RMD going to 72?

[pb4uski]

Yup, makes perfect sense in the spirit of the original INDIVIDUAL retirement account concept.

Ah... that is what the "I" in IRA stands for, huh? Some people have forgot about that... or misunderstood the "I" to be intergenerational.

 

[FIREchief]

I believe the "individual" reference was chosen to distinguish IRAs from what, at the time, were group pension plans. The idea was to incentivize "individuals" to save aggressively for their retirements and not count on a disappearing defined benefit plan. Part of the incentive was to allow for stretched pay outs to heirs so as not to have to worry about a ticking tax timebomb in the event that a person's (very responsible and responsive to the government's desires) 30 year tax-deferred nest egg was unexpectedly passed to heirs due to early death. Well, guess what? Gotcha!!

 

[RunningBum]

Ah... that is what the "I" in IRA stands for, huh? Some people have forgot about that... or misunderstood the "I" to be intergenerational.

If it was really meant to only be "Individual", why did they come up with the stretch IRA in the first place? That's the big issue, it's been a bait and switch. You can't deny that. Do you believe the tax law, or the name they assigned it? I'll bet I could find other inappropriately named tax programs if I tried.

Big problems for people who believed it. Not an issue for me. My son should only inherit a Roth. I'd rather he was able to spread out the distribution over his lifetime, but at least it's only the gains after distribution that will be taxable for him.

 

[FIREchief]

^ there are tax bracket limits to your income, right?

Yes, and a person pays exactly the same marginal taxes on money withdrawn from a tIRA regardless of whether or not the withdrawal is driven by an RMD requirement. As another poster correctly pointed out, the only real difference is being able to Roth convert an unneeded non-RMD withdrawal vs. investing an RMD withdrawal in after-tax.

 

[FIREchief]

I would favor leaving the age for RMDs as is and having non-spousal beneficiaries take RMDs based on the age that the decedent who they inherited it from would have been rather than some arbitrary 10 year period... IOW, do RMDs for non-spousal beneficiaries on the same schedule as if the original owner was still alive.

This would seem more fair. There would need to be rules to govern what happens in the scenario where the decedent had not yet reached the age where RMDs are required.

 

[pb4uski]

.... Part of the incentive was to allow for stretched pay outs to heirs so as not to have to worry about a ticking tax timebomb in the event that a person's (very responsible and responsive to the government's desires) ...

WADR, stop making stuff up.

 

[pb4uski]

This would seem more fair. There would need to be rules to govern what happens in the scenario where the decedent had not yet reached the age where RMDs are required.

Just do the same as if s/he were alive... no RMDs until decedent would have been 70 1/2, then follow RMD chart.

 

[pb4uski]

If it was really meant to only be "Individual", why did they come up with the stretch IRA in the first place? That's the big issue, it's been a bait and switch. You can't deny that. Do you believe the tax law, or the name they assigned it? I'll bet I could find other inappropriately named tax programs if I tried.

Big problems for people who believed it. Not an issue for me. My son should only inherit a Roth. I'd rather he was able to spread out the distribution over his lifetime, but at least it's only the gains after distribution that will be taxable for him.

We had this debate earlier. No bait and switch... just a poor response to close a loophole that is being taken advantage of in a manner not originally intended.

They had to do something to ultimately tax leftover IRA money if someone died. Spousal was easy. I contend that for non-spouses that they had the next generation... kids, nieces and nephews in mind so they just said over the non-spouse beneficiaries lifetime... easy peasy.

Then later, some clever accountants figured out that tax deferral could be stretched even further by designating a grandchild or great-grandchild as a beneficiary... so the tax deferral lasts another generation or two over what was originally envisioned. Now they are reining it in... and arguably overreacting by making it 10 years.

 

[street]

Yes, and a person pays exactly the same marginal taxes on money withdrawn from a tIRA regardless of whether or not the withdrawal is driven by an RMD requirement. As another poster correctly pointed out, the only real difference is being able to Roth convert an unneeded non-RMD withdrawal vs. investing an RMD withdrawal in after-tax.

