Personal Finance

Protect your retirement funds now, avoid the heavy tax hit later.

New York Life | July 01, 2020

couple retirement planning

The SECURE Act is here.

The stretch IRA has been eliminated for many beneficiaries.

What now?

Protect yourself and your loved ones with planning options that can create better tax and estate plans for your retirement savings.

The SECURE Act (Setting Every Community Up for Retirement Enhancement)  has eliminated the stretch IRA for many beneficiaries. That could have a significant negative tax impact on the plans you’ve made for your retirement savings.

However, there are alternative solutions that can put your beneficiaries in a better position, providing them with larger inheritances and fewer taxes, and allowing you to assert more control. One of the better options is to use cash value life insurance in place of a traditional stretch IRA. I call it “The Life Insurance Replacement Plan,” and that is the focus of this guide.

Elimination of the stretch IRA.

The so called “stretch IRA” is never mentioned in the tax code. It is simply a term that has evolved over many years to describe the extended tax deferral available to beneficiaries of retirement plans, like your children and grandchildren.

However, beginning with deaths in 2020, Congress has eliminated the stretch option for many beneficiaries and replaced it with a 10-year payout.

The 10-year rule requires accounts to be emptied by the end of the tenth year following the year of death. There are no annual RMDs. Instead, the only RMD on an inherited IRA is the balance at the end of the 10 years after the death. The new 10-year rule applies to beneficiaries of both traditional IRAs and Roth IRAs, as well as beneficiaries of company retirement plans.

But the SECURE Act, by eliminating the stretch IRA, has shined a light on an option that may have been a better strategy all along. The change in tax law now makes most larger traditional IRAs less desirable for estate planning purposes (i.e., less desirable to leave to beneficiaries), and Roth IRAs and cash value life insurance more desirable.

Does the 10-year rule apply to all beneficiaries? Not quite. There are five classes of “eligible designated beneficiaries” (a term made up by Congress) who are exempt from the 10-year post-death payout rule and can still stretch RMDs over their life expectancy. However, this group includes only spouses and a limited group of non-spouse beneficiaries.

Which IRAs are most affected by the elimination of the stretch IRA?

The IRAs most impacted by the loss of the stretch IRA would be the larger IRA balances where a significant portion of your account will not be needed during your lifetime and will be passed on to your beneficiaries. The larger the portion left to your beneficiaries, the greater the tax impact will be for them, since most non-spouse beneficiaries will be forced to empty the accounts within 10 years after the death.

Impact on trusts.

Many larger IRAs are left to trusts to exercise control over the funds your beneficiaries inherit. This is frequently done when you worry about beneficiaries who fall into these categories:

–  Minors; the disabled; spendthrifts; those with creditor or financial problems; those facing lawsuits, bankruptcy, or messy divorces; those with family complications from second marriages; those with poor money management skills; and other beneficiaries who may be vulnerable and easily preyed upon.

Trusts as IRA beneficiaries will no longer work well under the SECURE Act. After 10 years, someone must pay the taxes on the entire taxable IRA balance:

   – Either the trust, at high trust tax rates (if the funds are held inside the trust to be protected), or                

   – By the individual trust beneficiaries at their own rates—but then the funds are no longer protected in trust.

Roth IRAs will work better here since there will be no taxes when the funds go to the trust or to the trust beneficiaries.

If you have named a trust as your IRA beneficiary, your plan needs an immediate review, and it should probably be overhauled. Of course, this is something to review with your financial, legal, and tax advisors.

Individual beneficiaries.

Most IRAs are left directly to individual beneficiaries and not to a trust. However, the post-death payout term for most non-spouse beneficiaries (like a child or grandchild) will often be the same 10 years. The entire inherited IRA balance will have to be paid out to these beneficiaries at the end of the 10 years.


Conclusion: A replacement estate planning option is needed for IRAs and for other retirement accounts

The three key objectives for a successful estate plan:

  1. Larger inheritances
  2. More post-death control
  3. Fewer taxes

The SECURE Act problem:

The SECURE Act could result in less post-death control and more taxes. Most people want the opposite result. One solution is permanent, cash value life insurance. This plan, which I call the “Life Insurance Replacement Plan,” will not only result in a more productive and less complicated estate plan, but it can also provide your family with the three key estate planning objectives outlined above.

Life insurance as a solution:

The SECURE Act makes permanent life insurance a more attractive estate planning vehicle than an IRA.

The life insurance death benefit can help address the three most desired estate planning objectives:

  • Larger inheritances
  • More post-death control
  • Fewer taxes

How the life insurance replacement plan works:

You would begin by working with your financial and tax advisors to draw down IRA funds at the lowest possible tax cost. This can be done over several years, using up the lower tax brackets. While these distributions are taxable, they are being replaced with a more tax-efficient long-term estate plan, since they will be used to build tax-free funds inside a permanent life insurance policy.

Caution: Avoid the 10% tax penalty

There is a 10% early distribution penalty on IRA funds withdrawn before age 59½, so this strategy is not recommended for anyone under age 59½. Roth conversions may be a better option here, or you can wait until age 59½, when there will be no penalty.

Then use the retirement funds withdrawn (that were earmarked for beneficiaries) to purchase a permanent life insurance policy. If a trust is needed for post-death control, the life insurance can be owned by an insurance trust (an irrevocable life insurance trust, or ILIT).

The sweet spot for planning—ages 59½ to 72.

Take advantage of your “sweet spot.” This is when you are between ages 59½ and 72. During this period, IRA distributions are penalty free, but RMDs are not yet required. During this time, you have the most flexibility with your IRA, so it is an optimal time for taking IRA withdrawals for a life insurance replacement plan.

