Congress Eyes Inherited IRAs
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BellBarbara
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We definitely have a spending problem, but that doesn't excuse a loophole like an IRA not being taxed for the convenience of the person who inherited it.
This is not an inheritance issue, these monies were tax deferred for the individual, and taxes should be due when they die.
This is not an inheritance issue, these monies were tax deferred for the individual, and taxes should be due when they die.
Since 1) inherited tIRA withdrawals are already required plus taxed, and 2) many inheritors deplete the IRA funds immediately and are quickly taxed on the whole amount, I question how much sooner the tax dollars will get to Uncle Sam. In fact given #2, forcing most everyone into a 5-year withdrawal might actually reduce the speed at which IRAs are taxed.
Htown Harry
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I didn't see this thread before I started new one on transportation bills now being considered by the House and Senate.
The Senate version had the inherited IRA provisions referenced in the OP's link to the Monday Bloomberg article, but the Finance committee found other funding sources and did not include any IRA changes in what they passed on Tuesday. So, no changes for now.
It will come back later attached to some other bill, I suspect.
For those who want to read the details of Sen. Baucus' inherited IRA proposal, here is the link. IRA provisions start on page 12:
http://finance.senate.gov/legislation/download/?id=d203a88c-7df7-4c87-b3fa-15bfbc3eacd8
The Senate version had the inherited IRA provisions referenced in the OP's link to the Monday Bloomberg article, but the Finance committee found other funding sources and did not include any IRA changes in what they passed on Tuesday. So, no changes for now.
It will come back later attached to some other bill, I suspect.
For those who want to read the details of Sen. Baucus' inherited IRA proposal, here is the link. IRA provisions start on page 12:
http://finance.senate.gov/legislation/download/?id=d203a88c-7df7-4c87-b3fa-15bfbc3eacd8
"If Congress does nothing -- literally, nothing -- and lets all laws play out as they're currently written in the books, the budget deficit over the next decade virtually disappears."
from http://www.fool.com/investing/general/2012/02/01/congress-do-nothing-and-the-budget-is-fixed-.aspx
from http://www.fool.com/investing/general/2012/02/01/congress-do-nothing-and-the-budget-is-fixed-.aspx
Leonidas
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The ability to inherit these things is more modern than IRA's themselves (Bush II admin, I think) - a plum given to voters by the politicians to garner votes. Taking it away will be yet another political gesture to garner votes (just flipping of sentiment from "I deserve it" to "They don't deserve it").
Such things play well to some voters. Smart on the pols part - getting voters to argue over how to tax each other while they continue to get elected and spend the tax dollars foolishly. I'm not sure who is the greater prostitute in this scenario - them that sell their governing for a continued life of privilege at taxpayer expense, or them that sell their votes for a few dollars.
Such things play well to some voters. Smart on the pols part - getting voters to argue over how to tax each other while they continue to get elected and spend the tax dollars foolishly. I'm not sure who is the greater prostitute in this scenario - them that sell their governing for a continued life of privilege at taxpayer expense, or them that sell their votes for a few dollars.
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Htown Harry
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There are range of beneficiary withdrawal options under current law. The proposal in the OP's news link would eliminate them in favor of one treatment of taxes being due over five years.
The CBO has access to all of the IRS data on how non-spouse beneficiaries are actually handling their distributions and the tax payments. They no doubt have some big spreadsheets that show what-if projections for all kinds of options.
For example:
Bellbarbara's proposal:
1. 100% immediately taxable at beneficiary's tax rate OR, possibly
1A. 100% immediately taxable at the deceased's tax rate
Current options are listed below (they are not mutually exclusive). All withdrawals are taxable at the beneficiary's tax rate. The minimum withdrawals are subject to an overriding provision that if an IRA owner dies on or after the required beginning date (typically at 70-1/2), the remaining interest must be distributed at least as rapidly as under the minimum distribution method being used as of the date of death.
2. Withdraw some or all immediately
3. Take the entire account by the end of the fifth year following the year of the owner's death. If this rule applies, no distribution is required for any year before that fifth year.
4. Use the life expectancy table and the beneficiary's age as of his or her birthday in the year following the year of the owner's death, reduced by one for each year since the year following the owner's death. Example: a 50-year-old with a life expectancy of 85 has a first-year taxable withdrawal of 1/35th of the IRA balance.
Baucus's proposal:
5. One treatment of taxes in lieu of the current options, with taxes due over five years (apparently similar to #3).
Htown Harry's proposal:
6. Keep the current options, but change #4 to a table based on the owner's projected life expectancy at death. For example, if a 65-year-old dies 20 years "early" compared to life expectancy of 85, the beneficiary would be required to withdraw 1/20th of the IRA balance in the first year. (Similar to the override provision that now only applies if the owner is already subject to RMD's).
Greyhare's speculation that any changes will produce limited additional revenue may or not be correct. I think that conculsion may be based on an assumption that options 2 and 3 are chosen by most beneficiaries and at an equal frequency by beneficiaries inheriting large IRA's.
My guess is that the biggest IRA's are most frequently kept largely tax-deferred for long periods using option #4, hence the number-crunchers at CBO believe there's real money to be found by tightening up the rules.
tightasadrum
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I won't lose much sleep over this one either way...I'll be dead!
I think I'm in that mindset as well
Count me in that group. I'm not expecting anything and if there should be beneficiaries for my portfolio even after taxes what is left is all gravy for them.
OP
OP
RetireBy90
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I guess my take is how did it become public property? They hound us for taxes while we are alive, then stake a claim to anything left? I agree we'll be gone so won't affect me but I think that you should be able to leave what ever is left to whoever you want. It doesn't belong to govt, they should leave it alone. IMHO.
