WSJ on leaving Roth IRA to heirs.. no so fast???

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nbseer
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WSJ on leaving Roth IRA to heirs.. no so fast???

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teacher
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by teacher »

We intend to leave our Roth IRAs to our children. Apparently, possible new IRA rules are closer to reality than I thought. The first change would "require Roth owners to start taking distributions at age 70½." If that happens, there wouldn't be much left to heirs. The second change would possibly end the "ability of nonspousal IRA beneficiaries to stretch distributions. Instead, inherited IRAs would have to be disbursed within five years of the owner's death." I hoped any changes to the ROTH would allow invested money to be grandfathered in. Only new money would be impacted. Hopefully, that is the intent, but realistically, that seems unlikely. Not sure what to do now. Convert, or let the chips fall where they may?
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kramer
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by kramer »

Useful article. Thanks.

The article didn't elaborate on this, but I guess they could easily put in the tax code that a ROTH IRA distribution counts as income toward deciding if your Social Security is taxable (or that you owe a higher Medicare Part B premium). Even if the ROTH IRA distribution itself is not taxable. I think that is how municipal bond income is treated now?
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VictoriaF
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by VictoriaF »

kramer wrote:The article didn't elaborate on this, but I guess they could easily put in the tax code that a ROTH IRA distribution counts as income toward deciding if your Social Security is taxable (or that you owe a higher Medicare Part B premium). Even if the ROTH IRA distribution itself is not taxable. I think that is how municipal bond income is treated now?
This is a good insight.

The Federal Thrift Savings Plan (TSP) requires taking RMDs from the Roth accounts. I was hoping that this requirement may be eliminated in the future, or bypassed by rolling the funds over into a Roth IRAs, but the article suggests that RMDs will be more prevalent, not less. And if the Social Security taxation will be higher due to the Roth distributions, the motivation for converting to Roth will diminish.

Victoria
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rkhusky
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by rkhusky »

The problem with trying to plan based on potential changes to the tax code is that there are so many possibilities. For example, the US could implement a wealth tax or a tax on deposits or assets (http://www.washingtontimes.com/news/201 ... onvention/), which would penalize savers and completely change retirement investment strategies. Or the US could implement a national sales tax to replace (or supplement) the income tax (http://fortune.com/2014/02/18/how-a-nat ... y-problem/), which would also completely change tax-aware investing strategies. Trying to plan based on these hypotheticals often leads to opposing strategies. Of course having it in the president's budget makes it a bit more plausible, but not necessarily a sure thing.
freddie
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by freddie »

kramer wrote:Useful article. Thanks.

The article didn't elaborate on this, but I guess they could easily put in the tax code that a ROTH IRA distribution counts as income toward deciding if your Social Security is taxable (or that you owe a higher Medicare Part B premium). Even if the ROTH IRA distribution itself is not taxable. I think that is how municipal bond income is treated now?
This is all off in speculation land but yeah treating ROTH income like muni income for the purposes of SS taxation and ACA subsidies makes a ton of sense. So does having RMDs. The purpose of IRAs is to fund your retirement not your heirs. But trying to predict the future is impossible.
Tanelorn
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by Tanelorn »

rkhusky wrote:The problem with trying to plan based on potential changes to the tax code is that there are so many possibilities.
This one is in the 2015 proposed budget. Yes, it's still not law, but most of the other things you mentioned are a lot farther away from being implemented at least at this point.
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VictoriaF
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by VictoriaF »

freddie wrote:
kramer wrote:Useful article. Thanks.

The article didn't elaborate on this, but I guess they could easily put in the tax code that a ROTH IRA distribution counts as income toward deciding if your Social Security is taxable (or that you owe a higher Medicare Part B premium). Even if the ROTH IRA distribution itself is not taxable. I think that is how municipal bond income is treated now?
This is all off in speculation land but yeah treating ROTH income like muni income for the purposes of SS taxation and ACA subsidies makes a ton of sense. So does having RMDs. The purpose of IRAs is to fund your retirement not your heirs. But trying to predict the future is impossible.
"Predicting future" has two values: yes and now, 1 and 0; and in this binary context, the obvious answer is "no" (0), i.e., it's impossible to predict the future.

However, some future events can and should be evaluated for their risk, with risk calculated as the product of the probability and impact. The addition of Roth RMDs to the proposed budget significantly increases the probability component of the risk, even as the impact of this event is relatively minor for the Roth account owners. The inclusion of the muni income for the purpose of taxing Social Security significantly increases the probability that Roth RMDs will be treated similarly. The impact of this outcome is significant for the account owners, not just their heirs. For example, I am contemplating large Roth conversions during early retirement years. One driver for these conversions is to minimize the taxation of Social Security when I eventually start taking it. If my Social Security will be taxed at the maximum rate, the Roth conversions may be unnecessary or even financially imprudent.

Victoria
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SGM
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by SGM »

I have already converted 95% of traditional 401ks and IRAs to a Roth. I was aware of the budget item. Ed Slott recently discussed on the James Lange radio show #162 http://www.paytaxeslater.com/radioshow_ ... ch_ira.php how some will get around this problem if needed in the future. Ed feels that the government will shoot themselves in the foot because smart people will get around the end of the stretch IRA with trusts. A lot more tax free money will be passed on than if they retain the stretch IRAs.
rkhusky
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by rkhusky »

Tanelorn wrote:
rkhusky wrote:The problem with trying to plan based on potential changes to the tax code is that there are so many possibilities.
This one is in the 2015 proposed budget. Yes, it's still not law, but most of the other things you mentioned are a lot farther away from being implemented at least at this point.
I was mainly concerned with the additional SS taxation, which seems like a tax penalty on Roths.
VictoriaF wrote: The inclusion of the muni income for the purpose of taxing Social Security significantly increases the probability that Roth RMDs will be treated similarly.
Muni income is "income", Roth withdrawals are not, just like withdrawals from a savings account are not income. It seems like quite a stretch of the Roth rules to start counting the latter as income. Surely contributions to Roth IRA's would not be counted as income. And if one wanted to use the earnings in the SS taxation equation, how would you fairly compute the cost basis?
MichDad
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

Post by MichDad »

VictoriaF wrote:
kramer wrote:The article didn't elaborate on this, but I guess they could easily put in the tax code that a ROTH IRA distribution counts as income toward deciding if your Social Security is taxable (or that you owe a higher Medicare Part B premium). Even if the ROTH IRA distribution itself is not taxable. I think that is how municipal bond income is treated now?
This is a good insight.

The Federal Thrift Savings Plan (TSP) requires taking RMDs from the Roth accounts. I was hoping that this requirement may be eliminated in the future, or bypassed by rolling the funds over into a Roth IRAs, but the article suggests that RMDs will be more prevalent, not less. And if the Social Security taxation will be higher due to the Roth distributions, the motivation for converting to Roth will diminish.

Victoria
Victoria,

The TSP is no different from a 401(k) plan in this respect. 401(k) plan account holders are also required to take RMDs beginning at age 70.5. Here is a quote on this from the IRS:

"What types of retirement plans require minimum distributions?

The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive."

Here is a link to the source:

http://www.irs.gov/Retirement-Plans/Ret ... tributions

Under present law, both 401(k) plan holders and TSP plan account holders have the option of transferring their Roth holdings to a Roth IRA to avoid the RMDs.

MichDad
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Re: WSJ on leaving Roth IRA to heirs.. no so fast???

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