Yes, that is why it gives me more years to withdraw from my IRA and stay in a lower tax bracket. For me I like the idea of extended years for a start in RMD.

 

[RunningBum]

We had this debate earlier.

I know we did. But if you can repeat yourself, I can too!

I still contend that the biggest issue is people getting the rug pulled out from under them. Not just the surprise factor, but because they made estate plans over the years based on tax law, and now have it drastically changed. Especially for people in their final years it's not going to be easy to adjust.

 

[USGrant1962]

Tax law changes all the time. Minor changes constantly, and major changes every 8 or 10 years. All we can do is plan based on current law and adjust when it changes.

 

[pb4uski]

.... Not just the surprise factor, but because they made estate plans over the years based on tax law, and now have it drastically changed. Especially for people in their final years it's not going to be easy to adjust.

To be honest, if it is people who have designated their grandshildren or great-grandchildren who have their estate plans blown up by this change then to me that is sweet justice ... no sympathy at all... nada.

I do have a bit of sympathy for those whose non-spousal beneficiaries are their kids or nieces or nephews.

Like I've said many times, I would prefer a different solution but I also think that change is required to close the loophole.

 

[pb4uski]

We had this debate earlier. ....

I know we did. ...

Good... I was afraid that you were losing it for a second there.

 

[RunningBum]

Tax law changes all the time. Minor changes constantly, and major changes every 8 or 10 years. All we can do is plan based on current law and adjust when it changes.

That's certain a general lesson to take from this. Don't get carried away with any tax strategy if a change will crush it. As another example, I'm planning to hold fund shares with have large unrealized LTCGs, because of the step up basis for heirs. Maybe I should rethink any heavy reliance on that. OTOH, it'd probably be 15% either way, so it's not that big of a deal.

 

[RobbieB]

I'd just give the next gen 1 lump sum.

 

[FIREchief]

I do have a bit of sympathy for those whose non-spousal beneficiaries are their kids or nieces or nephews.

Then why not just limit the lifetime stretch to children, and impose the ten year limit on all other individuals?

 

[Winemaker]

Thanks MichaelB. Sounds like politics as usual.

Isn't everything in Washington, politics?

The general public, who hasn't one iota of sense of the Constitution, how our republic is supposed to work, is totally lost. For instance, some uneducated dunces think that if Trump is impeached, Hillary becomes President. We the people, are/should demand exactly what is spelled out in our Constitution. If you don't like what's there, then there is a process to change it.

This bill, currently passed by the House, has to be passed by the Senate, and has 390 opinions on this forum alone about, changing the rules midstream, eliminating RMDs completely, and general confusion.

The only reason this bill is under consideration, is because someone thinks someone else is getting screwed, and were gonna screw that person because we can, and when we do, he's gonna remember it. Politics, 1st degree.

 

[FIREchief]

WADR, stop making stuff up.

Do you honestly not believe that the stretch payout for heirs was an incentive for people to embrace the IRA as a retirement savings tool? The IRA locks people away from their money until 59 1/2 by design. There had to be some sweeteners in place to draw people into participation. This is what the Government does. They are taking a major sweetener away and it may cause some to rethink IRA vs. after-tax buy and hold. The later offers not only tax deferral, but tax forgiveness via the stepped-up basis.

Honest tax deferral is quietly changing into tax shenanigans.

 

[Cobra9777]

...I would favor leaving the age for RMDs as is and having non-spousal beneficiaries take RMDs based on the age that the decedent who they inherited it from would have been rather than some arbitrary 10 year period... IOW, do RMDs for non-spousal beneficiaries on the same schedule as if the original owner was still alive.

Do the RMD factors actually amortize an IRA balance to zero at some point? I ran it out to age 120 and there was still a balance. Very small, but not zero. And still fairly meaningful at age 100. So under your approach, how long do you assume the original owner lived for purposes of taxing the beneficiary?

