RMD going to 72?

[CardsFan]

I got in trouble last time I tried to "guess" at an answer, but anyway, my guess is it would have almost zero affect. Due to the fact that the vast majority (again a guess) of 401K and IRA participants don't have a clue that the "stretch" provision for non spousal beneficiaries is even a "thing".

I think you may be correct. Also, for most, the effect on heirs is probably minimal (versus the proposed 10 years), due to the account size.

 

[jebmke]

Show me the contract you have with Congress and point out where it says that they cannot change the laws. Then I'll understand.

Oh, you don't have a contract? You just assumed that things would stay the same. I think I do understand.

indeed. Even Social Security has been ruled not binding.

 

[pb4uski]

I got in trouble last time I tried to "guess" at an answer, but anyway, my guess is it would have almost zero affect. Due to the fact that the vast majority (again a guess) of 401K and IRA participants don't have a clue that the "stretch" provision for non spousal beneficiaries is even a "thing".

+1 Negligible impact.

The vast majority of participants are focused on the benefits of tax deferral for them and for their spouses since in most cases they expect to actually use that money in their retirement rather than hoard it for subsequent generations. The tax impact on their kids (aka non-spousal beneficiaries) is likely of little concern to them and I suspect that many of them would be fine with taxing anything left to kids over 10 years after the spouse passes as being a-ok... especially if you keep the first $400k under the current rules.

Pigs get fat, hogs get slaughtered.... and the clever ones who sought to super-stretch it to their grand-children and great-grandchildren are going to end up ruining the stretch for everyone as Congress overreacts to close the loophole.... which also conveniently also raises a lot of tax revenue.

 

[FIREchief]

especially if you keep the first $400k under the current rules.

Exactly which rules are these?

and the clever ones who sought to super-stretch it to their grand-children and great-grandchildren are going to end up ruining the stretch for everyone as Congress overreacts to close the loophole....

Again, you suggest that this type of super-stretch to many generations is possible. It is not. The first beneficiary's age determines the RMD's for any and all successor beneficiaries. Do your really think that there are any great-grandchildren who are currently inheriting qualified retirement assets?

 

[pb4uski]

.... Again, you suggest that this type of super-stretch to many generations is possible. It is not. The first beneficiary's age determines the RMD's for any and all successor beneficiaries. Do your really think that there are any great-grandchildren who are currently inheriting qualified retirement assets?

It is possible. Your mistake seems to be thinking that the great-grandchild is inheriting an inherited IRA from their grandparents or parents... that is not the case... the great-grandchild is the beneficiary of an IRA owned by a great-grandparent who is intentionally skipping a couple generations. The skipped generations are perhaps wealthy in their own right or are inheriting other assets like taxable accounts and getting a stepped up basis or even other IRA accounts.

Yes, some wealthy people whose spouse or children do not need the money or are inheriting other assets are designating grandchildren or great-grandchildren as tIRA beneficiaries. If my 89 yo mother designated her 2 yo great-grandchild as a beneficiary it would stretch that IRA... the RMD factor is 80 years for a 2 yo compared to 25 years for her 60 yo grandmother... so it stretches it an additonal 55 years!!

The stretch IRA takes advantage of the fact that younger beneficiaries have smaller RMDs. With a stretch IRA, account holders name their youngest relatives as beneficiaries. Well-to-do folks who know that their spouses have enough money to get by can preserve and extend their family’s fortune by naming children, grandchildren and great-grandchildren as IRA beneficiaries. Those younger relatives then take RMDs that are small enough to trigger minimal taxes. The rest of the inherited account can continue to grow tax-deferred and increase in value. It’s a form of inter-generational wealth transfer with serious tax advantages. Not all IRAs can be stretched, so if you’re considering this strategy consult your IRA provider.

If you’re not comfortable bypassing your spouse as your IRA beneficiary you can instruct him or her to stretch for you. With this strategy, you name your spouse as your IRA beneficiary. He or she rolls your IRA into an inherited IRA in his or her name and starts taking RMDs at age 70.5. Your spouse names a member of the younger generation as the IRA’s beneficiary. When your spouse dies, the young beneficiary starts taking the small RMDs described above.

