RMD going to 72?

[PatrickA5]

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

Agreed. I imagine my kids will have their inheritance withdrawn within a few years. Ten? No way. They may "stretch" the distributions as much as 5 years, but I doubt it.

My guess (and only a guess) is that very few (non spousal) people that inherit an IRA stretch it over their lifetimes. I think 10 years is a reasonable amount of time for the average inherited IRA to be distributed.

 

[copyright1997reloaded]

Agreed. I imagine my kids will have their inheritance withdrawn within a few years. Ten? No way. They may "stretch" the distributions as much as 5 years, but I doubt it.

My guess (and only a guess) is that very few (non spousal) people that inherit an IRA stretch it over their lifetimes. I think 10 years is a reasonable amount of time for the average inherited IRA to be distributed.

Is it all about what your kids would do? Anyone caring about their future retirement would RMD it over their lifetime to get the benefit of tax-deferred growth of the assets.

Just a few posts above we see the estimated tax impacts: "There are a lot of minor provisions but the cost of the RMD move was estimated at $8.8B and the revenue from the stretch change was estimated at $15.8B."

That means the impact to those who would utilize the stretch provisions is almost twice the benefit accrued to those would would delay their RMD start from 70 1/2 to 72.

So there is no need to guess.

 

[pb4uski]

Agreed. I imagine my kids will have their inheritance withdrawn within a few years. Ten? No way. They may "stretch" the distributions as much as 5 years, but I doubt it.

My guess (and only a guess) is that very few (non spousal) people that inherit an IRA stretch it over their lifetimes. I think 10 years is a reasonable amount of time for the average inherited IRA to be distributed.

That's fine.... if the RMD is the same as currently or changed to 20 years or whatever, beneficiaries who want the money sooner are free to take it out earlier and pay whatever taxes are due.... it is required minimum distribution... one can always chose to withdraw more.

 

[MissMolly]

Agreed. I imagine my kids will have their inheritance withdrawn within a few years. Ten? No way. They may "stretch" the distributions as much as 5 years, but I doubt it.

My guess (and only a guess) is that very few (non spousal) people that inherit an IRA stretch it over their lifetimes. I think 10 years is a reasonable amount of time for the average inherited IRA to be distributed.

I'm not sure why you would guess this. I don't know a lot of people with inherited non-spousal IRAs but I do know that my 6 siblings and I inherited an IRA from our mom 6 years ago. We all pull our RMDs each year, but that's it. Nobody has emptied theirs and nobody intends to empty theirs. And so far, even with pulling the RMDs each year, the account has maintained it's value. I hope/plan for it to still be there when I die and my kids inherit it.

 

[pb4uski]

.... And so far, even with pulling the RMDs each year, the account has maintained it's value. I hope/plan for it to still be there when I die and my kids inherit it.

Ergo.... the problem.

Not picking on you specifically MissMolly, but if your kids inherit from you and under the current rules it is stretched over their lifetime then there will likely be 50 years between when your mother retired and when the IRA is emptied.... perhaps as much as 50-80 years of tax deferral... probably not really what was intended in the beginning... arguably Congress should have had better foresight but they didn't.

 

[MissMolly]

I think the rules change on an inherited inherited IRA. I'm pretty sure they have to stick with my schedule. I get your point, but in reality, it's not 50 - 80 years of tax deferral. I pay those taxes now every year, as would they.

 

[Big_Hitter]

Ergo.... the problem.

Not picking on you specifically MissMolly, but if your kids inherit from you and under the current rules it is stretched over their lifetime then there will likely be 50 years between when your mother retired and when the IRA is emptied.... perhaps as much as 50-80 years of tax deferral... probably not really what was intended in the beginning... arguably Congress should have had better foresight but they didn't.

so much for the rule against perpetuities (IRC 401(a)(9))

 

[Mdlerth]

Compounding is a super power

Ergo.... the problem.

Not picking on you specifically MissMolly, but if your kids inherit from you and under the current rules it is stretched over their lifetime then there will likely be 50 years between when your mother retired and when the IRA is emptied.... perhaps as much as 50-80 years of tax deferral... probably not really what was intended in the beginning... arguably Congress should have had better foresight but they didn't.

I wonder about this. During those 50-80 years the account will grow, and when it finally does get taxed there will be a much larger sum on which to base the tax. Are the people on this forum the only ones who understand compounding?

 

[copyright1997reloaded]

so much for the rule against perpetuities (IRC 401(a)(9))

Again, beneficiary IRA's do not violate anything in 401(a)(9).

