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Retirement Planning > Retirement Investing

Retirement Bill Would Limit 'Stretch' IRAs

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A little-known provision in the bipartisan Retirement Enhancement and Savings Act (RESA) legislation includes a revenue-raising measure that would curb the tax deferral benefits of “stretch” IRAs, according to Andy Friedman of The Washington Update.

Friedman writes in a recent white paper that The Family Savings Act of 2018, H.R. 6757, which incorporates many of the RESA provisions and is part of the House Ways and Means Committee’s three-pronged “Tax Reform 2.0″ package, does not include the provision curtailing the availability of stretch IRAs that’s discussed in RESA.

The House Rules Committee plans to set the rule for debate Wednesday on the tax package with an expected House floor vote Thursday. But RESA has a far greater chance of being enacted, likely before the end of the year, according to Friedman.

Under current law, beneficiaries who inherit an IRA or 401(k) account upon the death of the account owner can choose to take payments over their expected lifetimes, Friedman explains, with amounts remaining in the retirement account continuing to accumulate tax-deferred.

“This ability to ‘stretch’ inherited retirement assets provides significant tax deferral benefits,” he said.

However, RESA would limit “stretches” to aggregate account values under $450,000.

“To the extent an individual’s aggregate IRA and 401(k) account value exceeds $450,000, the excess must be distributed (and the associated income tax paid) within five years of the death of the account holder,” Friedman writes, unless one the beneficiaries is:

  • the spouse of the deceased;
  • disabled or chronically ill;
  • less than 10 years younger than the deceased; or
  • a child of the deceased who has not reached the age of majority.

Friedman notes that there’s a chance the “stretch” provision could be dropped from the bill before RESA is enacted.

He added in his paper: “The Republicans did not propose to change the ‘stretch’ rules in similar legislation aimed at expanding retirement savings opportunities. If the ‘stretch’ change does remain in the RESA bill, we expect the rule to apply to distributions from retirement accounts held by individuals who die after the bill’s effective date.”

“There is always a chance that the stretch provision is dropped from RESA, particularly given that it is not included in Tax Reform 2.0,” Friedman told ThinkAdvisor on Monday. “If I had to bet, I’d say that the final RESA bill with retain the provision, but that is not definite.”

Friedman expects Congress to pass some version of retirement legislation before the end of the year, likely after the midterm election.

The Tax Reform 2.0 package, however, “has no path to passage through Congress” as the Senate will not take up the measure, Friedman opines. “The House Republicans surely realize this, but presumably put forth the proposal as the midterm election approach to remind voters of their ongoing determination to lower taxes.”

While President Donald Trump’s recent executive order opening the door to multiple-employer retirement plans and potential easing of required minimum distribution rules for retirement plans seeks to implement as much of RESA as possible without congressional action, Friedman notes, the administration “has only limited ability to make changes unilaterally.”

That said, the administration can “provide some relief, say, by reducing compliance burdens and updating the actuarial tables used to compute RMDs,” Friedman said.

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