What will the death of the Stretch IRA do to markets

[HadEnuff]

Between me and my siblings we inherited over a million in IRAs (split up into little pieces. As far as sI know we have all chosen the longest option, i.e. RMD's spread out over our projected life spans, hence, that money remains in the markets, invested. Since the markets have done well in that time, the balances are likely at least as high as what we inherited. I know mine is.

It has been 5 years since our dad passed away. Under the new proposal, none of it would still be in IRAs.
Not only would it all have been taxed, but it would likely have pushed most of us into AMT land, thus taxed at an even higher rate.
Once out of the tax advantaged IRAs, it changes completely how, or even if, it would be invested.
Projecting that out to all of the IRAs being thus passed on over the next decades, how can that not be devastating to the markets?

Please keep comments away from political agendas, in order to keep Porky Pig at bay.
Thoughts?

 

[athena53]

I'm not sure how that would change the investment composition, other than maybe shifting towards more tax-advantaged investments (municipal bonds, equities focused on LT capital gains). If I were in the good news/bad news position of inheriting a large IRA with the entire amount immediately taxable, I'd likely sell enough to pay the taxes, re-assess the composition of the rest and tweak as necessary, grumble about the taxes, and go on.

 

[HadEnuff]

But won't the markets be effected simply by the fact that over time, there will be significantly fewer dollars to invest?
Or is the number of dollars invested in equities (I think the equities markets would be most affected) through IRAs a relatively small amount, in the overall scheme?

 

[Bestwifeever]

Some people might move the withdrawn IRA remains, once taxes were paid, into equities--not all IRAs are all invested in equities. Ours is around 55 percent bond index funds, so imagine our heirs would move that into equities.

 

[rodi]

AFAIK - there are no proposals that have been voted on specific to this issue. Like changes to the ACA, etc... this is speculation about a political topic. Tread very lightly.

 

[2017ish]

I gave this some thought after seeing the 26-0 Finance Committee vote, which took it out of purely "speculative" territory for me. (Although obviously not into "action" territory.) As noted by James Lange, historically, "when you had a 26-0 Senate vote, the legislation always became law the next year.”

In our case (with heirs who are doing well), it is another [small] weight on the scale for aggressive Roth conversions when we retire.

Doubt that there will be any noticeable impact on the markets, even though total retirement assets (24.5 trillion as of 6/30/16) are roughly equal to total market valuation of US listed equities (25 trillion or so as of 12/31/15). First, although I don't have stats, I suspect that the percentage of retirement assets that reside in inherited IRAs is rather small. Second, anytime the tax law changes, the planning professionals react. Thus, even if there were an impact, it would likely be transitory. Third, the change essentially would take 40 years m/l of sales volume and compress it into 5 on a rolling basis as people died. Given the trading volume in the markets, this doesn't strike me as a market-moving event.

 

[LOL!]

But won't the markets be effected simply by the fact that over time, there will be significantly fewer dollars to invest?
Or is the number of dollars invested in equities (I think the equities markets would be most affected) through IRAs a relatively small amount, in the overall scheme?

Nothing would change for the most part. Consider the following which neglects taxes:

1. I sell 100,000 shares of Vanguard Total Stock Market Index fund in my IRA
and withdraw the cash which is used when ...

2. I buy 100,000 shares of Vanguard Total Stock Market Index fund in my taxable account.

How much did the number of dollars invested in equities change?

Presumably folks with stretch IRAs have some bonds, maybe even US government bonds. If they sell out of the IRA, then they pay the IRS taxes and invest the rest as before.

Presumably, they would also spend the same amount annually as before. I think the net affect would be unnoticeable.

I disagree that it would change the kinds of things people would be invested in. Can you explain please?

 

[HadEnuff]

I gave this some thought after seeing the 26-0 Finance Committee vote, which took it out of purely "speculative" territory for me. (Although obviously not into "action" territory.) As noted by James Lange, historically, "when you had a 26-0 Senate vote, the legislation always became law the next year.”

In our case (with heirs who are doing well), it is another [small] weight on the scale for aggressive Roth conversions when we retire.

Doubt that there will be any noticeable impact on the markets, even though total retirement assets (24.5 trillion as of 6/30/16) are roughly equal to total market valuation of US listed equities (25 trillion or so as of 12/31/15). First, although I don't have stats, I suspect that the percentage of retirement assets that reside in inherited IRAs is rather small. Second, anytime the tax law changes, the planning professionals react. Thus, even if there were an impact, it would likely be transitory. Third, the change essentially would take 40 years m/l of sales volume and compress it into 5 on a rolling basis as people died. Given the trading volume in the markets, this doesn't strike me as a market-moving event.

