Extinction of the Traditional IRA?

[steelpony10]

       I saw a financial gypsy article looking into the possibility of raising initial RMD’s to age 75 after tinkering with the RMD tables recently.

       The Fed’s also have realized they lost all that revenue all those years in taxes and the boomers didn’t save enough. That system didn’t work so well. What to do?

        The solution may be to abolish the confusing RMD system requirements totally now for current retirees and phase out traditional IRA’s leaving the ROTH only.

         Future Fed’s get more tax money up front, retirees get to keep the whole harvest and the ten year rule at the back end gets even more money quicker to the government of the people.*

         * Of course the Fed’s will just blow through that also and leaving retirees with tax free money…well oh boy.

          

[Capital]

The 10-year forced withdrawal rule for IRAs of all sorts for most non-spouse beneficiaries has, in my opinion, already killed the Traditional IRA. I know that it has changed my approach to converting during my lifetime. I plan to convert all my Traditional IRAs to either taxable or Roth IRAs prior to my demise. At my childen's ages they will probably inherit in their most productive and most highly paid years of life. Forcing them to pay maximum taxes to get any Traditional IRA funds I might leave is hard for me to stomach. If I could have done so I would have put it all in Roth IRAs, paid the tax on the contributions, and paid no tax on the far greater amount that will be distributed. I am currently funding my children's Roth IRAs by gifting them the full amount that they can contribute. By giving them their own Roth IRAs, they will be able to keep those funds in a Roth much longer than those they will inherit.

[galeno]

The USA does so many things that just appear bizzaro to me.

No one appears to like them.

[Chahta]

I've heard that 75 age for RMDs kicked around. No disrespect, but why the obsession with inheritance? While I would welcome the rise in age for RMDs, it will only enable me to spend less and be more "growthful". I did my first Roth conversion this year and plan to convert as much as possible. If I outlive my mother, I will inherit a substantial amount and will use it to convert. At that point I will then have a horrible tax situation with a taxable account. But then again I should take my own advice to her; "Don't worry about taxes. Be glad you can pay them." Now I sound like steelpony10 . 


Capital , if you convert to taxable then you will be creating tax upon tax. If you convert to Roth it's done with 1 tax bill.


"The USA does so many things that just appear bizzaro to me."

galeno , it is because the "US" does things for themselves. Never for "us".

[anovice]

A good paper on the subject. One of the points I found interesting.

"The government’s intent in creating IRAs was to help prepare people for retirement—not help people build up vast inheritances for their beneficiar-ies.171 Once an IRA owner dies and the account transfers over to a beneficiary, it is no longer a retirement account; rather, it is a form of inheritance and therefore does not retain the intended function of an IRA"

lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=3934&context=bclr

[retiredat48]

Jan 29, 2022 21:21:47 GMT anovice said:

A good paper on the subject. One of the points I found interesting.

"The government’s intent in creating IRAs was to help prepare people for retirement—not help people build up vast inheritances for their beneficiar-ies.171 Once an IRA owner dies and the account transfers over to a beneficiary, it is no longer a retirement account; rather, it is a form of inheritance and therefore does not retain the intended function of an IRA"

lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=3934&context=bclr

Thanks for the link...I will read it.

Your post begs the question: "Fine, don't have IRA status for beneficiaries.  But why not have a step-up in basis at death like most other assets?  So one does not face income on top of personal (benefixiary) income, on the required 10 years of IRA liquidation."

R48

[Capital]

Jan 29, 2022 15:02:21 GMT Chahta said:

Capital , if you convert to taxable then you will be creating tax upon tax. If you convert to Roth it's done with 1 tax bill.

Chahta , I have no intention of converting from Traditional to Taxable. Only RMDs will be in my Taxable. Just to clarify.

[Chahta]

Seems to me that an heir should deplete the TIRA and use the taxed proceeds to fund their own Roth or accelerate their own Roth conversions. Possibly live off the proceeds and use their salary to max out 401k contributions, as long as they work.

[uncleharley]

I thought that under the Trump tax reduction we can inherit up to 250 million dollars tax free. Was this just a proposal that never passed?

[Capital]

Jan 30, 2022 13:48:00 GMT uncleharley said:

I thought that under the Trump tax reduction we can inherit up to 250 million dollars tax free. Was this just a proposal that never passed?

uncleharley , the problem is with Traditional IRAs. They are what IRS calls IRD Property - Income with Respect to the Decedent. This property is passed with no basis increase. When your beneficiary takes a distribution from these funds it is income to your beneficiary 100% unless you have basis to pass along due to prior non-deductible contributions - just as it would have been if you took the distribution in your lifetime. Since they must take this out within 10 years the income tax the beneficiary pays could be huge if your beneficiary is in a lofty income tax bracket. With a taxable account you pass the property at FMV and with a Roth your pass the property at the FMV when the beneficiary takes the distribution - possibly up to 10 years after death.

As for the Trump change you are referring to, I do not think anything like that passed - at least I am not aware of it is it did. What I do remember is an increase to $11M and change per person; however, this does not change the income tax rules for IRD property - only the estate taxation. Theoretically, for a large enough estate, you could pay the estate tax on the value of the Traditional IRA transferred at death and the beneficiaries could pay income tax when they take distributions from the inherited Traditional IRA. The top Estate Tax rate is 40% and the top Income Tax rate is 37% - a total of the two taxes being 87%. Granted this situation would only be for the super rich among us - but - it could occur. My whole thought process is to use my lower tax brackets in retirement to get dollars out of Traditional IRAs into Roth IRAs to save what could be a whole lot more in taxes to my heirs. To do so is a very complicated task because you have quite a few tax situations to deal with including (1) your income tax brackets, (2) your Medicare excess income brackets and (3) your Social Security taxation brackets.