Industry trade groups are up in arms over a provision in a Senate highway bill that would reduce the value of inherited IRAs, commonly referred to as stretch IRAs, and are determined to have it removed.
The bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, includes a provision that would no longer permit tax deferred stretches of IRAs for beneficiaries other than a spouse, minor children or the disabled. Others, such as adult children, would only be permitted a five-year window to defer.
The provision would require beneficiaries to pay taxes on inherited IRAs over five years instead of spreading them over their lifetime. If passed, the provision would apply to deaths after Dec. 31, 2012.
The proposal is designed to reduce the value of a tax-planning technique that allows inside buildup of tax-deferred funds inside inherited retirement accounts.
Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, added the provision on Feb. 7 during markup of the bill by his committee, but after pushback he promised to have the provision removed.
During the markup of the bill, Baucus said that “IRAs are intended for retirement,” adding that IRAs are being “used by some taxpayers to give tax-free benefits” to future generations. The taxes from the stretch IRAs provision was to be used to help pay for the highway bill, and would raise $4.6 billion over 10 years.
As it stands now, the provision was adopted by Baucus’ committee and remains intact in the highway bill, which awaits action by the full Senate. Once taken up by the Senate, industry officials believe that the IRA provision will be replaced with one that raises the funds by changing the way assets are valued in defined benefit plans.
Judy Miller, chief of actuarial issues at the American Society of Pension Professionals and Actuaries, says that the new provision would likely “reduce the current required contribution to defined benefit plans; when you do that there are fewer deductions taken so it raises money.”