 401(k),” said Henderson. “With an IRA, you can choose individual stocks as well as funds—and even use alternative investments.”

Henderson advises IRA account holders to be aware of the tax consequences of a rollover.

“If you’ve received a tax benefit for your 401(k) contributions, you need to make up for that when you roll into a Roth, which is funded with after-tax money. You might owe a hefty tax bill today, so make sure you’re prepared,” said Henderson.

In addition to other financial advisors, Henderson also advises account holders to talk to tax professionals if they’re unsure of what action to take with a rollover.

“Talk to a tax professional if you’re rolling into an account with different treatment,” said Henderson.

Saving money with IRA rollovers is crucial

Henderson said that if an account holder doesn’t have a professional money advisor, they can put the IRA funds in low-cost index funds.

“If an investor doesn’t want to have those funds professionally managed, I would encourage [them] to use low-cost index funds, or maybe even a target-date fund. It’s going to reduce the probability of a negative outcome.”

“By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs.”

More advice about 401k to Roth IRA conversion

Michael Cohen is a retirement specialist with Certainty Retirement Advisors in Belvidere. He noted that no taxes will be owed on a conversion if the amount withdrawn from one account is identical to the funds in the new account.

“A person does not begin to pay tax on that withdrawal until they actually take constructive receipt of the money, meaning that they keep the funds in their bank account for 60 days or more, or that they spend the money,” he said.

Roth IRAs can help self-employed day traders — 401k rollovers can be different from IRA rollovers

He added that an account holder must choose their own retirement account.

“If you feel like you want to keep taking risk with that money at age 62, then you can roll that 401(k) into an IRA with any brokerage firm,” he said. “Keep in mind that there will be no tax consequence to you for converting the 401(k) into an IRA, but that money will all be treated as ordinary income — 100% taxable — as you begin to spend that money in retirement.”

More advice on rolling over 401k to IRA

Mark Dunsmoor is the senior vice president of Regency Business Development. He has advice for clients who want to rollover a 401k to an IRA.

“If you wish to open a rollover account, you must be certain to open the account and then arrange for 401 (k) funds to be transferred directly to it,” said Dunsmoor. “If you take possession of this money first, it will be considered income and you will be liable for paying income taxes on it.”

In addition, Dunmoor wrote about the great affect IRA accounts have on retirement.

“IRA accounts have had a significant impact on retirement savings since its inception nearly 45 years ago,” said Dunsmoor. “An Investment Company Institute survey in 2015 revealed that Americans had 7.6 trillion dollars in IRA’s. You know that number has only grown since then.”

Timing is key for an IRA rollover

Henderson agrees with Cheng that IRA account holders should avoid direct payouts from accounts.

“In many cases, you’ll end up with a check that you need to pass on to your new account provider,” said Henderson. “Open your new IRA before starting the rollover so you can tell the old provider how to make out the check.”

SEP IRA — IRA rollovers can help account holders

The goal, Henderson says, is to avoid keeping the money in your personal bank account. In addition, Henderson also tells IRA account holders that they should act quickly to avoid taxes on direct payouts.

“You only have 60 days to complete the transaction to avoid it being a taxable event. It’s best to have everything set up before getting that check,” said Henderson.

Account holders should exercise caution

Assaf said IRA account holders should make an IRA transfer with a trustee-to-trustee transfer.

“The key is that the transfer should be made directly through a trustee-to-trustee transfer,” said Assaf. “You shouldn’t withdraw the money from your IRA first as that could lead to a taxable event and penalties.”

Assaf agrees with Ramthun that account holders should meet with HSA specialists to handle IRA rollovers.

“You should call our HSA specialists to handle the transaction to ensure the IRA withdrawal isn’t treated as a taxable event. He recommends that account holders “make sure that the money rolled over into the HSA is treated as an HSA contribution,” says Assaf.

Assaf also advises account holders to treat their IRA like an HSA contribution.

“The key is to ensure the money rolled from the IRA is treated as an HSA contribution,” she says. “Some HSA administrators may send the trustee-to-trustee check to you. And in this instance, you will want to make sure that when you send the check to your HSA administrator to include either a letter of instruction or deposit slip. She said it should be
“indicating that the check should be treated as an HSA contribution.”

Should an account holder rollover an IRA in an economic downturn?

While an account holder wants to rollover an IRA, some financial advisers advise against a withdrawal in this economic downturn. Sophia Bera is a certified financial planner. She’s the founder and CEO of Austin, Texas-based Gen Y Planning. In this volatile economy, she said there is a dilemma for account holders.

“Sometimes there isn’t a really clear option,” said Berra.

“That’s why this is challenging,” added Berra.

In addition to that advice, Bera says that account holders should focus on more immediate needs.

“Focus on more immediate cash flow needs and let your 401(k) plan sit for now,” advises Bera. As a member of the CNBC Financial Advisor Council, she advises IRA account holders.

“You might have more options a few months from now,” said Berra.

Berra also agrees with Henderson that index funds could be best for some account holders.

“You can choose a bunch of index funds or lower-cost funds,” said Bera.

Ivory Johnson is a CFP and founder of Washington, D.C.-based Delancy Wealth Management. He advises account holders to rollover their accounts to an IRA instead of a new employer’s 401k.

“When you have economic growth declining and no inflation — or deflation — there are certain sectors, like consumer staples, utilities that usually do well,” said Johnson.

“You may not be able to pinpoint that inside a 401(k),” added Johnson.

