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Still has to pass the Senate. Sadly also making inherited IRAs be drained within 10 years. Hope that gets changed. Certainly not conducive to improved retirement savings if the inherited IRA has to be drained that fast.

IMO the faster drawdown of inherited IRAs will make Roth conversions all the more important for those of us who expect to pass on IRA money to the kids. I for one really hope this doesn't pass the Senate as it puts our kids in a more compromised position for retirement than we had hoped to leave them in.

IP
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Remember that taking money out of an IRA does not mean that you have to spend the money (except for the tax hit). Your heirs could simply move the money to a taxable investment account and continue saving for their own retirement.

—Peter
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Sadly also making inherited IRAs be drained within 10 years. Hope that gets changed. Certainly not conducive to improved retirement savings if the inherited IRA has to be drained that fast.

IMO the faster drawdown of inherited IRAs will make Roth conversions all the more important for those of us who expect to pass on IRA money to the kids.


Converting the money from a Traditional account into a Roth account before passing it on will just have the effect of having the original owner pay the taxes sooner instead of the beneficiaries paying taxes later. It won't negate the requirement to drain the account within 10 years, since Roth accounts are 'tax-advantaged' too. From the explanation of what the bill "means to you" https://www.wsj.com/articles/what-does-the-house-retirement-... (with my bolding):

If you inherit an IRA
You’d no longer be able to liquidate the balance over your lifetime and stretch out tax payments. Instead, if you inherit tax-advantaged retirement accounts after Dec. 31, 2019, you must withdraw the money within a decade of the IRA owner’s death and pay any taxes due. Exceptions include surviving spouses and minor children.


Net-net - by moving the money out of the tax-advantaged accounts sooner, the new rules will have the impact of providing tax revenue sooner, rather than later, so that Congress can spend more now.

I for one really hope this doesn't pass the Senate as it puts our kids in a more compromised position for retirement than we had hoped to leave them in.

Because of the revenue impacts, I doubt this will change. Congress is trying to mitigate the revenue impacts of the tax-advantaged accounts without having to do something more blatant like means testing.

AJ
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Converting the money from a Traditional account into a Roth account before passing it on will just have the effect of having the original owner pay the taxes sooner instead of the beneficiaries paying taxes later. It won't negate the requirement to drain the account within 10 years, since Roth accounts are 'tax-advantaged' too.

I understand this. However, at 24 Eldest is already in the 24% tax bracket, (28% based on 2017 rates which will return in 2026 unless steps are made to make current rates permanent,) that we are targeting for conversions. He is in a very hot market and been getting 15-20% annual raises which while unlikely to continue at that pace, are likely to continue at above average. He will pay much more in taxes on our TIRAs than we will by paying them now as planned, up to the 24% bracket. I would rather the money stay with the kids, not go to Uncle Sam. This was one of our original reasons for doing the conversions. Now that there is a risk that Eldest will have to pay taxes on the money with a restricted 10 year window rather than just on lifetime RMDs, that reason for conversion has magnified.

IP
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Converting the money from a Traditional account into a Roth account before passing it on will just have the effect of having the original owner pay the taxes sooner instead of the beneficiaries paying taxes later.

If the estate will incur estate taxes then converting to a ROTH has the advantage of decreasing estate taxes. Prepaying income taxes decreases the estate taxable amount.
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Moving the age up to 72 isn't that much of a change. For around half a 2 year deferral but for the other half only a year deferral.
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It also means that the option of doing a QCD from an IRA is also deferred to 72.
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If the estate will incur estate taxes then converting to a ROTH has the advantage of decreasing estate taxes. Prepaying income taxes decreases the estate taxable amount.

At least for Federal estate taxes, I doubt that pre-paying the taxes by doing Roth conversions would help much, unless the owners wanted to go way into the 37% bracket. Federal estate taxes don't kick in until $11.4MM if single, and $22.8MM if MFJ.

AJ
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At least for Federal estate taxes, I doubt that pre-paying the taxes by doing Roth conversions would help much, unless the owners wanted to go way into the 37% bracket. Federal estate taxes don't kick in until $11.4MM if single, and $22.8MM if MFJ.

Sure would be nice to that that problem!
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Federal estate taxes don't kick in until $11.4MM if single, and $22.8MM if MFJ.

