Senator wants to raid inherited IRAs

Bloomberg reports that Sen. Max Baucus (D-Mont), chair of the Finance Committee, has proposed requiring that inherited IRAs and retirement accounts be paid out to beneficiaries within five years of the death of the participant. This would generate something in the neighborhood of $4.6 billion for the U.S. Treasury. Under current law, an IRA that is inherited by a properly-named designated beneficiary (other than the spouse) is usually paid out over the life expectancy of the beneficiary, a benefit that can significantly delay mandatory distributions of taxable income. Sen. Baucus, mischaracterizing the system that Congress created and that has been in place for many years, complains that beneficiaries are "abusing" the system by delaying distributions.  "They’re being used by some taxpayers to give tax-free benefits," he is quoted as saying. Tax-deferred, Senator, not tax-free. The money will be paid out, and tax will be paid.

Reports soon arose that Sen. Baucus was "backing off" a little bit on his proposal, but we can expect that legislators will continue to cast covetous glances at the accounts that are building wealth by keeping money out of the hands of the tax man for extended periods of time.

Update Feb 22: AdvisorOne reports that the provision, added by Sen. Baucus on February 7 during committee markup, remains in the bill. So much for backing off. The Financial Services Institute is "mobilizing" its members to press for the removal of this provision.