Proposal to Limit “Stretch” IRA’s

Brooke Salvini |

You should be aware that Congress is considering action to limit the ability to “stretch” the tax deferral of retirement plan and IRA money inherited by children and grandchildren. See the article below posted to the Wall Street Journal Washington Wire Blog today.
I will keep you posted as I learn more.

Senate Highway Bill Would Tap Into Individual’s Retirement Money.
WSJ Blogs – Washington Wire 2/7/2012
By John D. McKinnon
The Senate Finance Committee is expected to pass a highway bill that boosts revenues with a series of narrow tax increases, including raising taxes on money saved for retirement.

Specifically, the Senate committee would curb what are known as “stretch” IRAs and 401(k)s.

The path to a final deal with House Republicans on the contentious transportation-funding issue remained unclear, and the House bill doesn’t contain the IRA tax change. But the proposal signaled that Senate leaders are likely to continue targeting personal retirement accounts.

Under current law, owners of IRAs can stretch the life – and increase the value – of tax-deferred IRAs by passing them along to children or grandchildren at death. That’s because required annual minimum distributions typically are calculated using life expectancy tables; younger people get smaller payouts, so when they inherit an IRA, the money lasts longer and typically grows more.

The Senate Finance bill would require taxes to be paid on the account as if it were fully distributed within five years of the account holder’s death. There would be hardship exceptions for certain beneficiaries, including special-needs children. The proposal would raise about $4.6 billion over the next decade.

Highway funding renewal faces a March 31 deadline. Lawmakers are trying to maintain funding levels despite the long-term erosion of fuel taxes as a revenue source. The bill was pulled together by Finance Chairman Max Baucus (D., Mont.) from proposals by lawmakers of both parties.