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Joe Taxpayer

JoeTaxpayer — Financial Commentary For The Average Joe Financial Commentary For The Average Joe Over the years, I’ve focused on the bits of the tax code that a middle class tax filer might benefit from. The Roth Conversion (still a good tool) and the Recharacterization, which the tax code killed, among them. Another bit of the tax code allowed a beneficiary of a taxable IRA or 401(k) to take distributions over his/her own lifetime, ‘stretching’ the withdrawals over decades to both allow for growth over time and reduce each year’s tax burden. Consider, if I have one married child, and leave her $1M, with no other income, no deductions, a $50K withdrawal taxed on $26K (due to the current standard deduction) produces a tax bill of $2739. Not too bad. Of course, if they have other income, they’ll see a higher bill, but this is just an example of the benefit of the stretch feature. Now, H.R. 5282, ironically titled “Retirement Enhancement and Savings Act of 2018” proposes to limit the withdrawal option for one’s inherited retirement accounts. A five year required withdrawal. The million would need to be withdrawn $200K/yr, resulting in a taxable $176K resulting in a $30,819 tax due. Over $150K (over the 5 years) or 15%+ vs an effective rate of about 5.5%.

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