Thanks, that's exactly the kind of conversation I'm looking for.

 

[kaneohe]

Wasn't there a large protective shelter here.......I seem to recall 450K in
stretch IRAs could be maintained in the proposal?

 

[2017ish]

Wasn't there a large protective shelter here.......I seem to recall 450K in
stretch IRAs could be maintained in the proposal?

Yes. 450 was proposed to be sheltered. That is one reason why the proposal, if enacted, would only be a small nudge in favor of aggressive Roth conversions for us. We should be able to convert enough in the next decade to get within the safeharbor for each kid... (And, if the market gods smile upon us, we can structure to get amounts to potential grandkids, etc.--lots of ways to skin this, but would be hard for those few with tens of millions in the IRA)

Heck, if the markets fall far enough, none of us will have to worry.

 

[Golden sunsets]

We did give this some thought after reading about the potential death of the stretch IRA. We had at one point considered aggressive conversion to Roth's per iOrp's modeling but after converting a small amount of DH's IRA in a year when our income was lower than usual, we elected not to continue the conversions as we would have bumped ourselves into either the 28 or 33% brackets along with incurring AMT's depending on the year. Finally, 2017 is the first year that we will rely entirely on pensions/SS with no earned income, but also the year that RMD's kick in for DH. In 2019 RMD's kick in for me. If this proposed rule becomes law we will rethink Roth conversions over and above RMD's if there is a change in the tax code and attempt to compare the results to the taxes that our children would pay if we continue to take RMD's only. I surmise though that there would be a high degree of speculation in such an exercise. And who knows what changes might be made to the the tax code vis a via Roth's.


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[growing_older]

There is nothing that can be planned for to account for proposed rule changes that might or might not become law. In other discussions, some lawmakers are proposing eliminating all Roth conversions in a "baby out with the bathwater" response to backdoor and mega-backdoor Roth maneuvers. If we respond to every proposal, we will be churning our accounts in anticipation of phantoms that never materialize.

 

[GrayHare]

If the first $450k can remain inside a stretch IRA I don't see any market impact at all because the % of people with IRA totals in excess of $450k is, I presume, small.

I have never seen that % presented. There are many reports of "average IRA account balance", but none that report average and median total amounts of people with IRAs. Many people have multiple IRA accounts.

 

[exnavynuke]

But won't the markets be effected simply by the fact that over time, there will be significantly fewer dollars to invest?
Or is the number of dollars invested in equities (I think the equities markets would be most affected) through IRAs a relatively small amount, in the overall scheme?

I don't have hard data to support my assumption, but I'd wager that the percentage of money invested in the market in IRA's which would be subject to the proposed 5-year rule is a "drop in the bucket" of the total market. I agree pretty much with the sentiment 2017ish made on the subject.

 

[donheff]

About the only change I would expect is that people inheriting large IRAs might change the IRA AA to a more conservative mix so they didn't get stuck taking a massive distribution during a major downturn. Can't see a major market impact from this or the conversion of a bit more to taxes - especially since these taxes would undoubtedly be accompanied by other tax cuts.

 

[bingybear]

If this happened in DW case (we think she is inline to inherit some IRAs), I would expect she would decline some part of it so part would go to other contingent heirs to divide up some of the tax between people. This should lower some of the taxes a bit.
I would suspect changes would still allow distribution of be over some number of years, albeit it would be much shorter than the stretch ira. So you do the best you can on taxes and reinvest.
Yes some will be pulled in taxes, but will it really be that much compared to the size of the market? And you can be sure the government will spend the tax dollars... some where.

 

[kgtest]

CRT?

I suspect many strech ira strategists will transitiom future planning to CRTs. As for those who have stretch ira's...it looks like it will be a good bargaining chip to push legislation through last-minute. That's how it works.

