New Spending Bill: Inheriting IRAs Just Got Complicated

Summary

---

WSJ Your Money Briefing

Episode: New Spending Bill: Inheriting IRAs Just Got Complicated
Date: December 23, 2019
Host: J.R. Whalen
Guest: Laura Saunders, Wall Street Journal Tax Reporter

---

Episode Overview

This episode focuses on significant changes to "stretch" IRAs following the passage of a new spending bill. Host J.R. Whalen and WSJ tax reporter Laura Saunders examine how the new law alters the rules for inheriting IRAs, especially for non-spouse beneficiaries, and what these changes mean for estate planning and wealth transfer. They explore the motivations behind the changes, reactions from experts and savers, alternate strategies for passing on assets, and practical implications for both traditional and Roth IRAs.

---

Key Discussion Points & Insights

Changes to Stretch IRAs

• Old vs. New Rules

  • Previously, beneficiaries—often children or grandchildren—could "stretch" IRA distributions across their own life expectancy, sometimes up to 50-60 years.
  • New Rule: Most heirs must withdraw all inherited IRA assets within 10 years of the original owner's death.
  • (Laura Saunders, 01:58) "Now what happens is that with exceptions, the heirs have to withdraw the money within 10 years. So you don't get a 60 year stretch in your IRA, you get a 10 year stretch..."

• Notable Exception: Surviving Spouses

  • Surviving spouses remain under the old law and can stretch distributions over their lifetimes.
  • (Laura Saunders, 02:33) "The big exception is surviving spouses. They're covered by old law and so they still get to take it out over as many years as they're alive."

Rationale and Criticism

• Why the Change?

  • Supporters argue IRAs were meant for the original owner and spouse, not for multigenerational wealth transfer.
  • (Laura Saunders, 00:59 / 02:56) "Supporters of the move say that really IRAs should just be for the owner and for the spouse, not for wealth, succession in generations and things like that."

• Criticism of Late-Game Rule Change

  • Critics feel changing the rules so late undermines trust in the retirement system and Congress' promises to savers.
  • (Laura Saunders, 00:59 / 02:56) "Congress is changing the rules at the end of a very long game, maybe the ninth inning of a game... So people may think that they can't trust what Congress says about IRAs or Roth IRAs or anything else, the taxes on them."

Alternatives to Inherited IRAs

• Life Insurance as a Tool

  • Life insurance may offer more flexibility and potential estate or income tax benefits, but can be complex and costly.
  • (Laura Saunders, 03:32) "Life insurance can be tricky. It can be extremely flexible. You can put it in a trust if you have ne'er-do-well heirs... It can be exempt from estate taxes and income taxes, so it has benefits. At the same time, it can have lots of fees and issues and things like that. So you have to be a very careful buyer of life insurance. A stretch IRA was a much more simple product in many ways."

• Option to Do Nothing

  • The 10-year withdrawal window is still a "stretch" compared to immediate distributions, and may suffice for many.
  • (Laura Saunders, 04:02) "A 10 year stretch is still a stretch. And so maybe that can work too."

Practical Implications for Heirs

• Managing Withdrawals
  • Under the new law, there’s flexibility to let assets compound tax-deferred within the IRA for up to 10 years, allowing for strategic withdrawals.
  • For Roth IRAs (no taxes on withdrawals) it may make sense to let the money grow until the 10th year.
  • For traditional IRAs (taxable withdrawals), pulling all assets at once could bump heirs into higher tax brackets, so careful planning is required.
  • (Laura Saunders, 04:13) "Under the old rules, you had to take out a certain amount of money every year. Now with a 10 year stretch, you can leave it all to grow until the end. Now, if you have a Roth IRA that doesn't have any taxes on it, that's probably a great idea. You just let it compound for 10 years."
  • (Laura Saunders, 04:13) "If you pull it out in one lump sum, that might shoot you through a bunch of tax brackets. So you need to be careful."

---

Notable Quotes & Memorable Moments

• Laura Saunders on Congressional Trust:
  "Congress is changing the rules at the end of a very long game, maybe the ninth inning of a game, and they shouldn't do that." (00:59, 02:56)

• On Life Insurance as an Alternative:
  "Life insurance can be extremely flexible... but you have to be a very careful buyer of life insurance. A stretch IRA was a much more simple product in many ways." (03:32)

• On the Practicality of the New Rules:
  "A 10 year stretch is still a stretch. And so maybe that can work too." (04:02)

• On Planning Withdrawals:
  "If you have a Roth IRA that doesn't have any taxes on it, that's probably a great idea. You just let it compound for 10 years. If you have a traditional IRA ... if you pull it out in one lump sum, that might shoot you through a bunch of tax brackets. So you need to be careful." (04:13)

