RMD going to 72?

[steelyman]

Since the topic is currently getting attention/airplay, it’s a good time to review the beneficiary designations on your own IRAs, 401(k)s, 403(b)s, 457s and so on. I think I may revise these on my inherited IRA although I went through the accounts while doing my estate docs in 2017 so it’s been done recently.

 

[joeea]

But the main priority should be those who are now seniors who need to delay their RMD as far as possible to avoid their own overtaxed situation !!

Remember. You aren't avoiding anything. You are just delaying finally paying taxes that you have already been delaying.

 

[Another Reader]

The way I read the summary, if the original IRA owner died over 10 years ago, the account would have to be withdrawn completely unless inherited by those exempted.

I guess the details won’t be known until something passes (and may still be murky).

My understanding is that is that the changes to stretch IRA's are prospective, applicable to deaths after December 31, 2019, in at least one of the bills. Making it retrospective is grossly unfair to people that have planned withdrawals for years based on the stretch provision. Having to take everything out immediately for those folks that inherited large IRA's from someone that died over ten years ago is insane. The taxes I would have to pay next year between California and federal income tax would be something like 48 percent of the balance, based on the top brackets. That is unbelievably punitive.

ETA: The Wall Street Journal states "after the end of this year." That means I'm safe but my heirs aren't. Not only will they have to liquidate the remainder of the IRA I inherited, they will also have to liquidate part of mine.

This bill also helps annuity peddlers. The insurance companies must have helped write the bill.

 

[steelyman]

Next they will accelerate the tables for RMD's for heirs so the money gets drained sooner.

Who knows what they may come up with? All of us can only react and plan as best we can.

It seems to me the life expectancy tables for heirs would already be eliminated (not accelerated) by the current legislation under consideration. Only the original owner’s date of death matters.

 

[steelyman]

My understanding is that is that the changes to stretch IRA's are prospective, applicable to deaths after December 31, 2019, in at least one of the bills.

Ah. That’s an important detail I could easily have missed. I hope that’s what is done in a final version.

 

[joeea]

Who knows what they may come up with? All of us can only react and plan as best we can.

Very true.

Just like with all rule changes, we can only plan for what is, then react and re-plan for whatever actually happens.

And as with most changes, some folks end up with a net win, others end up with a net loss.

 

[MichaelB]

Just a reminder. This is the House bill. A Senate bill still needs to pass, and if different, reconciled and passed again by both houses.

Then, the actual rules need to be written, which will govern exactly how many of these details will be implemented. Lots of possibilities for changes ahead.

Let’s please keep the political comments out of the discussion.

 

[pb4uski]

I don't get the indignation at the changes to the stretch IRA rules.

It is an INDIVIDUAL retirement account, with the intent to allow INDIVIDUALS to DEFER income taxes to benefit from deferral... presumably by paying less taxes (NOT NO TAXES) in retirement than if they didn't have this retirement savings opportunity and the income was taxed when earned.

It is solely a tax arbitrage play... even with growth since [1*(1-t)]*(1+i)^n = [1*(1+i)^n]*(1-t) if t is the same... it is only a benefit where your marginal tax rate in retirement is less than your marginal tax rate when you deferred the income.

I don't think that when the IRA was first established that it was intended to allow people to pass tax deferral benefits to their children and grandchildren. IMO it is an unintended consequence or loophole in the law that the Congress is now reigning in.

How many of you, when you first started deferring income into retirement savings, thought.... this is great, I'll be able to pass $$$$ onto my grandchildren and they'll get to defer taxes on it! I know that wasn't anywhere near my mind... it was the benefits to me and my spouse... not even my children.

So now, many years later, people are increasingly taking advantage of this loophole, encouraged by advisors to do so, and Congress is amending it to get back towards its original intent. Non-spousal beneficiaries will stretch over 10 years (House version) or the first $400,000 can be stretched over life and any remainder will be income over 5 years (Senate version). In both cases much better than being immediately taxable.

Both the INDIVIDUAL and their spouse still get the tax deferral benefits that were part of "the deal".

Our kids will be impacted by the changes to the stretch but to me that wasn't part of "the deal" to begin with so I have no objection to those changes. The change in RMD age from 70 1/2 to 72 is a bone thrown in to make the stretch changes more palatable.

 

[kgtest]

I don't get the indignation at the changes to the stretch IRA rules.

It is an INDIVIDUAL retirement account, with the intent to allow INDIVIDUALS to DEFER income taxes to benefit from deferral... presumably by paying less taxes (NOT NO TAXES) in retirement than if they didn't have this retirement savings opportunity and the income was taxed when earned.

