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Sen. Reid Strips Stretch IRA Provision From Senate Bill

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Senate Majority Leader Harry Reid, D-Nev., has removed a controversial provision within a Senate highway bill that would have reduced the value of inherited IRAs, commonly referred to as stretch IRAs.

The bill, S. 1813, the Highway Investment, Job Creation, and Economic Growth Act, included 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 have only been permitted a five-year window to defer.

The provision would have also required beneficiaries to pay taxes on inherited IRAs over five years instead of spreading them over their lifetimes, and would have applied to deaths after Dec. 31, 2012.

Reid replaced the IRA provision with a “Pension Funding Stabilization” provision which said that defined benefit plan liabilities would continue to be determined based on corporate bond segment rates, which are based on the average interest rates over the preceding two years. However, beginning in 2012 for purposes of the minimum funding rules, any segment rate must be within 15% of the average of such segment rates for the 10-year period preceding the current year. This provision is estimated to raise just over $7 billion in revenue over 10 years.

Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee, added the IRA 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 have raised $4.6 billion over 10 years.