Retirement & Enhancement Savings Act 2018 – passed House, now in Senate finance committee as SB 2526

Submitted by David Frantz on Mon, 2019-03-04 16:51

SB 2526 eliminates the Stretch provision for inherited IRA’s and replaces with it with a “Must Pay Out in 5 years” provision.
For those planning on leaving all or some of your IRA to younger family members; the lifetime value your gift will be significantly reduced. The younger the recipient, the greater the reduction. If you have read Mr. Slott’s book, you will see the impact on inherited IRA’s can be huge.



Submitted by Alan - IRA critic on Tue, 2019-03-05 00:25

This is going to pass one of these years, since the temptation to use the added revenue to offset other spending is too great. Prior versions of the 5 year rule requirement included exemptions for spouses, and also a dollar value of around 450k, which would make enforcement of the provision almost impossible. The IRS has never established a handle on inherited IRA RMDs since day 1. The aggregation rules contribute to making this difficult. The 5 year rule would be a particular blow to non spouse beneficiaries inheriting a Roth IRA, particularly younger beneficiaries whose annual RMDs would be minimal.  We will see how far this goes this time around.

Submitted by Richard Rea on Mon, 2019-04-08 15:24

  • “(1) The IRS has never established a handle on inherited IRA RMDs since day 1.
  •  (2)The aggregation rules contribute to making this difficult.”

Submitted by Chuck 2009x on Tue, 2019-04-09 17:20

  • I don’t want to speak for Alan but, I think he’s talking about a situation where a decedent has multiple accounts spread across different custodians.  Now for plain RMD calculations, each custodian calculates an RMD for the account it holds, and notifies the owner.  The beneficiary doesn’t have to take the RMD in proportion to each account’s value; he just has to take the total aggregate amount from SOMEWHERE.  And the custodians don’t police that.
  • Now try to put an exemption on top of that.  None of the custodians know the other accounts exist, nor how many beneficiaries exist for accounts not held under their roof.  Therefore, they can’t know the total value of all the accounts nor how to pro-rate the exemption.

Submitted by Chuck 2009x on Thu, 2019-03-28 19:22

  • I’ve been following this for a couple of years now
  • S2526 was in the prior Congress.
  •  HR 1007 is the same bill, just with “2019” at the end.  It was introduced in the House in this Congress.  An identical bill has not yet been introduced in the current Senate.
  •  As happened in the prior Congress, there are a number of bills in the House that have overlap with RESA.
  •  The House Ways and Means Committee appears to have finished their hearings on this and related retirement matters and it sounds like they are going to proceed to markup next week and a possible vote by April 15.  Markups are the sausage-making process.
  •  If you want to follow this, go to Congress.gov and search on H.R.1007.  When you bring up that bill, there is a tab called Related Bills that shows all the other bills.  As far as I can tell, none of the other bills have the provision that kills the Stretch.
  • Keep your fingers crossed that either HR1007 gets amended to take out Sec 501 or some other bill gets put up that doesn’t have it.

 

Submitted by Chuck 2009x on Sat, 2019-03-30 13:34

  • So what came out of the sausage grinding process was a new bill called Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019.  It doesn’t have an HR number yet.
  • They expect to vote it out of the Ways and Means committtee next week.
  • Nothing’s been filed in the Senate yet.
  • The text is available at https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_008_xml_0.pdf
  • The section relevant to the Stretch provisions is Section 401
  • From my reading, as compared to RESA, they:
  • Eliminated the $450,000 exemption, but increased the required distribution period from 5 to 10 years
  • Kept same exceptions as RESA for certain beneficiaries (disabled, etc)
  • Applies to original owner death after December 31, 2019
  • In my personal situation, this probably ends up being a slightly favorable change or a wash vs RESA, but still much worse than being able to take it based on life expectancy

    • Submitted by Chuck 2009x on Sat, 2019-03-30 13:42

    I’m not really familiar with the 5 year rule – does it require periodic distributions on some formula, or can you take it however you want as long as you zero it out in 5 years?

