Posted on 14 February 2012
By Mark Miller
Inherited retirement accounts are truly one of those gifts that keep on giving because heirs can benefit for many years without much tax burden. But Congress is starting to talk about curtailing breaks on the accounts.
A revenue-raising proposal floated in the Senate Finance Committee last week would sharply limit the time allowed for the liquidation of inherited Individual Retirement Accounts (IRAs) and 401(k)s. Currently, heirs can choose between taking a lump sum distribution, or stretching out distributions over many years. Heirs who do take the longer-range distributions from these so-called “stretch IRAs” can, in turn, pass on the accounts to their own beneficiaries, allowing the assets to yield tax-sheltered returns for decades.
The Senate proposal would place a five-year limit on retirement account liquidations. The change would help finance a major transportation funding bill, raising $4.6 billion over 10 years by accelerating income tax due on assets coming out of retirement accounts. And it would grandfather in existing inherited accounts.
The idea appears to be going nowhere fast right now, but it could surface in future tax reform debates. The debate starts with a valid point about tax policy: The idea behind preferential tax treatment for IRAs and 401(k)s is to help people save for their own retirement, not to make long-term tax-advantaged gifts to heirs.
Learn more about how stretch IRAs work and how they can be used across generations in my column today at Reuters Money.