• Assume a 20% combined income tax rate on the income generated by withdrawn funds invested outside of the IRA.

Income tax results to the designated beneficiary under the new law:

• Assuming the designated beneficiary elects to take equal payments over 10 years, the payments would be $82,731 (based on a standard amortization table, at 5%). After 25 years, these payments would grow to $1,854,391, after-tax.

• Assuming the designated beneficiary waits until the end of year 10 to take the IRA balance, the after-tax amount after 25 years will be $1,760,242, or approximately 5% less than the strategy of spreading the IRA distributions equally over 10 years.

Income tax results to the designated beneficiary under the old law:

• Under the old law, if the designated beneficiary took only the required minimum distributions over his or her 25-year life expectancy under the IRS tables, the after-tax value of the IRA distributions at the designated beneficiary’s age 85 would be $2,204,122. This is about 19% more than the best scenario under the new law, spreading out payments even further at an even lower income tax rate obviously being the difference.

Planning Alternatives

There are a number of alternatives the client can consider in order to mitigate the adverse effects of the new tax law. The major alternatives will be briefly explored and tested here:

1. Take larger IRA distributions during lifetime. The theory here is to withdraw significant additional penalty-free amounts from the IRA, etc., during the owner’s lifetime, so that they will hopefully be taxed at a lower income tax rate than the beneficiary would otherwise pay, with the net after-tax funds then reinvested either in a Roth IRA or in other assets which will receive a stepped-up income tax basis at death. Does this plan make sense?

Let’s assume the combined federal and state income tax rate to the IRA owner or designated beneficiary on early withdrawals (by the account owner) and withdrawals under the new 10-year withdrawal rule (by the designated beneficiary) is 35%, but that the combined tax rate on the investments which are purchased with the after-tax withdrawals is only 20%. (Remember the tax rate on capital gains can be as little as 0%, to the extent the beneficiary holds investments until death.) The numbers can be run a variety of different ways, but in general paying income taxes early, and at a significantly higher income tax rate than the account owner would have paid if he or she had maximized the income tax deferral available during his or her lifetime, is, unfortunately, not going to make a lot of mathematical sense in most situations.