Here Is One Way For The U.S. Government To Create New Revenue
Clark Griswold had this horrific look on his face when he opened up his Christmas bonus check in the movie Christmas Vacation. His entire family was waiting with baited breath to hear how much money he received for all of his hard work only to hear that what he got was a gift to the Jelly Of The Month Club. His cousin Randy Quaid had a famous line in the move when he said, “Clark, it’s the gift that keeps on giving.”
Inherited (or sometimes called Stretch) IRA’s have been a gift that many children have been receiving from their parents for years. Essentially, if you parent passes away and you inherit their IRA account, you are allowed to distribute money from that IRA over the rest of your lifetime instead of the current distribution the prior owner of the IRA was taking. If the Inherited IRA has $500,000, distributing that money over a 30 or 40 year time frame would surely spread out a lesser tax liability than having to distribute that money over 5 or 10 years as all of the money would generally be included in your ordinary income. (Source: IRS.gov)
A revenue-raising proposal floated in the Senate Finance Committee last week would sharply limit the time allowed for the liquidation of inherited Individual Retirement Accounts (IRAs) and 401(k)s. Currently, heirs can choose between taking a lump sum distribution and stretching out distributions over many years. Heirs who do take the longer-range distributions from these so-called “stretch IRAs” can, in turn, pass on the accounts to their own beneficiaries, allowing the assets to yield tax-sheltered returns for decades. (source: reuters.com)
The Senate proposal would place a five-year limit on retirement account liquidations. The change would help finance a major transportation funding bill, raising $4.6 billion over 10 years by accelerating income tax due on assets coming out of retirement accounts. And it would grandfather in existing inherited accounts.
Nothing has passed yet and the proposal hasn’t gotten very far at this point. As I have been writing articles for many months now about the U.S. Government facing the inevitability of having to raise revenue, this is just one very simple example of how they will go about doing it within the tax system.
Think about this. If you make $100,000 of income as a family and you ‘Inherit’ a $500,000 IRA, what will happen under this proposal. Well, you would have to distribute $100,000 per year over the next five years or add another $100,000 of income to your overall situation. What tax bracket would this take you into with this additional income? How many of your current deductions would get phased out with this new income? How might it affect your ability to qualify for things like financial aid?
Of course, if your parent’s plan their IRA intelligently there will always be strategies that may help you avoid these potential taxes when you inherit their IRA. I continue to believe that tax management will be more important than asset management over the next decade. Keep an eye out for programs like these to pass as part of some larger piece of legislation, and I promise you there won’t be a footnote to add you to the Jelly Of The Month Club.
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc
The Leaders in Gen x & Y Financial Advice
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