Source: https://smartasset.com/retirement/what-is-a-stretch-ira

IRA accounts pass at the death of the owner by contract or beneficiary designation. It is typical practice for most IRA owners to name their spouse as the primary IRA beneficiary and their children as the contingent beneficiaries. While there is nothing wrong with this strategy, it might require the spouse to take more taxable income from the IRA than what they really need when they inherit the IRA. If income needs are not an issue for the spouse and children, then naming younger beneficiaries (such as grandchildren or great-grandchildren) allows you to stretch the value of the IRA out over generations. This is possible because grandchildren are younger and their required minimum distribution (RMD) figure will be much less at a younger age (see example below).

https://www.investopedia.com/ask/answers/09/stretch-ira.asp

The first beneficiary (really, oldest beneficiary) only applies where multiple beneficiaries inherit an IRA... but that constraint can easily be sidestepped by dividing the IRA into different accounts even after the original owner's death.

. A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any time, either before or after the owner's required beginning date. Generally, these separate accounts or shares are combined for purposes of determining the minimum required distribution. However, these separate accounts or shares won't be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner's death.

https://www.irs.gov/publications/p590b#en_US_2018_publink1000230790

Also see: https://www.fidelity.com/viewpoints/retirement/non-spouse-IRA

 

[ncbill]

Hopefully those of us who have already inherited a non-spousal IRA will be grandfathered.

 

[statsman]

I got in trouble last time I tried to "guess" at an answer, but anyway, my guess is it would have almost zero affect. Due to the fact that the vast majority (again a guess) of 401K and IRA participants don't have a clue that the "stretch" provision for non spousal beneficiaries is even a "thing".

Probably true. But if the younger generation were smart, in the event of inheriting an non-spouse IRA expected to be cashed out in 5 or 10 years, they should max out their own contributions to 401(k)/tIRA plans during that time period to offset some of the income/tax hit. Sadly, many will think it's free money and spend it.

 

[SecondCor521]

A little bit of a thread hijack, but it's related.

Suppose Grandpa dies and leaves his $1M traditional IRA to his 50 year old son. Grandpa and the son both live in a state where partial disclaimers are legal. 50DS partially disclaims half of the traditional IRA, which according to federal and state law, results in the disclaimed half going to 50DS's son, who is 25.

Question: Under current law, can 25DGS do a stretch IRA over his lifetime? (I think so.)

Bonus question: Under the proposed new law, is there any advantage to such a strategy?

 

[pb4uski]

A little bit of a thread hijack, but it's related.

Suppose Grandpa dies and leaves his $1M traditional IRA to his 50 year old son. Grandpa and the son both live in a state where partial disclaimers are legal. 50DS partially disclaims half of the traditional IRA, which according to federal and state law, results in the disclaimed half going to 50DS's son, who is 25.

Question: Under current law, can 25DGS do a stretch IRA over his lifetime? (I think so.)

Bonus question: Under the proposed new law, is there any advantage to such a strategy?

Yes, I think so too... as long as the IRAs are separated before they are inherited DS would have his lifetime (34.2 years) and DGS would have his lifetime (58.2 years). OTOH, if the IRAs are not separated then it would fall under the multiple beneficiaries rule and both DS and DGS would uses DS' lifetime since DS is the oldest beneficiary.

If you are listed as a nonspouse beneficiary along with one or more other beneficiaries, it's important to separate your shares of the decedent's IRA in your name and then complete your first RMD by December 31 of the year following the original IRA owner's death. If you don't meet this deadline, your RMD calculation will be based on the oldest beneficiary's life expectancy. If that person is older than you are, you will need to take larger RMDs, which will deplete your tax-advantaged assets more quickly.

Under the proposed law, I think they would each get 5 years or 10 years or whatever is settled upon.

 

[RunningBum]

A little bit of a thread hijack, but it's related.

Suppose Grandpa dies and leaves his $1M traditional IRA to his 50 year old son. Grandpa and the son both live in a state where partial disclaimers are legal. 50DS partially disclaims half of the traditional IRA, which according to federal and state law, results in the disclaimed half going to 50DS's son, who is 25.

Question: Under current law, can 25DGS do a stretch IRA over his lifetime? (I think so.)

Bonus question: Under the proposed new law, is there any advantage to such a strategy?

It's not uncommon for a 50 yo to be making more than a 25 yo, so the 25 yo would pay less in taxes. Distributing it over 2 tax payers might also reduce taxes. Instead of one taking on average $100k/yr distribution, which might jump him a couple of tax brackets, two could take an average of $50K/yr. If it's allowed.

Where it doesn't work (I think) is where Grandpa has $2M and leaves 50% to each son. If one son disclaims some or all of it, it goes to the other son, not the first son's heirs. Or am I wrong about that?

 

[JustCurious]

The IRA and 401K were the 'Answer' to eliminating Pensions. -- IMO, they came up way short..... Similar to 'Private Accounts' instead of Social Security.