If you work through a reasonably typical example... it's roughly the same answer as current law for a child of the deceased. Your approach does address the generation-skipping abuse. But the implementation might be too impractical. Seems to me, a more straightforward reform would be to leave current law (more practical) in effect for children and other non-generation-skipping, non-spousal beneficiaries (...I'm sure the IRS could come up with an allowable list of relatives... and/or age criteria relative to original owner). All others get the 10-year treatment.

 

[target2019]

If passed, we would both benefit from additional year(s) to convert some IRA.
Thinking about this at length, I'd prefer children to have lengthier payout. Now I understand the motivation behind the bill(s). Doesn't surprise me.

 

[pb4uski]

Do the RMD factors actually amortize an IRA balance to zero at some point? I ran it out to age 120 and there was still a balance. Very small, but not zero. And still fairly meaningful at age 100. So under your approach, how long do you assume the original owner lived for purposes of taxing the beneficiary?

If you work through a reasonably typical example... it's roughly the same answer as current law for a child of the deceased. Your approach does address the generation-skipping abuse. But the implementation might be too impractical. Seems to me, a more straightforward reform would be to leave current law (more practical) in effect for children and other non-generation-skipping, non-spousal beneficiaries (...I'm sure the IRS could come up with an allowable list of relatives... and/or age criteria relative to original owner). All others get the 10-year treatment.

Good point. No, mathematically the RMD table would never get to zero. You could shift to 10 years when the original owner would have been 92 (the RMD withdrawal is about 10% at age 92) to ensure the account ultimately is zero.

 

[pb4uski]

Then why not just limit the lifetime stretch to children, and impose the ten year limit on all other individuals?

You could have non-abusive situations that are niece's and nephews by blood or adoption or even family friends that are the next generation for people with no children or nieces or nephews.

 

[pb4uski]

Do you honestly not believe that the stretch payout for heirs was an incentive for people to embrace the IRA as a retirement savings tool? ....

Yes... I do not believe that Congress intended to provide a multi-generational deferral of taxation of income.

I believe that the primary focus was for the individual to save for retirement in a tax advantaged way with an expectation that most participants would use that money in retirement and not hoard it and RMDs we're intended to ensure that income ultimately did get taxed The concept was then logically extended to spouse beneficiaries considering the couple as a single economic unit. If any balance remained, the same concept was intended to be extended to the next generation (children or niece's and nephews). I don't believe that it was intended to be extended to grandchildren or great-grandchildren.

I highly doubt it was intended to allow participants to defer taxes for multiple generationsas you erroneously suggest.

Also see post #271:

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.

 

[steelyman]

Good point. No, mathematically the RMD table would never get to zero. You could shift to 10 years when the original owner would have been 92 (the RMD withdrawal is about 10% at age 92) to ensure the account ultimately is zero.

I haven’t reached RMD for personal IRAs yet but am a beneficiary of an inherited IRA. I’m also no tax expert but my calculations for RMDs for that IIRA have matched Fidelity’s to the penny.

My understanding is that the distribution period is fixed at the date of the original owner’s death and the IRS tables for survivors give the divisor to be used for the initial distribution.

Thereafter, you subtract one from the divisor for subsequent distributions until the account is depleted. So it does reach zero.

Repeat: no expert here!

[ADDED] In the context of basing distributions on the original owner’s schedule: that makes sense to me but revising to a fixed period as above for survivors seems logical and ensures the account is depleted and taxes are paid.

 

[pb4uski]

I haven’t reached RMD for personal IRAs yet but am a beneficiary of an inherited IRA. I’m also no tax expert but my calculations for RMDs for that IIRA have matched Fidelity’s to the penny.

My understanding is that the distribution period is fixed at the date of the original owner’s death and the IRS tables for survivors give the divisor to be used for the initial distribution.

Thereafter, you subtract one from the divisor for subsequent distributions until the account is depleted. So it does reach zero.

Repeat: no expert here!

I was thinking for the original owner because we were talking about an approach to just do RMDs for an inherited IRA based on the original owner's RMDs. The table that I was looking at said to use 1.9 years for "115+" so from age 115 onwards you would withdraw 52.63% year so I guess that it would ultimately be less than a penny so it would reach zero... I stand corrected.