retirement account –

Wall Street is in a bull market. However, self-employed people still have to navigate hard financial issues. They don’t have the luxury of traditional IRAs or restricted stock units. However, when they’re trying to save for retirement, there can be options.

A simplified employee pension(SEP) plan is one way that a self-employed person or an independent contractor like a day trader can still save for retirement. This TradingSim article will explain how a self-employed person like a day trader working from home can open a SEP. This article will also help business owners find the best SEP for them.

What is a SEP IRA?

A simplified employee pension plan is a retirement savings plan that small business owners establish for themselves and their employees.

Howard Pressman is a financial planner with Egan, Berger & Wiener in Vienna, Virginia. He said SEP IRA’s are a great retirement saving option for business owners or independent contractors.

“SEP IRAs and solo 401(k)s are great options for self-employed people and should be considered by anyone wishing to save for their future,” said Pressman.

How can a self-employed person open a SEP IRA?

If a self-employed person wants to open a SEP, they must file paperwork with the IRS. In addition to that paperwork, an entrepreneur can file through Form 5305-SEP. However, there are exceptions. If an employer already has another 401k retirement plan or has leased employees, they may not be able to use that form.

Then, entrepreneurs should consult a financial planner to find the best account provider for them. After consulting a financial planner, business owners must set up a SEP IRA for their employees.

Ryan Repko is a certified financial planner at Ruedi Wealth Management. He maintains that SEPs are simple to set up.

“SEPs are very easy to establish and have virtually no filing requirements, which makes them very attractive for small businesses,” said Repko.

Where can a self-employed person open a SEP?

Greg Wells is vice president of EP Wealth Advisors. He recommends places where people can open SEP IRAs.

“We recommend one of the discount brokerage firms who have no setup fees, no maintenance fees, extremely low trading cost and commission-free options,” Wells says. “[Charles] Schwab, Fidelity and TD Ameritrade are all great low-cost options, and easy to work with if a client is up against the deadline.”

Financial experts give SEP advice

Todd Youngdahl, a certified financial planner, said it’s affordable to set up a SEP.

“In most cases, there is no set-up fee for a SEP IRA and no annual custodial or maintenance fee,” Youngdahl says.

Wayne Bland is a financial planner for Metro Retirement Plan Advisors. He advises employers to set up SEPs with an Employee Identification Number (EIN). Bland says that’s a better option than using their own social security numbers.

“I’ve never seen anyone set up a SEP under their own social security number, it’s always been under an EIN number,” said Bland.

How is a SEP different from a traditional IRA?

In many ways, SEP IRAs are similar to traditional IRAs. With both, IRA holders must wait until they’re 59 1/2 to make tax-free withdrawals. Once an account holder is 72, there are required minimum distributions. These mandatory withdrawals are the same for both types of accounts.

While a traditional IRA may seem more advantageous, a SEP could have more benefits for business owners. Traditional IRAs have lower savings limits than SEPs.

In 2020, self-employed people can contribute either 25% of their income or up to $57,000 a year, whichever is lower. That’s a $1,000 increase from 2019.

Archie Ponce is a certified financial planner and executive vice president of Optima Asset Management. He noted that self-employed people contribute more to SEP IRA’s than traditional IRA’s and stretch IRAs.

SEPs lets self-employed save money

“SEP IRAs provide the self-employed business owner the ability to contribute a potentially larger amount than a traditional or Roth IRA,” said Ponce.

Chad Parks is the founder and CEO of the retirement plan provider Ubiquity Retirement and Savings. He noted that SEPs can help people save with higher saving limits in the accounts.

“If you earn $19,500 and want to put it all into a self-employed 401(k), you could. That would reduce your taxable income to zero,” said Parks.

Jim Hitt is the founder of American IRA. He notes that his company can be a great option for self-employed people saving for retirement.

“We wanted to show people that there’s more than one way to shear a sheep. In other words, there’s more than one way to plan for retirement. And for people who are already independently-minded-such as the self-employed-a SEP can be a great way to store a lot of money for retirement,” said Hitt.

Can employers have SEPs and other IRAs?

While self-employed people can contribute to a SEP, they can choose other retirement plans as well. Dave Cherill is a certified public accountant in New York. He said that there is important criteria to consider when choosing between a SEP IRA and solo 401k.

“The first criteria most people use in choosing between a SEP and a solo 401(k) is how much can I contribute to it?” said Cherill.

