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

"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]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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...etch-IRAs,-Threatens-5-Year-Rule-For-All.html

 

[ripper1]

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

Just wait.

 

[MichaelB]

Just wait.

For what?

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.

Fairmark tax advisors Inherited Roth IRA

We sometimes see statements like this: "On your death, your beneficiaries receive your Roth IRA tax-free." That statement could be a little misleading. For one thing, the estate tax applies to assets you own in a Roth IRA the same way it applies to assets you own in a regular IRA. What's more, if you die less than five years after setting up a Roth IRA, your beneficiaries may have to pay tax on earnings if they withdraw them too soon.

 

[GrayHare]

Fairmark tax advisors Inherited Roth IRA

That's a separate 5-year issue... the subject of this thread is required distributions within 5 years. Your earlier post suggested Roths have no RMDs but do have a required distribution within 5 years. Instead the distribution rules for Roths are the same as those for inherited tIRAs, and no current rule requires a person to deplete either IRA type within 5 years, per
http://www.investopedia.com/articles/retirement/03/111903.asp

 

[Koolau]

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.

While it would be natural to assume Congress will either take the revenue from "taxpayers" or dead people*, in fact, what they have done is simply increase the debt. Who knows who will foot that bill in future. IOW I am not aware that tax rates have gone up recently - to cover dead people sheltering their inheritances or for any other reason.

Arguments have been made for a very long time as to whether and how inherited money should be taxed. This proposed bill is one possibility. Still, to me, the real question the public needs to address (to "assist" their elected representatives to do the public's will) is: Does the US have a revenue problem or a spending problem. How you come down on that determines how you feel about virtually all "revenue enhancing" (aka tax increases) schemes like the one proposed. YMMV

*dead people DO typically have to file tax returns at least for one year post death. They DO pay taxes in many cases.

 

[youbet]

Still, to me, the real question the public needs to address (to "assist" their elected representatives to do the public's will) is: Does the US have a revenue problem or a spending problem.

+1

Nicely stated Koolau. Many seem to agree that the level of our current debt and the rate at which it is increasing is problematic. But fewer seem to agree as to whether the solution lies in reduced spending or increased taxation.

 

[james7]

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.

Agreed. It is about time Congress started cracking down on these IRA schemes to avoid taxes by making the heirs dissolve the IRA and pay taxes immediately on the funds. Yes, the "I" is for individual and the "R" is for retirement and if the individual has passed on obviously the retirement funds will not be needed so there is no reason for future generations to benefit in any way while we taxpayers foot the bill.

Instead Congress needs to get rid of ALL federal and state inheritance taxes and estate probate fees, so that small businesses, family farms, and one's real property (real estate) will not have to be sold to meet this burden. We have enough taxable events in this country (making money, spending money, etc.) without death being one of them.