Wyden targets ‘estate-planning loophole’News added by Benefits Pro on July 1, 2014

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By Nick Thornton

Legislation that would increase the tax exposure on inherited retirement accounts has been proposed by Senate Finance Committee Chairman Ron Wyden (D-Ore.).

The item was bundled into the Preserving America’s Transit and Highways Act.

Currently, IRA and 401(k) accounts are required to make annual taxable distributions when their owners reach age 70 and a half. When those accounts are willed to a young beneficiary, the same minimum distributions are required, but can be protracted over a significant period, according to the Finance Committee’s summary of the provision.

Tax liabilities on inherited retirement accounts are reduced when spread over the lifetime of the beneficiary. Assets in accounts are also allowed to grow when given the opportunity to benefit from market inflation.

Sen. Wyden’s measure would close what the Finance Committee’s summary calls an “estate-tax planning loophole.” Inherited retirement savings accounts, including qualified annuities and defined benefit pensions, would be required to be fully distributed within five years of the death of their original holder.

Exceptions would be allowed if the inheriting beneficiary is within 10 years of the original account owner’s age, or if the inheriting beneficiary were an individual with special needs, a minor, or the account holder’s spouse.

If passed with the new highway bill, the provision is estimated to raise $3.7 billion over 10 years.

Inherited retirement accounts are increasingly being viewed as source of funding for government and creditor coffers. The Supreme Court recently upheld a 7th Circuit decision that said inherited IRAs do not enjoy the protections of regular IRAs in bankruptcy proceedings.

Originally published on BenefitsPro.com
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