RMD going to 72?

[pb4uski]

....It was not the intent of those that invented the stretch IRA way back when. ...

You forgot to add "in my opinion" or do you have something to substantiate that claim? While we're at it... who "invented" the stretch IRA?

 

[Another Reader]

You forgot to add "in my opinion" or do you have something to substantiate that claim? While we're at it... who "invented" the stretch IRA?

I guess I'm not being clear. The people that devised and implemented the stretch IRA would not have done that if they did not want the IRA to pass beyond the spouse of the owner to the heirs and to receive preferential tax treatment when it did. The stretch IRA exists because that was their intent, whoever they were. Can you think of another reason to devise and implement the stretch IRA?

 

[pb4uski]

... Can you think of another reason to devise and implement the stretch IRA?

Yup. Read on.

When Congress created the IRA they wanted to make sure that the income that was deferred was ultimately taxed. So they created the RMDs to force IRA owners to do withdrawals so that deferred income ultimately was taxed. Then some staffer asked... but what it the owner dies before the IRA is exhausted? So they added spousal and non-spousal RMD rules for inherited IRAs to make sure that the money was ultimately taxed.

I contend that when they made the non-spousal rules to require withdrawals over the new owner's lifetime that they had in mind the next generation... kids, friends, nieces, nephews... people who would typically be 20-30 years younger than the owner.

Then years later some clever tax accountants and lawyers got to thinking that if the IRA owner was rich and their spouse or the next generation didn't "need" that IRA money that the taxes could be deferred even longer by making the beneficiaries grandchildren or great-grandchildren.... beneficiaries that were 40-60 or even 70 years or more younger than the owner.... hence it stretches tax deferral even longer.

The stretch was NOT a creation of legislators based on some public policy objective, but rather the creation of some clever tax accountants and lawyers exploiting that the law not specific.

The proposed legislation reigns in that explotation... arguably a bit excessively if it ends up being 10 years.

If you have some research or citations suggesting that there was a specific public policy objective when the stretch IRA was "created" then by all means share it.

 

[GrayHare]

I think that was the law of unintended consequences at work. Possibly a better approach when IRAs were first brought into law would have been to simply continue a decedent's RMDs on his/her original schedule, regardless of the beneficiary. It would have been both simpler to understand, and Ed Slott would not have been spreading the word about stretch IRAs on PBS all those years.

A new possible unintended consequence of requiring an IRA to be emptied within 5 or 10 years is there will be cases in which a young person will receive larger withdrawals than they otherwise would have. "You mean from age 16 to 25 I'll get $20,000 a year from pop's IRA! I can drop out of school! And no need to work!"

 

[Another Reader]

"... but what it the owner dies before the IRA is exhausted? So they added spousal and non-spousal RMD rules for inherited IRAs to make sure that the money was ultimately taxed."

How was the money going to escape taxation? Would it sit in a frozen, untouchable account if the owner died before the account was exhausted? No, rules had to be made so the money could be taken as income by the inheritors and the government received taxes on the income as it was taken. The non spousal inheritor, whoever that may be, gets a different withdrawal schedule than the spouse. Since the authors did not define acceptable beneficiaries, anyone was acceptable.

I don't see exploitation by clever lawyers and CPA's. My guess is the drafters figured they would get the tax as the income was drawn, like other income is taxed. Remember, in 1974, IRA's were not a significant part of most people's retirement. It probably wasn't a lot of money in the minds of those that wrote the legislation.

The "specific public policy objective" was to have inheritors be able to use the accounts for income and the taxes to be paid as the income was drawn. Contend what you want about accountants and lawyers, we will just have to agree to disagree.

 

[FIREchief]

I think that was the law of unintended consequences at work. Possibly a better approach when IRAs were first brought into law would have been to simply continue a decedent's RMDs on his/her original schedule, regardless of the beneficiary. It would have been both simpler to understand, and Ed Slott would not have been spreading the word about stretch IRAs on PBS all those years.

Good points.

A new possible unintended consequence of requiring an IRA to be emptied within 5 or 10 years is there will be cases in which a young person will receive larger withdrawals than they otherwise would have. "You mean from age 16 to 25 I'll get $20,000 a year from pop's IRA! I can drop out of school! And no need to work!"