I actually prefer having access to IRAs and tax favored employer sponsored retirement plans with employer matches over having a pension. You typically have to work for the same employer for many years to be entitled to a pension, and even then there are rules about how much you get based on years of service. Let's say you have to be with an employer for 20 years to get a pension, what happens if you get fired in year 18? You get nothing. Or you want to change employers for a better opportunity or because you are miserable, but you feel tied down by your pension so you stay. At least with IRAs and 401ks you get to keep what you and your employer contributed over the years along with any gains and you can move around within reason.

 

[SecondCor521]

It's not uncommon for a 50 yo to be making more than a 25 yo, so the 25 yo would pay less in taxes. Distributing it over 2 tax payers might also reduce taxes. Instead of one taking on average $100k/yr distribution, which might jump him a couple of tax brackets, two could take an average of $50K/yr. If it's allowed.

Where it doesn't work (I think) is where Grandpa has $2M and leaves 50% to each son. If one son disclaims some or all of it, it goes to the other son, not the first son's heirs. Or am I wrong about that?

In this case the 50DS is retired early, but point taken. ;-)

I didn't even think about the fact that spreading the distribution among multiple beneficiaries would lower the impact on each one. Duh. Good point.

As to your question, it depends on how the beneficiaries are listed. I am not an expert, but what I have researched indicates that a disclaimer in general operates as though the one who is disclaiming had predeceased the original owner with respect to the disclaimed asset. If Grandpa lists "Son 1" and "Son 2", then it would operate as you described. If Grandpa lists "Son 1 per stirpes" and "Son 2 per stirpes", the disclaimed portion would go to Son 1's children.

On the strategy front, I think I remember reading that the $400K is per original owner, not per beneficiary. But if it is per beneficiary and there are more grandkids around who can each shelter $400K and if the children don't need the money, then I think my idea might have merit. In any case, disclaiming to a younger generation helps as long as RMDs-on-age-of-beneficiary remains to any extent.

And @pb4uski, yes, the IRAs would be split before inheriting to allow 25DGS to use the larger divisor.

Just brainstorming for strategies, since as noted previously these new rules would likely impact my family. (I'm 50DS in this situation, although our situation involves more people and different dollar amounts than in the example in my question.)

 

[pb4uski]

....On the strategy front, I think I remember reading that the $400K is per original owner, not per beneficiary. ....

That is my recollection as well.

 

[mpeirce]

I actually prefer having access to IRAs and tax favored employer sponsored retirement plans with employer matches over having a pension. You typically have to work for the same employer for many years to be entitled to a pension, and even then there are rules about how much you get based on years of service.

+1

There's no way I'd have worked for a company that offered a pension rather than a matching 401(k) during my career years. I've always been in charge of my money and I liked it that way. Being tied to one company was just not something that interested me.

My DM specifically took a career path with a government pension (starting in the early 70's) and while it has worked out well for her, it limited were she could work.

 

[copyright1997reloaded]

It will be interesting to see by how much tIRA and t401k contribs decline if this new law takes effect. I would stop making tIRA contribs unless I could cheaply Rothify them, and I would reduce t401k contribs to no more than the level of the employer match.

I've already changed my behavior with the expectation that this law will pass. Even though this past year (tax year 2018) I hit the 32% marginal bracket, I just changed my 457(b) contribution from traditional to Roth. My traditional contributions will be limited to what is necessary to keep me in the 24% marginal (single) bracket.

+1

There's no way I'd have worked for a company that offered a pension rather than a matching 401(k) during my career years. I've always been in charge of my money and I liked it that way. Being tied to one company was just not something that interested me.

My DM specifically took a career path with a government pension (starting in the early 70's) and while it has worked out well for her, it limited were she could work.

Even better were those companies that provided BOTH.

Another change in strategy given the new law. I had intended to leave some assets to charity (in additional to the DAF I've already set up). While I will still do so, I will switch those to be from traditional accounts, rather than non-tax-deferred items.

 

[cathy63]

... Let's say you have to be with an employer for 20 years to get a pension, what happens if you get fired in year 18? You get nothing...

Actually ERISA (Federal law) requires that a private pension's vesting period can be no longer than 5 years. So if you get fired in year 18, then you still get to claim that pension when you reach retirement age.

 

[googily]

Even better were those companies that provided BOTH.

{waves} I am a lucky beneficiary of this, though our company froze the pension to new entrants in 2009 and froze the benefits completely in 2012. They added a cash balance plan to replace the pension going forward, and also added a second defined contribution plan to replace the 401k match, which they had dropped to 1% (but which this year came back up to 3%).

