Congress has proposed new rules aimed at generating additional tax revenue from inherited IRAs.
The proposal would give heirs five years to liquidate and withdraw all cash from the inherited IRA or 401(k). This would trigger income tax payments. It is estimated that this proposal would generate $4.6 billion in income tax payments over a 10-year period.
Currently, if you inherit an IRA, you can make minimum distributions and let the balance grow tax-deferred for decades. The new proposal would force the entire IRA to be distributed within 5 years and tax would be collected on the entire IRA value. The proposal would apply to accounts inherited from owners who die after 2012. Children with special needs, spouses and beneficiaries within 10 years of the deceased age would all be exempt.
This proposal has not reached the House. However, it demonstrates the governments willingness to seek tax revenue from otherwise protected sources.