What will the death of the Stretch IRA do to markets

[kgtest]

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.

DW managed to make her $20,000 stretch IRA last 15years. Helped with college tuition and living expenses, bought her a car, helped pay down some of my debt and finally dissolved it when we purchased our first kid hauler 2years ago. Of course it remained invested until the very last withdrawal and she used it for very important things in her life.

That money helped us greatly, so glad she didn't pi#$ it away. I'm guessing she is the exception.

 

[meierlde]

Of course the change will change how people give to charities, if you want to leave something to charity you would do it thru a 401k/IRA because the charity does not pay tax on withdrawals. Of course this was attractive as well when estate taxes where higher, in particular because you could deduct the estate tax on your income tax when you withdrew from a retirement plan.
The net idea is that 401ks/Iras are for your retirement only, not a perputuity.

 

[Svensk Anga]

And it is probably $450K per beneficiary.

I think this is mistaken. The proposed exclusion is per deceased IRA owner, not per beneficiary. This is per James Lange here (bottom of page 1): http://www.paytaxeslater.com/articles/the-ultimate-retirement-and-estate-plan-for-your-million-dollar-ira-addendum.pdf

And if you have both Roth and Traditional IRA's/401k's, the 450k exclusion is split between the two pro-rata. (See page 5 in the link.)

 

[SecondCor521]

I think this is mistaken. The proposed exclusion is per deceased IRA owner, not per beneficiary. This is per James Lange here (bottom of page 1): http://www.paytaxeslater.com/articles/the-ultimate-retirement-and-estate-plan-for-your-million-dollar-ira-addendum.pdf

And if you have both Roth and Traditional IRA's/401k's, the 450k exclusion is split between the two pro-rata. (See page 5 in the link.)

Thank you for the correction! Bummer, but accurate information is great. I was guessing, and I guess I guessed wrong.

 

[rodi]

Is this retroactive? In other words the beneficiary IRA I inherited 8 years ago (that I'm stretching) - Would I have to cash it out over 5 years starting when the bill goes into effect. Would I have to cash it all out, since it's been more than 5 years? Or would I be grandfathered in under the existing rules?

It's enough that it would definitely blow my ACA tax credit qualifications (but they're likely going away also - so that's a moot point.)

I will wait till there's a law before I change my budget/planning, however.

 

[Taxman59]

My favorite bene story was a client who inherited about $450k in an IRA. She and her husband made about $350k per year (he was a salesman for her family's paper company, she had S-Corp shares in the company). We worked out a plan for her to stretch the IRA out over her lifetime (she was in her 30s). I helped her get the investment account established with a friend of mine (no fees to me, and due to my relationship with the broker, she was at the lowest tier of fees).
I started getting calls from the broker about a month after the account was established. She took out $30k. A call to her and she says she needs a new car because hers was almost 3 years old and had 30k miles on it. A week later, she needs about $10k to lease a new car for her husband (he can't be driving around a 2 year old car and appear successful to his clients!). Another month goes by and she has taken out $30k for a kitchen remodel (this was 25 years ago, so a decent remodel in a modest house).

When I did their taxes, I informed them that the tax bill on the IRA withdrawals was about $30k, and they would need to up their estimated tax payments. Another hit to the IRA. At this point, I recalculated the withdrawals for a 5 year payout, and explained that there would be some taxes due, but in the long run it would match their spending pattern. Fast forward a year, and I asked the broker for the 1099 for the now taxable account and the IRA. He said the IRA was closed, and the taxable was down to $120k. It seems that her DH had to have a new leased BMW every year (latest model with all of the upgrades, because money was no problem!), and she wanted to have more exciting travel options. In the end, all of the IRA $$ was gone in 3 1/2 years, and "it was my fault for making them pay taxes" .

Side note, the husband also inherited some money, all after tax. I talked to the broker about 10 years later, and he hadn't touched his money and it was about 2 1/2 times what he inherited and he was planning on using it to supplement his retirement!

 

[hesperus]

Wasn't aware of this bill.
Whew... At least the inherited IRA I received in 2011 will be grandfathered in for the rest of my life. My sibling and I split a $1.4M IRA from our father. If we had to liquidate over five years, there's no question we would have been bumped into the highest tax rate for each of those five years.

 

[meierlde]

Wasn't aware of this bill.
Whew... At least the inherited IRA I received in 2011 will be grandfathered in for the rest of my life. My sibling and I split a $1.4M IRA from our father. If we had to liquidate over five years, there's no question we would have been bumped into the highest tax rate for each of those five years.

taking 700k divided by 5 is about 140k so you must have substantial additional income as top rates start at 413k or so.

 

[GrayHare]

Pure opinion here. The stretch IRA is a generous benefit, perhaps too generous. A mandatory 5-year withdrawal is the opposite. Others have posted here about simply keeping the RMDs on the original IRA owner's schedule, which IMO is a fair compromise. Make the 5-year mandatory only if it would be longer than the original owner's remaining RMD schedule. And, still permit beneficiaries to take more than the RMD should they wish. This way Uncle Sam gets his tax at the same pace he would have had the original owner not died, and Uncle Sam still will likely collect more in tax since the beneficiary is probably working and in a higher tax bracket than the retired original IRA owner.

 

[hesperus]

taking 700k divided by 5 is about 140k so you must have substantial additional income as top rates start at 413k or so.

We do. The non IRA portion of the portfolio generates enough income, in addition to wife's employment income, to put us over that higher tax rate, IF we were forced to take a 5 year IRA drawdown.