Proposed Act Could Stop Use of Stretch IRAs

The proposed Highway Investment, Job Creation and Economic Growth Act of 2012 contains a provision that limits a taxpayer’s use of a stretch IRA unless the taxpayer has converted the account to a Roth. If passed, this proposal could limit the ability of a taxpayer’s heirs to benefit from retirement assets.

A stretch IRA is a financial strategy that allows the taxpayer to stretch out the life of his or her IRA. Prior to the creation of Roth IRAs, the term stretch IRA described a strategy in which a spouse, child, or grandchild drew out distributions form an inherited traditional pretax IRA over his or her life expectancy.

The new legislation would require most nonspouse inheritors of IRAs to withdraw the entire IRA amount from a traditional IRA within five years of the inheritance, beginning with deaths next year. This new rule would also apply to employer-sponsored plans, but inheritance rules for Roth IRAs would remain the same.

See Deborah L. Jacobs, Congress May Crush Key Tool for IRA Inheritors, Forbes, Feb. 8, 2012.