A Must Read for IRA Inherited Account Holders

You probably woke up this morning and asked yourself the all-important question, “What does my Inherited IRA and highways have in common?” What a silly question….I think I can understand why you wouldn’t ask yourself that.

Recently, in a fairly well-hidden bill that was defeated, there was an amendment by lawmakers that tried to eliminate (or greatly reduce) the estate benefits of the Inherited IRA. The defeated proposal would have raised nearly 5 BILLION over a 10 year period by amending and changing some of the rules pertaining to the aforementioned retirement account, and how people actually take distributions on that account.

What’s an Inherited IRA?

You might be asking what exactly is an Inherited IRA and HOW would it raise nearly 5 billion dollars for roads? Well, the Inherited IRA allows heirs of the original account holders of the IRA (before it became inherited) to stretch out the period of time they needed to pay taxes on the Inherited IRA over their expected lifetime. However, the proposed amendment would have required the beneficiary of the account to distribute and pay applicable taxes over a five year period of time. As an example, if an individual aged 45 received an Inherited IRA from their deceased parent and that 45 year old had a life expectancy of age 80, he/she could spread out the required tax bill to Uncle Sam over that time period — vs. — the proposed amendment of 5 years. To say this would be quite an adjustment would be an understatement.

While the amendment was defeated, it is a sign of possible “winds of change” with regard to how much is allowed to go into a retirement plan, taxation amounts, durations, etc. The fact that it was even originally included as a deficit-reducing tool is indeed surprising.
In fairness to the proposal, many view “stretch” related IRA plans to be more of an estate issue that a retirement issue. It is fair to say that lawmakers certainly viewed a tool such as the Inherited IRA more as a way to prolong the government’s ability to receive taxes from a retirement plan that’s intended purpose is to stretch out the benefits over a longer period of time.

As Senator Max Baucus from Montana stated, “IRAs are intended for retirement. They’re being used by some taxpayers to give tax-free benefits to second, third, maybe fourth generations.” Further, Baucus noted, “It’s important to put the R back in IRA. They’re for retirement, not an estate-planning tool.”

While this was a noted surprise as an amendment to the bill, there has not been any recent serious discussion about lawmakers considering further changes to the tax code as it relates to other plans such as IRAs (Traditional and Roth) or 401Ks and the like. But, this is certainly good food for thought.

BawldGuy Here: This very attempt at raiding qualified plans by the House and Senate are what I’ve been warning folks about for several years. It’s yet another solid reason to get out of whatever plan you’re in — and sooner rather than later. Around 4:30 yesterday afternoon would serve you just fine, thank you.

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