I believe that there are a LOT of living trusts out there than include conduit trust boilerplate. Talk about unintended consequences. If people have named these trusts beneficiaries of their qualified accounts, I'm guessing the trustees will have to empty them to the beneficiaries within ten years. Pretty much eliminates the tiny amount of asset protection they would have otherwise provided.

 

[Winemaker]

I believe Jim Lange, a CFP, CPA and tax attorney out of Pittsburgh, was the "inventor" of the stretch IRA. He wrote several books about it years ago, got a lot of publicity from Jane Bryant Quinn.

 

[aza455]

... Pretty much eliminates the tiny amount of asset protection they would have otherwise provided.

Not sure I follow this last sentence. Can you explain what you mean?

 

[joeea]

I just saw this nugget in the House Ways and Means Committee summary of the bill and it was relevant to our discussion earlier so I post it:



Seems to state congressional intent pretty clearly to me!

https://waysandmeans.house.gov/site...s/documents/SECURE Act section by section.pdf

That's fair. But I'm of the "watch what they do, not what they say" camp.

[mod edit]

I judge a bill based on what it actually does. I let others decide whatever small part of what they say is actually what they meant.

 

[joeea]

Why on earth does Washington want to "ensure" that I spend my savings before I die? Can't I incorporate any and all assets I have of every kind into my estate planning? Yikes!! Talk about big brother. We all know that the clear intent was to make the bill revenue neutral, regardless of what they may publish.

You are mistaken. Washington does not care if you spend your savings, or not.

"Washington" gave you a way to defer some taxes until later in your life. They didn't want to give you a way to avoid paying those taxes indefinitely. If they simply wanted to forgive any and all taxes due on monies put into a retirement account, there would have been far simpler ways to do so.

You don't need to spend a penny. You are free to incorporate any and all assets into your estate planning - as log as you pay the taxes that are due.

 

[joeea]

The whole discussion of "fairness" regarding what was intended versus what was not intended (for RMDs and elsewhere) is completely beside the point. There is only "what is". And "what is" can and does change.

Blame it on clever lawyers and CPAs if you like, but it's shortsighted to think that people won't use every tool at their disposal to avoid paying taxes any way they can. And of course the wealthier you are, the mode tools you can afford. Lawmakers know this.

Let's try not to whine about Washington taking away a benefit we were planning on. The rules change, and our strategies will change accordingly. Our clever lawyers and CPAs will see to that.

 

[pb4uski]

I don't disagree with you joeea.

We've seen time and time again with the closing of the Roth conversion horse race, file and suspend for SS, stretch IRAs and others.... areas where clever people exploited the structure and language of the law to their benefit. That is all fine and good... I believe in Learned Hand that we are free to structure our finances to pay less tax if we chose to. If a loophole is there I will take advantage of it too... I just won't whine when they close a loophole providing a benefit that I shouldn't have reasonably expected to begin with.

When legislators come along and plug the loophole, it is just a natural part of the process of taxpayers finding loopholes, taking advantage of them and legislators later closing them when they get too big. IMO that is what they are doing with the stretch IRA changes and 10 years is probably an overreaction but it is what it is and if they exempt the first $400k that helps. The increase in the RMD from 70 1/2 to 72 is IMO an inconsequential bone they are throwing in to make the closing of the stretch IRA loophole more palatable.

 

[FIREchief]

You are mistaken. Washington does not care if you spend your savings, or not.

"Washington" gave you a way to defer some taxes until later in your life. They didn't want to give you a way to avoid paying those taxes indefinitely. If they simply wanted to forgive any and all taxes due on monies put into a retirement account, there would have been far simpler ways to do so.

You don't need to spend a penny. You are free to incorporate any and all assets into your estate planning - as log as you pay the taxes that are due.

I agree with you, but that's not what they said!

Originally Posted by pb4uski
I just saw this nugget in the House Ways and Means Committee summary of the bill and it was relevant to our discussion earlier so I post it:

Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries.

 

[RobbieB]

They want both. The taxes help the budget and the spending helps the economy.

Blow That Dough!

 

[FIREchief]

Not sure I follow this last sentence. Can you explain what you mean?

