• Home
  • About Us
  • Toolkit
  • Getting Finances Done
    • Hiring Advisors
    • Debt Management
    • Spending Plan
  • Insurance
    • Life Insurance
    • Health Insurance
    • Disability Insurance
    • Homeowners/Renters Insurance
  • Contact Us
  • Privacy Policy
  • Risk Tolerance Quiz

The Free Financial Advisor

You are here: Home / Estate Planning / Unplug Grandma’s Life Support…Quick! Inherited IRA rules changing?

Unplug Grandma’s Life Support…Quick! Inherited IRA rules changing?

February 29, 2012 by The Other Guy 21 Comments

Why You Might Have the Awful Hope That Grandma Dies This Year.

According to this Wall Street Journal article, Congress is toying with the idea of getting rid of (or at least seriously modifying) Inherited IRAs.

Here’s why you should care: getting an inherited IRA is like winning the lifetime income lottery.

What is an Inherited IRA?

 

An inherited IRA is just what it sounds like – it’s an IRA that you didn’t start, i.e., you inherited it.  In most cases, when someone passes away, they’ll leave retirement accounts to their spouse, but sometimes those spouses are pre-deceased. In this case IRA assets fall down to the next (or sometimes the third) generation.

When you inherit a spouse’s IRA, the IRS allows you to convert it to your own, delaying any and all taxes until at least age 70 ½ (assuming you don’t remove the money to spend).  If your spouse is substantially younger than you, couples are allowed to treat it as an inherited IRA for tax purposes.

What are the Current Benefits of an Inherited IRA?

 

The major benefit is the ability for non-spouse beneficiaries to distribute those taxable dollars over the lifetime of the beneficiary.

Grandma is 68 and goes to what crazy uncle Jim called “that big tax shelter in the sky,” but leaves her $500,000 IRA to her 4 year old grandson.  Because the distribution is based on his life expectancy…around 80 years or so… if structured correctly it would provide him income for the rest of his life.

Apparently, the IRS and Congress think it’s too long to wait another 80 years or so to wring all the tax money from Granny’s IRA, so thye’re thinking about changing the law to require distributions from an  inherited IRA within 5 years of the original  account holder’s death.

Yikes.

That’s a change.

Thankfully, this isn’t anywhere near the President’s desk yet, but I wanted to put it on your radar screen…in case…you know…someone has a little “slip and fall.”

Don’t quote me later.

– TheOtherGuy

 

 

Enhanced by Zemanta
(Visited 229 times, 1 visits today)

Filed Under: Estate Planning, investing news Tagged With: Congress, Granny, Individual Retirement Account, inherited IRA, Internal Revenue Service, Life expectancy, rules changing, Tax

Comments

  1. PK says

    February 29, 2012 at 10:31 am

    A stealth tax which would never show up as a tax? You figure the odds on it making it through somewhere are pretty high. Just like my cynical thoughts on the provisions of SOPA/PIPA – they will show up eventually, either through HR 1981 or tacked onto some other bill.

    How about a Roth? Still looking the same?

    Reply
    • Average Joe says

      March 1, 2012 at 8:24 am

      Right, PK! Like social agenda items tacked onto a highway bill….

      Reply
  2. WorkSaveLive says

    February 29, 2012 at 12:30 pm

    Nobody really wants to raise taxes on the “middle” or semi-upper class, so the government is going to continue to find ways to increase taxes with most people not knowing.

    This rule change. Getting rid of the mortgage interest deduction…talks about not allowing charitable contributions to be deducted.

    It’s all ridiculous. The fact is that taxes will go up one way or another. It’s just how they package it.

    Reply
    • Average Joe says

      March 1, 2012 at 8:23 am

      Jason, it reminds me of the boiling frog analogy. Nobody feels a thing as the water gets hotter and hotter.

      Reply
  3. Roshawn @ Watson Inc says

    February 29, 2012 at 1:43 pm

    This is yet another example of how taxation can be simply ridiculous. Why are we robbing Junior of his inheritance?

    Reply
  4. SB @ FPR says

    March 1, 2012 at 7:42 am

    Actually the current law allows tax free money for heirs. So, I am not surprised by this move.

    Reply
    • Average Joe says

      March 1, 2012 at 8:40 am

      You’re correct in one way, SB, but this is a different animal. Here’s what I mean:

      People DO have a $5M unified tax credit exemption for estate and gift taxes. That covers any estate tax liability, and as you’ve said, passes items “tax free” (as far as estate tax goes).

      However, this is an INCOME tax, which is a different beast. Money inside an IRA is taxed when it leaves the tax shelter.

