Drawbacks of the New 10-Year Rule
So…what’s so bad about these changes? The kids or grandkids still get the money, right?
Well, yes, but many parents and grandparents would prefer their kids to wait before they access that money. Maybe they don’t want the kids getting full access until they hit a particular age – 35 instead of 18, for example. But even if the kids wanted to obey those wishes, without a stretch provision, they'll be forced to empty the account within 10 years – perhaps before they’re responsible enough to use it wisely, as the parents or grandparents intended.
And here’s another drawback.
If your heirs inherit a traditional IRA, that money hasn’t been taxed yet. When they start withdrawing money, it could have a significant impact on the amount of income tax they owe. If, for example, a grandchild is in her 40s and in her peak earning years, adding extra income via forced IRA withdrawals is probably going to bump up her tax bracket, forcing her to pay more.
Most parents and grandparents don’t want to leave behind a tax burden.
But that’s exactly what could happen with the elimination of the stretch provision.
Next blogpost, we will discuss why life insurance becomes a better opportunity with the changes.