New Obama IRA Rules

Recently President Obama proposed two changes to the existing IRA rules. Tapping into the IRA basics, these two proposals are made to simplify the complicated aspects of IRA withdrawal rules. The proposed amendments can be found in a 151-page Treasury Department document that explains all the Administration’s fiscal 2012 tax proposals and would certainly be very beneficial for retirees and heirs of IRA’s.

The first proposed change aims to eliminate traps for non-spouse IRA heirs that Forbes has been constantly warning individuals. Generally, a beneficiary inheriting an IRA can stretch out the distributions according to his or her own lifespan. With the right decisions and actions with his or her inherited IRA, one can enjoy years of tax incentives with each withdrawal.

60-day IRA Rollover Rule

There’s a rule with IRA’s that allows you to withdraw money from your account free from tax and fees provided that you will return it within 60 days. This is called the 60-day rollover rule. Unfortunately with inherited IRA’s this is not applicable. Although there are no early withdrawal fees for beneficiaries, once you take out money from your inherited IRA account you shall be and will be charged accordingly. That’s how inherited IRA distribution rules work. Fund movement with IRA’s that are inherited should be a specified trustee-to-trustee transaction. Meaning it should be from one IRA custodian to another. Another thing is that you should change the title of the IRA account if you are not the spouse of the deceased IRA account owner.

For simplification, the administration of President Obama is proposing a change on the 60-day rollover rule. The change would be to allow non-spousal heirs to use the 60-day rollover. With this, of course heirs can borrow money without worrying about tax and fees if they can return what they owe to the account within 60 days from the date of the loan.

IRA Required Minimum Distributions

The second one is to remove the provisions regarding required minimum distributions (RMD’s) if and only if all of the retirement plans with tax incentives owned by an individual totaled less than $50,000. Upon reaching the age of 70 ½, an account holder is required to take minimum distributions with their Traditional IRA’s but not from their Roth accounts. But with inherited IRA’s they will have to take RMD’s with both their Traditional and Roth account. Making things worse, account holders who fail to take RMD’s will be charged with a penalty of 50% of the missed pay-out amount.

The Treasury document explains that this proposal aims to provide senior citizens the flexibility to decide how much they will withdraw and how much often they will make their withdrawals. With this change, account holders will also be spared with the hassle of computing yearly RMD’s. Also under this proposal, allows young heirs to be free of RMD’s. The child can now leave the funds of the IRA that he or she inherited in order to reserve it for future use, for instance, college expenses.

If you currently have an IRA account, aside from the current news about IRA’s, you should know about the important 2011 IRA dates. These are January 1, January 31, April 15, September 30, October 15, and December 31.

  • Sam B

    When would these rules take effect?

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The information provided on this website does not constitute professional financial advice. We do our best to maintain current & accurate information, but some information may have changed since it was published. Please consult your tax or legal advisor(s) for questions & advice concerning your personal financial situation.

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