    Submitted by David Mertz on Sat, 2019-03-30 14:26

    The existing 5-year rule simply says that the entire balance must be distributed by the end of the 5th year following the decedent’s year of death.  There is no requirement to make periodic distributions.

    Submitted by Alan - IRA critic on Sat, 2019-03-30 17:06

    • If that proposed 10 year rule operates like the 5 year rule, that removes all RMD requirements for the first 9 years, so no missed RMDs to be made up, but beneficiaries who do nothing are set up for a huge tax bill for the 10th year on a TIRA. Conversely, for an inherited tax free Roth IRA, it would be best to generate as much tax free gains as possible, so these might not be drained until the end of the 10th year. 
    • This might also affect the rules for surviving spouse’s who have reasons to maintain an inherited IRA until 59.5.

    Submitted by Bruce Steiner on Sun, 2019-03-31 01:57

    • This has a good chance of passing since it’s being introduced by both the chairman and the ranking minority member of the Ways and Means Committee.
    • Allowing 10 years rather than 5 years reduces the impact of bunching the income.  It’s analogous to the old 10-year averaging, except it’s added to the recipient’s other income (whereas the old 10-year averaging ignored the recipient’s other income).
    • There’s an exception for disabled beneficiaries.  But an IRA owner would often provide for a disabled beneficiary in trust rather than outright.  How would it work if you provide for a disabled beneficiary in trust rather than outright?  (Our clients almost always provide for their children, disabled or not, in trust rather than outright, to keep their inheritances out of their estates, and to better protect their inheritances from their creditors and spouses, and Medicaid.
    • A charitable remainder trust is a workaround.  It provides a result similar to that of a stretch over the beneficiary’s life expectancy.  However, it’s less flexible, and (with a narrow exception for a beneficiary with special needs) requires that the distributions be outright rather than in trust.
    • Bruce Steiner

    Submitted by Richard Rea on Mon, 2019-04-08 15:36

    Bruce,”(Our clients almost always provide for their children, disabled or not, in trust rather than outright, to keep their inheritances out of their estates, and to better protect their inheritances from their creditors, spouses, and Medicaid.)I have a Revokable Family Trust but keep the IRA funds out of it.   I preferred to use the “beneficary option” in the IRA(s) to distribute the money to 3 kids.  Should I revisit this decision?

    Submitted by Bruce Steiner on Tue, 2019-04-09 21:36

    • What is the “beneficiary option?”
    • You can leave IRA benefits in trust by naming a trust or trusts as the beneficiaries of your IRA (on the beneficiary designation form).  For example, if you have a spouse and children, you could name your spouse as the primary beneficiary and trusts for your children as the contingent beneficiaries.
    • If you’re in fact in Seattle as your handle “SeattleSun” suggests, why would you have a revocable trust?  When I spoke at the Seattle Estate Planning Conference in 2016, I was told that probating a Will in Washington State was not difficult, and that revocable trusts were not commonly used in Washington State.

    Submitted by Richard Rea on Thu, 2019-05-02 01:37

    • What is the “beneficiary option?”   Used the “IRA Befeficiary Designation Form” to distribute the IRAs to the three adult “kids” all now in their mid to late 30s.   Wife agreed to this and her signature was notorized.
    • “why would you have a revocable trust?”  Wife a degenerate gambler and bad alcoholic.   A revokable trust without her as “trustee” was the best idea I could come up with.  Assets in the trust like the house, etc are ones that I can’t  use a “beneficiary form” to distribute assets to the children, like IRA, Life Insurance, etc.
    • Your comments on my estate strategy welcome and appreciated.  Most estate stratgies I see have to do with a drug addicted child, not spouce.

