Changes to the treatment of IRAs are the focus of the proposed SECURE act. Previously, we addressed a change to the timing of required minimum distributions from IRAs, the act proposing to make age 72 the new beginning date instead of age 70 ½. Since that time, much more attention and discussion has been given to the proposed treatment of inherited IRAs. For most beneficiaries, the new rule would require complete distribution of the IRA within ten years of the death of the IRA owner.
One objection to the proposed change is that it would adversely impact the long term and estate planning of some IRA owners who intend to allow their heirs to take advantage of the stretch IRA to take withdrawals from the inherited IRA over their life expectancies. This has provided a means for the IRA owners to take advantage of tax deferral and prolong that deferral until long after their deaths.
The obvious counter argument is that, as the name indicates, the IRA is a retirement account, with tax benefits granted to encourage workers to save for their retirements. It was not intended to be an estate planning tool to be leveraged to fund goals of members of future generations.
Regardless of who wins the argument here, it is interesting to note that the proposal seems to be one intended to reduce taxpayer gamesmanship on the federal level. Just as Congress reduced the amount of state and local taxes a person would be permitted to deduct from their federal taxable income, it appears that Congress here is reducing the ability of taxpayers to defer tax on income that won’t be used to fund their retirements. The outcry from some taxpayers and their advocates seems to be consistent here – those with substantial income and assets are finding some of their methods of reducing taxes will no longer be available and that is not acceptable to them. The fact that the rules may change is not unfair and an objective observer might well be excused for believing that the intent of the change is to ensure tax at the higher end of the income spectrum. The taxpayer does have the ability to arrange affairs to minimize taxes and no doubt will seek out and find alternative methods of funding estates and reducing the tax burden.