Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I was under the impression that the fundamental reason for IRA and other tax-deferred accounts was to encourage people to save for their own retirement needs.
It would appear that they have been perverted into yet another slimy mechanism to basically avoid the payment of taxes by heirs who had absolutely no part in accumulating these tax-DEFERRED vehicles.
You'll excuse my cynicism if I suggest that this sort of maneuver is most likely to be exploited by the 1% rather than the 99%.
"Was this a maneuver to exploit paying their fair share?"
Since you invite me to be the judge, I'd say definitely. You'll never hear me suggest that slimy financial practices are the exclusive province of one particular political group or another. We both know that ain't so.
As Mr. Romney said, he doesn't pay one dollar more "than he has to". The issue here is with the tax code, of course, not with the taxpayer. Would it be too cynical of me to suggest that one reason the tax code is as convoluted as it is is is because folks like the Kennedy's and the Romney's had quite a hand in making it that way?
It's not all that hard to sneak in a seemingly innocuous tax provision into some (frequently) completely unrelated bill, and then later claim that it's "legal" to follow that provision. Multiply that one example times many, many provisions and many, many years and many, many high-powered tax lawyers and it's no wonder that the 1% pays less, as a %, than the rest of us.
The same thing applies to our industrial tax base. We keep hearing how, at 35%, the US has "one of the highest business tax rates in the world". What's NEVER mentioned is that virtually NO business EVER pays at that rate (that sneaky ol' tax code, again), and when the smoke clears, they pay at a rate much less than "the rest of the world".
It's all a game, and the 99% are not going to win.
Well, without trying to design yet more tax loopholes, I would basically think that if you must pay an inheritance tax, than surely there should be an offset to eliminate or reduce further taxes.
With respect to the Baucus tax proposal specifically: • a) The proposal was only to "require younger beneficiaries to pay taxes over five years instead of spreading them over their lifetimes." • b) It isn't going to get off the table, and of course he well knows that.
"But hey, we have to fund our highways, don't we?"
Well, yes we do, if we want to have them. And if there isn't enough money in the highway funds to do that, please pick one of the following:
• Raise (Gasp!!) the highway/fuel taxes to the level necessary to do what needs to be done.
• Take the money from someplace else. Maybe the good ol' elusive "waste and spending" pocket (if anyone can ever actually find that).
• Borrow the money- hell, let the kids pay for it later. (They'll have the money because we'll leave it to 'em in untaxed retirement accounts).
• Forget it, let the national transportation infrastructure continue to decay.
There's no free lunch. Either pay the tariff to live in a first world country or move to a place with no taxes, no government, and not much of anything else either.
One of my best friends has a perspective virtually identical to the one which you consistently express.
Very unfortunately, one of his grandchildren has severe cognitive difficulty. Our public education system therefore spends a significant amount of money to provide the special education resources necessary to help with this child. This kind of specialized help is generally not available from private schools, and if it is, is certainly unaffordable to the average taxpayer. As you have experience in the private educational system, I would appreciate your insight on that.
My wife, having well and truly paid her dues and then some, taught in the public school system for 35 years, and we are well aware of the resources being devoted to this sort of need.
Of course we would never mention this to him, but while he has no problem complaining about taxes and too much government he has a very curious blind spot for the special situation in which we, as a society, help his family with a problem which the average citizen finds overwhelming. If Fox News and Rush Limbaugh ever come out against spending tax money for special education, my friend will be very conflicted indeed, even though Fox and Rush are of course right (no pun!) about everything else.
My wife and I have no children, but we do understand that if we are going to live in this country it is part of our obligation to help support the educational system. And yes, that would be "the children", a concept which you seem to find amusing. Sometimes "saving the children" is an added community expense. Again, part of the tariff to live in a first-world country.
You may disagree, and of course are free to do so. The right to publicly disagree is also part of the privilege of living in a first-world country.