It is solely a tax arbitrage play... even with growth since [1*(1-t)]*(1+i)^n = [1*(1+i)^n]*(1-t) if t is the same... it is only a benefit where your marginal tax rate in retirement is less than your marginal tax rate when you deferred the income.

I don't think that when the IRA was first established that it was intended to allow people to pass tax deferral benefits to their children and grandchildren. IMO it is an unintended consequence or loophole in the law that the Congress is now reigning in.

How many of you, when you first started deferring income into retirement savings, thought.... this is great, I'll be able to pass $$$$ onto my grandchildren and they'll get to defer taxes on it! I know that wasn't anywhere near my mind... it was the benefits to me and my spouse... not even my children.

So now, many years later, people are increasingly taking advantage of this loophole, encouraged by advisors to do so, and Congress is amending it to get back towards its original intent. Non-spousal beneficiaries will stretch over 10 years (House version) or the first $400,000 can be stretched over life and any remainder will be income over 5 years (Senate version). In both cases much better than being immediately taxable.

Both the INDIVIDUAL and their spouse still get the tax deferral benefits that were part of "the deal".

Our kids will be impacted by the changes to the stretch but to me that wasn't part of "the deal" to begin with so I have no objection to those changes. The change in RMD age from 70 1/2 to 72 is a bone thrown in to make the stretch changes more palatable.

I object. Until a new loophole presents itself

Was definitely part of my folks estate planning. Back to the drawing board. Admittedly, it won't probably effect me too much since DFIL has all his dough in Roth, and DF is pushing Roth conversions to the max where I doubt he would have more than 1.2MM (3 kids 400k x 3 = 1.2MM) in his IRA upon death of him AND mom... but its certainly a possibility. I will just advise him to move his money makers into Roth (which was tactically always part of the Strategy but now becomes more important).

I feel like the new game will be...Uh uh uhhh, not more than 400k per beneficiary in IRA upon expiration. So people will strategically and tactically pursue that MO.

 

[euro]

I don't get the indignation at the changes to the stretch IRA rules.

It is an INDIVIDUAL retirement account, with the intent to allow INDIVIDUALS to DEFER income taxes to benefit from deferral... presumably by paying less taxes (NOT NO TAXES) in retirement than if they didn't have this retirement savings opportunity and the income was taxed when earned.

It is solely a tax arbitrage play... even with growth since [1*(1-t)]*(1+i)^n = [1*(1+i)^n]*(1-t) if t is the same... it is only a benefit where your marginal tax rate in retirement is less than your marginal tax rate when you deferred the income.

I don't think that when the IRA was first established that it was intended to allow people to pass tax deferral benefits to their children and grandchildren. IMO it is an unintended consequence or loophole in the law that the Congress is now reigning in.

How many of you, when you first started deferring income into retirement savings, thought.... this is great, I'll be able to pass $$$$ onto my grandchildren and they'll get to defer taxes on it! I know that wasn't anywhere near my mind... it was the benefits to me and my spouse... not even my children.

So now, many years later, people are increasingly taking advantage of this loophole, encouraged by advisors to do so, and Congress is amending it to get back towards its original intent. Non-spousal beneficiaries will stretch over 10 years (House version) or the first $400,000 can be stretched over life and any remainder will be income over 5 years (Senate version). In both cases much better than being immediately taxable.

Both the INDIVIDUAL and their spouse still get the tax deferral benefits that were part of "the deal".

Our kids will be impacted by the changes to the stretch but to me that wasn't part of "the deal" to begin with so I have no objection to those changes. The change in RMD age from 70 1/2 to 72 is a bone thrown in to make the stretch changes more palatable.

Well said - I could not agree more!

I don’t blame anyone for trying to hang on to any particular loophole that happens to benefit them, and indeed, this will have negative tax consequences for MY heirs too. Alas, as someone already pointed out, they can always turn down the inheritance, if they don’t like to pay the taxes.

 

[pb4uski]

.... I feel like the new game will be...Uh uh uhhh, not more than 400k per beneficiary in IRA upon expiration. So people will strategically and tactically pursue that MO.

The $$$ limit (I've read $400k and $450k in a different source) is per IRA owner, not per beneficiary. To make per beneficiary would create inequities for IRA owners with few or many beneficiaries.

 

[kgtest]

The $$$ limit (I've read $400k and $450k in a different source) is per IRA owner, not per beneficiary. To make per beneficiary would create inequities for IRA owners with few or many beneficiaries.

Aha! Thanks for the clarification! That definitely makes more sense now.

