Rethinking Required Minimum Distributions

I recently read that a part of Speaker Ryan’s proposed income tax law changes would be the elimination of many income tax deductions. One deduction that his proposal eliminates is the IRC 691(c) deduction for federal estate taxes that were imposed on a decedent’s retirement assets, e.g. IRAs, 401(k) plans.

The purpose of IRC 691(c) is to prevent ‘double taxation’ of retirement benefits. The double taxation consists of (i) the federal estate tax  imposed on the decedent’s retirement benefits; and (ii) the income taxes that the beneficiaries pay on the inherited retirement benefits. IRC 691(c) gives to the beneficiary of the retirement assets an ‘off-setting’ income tax deduction for the federal estate taxes that were assessed on the same retirement assets, which deduction is then  used to reduce the income tax liability that the beneficiary must pay on the inherited IRA or 401(k) account.

Under both President Trump’s proposed plan to simplify the income tax laws, and Speaker Ryan’s proposed tax  plan, the IRC 691(c) income tax deduction would be eliminated.

Why is this something to watch? It might be advisable for some clients who are currently taking required minimum distributions from inherited IRAs that were previously subject to federal estate taxes  to accelerate the amounts that they take from their inherited IRA in order to claim the IRC 691(c) deduction while it is still available.

Historically our advice to clients who are beneficiaries of inherited IRAs is to exploit, aka stretch, the required minimum distribution to take the lowest amount required, so that more assets can remain inside the inherited IRA growing in a tax deferred environment. But that advice may  have been premised on the availability of the IRC 691(c) income tax deduction.

If no estate taxes were attributable to the inherited IRA, then the elimination of the IRC 691(c) deduction will not pose a problem. But for those inherited IRAs that had been subject to some estate tax, the loss of the IRC 691(c) income tax deduction might prompt a reevaluation of continuing with taking only required minimum distributions.

I would not run out and tell every client to accelerate their withdrawals from their inherited IRAs, but I would at least mention to them that the potential loss of the IRC 691(c) income tax deduction which would make future IRA withdrawals more expensive.