Gary Mettler believes he has discovered a solution to a painful new estate planning problem: the death of the stretch IRA.
Mettler — who bills himself as the "Annuity Maestro" — says the new IRS proposed required minimum distribution regulations show that taxpayers can get around the effects of the change by making single-premium immediate annuities, or SPIAs, part of their estate planning arrangements.
The IRS intends to let taxpayers pass both SPIAs and inheritable defined benefit pension plans on to children, grandchildren, siblings, friends and other heirs in a way that can hold down the heirs' tax bills, Mettler said Wednesday in an email.
From the perspective of the IRS, the stretch IRA rules in the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019 apply only to defined contribution plans and investment IRA accounts, not to SPIAs, Mettler added.
SPIAs "are not the industry favorite sons," Mettler said. "The annuity industry itself has not been very supportive, as they prefer their agents to continue to sell investment/savings design annuity contracts."
But increasing use of SPIAs may now be a good tool for helping clients meet planning objectives, Mettler said.
Mettler has been writing about the SPIA solution on LinkedIn.
Colleagues have greeted the commentaries with enthusiasm but say they would like to tax lawyers, accountants and insurers that issue SPIAs weigh in.
Follow-up: Mettler's reading of the draft regulations represents his view of what the IRS is saying, not a tax advisor's interpretation of final IRS regulations.
Since the original version of this article was published, other advisors have weighed in and said they believe that the IRS comments about annuities apply only to the annuity benefits streams coming out of employer-sponsored pension plans, not to individual annuities, and that Mettler's strategy probably won't work.
Readers should talk to their own tax advisors before thinking about using a SPIA or any other arrangement in efforts to solve the stretch IRA problem, the critics say.
What It Means
If Mettler is right, and you work in the areas of annuities, retirement planning or estate planning, you might find yourselves helping clients find the life insurers that do like to sell SPIAs, to help those clients pass retirement savings on to heirs.
Tax Expenditures
Clients and their financial professionals see efforts to reduce federal income taxes as a natural human activity.
The federal government sees the tax revenue lost due to use of IRAs, 401(k) plans and other retirement savings arrangements as "tax expenditures."
When members of Congress propose legislation that will cut federal revenue or increase federal spending, they are supposed to offer ideas for offsetting the impact of those changes on the federal budget deficit.
One way lawmakers can find "pay fors" is to look at the lists of tax expenditures that the Office of Management and Budget publishes along with the president's federal budget proposal every year, and to look at Congressional Budget Office reports on pay-for ideas.
One popular source of pay-fors is rules that help relatively affluent people cut the amount of federal income taxes they and their heirs pay.
Lawmakers used a change in the stretch IRA rules to offset about $16 billion of the Secure Act budget impact over the period from 2020 through 2029, according to a Congressional Research Service report on the stretch IRA proposal.
