This idea has been raised, in one form or another, several times in the past few years, by Federal officials eager to accelerate the release of these funds as distributions of ordinary income that will generate tax revenue. Most of the proposals made by the outgoing Obama administration had called for the outright elimination of the "stretch" distribution for all funds payable to a non-spouse beneficiary.
This more recent proposal offers more of a compromise. It would provide:
- The current right of the spouse of the participant to treat the account as his or her own after the participant's death to remain unchanged.
- The current ability of a non-spouse beneficiary to take distributions from the account based on his or her own life expectancy to remain in effect for the first $450,000 in all accounts owned by him.
- For amounts over $450,000, they are to be subject to a much faster distribution schedule. All such funds must be distributed, as ordinary income, within five years after the participant has died.
On request, we can provide a model payout schedule that will demonstrate, for a given set of retirement accounts, how this proposal would affect distributions.
Knowledgeable observers expect that this proposal or something close to it has a good chance of passing in 2017. At this point, the bill has been approved by the Senate Finance Committee. There are still several steps needed before it is passed and enacted.
How much additional revenue this proposal would generate is uncertain. Commentators familiar with the issue have pointed out that most non-spouse beneficiaries do not leave the funds in place to continue to grow over the "stretch" period. Most, they say, take the money out, pay the tax on it, and spend it.