The distribution period of the account balance/accrued benefit is over the life
of such designated beneficiary (or over a period not extending beyond the life
expectancy of such designated beneficiary)(“Life Expectancy Rule”).

and

A plan may provide that employees or beneficiaries can elect whether the five
year or life expectancy rule applies to distributions after the death of an
employee who has a designated beneficiary.

Source, right from the horses mouth (the IRS): https://www.irs.gov/pub/irs-tege/epchd603.pdf

I for the life of me do not understand why folks on here thing this is somehow a loophole or unintended. It is neither of those and is not a method for the "rich" to do multi-generational transfers.

The "rich" have much better ways to do this without having to resort to stretch provisions on an IRA. For example, via Family Limited Partnership.

The "super rich" can also have multi-generational control by creating a private charity (family foundation) where the children, grand children and so on control the assets of the foundation. Private foundations can even hire their children. For example:

Federal tax law permits foundations to pay “reasonable compensation” to qualified staff—even if the foundation is staffed by your family. Foundation Source’s optional Compensational Benchmarking Program is available to clients who want to ensure that compliance with IRS regulations.

Source: https://www.foundationsource.com/learn-about-foundations/benefits-of-a-private-foundation/

 

[MissMolly]

But my point still is that they would be on my schedule. The schedule doesn't reset on an inherited inherited IRA. So in 30 years from NOW (not 50 or 80) they would be required to pull RMDs of 50% each year. It's not going to last long with that type of schedule, so I think some of this is getting blown out of proportion. And I still hope to be around for a good portion of those next 30 years.

 

[pb4uski]

I wonder about this. During those 50-80 years the account will grow, and when it finally does get taxed there will be a much larger sum on which to base the tax. Are the people on this forum the only ones who understand compounding?

I'm not sure what your point is... any money withdrawn would be taxed if invested too.

The point is that the idea was to allow the owner to save for their retirement in a tax-advantaged way and the RMDs were put in place to ensure that the money ultimately got taxed.... not for tax-deferral benefits to be provided to multiple generations.

 

[pb4uski]

I think the rules change on an inherited inherited IRA. I'm pretty sure they have to stick with my schedule. I get your point, but in reality, it's not 50 - 80 years of tax deferral. I pay those taxes now every year, as would they.

Good point... I forgot that they get your schedule and not a new one but tax deferral can 50-80 years.

Longest case.... an IRA that I made single deposit to when I was 20 is inherited by my child that I had a 25 when I die at 70 and child is 45. The 45 yo beneficiary withdraws over 39 years so tax deferral is stretched over 89 years (70-20+39). The other extreme is a IRA contribution that I make at age 70 and die shortly thereafter so tax deferral for my 45 yo beneficiary is 39 years.

So put together 40-90 years of tax deferral broadly speaking.

 

[Big_Hitter]

Again, beneficiary IRA's do not violate anything in 401(a)(9).

yep - they are under a different code section - my point is that 401(a)(9) generally prevents perpetuities

 

[gerntz]

Seems like the 10 years after death time limit penalizes the beneficiaries of those that die shortly after retirement as the IRA assets are higher & thus distributed in bigger lumps that are taxed higher.

A better way to me would be that the assets all need to be distributed at the IRA owner's age of say 100 regardless of how long they live.

 

[PatrickA5]

I'm not sure why you would guess this. I don't know a lot of people with inherited non-spousal IRAs but I do know that my 6 siblings and I inherited an IRA from our mom 6 years ago. We all pull our RMDs each year, but that's it. Nobody has emptied theirs and nobody intends to empty theirs. And so far, even with pulling the RMDs each year, the account has maintained it's value. I hope/plan for it to still be there when I die and my kids inherit it.

I really have no idea how this plays out in real life. I'm not surprised that people on this board would want the lifetime stretch. I just don't think that's what most people actually do. I just doubt that the average 35 year old making $50K a year is going to stretch that $100K inheritance over their lifetimes. It would be interesting to know the statistics. I could be wrong. And, personally, I would like to keep the stretch provision, but I don't think a 10 year RMD schedule is that bad.

 

[CardsFan]

I really have no idea how this plays out in real life. I'm not surprised that people on this board would want the lifetime stretch. I just don't think that's what most people actually do. I just doubt that the average 35 year old making $50K a year is going to stretch that $100K inheritance over their lifetimes. It would be interesting to know the statistics. I could be wrong. And, personally, I would like to keep the stretch provision, but I don't think a 10 year RMD schedule is that bad.

