Demise of IRA “stretch” as proposed by Senate
The Senate Finance Committee recently floated a proposal to put a five-year time limit on liquidating IRAs and 401(k)s. The Senate Finance Committee said the change would raise $4.6 billion over 10 years from accelerated tax collections. Even though the proposal died in the Committee, there is speculation that, in view of the need to raise revenues in the future, the proposal will surface again. If my understanding is correct regarding this proposal, this would be the demise of “stretch” IRAs. It is not clear to me if the proposal included Roth IRAs under the umbrella of “IRAs”. If the idea is to raise revenues, Roth IRAs, even if accelerated, would not raise any additional revenues because the distributions are generally free of income tax. However, not being able to “stretch” Roth IRA distributions would severely limit the benefits of long-term growth and tax-free distributions. Can anyone (including Mr. Slott) shed additional light on the Committee proposal?
Permalink Submitted by Alan Spross on Fri, 2012-03-16 02:47
Before it was dropped, the proposal only applied to non spouse inherited IRAs, not to owned IRAs. The basic justification was explained that an owned IRA is intended to support the owner in his retirement, while a non spouse inherited IRA typically provides for a succeeding generation, not for the owner. Accordingly, the non spouse beneficiary would only be given a limited time to drain the account and that would produce accelerated tax revenue.
While it was dropped, the mere fact that it even made it into the original legislation is an indication of what Congress is thinking about to generate needed tax revenue. For original IRA owners (or spouses who assume ownership of their spouse’s IRA after spouse’s death) there is another proposal floating around to eliminate RMDs for those whose account balances are under 75,000, and another one to reduce RMDs for those who allocate a portion of their IRA to the purchase of longevity insurance (Annuity that generally does not kick in until 85).
Therefore, IRA owners should not be too worried yet, except with respect to tax rates increases on the horizon.
Permalink Submitted by Steve Mayer on Fri, 2012-03-16 02:50
My opinion is you can only make decisions on what the law is now, and not speculate on the future on what “might” happen. You know, and I know, that taxes are going up in the future, so I think that the greatest tax advantage in the tax code is life insurance. If you can’t take advantage of life insurance, maybe you know someone you love can.[url]http://www.401klifeinsurance.com[/url%5D