Until 2026 and then the personal tax changes expire (but not the corporate tax cuts).
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inparadise: "Sadly also making inherited IRAs be drained within 10 years. Hope that gets changed. Certainly not conducive to improved retirement savings if the inherited IRA has to be drained that fast."

Spousal inherited IRAs?

Non-spousal IRAs currently have 5-year+ balance of year of death to be drawn, unless RMD's are started within 1 year after the end of the year of death.

So what, exactly, is changing?

Curiously, JAFO
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aj485

{{{Sadly also making inherited IRAs be drained within 10 years. Hope that gets changed. Certainly not conducive to improved retirement savings if the inherited IRA has to be drained that fast.

IMO the faster drawdown of inherited IRAs will make Roth conversions all the more important for those of us who expect to pass on IRA money to the kids.}}}

Converting the money from a Traditional account into a Roth account before passing it on will just have the effect of having the original owner pay the taxes sooner instead of the beneficiaries paying taxes later. It won't negate the requirement to drain the account within 10 years, since Roth accounts are 'tax-advantaged' too. From the explanation of what the bill "means to you" https://www.wsj.com/articles/what-does-the-house-retirement-...... (with my bolding):

If you inherit an IRA
You’d no longer be able to liquidate the balance over your lifetime and stretch out tax payments. Instead, if you inherit tax-advantaged retirement accounts after Dec. 31, 2019, you must withdraw the money within a decade of the IRA owner’s death and pay any taxes due. Exceptions include surviving spouses and minor children.

Net-net - by moving the money out of the tax-advantaged accounts sooner, the new rules will have the impact of providing tax revenue sooner, rather than later, so that Congress can spend more now."

More likely it is too offset the tax revenue losses from moving that starting RMD age back (to 72 [or 75] or whatever finally passes).

Query, does the change in the law grandfather those who started the lifetime, stretch before the law changed?

Curiously, JAFO
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Spousal inherited IRAs?

No, non-spousal IRAs. Spouses are exempt, and there are some other exceptions, like for beneficiaries who are disabled or minor children.

Non-spousal IRAs currently have 5-year+ balance of year of death to be drawn, unless RMD's are started within 1 year after the end of the year of death.

So what, exactly, is changing?


Even if you start RMDs within a year of the owner's death (which many beneficiaries do), the account still has to be drained within the 5 years (Senate version) or 10 years (House version).

If it's a small IRA, it's probably not a big deal. But if it's a mid 6 figure IRA (or more), the requirement to take the money out in 5 or 10 years is probably going to bump the beneficiary up a bracket or two, especially when you consider that the chained CPI is going to slow down inflation of the brackets.

AJ
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More likely it is too offset the tax revenue losses from moving that starting RMD age back (to 72 [or 75] or whatever finally passes).

Yes, that's exactly the reasoning that was given for this change in the articles I read.

Query, does the change in the law grandfather those who started the lifetime, stretch before the law changed?

For the House version, the effective date of this change will be IRAs inherited after Dec 31, 2019. I don't know the effective date for the Senate version, but I suspect that it has a similar effective date.

AJ
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aj485

<<<Spousal inherited IRAs?>>>

"No, non-spousal IRAs. Spouses are exempt, and there are some other exceptions, like for beneficiaries who are disabled or minor children."

Thank you.

<<<Non-spousal IRAs currently have 5-year+ balance of year of death to be drawn, unless RMD's are started within 1 year after the end of the year of death.

So what, exactly, is changing?>>>

"Even if you start RMDs within a year of the owner's death (which many beneficiaries do), the account still has to be drained within the 5 years (Senate version) or 10 years (House version)."

Thank you. Could one still wait the x years and then withdraw it all, as is possible under current rules?

"If it's a small IRA, it's probably not a big deal. But if it's a mid 6 figure IRA (or more), the requirement to take the money out in 5 or 10 years is probably going to bump the beneficiary up a bracket or two, especially when you consider that the chained CPI is going to slow down inflation of the brackets."

Retirement account balances, among certain other items, are not reported on FAFSA but are disclosed in the CSS/Financial Aid PROFILE, FWIIW.

Regards, JAFO
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aj485:

<<<Query, does the change in the law grandfather those who started the lifetime, stretch before the law changed?>>>

"For the House version, the effective date of this change will be IRAs inherited after Dec 31, 2019. I don't know the effective date for the Senate version, but I suspect that it has a similar effective date."

