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Inherited IRA's Could See Changes With Obama Budget

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In his latest budget that was submitted to Congress, President Obama included 6 changes involving Individual Retirement Accounts (IRA’s), including Inherited IRA’s. So, why are Inherited IRA’s important? And how might these changes affect retirees?

Inherited IRAs (sometimes referred to as “stretch IRAs”) have been a wonderful way to pass on wealth to the next generation while preserving the tax-deferred compounded growth that is the main benefit associated with the traditional IRA.

There isn’t any way to know if this, or the other proposed changes, will become law, but it is worth being aware so we can be prepared. Today, I decided to focus on Inherited IRA’s because of the impact any changes may have on retirees and their children.

For instance, Sam has added money to his 401k plan throughout his 30-year career. Combined with the company match, he accumulated $1.5 million dollars by the time he retired at age 60. Sam rolled that money to an Individual Retirement Account and it continued to grow, even after he started taking required minimum distributions when he turned 70 ½.

Knowing that his wife would be taken care of in the event of his death, he names his 3 children as the primary beneficiaries of his IRA. Under current law, when he dies, each child has the option of only taking out the required amount based on their life expectancy. The rest can remain in the IRA and continue to grow tax-deferred. Assuming that the Sam’s child was 40 when he/she inherited the IRA, he/she could have another 30 years or more of tax-deferred growth.

Think about that: Sam deferred the taxes on his contributions to his 401k, taxes on the company match and the taxes on that growth for over 45 years assuming he dies at age 75. Then the 40-year old child can continue that deferral for another 30-40 years, but will have to take out required distributions each year. All told, it is possible for there to have been almost 80 years of tax-deferred growth!

With all the budget deficits and the current administration’s concept of Robin Hood ‘fairness’, it is easy to see why the government would want to find a way to get their taxes on the money in the IRA more quickly. Frankly, I can’t blame them—80 years is a long time to wait! Thus, they are focusing on Inherited IRA’s.

In the current budget that the Obama administration submitted, those inheriting an IRA would be required to drain the account by the end of the fifth year after the original owner’s death. That still leaves almost 50 years of tax-deferred growth in the example above—not bad.

If this becomes law, many retirees will want to revisit their beneficiary strategies to see if it might be worth making some changes and/or adjustments. And it is likely that this will not become law—Senator Max Baucus has tried to get this type of measure passed but hasn’t been successful. Still, it is worth keeping an eye on it and even contacting your Congressional members to let them know if you oppose it.

Common Sense Advisors does not offer investment advice via this medium. Under no circumstance whatsoever do these postings, opinions, charts, or any other information represent a recommendation or personalized investment, tax, or financial planning advice. Learn more about our firm at www.commonsenseadvisors.com

Twitter:  @JeffVoudrie

Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

The post Inherited IRA's Could See Changes With Obama Budget by Jeff Voudrie appeared first on See It Market.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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