Sure. There are two general types of trusts that can inherit qualified assets while still preserving the stretch. A conduit trust only requires that the primary beneficiary(s) be an individual, and it forces the trustee to distribute all RMDs in the year withdrawn. An accumulation trust is slightly more complex. It requires that ALL potential beneficiaries be individuals, but it allows the trustee to retain RMDs within the trust after withdrawn. Since the conduit trust forces assets out of the trust, these distributed assets lose the asset protection features of the trust.

If a new law now requires all assets to be withdrawn from the inherited IRA within ten years, a conduit trust will have to distribute them all to the beneficiary within ten years. For somebody with significant qualified assets, this would largely defeat the benefits of a trust. I have talked to estate planning attorneys who don't even understand the current law, yet they're selling one-size-fits-all trusts to anybody they can find for about 5 grand a pop. The trusts like this that I have seen simply nest a conduit trust for receipt of qualified assets within a more comprehensive trust. As with one-size-fits-all clothing, they rarely are a good fit for anybody. (please see my signature)

 

[MichaelB]

"What were they thinking - then" is not as important as "what they are thinking - now". One fact that clearly is on the radar screen of everyone in Congress, regardless of role or affiliation, is the tax expenditure for pension contribution and earnings is now around 1.4% of GDP. It is slightly less than the expenditure for employer provided health care. Combined, they represent 1/3 of the total of all tax expenditures and almost 3% of GDP, and 3/4 of our total federal spending deficit.

Tax expenditure means the value of uncollected taxes from the tax break. So, earned income shielded from taxes using IRA + 401(k) + similar programs, along with the investment income.

The message in this particular tax law is pretty clear. The people that earn the income and are able to shield it from income tax when it is earned should expect to pay taxes on it eventually. Should those funds outlast them, their beneficiaries will pay the remaining tax owed, and they have 10 years to do so. There simply is too much untaxed income in that bucket.

 

[RunningBum]

The message in this particular tax law is pretty clear. The people that earn the income and are able to shield it from income tax when it is earned should expect to pay taxes on it eventually. Should those funds outlast them, their beneficiaries will pay the remaining tax owed, and they have 10 years to do so. There simply is too much untaxed income in that bucket.

Does anyone have numbers on how much is in that bucket (inherited IRAs) or what % of all IRAs they make up?

 

[Another Reader]

"What were they thinking - then" is not as important as "what they are thinking - now". One fact that clearly is on the radar screen of everyone in Congress, regardless of role or affiliation, is the tax expenditure for pension contribution and earnings is now around 1.4% of GDP. It is slightly less than the expenditure for employer provided health care. Combined, they represent 1/3 of the total of all tax expenditures and almost 3% of GDP, and 3/4 of our total federal spending deficit.

Tax expenditure means the value of uncollected taxes from the tax break. So, earned income shielded from taxes using IRA + 401(k) + similar programs, along with the investment income.

The message in this particular tax law is pretty clear. The people that earn the income and are able to shield it from income tax when it is earned should expect to pay taxes on it eventually. Should those funds outlast them, their beneficiaries will pay the remaining tax owed, and they have 10 years to do so. There simply is too much untaxed income in that bucket.

Yep. They want the money and they want it sooner rather than later. The fact that the statistics you cite exist, means this has been on the agenda for awhile.

 

[pb4uski]

Sure. There are two general types of trusts that can inherit qualified assets while still preserving the stretch. A conduit trust only requires that the primary beneficiary(s) be an individual, and it forces the trustee to distribute all RMDs in the year withdrawn. An accumulation trust is slightly more complex. It requires that ALL potential beneficiaries be individuals, but it allows the trustee to retain RMDs within the trust after withdrawn. Since the conduit trust forces assets out of the trust, these distributed assets lose the asset protection features of the trust.

If a new law now requires all assets to be withdrawn from the inherited IRA within ten years, a conduit trust will have to distribute them all to the beneficiary within ten years. For somebody with significant qualified assets, this would largely defeat the benefits of a trust. I have talked to estate planning attorneys who don't even understand the current law, yet they're selling one-size-fits-all trusts to anybody they can find for about 5 grand a pop. The trusts like this that I have seen simply nest a conduit trust for receipt of qualified assets within a more comprehensive trust. As with one-size-fits-all clothing, they rarely are a good fit for anybody. (please see my signature)

I guess a part of what you wrote doesn't make sense to me.