      Estates suffer a DOUBLE whammy because they’re hit with estate and income tax. In fact, the funny part? Estate taxes are levied on the gross amount, before income taxes are applied, allowing the government to tax money that’s already being paid to them to cover other taxes.

      Reply
  5. Hunter - Financially Consumed says

    March 1, 2012 at 12:09 pm

    As long as they don’t change the rules on my Roth IRA, they can wring as much tax as they want out of inherited investments.

    Reply
    • TheOtherGuy says

      March 1, 2012 at 1:05 pm

      Well, Hunter, therein lies part of the issue: If they’re going to sneak in and take away this little break – how long before they realize the Roth concept is flawed too and take that away? Plus, one of the benefits of leaving a Roth IRA to a beneficiary is that money continues to grow tax-free forever; so even though they require RMDs from Roth IRAs for beneficiaries, the RMD amount is so small – the Roth can be left growing tax free for a long time; if they shorten that to 5 years, then that money will be out of that tax-shelter much sooner.

      Reply
  6. Evan says

    March 1, 2012 at 12:22 pm

    I got into the financial industry post 2006 but wasn’t this actually the law at one point already?

    Reply
  7. Christa says

    March 1, 2012 at 3:46 pm

    Hmmm, a fall could be arranged…

    Great info — I’ll be sure to stay away from estates and set up an inherited IRA.

    Reply
    • Average Joe says

      March 1, 2012 at 5:46 pm

      It’ll be our secret, Christa!

      Reply
  8. Blogoday says

    March 2, 2012 at 4:22 am

    You are today’s Blogoday! – This means that Joe will be following through with a stunt involving running around in his underwear 😉

    Reply
  9. Darwin's Money says

    March 2, 2012 at 8:37 pm

    I know with the inheritance tax limits and sunset provisions jumping around each year it must have put the idea in a few peoples’ heads! Amazing (and disturbing) what a motivator money can be.

    Reply
  10. Buck Inspire says

    March 6, 2012 at 2:27 am

    Death and taxes right? Going after Granny’s IRA, too? The humanity!

    Reply
  11. YFS says

    March 6, 2012 at 5:35 pm

    Now that’s some grade a horse crap. 5 years! That’s ridiculous! I am willing to bet the ROTH IRA tax free gains will come underfire next.

    Reply

Trackbacks

  1. FPR Weekly Roundup of Great Reads | Finance Product Reviews - Be Informed says:
    March 3, 2012 at 12:49 am

    […] Free Financial Advisor discusses about changes in inherited IRA rules […]

    Reply
  2. Friday's Circle of Friends - March 2 - The Late Edition | Tackling Our Debt says:
    March 3, 2012 at 4:52 pm

    […] Free Financial Advisor wrote about changes in inherited IRA rules […]

    Reply
  3. Carnival of Money Pros – 2nd Edition - Passive Income to Retire says:
    March 4, 2012 at 5:37 am

    […] Free Financial Advisor writes Unplug Grandma’s Life Support…Quick! Inherited IRA Rules Changing? – According to a piece in the Wall Street Journal, Congress is eyeing changes to the Inherited […]

    Reply
  4. The Worst of the Free Financial Advisor Podcast – Episode 1: A Big Reveal, College Planning Tips & Tricks & Meet the Roundtable - The Free Financial Advisor | The Free Financial Advisor says:
    March 12, 2012 at 2:26 pm

    […] Our discussion on possible inheritance IRA law changes. […]

    Reply
  5. {enalapril persistent dry cough|enalapril uso clпїЅnico|enalapril call doctor|valium enalapril|enalapril color pill|vasotec vs norvasc|vasotec monopril} says:
    July 18, 2014 at 9:04 pm

    trackback

    Can I simply say what a aid to find someone who truly knows what theyre speaking about on the internet. You definitely know learn how to deliver a problem to mild and make it important. More folks must learn this and perceive this side of the story. I…

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

FOLLOW US

Search this site:


Recent Posts

  • How long should you keep financial records after a death? by Jacob Sensiba
  • Can My Savings Account Affect My Financial Aid? by Tamila McDonald
  • What Advantages and Disadvantages Are There To… by Jacob Sensiba
  • How to Recover Pay Stubs From Your Old Job? by Susan Paige
  • How to Avoid NJ Exit Tax by Jacob Sensiba
  • When Are Manufactured Homes a Good Investment? by Tamila McDonald
  • Appreciating vs. Depreciating Assets by Jacob Sensiba

Copyright © 2022 · News Pro Theme on Genesis Framework