Congress Seeks to Significantly Curtail Ability to “Stretch” IRA Accounts.

Todd Bartimole

In most cases an IRA account inherited by a child from a parent can currently continue to be held in a tax-free state, except that the child will be required to take required minimum distributions over their lifetime. This can allow significant tax savings to those inheriting IRA and retirement assets.

Brewing in the US Senate is a bill favorably reported out of the Senate Finance Committee to amend the IRC and ERISA laws entitled the “Retirement Enhancement and Savings Act.” Among other things, the act would repeal the maximum age to contribute to an IRA, and it would modify the required minimum distribution rules with respect to defined contribution plan and IRA balances held at the date of death of the account owner.

New Law Would Have Significant Impact on Retirement Accounts

The new law would require that where there is a deceased person with total collective balances over $450,000 in IRA and retirement accounts, distributions will be required to be made by the end of the fifth calendar year following the year of the employee or IRA owner’s death. This essentially ends the “stretch” on these types of retirement assets which is currently available.

Exempted from these rules are:

1. The surviving spouse of the employee or IRA owner,
2. Disabled or chronically ill individuals,
3. Individuals who are not more than 10 years younger than the employee or IRA owner, or
4. Any minor child of the employee or IRA owner.

If passed into law, the effect for persons with larger retirement accounts will be significant. Retirement assets account for approximately 35% of all household financial assets in the United States. The act would likely create significant income tax revenue to the US government, as it would represent a tax increase on many beneficiaries of retirement assets.

Contact Todd Bartimole, Attorney and Shareholder at Cavitch, Familo & Durkin with concerns regarding retirement plans and estate planning. Todd practices law primarily in the areas of Estate Planning, Elder Law and Disability and Special Needs Planning.

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