Permanent Value

Week in Review 7/29/13

Bruce Doole
July 29th, 2013

Maximum accumulation in retirement accounts

The President is proposing limiting the total amount an individual may hold in retirement accounts to a lump sum that can produce a lifetime annual annuity of about $200,000 at age 62. Under current conditions, this limitation would result in a maximum total retirement account balance of $3.4 million.

Under this proposal, at the end of each year, an individual would add up the total amount held in IRAs, Roth IRAs, 401(k)s and qualified pension plans. If the total exceeds $3.4 million, the holder would be required to remove from an account (and pay income tax on) contributions made during that year sufficient to bring the total account value under $3.4 million.

Because this proposal caught most people by surprise, the Hill has not had sufficient time to react to it. The retirement plan lobby is mounting a vigorous campaign in opposition. On balance, the proposal is unlikely to pass Congress, but it is too soon to say so with any sort of certainty.

Eliminate “stretching” of inherited retirement assets

Under current law, an individual who inherits an IRA or is a beneficiary on a qualified retirement plan (such as a 401(k) account) can choose to take payments over his or her expected lifetime. Amounts remaining in the IRA or retirement plan continue to accumulate tax deferred. This ability to “stretch” inherited retirement assets provides significant tax benefits.

The President would eliminate a beneficiary’s ability to withdraw funds from an IRA or retirement plan over life. Instead, all amounts would have to be withdrawn (and the associated income tax paid) within five years of the death of the IRA holder or plan participant. The rationale for this change is that a retirement account is intended to provide retirement income for the original holder, not for heirs.

The proposed rule would not apply to inheritances by a spouse. The rule would apply only to inheritances due to deaths that occur in 2014 or later. As written it would not apply to stretches of nonqualified annuity contracts.

The proposed change to stretch IRAs and retirement plans is a “loophole closer.” The prospects for passage are discussed in the section on loophole closers below.

Wealth Transfer Tax Changes

The “fiscal cliff” compromise reached at the end of 2012 “permanently” adopted the estate, gift and generation-skipping lifetime exemption amounts set in 2010, and indexed those exemptions for inflation. For 2013, the exemptions are set at $5.25 million. (These lifetime exemptions are in addition to the annual gift tax exclusion that in 2013 permits an investor to give away $14,000 to as many recipients as he or she wishes. This $14,000 exclusion, too, is indexed for inflation and will increase in future years.) The compromise also set the tax rate for the gift, estate, and generation-skipping taxes at 40% beginning in 2013.

“Permanent” means that the enacted provision has no explicit “sunset” date, where old rules automatically come back into effect. Nonetheless, Congress can always choose to change the tax law at a future date.

Coming so quickly on the heels of the fiscal cliff compromise, the President’s proposal is unlikely to pass Congress.


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