Limits to stretch IRAs floated to pay for highway repairs

When Congress returns from its July 4 recess next week, the Senate tax-writing panel will resume its effort to pass a bill that would pay for highway repairs in part by changing policy toward inherited individual retirement accounts.
The provision, part of a bill before the Senate Finance Committee, would require the distribution of IRAs within five years of the death of the account holder, with some exceptions — including cases where the recipient is a spouse, minor or whose age is within 10 years of the person who died. Under current law, distributions can be stretched over the life of the beneficiary, which can be many years if he or she is young.
A committee summary of the bill says that limiting so-called stretch IRAs would raise $3.7 billion over 10 years. The entire bill, which includes several other provisions, would raise a total of about $8 billion for the Highway Trust Fund.
The highway fund must be reauthorized by Congress. It could start running out of money in August, according to the Department of Transportation, which could halt local projects.
On Tuesday, President Barack Obama challenged Congress to act quickly or else put at risk tens of thousands of layoffs related to road-work jobs.
The Senate Finance Committee began a markup of a highway-financing bill on June 26. The session recessed prior to a vote. The panel will reconvene as soon as possible after lawmakers return to Washington next week, according to Ryan Carey, a spokesman for committee Chairman Ron Wyden, D-Ore.
“I’ve bent over backward to come up with the most benign, agreeable offsets possible,” Mr. Wyden said in remarks prepared for the June 26 meeting. “Rather than raising taxes, the legislation includes measures designed to boost tax compliance — to make sure people pay taxes they owe.”
Curbing inherited IRAs “is one of the least painful revenue raisers waiting to be used,” said Clint Stretch, senior tax policy counsel at Tax Analysts, a consulting and publishing firm. “This is not really a tax increase, it’s a tax acceleration.”
It has been on the congressional shelf for many years and often is proposed to pay for spending priorities.
Michael Kitces, a partner and director of research at Pinnacle Advisory Group, wrote about limits on stretch IRAs in 2012 highway funding discussions in his blog, Nerd’s Eye View.
As is the case today, there’s no guarantee that stretch IRAs will be tapped as a highway funding source, Mr. Kitces wrote in 2012. But he recommended that investment advisers be cognizant of the possibility.
“It may be best practice when discussing estate planning matters with clients to at least acknowledge the risk that by the time the client’s estate plan is actually implemented, a stretch IRA may no longer be an arrow in the estate planner’s quiver,” Mr. Kitces wrote.
Once a tax-reform idea is put on the table at the Capitol, it’s rarely taken off. In the case of inherited IRAs, the opponents have already been identified, and new ones won’t likely be created, according to Mr. Stretch.
“You know who you’re going to offend,” Mr. Stretch said. “It will always come up.”
Highway projects are usually funded by gasoline taxes. It’s unclear what approach the Republican-majority House will take.