Congress Eyes Inherited IRAs

[RetireBy90]

Well, I guess it was a question of when not if. Reading yesterday WSJ on B9 there is an article on a senate proposal that would give heirs five years to empty inherited IRAs or 401Ks. Sen Baucus said they are intended for retirement but are being used by some to give tax-free benefits to second, third and maybe even fourth generations.

Doesn't look from the article to be likely to happen today, but once they start looking at where to get more $$$ are any of the tax advantaged accounts safe?

Quoted Ed Slott as pointing out one problem (other than failure of congress to keep you hands off my $$) such as once the $$ comes out of an IRA it is not sheltered from creditors.

He goes on to suggest that if this was to happen, some other stratagies would include taking the IRA $$ and buying a life ins policy that you fund or setting up a trust to get the $$ and pay it out to the heirs.

Guess this is something to keep in mind. No guarentees but death and taxes.

[farmerEd]

It does actually make some sense, in my opinion. The 'I' in IRA, does stand for individual after all, and if the 'Individual' has passed on, I don't see why society should continue to pass on tax-free compounding on to the next generation.

5 years seems like a reasonable pay out period.

[MichaelB]

One quote in the article stands out

Quote:

"IRAs are intended for retirement," Sen. Baucus said at a committee hearing on Tuesday. "They are being used by some taxpayers to give tax-free benefits to second, third, maybe even fourth generations."

I wonder how four generations can benefit from something that was only introduced in 1974 and cannot be passed along until the holder passes away.

[BellBarbara]

I agree, and would make it even less than 5 years. For every dollar they are not collecting from something like this, some taxpayer is footing the bill. There is no benefit to the treasury.

[justplainbll]

Hope the inherited IRA BS will not apply between spouses.

[meierlde]

Quote:

Originally Posted by BellBarbara I agree, and would make it even less than 5 years. For every dollar they are not collecting from something like this, some taxpayer is footing the bill. There is no benefit to the treasury.

Actually just require the inheritor to withdraw money based upon the original IRA creators RMD, just start it immediately letting the RMD before the person is aged 70 be the age 70 withdrawal rate(3.6%). One should also do the same for Roths. This way the government income is death neutral.

[justplainbll]

Quote:

Originally Posted by BellBarbara I agree, and would make it even less than 5 years. For every dollar they are not collecting from something like this, some taxpayer is footing the bill. There is no benefit to the treasury.

A benefit might be a reduction of public assistance costs.

[justplainbll]

Quote:

Originally Posted by meierlde Actually just require the inheritor to withdraw money based upon the original IRA creators RMD, just start it immediately letting the RMD before the person is aged 70 be the age 70 withdrawal rate(3.6%). One should also do the same for Roths. This way the government income is death neutral.

There's no RMD for ROTHs. Many people paid through the nose to build up their ROTHs based on the current rules. Starting to really sound like rules are made to be broken.

[BellBarbara]

Quote:

Originally Posted by justplainbll A benefit might be a reduction of public assistance costs.

How would this lower public assistance? If someone is on public assistance, and inherits an IRA, wouldn't taking the money get them off PA? Maybe you mean in the future? I am worried about today's taxpayer (we are still working) and paying high taxes to benefit someone in this category.

[sheehs1]

Sounds to me like the government continues the "want the money ASAP" mantra. The Roth conversion was set up so that those with significant IRA accounts "might" convert some and pay taxes, NOW. And they will probably change the Roth rules 15 years from now too!

I really don't understand, because RMD is but one option on an inherited IRA. Taxes ARE paid by the beneficiary at the time of a RMD distribution, so it is not tax free. IF the beneficiary elects a RMD over their lifetime, the RMD starts immediately regardless of their age (i.e., they could be 20 years old). The money remaining each year in the inherited IRA, continues to compound (maybe) and the government "eventually" gets a piece of that compounding as well.

[MichaelB]

Quote:

Originally Posted by justplainbll There's no RMD for ROTHs. Many people paid through the nose to build up their ROTHs based on the current rules. Starting to really sound like rules are made to be broken.

Nothing in the article suggested there is any proposal to tax inherited Roth IRAs.

[kaneohe]

Quote:

Originally Posted by justplainbll There's no RMD for ROTHs. Many people paid through the nose to build up their ROTHs based on the current rules. Starting to really sound like rules are made to be broken.

true for original owner but not for beneficiary

[MichaelB]

Quote:

Originally Posted by kaneohe true for original owner but not for beneficiary

While a beneficiary cannot add to an inherited Roth it is not subject to any RMDs. It is subject to the 5 year requirement.

[sheehs1]

Quote:

Originally Posted by MichaelB One quote in the article stands out I wonder how four generations can benefit from something that was only introduced in 1974 and cannot be passed along until the holder passes away.

+1
Also, how can these be tax free benefits.? That may be an erroneous statement. Whether it is an IRA or annuity, at some point taxes are paid. For an IRA, if lump sum taken, taxes are due that year. If 5 year pay out is selected, taxes are owed each of the 5 years. If RMD, it starts immediately and taxes are paid on the RMD amount. If an annuity, taxes are paid on the increase in the overall annuity at death of the decedent.
That has been our real life experience.

Anyone have a clue how this could be "a tax free" benefit?

[okapi]

It mentions in the article that some wanted it as an amendment in The Highway Bill.Don"t ya just love are congress folk.

[GrayHare]

Quote:

Originally Posted by MichaelB While a beneficiary cannot add to an inherited Roth it is not subject to any RMDs. It is subject to the 5 year requirement.

Do you have a link? Instead to my knowledge there is no 5-year requirement currently, and RMDs of inherited IRAs are the same % for both tIRAs and Roths.

[grumpy]

I would hope that existing inherited IRA's would be exempted from any such changes. In our case we have three inherited IRA's. We take the RMD's, pay the taxes, and since we don't need the $'s for living expenses, we reinvest the money in taxable investments. Uncle Sam gets his cut of the RMD and eventually gets a cut of any taxable investment gains. In a few years we will have to start taking RMD's from our own IRA's too. At least for us, the gov't will be collecting plenty of taxes.

[justplainbll]

Quote:

Originally Posted by MichaelB Nothing in the article suggested there is any proposal to tax inherited Roth IRAs.

I was responding to the post from meierlde

[GrayHare]

"...it's also worth noting that in reality, many people don't stretch IRAs at all, but simply take the money and run."

that and lots of details at http://www.kitces.com/blog/archives/...e-For-All.html

[ripper1]

Quote:

Originally Posted by MichaelB Nothing in the article suggested there is any proposal to tax inherited Roth IRAs.

Just wait.