Tax bill stretch provision

Submitted by Bob Lloyd on Wed, 2019-06-19 21:32

I understand the so-called “Secure” tax bill has passed the House but has not been voted on in the Senate. So my question pertains to the House version as passed. Some reports indicated the maximum modified “stretch” for non-spouse beneficiaries will be 5 years but other reports say 10 years. Which is correct?
Thanks



Submitted by Alan - IRA critic on Wed, 2019-06-19 22:02

10 years. The Senate version (RESA) includes an exemption of 400-450k per beneficiary, but if the inherited value exceeds that amount for all accounts inherited, the accounts must be drained in 5 years like the current 5 year rule. Conference committee may well adopt some compromise provision. Given the lack of meaningful inherited IRA RMD rules enforcement in the past, the resulting legislation should consider not increasing complexity beyond what is practical to administer. Probably a good idea to reduce the current 50% penalty which is routinely waived by the IRS to something like 10%, then actually levy the penalty so there is some incentive to comply.



Submitted by Chuck 2009x on Wed, 2019-06-26 18:26

  • The SECURE act currently definitely calls for a 10 year distribution period.
  • To clarify, my understanding of the RESA language is that the exempted amount can be distributed over life expectancy, while the amount over the exemption has to be drained in 5 years.
  • Simplest example: a million dollar IRA left to a single bene.
  • $400,000 can be taken over life expectancy, starting on the same schedule as it would work now.
  • $600,000 has to be taken by the end of 5 years, at the bene’s discretion
  • Both buckets of distributions would have their clocks start ticking at the same time.
  • That’s an easy calculation to do every year if the money is sitting in a single checking account.  If it’s invested, and/or if there are multiple benes and multiple custodians, GOOD LUCK and pass the aspirin.
  • I’m in a position where the RESA method would be more favorable, and I could keep track of it myself.  But I’d hate to be the guy at the IRS or at a custodian trying to figure out how to make it work on their systems.  I don’t think they can do it.


Submitted by Alan - IRA critic on Wed, 2019-06-26 19:43

  • Yes, the “to the extent” wording in relation to the 400k per beneficiary limit appears to split the distribution period of the account. Looks like each plan will have to split into two sub accounts for each beneficiary, one holding 40% of the balance (LE) and the other 60%. By the time this is done, the 1mm might be 800k or 1.2mm but the value on the DOD seems to dictate a % split. 
  • Another interesting scenario is that if there are multiple inherited accounts, each DC plan will have to discover the inherited value per beneficiary of all other plans including inherited IRAs to determine if the 400k threshold is exceeded. And if so, they will each have to determine the value of the sub accounts for each beneficiary they have??? 
  • Since these bills will probably end up in conference, it will be very challenging with all the testimony from interested parties, and may take years to hash out the enforcement plans of the IRS and EPCRS, the problems for the plan administrators, and the complete confusion foisted on beneficiaries and even their advisors.  Already too late for 1/1/2020 deaths to apply to my way of thinking.


Submitted by Brad Hughes on Mon, 2019-07-01 14:53

I assume, since Roths have no RMD component, that they are excluded from consideration in this proposed legislation?



Submitted by Alan - IRA critic on Mon, 2019-07-01 15:12

Not so. Non spouse beneficiaries must take RMDs from inherited Roth IRAs. LIfe expectancy RMDs are calculated in the same manner as inherited TIRAs presently. Under the proposals a restricted stretch will also apply to inherited Roth IRAs.



Submitted by Vickie Intriago on Tue, 2019-07-09 01:53

Even though there is still a life expectancy RMD that must be satisfied.  I assume these distributions are TAX Free.Please confirm.



Submitted by Alan - IRA critic on Tue, 2019-07-09 02:16

Yes, inherited Roth IRA distributions will be tax free in almost all situations. But if the beneficiary withdraws earnings before the Roth IRA is qualified (not held 5 years including the owner’s holding period), the earnings would be taxable. That would be very rare since earnings would come out last.



Submitted by Randy Aleman on Mon, 2019-07-15 14:59

Just to make sure I understand correctly, under this newly proposed federal legislation, IF a spouse inherits a ROTH ira, there are no withdrawal requirements, but if a non-spouse inherits a Roth IRA then they have to make monthly withdrawals for their remaining life expectancy, assuming this legislation passes? And if the Roth funds had previously been held for a minimum of 5 years…then in either of the above cases it would be non-taxable events to either the spouse or the non-spouse?



Submitted by Alan - IRA critic on Mon, 2019-07-15 15:50

Yes, that is correct except that the beneficiary RMD does not have to be taken monthly. The total RMD must be taken annually using any distribution pattern desired. Spouses that elect ownership or roll over the inherited IRA to their owned IRA are subject to the normal RMD requirements of an owner. An owned Roth does not have any RMD requirement.  In other words, the proposed legislation does not affect spouses, but will affect non spouse beneficiaries of all types.



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