Inherited IRAs are earned and investment income never taxed. Once it is taxed you can leave it to whomever you choose. No different than any other income.
FinanceDude
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I disagree 100%, some of those beneficiary IRAs go to minor children, and guess who pays the taxes
? I now see the proposal lets the minors wait until adulthood to pay the taxes. That will for sure guarantee that the money doesn't get stretched out very far................
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BellBarbara
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Yes, but essentially the person who owned the IRA owes the tax. They should tax it when the entity cashes it out.
Everyone comes up with a reason not to pay the taxes, that is why our tax system is so messed up. The person got to defer while alive and working, when they die, the taxes should be paid, not shifted to others to pay.
My personal pet peeve are all these "reasons" people should get a pass on taxes. That is why those of us who work pay so much!
Everyone comes up with a reason not to pay the taxes, that is why our tax system is so messed up. The person got to defer while alive and working, when they die, the taxes should be paid, not shifted to others to pay.
My personal pet peeve are all these "reasons" people should get a pass on taxes. That is why those of us who work pay so much!
justplainbll
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I have not seen very many people on this forum indicate that they're paying more than 15% on their AGI.
Any deferral of the payment of taxes on tIRAs will likely result in ultimately higher tax revenues. The ability to pass down IRAs encourages a thrift mentality that has become sorely lacking in America's entitlement and instant gratification oriented society.
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Huston55
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Aeowyn
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They might be referring to a technique used to delay taxes as long as possible of: Instead of listing your child as a beneficiary of an IRA/401K, you list your grandchild or great grandchild (3rd/4th generation) as the beneficiary. The RMD is based on the age of the holder. The younger the beneficiary, the smaller the RMD - the longer you delay taxes.
OP
OP
RetireBy90
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1) I would think that this issue of passing along tax deferred investments would be a good thing for Da Man. As long as the pot of $$ keeps growing so does the taxes to be collected. I mean come on, we are all willing to put $$ into an investment with expectation of a payoff down the road, so now that is a bad thing for Da Man ? He will get his one day and the more it grows the more he gets.
2) For Roth accounts, I would say it isn't tax free, taxes have been paid. That was the deal when I paid my taxes early on this.
2) For Roth accounts, I would say it isn't tax free, taxes have been paid. That was the deal when I paid my taxes early on this.
FinanceDude
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So, why have encourage saving in 401Ks or IRAs at all? Not enough people do that anyway, let's just punish those that do? Not sure where you are heading with this.......
I pay PLENTY of taxes, and have for MANY years........
We encourage saving through IRA and 401(k) so people will provide for their retirements. Not sure what punishment you are talking about. Thank you for paying plenty of taxes for many years.So, why have encourage saving in 401Ks or IRAs at all? Not enough people do that anyway, let's just punish those that do? Not sure where you are heading with this.......
I pay PLENTY of taxes, and have for MANY years........
teejayevans
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Da man needs the money today, he has special interests to take care of, how dare you be so selfish
, let the bill come due when they are out of office.They have to raise taxes, because they can't stop spending, its just going to be a stealth tax here and there. Other ideas I've heard of:
Eliminate HSAs (Pelosi said they are a tax dodge ?!?)
Move starting RMDs from 70.5 to 65
Funny how they never talk about changing the insurance laws (VULs, ILITs, etc), probably has nothing to do with the insurance companies donations/lobbyists.
TJ
FinanceDude
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Hopefully Congress finds something else to worry about..........
Why mess with the beneficiaries of inherited IRAs? They'll get the money at some point. This sounds like another one of those dumb ideas where Uncle Sam wants their money now. Remember the old conversion from IRA to Roth in the late 90's, where you could spread the taxes over 4 years? Only 25% of ALL eligible people took "advantage" of that "special deal". How did that work out for ya, Uncle Sam? 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.
originally posted by Aeowyn
They might be referring to a technique used to delay taxes as long as possible of: Instead of listing your child as a beneficiary of an IRA/401K, you list your grandchild or great grandchild (3rd/4th generation) as the beneficiary.
***************************************************
...or perhaps you just have a compressed generation of 20 yrs of
shorter than normal longevity, say 65yrs and the original IRA owner
was older when the IRA was started. Also I think the original owner
is generation 1, so only 3 more generations needed.
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.
originally posted by Aeowyn
They might be referring to a technique used to delay taxes as long as possible of: Instead of listing your child as a beneficiary of an IRA/401K, you list your grandchild or great grandchild (3rd/4th generation) as the beneficiary.
***************************************************
...or perhaps you just have a compressed generation of 20 yrs of
shorter than normal longevity, say 65yrs and the original IRA owner
was older when the IRA was started. Also I think the original owner
is generation 1, so only 3 more generations needed.
FinanceDude
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Did they consider community property states, like Wisconsin? The only way you can list someone other than your spouse as a primary beneficiary of an IRA is if they sign a form saying they're ok with that. Anyone think that might be a hard signature to get?
Typical Congress, again showing their lack of due diligence on financial matters that affect real people.......
I would say the majority of people in the US can't even do so-called "stretch IRAs" because they don't have enough other assets to afford retirement and give money to younger generations. What was the point again, to "raise" $4.5 billion a year when we are $15.4 TRILLION in the red? That's like looking for spare change on the ground to pay your $300,000 mortgage payment...........
HFWR
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
There are already rules for non-spousal beneficiaries regarding IRAs. It can't be kept sheltered indefinitely...