Cherill says the solo 401k could be best for self-employed people with more limited income.

“Normally the solo 401(k) allows for a greater contribution, especially in cases where there is limited self-employed income,” said Cherill.

However, Cherill sees the SEP as a more cost-effective retirement account for the self-employed and small business owners.

“The SEP is simply easier from a cost and administrative perspective,” said Cherill.

Wayne Bland is a financial advisor for Metro Retirement Plan Advisors. He wants his small business clients to get traditional IRA’s if they have more than 10 employees.

“Once they get 10 or more employees they usually start looking at 401(k) plans or other options,” said Bland.

Ferrigno reminds his clients that with SEPs, they can’t make withdrawals from the accounts before they’re 59 1/2 without penalties.

“There’s no ability to take early distributions from the account if you retire prior to 59.5 as some other qualified plans may allow,” said Ferrigno.

What kinds of businesses can open SEP IRAs?

SEP IRA’s are available for many different kinds of small businesses. Brad Ronsley is a certified financial planner. He says that SEPs are a good option for small businesses.

“SEP IRAs are available for a variety of small-business types. They include sole proprietorships, partnerships, limited liability companies, S corporations and C corporations. The plans can be an especially attractive option for a small business with few employees, ” said Ronsley.

How did coronavirus impact SEP IRAs?

As a result of COVID-19, many entrepreneurs have started saving more of their income to weather the economic storm. If they are investing on their own in a volatile market, there is even more uncertainty. However, business owners can start small to open a SEP.

Rick Irace is the head of service and operations for Ascensus’ retirement division. He advocates for any business owner to save whatever they can for retirement.

“Every little bit helps when it comes to saving for retirement,” said Irace.

“Someone who is stretched thin financially can start by simply setting 1% of their pay aside,” added Irace.

While Irace wants investors to save as much as they can, other financial advisors disagree. Michael Kojonen, president of Principal Preservation Services, recommends setting aside any extra money they might have in savings. That may take a priority over funding a SEP.

“It’s tough, because it depends on your industry,” Kojonen said. “Don’t make any quick decisions about funding it early.”

“An individual should have three to six months of expenses set aside. For my business, I have at least a year of expenses. The pandemic scared everyone into having bigger reserves,” added Kojonen.

What are investment options for SEP IRAs?

SEP IRA funds can be invested in stocks, bonds, ETFs, mutual funds, and other securities.

What are the tax benefits of a SEP?

Ponce notes that there are tax benefits for an employer funding a SEP.

“The tax benefits to the employer are tax-deduction and tax-deferral benefits for the self-employed individual personally,” said Ponce.

Greg Wells is vice president of EP Wealth Advisors. He advocates for SEPs because contributions can be made as often as the account holder wants.

“SEPs are great because they can be opened and funded after the year ends, all the way up until the extension if the person files for an extension,” said Wells.

“It’s also a great tax planning technique as one can wait until their year ends and see where the numbers finish, then decide what to contribute to a SEP,” added Wells.

What are the tax rules of having a SEP IRA?

If a small business owner deducts contributions today, they pay income taxes when they withdraw the money. An employer gets tax deductions for contributions to employees’ accounts. The IRS provides more detailed information about the tax implications of a SEP.

What are the downsides of a SEP IRA?

Even though a SEP IRA may be beneficial to self-employed people, there are setbacks. A SEP IRA doesn’t have a Roth version. That means that a self-employed person can’t choose to currently pay taxes on contributions. Later, they can take tax-free distributions in retirement, like in a Roth IRA.

Like traditional IRAs, there can’t be tax- free withdrawals before self-employed people turn 59. Account holders also have to take required minimum distributions after they turn 72. In addition, there is no way to make up SEP contributions if an account holder starts an account if they’re 50 and over.

Can a SEP help small business owners?

Funding a SEP could be best for small businesses. Only employers can fund a SEP for their workers. Employees can’t fund one on their own.

Niko Finnigan, a partner at Delta Wealth Advisors, believes that the SEP IRA can be beneficial for small business owners.

“The SEP IRA is powerful for closely held businesses because it requires the employer to contribute the same percentage of income for each employee,” said Finnigan.

If an employer wants to add more workers, a SEP may not be best, according to Finnigan.

“The employer would be required to contribute to every employee’s SEP IRA, which can quickly become costly,” said Finnigan.

Paul Ferrigno is a certified financial planner at Ferrigno Financial. He advocates his small business clients to open SEPs.