 

[RunningBum]

I don't get the indignation at the changes to the stretch IRA rules.

It is an INDIVIDUAL retirement account, with the intent to allow INDIVIDUALS to DEFER income taxes to benefit from deferral... presumably by paying less taxes (NOT NO TAXES) in retirement than if they didn't have this retirement savings opportunity and the income was taxed when earned.

It is solely a tax arbitrage play... even with growth since [1*(1-t)]*(1+i)^n = [1*(1+i)^n]*(1-t) if t is the same... it is only a benefit where your marginal tax rate in retirement is less than your marginal tax rate when you deferred the income.

I don't think that when the IRA was first established that it was intended to allow people to pass tax deferral benefits to their children and grandchildren. IMO it is an unintended consequence or loophole in the law that the Congress is now reigning in.

How many of you, when you first started deferring income into retirement savings, thought.... this is great, I'll be able to pass $$$$ onto my grandchildren and they'll get to defer taxes on it! I know that wasn't anywhere near my mind... it was the benefits to me and my spouse... not even my children.

So now, many years later, people are increasingly taking advantage of this loophole, encouraged by advisors to do so, and Congress is amending it to get back towards its original intent. Non-spousal beneficiaries will stretch over 10 years (House version) or the first $400,000 can be stretched over life and any remainder will be income over 5 years (Senate version). In both cases much better than being immediately taxable.

Both the INDIVIDUAL and their spouse still get the tax deferral benefits that were part of "the deal".

Our kids will be impacted by the changes to the stretch but to me that wasn't part of "the deal" to begin with so I have no objection to those changes. The change in RMD age from 70 1/2 to 72 is a bone thrown in to make the stretch changes more palatable.

I'm going to disagree with you on this.

When Congress allowed inherited IRAs to be spread out via lifetime RMDs that was a conscious decision, not some fallout that unintentionally happened. How can you say this wasn't part of "the deal", when it was very explicitly part of the deal. You can't say they had no idea that heirs would stretch out the tax deferment, because they made directly stated in the law that they could. If they didn't intend for that to happen, they wouldn't have allowed it. They didn't have to include that language, and it's not language they felt forced to add to make work what I agree the primary intent is (individual retirement savings).

Just because I didn't start saving in an IRA with the intent to pass it on to my unborn child doesn't mean that once I got in a better situation that I'm not going to take advantage of it.

I'm not going to be indignant about this tax change. Whatever happens happens, but for you to pretend this was some kind of accidental benefit that nobody could foresee is incorrect. They aren't correcting an accident, they are changing a secondary and stated benefit of the original plan.

 

[joeea]

Just a reminder. This is the House bill. A Senate bill still needs to pass, and if different, reconciled and passed again by both houses.

And then the president still needs to sign it or not.

 

[GrayHare]

+1 on what pb4uski wrote.

I'd say 5 years is unfairly short to all, and 10 years is more reasonable.

There are probably loopholes/ways to continue the stretch beyond that period, such as putting the IRA funds in an annuity.

 

[joeea]

I don't get the indignation at the changes to the stretch IRA rules.

It's human nature to be unhappy in that situation.

With virtually all changes, there are winners and losers. Whenever the rules are changed, those who took advantage of the old rules may be inconvenienced or disadvantaged. And of course we can only make plans on the rules as they exist today. When the rules change, we need to revise our plans.

When the social security rules were revised and "aggressive claiming" strategies were not longer allowed, I lost the ability to file and suspend. By my calculations that cost us over $40k.

I won't say I was "indignant", since that amount isn't a huge deal. I wasn't happy, but these things happen. Plans revised.

 

[walkinwood]

A "loophole" is when someone else benefits. If you benefit, it is as intended in the law.


Anyone know if there is any change to the RMD formula?

 

[RunningBum]

An example of a loophole or unintended consequence is the Roth conversion horse race people used to play because they could recharacterize conversions. It was never intended that one would make multiple conversions with the intent of keeping only the one that worked out best, and taking a mulligan on the rest. That just happened to be a unintended consequence that some people took advantage of.

You can say that a lifetime RMD on an inherited IRA was unintended, because there was no other reason for making that provision. If they didn't intend for that to be used, what other reason was there for lifetime RMDs on them?

 

[pb4uski]

A "loophole" is when someone else benefits. If you benefit, it is as intended in the law.


Anyone know if there is any change to the RMD formula?

On the first part.... pithy but nonsense.

As I said for this stretch IRA situation and the SS file and suspend change, in both cases it hurt my heirs or us, but since it "took away" something that I shouldn't have had to begin with it didn't bother me at all.