---

Timestamps for Important Segments

• [00:36] Introduction of episode and topic: changes to stretch IRAs
• [01:58] Explanation of new 10-year rule for non-spouse heirs
• [02:33] Exceptions to new rule: surviving spouses
• [02:56] Discussion on fairness and trust in Congress
• [03:32] Alternatives for wealth transfer: life insurance
• [04:02] Considering inaction; the "10-year stretch"
• [04:13] Strategies for taking withdrawals; Roth vs. traditional IRA implications

---

Summary

This episode breaks down critical changes to inherited IRAs due to the new spending bill, clarifying that most non-spouse heirs will need to withdraw IRA assets within 10 years, disrupting longstanding estate planning strategies. While this move aims to limit multigenerational wealth transfers, it faces criticism for undermining public trust. Alternatives such as life insurance offer some options, but come with their own challenges. Ultimately, heirs and savers should carefully reassess their plans to ensure optimal tax and investment outcomes under the revised rules.

Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

Here's your Money briefing. I'm J.R. whalen. At the Wall Street Journal in New York. On Friday we discuss the sweeping changes to the retirement system under the new spending bill passed by Congress and signed by President Trump. Today, Wall Street Journal tax reporter Laura Saunders goes in a little deeper. She'll explain changes coming to so called stretch IRAs which allow people to pass investments onto a younger generation.

[Laura Saunders]

The supporters of the move say that really IRAs should just be for the owner and for the spouse, not for wealth, succession in generations and things like that. But the critics have a good point too. It's that Congress is changing the rules at the end of a very long game, maybe the ninth inning of a game, and they shouldn't do that.

[J.R. Whalen]

We'll also discuss alternate investment tools besides IRAs to pass savings onto the grandchildren. That's coming up. The spending bill signed into law last week makes significant changes to the so called stretch IRA which allows people to extend the life of their IRA or Roth IRA by leaving the accounts for younger heirs. And Wall Street Journal tax reporter Laura Saunders is here with details. Now, Laura, you brought this to our attention earlier this year. This puts a wrench in any plans to pass IRAs to down to grandchildren.

[Laura Saunders]

Well, for many people it does. People that were not going to use all the money in their accounts could leave the accounts to much younger heirs and the younger heirs could take the money out over their life expectancy, which could be another 50 or 60 years. Now what happens is that with exceptions, the heirs have to withdraw the money within 10 years. So you don't get a 60 year stretch in your IRA, you get a 10 year stretch in your IRA with exceptions.

[J.R. Whalen]

So they have to take all the money out in a 10 year span. Yes, but not all heirs are affected by this new rule.

[Laura Saunders]

The big exception is surviving spouses. They're covered by old law and so they still get to take it out over as many years as they're alive. Really.

[J.R. Whalen]

Now people who have had these stretch IRAs have been contributing for in some cases decades. And critics of this move that Congress made last week, say this sort of chips away and at the trust that savers have in Congress.

[Laura Saunders]

Well, exactly. The supporters of the move say that really IRAs should just be for the owner and for the spouse, not for wealth, succession and generations and things like that. But the critics have a good point too. It's that Congress is changing the rules at the end of a very long game, maybe the ninth inning of a game, and they shouldn't do that. So people may think that they can't trust what Congress says about iras or Roth iras or anything else, the taxes on them.

[J.R. Whalen]

Now you suggest that life insurance could be a way to set up an investment product for heirs as an alternative.

[Laura Saunders]

I think that some people will look at that. Life insurance can be tricky. It can be extremely flexible. You can put it in a trust if you have ne' er do well, heirs and things like that. It can be exempt from estate taxes and income taxes, so it has benefits at the same time. It can have lots of fees and issues and things like that. So you have to be a very careful buyer of life insurance. A stretch IRA was a much more simple product in many ways.

[J.R. Whalen]

So pros and cons on both sides?

[Laura Saunders]

Yes, yes.

[J.R. Whalen]

And you could do nothing?

[Laura Saunders]

Yes, that's one of the things is, you know, a 10 year stretch is still a stretch. And so maybe that can work too.

[J.R. Whalen]

At the end of 10 years, you've taken all the money out. You could perhaps invest it elsewhere.

[Laura Saunders]

Well, the good news there is that under the old rules, you had to take out a certain amount of money every year. Now with a 10 year stretch, you can leave it all to grow until the end. Now, if you have a Roth IRA that doesn't have any taxes on it, that's probably a great idea. You just let IT compound for 10 years. If you have a traditional IRA that has taxes, if you pull it out in one lump sum, that might shoot you through a bunch of tax brackets. So you need to be careful.

[J.R. Whalen]

All right. That's Wall Street Journal tax reporter Laura Saunders with us. Laura, thanks for coming on the show.

[Laura Saunders]

Thanks for having me.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Infliction is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.