Thisis a simple proposal; it's discouraging to see how everyone (including apparently Bloomberg) is getting it wrong. (Though they seem to have corrected their error without documenting the change in the article's "update" note.)
First, here's a clear, simple description of the proposal, at Forbes. (Ignore the couple of sentences on disclaiming inheritances; that description is correct, and disclaiming is a good post-death estate planning tool, but a distraction.) And if you want to go to the source, Forbes even provides the link to the Joint Committee on Taxation's writeup for the Senate Finance Committee. (See item 7, starting at p. 12, i.e. pdf p. 14.)
This is a proposal to end "stretch traditional IRAs". To summarize Forbes - nonspousal inherited IRAs, including Roths, generally must be closed within roughly five years of inheritance. Somewhat recently ( April 2002) the regulations were changed to allow a longer withdrawal period. Withdrawals are now allowed by the IRS (though the IRA custodian may not allow it) over a fixed period of years that is determined by the life expectancy of the beneficiary when the IRA is inherited (or in some cases, the deceased's expectancy). For example, if you're 17 when you inherit an IRA, your life expectancy (single life table) is 66 years, and at age 83, you've no more IRA left, even if you're still living. (That differs from RMDs on your own IRAs.)
Since spouses could always adopt the IRAs as their own, they are not really affected by this proposed change. Since only taxable (traditional) IRAs are affected, this does not affect tax-free growth (only tax-deferred growth - which is why Bloomberg was wrong). This is only a change back toward what IRAs used to be, a move back toward traditional purpose, the type of change (and simplification) that some might call conservative.
OJ is right - the traditional purpose of an IRA is for retirement. That's the rationale behind RMDs - IRAs were not designed as wealth transfer vehicles. This change is one back toward simpler tax code and original function. (Some recent changes, like treating IRAs, 403(b)s, 401(k)s, 457s, etc. similarly and enabling direct transfers, may not be restoring the original code, but are preserving original function and are huge simplifications - so not all changes need be retrograde to be true to original purpose.)
Maurice said that he is paying taxes on his inherited IRA. That was likely a choice of his benefactor, who (unless that person died years ago) could have converted the IRA to a Roth. (I've even facilitated a "deathbed conversion".) Reasons for doing the conversion - the beneficiary was in a higher tax bracket than the benefactor, the benefactor wanted to reduce the size of a taxable estate. Reasons for not doing the conversion - not allowed at the time, beneficiary was in a lower tax bracket.
In that last case, the beneficiary would actually be paying lower taxes than the benefactor would have; seems like a win.
Even though Maurice is under 59.5, the IRA is not charging him a 10% penalty for underage withdrawals. Taxes, sure, traditional IRA withdrawals are subject to taxes. But nothing extraordinary - no penalties.
I think that continuing this assault on people who INVEST in companies through taxation is the wrong answer...we need to create more taxpayers. Soon we are going to have a ceiling that people do not want to strive to go higher than because the amount of work put into their professions does not offset the imense taxes that are a by-product of success....i.e. Europe. One quote that has always made some sense to me....
"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." ~Winston Churchill
Trust me...I am not crazy Bachmann who states that no one should pay taxes, but "taxes" are so often viewed as the solution vice being referenced as the problem.
Fine tuning a few points. There is an RMD only if you elect to "stretch" your IRA. Otherwise you have until year 5 to take withdrawals (at which point the entire value must be withdrawn). The RMD for a stretch IRA starts the year after the decedent's death. Here's Fidelity's example: - Year of Death 2006 (that would be the year one inherits since one inherits automatically at death) - Year of First RMD - 2007 (the next year, not the year the IRA is inherited)
The RMD for a traditional IRA (that one owns) is based on one's current life expectancy. That is, one takes the current value (as of Dec 31, last year), divides that value by one's current life expectancy, and that's the RMD. In contrast, the RMD for an inherited IRA is based on one's past life expectancy. That is, one takes the current value (as of Dec 31), divides by one's life expectancy in the year of inheritance (minus the number of years that have passed since then).
