Individuals may be able to transfer more wealth to their children or grandchildren through tax-deferred retirement accounts as a result of possible changes under a new executive order.

The directive, issued by President Donald Trump Aug. 31, called on the Treasury Department to consider increasing the life expectancy rates it uses to calculate how much money retirees must take out of their 401(k)s and individual retirement accounts (IRAs) when they reach a certain age.

If Treasury increases those rates, which haven’t been updated since 2002, it would strengthen an estate-planning strategy known as the “stretch IRA,” in which an owner extends the ability to postpone paying taxes on money in his or her IRA by passing it to a non-spouse beneficiary, such as a child, grandchild, or even a great-grandchild.

With higher life expectancy rates, “there’s a greater chance that money will be left over” in the owner’s IRA when he or she dies “that could go to a younger generation and then continue on and compound,” said James F. Hogan, managing director at Andersen Tax LLC in Washington and a former IRS official.

How It Works

Under current law, when a person reaches age 70 1/2, he or she must take a yearly minimum amount—the required minimum distribution (RMD)—out of their 401(k)s or IRAs equal to the account balance on Dec. 31 of the previous year divided by the number of years left in the owner’s life expectancy.

Higher life expectancy rates mean that the amount a person must withdraw each year will be less, which will reduce the amount of taxes due and increase the odds that there will be more money in the retirement account when the owner dies, said Lester B. Law, a member of Franklin Karibjanian & Law PLLC who focuses on estate and trust planning. This means “there’s more money to go around,” said Law, a member of the Bloomberg Tax Estates, Gifts and Trusts Advisory Board.

Under the stretch IRA strategy, the owner leaves the IRA—and whatever money is in it—to a younger family member as opposed to a spouse.

In the year following the owner’s death, that non-spouse beneficiary must take RMDs from the inherited IRA each year, but the younger that person is, the greater his or her life expectancy, and the smaller the distributions will be.

This allows more of the money in the account to grow for a longer period of time on a tax-deferred basis. The stretch IRA strategy is especially beneficial when a Roth IRA is used because distributions are generally tax-free, while traditional IRA distributions are treated as ordinary income.

Different Tables

There are different life expectancy estimates, or “mortality tables,” for IRA owners and IRA beneficiaries.

Based on the broad nature of the language in the executive order, it’s unclear if Treasury will consider changing tables for both, Hogan said. “It’s broad enough to give Treasury some latitude,” he said. If the life expectancy rates for both owners and beneficiaries are increased, that will further boost the benefits of the stretch IRA strategy, Hogan said.

Law said if Treasury updates its life expectancy estimates, it will likely revise tables for both because they are traditionally released together in regulations. “I can’t imagine that you’d do one and not the other.”

And while increasing those values will make the stretch IRA strategy more effective, Law said such a change will likely have little effect on how people plan. “The question is: How much of a move are we going to see?”

The changes to the rates will likely be marginal, he said. “In big-picture numbers, yes, there’s more money that stays inside of deferred accounts, but would you plan any differently if you’re” now taking out an amount that’s, say, 0.1 percentage point less than what was being taken out before? he said. “Probably not.”

Lawmakers Watching

Boosting the benefits of stretch IRAs would contradict a bipartisan effort in the Senate to restrict the use of that strategy under the Retirement Enhancement and Savings Act of 2018 (S. 2526). House Ways and Means Committee Chairman Kevin Brady (R-Texas) has talked about including some of the RESA measures in his tax cut 2.0 package, but it’s unclear if that restriction would make the cut.

An aide for Sen. Ron Wyden (D-Ore.), one of the lead sponsors of RESA and the Senate Finance Committee’s ranking member, said the committee’s staff will be monitoring Treasury and the Department of Labor’s decision on how to proceed under the executive order and will review any rules that are proposed.

Ways and Means ranking member Richard Neal (D-Mass.) said: “I think we should take a look at these things, but we need to do it in a more fully engaged” way through hearings and the normal legislative process, rather than an executive order. Neal is lead sponsor of the Retirement Plan Simplification and Enhancement Act (H.R. 4524), which includes changes to required minimum distributions.

Steven M. Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center, said there is a lot of interest in retirement reform. And people are living longer so it may make sense to adjust life expectancy rates and the amounts individuals are required to take out of their retirement savings accounts to ensure that they have enough money to last them throughout their lives, he said.

“On the other hand, you don’t want to exacerbate the problems of tax planning” and allow people to reap tax benefits far beyond a normal retirement period, Rosenthal said.