Once again, thank you.

Regards, JAFO
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Thank you. Could one still wait the x years and then withdraw it all, as is possible under current rules?

The summary of the SECURE act that I saw https://waysandmeans.house.gov/sites/democrats.waysandmeans.... said:

The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

The summary of the RESA act that I saw https://www.finance.senate.gov/imo/media/doc/RESA%20Summary%... said:

The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA account balances upon the death of the account owner. Under the legislation, the account balance is required to be distributed and included in income by the beneficiary by the end of the fifth calendar year following the year of the employee’s or IRA owner’s death. The requirement does not apply to distributions to the surviving spouse of the employee (or IRA owner) or to beneficiaries who are disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or the child of the employee (or IRA owner) who has not reached the age of majority. An exception to the five-year distribution deadline is provided for each beneficiary to the extent that the balance of the account they receive from the deceased employee or IRA owner does not exceed $400,000, valued as of the date of death. The modification limits the tax benefit for bequests of retirement savings, while protecting the needs of surviving spouses and certain other beneficiaries, and continuing to encourage retirement savings by beneficiaries of such accounts. The legislation also adds new reporting requirements on the account balances held by beneficiaries of deceased employees and IRA owners to ensure compliance.

Since neither one says anything about RMDs being required by beneficiaries, I would presume that as long as you empty the account in the required timeframe, you should be in compliance.

AJ
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Non-spousal IRAs currently have 5-year+ balance of year of death to be drawn, unless RMD's are started within 1 year after the end of the year of death.

So what, exactly, is changing?


In addition to all the great answers AJ provided, the elimination of the ability to pass on IRA assets to our kids to draw RMDs from greatly diminishes the value of IRAs for us. Will have to think this through and reconsider our recommendation that the boys contribute as much as they can to their IRAs/401Ks, and instead put the money in a taxable brokerage account in a tax efficient way. Since they are only dealing with Roths at this point, other than company match to 401K which is treated as a Traditional contribution, it may be less of an issue for them, but if you are a buy and hold investor, who has the discipline not to tap their retirement funds or need the lawsuit protection of the funds, I am not really convinced these accounts are now worth the restrictions and paperwork.

I guess I may as well get comfortable with the gov't coming after us savers to redistribute what we carefully saved to give to those who did not. It's the same thing with student loans. Having had student loans of our own, we saved to pay for the kids college so they didn't have to take out the loans that are now being discussed as possibly being forgiven. Someone has to pay for those bills though. It's not like the loan companies are going to eliminate the debt out of the kindness of their heart.

IP
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I guess I may as well get comfortable with the gov't coming after us savers to redistribute what we carefully saved ...

As long as the government continues to promote inflation, the government is already coming after we savers to redistribute what we have saved, mostly as subsidies to the military-industrial complex and the super-rich. After all, inflation is just a (poorly) hidden tax on our assets. And while we have little choice but to become accustomed to it, there is no reason to be comfortable with it.
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A somewhat unrelated comment,

Verify your beneficiaries whenever there is a major change (marriage, divorce, death in the family, change of administrator, etc..) and every few years.


An IRA or 401K that doesn't have a beneficiary or a living beneficiary goes to the estate which may trigger probate and fastest distribution than necessary.
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imparadise,

You wrote, Will have to think this through and reconsider our recommendation that the boys contribute as much as they can to their IRAs/401Ks, and instead put the money in a taxable brokerage account in a tax efficient way.

As far as I can your tell tax-advantaged accounts will still always perform at least as well as a taxable brokerage account, even if you have to plan on eventually withdrawing or converting the money in retirement. So I'm not sure why you would change this recommendation for your kids.

At most the RMD proposals Congress is considering simply encourage retirees to convert their traditional accounts to Roth (and pay taxes) as soon as is practical so as to avoid having their heirs inherit a large tax liability that has to be paid quickly. Once converted, your heirs have no immediate tax liability. They just have to take the distributions in a short time frame and invest the funds in a taxable account (or they can spend it) before the time limit.

Once the funds are in a taxable account they might start owing taxes on earnings or capital gains, but I think that's the kind of problem our kids should aspire to...