For example, suppose you inherit an IRA at 17. You take the value, divide by 66 (the life expectancy of a 17 year old), and that's the RMD. The next year, you divide by 65, then by 64, then by 63. At age 82, you divide by 1 - that means you take out anything remaining. IRA is depleted.
In contrast, if your traditional (not inherited) IRA still has money in it at age 83, you divide that by the expected current lifetime of an 83 year old (16.3) - that leaves you about 93% of the IRA going forward, unlike the inherited. Only one of these IRAs is based on your life expectancy. The other (inherited one) is based on what your life expectancy used to be.
If one inherits a Roth IRA, there is the potential for a virtual penalty (technically a tax). Suppose the original owner does a Roth conversion and immediately dies. If the beneficiary chooses to take RMDs (rather than withdraw everything within 5 years), then there's no penalty for taking out the converted amount. But suppose the RMD forces the beneficiary to dip into earnings within five years of conversion. Then those earnings will be taxable - it's the same five year rule as for regular Roth conversions. But with the inherited IRA, an RMD is forcing you to take withdrawals that could reach into earnings. With a regular (non-inherited) Roth, you are never forced to take withdrawals, so you can wait out the five years.
It's not likely that you'd have to dip into earnings, but it is possible. Say you inherit an IRA containing a single stock that pays dividends, and then the stock goes bust. All that's left in that IRA is its earnings (the dividends), and that's going to be less than the RMD. So you're stuck withdrawing those dividends and paying taxes on them, even though they came from a Roth.
Whether this proposed change benefits people is a matter of what one means by "benefits". If having a simpler tax code that one has a better chance of understanding is a benefit, then yes, this will benefit people. If a person is well enough informed to make a good decision among more options, then taking away some options cannot be superior. But that's the inherent conflict between choice and simplicity - the more choice, the greater the complexity. Which offers the greater benefit, choice or simplicity?
I wish I could find something that talked about legislative history and intent - so far the best I can find is this paper talking about how the original IRA really didn't help the lowly wage earner it was designed to help. The IRA was introduced as part of ERISA - the massive legislation that deals with pensions (including 401(k)s) and the paper repeatedly talks about retirement). It contrasts that IRA with the extraordinary benefits that KEOGHs conferred. (Incidentally, a finacial planner one told me that KEOGH stood for - Keep Everything Out of Government Hands. It was a joke.)
Comments
It would appear that they have been perverted into yet another slimy mechanism to basically avoid the payment of taxes by heirs who had absolutely no part in accumulating these tax-DEFERRED vehicles.
You'll excuse my cynicism if I suggest that this sort of maneuver is most likely to be exploited by the 1% rather than the 99%.
⇒ Bloomberg: "proposal would curtail a tax-planning technique that allows the buildup of tax-free gains inside inherited retirement accounts."
Since you invite me to be the judge, I'd say definitely. You'll never hear me suggest that slimy financial practices are the exclusive province of one particular political group or another. We both know that ain't so.
As Mr. Romney said, he doesn't pay one dollar more "than he has to". The issue here is with the tax code, of course, not with the taxpayer. Would it be too cynical of me to suggest that one reason the tax code is as convoluted as it is is is because folks like the Kennedy's and the Romney's had quite a hand in making it that way?
It's not all that hard to sneak in a seemingly innocuous tax provision into some (frequently) completely unrelated bill, and then later claim that it's "legal" to follow that provision. Multiply that one example times many, many provisions and many, many years and many, many high-powered tax lawyers and it's no wonder that the 1% pays less, as a %, than the rest of us.
The same thing applies to our industrial tax base. We keep hearing how, at 35%, the US has "one of the highest business tax rates in the world". What's NEVER mentioned is that virtually NO business EVER pays at that rate (that sneaky ol' tax code, again), and when the smoke clears, they pay at a rate much less than "the rest of the world".
