Congress Eyes New Rules For Inherited IRAs - Aaron Skloff, AIF, CFA, MBA - CEO Skloff Financial Group
February 11, 2012 – WEEKEND INVESTOR By Kelly Greene Congress Eyes New Rules For Inherited IRAsA surprise proposal in Congress to drum up tax revenue from inherited IRAs is raising eyebrows—and making some financialadvisers nervous.A Senate Finance Committee proposal floated this past week as part of a highway-funding bill would give heirs five years toempty inherited individual retirement accounts or 401(k)s, which would typically trigger income-tax payments. The rule changecould raise some $4.6 billion in income taxes over the next decade, according to a statement by Sen. Max Baucus (D., Mont.),chairman of the Senate Finance Committee."IRAs are intended for retirement," Sen. Baucus said at a committee hearing on Tuesday. "They are being used by some taxpayersto give tax-free benefits to second, third, maybe even fourth generations."Today, if you inherit an IRA or 401(k), you can stretch withdrawals across your life expectancy, meaning the assets couldcontinue to increase in value, tax-deferred, for decades while you withdraw a relatively small portion each year. Income tax is dueon distributions unless the inherited account is a Roth IRA.February 11, 2012 CommentsImagine you are at the seventh game of the World Series. It’s the ninth inning of the game and your team is two runs behind, witha score of 6-4. Your team’s slugger is at bat, with bases loaded and only one strike on his count. The opposing team’s pitcherdelivers a fastball right down the middle of the plate, but your team’s slugger swings and misses. The umpire yells, “Strike!”Although you are disappointed, you know his next swing will surely be a grand slam – clinching the World Series win.Out of nowhere the Commissioner of Major League Baseball yells, “Game Over!” You, everyone in the stadium and just abouteveryone around the world are convinced the Commissioner has lost his mind. The Commissioner explains, “In the middle of thegame I changed the rules from three strikes makes an out, to two strikes makes an out.” The Commissioner would likely beclassified as insane and his decision overturned.Does the Commissioner’s decision sound absolutely ridiculous? Not as ridiculous as the proposal Congress recently made tochange the rules on Required Minimum Distributions (RMDs) in the middle of the game. Congress, yes – the same Congress youvote in and out of office, has the gall to propose changing the rules on asset withdrawals that are already inside IndividualRetirement Accounts (IRAs). Their proposal would destroy one of the key benefits of IRAs, tax sheltering on remaining balancesafter your death. In the middle of the game Congress is proposing a mere five year window for heirs to take all remainingwithdrawals on inherited IRAs. Is Congress insane?One of the most powerful benefits of IRAs is the flexibility to stretch withdrawals over multiple generations. This stretch canfurther defer the taxation of traditional IRAs and further avoid the taxation of Roth IRAs – allowing your assets to grow on a taxadvantaged basis over multiple generations and simultaneously leaving a legacy. This was a key determinant in taxpayers’decision to contribute to IRAs and continues to be a key determinant for future contributions.Stop this insanity. Write to your congressman or congresswoman, your senators, and Senator Max Baucus (Democrat, Montanaand chairman of the Senate Finance Committee) demanding they remember who they work for – you. Remind them they cannotchange the rules in the middle of the game.Aaron Skloff, AIF, CFA, MBACEO - Skloff Financial GroupAaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration(MBA), is the Chief Executive Officer of Skloff Financial Group, a NJ based Registered Investment Advisory firm. The firmspecializes in financial planning and investment management services for high net worth individuals and benefits for small tomiddle sized companies. He can be contacted at www.skloff.com or 908-464-3060.