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Estate Plan Risk to the STRETCH-OUT for Inherited IRA’S

By Howard C. Stross
February 16, 2012


Is there a risk to your estate plan of losing the stretch out (regarding life expectancy) treatment for inherited IRAs? The U. S. Senate Finance Committee on February 7, released its proposed new tax legislation to curb the use of IRA stretch outs. The commentary below is on the proposal to make nearly all IRA plans distributable only under the “Five Year Rule.”

“Require Distributions of Inherited IRAs within 5 years.”

Under current law, holders of IRAs and 401(k)-type accounts are required to begin taking taxable distributions from those accounts once they reach age 70-1/2. However, they can stretch those distributions over many years if they leave their account to a very young beneficiary. When the account holder dies, the taxation of the account is then spread over the life of the beneficiary.

The Chairman’s Modification would require the retirement savings accounts to be treated, for tax purposes, as distributed within five years of the death of the account holder, unless the beneficiary is…

  1. the account holder’s age
  2. a child with special needs
  3. or older than 70.

This provision is estimated to raise $4.648 billion over ten years. You may access the Senate Finance proposal through the Senate’s website:

When you’re contemplating your IRA and your estate plan, please remember that this is not law – not yet.  Given that the folks in Washington D. C. appear to be seeking “revenue enhancements,” this proposal should be taken seriously when you discuss estate planning with your estate planning attorney.

What can you do?

Send messages to your Representative and Senators in Washington and tell them what you think of this proposal.  While this proposal may be kicked around in Washington for some time, this tax concept probably won’t go away.

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