Lawmakers’ attempt to raise tax revenue by curtailing stretch IRAs in the bipartisan Retirement Enhancement and Savings Act (RESA) will fail, and will actually result in lost revenue, argues IRA guru Ed Slott.
“I don’t agree that eliminating the stretch IRA would produce the billions in tax revenue that Congress thinks it will,” Slott told ThinkAdvisor in a Tuesday email regarding RESA’s provision that would limit “stretches” to aggregate account values under $450,000. “In fact, it will be a revenue loser!”
Why? If the stretch IRA were eliminated, “the government would be the big loser, since this would immediately stop the gravy train of Roth conversion money flowing into Uncle Sam from older people converting large IRAs for their children and grandchildren,” Slott said.
An IRA can be “stretched” when the account owner sets a young relative such as a grandchild as a beneficiary. When the account is inherited, the grandchild can opt to stretch out the life of the account by taking a much smaller required minimum distribution, in the case of a traditional IRA, or no RMD with a Roth IRA.
“Why would a 70-year-old pay the tax to convert [to a Roth] if the grandchild’s tax-free stretch Roth IRA period could be cut from 70 years to just 5 years? It wouldn’t be worth it.”
While Congress projects “several billion in new revenue from eliminating the stretch IRA,” Slott said, “that revenue will not materialize.”
Eliminating the stretch IRA “will cost the government a fortune, but Congress cannot see that — they rarely see the long-term impact on financial issues.”
On top of Roth conversion losses, eliminating the stretch IRA “will wake people up to do the planning they probably should have been doing all along. That means more IRA money will be withdrawn and leveraged to tax-free vehicles, like life insurance, that are even better than stretch IRAs,” Slott maintains.