Here’s a way to beat the tax burden for IRA heirs

New federal rules for individual retirement accounts greatly increase the tax burden for some heirs by telescoping the allowable period for withdrawals. Yet this pain can be greatly reduced by converting regular IRAs to Roth IRAs before bequeathing them.

Previously, all heirs had their entire life expectancy to take withdrawals from inherited IRAs, so they were able to stretch out these accounts, and the tax on withdrawals, over decades. Hence, the nickname for inherited accounts: stretch IRAs.

This changed in December, when Congress passed the Secure Act of 2019. The act preserves the lifelong stretch period for surviving spouses, minor children, the chronically ill and other individuals who aren’t more than 10 years younger than their benefactors; the latter category would include most siblings.

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But for other heirs, including adult children, the new rules limit the stretch period to a single decade. Starting with the IRA bequests from benefactors who die this year, heirs are now required to withdraw all money from these accounts within 10 years and pay ordinary income tax on each withdrawal in the year that they take it.

The new law means that, along with their accumulated wealth, those who bequeath substantial IRAs to their adult children now may be leaving them a huge tax burden. This greatly increases the need for estate-planning strategies to lighten this load.

Even before the new legislation, leaving heirs an IRA meant passing along some of your own lifetime income tax liability, as contributions to these accounts are tax-deferred. Yet the stretch rules, which allowed heirs virtually the rest of their lives to pay these taxes while continuing to get investment gains, minimized this tax burden by spreading it out for so long.