Senate Finance Committee Approves Bipartisan Pension Bills

[Big_Hitter]

http://www.groom.com/media/publicat...mmittee Approves Bipartisan Pension Bills.pdf

Good read. Take note that one of the rules changes stretch iras, which may affect many on the forum:

"Post-Death Required Minimum Distribution Rules (“Stretch IRAs”). Current post-death required minimum distribution (“RMD”) rules generally provide that if an employee or IRA owner dies before the required beginning date and has a designated beneficiary, RMD distributions are permitted to be paid over the designated beneficiary’s life expectancy. RESA would change the post-death RMD rules to generally require that all distributions after death (including to a designated beneficiary) be made by the end of the fifth calendar year following the year of death – a significant revenue raiser. The requirement does not apply if the designated beneficiary is an eligible beneficiary, which is defined as any beneficiary who, as of the date of death, is a surviving spouse, disabled, or chronically ill, or is an individual who is not more than 10 years younger than the employee (or IRA owner), or is a child of the employee (or IRA owner) who has not reached the age of majority. In addition, RESA would provide that the new 5-year distribution requirement only applies to the extent that the amount of an individual’s aggregate account balances under all IRAs and defined contributions plans, determined as of the date of death, exceeds $450,000 (indexed for inflation).

 

[CardsFan]

Quite a money grab! At least the spouse is protected. Also, am I correct that this only applies if the owner dies before RMD's kick-in? What happens if RMD's are already being taken? I am still 9 years from RMD's, so I have not looked at this too carefully, but it sounds like I need to consider this for estate planning. One more reason to do Roth roll-overs

 

[Big_Hitter]

yeah this is a big deal - looks like it also applies to monies left in a 401k/ps plan

 

[2017ish]

I see no specific reference to Roth IRA's in either the Groom analysis or the Chairman's markup of the Bill. Am I missing something--or is the present rule of RMD based on Roth beneficiary's life expectancy unaffected?

 

[stepford]

I see no specific reference to Roth IRA's in either the Groom analysis or the Chairman's markup of the Bill. Am I missing something--or is the present rule of RMD based on Roth beneficiary's life expectancy unaffected?

Since Roth's aren't subject to RMDs maybe it doesn't apply.

 

[ExFlyBoy5]

Wow. Now THAT is some news. I wonder if the media will pre-empt Kardashian coverage for this?

 

[Walt34]

Wow. Now THAT is some news. I wonder if the media will pre-empt Kardashian coverage for this?

Of course not, silly. Why would TV programmers think that potential legislation that would seriously affect the retirement plans of millions of people be more important than the Kardashians?

 

[Bestwifeever]

I think this legislation is fair--the spouse and minor and disabled children are still protected, I believe?

 

[ExFlyBoy5]

Of course not, silly. Why would TV programmers think that potential legislation that would seriously affect the retirement plans of millions of people be more important than the Kardashians?

I think because as soon as the anchor muttered the words, "A congressional committee has...", they will flip the TV immediately to "Entertainment Tonight" or "The Real Housewives of **INSERT ANY CITY HERE**."

Anyway, this could *really* affect my taxable income if/when my Dad dies. He has a sizable nest egg and as I read this, I would be subject to some VERY hefty taxes for a 5 year period. I know some folks would argue, "Well, that's a good problem to have!" but it still seems like money grab to me.

I think this legislation is fair--the spouse and minor and disabled children are still protected, I believe?

Without getting political, I am not sure I would look at this as fair. If my Dad died today, the taxes would be spread out for about 40 years. With this proposal, that would be 5 years. On a hypothetical $1,000,000 balance (which isn't a large amount, really) that means instead of taking a RMD of $25,000, it would now be $200,000!!! That's 8x the amount under the current law, and it would result in a significant tax penalty.

 

[Walt34]

Anyway, this could *really* affect my taxable income if/when my Dad dies. He has a sizable nest egg and as I read this, I would be subject to some VERY hefty taxes for a 5 year period. I know some folks would argue, "Well, that's a good problem to have!" but it still seems like money grab to me.

You and lots of other people would be affected and it does seem like a money grab. But other than writing to my congresscritter there isn't a thing I can do about it so I'm not going to worry about it.

 

[Bestwifeever]

I never felt the legislation was meant to benefit the heirs and shelter taxes in perpetuity, but obviously others have other feelings. Carry on.

 

[ExFlyBoy5]

You and lots of other people would be affected and it does seem like a money grab. But other than writing to my congresscritter there isn't a thing I can do about it so I'm not going to worry about it.

That is quite true. My Dad often complains about the ills of the world and I constantly tell him that there isn't a damn thing he really can do about it and to essentially, "get over it." I suppose I should take my own advice.

 

[ExFlyBoy5]

I never felt the legislation was meant to benefit the heirs and shelter taxes in perpetuity, but obviously others have other feelings. Carry on.

Under the current rules, the taxes WILL be paid (albeit over a longer period) so they are not sheltered in perpetuity.