Find a reputable IRA manager for rollovers

Johnson advocates that account holders should consult a tax professional before an IRA rollover.

“Interview several,” Johnson said. He also recommends that in addition to their credentials, an account holder should trust their advisor.

“You have to trust the person and you have to know that they are competent,” he said.

Financial advisor Sam Davis is a partner with TBH Global Asset Management. He said that a rollover from a company’s retirement plan to an IRA can be beneficial to account holders.

“Rolling over one’s funds from a company retirement plan to an IRA certainly opens up the world of investment options,” said Davis.

“If one prefers an advisor to manage those funds, research their track record, compensation model, client references, and investment philosophy,” Davis recommends. “If an investor doesn’t want to have those funds professionally managed, I would encourage [them] to use low-cost index funds, or maybe even a target-date fund. It’s going to reduce the probability of a negative outcome.”

Financial Expert can help people decide how to make IRA rollover

With IRA rollovers, Davis agrees with Hamilton that young people have an advantage with IRA rollovers.

“If one is young and working with a small balance, rolling the old retirement funds into the new employer’s plan can make a lot of sense,” says Davis. “This often reduces fees, ensures the person is prudentially invested, and consolidates accounts versus having small accounts scattered at various firms.

Some advisors want 401k rollovers into IRA’s

Berra wants account holders to rollover old 401k accounts into a new IRA.

“The market is down, so it might be a good time to put that money in now to have that growth on that money,” said Berra.

In addition, Berra said that the funds can be spread out.

“I’m a fan of having a little bit of money in different taxable buckets,” added Berra.

Melissa Brennan is a financial planner with ARS Private Wealth in Houston. In contrast to other financial advisors, she wants account holders to hold back on rollover their IRA’s.

“Someone might lose their job and want to roll over their 401(k) to an IRA. She said that “they underestimate how long they’re going to be unemployed” and may need those funds for emergencies.

What do financial advisors say about rollover IRA’s?

Dan Moisand is a financial advisor with Moisand Fitzgerald Tomayo. He gave detailed IRA rollover advice to a person asking for IRA rollover advice.

First, he spoke about the details of a rollover.

“A “rollover” IRA attaches to a traditional IRA. Most people do not split the contribution because they prefer the tax treatment of one over the other. But you can split the $7,000 between a traditional IRA and a Roth in any proportion you like as long as your income fits the eligibility criteria,” said Moisand.

Next, Moisand spoke about the tax implications of an IRA rollover.

“There is no tax deduction for a Roth contribution, but earnings can be tax free when distributed. If your Modified Adjusted Gross Income (MAGI) for 2019 is under $122,000 (single filer) or $193,000 (joint filers), you can choose to put all $7,000 ($6,000 regular contribution limit + $1,000 catch-up contribution. That’s for being over age 50) into a Roth IRA. Above those income limits a partial contribution is permitted. If your MAGI is above $137,000 as a single or $203,000 as a couple, no Roth contribution is allowed,” said Moisand.

In addition to that information, he added more insight.

“There is no maximum MAGI limit for contributing to a traditional IRA. But earnings are taxed as ordinary income when distributed. However, there are income limits that affect whether you can deduct the contribution to the traditional IRA. That can change “if you or your spouse participate in a qualified plan like a 401(k)”. If neither of you are a participant, whatever you contribute to the IRA is fully deductible,” said Moisand.

“These days, for most taxpayers, the designation of an IRA as a rollover IRA is not important but here are two situations in which the designation matters.”

What are some IRA rollover rules?

In addition to that advice, the expert also made more comments.

“First, some employer-sponsored qualified plans like 401(k)s will only accept incoming rollovers of money that was in another qualified plan or a rollover IRA containing only money from a qualified plan. If a roll-in to a new qualified plan is not in your future, contributing to the rollover IRA should not be an issue but if you want to preserve the rollover status, just open a second IRA and contribute to that,” said Moisand.

In additon to that advice, Moissand offered more guidance.

“Second, in some states IRAs provide less creditor protection than applies to qualified retirement plans like 401(K)s. Keeping funds rolled out from a qualified plan in a rollover IRA segregated from other IRA assets can preserve the more extensive creditor protection of the qualified plan,” concluded Moisand.

What is the timeline for an IRA withdrawal?

While an account holder has some time, they have to act quickly for an IRA withdrawal. FINRA, the government overseer of broker-dealers, said account holders have a limited time.

“By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs,” said FINRA.

In addition to FINRA, financial expert Lynn Brenner offered advice to a client.

“So what is a 60-day rollover? It’s what happens when you take an IRA distribution on which you don’t owe taxes because within 60 days you deposit the entire amount back into an IRA. The 60 days is a grace period in which you can replace an IRA distribution that you took by mistake or that you used as an emergency loan to yourself,” said Brenner.

In her advice column, Brenner also noted that the time restraints of IRA rollovers.

“You can only do one 60-day IRA rollover every 12 months, regardless of how many IRA accounts of how many IRA accounts you have. If you do more than one, any additional rollovers are treated as taxable income,” said Brenner.

In addition to that advice, Brenner offered more guidance.

“And if you redeposit an over-the-annual-limit rollover in an IRA, it’s treated as an excess contribution. She noted that the contribution is subject to a 6% annual penalty until you withdraw it,” added Brenner.

Should a person rollover an IRA during the economic downturn?

In this time of economic uncertainty, some financial advisors say that rolling over a 401k into an IRA could be beneficial for people who find themselves unemployed. Bobby Glotfelty is a senior licensed financial professional with Series 7, 24, and 65 licenses at Betterment. He noted that there has been an increase in 401k rollovers.