Life insurance offers tax and estate planning advantages over IRAs —after the SECURE Act.

Life insurance is more tax-efficient.

  •      Life insurance will be income tax free to beneficiaries (except for the annual investment income).
  •      Life insurance can also be estate tax free if it is set up outside the estate.

Life insurance is more flexible when trusts are needed for post-death control.

Life insurance is generally a better, more flexible, and more customizable asset to leave to a trust. It can simulate many aspects of the stretch IRA without the tax complications of an IRA trust. You can set the schedule and the terms of the trust by which you would like your beneficiaries to have access to the life insurance funds. There is no worry about who the trust beneficiaries or contingent beneficiaries are, or their ages, as there is with an IRA trust. Life insurance can be paid to an irrevocable life insurance trust (ILIT) so that the life insurance proceeds will be estate tax free. IRA funds can never be removed from the estate without being withdrawn.

A life insurance trust can be focused on your wishes, and you will not have to deal with the array of tax rules that you would have to work around with an IRA trust. It’s simpler and more effective, with less tax intrusion. You get to focus on the plan you desire without worrying about tripping over the quagmire of IRA trust tax rules.


Life insurance can provide more certainty in a fast-changing world. Congress has historically changed tax laws more often than it has changed the treatment of insurance benefits.

Leverage—life insurance provides leveraged wealth transfer.

In most cases, more funds will go to the eventual beneficiaries, and with fewer taxes, than if the IRA was left directly to the beneficiaries or to an IRA trust subject to taxation. IRAs will be subject to the risk of potentially higher tax rates in the future. Generally, tax-free vehicles, like Roth IRAs and life insurance, avoid that risk

Lifetime benefits of —permanent insurance:

  • Life insurance can double as a tax-free retirement account.
  • Life insurance can create additional tax-advantaged funds when other retirement plans are maxed out.
  •  Life insurance cash value can often be accessed in lieu of taxable retirement funds to keep taxes lower in retirement by creating a tax-free stream of income, if needed.

Life insurance solves family money problems, without any of the tax restrictions that apply to IRA funds.

Life insurance drawbacks:

Life is not perfect. Everything has a cost or downside, and you need to know both the pros and the cons before you make any financial decision. Life insurance is a long-term commitment, so doing a thorough evaluation and analysis is critical. Your family may be relying on this plan for decades. You should review all of the information that goes into this decision with your professional financial, tax, legal, and insurance advisors before taking any action.

This life insurance replacement plan as an alternative to the stretch IRA (which was largely eliminated by the SECURE Act) may not be for everyone. This strategy assumes that your IRA funds will not be needed during your lifetime, which is often the case for the larger IRAs. Other (non-IRA) funds will need to be available for lifetime use.

Not everyone is insurable. You must medically qualify for insurance coverage. No plan fits everyone, so this particular planning should be evaluated based on your personal financial situation, and should be implemented only with professional guidance.

There is a current income tax expense when you use IRA money to fund the policy.       

This is about planning, however, for a better long-term tax benefit, and such long-term benefits often require a current investment. Tax rates are at a low point right now, and they could increase soon. If no action is taken now, your IRA funds will be forced out later through RMDs and may be more heavily taxed at that time if rates do rise. Using IRA funds now will require paying current taxes and reduce your IRA balance but, in turn, reduce your future income taxes by eliminating required minimum distributions on those IRA funds.


Life insurance is a long-term planning vehicle.

  •   Policy premiums must be continually paid when due to keep the policy in force.

         - You cannot turn it off and on like IRA or 401(k) contributions.

         - You must have a long-term funding plan in place for premium payments.

  •   It can take several years for substantial policy cash value to build up (but the death benefit is there from day one).

Note: Lifetime policy withdrawals reduce the death benefit and available cash surrender value. Policy loans will also accrue interest at the current rate as well as reduce the death benefit and available cash surrender value.

Planning steps.

Considering the changes made by the SECURE Act, it is essential that you review your current plan. Bear in mind that the new tax rules are already in effect. Begin by consulting with your professional advisors.

Evaluate the possible life insurance solutions described in this guide so you can meet the three most desired estate planning objectives:

  •  Larger inheritances
  •   More control
  •   Fewer taxes

Always consider both the benefits and the drawbacks of any financial, tax, or estate plan.

Good advice is essential.

The SECURE Act has changed the game when it comes to retirement and estate planning. Give some serious consideration to how the elimination of the stretch IRA for many beneficiaries will impact your family. Reconsidering your beneficiary designation for your IRA, converting traditional IRAs to Roth IRAs, and increasing the use of life insurance are all strategies that should be evaluated in the wake of the SECURE Act.

Do you have questions about your own situation? The SECURE Act means that now, more than ever, good advice is essential. A qualified financial advisor can help guide you through all the new rules and ensure that you are best positioned to take advantage of the breaks while avoiding the pitfalls.

—Ed Slott, CPA

This material is for informational purposes only and includes a discussion of one or more tax-related topics prepared to assist in the promotion or marketing of the transactions or matters addressed. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals. New York Life, its agents and employees may not provide tax, legal, or accounting advice. Consult your own professional advisors concerning your specific circumstances before taking any action in regard to this information. Ed Slott and Company, LLC is not owned or operated by New York Life or its affiliates. Ed Slott is solely responsible for the content of this material, which may not necessarily represent the opinions of New York Life Insurance Company or its subsidiaries.


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New York Life Insurance Company
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