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Washington raises the roof, agrees now is not the time to decide anything

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After 16 days of debate, arguments and just plain childish behavior, our leaders have decided that the best they could do was to not decide anything.

All that transpired in Washington last Thursday was an agreement to move the decision to a later time. Congress pushed the budget debates back until December and temporarily raised the debt ceiling all the way to Jan. 15, 2014.

On the positive side, our parks are reopened and temporarily furloughed employees are back to work. Other than that, nothing changed.

We still face a national debt that is about to surpass $17 trillion and a budget that is spending an extra $700 billion more than our government brings in per year.

We have failed. Our leaders have let us down and I, for one, am very worried about the future stability of our economy because of it.

With the budget debates pushed back, I'd like to look at one of the proposals that is still being discussed.

The most troublesome change deals with how an IRA is inherited. Currently, when someone inherits an IRA, they have basically two options.

Option one: Take all the money out and pay tax on the entire distribution in that year. IRAs are considered income in respect of the decedent, which basically means the entire IRA is considered your ordinary income and so will be taxed accordingly.

If the IRA is large enough, say more than $400,000, this could place you into the highest tax bracket of 39.6 percent. This basically means that $160,000 of your inheritance is now gone, in addition to any applicable state inheritance taxes.

Hopefully this isn't the route you would go, but instead you may choose option 2: "Stretch out" the payments over your life expectancy.

The IRS assigns a life expectancy to every beneficiary and allows the money to continue to grow tax deferred but forces annual distributions based on your age.

This would allow the money to continue to grow and give you the opportunity to earn more on the untaxed portion.

The new budget proposes to do away with the "stretch" provision and force the payout over a mere five years (forcing beneficiaries into a possibly higher tax bracket and therefore a smaller inheritance).

From experience, I imagine if this proposal goes through, most people won't bother stretching the payouts over five years. Instead, they will take the money out all in one year.

This would be a huge tax mistake. However, I see individuals making similar mistakes with their IRAs every day. Typically, it is done out of ignorance of the tax code and unintentionally costs people thousands of extra unnecessary tax dollars every year.

Keep your eye on these budget talks. I know the media will be letting us know if and when Congress has reached a consensus. However, they won't necessarily show you the parts of the deal that will affect you the most.

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Joe Wirbick

Joe Wirbick

Joe Wirbick is the president of Lancaster financial services firm Sequinox. Joe specializes in retirement planning and distribution. Tax information is provided for informational purposes only.

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