It's going to be a lot of separate payments when the time comes!

 

[FIREchief]

It is possible. Your mistake seems to be thinking that the great-grandchild is inheriting an inherited IRA from their grandparents or parents... that is not the case... the great-grandchild is the beneficiary of an IRA owned by a great-grandparent who is intentionally skipping a couple generations. The skipped generations are perhaps wealthy in their own right or are inheriting other assets like taxable accounts and getting a stepped up basis or even other IRA accounts.

Yes, you are correct. I misunderstood your post. I initially thought that you were suggesting that RMDs would be recalculated (i.e. stretched further) upon death of a grandchild, who passed along an inherited IRA to a great-grandchild. Somebody misunderstood this earlier in the thread, so I guess that was what confused me.

Yes, some wealthy people whose spouse or children do not need the money or are inheriting other assets are designating grandchildren or great-grandchildren as tIRA beneficiaries. If my 89 yo mother designated her 2 yo great-grandchild as a beneficiary it would stretch that IRA... the RMD factor is 80 years for a 2 yo compared to 25 years for her 60 yo grandmother... so it stretches it an additonal 55 years!!

While this certainly could happen, I doubt it is happening frequently enough to make any difference in Washington's revenue picture. Besides, wouldn't your 89 yo mother be concerned about dumping 16 years worth of compounded growth into the lap of that 2 yo on his/her 18th Birthday? OTOH, it might work....

 

[pb4uski]

....Besides, wouldn't your 89 yo mother be concerned about dumping 16 years worth of compounded growth into the lap of that 2 yo on his/her 18th Birthday? OTOH, it might work....

Can you elaborate? how would she be dumping 16 years worth of componunded growth? As I understand it the 2 yo wuld still need to take RMDs at ~1/80th, 1/79th, 1/78th...etc.

 

[FIREchief]

On the strategy front, I think I remember reading that the $400K is per original owner, not per beneficiary. But if it is per beneficiary and there are more grandkids around who can each shelter $400K and if the children don't need the money, then I think my idea might have merit.

Are you referring to the Senate version? (i.e. the $400K)

 

[FIREchief]

Can you elaborate? how would she be dumping 16 years worth of componunded growth? As I understand it the 2 yo wuld still need to take RMDs at ~1/80th, 1/79th, 1/78th...etc.

Exactly. Which would leave a WHOLE LOTTA compounded growth on top of the original/remaining principle.

 

[SecondCor521]

Are you referring to the Senate version? (i.e. the $400K)

I don't know!

I know there are different versions of the bill floating out there with different parameters, and one of them has something in it about $400K.

In general, I'm going to watch and wait and see what happens. I have a tickler in the fall to follow up and figure out how to respond strategically to whatever gets implemented (if anything).

Until then I'm just musing and brainstorming.

 

[FIREchief]

Actually ERISA (Federal law) requires that a private pension's vesting period can be no longer than 5 years. So if you get fired in year 18, then you still get to claim that pension when you reach retirement age.

It's the way that payments are calculated. If I start for MegaCorp at age 22 and get canned at 40, I'm likely not eligible to start receiving that pension until I'm 65. 25 years of inflation (even at today's rates) will devastate the purchasing power of a pension based upon things like final five years salary, actual salaries during participation, etc.

 

[FIREchief]

Suppose Grandpa dies and leaves his $1M traditional IRA to his 50 year old son. Grandpa and the son both live in a state where partial disclaimers are legal. 50DS partially disclaims half of the traditional IRA, which according to federal and state law, results in the disclaimed half going to 50DS's son, who is 25.

I believe that if a primary beneficiary disclaims his/her rights to inherit, the assets would then pass to any named contingent beneficiaries. If none are named, and primary disclaims, then the assets likely pass to the estate (which is an awful way to pass along qualified retirement assets to individual heirs - under either current or future law).

 

[FIREchief]

I don't know!

I know there are different versions of the bill floating out there with different parameters, and one of them has something in it about $400K.

The Senate's version has a five year sunset (instead of the ten years in the House's SECURE act), but also excludes the first $400K. I've looked for more details/interpretations but come up empty. The consensus thinking appears to be that the $400K limit would apply to the initial total amount of qualified assets, not to each beneficiary. If this were true, it would argue for Roth converting at least $400K to maximize the benefits of that remaining stretch. That said, I think the five year limit in the Senate version is a deal killer. It goes too far in requiring, for example, a $3.4M tIRA to generate taxes at the beneficiary(s) ordinary income tax rate for $3M over five years.