Are Inherited “Stretch” IRA’s Getting Chopped?

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Are Inherited “Stretch” IRA’s Getting Chopped?

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February 22, 2012

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.

Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20's, 30's, and 40's in the country.

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc

The Leaders in Gen x & Y Financial Advice

Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS. NFPAS does not provide tax or legal advice. This site is published for residents of the United States only. Registered Representatives and Investment Advisor Representatives of NFP Advisor Services, LLC (NFPAS) may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact NFPAS Compliance Department at 512-697-6000. PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. NFP Advisor Services, LLC makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is NFP Advisor Services, LLC liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. https://Bit.ly/KF-Disclosures

This site is published for residents of the United States only. Registered Representatives of Kestra IS and Investment Advisor Representatives of Kestra AS may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all products and services referenced on this site are available in every state and through every representative or advisor listed. For additional information, please contact Kestra IS Compliance Department at 844-553-7872.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. Kestra IS and Kestra AS makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is Kestra IS and Kestra AS liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.