Stretch IRA
Does the House tax proposal say anything about changing the rules on stretch IRAs or is any change expected to be proposed by the Senate?
I think there is a good chance that the beneficiary stretch constriction to 5 years will end up in the bill, although much of the increased revenue from that will occur more than 10 years out. The prior administration proposed that for 3 or 4 years in a row, and as stated it would not take much to include it in the Senate bill. It would be interesting to see how much revenue is projected from that as opposed to the recharacterization provision. Perhaps the latter revenue projection was muted due to fewer conversions assumed. I think the recharacterization provision (Sec 1501) will have to be altered to limit it to conversions. Regular contribution recharacterizations are not going to produce enough revenue to matter since most people whose income is too high for a Roth contribution cannot deduct the TIRA contribution to begin with. Without recharacterizations, those Roth contributions would have to be removed to avoid excess contributions to the Roth. The IRS and the financial industry may be happy with conversion recharacterizations ending, but not for regular contributions which present different issues.
In the Senate bill from last year (RESA 2016), the accelerated distribution requirement was being used directly as a “payfor” to make up for revenue that would be lost due to expanding or implementing multi-employer plans. If it ends up in the tax bill, MEPs will probably be out of the mix, it’ll just be because they need every penny of revenue they can find. My brother and I stand to split a ~$1.4 mln IRA and losing the stretch will cost us each 300 grand over 25 years assuming an average 5% return could be achieved.
Maybe not this year, but eventually the LE stretch will probably be axed for non spouse beneficiaries as you say. What remains to be seen is whether that would apply to all inherited accounts, or just to those inherited after a certain date.
There’s nothing in the latest (11/14, 2nd version) Chairman’s markup of the Senate bill.I went back and looked at the documents associated with RESA 2016 and found that over 10 years, killing the stretch for non-spousals was estimated to raise “only” 3.2 billion, with a peak year of just under 600 million. So not a huge gap filler. I think if killing the stretch gets revived somewhere, it will still probably be used as a payfor for expanding MEPs – they’ve done the calcs, so those two things seem tied together. And just to add, RESA 2016 provisions would have gone into effect with deaths on or after Jan 1, 2017. I’ve not looked at a lot of tax bills, and when exactly in a year a bill gets passed probably makes a difference – passed first half of the year, the IRS has time to promulgate rules, etc, and so they could make it effective with the beginning of that same year. Passed later in the year, better chance the effective date is the end of the year it gets passed.
Permalink Submitted by Chuck 2009x on Sun, 2017-11-05 16:14
There was nothing in the House bill. No idea what the Senate will do, but the Senate Finance Committee is where the language killing the non-spousal stretch was written last year. My sense is that the House committee caved on too much too fast all of a sudden on the revenue side at the beginning of this week so people would shut up and they could release it. They’ve already made a change on Friday. I think they are probably significantly short on the revenue side from where they need to be under the rules to be allowed to pass it with 50 votes. I expect to be sweating it out the next couple of weeks. I would suggest setting up an account on Congress.gov and setting up an alert on the phrase “required minimum distribution” although you will probably hear about it from somewhere else first, it often takes a day or so for the Congress.gov site to be updated. The concept and language to kill the stretch are ready-made and can be dropped into any bill, any time. I think if nothing ends up in this tax bill, Stretch IRA is probably safe for a year or two, but that’s certainly not guaranteed.