May 24, 2019 at 5:11 pm #3324
Kaye, the almost-repeal of the Stretch IRA benefit buried in the SECURE act is flying under the media’s radar. Please enlighten us with your perspective and recommendations.
Off-topic, I decided to convert enough traditional IRA money to Roth last December to max out the 24% bracket. This week I learned that this tactic is so common it has a name: bracket-filling. At the top of the 24% bracket even a California resident saves money compared with pre-2018 tax rates. I plan to repeat this tactic every year until the tax rates increase.May 24, 2019 at 5:28 pm #3325
Are you sure about that, AMTbuff? I thought so too, but when I read the actual text that passed the House it is not at all clear to me that the change applies to IRAs.
Sec. 401 of the bill has the language about limiting stretch to 10 years. However, that limitation appears to be entirely in the context of defined contribution plans. It starts: SPECIAL RULES FOR CERTAIN DEFINED CONTRIBUTION PLANS.—In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest — note that it refers to “employees”. And the text of that part of the bill talks about amending IRC 401(a)(9), which is all about “Qualified pension, profit-sharing, and stock bonus plans”.
It’s my understanding that IRAs are not any of those and so it appears to me that the stretch limitation actually passed doesn’t touch IRAs.May 24, 2019 at 6:50 pm #3329
It’s sneaky. Section 408(1)(6), the IRA provision, points back to 401(a)(9) for after-death rules:
408(1)(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.May 24, 2019 at 8:07 pm #3330
Ahhhhhhhh! Thanks, AMTbuff!May 24, 2019 at 8:50 pm #3331
The stretch is probably going to limited for non spouse, but the Senate bill differs considerably from the House bill, so these two bills will have to go to joint committee to resolve the differences. The end result will either by a higher dollar exemption and 5 year stretch or no exemption and 10 year stretch. Or some combination thereof. At this point, additional complexity appears inevitable when the IRS and financial industry were not able to effectively administer the prior rules. Of course, we will also likely get new enforcement pledges from the IRS. The financial industry is backing these bills, and perhaps that indicates they will not be saddled with too much more reporting.May 25, 2019 at 1:57 pm #3334
Yea, still waiting for things to settle, but I have a general question about when they talk about limiting by size of the account. When they say $450k limit, do the refer to the account of the deceased or the account of the beneficiary? $800k account split between 2 beneficiaries, is that 1 $800K account or 2 $400k accounts?
And if you do an article on stretch (obviously after the law passes), please include a part of its affect on FAFSA (and if the account is the parent’s or the student’s). Lots on confusion on that partMay 25, 2019 at 5:59 pm #3335
Under Sec 501 of the RESA bill in the Senate, the dollar limit was 400,000 for each beneficiary. In your example, if each beneficiary received 400,000 or less they could still stretch their inherited IRA account. But if a beneficiary inherited 400,001 or more valued on the date of death, the 5 year rule would apply. Note that if the value was over 400,000 on date of death, but had fallen to 350,000 by the time the beneficiary found out about the account and submitted the paperwork, the 5 year rule would still apply. The house bill is totally different, so who knows what the compromise provisions will be.
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