Friday Reading: Kill the Stretch IRA

By Harry Sit

Congress Fires Warning Shot At Stretch IRAs, Threatens 5-Year Rule For All by Michael Kitces at Nerd’s Eye View

A stretch IRA is an IRA inherited by a younger beneficiary, who then keeps the bulk of the money in the IRA for many years on end to enjoy tax deferred growth (hence "stretch"). Senate Finance Committee Chairman Max Baucus proposed to change the rule to make a non-spouse beneficiary withdraw the money in 5 years, with some exceptions.

Although the proposal is withdrawn for now, I support this change. An IRA is intended for a person’s (and his or her spouse’s) retirement. It’s not for inheritance. If a person died before he or she had the chance to use all the money, the IRA shield should just break open. The money should either go to the spouse’s IRA* or just become a taxable inheritance. Giving 5 years to a non-spouse beneficiary is already pretty generous.

* By spouse I mean the domestic partner too.

*****

Vanguard Spotlights Simplicity? from Oblivious Investor

Excellent guest post by Nisprius. I hope he will make a regular appearance at Oblivious Investor. My post scheduled for next Monday will also refer to an article by Nisiprius.

Investing can seem daunting for beginners. When you trim down the choices and make it simple, people will come on board easier. It’s a very smart move by Vanguard to focus on three core funds.

*****

Dependents can fund Roths, even if their parents can’t from Ask Liz Weston

Personal finance and credit score expert Liz Weston points out that as long as the kids have earned income, they can contribute to a Roth IRA even if they are still claimed as a dependent by the parents. Any income limit on the parents doesn’t matter, although the kids won’t be able to get the Saver’s Credit because they are claimed as a dependent.

Think high school and college students who work part-time. Parents just need to give the money to their kids. Of course only well-off families can afford to do so. Struggling middle class families have trouble finding money to fund their own IRAs let alone their kids’ IRAs. Well-off parents can also use the backdoor Roth. When it comes to saving for retirement, a higher income definitely helps in taking advantage of all the tax breaks, both for themselves and for their kids.

*****

The Keys to Managing Your Money for the Long Haul by Chris Farrell at Kiplinger.com

After a stock market crash everybody became a conservative investor. Safety became the No. 1 goal. I heard about this new framework of investing one pot in safe assets (TIPS and I Bonds) for basic needs and another pot for nice-to-have’s. Wade Pfau wrote about it in The Safety-first, Goals-based Approach to Financial Planning.

I received a review copy of Bodie & Taqqu’s new book Risk Less and Prosper. I will read it and tell you what I think about it.

*****

The Wrong Thing To Focus On When Re-Financing from Money Beagle

A timely article to remind those who refinance their mortgages not to focus on the difference in monthly payment. Part of the reduction comes from paying less on principal, which ends up costing more over time. However, don’t let it stop you from refinancing. You can just pay a little more than the required monthly payment to maintain the pay off date.

I have a whole series of posts on How to Refi.

Blog of the Week: Money Beagle

2.2% Rewards Card $444 Bonus

Earn 2.2% toward travel on all purchases with Barclaycard Arrival World MasterCard. No caps and no foreign transaction fees. 40,000 bonus points if you make $1,000 or more in purchases in the first 90 days. $89 annual fee waived in the first year (40,000 bonus miles pay for 5 more years after that). Learn More

Software picked, likely related posts:

Posted on February 17, 2012 under News. Keywords: , , , , .

Leave a comment

Comments

5 Comments on Friday Reading: Kill the Stretch IRA

  1. Money Beagle on February 17, 2012
     

    Wow, blog of the week! I’m honored! Thanks much and have a great weekend!

  2. White Coat Investor on February 18, 2012
     

    I disagree with getting rid of stretch IRAs. Changing the rules all the time sucks. Part of the reason I favor IRA and Roth IRA investing is for the estate planning benefits. A taxable account gets an estate planning benefit (step up in basis at death), so why shouldn’t an IRA? We don’t need to discourage saving for retirement any more than we already do.

  3. TFB on February 18, 2012
     

    @White Coat – It depends on whether the change is for the good or not. No reason to continue old bad rules. The middle class doesn’t have an estate to plan for. Estate planning benefits fall predominantly to the affluent and the rich. For that matter, I question why a taxable account must get a step up in basis at death. Only for convenience because the heirs can’t find records from the deceased? Those who have more money in IRA than they can use in their lifetime don’t need encouragement. They already seek out all the tax benefits they can get.

    I also see out all the tax benefits I can get, but I would have no problem with my beneficiaries paying taxes I didn’t pay, from the money I leave behind. If I used the money, I would’ve paid taxes anyway.

  4. David C on February 18, 2012
     

    My only real gripe with this particular attempt to kill so-called “stretch IRAs” is due to the fact that it was presented as a way to replenish the Highway Trust Fund (rather than do the right thing IMHO and raise the gas tax).

    Otherwise it actually sounded rather sensible to me… the exceptions they were proposing in particular meant that they were (are?) only trying to target multi-generational transfers (parent to child/grandchild/great grandchild).

  5. dd on February 18, 2012
     

    Perhaps a happy medium could be reached by using the 5-year withdrawal rule with inherited IRAs over $100K or another amount.

Tell me what you're thinking, but please don't spam. See comments moderation policy.