“We have seen a relatively large uptick of people rolling over 401(k)s into their IRAs,” said Glofelty. “A lot of these cases are people who are no longer employed or are still looking for employment.”

Glofelty noted that moving from a 401k to an IRA gives account holders more options.

“By moving into an IRA, you generally have more investment options than you would with a 401(k). Often, 401(k)s restrict you on what you can invest in,” said Glotfelty. With more investment options, like index funds and ETFs, you can invest more specifically to your goals.”

“By switching to an IRA, a lot of times you’ll find lower fees,” said Glotfelty. “It’s easier to figure out the fees you actually pay within an IRA.”

Glofelty also said that a rollover to a new employer’s plan doesn’t have to be so difficult.

“You can always roll your IRA assets back into your new employer’s 401(k),” Glotfelty says.

Gloefelty also says that 401k rollovers can help retirement account holders.

“In almost all cases, rolling retirement funds over to an IRA makes sense,” said Glotfelty.

Fidelity changes IRA rollover rules

Fidelity is a IRA provider that offers changes to its IRA rules to ease rollover rules. Dave Gray, head of workplace retirement offerings and platforms, spoke about the changes.

“Our goal is to be a market leader,” he says. “Most 401(k) recordkeepers are still urging participants to roll over once they leave.”

He said Fidelity won’t force Fidelity customers to turn old 401k’s over to IRA’s.

“It’s their choice,” said Gray.

Are IRA rollovers necessary?

Scott Smith is an analyst with Boston-based Cerulli Associates. Smith said that IRA rollovers have evolved and may not even be always necessary.

“Fidelity wants to be best in class,” Smith says. “Retirement recordkeeping is a big business. They won’t shun rollovers. But they want to let clients know [when] the best outcome is to stay in the plan… they’re still getting all of the advice.”

“Employers’ attitudes are changing and they are now more comfortable allowing people to keep their assets in the 401(k) plan even after they’ve left the firm.”

Randy Long is principal at SageView Advisory Group LLP in Irvine, Calif. He said that some account holders may want to keep their current retirement accounts.

Some financial experts advocate not making IRA withdrawals

“We’re seeing more and more participants, even after retirement, who leave their money in the plan,” said Long. “We still consult them. But they’re getting institutional pricing on those funds. If they roll them to an IRA, they don’t get the same institutional pricing.”

Gray notes that some account holders think 401k accounts are cheaper to keep in the long run.

“Some of the conventional thinking that 401(k) plans are cheaper than brokerage accounts continues to evolve,” Gray says.

Demographic changes causes Fidelity rollover changes

Mike Alfred is co-founder and CEO of Digital Assets Data Inc. He said the IRA rollover change at Fidelity is probably because of demographic changes.

“This feels like a natural evolution driven by demographics. The average 401(k) participant is getting older and approaching retirement,” Alfred says

Smith says that financial advisors have a leveling of fees that have to conform to compliance.

“I think firms have worked to level revenue regardless if it’s an IRA , or if participants stay in the plan. That way, they can minimize the potential for conflict of interest,” Smith says.

Gray says that retirees can have rollovers to IRA’s instead of depending on 401ks.

“Not all plans are designed to permit partial withdrawals or systematic retirement income withdrawal payments from their retirement plan,” said Gray.

Fidelity offers more flexibility for IRA rollovers

Gray said Fidelity’s retirement accounts can help account holders.

“Our solution now allows plan sponsors to offer a wide-range of withdrawal types and flexibility for participants who choose to leave their savings in the plan after retirement: a digital end-user experience, a customizable cash flow withdrawal strategy and a suite of dedicated retirement income funds, all of which seamlessly integrate into a company’s workplace savings platform,” said Gray.

Fidelity added in a statement that the plan will help retirees.

“The underlying exposures include a diversified mix of core and extended asset classes for a product specifically designed for customers in retirement seeking current income which differentiate this retirement income product from a standard all passive target-date product,” according to a statement.

Smith said that a retirement plan depends on a person’s individual needs.

“There are people who want more customized investments than they’d find in the 401(k) plan, which is designed for the masses,” he adds.”If you’re higher-net-worth, you need an IRA rollover with more [options].

Advice for retirees on IRA rollovers

Carolyn McClanahan is a certified financial planner at Life Planning Partners in Jacksonville, Florida. She had advice for a retiree couple on their IRA rollover questions.

“Since you’re both in your 60s, if you want to move your 401(k) money to a Roth IRA so that you can take out that money penalty-free, you don’t have to make a move at all. The 10% early withdrawal penalty applies to 401(k) account owners who are under age 59 ½, so you would not be penalized for taking money out. However, you will have to pay taxes as you withdraw the 401(k) money. With a Roth IRA, you can make tax-free withdrawals,” said McClanahan.

“One option is to withdraw your 401(k) over time to reduce the tax hit, McClanahan said. Another option is to do a 401(k) rollover into a traditional IRA. “Often, workplace 401(k)s charge fees to make withdrawals, plus you often have to go through an administrator to get distributions. IRAs at self-directed brokerages don’t have these types of issues,” continued McClanahan.

McClanahan also spoke of a third option for the retirees’ accounts.

“The third option is rolling all of the 401(k) money into a Roth IRA. Just keep in mind, you’ll “have to pay taxes on the entire conversion in one year, which can be pretty hefty,” McClanahan said.

No matter what IRA holders do with their accounts, here are five stocks that are the best to have in IRA’s.

