New Spending Bill: Inheriting IRAs Just Got Complicated
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What is the main topic discussed in this episode?
Here's your Money Briefing. I'm J.R. Whelan at The Wall Street Journal in New York. On Friday, we discussed 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.
What change did the new spending bill make to stretch IRAs?
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.
We'll also discuss alternate investment tools besides IRAs to pass savings on to 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 down to grandchildren.
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.
Who is exempt from the new 10-year withdrawal rule for inherited IRAs?
So you don't get a 60-year stretch in your IRA. You get a 10-year stretch in your IRA with exceptions.
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.
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.
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 at the trust that savers have in Congress.
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.
How will the 10-year rule affect grandchildren and younger heirs?
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 about the taxes on them.
Now, you suggest that life insurance could be a way to set up an investment product for heirs as an alternative.
I think that some people will look at that.
Why do critics say Congress shouldn't change IRA rules now?
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.
So pros and cons on both sides.
Yes, yes.
What alternatives to IRAs can people use to pass wealth to heirs?
And you could do nothing.
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.
At the end of 10 years, you've taken all the money out. You could perhaps invest it elsewhere.
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 the 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.
How should heirs handle taxes and timing under the new rules?
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.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:28
2
What change did the new spending bill make to stretch IRAs?
0:28–1:49
3
Who is exempt from the new 10-year withdrawal rule for inherited IRAs?
1:49–2:35
4
How will the 10-year rule affect grandchildren and younger heirs?
2:35–3:02
5
Why do critics say Congress shouldn't change IRA rules now?
3:02–3:30
6
What alternatives to IRAs can people use to pass wealth to heirs?
3:30–3:58
7
How should heirs handle taxes and timing under the new rules?
3:58–4:19
Speakers
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