From what you wrote, under the current law an accumuation trust can retain RMDs, with said RMDs based on the balance of the account and the age/remaining life of the beneficiary under the current law. If this is so, why couldn't an accumulation trust retain RMDs that are based on the balance and 10 years rather than lifetime?

IOW, in all cases they are RMDs, it is just the the underlying formula of how to calculate RMDs will change.

 

[MichaelB]

Yep. They want the money and they want it sooner rather than later. The fact that the statistics you cite exist, means this has been on the agenda for awhile.

Yeah, I've read mentions of this for quite a few years. It's funny, because when comparing the two big tax expenditures, employer health care and retirement savings, the former is tax revenue lost forever, while the latter is just tax postponed - yet both are described using the same "tax income lost" language. In my mind, they're not the same.

Does anyone have numbers on how much is in that bucket (inherited IRAs) or what % of all IRAs they make up?

I've looked in the past and never seen an estimate, and would also like to know. Total IRA assets are around $7.7T as of last year.

My (uneducated WAG) guess is most of this is owned by the middle 3/4 of the population. Very wealthy people use other vehicles to stash their assets. The "Romney IRA" account is real, but we have no way of knowing how significant it is, and it's a bit restrictive, so I don't see it as a popular vehicle to pass assets to future generations.

If 10% of all the IRA assets were inherited (non-spouse) over the next 20 years, that would be $770B. If this legislation reduced the total holding of that money from 40 to 10 years, that pulls ahead around $500B of additional taxable income. If the average rate is 20%, that's $100B. So, the real benefit of this legislation is 20 years from now, when Boomers are saying their final adios and heirs are paying tax on the inherited IRA.

The fiscal impact of tax legislation is usually measured over 10 years (I think). With this bill there is a much greater impact in the 10-30 year period after that.

 

[googily]

Short version: if you really want to help your kids avoid taxes, pay em yourself by withdrawing from IRAs and investing in taxable, where at least they'll get stepped-up values. For now. [emoji16]

 

[FIREchief]

I guess a part of what you wrote doesn't make sense to me.

From what you wrote, under the current law an accumuation trust can retain RMDs, with said RMDs based on the balance of the account and the age/remaining life of the beneficiary under the current law. If this is so, why couldn't an accumulation trust retain RMDs that are based on the balance and 10 years rather than lifetime?

IOW, in all cases they are RMDs, it is just the the underlying formula of how to calculate RMDs will change.

I think you understand correctly. We may have a challenge with semantics.

Amounts withdrawn = assets withdrawn from the inherited IRA (owned by the trust) either as RMDs or other withdrawals

Amounts distributed = assets that the trustee removes from the trust and distributes to the trust beneficiary

With a conduit trust, all amounts withdrawn are immediately distributed to the trust beneficiary.

With an accumulation trust, amounts withdrawn may either be distributed to the trust beneficiary immediately or retained within the trust. This is why an accumulation trust provides strong asset protection, but a conduit trust does not (especially if the ten year requirement becomes law). See my signature.

 

[FIREchief]

Short version: if you really want to help your kids avoid taxes, pay em yourself by withdrawing from IRAs and investing in taxable, where at least they'll get stepped-up values. For now. [emoji16]

If I'm going to withdraw tIRA assets and pay taxes on them, why wouldn't I instead Roth convert them? The tax cost would be the same. Who wouldn't rather have a Roth dollar than an after-tax dollar?

 

[steelyman]

I was thinking about ways that a compressed time frame (whether 5 or 10 years) for withdrawals from an inherited IRA might influence asset allocation. Statistics like the length of time it takes to recover from a severe market drop seem a little less comforting within a smaller window.

 

[samclem]

I was thinking about ways that a compressed time frame (whether 5 or 10 years) for withdrawals from an inherited IRA might influence asset allocation. Statistics like the length of time it takes to recover from a severe market drop seem a little less comforting within a smaller window.

True, if the money is being spent. But if it is just being withdrawn to meet the requirements of the law, it can be immediately reinvested in whatever asset type it was in before, so no potential for being "stung" by a temporary price dip, and no real impact on the desirable asset allocation (as far as I can tell)