How Proposed IRA Changes Could Hurt Your Family's Future

IRAs were designed to help people fund their retirement, but with many retirees not using up their retirement account balances before they die, IRAs also serve a useful purpose in passing wealth to future generations. Now, though, proposals in President Obama's new budget would greatly change the way inherited IRAs work.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at how changes to inherited IRA rules would make them far less desirable for estate-planning purposes. Dan notes that the proposal doesn't change current rules allowing spouses to roll over inherited IRAs to IRAs in their own name. But the real changes apply to heirs other than spouses. Dan points out that under current law, many beneficiaries can use what's known as a stretch IRA to take distributions over the course of their lifetimes, minimizing the tax impact and maximizing tax deferral. But the budget would change those rules, instead forcing most non-spouse beneficiaries to withdraw the full balance of inherited IRAs within five years of the original owner's death. Dan concludes that such rules accelerate taxation and discourages using inherited IRAs for one's own retirement.

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Read/Post Comments (6) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 09, 2014, at 1:08 AM, arsailman1 wrote:

    So, what are the ramifications of these proposed changes? The article says just about nothing.

  • Report this Comment On March 09, 2014, at 12:32 PM, mernadecabeza wrote:

    Another proposed change to further the Socialist agenda of this president and destroy wealth creation. this president will not be happy until destroys whats left of the middle class.

  • Report this Comment On March 09, 2014, at 4:26 PM, jrgreenejr wrote:

    Arsailman1, the changes impact the use of an IRA's tranfer to a child in that under the current rules the child can place the transfer in their IRA without paying taxes or having to withdraw until age 70 1/2.

    Yes mernadecabeza is correct it is totally against the socialist idea of transfering of wealth which benefits anyone but the government.

  • Report this Comment On March 10, 2014, at 12:30 AM, jlclayton wrote:

    So if someone inherits a parent's IRA, they need to take the disbursements within 5 years, and these would be taxable. However, since this money can be used to pay a portion of the person's bills, that frees up a portion of their earned income to be able to contribute more to their own IRA account which is non-taxable, correct? I can understand that those taxpayers who are already funding their retirement accounts to the fullest extent may not be able to take advantage of this, but for most taxpayers it seems as though this could just be a wash, unless I'm missing something?

  • Report this Comment On March 10, 2014, at 10:54 AM, freddiegofaster wrote:

    Is the Keough Account dead or someting?

  • Report this Comment On March 11, 2014, at 7:01 AM, inparadise wrote:

    "...under the current rules the child can place the transfer in their IRA without paying taxes or having to withdraw until age 70 1/2."

    This is not quite correct. Non-spousal inherited IRAs are subject to RMDs, but based on the age of those who inherited, not the original owner.

    So just how do these changes help the next generation deal with the supposed "crisis" in retirement funding?

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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