    Submitted by Bruce Steiner on Sun, 2019-05-05 14:12

    • While revocable trusts are not commonly used in Washington State, your wife’s situation is such that it makes sense for her to create a trust for her own benefit.  Of course, if she can revoke it, she can destroy the protection.  She might want to consider making it so that she can only amend or revoke it with the consent of some trusted person(s).
    • You can easily leave your nonretirement assets to your wife in trust rather than outright, to protect against her situation. 
    • But under current law if you leave your IRA to her in trust, the stretch will be limited to her life expectancy.  If you leave your IRA to your wife outright, she can roll it over, name new beneficiaries, potentially convert to a Roth, and get a longer stretch.  However that gives up the protection with respect to her situation.
    • Alternatively, you can leave your IRA to or in trust for your children or grandchildren and get a longer stretch.  However, if you do that, your IRA benefits won’t be available for your wife if she ever needs them.  So this is more attractive if you have sufficient other nonretirement assets to leave in trust for your wife.
    • Washington State has a high state estate tax (the top rate is 20%), and a low exemption ($2,193,000), and allows a state-only QTIP election.  Your planning may vary depending on the size of your estates.  Since you didn’t say what the size of your estate and the size of your wife’s estate are, the above doesn’t take this into account
    • Since I’m only admitted in NY, NJ and FL, none of which is a community property state, and since the nearest community property state is far away, I don’t deal with community property very often.  So I haven’t considered the community property aspects of this.  You should consult with competent local counsel who’s familar with retirement benefits as to the community property aspects of this.
    • The above may change if the proposal to limit the stretch is enacted.
    • Bruce Steiner

    Submitted by Chuck 2009x on Sun, 2019-03-31 12:04

    • I agree this has a good chance of getting through.
    • Because of who sponsored it
    • Because it was filed early and appears to be being set up for a full House vote fast
    • Because there’s hardly anything in it for anyone to object to (except non-spousal benes)
    • Seems like low-hanging fruit that’s less likely to just sit on the shelf, but you never know
    • There’s always a chance it gets amended, but I don’t see anything the Senate would be prone to change.  The accelerated distribution scheme was a direct payfor for almost the entire RESA bill.  Assuming those numbers still work with the 10 year period, I don’t think the Senate would say “Go back to the RESA scheme with the exemption and 5 year period instead.”
    • It is a little interesting that they eliminated the $450k exemption in exchange for increasing the period.  That means it will affect a lot more people; that’s probably how they get the payfor numbers to still work.
    • 10 years is better than 5 for me because I will be retired within 5 years, but maybe not much before that.  So if the inheritance occurred right after the law went into effect, I could delay the distributions until after I no longer have a salary, so more of it will be taxed at a lower rate, and of course benefit from the longer tax-deferred period on income earned by the portfolio.
    • Gotta revise my RESA projections spreadsheet

    Submitted by Chuck 2009x on Tue, 2019-04-02 18:03

    • The SECURE Act is H.R. 1944.  I watched the video of the Ways and Means Committee markup session today.  Rep Kind did mention the Stretch IRA but only in the context of a benign “we’re just pulling that revenue forward.”  He indicated that Grassley (chair of the Senate finance Committee) was on board, no surprise, they had favorably voted on RESA twice.
    • H.R.1944 was voted unanimously (in favor) out of the Ways and Means Committee

    Submitted by Richard Rea on Wed, 2019-04-03 18:36

    “we’re just pulling that revenue forward.” Not true, I rountinly grow my retirement accounts far in excess of the RMD amount.   It kills the Goose than was going to lay the golden eggs for my children and grand children.

    Submitted by Richard Rea on Wed, 2019-04-03 19:00

    Currrent situation: used the “designated beneficry feature” of my retirment accounts to leave a 1/3 each to my three children out side of the Family Trust. So using the 10 year rule for three kids would mean $X/30 or $xxx,xxx per year per child.If I added in the 8 grand children I could increase the demonitor to 110 (10 yr X 11 beneficaries) or $xx,xxx per year per person.  Is all just a tax reduction exercise at this point?  

    Submitted by Chuck 2009x on Wed, 2019-04-10 17:56

    • If either the 5 year or the 10 year rule passes, neither require the accelerated distributions to be taken in yearly increments.  The benes just have to take the full (non-exempted if any) amount required by the last day of the period.
    • So the gist of your question is correct, but the amount a bene might elect to take in a given year could vary depending on how much other income they had in that year(s), in order to try to avoid spilling into a higher bracket.
    • So if you had a bene who was still going to be a high earner in the first few years of his distribution period, he might want to not take any distributions until his wage income stopped.