Summary of Relevant Characteristics of Testamentary Charitable Remainder Trusts
The trust must comply with the requirements of IRC §664 and the Regulations thereunder.
The CRT will be exempt from federal income tax, except for any year in which it has any unrelated business taxable income.3
The bequest to the CRT will be part of the taxable estate of the decedent.
The decedent's estate will be entitled to a charitable deduction under IRC §2055 for the present value of the charitable remainder interest in the trust.4
Unless the income beneficiary of the CRT is the decedent's spouse, the present value of the income interest will be taxable.5
If the estate tax on the bequest to the CRT is payable from that bequest, the computation of the tax and the charitable deduction for the remainder interest will be interrelated.
The CRT will be subject to certain of the Chapter 42 excise tax provisions applicable to private foundations, specifically IRC §4941 (self-dealing) and IRC §4945 (taxable expenditures).6

 

[GrayHare]

I believe the maximum CRT term is 20 years. Yes, that's better than 5 years but still less than the average duration of a generation-skipping stretch IRA.

 

[Taxman59]

My experience with clients who inherited assets (both qualified and after tax $) , is that the benes make grand plans for how the money will be in stead for the long term, only to have the account spent down over about 5 years! Thus, IMHO, any change to the stretch will have almost no effect on the investments in accounts.

 

[2017ish]

My experience with clients who inherited assets (both qualified and after tax $) , is that the benes make grand plans for how the money will be in stead for the long term, only to have the account spent down over about 5 years! Thus, IMHO, any change to the stretch will have almost no effect on the investments in accounts.

Well, from a policy standpoint that would certainly moot the issue! Query--in your practice, were you dealing with any of the .1% or even .05% of estates/beneficiaries? (I ask because, as is frequently the case, that thin slice, or fears of same, seems to be what is driving the proposals. As with the AMT and other such "fixes," however....)

 

[Taxman59]

Mostly educated (yet not financially), high earners with inherited IRAs of over $100k. They seem to think that the money will keep coming from somewhere ! Some of the highest earners / wealth owners were the worst. Their parents planned generationly yet the offspring lived for today. Sad. Spoke with an academic about long term trusts, and he proposed that the benefits were overstated due to fees and taxes. I pointed out that the long term plan relied on children and even grandchildren forego taking from the trusts so that future generations will be in the top .1% of the wealth owners. Not going to happen.

 

[meierlde]

Well, from a policy standpoint that would certainly moot the issue! Query--in your practice, were you dealing with any of the .1% or even .05% of estates/beneficiaries? (I ask because, as is frequently the case, that thin slice, or fears of same, seems to be what is driving the proposals. As with the AMT and other such "fixes," however....)

I suspect it is folks like Mitt Romney that started the idea. But a simpler fix would be that you must withdraw on the account founders RMD schedule, with for younger beneficiaries using the age 70 percentage until the original account holder reaches 70.

 

[growing_older]

Based on my discussions over the years with coworkers, most people have a very difficult time with seeing a large pool of money and not moving to use it as soon as possible. I saw somewhere that the mean time between receiving an unexpected financial windfall and buying a new car is under a week. I like to think my own heirs will exercise some restraint and stretch any IRA money they receive, but I'm not concerned enough to pay for a trust to force the issue. It will be their money. They should make their own decisions.

Many of these proposed changes to IRA rules (eliminating stretch, restricting or limiting Roth conversions) are emotional responses to the perceived notion that the very wealthy are somehow taking advantage - not necessarily to the actual size of the issue. Politics runs on emotions.

 

[SecondCor521]

If the first $450k can remain inside a stretch IRA I don't see any market impact at all because the % of people with IRA totals in excess of $450k is, I presume, small.

I have never seen that % presented. There are many reports of "average IRA account balance", but none that report average and median total amounts of people with IRAs. Many people have multiple IRA accounts.

And it is probably $450K per beneficiary. In my case I have two siblings, so the amount that could be sheltered vis-a-vis my Dad's IRA would be $450K x 3. I think there are very few IRA's out there that would have sheltering issues.

Also, it hasn't happened yet, but in my family if money ever had to come out of a t-IRA faster than desired, the excess that was not spent would very likely be invested back into the markets in a taxable account or perhaps in a college fund like a 529.

For these two reasons, I doubt that the proposal would have any impact on the markets.

 

[CardsFan]

Many of these proposed changes to IRA rules (eliminating stretch, restricting or limiting Roth conversions) are emotional responses to the perceived notion that the very wealthy are somehow taking advantage - not necessarily to the actual size of the issue. Politics runs on emotions.

+1.
Ironically, the VERY rich have far better mechanisms to convey wealth at low taxes. In reality, this impacts the middle to upper middle class saver, investor, and LBYM'er. Basically, many of us here.