 

[GTFan]

But her comment is valid - the 401ks/IRAs were really intended for one lifetime, not two.

I have no issue with acceleration of distros to children. But then again I've never been in favor of leaving large legacies. I can see where it could be a burden with an unexpectedly early demise however.

 

[samclem]

With this proposal, that would be 5 years. On a hypothetical $1,000,000 balance (which isn't a large amount, really) that means instead of taking a RMD of $25,000, it would now be $200,000!!! That's 8x the amount under the current law, and it would result in a significant tax penalty.

It's bad, but maybe not quite as bad as that. From the OP:

In addition, RESA would provide that the new 5-year distribution requirement only applies to the extent that the amount of an individual’s aggregate account balances under all IRAs and defined contributions plans, determined as of the date of death, exceeds $450,000 (indexed for inflation).

So, it looks like "only" the money over $450K would need to be distributed over 5 years. (I guess $450K is the new government definition for "rich?" All take note of that. Where did that number come from?). Also, it's not clear to me if "an individual" refers to the decedent or the beneficiary(ies). If the money is being divided among a bunch of heirs and the dispersal reqmt applies to recipients, then maybe quite a bit could be shielded under the $450K priviso.

Maybe there's room for some crafty use of trusts here. Or continued conversions into Roths well into retirement for the benefit of the kiddies.

 

[ExFlyBoy5]

But her comment is valid - the 401ks/IRAs were really intended for one lifetime, not two.

I have no issue with acceleration of distros to children. But then again I've never been in favor of leaving large legacies. I can see where it could be a burden with an unexpectedly early demise however.

I will agree with this to point, but I don't think that a value of $450,000 is what I would consider a "large legacy." Also, if it "was intended for one lifetime, not two", then why allow it to be inherited at ALL? Just give it to the government. And in my defense, she used the word "perpetuity" which is defined as "FOREVER"...there isn't any gray area in that definition.

This is a very touchy subject (obviously), so for the best interest to all those in the forum, I am going to kindly bow out now.

 

[CardsFan]

One could argue that the government is "entitled" to the taxes as if the owner lived to collect. According to this: https://www.ssa.gov/oact/STATS/table4c6.html it appears the life expectancy for a 70yo is about 15 years.

So, requiring the distributions to be taken over 15 years would be reasonable. 10 might be OK. 5 sounds like it is intentionally written to drive the inheritors of large accounts into high tax brackets, so that even more is collected than the owner would have paid.

Another option would be to tax the distributions at a set rate (15%?, 20%?). This could actually encourage inheritors to cash out early (since there is no benefit for waiting), which is the main goal of the legislation.

In any event, while this could impact a large number of folks on this forum, it would likely impact only a small fraction of the general population.

 

[samclem]

But her comment is valid - the 401ks/IRAs were really intended for one lifetime, not two.

?? Nobody knows what the "intent" was. It >clearly< allowed for the money to be spread beyond one lifetime, the spouse rules were never in doubt. The law was written as it was, and changing it now changes the rules for those who invested the money in a certain way because of a government promise. Changing the rules midstream is, on its face, unfair. Those who disagree will be in no position to argue when their Roth's get taxed (or, more likely, "back door taxed" by increasing the taxed portion of SS and the tax rate on other investments due to Roth withdrawals. Technically, the Roth withdrawals aren't directly taxed, but every dime withdrawn from Roth's would increase the tax bill . . .)

 

[MichaelB]

All of a sudden we're speculating on the new definition of wealthy and ROTH IRA's being taxed. Why not just stick to discussing the bill?

 

[GrayHare]

I can already hear the sound of annuities being purchased inside IRAs.

 

[FIREchief]

Since Roth's aren't subject to RMDs maybe it doesn't apply.

Since it is "post-death," I'm reading this as applying to both tIRA and Roth IRA. Realistically, the big hit would be to tIRA, as liquidating a large tIRA over five years could drive into the highest tax bracket. The Roth impact would be minimal at first, but would force investment into after-tax assets that would generate taxable income over time.

 

[Big_Hitter]

I guess one alternative is to pass away before the bill takes effect...

 

[Big_Hitter]

I never felt the legislation was meant to benefit the heirs and shelter taxes in perpetuity, but obviously others have other feelings. Carry on.

401(a)(9) has a rule against perpetuities, this is the code section or regs section that would be amended

this is why you can't take out a 100% J&S pension with someone 40 years younger than you that isn't a spouse

note they are keeping the spouse exception - sounds like this was something they should have had in the current regs

 

[CardsFan]

Well, I just emailed one of my Senators (the one I think might actually care about this) to express my concerns.

I will let you know what I hear back.

 

[CardsFan]

401(a)(9) has a rule against perpetuities, this is the code section or regs section that would be amended

this is why you can't take out a 100% J&S pension with someone 40 years younger than you that isn't a spouse

note they are keeping the spouse exception - sounds like this was something they should have had in the current regs

BUT, they did not have it in the current regs, and they have been around for years (30?). So why now?