    Submitted by Bruce Steiner on Sun, 2019-05-05 13:52

    • I’m not sure what you’re describing or what you’re trying to accomplish.
    • Under current law, if you leave your IRA to or in trust for your grandchildren rather than your children, they’ll get a longer stretch.  If the stretch is limited to 10 years, the stretch will be limited to 10 years either way.
    • Our clients generally provide for their children and grandchildren in trust rather than outright.  Unless each person’s share is too small to warrant administering a trust, you might want to leave your IRA to your children or grandchildren in separate trusts for their benefit rather than outright.
    • Bruce Steiner

    Submitted by Richard Rea on Wed, 2019-04-03 20:04

    sit on the bill.  After all Senetor Mitt Romeny (R-UT) has a $100 million in his IRA. https://www.trustetc.com/blog/August-2015/mitt-romney-ballooned-his-ira-to-100-million

    Submitted by Bruce Steiner on Sun, 2019-05-05 13:49

    • I would think Mitt Romney is leaving his IRA to charity (or to his wife and they she’ll leave it to charity).  We know he makes substantial charitable contributions.  If he weren’t planning to leave his IRA to charity, he would have converted to a Roth.
    • Bruce Steiner

    Submitted by Richard Rea on Wed, 2019-04-03 23:20

    Alan said, “Prior versions of the 5 year rule requirement included exemptions for spouses, and also a dollar value of around 450k, which would make enforcement of the provision almost impossible.”   Maybe a mute point now but was that $450k exemption per year?   Are both these exemptions NOT in the new bill?

    Submitted by Alan - IRA critic on Thu, 2019-04-04 01:23

    The spousal rollover will always be allowed, so they would not be affected by a 10 year rule any more than they were by the 5 year rule. Can’t recall if the 450k exemption under prior proposals triggered the 5 year rule upon the DOD or if it was triggered later if the balance for a particularly beneficiary exceeded 450 at some later date. Given the RMD aggregation rules for accounts inherited from the same decedent, that provision would have been almost unmanageable and unenforceable, particularly given the IRS’ multi decade history of almost no administration of beneficiary RMD rules.

    Submitted by Alan - IRA critic on Thu, 2019-04-04 02:02

    A surviving spouse can always do the spousal rollover so this would not affect them. 

    Submitted by Chuck 2009x on Thu, 2019-04-04 14:28

    • Grassley re-filed RESA in the Senate.  It’s S. 972.  The text isn’t up yet, but I expect it’ll be identical to the last one.
    • So now there are going to be identical RESA bills in both houses, plus Neal’s SECURE Act in the House, plus other House bills that are bits and pieces of both.
    • The $450,000 exemption in RESA works (approximately) like this:
    • The first $450,000 of the decedent’s IRA assets are excluded from accelerated distribution to beneficiaries and could be distributed over a beneficiaries life expectancy.  Above $450,000 would have to be distributed within 5 years.  The exemption amount would be pro-rated across multiple accounts AND the beneficiaries’ share of the account(s).
    • Simple Example:
    • One account worth $1,450,000 at death
    • 2 non-spousal beneficiaries each designated to get 50%, so each’s starting assets in the inherited IRAs would be $725,000.
    • For each, $500,000 would have to be distributed by the end of 5 years.  The remaining $225,000 could be taken on an RMD basis over life expectancy.  It wasn’t clear whether these RMDs of the remainder would start immediately (that’s my interpretation), or whether they would start at the end of the 5 year accelerated distributions.

     

    Submitted by Chuck 2009x on Thu, 2019-04-11 17:46

    • The text of S 972 is up.  There are a couple of differences between it and prior versions:
    • The exemption amount for non-spousal benes is reduced from $450,000 to $400,000
    • The accelerated distribution period remains 5 years
  • There is an inflation adjustment to increase the exemption amount for deaths that occur after the first year after enactment.
  • So RESA 2019 in the Senate isn’t identical to RESA 2019 in the House (HR 1007).  The House bill is the old version ($450k exemption with no inflation adjustment)

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