- Joel
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inparadise

<<<Non-spousal IRAs currently have 5-year+ balance of year of death to be drawn, unless RMD's are started within 1 year after the end of the year of death.

So what, exactly, is changing?>>>

"In addition to all the great answers AJ provided,"

I agree that aj's responses have been great, as she typically is.

"the elimination of the ability to pass on IRA assets to our kids to draw RMDs from greatly diminishes the value of IRAs for us."

Why? you response seems overly melodramatic to me.

You and your spouse still receive the same tax benefits while you are alive. Tax deferral and tax-deferred black box for all transactions therein, for a regular IRA and tax free growth in a Roth IRA (while you are alive).

For most people that is the lion's share of the benefit of such accounts.

And while I have not thought about it much, I am not certain that your boys will be worse inheriting a Roth IRA as opposed to a taxable account for which you have had to pays taxes every year on dividends and on profitable sale proceeds.

"Will have to think this through and reconsider our recommendation that the boys contribute as much as they can to their IRAs/401Ks, and instead put the money in a taxable brokerage account in a tax efficient way. Since they are only dealing with Roths at this point, other than company match to 401K which is treated as a Traditional contribution, it may be less of an issue for them, but if you are a buy and hold investor, who has the discipline not to tap their retirement funds or need the lawsuit protection of the funds, I am not really convinced these accounts are now worth the restrictions and paperwork."

Even most buy and hold investors receive dividends and occasionally sell a stock because of a change in fundamentals (or the need for capital for a better investment).

"I guess I may as well get comfortable with the gov't coming after us savers to redistribute what we carefully saved to give to those who did not."

The government was always going to receive taxes on the retirement accounts. All they are doing is marginally speeding up the timing, so the proposal is not some additional asset grab.

Long ago I suggested that people with ROTH accounts worry about (or at least not totally discount the possibility of) a change in law that start treating them like non-deductible traditional IRA accounts if the government was really looking for a big pot of funds to tax.

"It's the same thing with student loans. Having had student loans of our own, we saved to pay for the kids college so they didn't have to take out the loans that are now being discussed as possibly being forgiven. Someone has to pay for those bills though. It's not like the loan companies are going to eliminate the debt out of the kindness of their heart."

I suspect that it will be years before any federal laws are changed in the direction you are worrying about. Recall that the last changes to federal bankruptcy laws made student loans harder to discharge. Much of government, in general, but especially the republicans, are not likely to do any favors to for student borrowers.

In addition, your sons do not need to make payments on any student loans pending the change (if it ever happens) or worry about how much of their income is going to pay student loans and worry about which parts of life they are deferring because of student loan debt.

Regards, JAFO
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"the elimination of the ability to pass on IRA assets to our kids to draw RMDs from greatly diminishes the value of IRAs for us."
...
Why? you response seems overly melodramatic to me.


You are certainly entitled to your opinion, but the ability for the boys to take RMDs from inherited IRAs for the rest of their life was one reason why we put the money into IRAs in the first place. Shortening that time frame to 5-10 years is much less valuable to me or them.

And while I have not thought about it much, I am not certain that your boys will be worse inheriting a Roth IRA as opposed to a taxable account for which you have had to pays taxes every year on dividends and on profitable sale proceeds.

Unfortunately, most of our IRAs are Traditional, not Roth. So if we live a good long time and are able to do a significant amount of Roth conversions or spend down the IRAs, all is well and good, though no longer great. However, we try to plan for a hit by a truck scenario, which has increased in probability as in retirement DH and I spend so much more time together in the same vehicle. So there is an increased risk of the kids suddenly inheriting a significant amount of Traditional IRAs which if this law passes will have to be taxed within 5-10 years rather than over their lifetime. That will result in the govt getting way more money than had we simply kept it in a taxable account invested in individual buy and hold stocks or ETFs, which the kids would have inherited with a step up in basis, assuming that doesn't get changed too.

And it presents a difficulty for at least Youngest staying on target. We had recently had a discussion about inheritance with Youngest, telling him that we had no problem with his taking the RMD and spending it how he liked, but that we wanted him to take no more than the RMD. He understood that, was OK with it, (at least to our face,) leaving us with some sense that we could get away without setting up a trust and they would be OK with the RMD guidance. For several reasons I won't get into here, I am not a big fan of trusts.

