Please post an article on almost-repeal of the Stretch IRA

Home Fairmark Forum Retirement Savings and Benefits Please post an article on almost-repeal of the Stretch IRA

This topic contains 9 replies, has 5 voices, and was last updated by  neurodoc1@gmail.com 1 month, 1 week ago.

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  • #3324

    AMTbuff
    Participant

    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.

    #3325

    richc
    Participant

    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.

    Here’s the text: https://www.congress.gov/bill/116th-congress/house-bill/1994/text#toc-H084B5EBD76DF47C0B895121999E2270E

    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.

    • This reply was modified 2 months, 3 weeks ago by  richc.
    • This reply was modified 2 months, 3 weeks ago by  richc.
    #3329

    AMTbuff
    Participant

    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.

    #3330

    richc
    Participant

    Ahhhhhhhh! Thanks, AMTbuff!

    #3331

    Alan S.
    Participant

    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.

    #3334

    sonofagunk
    Participant

    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?

    Thanks

    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 part

    #3335

    Alan S.
    Participant

    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.

    #3473

    neurodoc1@gmail.com
    Participant

    At its simplest, what does, will, or might this mean for the individual with a solo 401(k) that has within it non-Roth and Roth components, who hopes to max the “stretch” for his/her non-spouse beneficiaries?

    If for example there is to be a $400K cap per beneficiary and $500K in 401(k) funds were left to an inheritor, then what result?

    The person with a 401(k) can invest in real estate without UBIT (UDFI) though the property they own has been mortgaged. When the property is inherited after the 401(k) owner dies, what happens to the gains – are they stepped up to the value at time of death? Under current tax law, What about the future tax treatment of the assets in the hands of the inheritor(s), e.g., will they be able to avoid UBIT if the assets in the 401(k) were acquired with Roth funds?

    Do solo 401(k) “die” with the principle? Can they continue for the life of the spouse, especially if spouse was covered by 401(k) too?

    Thanks for any answers.

    #3504

    Alan S.
    Participant

    The solo K with real estate holdings would have to be directly rolled into a self directed inherited IRA for a non spouse beneficiary, and that of course could result in UDFI issues in the IRA. There is no death basis adjustment in any retirement accounts but that would not matter for the Roth assets which should be qualified and tax free, except for UBIT related issues for which the inherited IRA must directly pay any taxes.

    A surviving spouse cannot own an inherited 401k, but if that spouse will continue the business they could elect ownership of the inherited IRA and then roll it into their continuing solo K if the plan accepts IRA rollovers. I don’t think this two step process can be abbreviated by avoiding an inherited IRA. If the surviving spouse closes the business, the solo K will have to be terminated within a few months and a 5500 filed.

    Given the provisions of bi partisan tax bills both limiting the non spouse stretch in various matters, the eventual beneficiaries need to be aware of the potential developments. Looks like the provisions will end up decided by a conference committee. The amount each beneficiary receives may or may not be factor in determining their eventual stretch.

    #3584

    neurodoc1@gmail.com
    Participant

    Alan, thank you for your answer to my question above about Roth and non-Roth assets in a 401(k) upon the death of principle. Too get it all clear, especially the tax treatment of real estate going forward in the hands of a non-spouse wife,
    may I continue?

    While the owner lived and held real estate in a Roth 401(k) account, he could mortgage the property and later sell it subject to that mortgage without paying UBIT, UDFI, or taxes of any sort on any gain over his original acquisition price. But if he died and the property went to a non-spouse beneficiary then? The death itself wouldn’t trigger any non-estate taxes, but the heir would be responsible for taxes going forward, no matter that the asset had been held as a Roth and will now be within a Roth inherited IRA? If the heir can pay off the mortgage the mortgage in full and wait >1 year to sell the property, then he/she will avoid UDFI on the gain? (I asked about “stepped up basis” because it seemed perverse that there would have been no taxes on any gain in property value during the plan owner’s life, but there would be big taxes if the property were subject to a mortgage and the gain in value were realized after it went to the non-spouse heir.)

    Would there be a much different result if upon the owner’s death, the property went to the spouse who had her own account in the same solo 401(k)? If the property had to go into a Roth IRA account [preserve the Roth!] before it transferred into the spouse’s 401(k) account, would any taxes be triggered on what had been and was to be a Roth asset? The spouse wouldn’t just figuratively step into the original owner’s shoes?

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