Recently, both the House of Representatives and Senate passed bipartisan bills covering a large
number of retirement issues. For many, the most important issues include proposed adjustments to the “stretch” IRA rules.
The current rules allow a spouse to rollover a deceased spouse’s IRA and declare it their own, without being required to take distributions from that IRA until the spouse-beneficiary reaches the mandatory age. The proposed legislation did not alter this rule. However, while the IRS rule now states that the mandatory age to begin taking Required Minimum Distributions (RMDs) is 70, the House bill proposes to increase this age to age 72.
Furthermore, if a person other than a spouse is the beneficiary, the rules currently provide that the beneficiary can generally take their distributions from the inherited IRA over their life expectancy, which is calculated by the IRS. This allows the beneficiary to “stretch” the distributions for a longer period of time, as well as the tax liability on those distributions. The House version of the bill reduces the stretch period to a maximum of ten years. The Senate version allows a stretch on the first $400,000 of all combined inherited IRAs (including both traditional and Roth IRAs), and the balance exceeding that amount must be distributed within five years. Both versions allow exceptions for certain beneficiaries, including minors and those who are disabled or chronically ill. Both would apply to inherited IRAs for deaths after the end of this calendar year.
These new proposals greatly accelerate IRA distributions for most non-spouse beneficiaries, and accordingly, the taxes due on such IRAs. How costly will this be? Both versions of the bills will have serious financial effect and likely result in “bracket creep” for many, resulting in significantly increased tax liabilities for the beneficiaries. This change in the stretch rules will cause both financial planners and investors to create a whole new array of planning ideas, leading to necessary revisions in estate plans that distribute these investments. If you have any questions about the way your retirement plan will be distributed upon your death, give us a call at 810 229-0220.