1. Amazon the top pick for IRAs

Amazon( NYSE:AMZN) had an incredible Q3 2020 with net sales increasing 37% to $96.1 billion in the third quarter.

“Two years ago, we increased Amazon’s minimum wage to $15 for all full-time, part-time, temporary, and seasonal employees across the U.S. and challenged other large employers to do the same. Best Buy and Target have stepped up, and we hope other large employers will also make the jump to $15. Now would be a great time,” said Jeff Bezos, Amazon founder and CEO.

Amazon stock is a top choice for IRA rollover stock

“Offering jobs with industry-leading pay and great healthcare, including to entry-level and front-line employees, is even more meaningful in a time like this, and we’re proud to have created over 400,000 jobs this year alone. We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season. Big thank you to our employees and selling partners around the world who’ve been busy getting ready to deliver for customers this holiday,” added Bezos.

Amazon has been a COVID-proof stock and is a great addition to IRA holders’ accounts.

2. Proctor and Gamble

Proctor & Gamble (NYSE:PG) stock has soared during the pandemic. The maker of Clorox wipes had great growth. Jon R. Moeller is the Vice Chairman, Chief Operating Officer and Chief Financial Officer. She spoke about the Q3 2020 results.

“Fiscal year-to-date 6% organic sales growth; 16% core earnings-per-share growth; over 100% adjusted free cash flow productivity building share. Just two days ago, we announced a 6% increase in our dividend, reflecting both of these results and the confidence we have in our future. This was the 64th consecutive annual increase and the 130th consecutive year in which P&G has paid a dividend. So that’s January through March and fiscal year to date, very strong results in very difficult conditions,” said Moeller.

Proctor and Gamble is a top stock for IRA accounts.

3. Apple

In addition to Proctor and Gamble, Apple( NASDAQ:AAPL) stock is a strong one for IRA holders.

Apple stock a good option for IRA rollovers

CEO Tim Cook spoke about the company’s Q4 2020 revenue of $64.7 billion.

“Apple capped off a fiscal year defined by innovation in the face of adversity with a September quarter record, led by all-time records for Mac and Services,” said Tim Cook, the company’s CEO. “Despite the ongoing impacts of COVID-19, [the company] is in the midst of our most prolific product introduction period ever, and the early response to all our new products, led by our first 5G-enabled iPhone lineup, has been tremendously positive. From remote learning to the home office, Apple products have been a window to the world for users as the pandemic continues, and our teams have met the needs of this moment with creativity, passion, and the kinds of big ideas that only Apple can deliver.”

CFO Luca Maestri added more information about Apple’s strong Q4 2020 revenue.

“Our outstanding September quarter performance concludes a remarkable fiscal year, where we established new all-time records for revenue, earnings per share, and free cash flow, in spite of an extremely volatile and challenging macro environment,” said Luca Maestri, Apple’s CFO. “Our sales results and the unmatched loyalty of our customers drove our active installed base of devices to an all-time high in all of our major product categories. We also returned nearly $22 billion to shareholders during the quarter, as we maintain our target of reaching a net cash neutral position over time”.

Apple is a top holding in an IRA holder’s account.

4. Google

Google parent Alphabet (NASDAQ:GOOG) had positive Q3 2020 earnings with $38.1 billion. Alphabet’s CFO, Ruth Porat, spoke about the results.

“Total revenues of $46.2 billion in the third quarter reflect broad based growth led by an increase in advertiser spend in Search and YouTube as well as continued strength in Google Cloud and Play,” Ruth Porat, Alphabet’s chief financial officer, said in a release.

Google is a solid holding in an IRA rollover.

5. Tesla

While Tesla (NASDAQ:TSLA) is a controversial company, Tesla has proven to be a lucrative holding for IRA’s. Tesla CEO and Space X founder Elon Musk spoke about the electric company’s Q3 2020 results.

Tesla stock can be an interesting addition to an IRA rollover

“So Q3 was our best quarter in history. We achieved record production and deliveries, record revenue, record net income, both GAAP and non-GAAP, and record free cash flow of $1.4 billion,” said Musk.

Tesla’s chief financial officer, Zachary Kirkhorn, also spoke about the positive results.

“Overall, our financial health continues to rapidly improve with Q3 being another great quarter on nearly all dimensions, as Elon has mentioned. On net income, we achieved our fifth sequential quarter of profitability, our best net income, and nearly double-digit operating margins,” said Kirkhorn.

No matter how an account holder rolls over an account, all the above stocks are good holdings for an account.

IRA rollovers can help save money

IRA rollovers can be an effective way to save money during job changes. With TradingSim articles, an account holder can find the best options to handle their money for the future.

The Stretch IRA (individual retirement account) was a popular tax strategy. The strategy benefitted wealthy people who wanted to leave their robust retirement accounts to their heirs. However, there are alternatives to the retirement account that can benefit investors.

In this TradingSim article, I’ll explain what a stretch IRA is. I’ll also detail how people benefitted it from it before 2020. Then, I will explain how recent legislation essentially ended the stretch IRA. This article will also explain what alternatives exist to help taxpayers rebalance their portfolios to pass their retirement accounts down to their loved ones.

What is a stretch IRA?

A stretch IRA is a strategy that taxpayers used to pass a 401k or IRA down to a family member. When a person uses that strategy, they don’t have to pay taxes on the IRA after it’s passed down to their heirs.

The term stretch IRA comes from the ability to pass the account down from generation to generation and “stretch” the account for many years. If a taxpayer is investing on their own, they were able to to use stretch IRA’s to benefit their investment strategies.