Mostly am just sick and tired of the gov't changing the rules of the game in the middle of the game. Makes it darned hard to plan.

In addition, your sons do not need to make payments on any student loans pending the change (if it ever happens) or worry about how much of their income is going to pay student loans and worry about which parts of life they are deferring because of student loan debt.

You missed my point entirely. Our kids don't have student loans because from conception we saved money to pay for their school. And should student loans get forgiven we will no doubt have to pay higher taxes so that the families that didn't save enough to pay for college and took out loans will have to have taxpayers either pony up or forgive their debt that should be income to the gov't and in theory keeping taxes lower. I dealt with my own loans at 9%, and didn't want the kids choices after college limited by student loan debt. Now it looks like I also will get to pay for other kids student loans. So why did we save?

None of this is about encouraging savings.

IP
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It seems to me that people tend to forget a couple of things about IRAs.

1. The I stands for individual - no implication at all about inheritability.
2. It's not all the individual's money. A portion of it belongs to the government as taxes that have been deferred.

The inheritance rule of 5 or 10 years to unwind it seems generous to me. The inheritor acquires the asset value but the tax situation is not inherited. Their particular tax situation should apply to their inheritance as they gain it. Or conversely, the IRA could be unwound at the individual's death and be taxed according to estate tax rules.
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"...the elimination of the ability to pass on IRA assets to our kids to draw RMDs from greatly diminishes the value of IRAs for us. Will have to think this through and reconsider our recommendation that the boys contribute as much as they can to their IRAs/401Ks, and instead put the money in a taxable brokerage account in a tax efficient way. Since they are only dealing with Roths at this point, other than company match to 401K which is treated as a Traditional contribution, it may be less of an issue for them, but if you are a buy and hold investor, who has the discipline not to tap their retirement funds or need the lawsuit protection of the funds, I am not really convinced these accounts are now worth the restrictions and paperwork."

I really think that's an overreaction, at least to some extent. You don't want to throw out the baby with the bathwater. Especially for young people, a traditional 401(k) or similar company plans, or a traditional IRA, can be a valuable first step for retirement savings. It's a lot easier to get started on a pre-tax basis, to get that first critical mass of retirement capital, and also to earn the company match where applicable.

I suggest to take a deep breath and re-focus. A traditional IRA is designed and intended to enable YOU to accumulate funds for YOUR RETIREMENT. It was never intended to be a family wealth legacy fund. That's why RMDs were put in place to begin with.

I'll be 66 this year, so maybe I have 6 years before I make serious withdrawals from my "big" IRA (a rollover of my 401(k) plan.) I generally haven't taken money from it since my father died, shortly after I retired at 62. I inherited a substantial sum, and since then have just taken withdrawals from my regular brokerage account. I won't complain that the inheritance complicated things for me, but let's say it superseded some of my previous planning.

Among other things, I have an inherited IRA that I therefore have to take RMDs from already. One of the less desirable features of an inherited nonspousal IRA is that the RMDs come at a faster pace than a traditional IRA of your own. The annual divisor goes down by exactly 1 each year, instead of the 0.7 or 0.8 in the Uniform Table for regular taxpayers. The point is to distribute the full amount over your life expectancy, as it was at the point of inheritance. And if that goes to a 10-year required payout, the effect will be even greater, and not a optional thing, to the same extent.

So now I'm analyzing and contemplating the pros and cons of taking bigger amounts out of my inherited IRA before (now) age 72, when the RMDs on the "big IRA" will kick in. That probably sounds like it makes sense, but in the short term, I still don't like the idea of generating more taxable income than I need, when I may still be able to use IRA money to pay deductible LTC premiums and other medical expenses in the future. I still think that the double standard deduction may not be with us forever, which would probably have us deducting those items again.

Bill
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Two posters now have pointed out that the I in IRA stands for INDIVIDUAL, not inheritance. None the less, I did not invest in IRAs based on the name, but based on what the rules of the accounts were, which included being able to pass the account on to children with RMDs from year one. The gov't now under guise of making it easier to accumulate retirement funds are now going to eliminate a key point that triggered my investing in this type of account. And it's not the first time they change the rules after decisions have been made. When we retired early the ACA was to be our backup for healthcare should our retiree healthcare go away, or for me when DH hits 65 and switches to Medicare, rendering his retiree healthcare null and void. Medicare itself was the terminating factor for most companies that provided retiree healthcare, and the 401K/IRA no doubt contributed to the decline of corporate pensions. The availability of student loans is a big reason for the escalating cost of college. Lots of unintended consequences.