“I advise my clients to open these plans when they have a small family business or limited number of employees that the employer feels the obligation to help save for retirement,” said Ferrigno.

How do SEPs impact employees?

When a business owner contributes a certain percentage to a SEP, they have to contribute the same amount to an employee’s account. For example, if an employer contributes 5% of their income to a SEP, they have to contribute the same amount for each employee.

Before adding employees to a SEP, they must meet certain criteria. An employee must be 21 and must have earned $600. Ponce also noted that employers can set certain boundaries for SEP eligibility.

“Employers can be less restrictive on the eligibility, but may not set requirements to be more restrictive,” said Ponce.

How do SEPs help employees?

According to Repko, employers can decide how much to contribute to employees’ SEPs.

“The employer contributions are discretionary from year to year, meaning there is no requirement for the company to make contributions each year. The business can choose when to make contributions, which can be a valuable planning tool so the contributions can coincide with profitable years,” said Repko.

While there are expenses with covering employees, those expenses are usually tax-deductible. However, financial expert Wayne Bland notes that if an employee leaves the company, they can take their IRA contributions with them.

“If they quit and go to work for a competitor down the street they take all of those contributions with them,” said Bland.

Even though SEP IRA’s can be expensive for small business owners, employees will stay with a company if there are benefits. Bland notes that the SEP IRA benefits for employers can outweigh the costs.

“Most investment options are available in whatever type of retirement plan you open. But employees love to know that the company is contributing 10, 15 or 25 percent above the gross pay to their retirement account. It reduces the need for the employee to save 10 percent of their gross pay,” said Bland.

Can a SEP IRA save a business money?

A SEP IRA can help businesses save money by helping employees. Ryan Repko, a certified financial planner at Ruedi Wealth Management, said it would help employees.

“The business could save money by establishing a SEP IRA because it would not have to make contributions on behalf of employees who haven’t worked for the company for at least three years,” Repko says.

However, Repko thinks the SEP IRA could be costly for business owners.

“The disadvantage is that any employee who has worked for the company for three years and is at least 21 years of age is going to be covered by the plan, even if they only work part-time,” said Repko.

What are the SEP withdrawal requirements?

If an employer wants to make an early SEP withdrawal, there are penalties. A business owner has to pay income tax on the withdrawn amount. In addition, an employer has to pay a 10% early withdrawal. However, there are exceptions.

If an account holder has certain medical expenses while unemployed, has a disability, or other extenuating circumstances, there may be withdrawal penalty waivers.

Which SEP IRAs are best for self-employed people?

While there are many IRA’s to choose from, these five brokerage accounts are considered the best SEPs.

1. Vanguard

Vanguard is considered one of the best SEP IRA’s for self-employed people. With $4.5 trillion in assets, the company is one of the most valuable retirement management accounts. Finance expert Andrew Chen says Vanguard’s IRA funds are affordable for self-employed people.

“Vanguard funds are best-in-class when it comes to passive index investing for low cost. What makes them stand out is their rock-bottom cost and passive management that allows investors to achieve market-matching returns for zero effort and near-zero cost,” said Chen.

Chen adds that the Vanguard retirement funds have several securities.

Vanguard helps manage risk for SEP IRAs — Vanguard SEP IRAs help account holders manage risk

“The underlying funds that make up the Vanguard target retirement funds hold U.S. stocks, international stocks, U.S. bonds and international bonds. Buy one of these funds and you’re done throughout your investment horizon,” said Chen.

Don Cody is president and CEO of Global Macro Asset Management. He said that because Vanguard is such a large retirement fund corporation, many money managers fund their IRAs with Vanguard.

“Vanguard, because of their size, attracts some of the best active money managers, and their passive or indexed investments track their underlying benchmarks exceptionally accurately,” said Cody.

2. Betterment

In addition to Vanguard, Betterment offers hands-off robo-advising SEP IRA accounts. The company has $13.5 billion in assets. Betterment’s 401k offering, Advised 401K, is a robo-advising retirement plan.

Betterment’s senior communications manager Danielle Shechtman says the company “has enhanced its policies and procedures and made personnel and other changes to ensure compliance with all applicable regulations.”

Dan Herron is a financial planner with Elemental Wealth Advisors. He said the automatic SEP IRA choices make Betterment a good choice for self-employed people.

“Plus, the technology is so good [and] the onboarding process is so easy, that there [aren’t many] administrative items for the advisor to do. The better these platforms get, the harder it will be for advisors to justify tacking on their fee,” said Herron.