Brian Graff is the president and CEO of the American Retirement Association. He wrote about the details of IRAs as estate planning for taxpayers.

“An IRA is an estate planning technique used to effectively spread the taxation of an inherited IRA by choosing a grandchild as a designated beneficiary,” wrote Graff.

“Under current rules, when an IRA account holder dies, the inherited IRA is generally required to be distributed over the life expectancy of the beneficiary. That would obviously be a long time — or ‘stretched’ — in the case of a grandchild beneficiary,” added Graff.

Financial experts explain the benefits of stretch IRAs

Jeffrey Levine is a tax expert and a CPA and CEO of BluePrint Wealth Alliance. He noted that many wealthy taxpayers have used the strategy to benefit their surviving family members after they pass away.

“It makes sense: Once you’re dead, you don’t need a retirement account,” said Levine.

Financial expert Ric Edelman is co-founder of Edelman Financial Engines. He said that stretch IRA’s were a source of income.

“The Stretch IRA was a loophole. IRAs are designed to be lifetime income for you,” said Edelman.

Apple stock is a popular stock for investors who have stretch IRAs

How is a stretch IRA different from a traditional IRA?

In a traditional IRA, a person takes the required minimum distribution after turning 72 by April 1. The IRS determines the required minimum distribution by taking the account balance on December 31 of the previous year.

After that, the IRS calculates the number of years left in an account holder’s life expectancy. The IRS “Uniform Lifetime” table makes that determination. The account holders and spouse beneficiaries withdrew their funds at a certain age. They withdrew funds by the age of 72 as well.

In contrast, in a stretch IRA, an account holder names their youngest relatives as beneficiaries instead of their spouses. The account gains value because it can take longer to cash out the IRA with a younger beneficiary.

The required minimum distributions are small enough to warrant smaller taxes. If an account holder’s spouse is named as a beneficiary, they roll the IRA over in their name. After that, they name a younger family member as a beneficiary to stretch the IRA without paying taxes.

Why are people against the stretch IRA?

While many wealthy people saw the stretch IRA as a way to expand wealth, many critics say it’s a way for the well-off to dodge paying taxes on their wealth. Former President Obama proposed a budget in 2016. In that proposed budget, non-spouse beneficiaries spend their IRA funds within five years. Tax expert Jeffrey Levine noted in 2019 that the limit would end the stretch IRA.

“In contrast, today such beneficiaries are generally able to extend distributions from their inherited retirement accounts over their life expectancy,” wrote Levine.

“To be very clear, this provision would effectively mark the death of the ‘stretch IRA,’ and all the tax benefits that come along with it,” added Levine.

Obama’s proposal in 2016 laid the groundwork for the SECURE Act.

Why is the stretch IRA “dead”?

The Setting Every Community Up for Retirement Enhancement ( SECURE) Act in 2020 marked the end of the stretch IRA in its current incarnation. In that legislation, there were a variety of changes to retirement account rules. As a result of the changes, an account holder’s beneficiaries have to withdraw from an inherited IRA within 10 years.

Because of that change, beneficiaries can’t stretch the IRA tax-free for generations. Bill Van Sant is the senior vice president and managing director at Girard. He commented on how the end of stretch IRA’s affect inherited accounts.

“The result will most likely be a quicker depletion of the inherited IRA but also more of the inherited IRA going to taxes, especially if the beneficiary is working during the time in which they have to spend down this IRA,” said Van Sant.

“For a lot of people, the bulk of their wealth has been established in their IRAs,” said Michael Repak, vice president and senior estate planner with Janney Montgomery Scott.

“This law, even though it didn’t get the publicity of the Tax Cuts and Jobs Act, will have an equal impact on estate planning,” he added.

“Any time a change like this comes along it forces the profession to revisit the arithmetic of their planning techniques,” said Repak. “Truth be told, we’re all in the same boat and trying to evaluate it all.”

What are the exceptions to the end of the stretch IRA?

Graff noted that there were exceptions to the end of the stretch IRA. He said the legislation “would change the rules so that it generally would require inherited IRAs to be distributed — and taxed — within 10 years. However, in the case of beneficiaries who are children, the 10-year period would not run until the child turns 18.

“So theoretically you could still ‘stretch’ the distribution for 28 years if the grandchild is a newborn, which admittedly is much less than the child’s life expectancy. It is important to note there are broad exceptions to this rule for IRA beneficiaries who are disabled and for surviving spouses,” added Graff.

While the stretch IRA is mostly ineffective, there are exceptions to the rule.

Minors are exempt from the 10-year rule until they reach the age of 18.
Beneficiaries are exempt if they’re no more than 10 years younger than the account holder. The law suspends the 10-year rule unto the death of the beneficiary.
Disabled or chronically ill people are exempt from the law until the disabled beneficiary’s death. Then, the funds are spent within 10 years.
A surviving spouse can roll over inherited assets into their own IRA’s to bypass the stretch IRA. The remaining assets are distributed within 10 years of the surviving spouse’s death.

What does the SECURE Act mean for taxpayers and their IRAs?

As a result, many IRA holders have to make changes to their accounts. Rhian Horgan is the founder of Kindur, a retirement financial technology company. He advocates that people make their spouses beneficiaries of their accounts. With that action, they can spend the IRA within the 10-year window.

“Check your IRA beneficiaries. It may be more beneficial to name your spouse, rather than children, as the beneficiary as they are not subject to the 10-year distribution rules,” said Horgan.

