The powerful tax-deferral tool is likely nearing its end.

WHAT IS STRETCHING: Sustaining and maximizing the tax-deferred status of an IRA when the beneficiary is a non-spouse such as a child.

WHO LIKES IT: Beneficiaries who accrue years of compounded, tax-deferred growth while minimizing the Present Value of the liability (i.e. $1 in the future is worth less than $1 today).

WHO DOESN’T: Governments that must wait years to realize tax receipts that when withdrawn gradually keep taxpayers in lower tax brackets.

IS IT GOING AWAY: Probably. In November the Senate Finance Committee voted 26-0 to do away with the strategy. Ongoing negotiations with the House show progress towards reconciled legislation that may be part of a larger comprehensive tax reform package.

WHAT WILL HAPPEN: The proposal is for beneficiaries of Inherited IRAs to withdraw and pay taxes on the entire IRA within 5 years of the IRA owner’s death. It’ll be extended to include all retirement plans including 401(k)s, 403(b)s, SEP-IRAs, etc.

THE EFFECT: Income taxes are accelerated and bunched distributions will likely push beneficiaries into higher tax brackets.

WHO’S EXCLUDED: Surviving spouses, charities, charitable remainder trusts, minors, disabled and chronically ill individuals and beneficiaries born within 10 years of the deceased IRA owner.

WHAT ELSE IS EXCLUDED: The proposal includes a new $450,000 exclusion to be indexed for inflation. It’s the maximum allowable exclusion – NOT an exclusion per IRA or beneficiary.

HOW WILL IT WORK: Assume you have $2,450,000 in an IRA and no surviving spouse. The beneficiary (such as your child) may exclude $450,000. The remaining $2,000,000 will have to be withdrawn over the next 5 years.

WHAT IF THERE ARE MULTIPLE IRAs: Proration. Assume an IRA with a $2,000,000 balance and a 401(k) with a $1,000,000 balance. The IRA represents 2/3 of the total so $300,000 of the exclusion (2/3 of $450,000) will be applied to it with the remaining $150,000 of the exclusion (1/3 of $450,000) applied to the 401(k).

IS THE EXCLUSION PORTABLE: Not if the proposal passes in its current form. A decedent leaving his/her IRA to a surviving spouse forfeits the exclusion. It is not added to the $450,000 exclusion that will be available to the surviving spouse at his/her subsequent death.

WHAT TO DO ABOUT IT: A couple of fixes include (1) leaving all but $450,000 of an IRA to a surviving spouse and (2) fixing after death through the use of disclaimer language in wills.