You make a good point, and the group here is clearly out of the norm, but it still could be significant:
From:
https://www.nerdwallet.com/article/investing/the-average-401k-balance-by-age
"Ages 60-69
Average 401(k) balance: $195,500.
Median 401(k) balance: $62,000"

And from here:
https://www.fool.com/retirement/2016/06/27/heres-how-much-the-average-american-has-in-an-ira.aspx

"Pre-retirees generally have well over $100,000 in their IRA, while Americans in the 65-69 age range have over $212,000."

So, "on Average" people in their late 60's have $300k to $400k in tax deferred accounts.

When I looked this up, I was actually surprised, as I expected the number to be lower.

But, "on average" heirs pulling for 10 years probably won't get hurt too bad with taxes.

Those of us with larger deferred accounts are the ones that need to consider tax plans to mitigate the total tax bill.

But, as said previously by others, the "deal" was never to avoid taxes for generations.

 

[Mdlerth]

It's like having an annuity and being immortal

I'm not sure what your point is... any money withdrawn would be taxed if invested too.

The point is that the idea was to allow the owner to save for their retirement in a tax-advantaged way and the RMDs were put in place to ensure that the money ultimately got taxed.... not for tax-deferral benefits to be provided to multiple generations.

Agreed. But I suggest that having tax-deferral benefits enjoyed by multiple generations of heirs isn't necessarily a bad thing for the tax-collecting body. Taxes are deferred, not eliminated. In the big picture, the government could net more revenue by lengthening the RMD schedule instead of compressing it. If the RMDs are small enough to never deplete the capital, the govt gets a revenue stream lasting forever instead of only a few years.

 

[GrayHare]

An attorney I consulted with about an inherited IRA said that before me he had no client that didn't just want the IRA balance in one big lump sum.

 

[Clone]

Does the proposed legislation also require inherited ROTH IRAs to be cashed out?

 

[ziggy29]

An attorney I consulted with about an inherited IRA said that before me he had no client that didn't just want the IRA balance in one big lump sum.

Wow.

I was the executor and successor trustee for my mom's estate when she passed in 2016. I had to deal with dividing an inherited IRA four ways and got the process started for everyone with Vanguard. (I told them what was coming and took my part; the other siblings had to do their own leg work to get it in their name.) It turned out that each share was a little less than $65K. I explained that I was no lawyer or CPA or tax pro, but here is what I understand about the taxation.... (insert details here). I think all of them chose to take RMDs from it (roughly $2K a year for each, give or take) rather than cash it all out.

Though had I to do it over again, when we knew we were moving from Texas to Oregon last year, I should have took out as much as I could in the 12% bracket while we were still in Texas -- a state with no income tax -- so there was less to be taxed in Oregon. Oh well.....

 

[target2019]

An attorney I consulted with about an inherited IRA said that before me he had no client that didn't just want the IRA balance in one big lump sum.

I'm not a lawyer, but I generally speak the truth about matters.


I know of one case where two smaller IRAs were inherited by 4 siblings. 2 of 4 took stretch, even though the yearly RMD is smallish. I do not what choice the other 2 made. RMDs had already started.

In another case, the beneficiary of a large inherited IRA is taking the money in 5 years. RMDs had not started.

Of all the tax cases I looked at this past season (over 100), most retirees were taking stretch on the inherited IRAs, with a few taking large sums as in past years.

So, most people I know contrast with most people known by a certain lawyer. But that means very little, I know.

 

[joeea]

A better way to me would be that the assets all need to be distributed at the IRA owner's age of say 100 regardless of how long they live.

That seems very reasonable to me. That ties it strictly to the "Individual" part of "IRA".

RMDs could start at 70.5 and end at 100.
So approximately 30 years from start to end.

 

[pb4uski]

+1

 

[steelyman]

I wonder (and don’t know the answer in the general case) if the expected changes in IRA treatment affect the decision to name a trust as a designated beneficiary. My understanding, likely based on Ed Slott’s “Retirement Time Bomb” book published a while ago, is that this is not recommended and my recollection is that the reason was it rules out the stretch IRA.

 

[RunningBum]

I wonder (and don’t know the answer in the general case) if the expected changes in IRA treatment affect the decision to name a trust as a designated beneficiary. My understanding, likely based on Ed Slott’s “Retirement Time Bomb” book published a while ago, is that this is not recommended and my recollection is that the reason was it rules out the stretch IRA.

As I understand it you'll still have 10 years, and I think you don't have to be on any schedule. So there's still a mini-stretch IRA, and I wouldn't think the advice would change.