It's all a game, and the 99% are not going to win.
With respect to the Baucus tax proposal specifically:
• a) The proposal was only to "require younger beneficiaries to pay taxes over five years instead of spreading them over their lifetimes."
• b) It isn't going to get off the table, and of course he well knows that.
Well, yes we do, if we want to have them. And if there isn't enough money in the highway funds to do that, please pick one of the following:
• Raise (Gasp!!) the highway/fuel taxes to the level necessary to do what needs to be done.
• Take the money from someplace else. Maybe the good ol' elusive "waste and spending" pocket (if anyone can ever actually find that).
• Borrow the money- hell, let the kids pay for it later. (They'll have the money because we'll leave it to 'em in untaxed retirement accounts).
• Forget it, let the national transportation infrastructure continue to decay.
There's no free lunch. Either pay the tariff to live in a first world country or move to a place with no taxes, no government, and not much of anything else either.
One of my best friends has a perspective virtually identical to the one which you consistently express.
Very unfortunately, one of his grandchildren has severe cognitive difficulty. Our public education system therefore spends a significant amount of money to provide the special education resources necessary to help with this child. This kind of specialized help is generally not available from private schools, and if it is, is certainly unaffordable to the average taxpayer. As you have experience in the private educational system, I would appreciate your insight on that.
My wife, having well and truly paid her dues and then some, taught in the public school system for 35 years, and we are well aware of the resources being devoted to this sort of need.
Of course we would never mention this to him, but while he has no problem complaining about taxes and too much government he has a very curious blind spot for the special situation in which we, as a society, help his family with a problem which the average citizen finds overwhelming. If Fox News and Rush Limbaugh ever come out against spending tax money for special education, my friend will be very conflicted indeed, even though Fox and Rush are of course right (no pun!) about everything else.
My wife and I have no children, but we do understand that if we are going to live in this country it is part of our obligation to help support the educational system. And yes, that would be "the children", a concept which you seem to find amusing. Sometimes "saving the children" is an added community expense. Again, part of the tariff to live in a first-world country.
You may disagree, and of course are free to do so. The right to publicly disagree is also part of the privilege of living in a first-world country.
First, here's a clear, simple description of the proposal, at Forbes. (Ignore the couple of sentences on disclaiming inheritances; that description is correct, and disclaiming is a good post-death estate planning tool, but a distraction.) And if you want to go to the source, Forbes even provides the link to the Joint Committee on Taxation's writeup for the Senate Finance Committee. (See item 7, starting at p. 12, i.e. pdf p. 14.)
This is a proposal to end "stretch traditional IRAs". To summarize Forbes - nonspousal inherited IRAs, including Roths, generally must be closed within roughly five years of inheritance. Somewhat recently ( April 2002) the regulations were changed to allow a longer withdrawal period. Withdrawals are now allowed by the IRS (though the IRA custodian may not allow it) over a fixed period of years that is determined by the life expectancy of the beneficiary when the IRA is inherited (or in some cases, the deceased's expectancy). For example, if you're 17 when you inherit an IRA, your life expectancy (single life table) is 66 years, and at age 83, you've no more IRA left, even if you're still living. (That differs from RMDs on your own IRAs.)
Since spouses could always adopt the IRAs as their own, they are not really affected by this proposed change. Since only taxable (traditional) IRAs are affected, this does not affect tax-free growth (only tax-deferred growth - which is why Bloomberg was wrong). This is only a change back toward what IRAs used to be, a move back toward traditional purpose, the type of change (and simplification) that some might call conservative.
OJ is right - the traditional purpose of an IRA is for retirement. That's the rationale behind RMDs - IRAs were not designed as wealth transfer vehicles. This change is one back toward simpler tax code and original function. (Some recent changes, like treating IRAs, 403(b)s, 401(k)s, 457s, etc. similarly and enabling direct transfers, may not be restoring the original code, but are preserving original function and are huge simplifications - so not all changes need be retrograde to be true to original purpose.)
