The perils of long-term financial planning…

Frugal savers bulls-eyed as Congress move to end “stretch” IRAs.


According to a WSJ recap…

Conventional financial planning wisdom has been to put as much money as possible into IRAs and 401Ks … starting early, maxing plan contributions, benefiting from company matches, growing accounts tax-free … and, if you don’t end up spending all of the dough in retirement, pass anything left in the pot to heirs.


While that basic logic still holds, Congress is moving to throw a monkey wrench into the works by substantially increasing the tax burden on heirs.

Here’s what’s going on…


Currently, savings stashed in a traditional IRA are sheltered from income taxes until money is withdrawn from the accounts.

And, some or all of the money must be withdrawn over an account owner’s life, starting at age 70-1/2.

Under current tax laws, upon death, any money left in the IRA can be passed down to heirs (think: children and grandchildren) … who have to withdraw the money in installments over their projected lifetime … paying income taxes on their withdrawals.

Since the withdrawals are spaced over the heir’s projected lifetime, it’s called a “Stretch IRA”

There’s a big tax benefit (to the heirs) … if they leave the max money in the IRA (i.e. only withdraw the amount that the tax laws require) then the ITA continues to grow income tax free (until its withdrawn).

So, what’s the change?

Congressional wheels are in motion to require that any beneficiary heirs withdraw all of an inherited IRA in 10 years (or less) … not over their lifetimes.

So, the Fed’s income tax take is accelerated … and, much of the heir’s tax-deferral benefits are lost.

That may not sound like a big deal, but…

An analysis presented in the WSJ article estimates:

Assuming a  6% annual rate of return, a 25% average tax rate, and minimum required withdrawals …

Under the current-law, a 23-year-old heir of a $100,000 IRA could receive a total of $2.3 million (after tax) by stretching withdrawals over 60 years.

But, limiting the allowable withdrawal period to 10 years, slashes the nominal take $1.6 million … about a 30% haircut.

I haven’t independently validated the WSJ analysis … but, I’ll stipulate to it.

So, I conclude that that the tax law change is is a big deal … especially to potential heirs.

They might want to tighten up their financial plans!


For more details, read the entire  WSJ  article.


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