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IRA: Retirement or Succession?

There is much ado in the financial world concerning various proposals to curb the use of the stretch IRA approach and otherwise change the current rules. Pundits decry the “devastating consequences” to some IRA owners if the changes are approved by Congress. Specifically, the Secure Act proposal would require complete distribution from many IRAs within ten years of the IRA owner’s death.
While this might seem hard for a person who planned to leave their IRAs to younger generations, letting them face the income taxes as and when they took distributions, a closer look suggests otherwise. First and foremost, the IRA has not been around all that long and, as its name indicates, was intended to facilitate saving for retirement by allowing workers to defer taxes on their contributions to qualified plans such as the individual IRA. This primary goal of the IRA is not affected by the proposed legislation which will continue to encourage workers to save money in an IRA while benefitting from tax deferral until such time as they take distributions.  The IRA during the contributing owner’s lifetime remains unaffected.
Another aspect of the IRA was the use of a stretch IRA which allowed the inheritor(s) of the remaining funds in the tax deferred account to continue deferral over their lifetimes while taking required minimum distributions which, of course, were subject to income taxation. This clearly has little to do with retirement and so we now see the proposals to limit the use of this technique.
The commonly heard argument that enactment of the proposals will wreak devastating damage to the plans of account owners seems very weak. The proposals would exempt account values below $450,000 as well as providing other exemptions for certain individuals and situations. This means the impact of the earlier taxation/limitation on the stretch would fall primarily on the wealthy who have accumulated large sums in their accounts while not paying taxes and then would wish to continue to defer taxes after their deaths. Why endorse a rule which benefits only the wealthy and abuses the intent of the IRA to fund retirement and not future generations?


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