To my knowledge there is no change in the RMD formula... RMD will still be 1/1 balance divided by remaining life from the table.

 

[pb4uski]

An example of a loophole or unintended consequence is the Roth conversion horse race people used to play because they could recharacterize conversions. It was never intended that one would make multiple conversions with the intent of keeping only the one that worked out best, and taking a mulligan on the rest. That just happened to be a unintended consequence that some people took advantage of.

You can say that a lifetime RMD on an inherited IRA was unintended, because there was no other reason for making that provision. If they didn't intend for that to be used, what other reason was there for lifetime RMDs on them?

Yup... the horse race is another great example. I was harmed by that change in that I would slightly overconvert and then recharacterize any excess over the top of the 12% tax bracket to avoid that onerous 27% marginal rate (12% +15% on preferenced income) on any excess.

I'm guessing that it was never envisioned that people would be dying and leaving such huge amounts in IRAs... and also skipping their kids and making their grandchildren beneficiaries in the name of further tax deferral.

The RMD alone is proof positive that the intent was that it wasn't intended to stretch tax deferral indefinitely.

I could see an idea of setting required distributions for non-spousal beneficiaries based on the age of the original IRA owner and the current RMD rules.... so whether I live or die RMDs would be the same for me or non-spousal beneficiaries... if my spouse survives me then apply the RMD rules applicable to me or to her if she is younger to the inherited IRA, but once she passes, go back to my age for non-spousal beneficiaries.

 

[joeea]

As I said for this stretch IRA situation and the SS file and suspend change, in both cases it hurt my heirs or us, but since it "took away" something that I shouldn't have had to begin with it didn't bother me at all.

As far as I know there is no official registry of what you "should have had" and what you "shouldn't have had". You only know what you have. And then sometimes you no longer have it.

You can decide on your own what you believe the core intent is behind any piece of legislature, and thus conclude that everything else is "shouldn't have".

Should you have had large SALT deductions? (shrug) Should you have had a $1M mortgage interest deduction? (shrug)

Sorry, but to me that arbitrary categorization is just silly.

 

[Chuckanut]

It is solely a tax arbitrage play... even with growth since [1*(1-t)]*(1+i)^n = [1*(1+i)^n]*(1-t) if t is the same... it is only a benefit where your marginal tax rate in retirement is less than your marginal tax rate when you deferred the income.

But, what if one takes the money out of the tIRA and converts it to a Roth instead? Long term one might come out ahead by no longer being taxed on future gains. Or am I missing something?

 

[Helena]

Remember. You aren't avoiding anything. You are just delaying finally paying taxes that you have already been delaying.

I have my own personal tax-advantage strategy for my yearly IRA withdrawals... getting two extra years working my own self-directed plan is very beneficial to me.

 

[pb4uski]

I'm going to disagree with you on this.

When Congress allowed inherited IRAs to be spread out via lifetime RMDs that was a conscious decision, not some fallout that unintentionally happened. How can you say this wasn't part of "the deal", when it was very explicitly part of the deal. You can't say they had no idea that heirs would stretch out the tax deferment, because they made directly stated in the law that they could. If they didn't intend for that to happen, they wouldn't have allowed it. They didn't have to include that language, and it's not language they felt forced to add to make work what I agree the primary intent is (individual retirement savings).

Just because I didn't start saving in an IRA with the intent to pass it on to my unborn child doesn't mean that once I got in a better situation that I'm not going to take advantage of it.

I'm not going to be indignant about this tax change. Whatever happens happens, but for you to pretend this was some kind of accidental benefit that nobody could foresee is incorrect. They aren't correcting an accident, they are changing a secondary and stated benefit of the original plan.

Ok, we disagree... not the first time nor the last I suspect. I never said that it was accidental. Remember, evenything was new.... I kinda doubt that Congress was thinking forward 30-50 years to what might happen and that many Americans would have saved and had IRA that grew to millions of $$$$. I'm guessing that the stretch IRA was a bit of an afterthought assuming that the owners or spouse's kids would inherit IRAs that would be not be all that significant after withdrawals and RMDs and not that the owner or surviving spouse would get clever and make their young grandchildren beneficiaries. I think that practice is being targeted in this legislation, and I think it should be.

I'm not sure many of us would have predicted that so many people would have such large IRAs, but the investment markets were generous.

 

[Dtail]

+1 on what pb4uski wrote.

I'd say 5 years is unfairly short to all, and 10 years is more reasonable.

There are probably loopholes/ways to continue the stretch beyond that period, such as putting the IRA funds in an annuity.

+2