No Love for Stretch IRAs in Latest Bill Before Congress, Says Orange County Estate Planning Attorney

11:25 pm Asset Protection, Estate Planning, Tax Planning

broken heart1 150x150 No Love for Stretch IRAs in Latest Bill Before Congress, Says Orange County Estate Planning AttorneyWhat is a provision that could potentially outlaw stretch IRAs doing in a transportation funding bill?  We have no idea.  But unfortunately, there it is.

Montana Senator Max Baucus, who is also Senate Finance Chairman, added the provision to the Highway Investment, Job Creation and Economic Growth Act of 2012.  Under the proposed legislation, starting in 2013, nonspouses who inherit traditional IRAs will be required to withdraw the entire amount from a traditional IRA within five years.

Currently, nonspouses who inherit IRAs have to begin taking distributions by Dec. 31 of the year following the receipt of the inheritance, but can “stretch” their withdrawals over their expected life spans – which provides potential decades of tax-deferred growth in a traditional or Roth IRA.

The proposed legislation would put an end to the “stretch” IRA except for beneficiaries who are disabled, chronically ill, a minor child or a beneficiary who is not more than 10 years younger than the IRA owner.  The rules for inherited Roth IRAs would remain unchanged.

If passed, this legislation could put a halt to an important estate planning strategy used, for example, by grandparents who leave an IRA to fund a grandchild’s college education.  The tax on the inherited IRA could be high enough in some cases to thwart these plans, discouraging saving and transfers of wealth between generations.

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