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.