Retirement Planning Curve Ball
Published on February 19, 2020
The SECURE Act...
The recently signed legislation, ‘The SECURE Act’ was intended to make saving for retirement “easier” for the “general public”. However, the SECURE Act throws a bit of a curveball into a common estate planning strategy - The “Stretch IRA.”
Prior to the SECURE Act, IRA beneficiaries were allowed to extend RMD’s (Required Minimum Distributions) on an inherited IRA over their entire lifetime. This planning technique allowed a more robust opportunity for tax-deferred growth. Now with new legislation; IRA beneficiaries, except spouses, must deplete all IRA holdings in their inherited IRAs within 10 years. By forcing the withdraw of IRA funds, Congress has limited the effectiveness of using an IRA as a future tax-deferred bequest to a non-spouse beneficiary.
A lesser publicized planning technique may be to take advantage of a little-known provision in HSA (Health Savings Account) legislation to provide a similar strategic benefit to beneficiaries. While most HSA contributions are made by individual account holders, anyone can make contributions into an eligible account holder’s HSA on their behalf. The individual making the contribution is not required to be “HSA Eligible”, only the account holder is required to be. Which means a parent could fund their child’s HSA annually up to the IRS contribution limit, thus giving the child a future tax-free windfall that could be used to pay for future medical expenses or invest for retirement. BONUS - The parent’s HSA contributions are tax-deductible for their child, even if they don’t itemize their deductions. That is a gift that keeps on giving!
The “Nuts and Bolts”:
HSAs are tax-advantaged medical savings accounts that allow account holders to save money on health-care costs for themselves and their families. Account holders can use their funds to pay for current medical expenses, or they can invest them and create medical “Nest Eggs” to cover future health-care costs. To open an HSA or contribute to an existing account, account holders must meet a few eligibility requirements.
· Not listed as a dependent on someone else’s tax return
· Contribution Limits $3,550 Single, $7,100 Family
HSA contributions can be either tax-free or tax deductible depending on how they are contributed. Other benefits of HSA funds are the tax-free growth as well as the use of the funds. Withdrawals from HSA’s, if used for qualified medical expenses, can be tax-free.
By contributing to a child’s HSA over time and letting compound interest and investment returns do their work, parents can provide a gifting strategy that could provide an additional safety net for their kids against unexpected medical expenses. Additionally, since HSAs don’t have an RMD (Required Minimum Distribution) requirement, those funds avoid a mandatory withdraw scenario now faced now by non-spouse IRA beneficiaries.
Tim Lofton | CEO | The Retirement Blueprint