In addition, the required minimum distribution age to make withdrawals changed. Before the SECURE ACT, the age was 70 1/2. Now that age is 72. Tony Drake, a certified financial planner, explained the details of the age changes.

“If you hit age 70 1/2 in 2019, you will need to take RMDs for 2019 and 2020 even though you don’t turn 72 until 2021. Those who turn age 70 1/2 in 2020 do not have to take their RMDs until age 72,” said Drake.

The SECURE Act impacts retirement accounts like stretch IRA’s

How does the SECURE ACT impact workers?

“The SECURE Act pushed that limit to age 72, allowing for IRA owners to defer paying tax on those funds while they, hopefully, keep growing,” added Drake.

Drake also noted that the SECURE Act helps IRA holders who are still working.

“The SECURE Act allows you to continue contributing to your IRA at any age as long as you are still working. This gives you a valuable tax deduction and helps you save more for retirement,” said Drake.

Drake also noted that small business owners can benefit from the SECURE Act.

“It encourages more small businesses to offer employees a 401(k) by utilizing tax credits to cover some of the cost,” said Drake.

“The SECURE Act allows plan providers to include more guaranteed lifetime income options, or annuities, in employer-sponsored 401(k)s,” added Drake.

How does the loss of stretch IRAs impact overall IRAs and estate planning?

Leon LaBrecque, chief growth officer of Sequoia Financial Group, noted that the new legislation will “open the whole door to a lot of financial planning.”

LaBreque also said that the SECURE Act impacts wealthy taxpayers. In addition, the legislation will impact middle-class IRA holders that are diligent savers.

“It really changes planning for anyone with an IRA bigger than about $400,000,” said LaBrecque. “And it wouldn’t just impact those with an IRA today,” said LaBrecque.

He noted it will impact “anyone with a large 401(k), 403(b), a pension plan, or any other retirement asset that will eventually get rolled into an IRA. This affects regular folks.”

“This law, even though it didn’t get the publicity of the Tax Cuts and Jobs Act, will have an equal impact on estate planning,” he added.

What are the tax implications for IRA holders after the SECURE Act?

As a result of the SECURE Act, there are many implications for taxpayers. Jamie Hopkins is the director of retirement research and vice president of private client services at the financial advisory firm Carson Group. He notes that assets in an IRA would have less time to grow under the new legislation.

When a beneficiary withdraws from the IRA, they have to withdraw a greater amount of money that will push them into a higher tax bracket.

“For most people, that would push them into a higher tax rate,” said Hopkins.

That child is getting that money at a point in time when he or she is probably in their highest earning years,” say

David Levine is a tax attorney at Groom Law Group. He joked that it would be better for IRA holders to pass away in 2019. Taxpayers could have still benefited from the stretch IRA last year.

“In some cases, it may be better to die on Dec. 31, 2019 than Jan. 1, 2020,” said Levine.

How does the end of stretch IRAs affect trusts?

In this bear market, IRA beneficiaries have to spend the money quicker than before. Ed Slott, a financial expert noted that IRA beneficiaries have to spend money quickly from any conduit trust that helped heirs inherit money.

Conduit trusts were similar to stretch IRAs. Trusts are a form of estate planning that gives the trust holders more control over their retirement accounts. Because of that leeway, they can let young beneficiaries extend IRA benefits. However, Slott noted that with the SECURE Act, the money must be withdrawn within a decade.

“Money is out [from the trust] after 10 years, and may get paid out to the very beneficiaries you used the trust to protect it from,” said Slott.

“Your trust won’t work anymore the way you thought it did. This is an emergency planning situation,” added Slott.

What do financial advisors advise about the end of the stretch IRA?

Many financial experts have different kinds of advice about how to handle the changes to the stretch IRA. Melissa Kahn is an advisor for State Street Global Advisors. She wants investors to talk to their financial advisors to change their estate planning.

“Advisors will want to talk to their individual clients as well as their small plan employers who may have used the ‘Stretch’ IRA tax rules for estate planning purposes. They will need to be aware of the changes and perhaps pivot to other estate planning strategies,” said Kahn.

Frederick Brackin is an associate in Gunster Law Firm’s Tax Law and Private Wealth Services. He advised IRA holders to have conduit trusts as alternatives to stretch IRA’s.

“For instance, if the client has named a conduit trust as a beneficiary, then that should immediately be discussed because under the new rule the payments to a conduit trust would flow through to the beneficiary of that trust over the 10-year period instead of over the beneficiary’s life expectancy under the prior rule,” said Brackin.

“The client may not want the beneficiary of that trust to receive such a substantial amount outright and therefore it may be necessary to amend the trust to provide for an accumulation trust instead of a conduit trust,” added Brackin.

What do financial advisors says about inherited IRAs?

Brackin adds that financial advisors should help IRA holders and advise them on how to work around the end of stretch IRAs.

“Therefore, advisors should work with clients to determine if a full or partial Roth conversion may make sense in that client’s specific situation. A Roth conversion will not be recommended under all circumstances, but where the correct circumstances exist,” said Brackin.

“For instance, if the account owner can pay the income tax on the conversion with funds that are outside of the retirement account, then the Roth conversion may be a way to work around some of the income tax issues created by the new 10-year rule,” added Brackin.

Steve Parrish is co-director of the Retirement Income Center at The American College of Financial Services. He noted that inherited IRAs will have to be reexamined.

“Inherited IRA trusts will have to be completely redrafted. Some new planning may come where the inherited IRA is deferred for 10 years after death and then paid out as a lump sum.” said Parrish.

