Ronald Morton's Elder Law Blog

Roth may become more compelling planning option

If the current proposal before congress to eliminate the stretch IRA provisions from the tax code go into effect, it presents an even more compelling reason to convert traditional IRA's into Roth IRA's.  While most people are reluctant to pay taxes now on a tax deferred account, the ability to pay taxes now under current rates, rather than under future rates which are likely to be higher.  Now with the potential loss of the ability of beneficiaries to stretch withdrawals when they inherit, thereby paying the taxes on the account within 5 years of their inheritance, the case for the Roth becomes more compelling.  Under the proposal, Roth beneficiaries would continue to enjoy required minimum distributions over their lifetimes, rather than accellerated 5 years.  Their growth and distributions would be tax free - unless, of course, congress eliminated the tax free character of the Roth IRA.  But they would never break a promise like that (unless, of course, you count their original promise not to tax social security benefits). 

Saying so long to the Stretch IRA?

The most recent proposed transportation legislation before congress has a provision that removes the ability of inheriting beneficiaries of traditional IRA's to take out the inherited funds over their lifetimes (because that has a lot to do with transportation infrastructure).  The so-called Stretch IRA provisions that have been contained in tax code for close to a decade now, permitted people that were named as beneficiaries of an IRA to withdraws their inheritance over their actuarial lifetimes, thereby keeping the majority of their funds in the IRA growing tax deferred.  Under the current proposal, that "gift" contained in the tax code would be removed, and beneficiaries would be required to withdraw the funds within 5 years of the owner's date of death, thereby accelerating the income tax owed on those previously tax deferred funds.  We all know that congress is looking for ways to increase revenue without looking like they are raising taxes.  Accelerating "income" by taking away the stretch may be an easy way for them to do it.  More info here.  Allowing the sunset of the current exemption for estate tax can't be far down the list.  After all, they won't be passing an increase, but simply allowing the law that was previously passed expire the way it was intended to when it was passed.