The only reason why the gov't is so willing to change these rules at will is because they do not play by these same rules. It's time they felt the pain of the changes they impose on others. Perhaps this way they would think things out more carefully and anticipate the unintended consequences of their actions. I realize this is not the board for this, and will not follow this line of discussion further, but yet again it bears warning on a tax strategies board that we live in a yo-yo state of gov't where the previous administrations mandates are likely to be reversed by the next, making long term strategy a crap shoot.

Will have to think this through and reconsider our recommendation that the boys contribute as much as they can to their IRAs/401Ks, and instead put the money in a taxable brokerage account in a tax efficient way.

...

I really think that's an overreaction...Especially for young people, a traditional 401(k) or similar company plans, or a traditional IRA, can be a valuable first step for retirement savings. It's a lot easier to get started on a pre-tax basis, to get that first critical mass of retirement capital, and also to earn the company match where applicable.


Really? Thinking something through is an overreaction? That does make you a much more conservative person than I. At 24 Eldest already maxes out his Roth 401K and IRA, in part because of my suggestion. Though he is already at the 24% tax bracket, given the industry he is in this is likely to be the lowest tax bracket of his life, so no TIRA/401K for him at this time. Yes, it's time that I think it through and possibly suggest he just does the 401K to company match, but because unlike us he has Roth 401K and IRAs at his disposal now, I have to think it through and discuss the options with him. Knowing the whole picture is important when giving advice.

So now I'm analyzing and contemplating the pros and cons of taking bigger amounts out of my inherited IRA before (now) age 72, when the RMDs on the "big IRA" will kick in. That probably sounds like it makes sense, but in the short term, I still don't like the idea of generating more taxable income than I need, when I may still be able to use IRA money to pay deductible LTC premiums and other medical expenses in the future. I still think that the double standard deduction may not be with us forever, which would probably have us deducting those items again.

Unless Trump's tax changes are made permanent, which IMO is unlikely in the above referenced Yo-Yo state of gov't, we revert back to 2017 tax law in 2026, so you are likely right about the future of the double standard deduction. We won't be subject to RMDs until after 2026 so the decision to convert to Roths is an easy one for us based on what we know today. And as I mentioned in a previous message on this thread, it becomes all the more important for us to do if this new law passes and the kids will have to draw down their inherited IRA over 5-10 years, since we would much rather they get the money than Uncle $am. Run your numbers, look at the data on hand.

IP
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inparadise:

<<<In addition, your sons do not need to make payments on any student loans pending the change (if it ever happens) or worry about how much of their income is going to pay student loans and worry about which parts of life they are deferring because of student loan debt.>>>

"You missed my point entirely."

No, I did not.

"Our kids don't have student loans because from conception we saved money to pay for their school."

Given that your sons do not have student loans, then everything I wrote above is true.

"And should student loans get forgiven we will no doubt have to pay higher taxes so that the families that didn't save enough to pay for college and took out loans will have to have taxpayers either pony up or forgive their debt that should be income to the gov't and in theory keeping taxes lower."

Higher taxes would be true even I you and your spouse had never had children; it is simply an argument about government spending that does not rely on you having (or not having) children.

And many student loans are not owed to the government.

"I dealt with my own loans at 9%, and didn't want the kids choices after college limited by student loan debt. Now it looks like I also will get to pay for other kids student loans. So why did we save?"

So that your children did not have their choices limited by student loan debt. So that there choice of school and/or major were not affected by student loan debt.

I had student loans, too, and recall the joy when they were finally paid back. And we were in a position to mostly avoid student loans by our children. But having money and options is almost always far better than not having money and having no, or very limited, options.

Regards, JAFO
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And as I mentioned in a previous message on this thread, it becomes all the more important for us to do if this new law passes and the kids will have to draw down their inherited IRA over 5-10 years,

I'm haven't taken a close look at the proposed law, but I would make sure to see if the RMDs in that law apply to only traditional IRAs or to both traditional and Roth IRAs. Even if you convert to Roth, they may need to withdraw over that 5-10 year period.

since we would much rather they get the money than Uncle $am. Run your numbers, look at the data on hand.