“To me, Betterment stands out from other robo-advisers,” says Kate Dore, the author of the Nashville-based money blog Cashville Skyline. “I like the goals-based investment tools, reasonable annual fee (.25 percent), no minimums, and automatic tax-loss harvesting and rebalancing.”

Soon after opening my account, I started doing an automatic transfer of $100 per month, which I eventually increased over time,” she said. “Four years later, and after substantial market volatility due to COVID-19, I’m still happy to report that the money in my brokerage account has far outperformed where it would be if it were sitting in a traditional savings account.”

Betterment SEP IRA best for hands-off approach to retirement savings

If a self-employed person wants a SEP IRA, Betterment can be a good option. Aaron Schumm is CEO of Vestwell, a fintech company. He says that Betterment’s advising program helps business owners plan for retirement.

“Traditional business-to-consumer fintech and robo-platform providers often pay lip service, saying they will work with advisors, yet in not-so-subtle ways the intent is to take the advisors’ clients,” Schumm says. “It’s important to always understand the core DNA of any partner firm and where their true focus and intent lay,” said Schumm.

Robo-Advisors — Betterment is a robo-advisor for SEP IRAs

Betterment for Advisors general manager Jon Mauney thinks Betterment’s program will help young entrepreneurs.

“Folks ready to get out there and hustle, we’re counting on this being a thing that they’re interested in,” said Mauney.

Theodore van Gerven is founder of Modern Wealth Builders. He advocates self-employed people to use a Betterment IRA that’s easy to set up.

“At the end of the day, for an advisor like me who doesn’t charge on the 401(k) itself, I’d want a platform that is easy to set up and doesn’t require much hands-on from me,” said van Gerven.

3. Fidelity

With Fidelity SEP IRAs, many people are increasing their contributions to these accounts. With this current economic uncertainty, many people are turning to saving in Fidelity IRAs. Katie Taylor is the vice president of thought leadership at Fidelity. She noted that the increased savings rate in SEP IRA’s is encouraging.

“Many working Americans rely on 401(k) accounts to fund their retirement. The fact that people across all age groups are saving at higher levels than what we’ve seen in the past is really encouraging,” said Taylor.

Taylor advises people to start saving in SEP IRAs as soon as possible.

“Start saving as soon as you start your career and take advantage of any matching contributions within a 401(k). Saving early and increasing contributions over time are key,” said Taylor.

Increase in 401k saving helps Fidelity SEP IRAs

With the increase in economic volatility, many employers are funding Fidelity SEP IRAs. Kevin Barry is the president of Workplace Investing at Fidelity Investments. He notes that many business owners are funding IRAs now for their employees.

“While the stock market’s performance in Q2 helped drive workplace retirement account balances higher, employer contributions also played a key role. Nearly 90% of employers continued to offer matching contributions to their employees over the last quarter, despite the unsteady business landscape,” said Barry.

Barry also noted that there was an increase in Fidelity SEP IRA investments during the nationwide quarantine.

“The company match can help drive participation in a workplace savings plan while providing employees with a savings goal to aim for, so we are encouraged to see that the majority of our clients continued to provide this important retirement savings benefit,” said Barry.

“In addition, we saw a growing number of investors make contributions to their IRA, with year-to-date contributions to IRAs increasing more than 20% over the same period last year,” continued Barry.

We generated $2.4 billion in total revenue in the second quarter with the title segment producing $2.2 billion, F&G producing $124 million, and the corporate segment generating $72 million.

Fidelity Q2 2020 earnings rise as more people save in SEP IRAs

As a result of increased SEP IRA contributions, Fidelity had a profitable Q2 2020. Chief financial officer Anthony J. Park spoke about the results.

“Second-quarter net earnings were $309 million, which include net realized gains of $162 million versus net realized gains of $41 million in the second quarter of 2019, primarily due to mark-to-market accounting treatment of equity and preferred stock securities, whether those securities were disposed of in the quarter or continued to be held in our investment portfolio. Excluding net realized gains, our total revenue was $2.3 billion as compared with $2.1 billion in the second quarter of 2019,” said Park.

Fidelity says saving for SEP IRA can make big difference later

Meghan Murphy is vice-president of Fidelity Investments. She notes that small savings in SEP IRAs can make a big difference in an account holder’s finances.