Maurice said that he is paying taxes on his inherited IRA. That was likely a choice of his benefactor, who (unless that person died years ago) could have converted the IRA to a Roth. (I've even facilitated a "deathbed conversion".) Reasons for doing the conversion - the beneficiary was in a higher tax bracket than the benefactor, the benefactor wanted to reduce the size of a taxable estate. Reasons for not doing the conversion - not allowed at the time, beneficiary was in a lower tax bracket.
In that last case, the beneficiary would actually be paying lower taxes than the benefactor would have; seems like a win.
Even though Maurice is under 59.5, the IRA is not charging him a 10% penalty for underage withdrawals. Taxes, sure, traditional IRA withdrawals are subject to taxes. But nothing extraordinary - no penalties.
"We contend that for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." ~Winston Churchill
Trust me...I am not crazy Bachmann who states that no one should pay taxes, but "taxes" are so often viewed as the solution vice being referenced as the problem.
- Year of Death 2006 (that would be the year one inherits since one inherits automatically at death)
- Year of First RMD - 2007 (the next year, not the year the IRA is inherited)
The RMD for a traditional IRA (that one owns) is based on one's current life expectancy. That is, one takes the current value (as of Dec 31, last year), divides that value by one's current life expectancy, and that's the RMD. In contrast, the RMD for an inherited IRA is based on one's past life expectancy. That is, one takes the current value (as of Dec 31), divides by one's life expectancy in the year of inheritance (minus the number of years that have passed since then).
For example, suppose you inherit an IRA at 17. You take the value, divide by 66 (the life expectancy of a 17 year old), and that's the RMD. The next year, you divide by 65, then by 64, then by 63. At age 82, you divide by 1 - that means you take out anything remaining. IRA is depleted.
In contrast, if your traditional (not inherited) IRA still has money in it at age 83, you divide that by the expected current lifetime of an 83 year old (16.3) - that leaves you about 93% of the IRA going forward, unlike the inherited. Only one of these IRAs is based on your life expectancy. The other (inherited one) is based on what your life expectancy used to be.
If one inherits a Roth IRA, there is the potential for a virtual penalty (technically a tax). Suppose the original owner does a Roth conversion and immediately dies. If the beneficiary chooses to take RMDs (rather than withdraw everything within 5 years), then there's no penalty for taking out the converted amount. But suppose the RMD forces the beneficiary to dip into earnings within five years of conversion. Then those earnings will be taxable - it's the same five year rule as for regular Roth conversions. But with the inherited IRA, an RMD is forcing you to take withdrawals that could reach into earnings. With a regular (non-inherited) Roth, you are never forced to take withdrawals, so you can wait out the five years.
It's not likely that you'd have to dip into earnings, but it is possible. Say you inherit an IRA containing a single stock that pays dividends, and then the stock goes bust. All that's left in that IRA is its earnings (the dividends), and that's going to be less than the RMD. So you're stuck withdrawing those dividends and paying taxes on them, even though they came from a Roth.
Whether this proposed change benefits people is a matter of what one means by "benefits". If having a simpler tax code that one has a better chance of understanding is a benefit, then yes, this will benefit people. If a person is well enough informed to make a good decision among more options, then taking away some options cannot be superior. But that's the inherent conflict between choice and simplicity - the more choice, the greater the complexity. Which offers the greater benefit, choice or simplicity?
I wish I could find something that talked about legislative history and intent - so far the best I can find is this paper talking about how the original IRA really didn't help the lowly wage earner it was designed to help. The IRA was introduced as part of ERISA - the massive legislation that deals with pensions (including 401(k)s) and the paper repeatedly talks about retirement). It contrasts that IRA with the extraordinary benefits that KEOGHs conferred. (Incidentally, a finacial planner one told me that KEOGH stood for - Keep Everything Out of Government Hands. It was a joke.)