As far as Roth v Traditional, since you are planning to leave some portion to your children, make sure you look at your tax bracket today compared to the best guess of their tax bracket down the road. Given enough time between now and then, would they choose to retire shortly after inheriting? Or perhaps take a sabbatical from work? That could significantly decrease their tax bracket.

And don't forget to consider simply withdrawing the funds from the traditional IRA and moving them into a taxable investment account rather than converting the money to a Roth. Since you are planning on not using the funds and leaving them to your children, the step up in basis they receive could be serve to make most of the inheritance tax-free to them. And invested in long-term growth stocks that pay little or no dividends, there could be little or no tax impact to you while you hold the investments.

Just trying to toss a few ideas out there.

--Peter
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I'm haven't taken a close look at the proposed law, but I would make sure to see if the RMDs in that law apply to only traditional IRAs or to both traditional and Roth IRAs. Even if you convert to Roth, they may need to withdraw over that 5-10 year period.

Neither the summary of the SECURE Act (House version) https://waysandmeans.house.gov/sites/democrats.waysandmeans.... or the RESA Act (Senate version) https://www.finance.senate.gov/imo/media/doc/RESA%20Summary%... mentions any specific type of IRA or employer retirement account. Based on that, my understanding is that the 5 or 10 year distribution will be applicable to all IRAs and all qualified employer retirement plans that are inherited by non-spouses, including Roth accounts. There are some exceptions, such as for minor children or disabled beneficiaries.

AJ
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I'm haven't taken a close look at the proposed law, but I would make sure to see if the RMDs in that law apply to only traditional IRAs or to both traditional and Roth IRAs. Even if you convert to Roth, they may need to withdraw over that 5-10 year period.

...

make sure you look at your tax bracket today compared to the best guess of their tax bracket down the road.


I am assuming that it applies to both, but the only one of concern are the Traditional IRAs since taking the money out of the Roths would not impact their taxes. We are already planning to make conversions up to the 24% tax bracket because if we don't the RMDs at 70.5 would place us in the 28% tax bracket based on the 2017 brackets. And this assumes we are both still alive at that time and can do MFJ. Our RMD tax rate is worse if only one of us is living. Eldest is already in the 24% bracket, granted filing single but with no girlfriend in sight. If something happens to us early on and we don't get to spend down the IRAs, having to take the inherited IRAs over 5-10 years would put his taxes well over 24%. No idea where Youngest is going to land on the tax scale as he is not yet out of college. Will not likely be anywhere near Eldest's tax bracket because of the different majors. With the difference in tax brackets taken into consideration, if this law passes we will likely change the ratios of the IRA inheritance to max Eldest out on the Roths and give Youngest more of the Traditional, making up for the tax difference with more taxable funds or simply more total IRA money. That will require changes over the years but it is easy enough to change the beneficiaries on an IRA, unlike changing a will or a trust.

And don't forget to consider simply withdrawing the funds from the traditional IRA and moving them into a taxable investment account rather than converting the money to a Roth. Since you are planning on not using the funds and leaving them to your children, the step up in basis they receive could be serve to make most of the inheritance tax-free to them. And invested in long-term growth stocks that pay little or no dividends, there could be little or no tax impact to you while you hold the investments.

Just trying to toss a few ideas out there.


Appreciate the ideas. It's not so much that we are not intending to use some of the funds, but that if we get hit by a bus they will inherit it all. Like a chess player I try to plan three moves ahead. But I don't see the point of putting our funds into a taxable account rather than a Roth after paying taxes on it. There will be no taxes on distributions from the Roth for us or them, and when inherited they will at least have 5-10 years of continued tax free appreciation in the inherited Roth. IMO there is a greater chance that step up in basis on death will be eliminated and inherited assets will inherit the original owners basis.

Thanks for your post.

IP
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inparadise: "IMO there is a greater chance that step up in basis on death will be eliminated and inherited assets will inherit the original owners basis."

IIRC, that has previously been tried, and it was such a *#%* disaster that the rules were changed back pretty quickly.

Perhaps one of the resident tax pros will recall the details and exactly when it happened and was then changed back.

Regards, JAFO
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