Pending legislative changes to RMDs for inherited retirement accounts

[Nothlit]

I know it's always good to take pending legislation with a grain of salt, but press coverage has been ticking upward lately regarding the parallel bills in the House ("SECURE Act") and Senate ("Retirement Enhancement and Savings Act") which would make several changes to treatment of retirement accounts (both employer plans and IRAs). Of particular note to me is that RMDs for inherited accounts can no longer use the life expectancy method for the beneficiary (except in certain limited cases like spouses, disabled beneficiaries, etc.). Instead, under the House bill, the remaining balance must be fully distributed within 10 years of the original owner's death. Under the Senate bill, as best I can tell, any amount over $400,000 must be distributed within 5 years.

If I'm understanding this correctly, these changes have the potential to increase the tax burden on beneficiaries by forcing them to withdraw more than they might otherwise want to in a shorter period of time, potentially forcing some portion of the distribution into a higher tax bracket.

Summary of the House bill: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf

Text of the House bill: https://www.congress.gov/bill/116th-congress/house-bill/1994/text (pertinent changes in Section 401)

Text of the Senate bill: https://www.congress.gov/bill/116th-congress/senate-bill/972/text (pertinent changes in Section 501)

If you have concerns about these possible changes, now would probably be a good time to contact your representatives.

[MDM]

At a quick read, section 401 of the House and 501 of the Senate seem directed only at employer plans, not IRAs.

Have you read in more depth and see reference to IRAs?

[beltim]

I think you missed this clause:
“(iv) APPLICATION TO ELIGIBLE RETIREMENT PLANS.—For purposes of applying the provisions of this subparagraph in determining the amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in section 402(c)(8)(B)) other than a defined benefit plan shall be treated as a defined contribution plan.”.

Useful references:
section 402(c)(8)(B)):

(B) Eligible retirement plan
The term "eligible retirement plan" means-
(i) an individual retirement account described in section 408(a),
(ii) an individual retirement annuity described in section 408(b) (other than an endowment contract),
(iii) a qualified trust,
(iv) an annuity plan described in section 403(a),
(v) an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), and
(vi) an annuity contract described in section 403(b).

408. Individual retirement accounts
(a) Individual retirement account
For purposes of this section, the term "individual retirement account" means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:
(1) Except in the case of a rollover contribution described in subsection (d)(3) or in section 402(c), 403(a)(4), 403(b)(8), or 457(e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section 219(b)(1)(A).
(2) The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
(3) No part of the trust funds will be invested in life insurance contracts.
(4) The interest of an individual in the balance in his account is nonforfeitable.
(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.
(6) Under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest of an individual for whose benefit the trust is maintained.

[MDM]

Great, thanks for the tour down the rabbit hole!

[ixtap]

If you or your heirs are so concerned about tax rates, you can always give more to charity.

[walkwalkwalk]

If you or your heirs are so concerned about tax rates, you can always give more to charity.

...Through Qualified Charitable Distributions (QCDs)

[beltim]

If you or your heirs are so concerned about tax rates, you can always give more to charity.

Not sure how this is a useful or productive comment.  Do you say the same thing to people discussing tax increases?

[walkwalkwalk]

If you or your heirs are so concerned about tax rates, you can always give more to charity.

Not sure how this is a useful or productive comment.  Do you say the same thing to people discussing tax increases?

Their quote wasn't that productive but my other comment made it more productive, so its fine.

[ixtap]

If you or your heirs are so concerned about tax rates, you can always give more to charity.

Not sure how this is a useful or productive comment.  Do you say the same thing to people discussing tax increases?

Their quote wasn't productive by my other comment made it productive, so its fine.

I do often suggest charitable donations to people who are complaining about their taxes, in a variety of situations. It is an effective way to reduce your taxes. In this case, it is just a round about way of commenting that even the proposed rules are quite generous.

QCD's are just one way of doing so, since you could leave your entire IRA to a charitable organization, thus relieving your heirs of any potential tax burden.

Besides, if this were bogleheads, we wouldn't be able to discuss proposed legislation at all, so productivity of comments would be a moot point.

[MustacheAndaHalf]

I do often suggest charitable donations to people ...  you could leave your entire IRA to a charitable organization, thus relieving your heirs of any potential tax burden.

Are you giving tax advice to people with 8-figure estates?
Currently estates worth less than $11,000,000 pay no taxes. 
Donating to charity doesn't seem that relevant before asking if someone's assets will exceed $11 million dollars.

[ixtap]

I do often suggest charitable donations to people ...  you could leave your entire IRA to a charitable organization, thus relieving your heirs of any potential tax burden.

Are you giving tax advice to people with 8-figure estates?
Currently estates worth less than $11,000,000 pay no taxes. 
Donating to charity doesn't seem that relevant before asking if someone's assets will exceed $11 million dollars.

The subject was RMDs, not estate taxes. If there is no inherited IRA, there is no RMD, thus no tax on it. Likewise, the RMD can be donated, and so no taxes would be owed it.

[FIREchiefsr]

I believe that some very similar proposals passed subcommittees four years ago (i.e. the last "year before" a presidential election).  Those died on the vine, and I'm hoping these do the same.  We'll see.  They seem to want people to save for retirement but they also want to grab a large piece of the pie if somebody who has played by the rules dies early in retirement.

[cashstore]

I'm doing what I can about it now.  Had an appointment to do some tax planning with mom and her financial advisor on Friday.  The obvious game is to start converting her IRA to Roth now, before the Trump tax cuts phase out. 

We won't be able to convert them all, but as far as I'm concerned if we can get the IRAs down to less than $400k before I inherit I personally wouldn't even be worried if they required me to convert them all in 5 years.  I'm still pretty damn tax efficient at $80-$90k per year.  For sure my effective rate will be less than hers while earning it.

Just my thoughts.

[DaMa]

Thanks for the heads up.  I've been debating converting my IRA to Roth up to the 12% tax bracket in the next 3 years, rather than staying at 10%.  This adds weight to just paying the extra 2%. 

[BTDretire]

Thanks for the heads up.  I've been debating converting my IRA to Roth up to the 12% tax bracket in the next 3 years, rather than staying at 10%.  This adds weight to just paying the extra 2%.

I'm just now trying to tax plan by doing Roth conversions while staying in the 12% bracket.

Re: Other posts about people trying spend less on taxes and then being told to just donate it to a charity. No, they are trying to save on taxes so they will have the money themselves. It that so hard?

[Nothlit]

Looks like the SECURE Act is on the verge of passing since it was attached to a current must-pass spending bill to avoid a government shutdown:

https://www.sfchronicle.com/business/networth/article/Big-changes-looming-for-IRAs-401-k-plans-under-14913978.php

It will do away with lifetime RMDs ("stretch IRA") for most non-spouse beneficiaries, instead requiring the inherited accounts to be fully distributed within 10 years.

[LightStache]

I'm doing what I can about it now.  Had an appointment to do some tax planning with mom and her financial advisor on Friday.  The obvious game is to start converting her IRA to Roth now, before the Trump tax cuts phase out. 

We won't be able to convert them all, but as far as I'm concerned if we can get the IRAs down to less than $400k before I inherit I personally wouldn't even be worried if they required me to convert them all in 5 years.  I'm still pretty damn tax efficient at $80-$90k per year.  For sure my effective rate will be less than hers while earning it.

Just my thoughts.

Yep there's always a way to strategize. If I inherit a large traditional retirement account I'll just suspend my own conversions for those years and suspend/defer my own compensation -- thanks for the vacay dead relatives! I can't complain about getting a fat inheritance and paying tax on a tax-deferred account.