Non Spouse Stretch a Congressional Target
While this was just proposed legislation at this point, it is surprising the proposal was even made. In fact, the provision was deleted from the legislation this AM. But it is probably a sign of things to come as a result of trying to “pay for” Congressional legislation. The implications of this thinking way be wide spread over the entire universe of tax deferred accounts. Will see how far this proposal goes:
http://www.kitces.com/blog/archives/253-Congress-Fires-Warning-Shot-At-S…
Permalink Submitted by mk foss on Sun, 2012-02-12 02:57
Good to hear that the proposal was eliminated – I’m still just getting the word with language of the bill.
The bad news is that once a law change is publicized and not enacted it seems to come back as a later possible law change.
Permalink Submitted by Genevieve Comfort on Sun, 2012-02-12 06:26
While I appreciate that the proposal has been removed for now, the proposed povisions have raised a question of interest for me. The proposal would have allowed a stretch in the case of a non-spouse beneficiary who is disabled.
How does one establish disability for this purpose? I have a 46-year old daughter who was declared “incapable of self-support due to a medical condition occurring prior to age 18″ by the Department of Defense” and was similarly declared by the Office of Personnel Management (OPM). Consequently, she remains insured under my wife’s Federal Employees Health Benefit Program and underTRICARE Standard based upon my military career. We never applied for any disability coverage for her under Social Security — I don’t even think she is eligible since she has never been employed.
She has a dependent’s military ID card. The Air Force records carry her as “permanently disabled” which she clearly is. She cannot walk more than 50 feet or so with a walker and suffers from constant pain.
So, all of this argues that she is “disabled.’ But, does it meet whatever test the IRS might require?
Thanks.
Gary_C
Permalink Submitted by Bruce Steiner on Sun, 2012-02-12 17:09
No one knows if this will be enacted, and if so, in what form. Some proposals that don’t get enacted initially are proposed again, and some of them are eventually enacted and some aren’t.
One can make an argument that there is no need to allow stretchouts after the IRA owner’s death, since the IRA is no longer needed for the IRA owner’s retirement. On the other hand, Section 408 says that an IRA is for the benefit of both the IRA owner and the IRA owner’s beneficiaries. Also, without stretchouts, there would be bunching of income for a traditional IRA (in other words, by paying it out over a short period, it would push the beneficiaries into higher tax brackets).
There is a broader argument for the stretchout. The wealthiest taxpayers get the most benefit from basis step-up at death and the reduced rates on dividends and capital gains. There are various tax benefits for working and middle class taxpayers that are phased out for upper middle class taxpayers. Upper middle class taxpayers bear the brunt of the AMT, and are likely to be in the 35% bracket due to the AMT exemption phaseout. The tax benefits for retirement benefits provide some relief for upper middle class taxpayers who are otherwise taxed at a high rate. While there have been some proposals to reduce the top tax rate and eliminate some deductions and other tax benefits (the IRA stretchout perhaps being one of them), the result of that may be to provide a large tax reduction to the wealthiest taxpayers while increasing the tax burden on middle and upper middle class taxpayers.
But all we can do is wait and see what Congress does on this and other tax issues, and then figure out how best to deal with it.
Permalink Submitted by Alan Spross on Sun, 2012-02-12 18:06
Gary,
It certainly appears that your daughter would qualify as disabled under Sec 72(m)(7), copied below. Qualifying for SSD is only one indicator of disability and not directly linked to this section. A statement from her MD might be needed, and I assume it would support a disability exception.
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72(m)(7) MEANING OF DISABLED. –For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An individual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Secretary may require.
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Permalink Submitted by Ann Viverette on Sat, 2012-02-18 19:34
I suspect that the easiest target for raising taxes is dead people.
I don’t think the government is that concerned about raising taxes on upper middle income earners, we all know the budget (budget? what budget??) will not be met by simply raising taxes on the ultra wealthy or on the merely wealthy.
With that in mind, I have begun to wonder what the strategy would be if this were to become law. One might move dividend paying stocks to Roth IRAs, so that those dividends could be spent as needed tax-free in retirement. With a small advantage in taxation of capital gains, one would keep fast growing investments in taxable accounts. Bonds would go into the traditional IRA, since the interest income is still income as it comes out, though any capital gains there would also be income for taxation purposes.