If IRA holders still want to stretch their retirement account benefits to their loved ones, here are the top five alternatives.

1. Accumulation trusts can be better alternative to stretch IRA

If IRA holders still want to extend their IRAs, they can put their funds in accumulation trusts. Accumulation trusts are exempt from the SECURE Act if account holders take action.

While the SECURE Act requires IRA beneficiaries to withdraw their funds within 10 years, accumulation trusts can be an exception. If an IRA holder chooses, the trustee can decide to stretch the withdrawals out for several years.

Accumulation trusts can have tax liabilities

Charlie Douglas, president of HH Legacy Investments, advises IRA holders to choose accumulation trusts. In that case, trustees have more control over how they give their heirs benefits.

“If you want the stretch benefit, you have to get rid of that [see-through] trust and go to an [accumulation] trust,” said Douglas.

While the trust may be beneficial to IRA holders, there is a tax burden. If they don’t choose traditional IRAs, there can be a hidden additional tax. With a traditional IRA, the trusts are taxed at a higher rate.

2.Roth IRAs a top alternative to stretch IRAs

In addition to accumulation trusts, Roth IRAs are another good alternative to stretch IRAs. Financial advisor Michael Repak noted that the change to stretch IRAs may make investors look closer at Roth IRA’s.

“This will force people to take a hard look at Roth conversions,” said Repak.

An IRA conversion to a Roth IRA would mean a reduced tax bill for the account holders. In contrast, the IRS taxes withdrawals from traditional IRAs at a higher rate.

Google stock is a common holding in Roth IRAs

IRA expert Ed Slott noted that the Roth IRA’s can be a better alternative to a stretch IRA. It can also be better than a traditional IRA.

“That strategy was not workable once you turned 70 1/2 because the process starts by being eligible to make a contribution to a traditional IRA. Now, they can do the backdoor Roth even after 70 1/2,” said Slott.

When the IRA holder first converts their traditional account to a Roth IRA, there is a tax penalty in the year of the conversion. The original account holder pays income tax on the money that’s converted into a Roth IRA. Because the original money was never taxed, it has to be taxed as income.

Many taxpayers may see this conversion as costly. However, Rehak notes that the extra cost will have long-term benefits.

“Just about every planning technique involves some trade-offs. But the trade-offs can be worth it, said Repak.

How can heirs benefit from Roth IRAs?

Non-spouse beneficiaries of IRA holders withdraw benefits tax-free if the money was contributed using after-tax income. That’s possible if the account was five years old when the IRA holder passed away.

Rob Greenman is a financial adviser and partner of Vista Capital Partners. He commented that the tax liability for heirs can be lower. That’s possible if they’re in the same tax bracket as the original IRA holder.

“Chipping away at the future tax liability due on withdrawals at low-income bracket levels over a number of years could be a favorable move,” said Greenman.

Christine Russell is a senior manager of retirement and annuities at TD Ameritrade. She recommends that IRA holders have different accounts for heirs that have different incomes.

“A solid strategy now is to have multiple primary beneficiaries,” says Russell.

“You could leave a bigger traditional IRA to a low earner, and a smaller Roth IRA to a high earner,” added Russell.

New Roth IRAs can help sidestep stretch IRAs

LaBrecque advised IRA holders could fund a completely new Roth IRA to leave inheritances to their heirs. The contribution limit is $6,000 if an account holder is under 50. If the account holder is 50 and older, the limit is $7,000. The income limit is $137,000 for single taxpayers and $203,000 for married couples.

LaBrecque noted that Roth IRAs can be part of an inheritance to bypass stretch IRAs. He also commented that Roth IRA’s can be used to sidestep the stretch IRA instead of leaving liquid cash.

“Instead of trying to leave them money when you die, you can use a Roth as part of their inheritance,” said LaBrecque.

Slott noted that wealthy IRA holders want to make sure the funds are not squandered or lost.

“Clients [with the largest IRA balances] are naturally concerned about post-death control. They built large IRAs and want to make sure that these funds are not misused, lost or squandered,” said Slott.

He notes that that IRAs are misused “by beneficiaries due to mismanagement, lawsuits, divorce, bankruptcy or by falling prey to financial scams or predators.”

“In order to keep your client’s IRA estate plan intact, the IRA portion will probably have to be replaced with either a Roth IRA (via lifetime Roth conversions) or with life insurance, which offers better leverage and flexibility since it won’t be subject to any post-death Secure Act limitations,” said Slott.

What do financial advisors say about Roth IRA taxes to bypass stretch IRAs?

Financial experts have tax advice about Roth IRA conversions. Jeffrey Corliss is managing director and partner at RDM Financial Group. He advises IRA holders to pay taxes on Roth conversions from outside assets.

“You want to pay the taxes due on the conversion from outside assets and not from the converted IRA assets. Due to penalty issues, it is never better to pay with funds from the IRA being converted, especially if you are under [age] 59 ½,” said Corliss.

Corliss also believes that a Roth IRA would be a good alternative to a stretch IRA.

“Given the change to the stretch IRA provision in the SECURE Act, doing a Roth IRA conversion may make sense and is at least worth looking into with your tax adviser,” says Corliss. “It may save you or your heirs many dollars in income taxes.”

Van Sant spoke about how IRA beneficiaries can have tax benefits from Roth IRA’s.

