Want to Leave Your IRA to Your Grandkids? Not So Fast
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What proposed IRA rule changes are introduced at the start of the episode?
Here's your money briefing. I'm Anne-Marie Fertoli at The Wall Street Journal in New York. IRAs not only allow people to save for retirement, but are also a way to leave money to the grandkids after they're gone. Our J.R. Whalen talks with Wall Street Journal tax reporter Laura Saunders about proposed legislation that would significantly change the rules that govern passing on tax-free IRA dollars to heirs. First, some money and market news you should know. This year's plunge in government bond yields has made it harder to find decent long-term returns, so some pension fund managers are looking into more non-traditional and riskier investments. That includes putting money in private markets, real estate projects, infrastructure financing, direct lending, and even greenhouses and waste management.
Donating time instead of money to others in need might increase your lifespan. A recent Texas A&M University study followed more than 3,500 people in their mid-60s for 13 years. Researchers found that the people who volunteered their time and energy
How do current IRA inheritance 'stretch' rules work for grandchildren?
were less likely to have died than those who gave money to charity. People who reported being a caregiver for someone other than a spouse also lowered their risk of mortality. According to the Charities Aid Foundation, an estimated 39 percent of Americans volunteered last year, down from five years ago at 45 percent. Americans ranked eighth in the world when it comes to volunteering. Coming up, a proposed change to IRAs.
Leaving an IRA to your grandkids seems easy enough. Not anymore, now that Uncle Sam wants to get involved. And it could cost the younger generation dearly when they cash out their inheritance. And Wall Street Journal tax reporter Laura Saunders is here to discuss. So Laura, what are the current rules regarding IRAs that are left to heirs?
Well, there are several rules, as you might imagine. It's always complicated. But it's one thing if you leave an IRA to an heir like a spouse.
What changes are the House and Senate proposing to inherited IRAs?
But if you leave it to a non-spouse heir like a grandchild, then there are these really favorable rules. They've been in effect for maybe 20 years that say that the... younger heir could take the money out over his or her lifetime. So if grandpa dies and leaves an IRA to his six-year-old grandson, then the child might have another 70 or 80 years to take out that money, and meanwhile, it can grow tax-free. Now, they have to take out a little bit every year, but it can go on for a very long time, and this is a wonderful benefit.
So now Congress is stepping in and the House and the Senate want to change those rules. Each bit is a bit different.
The House bill has passed with bipartisan support. So it has the upper hand in this. And we don't know what's going to happen with the Senate. But the Senate, I mean, excuse me, the House would say that if you're not a spouse and you inherit an IRA, you would have to take money out in no longer than 10 years.
10 years, not 70.
How would a 10-year payout rule affect taxes on inherited traditional vs. Roth IRAs?
Not 70 or 40 or whatever the child's projected lifespan is, but over 10 years.
Is that 10 years tax-free?
Well, it depends. A Roth IRA, the withdrawals are always tax-free and they would stay tax-free. A traditional IRA, the money is taxed. But you see it compresses either the time you have to let it grow tax-free or perhaps if you're leaving it to a grandchild and the grandchild has to take it out in 10 years, that would raise the tax rate on a traditional IRA because so much money is coming out every year.
Now, critics of the current rule that allows a grandchild or an heir that's not a spouse to take money out over the course of 67 years, essentially the life of that person, they've said this kind of tilts toward benefiting the very wealthy.
Well, yes, it does. And most of us are going to need our savings from IRAs and Roth IRAs to finance. fund our retirement. This is for people that have excess funds. And people have charged that it's Mitt Romney and people like that, because we know that he had a $100 million IRA that would take advantage of this rule. But Congress allowed it in the first place.
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Chapters
7 chapters
1
What proposed IRA rule changes are introduced at the start of the episode?
0:05–1:06
2
How do current IRA inheritance 'stretch' rules work for grandchildren?
1:06–2:09
3
What changes are the House and Senate proposing to inherited IRAs?
2:09–3:14
4
How would a 10-year payout rule affect taxes on inherited traditional vs. Roth IRAs?
3:14–4:59
5
Why do critics say the stretch rules disproportionately benefit the wealthy?
4:59–6:33
6
What real-world example shows how proposed rules could reduce grandchildren's inheritances?
6:33–7:31
7
When would the proposed SECURE Act changes take effect and what comes next in Congress?
7:31–7:37
Speakers
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