“Those small jumps by just 1% or 2% over a 20-year or 30-year career can really make a big difference in the end. The longer that money is in the plan and has time to grow, the better off you are,” said Murphy.

Murphy and Fidelity also advise account holders not to expect to earn too much on SEP IRAs right away.

“Few people get there overnight. Think of planning for retirement as a journey. The key is to save as much as you can now and try to increase savings over time,” wrote Fidelity.

4. E-Trade

In addition to Fidelity, E-Trade offers SEP IRAs. However, because of the current economic volatility, some investors are taking out their SEP IRA funds. Mike Loewengart is the managing Director of Investment Strategy at E-Trade Financial. He noted that young people are especially depleting their IRA funds.

“Young investors have a barrage of financial obligations—whether it’s paying down student debt or a mortgage, saving for retirement, or helping care for their parents,” said Loewengart.

“The recent health crisis has only magnified these issues, forcing some Millennial and Gen Z investors to tap their retirement funds for relief. It’s important for young investors to remember that they have a significant benefit their older counterparts do not—time. Making consistent contributions today, no matter how small, can make an impact over the long term,” added Loewengart.

E-trade SEP IRAs can be way to save money

Despite the “corona-conomy” brought on by the economic slowdown, E-Trade advocates continuing to contribute to their SEP IRAs.

“Many Americans are facing economic hardships amid the coronavirus pandemic and making big financial decisions in times of uncertainty can be difficult. But even though you can do it, doesn’t mean you should.”

“Make sure you’ve exhausted all the ways you can cut back on your expenses, such as refinancing to take advantage of the lower interest rate environment. Though it may seem daunting right now, those cutbacks could add up to help make important payments,” added Loewengart.

5. Ally

Ally Bank is an online bank that offers SEP IRAs to customers. The bank’s CEO Jeffrey Brown spoke about the bank’s early digital-only banking strategy.

“For us, we got a jumpstart maybe on the competition 10 years ago to really build out a digital-only strategy. There have certainly been opportunities and small brick-and-mortar deals that have come in front of Ally, and we’ve really said that doesn’t make sense for our strategy. Our strategy really should continue to be a leader in digital banking,” said Brown.

With low-trading commissions and no account minimums, Ally’s SEP IRA’s are an attractive option for investors. During this volatile time, Ally also is offering assistance to their customers.

How to Invest — Ally helps people invest in SEP IRAs

“At Ally, we recognize there has never been a more critical time to deliver on our promise to ‘do it right’, and we are committed to supporting the people we serve safely and confidently through this crisis,” said Ally CEO Brown.

“We are taking multiple steps to support our customers, communities and all stakeholders to bolster peace of mind and help safeguard their long-term financial well-being. We’ll leverage our strong market position and consumer lending capabilities as we work through the crisis and continue to prioritize long-term value. When we all do our part, we help create stronger and more resilient communities that benefit us all,” added Brown.

6. Ellevest

Ellevest offers SEP IRAs to investors, especially to female investors. Ellevest’s robo-advising format is easy to use. The investment company CEO Sallie Krawcheck thinks it’s critical to have women open SEP IRAs because more women are becoming entrepreneurs.

“If we’re[women] not investing, we’re doing most of the hard work around money (you know, going to work every day, turning in that amazing design, landing the difficult-to-close client, beating our sales projections)….but we’re only getting about half the reward. We’re depriving ourselves of the ability to take on more risks in our career, to ‘play loose,’ to have more fun in what we do, to do more in our careers, if we don’t have a financial cushion built up,” wrote Krawcheck on Ellevest’s blog.

Krawcheck also wants Ellevest to inspire female investors to save more of their funds in SEP IRAs.

“[Women] tend to leave more than 70% of our wealth in cash as opposed to investing it. For the typical professional woman, that can cost her hundreds of thousands — for some women, millions — of dollars over the course of their lives,” said Krawcheck.

Krawcheck also thinks it’s key for young investors to start saving in SEP IRA’s as soon as possible to accumulate wealth.

“A dollar invested in your 20s is worth more than a dollar invested in your 30s is worth more than a dollar invested in your 40s is worth much more than in your 50s, 60s or 70s,” said Krawcheck.

Ellevest’s IRA is another option for investors that want to save for retirement.

SEP IRA’s can be affordable option for business owners

While saving for retirement can be daunting, there are options for the self-employed. TradingSim can help self-employed people like day traders practice trading stocks that are available in the best simplified employment pension IRAs. These accounts can help investors have a stable retirement.

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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