“The original IRA owner will begin converting all or part of their IRA into a Roth IRA during their lifetime,” says Van Sant. “Although upon the original owner’s passing, the beneficiaries will still have to deplete the Roth IRA within 10 years, there will be no tax consequences [for the inheritors] as distributions from Roth IRAs are not subject to federal taxes.”

3. Life Insurance

In addition to Roth IRA’s, life insurance is an option for people who want to bypass the stretch IRA’s.

Financial expert Ric Edelman noted that life insurance can be an asset to taxpayers. They can benefit from having a life insurance policy to pass down to heirs.

“Parents can spend all of their assets and the kids still get an inheritance,” said Edelman.

What are the tax benefits of using life insurance to bypass the stretch IRA?

Greg Hammond is a financial professional with Hammond Iles Wealth Advisors. He noted that life insurance policies can reduce the taxes heirs have to pay.

“This strategy can be used by individuals of any age to increase the impact of their retirement funds. ” It can also “reduce the tax burden on their future heirs while paying less in income and estate taxes,” said Hammond.

Hammond noted that a life insurance policy can help limit tax liabilities for IRA holders.

“This ‘double impact’ retirement account strategy uses distributions from a retirement account to pay for a life insurance policy owned outside of the individual’s taxable state,” said Hammond.

It would “thereby leave an income and estate tax-free inheritance to their future heirs,” noted Hammond.

“Both the heirs and the charities receive the benefit of the planning, while potentially avoiding taxes,” added Hammond.

This is especially critical when you need to pay for a life insurance policy for a family member over the age of 80.

Example of Walt Disney Stock with earnings of $1.62 — Disney stock is a common stock that’s passed down through stretch IRAs

While using life insurance as an alternative to stretch IRAs is a good strategy, it isn’t always affordable. If an IRA holder lists an heir as a beneficiary on a life insurance policy late in life, it may cost more. Michael Roberts is president of Arden Trust Company. He warns policy holders to add their beneficiaries as soon as possible.

“That premium wouldn’t be cheap, and you would need to be insurable,” said Roberts.

If IRA holders want to find an alternative to stretch IRAs, a generous life insurance policy is always a good option.

4. Donating to Charity

Another way to bypass stretch IRAs is to donate IRA funds to charities. Keith Bernhardt is vice president of retirement income for Fidelity Investments. He noted that charitable contributions can help an IRA holder’s heirs.

“You might also want to do charitable giving from an IRA now and leave more money in other assets to heirs”, said Bernhardt.

How does charitable giving have an effect on taxes without a stretch IRA?

Craig Wild is a CPA and senior partner at Wild, Maney, & Resnick, LLP. He noted that taxpayers that take the standard deduction could lose a tax benefit.

“People that make charitable donations are losing the tax benefit if they’re taking the standard deduction,” said Wild.

If taxpayers over 70 want to make a direct donation from their IRA’s to charity, it can help heirs- and reap tax benefits. Wild noted that a qualified charitable contribution can meet the requirement to take minimum deductions.

“That’s an indirect way to get a tax benefit,” said Wild.

In addition, there are ways to help the beneficiaries as well.

Tim Steffen is a CPA and wealth management consultant with PIMCO. He echoes Wild’s assertion that the trust payment can copy the required minimum distribution to a beneficiary.

“In these cases, the payment you get off the trust can replicate the required minimum distribution the beneficiary would have taken from an IRA,” said Steffen.

“You get a payment from the charitable remainder trust instead of the IRA each year,” added Steffen.

While there is a tax deduction, the amount may be less because of the IRS. Thomas Neuhoff is a CPA with Henry & Peters in Tyler, Texas. He noted that the charitable deduction may be less than expected.

“The charitable deduction up front is so much smaller because of the rate set by the IRS,” said Neuhoff.

5. Create a charitable trust to bypass stretch IRA

In addition to giving money to a charity, IRA holders can create charitable trusts as an alternative to stretch IRAs. While it is possible, the amount in the IRA that a holder needs could be hefty. Robert S. Keebler is a CPA and partner with Keebler & Associates LLP. He noted that a great amount is needed in an IRA to create a charitable trust.

“Realistically, you’ll need at least $500,000 in the IRA to make it worthwhile,” said Keebler.

If there is a tragedy involving an heir, Keebler notes that the money in the trust still goes to a charity.

“If you do it for the life of your child, and the child dies a month after you do”, there is a consequence. “Then that money goes to charity,” said Keebler.

What are the tax implications of a charitable trust to bypass stretch IRAs?

Scott Bishop is vice president of financial planning with STA Wealth Management. He explained how charitable trusts are created.

“The asset owner could create and fund the trust with IRA assets at death, and beneficiaries would get a regular income stream from the trust,” said Bishop.

He also added that “similar to the required minimum distributions from an inherited IRA, which could be distributed over a certain amount of time or the beneficiary’s lifetime.”The assets are only taxed when they leave the trust.”

Repak noted that the longer that a person should carefully plan their charitable trust.

“The longer the period for the stream of payments, the less the tax deduction, so the term of the trust should be considered and coordinated with the IRA owner’s family goals and objectives,” said Repak.

“I think this is one of the most interesting options, but it’s important to bear in mind that this works best for a family that already has philanthropic intentions,” said Repak.

While giving to charity is something people should do anyway, creating a charitable trust can offer a way for IRA holders to help their heirs as well.

Alternatives to stretch IRA can help account holders and their heirs

While the stretch IRA is effectively over, there are still options for account holders. These alternatives can help account holders pass down their hard-earned assets to their loved ones. With TradingSim’s informative articles, people can find the best information to have the best financial futures.

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