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Bill gives IRAs a big break
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September 27, 2000: 5:16 p.m. ET
A sleeper clause of pension reform bill will allow IRA owners to fix mistakes
By Ed Slott
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NEW YORK (CNNfn) - This is huge! How can it be that no one has picked up on a sleeper provision of the proposed pension reform bill that will be a fresh start for IRA owners past 70-1/2? I believe it will prove to be the biggest part of this legislation.
Everyone's talking about the increase in IRA contributions from $2,000 to $5,000. That's good, but a major provision is in the bill that has the ability to save an IRA from excessive taxation and keep it growing tax-deferred for the longest possible time. Yet this key provision has not been publicized.
 In an earlier column, I went through some of the changes in the pension reform proposal. That was the bill (H.R. 1102) that would allow IRA and 401(k) contributions to be increased. The bill has passed the House for the second time by a 401-20 vote on Sept. 19 as part of H.R. 5203, now called the "Debt Relief and Retirement Security Reconciliation Act."
However, this bill contains a helpful provision. If enacted, IRA owners will receive a "fresh start" that will allow them to correct mistakes and allow IRA beneficiaries to continue the tax deferral that might have otherwise been lost under existing law.
Most people are either not aware that this fresh start provision has been included in the bill or do not realize its importance to IRA owners.
If you are past your Required Beginning Date (RBD) and have not made the right beneficiary choices or distribution method elections, you will be granted a second chance to correct your selections. The RBD is April 1 of the year after you turn 70-1/2.
Visit Ed Slott's irahelp.com
Under current law, your beneficiary and distribution options for calculating required distributions are irrevocable once you reach your RBD.
For example, if you are 76 and neglected to name a beneficiary when you were 70-1/2, your IRA would have to be distributed soon after your death.
Also, if you named your spouse as beneficiary at your RBD and now wanted to change to your child in order to take advantage of the longer life expectancy, it cannot be done under current law. You can change your beneficiary to your child, but you cannot lengthen the distribution schedule based on your child's life expectancy. That's because you are locked in to the joint life expectancy of you and your spouse, since your spouse was the designated beneficiary on your RBD.
This bill proposes to change all that.
It will let IRA owners that have passed their RBD have a limited opportunity to change their IRA beneficiary and distribution method for calculating both lifetime and post-death required distributions. These changes will be treated as if they were made before the RBD.
The tax proposal would give IRA owners one year to make all changes and have a second chance at creating an IRA distribution plan that can provide maximum benefit to IRA owners and their beneficiaries.
Read Ed Slott's recent columns on the three most important decisions you'll make with your IRA: Choosing a beneficiary, picking a life expectancy and picking a distribution method.
This bill provides an unprecedented window of opportunity. It is also desperately needed. Most IRA owners are still generally unaware of how important their IRA choices are. If enacted, this bill would eliminate the biggest tax traps with IRAs and will also change virtually all the distribution and planning advice given in the past.
I predict that advisers and financial institutions will be swamped with clients asking to make changes within the one-year period. One year may not be enough to make the changes on all IRAs.
Congress has finally realized that they have been one big pain in the neck with these complicated IRA distribution tax rules. This forgiving proposal reflects that. Both Congress and the IRS are aware that practically all IRAs have some compliance problem under current law. This is why they have come up with the fresh start concept.
Under the proposal, post-death distributions to beneficiaries would follow the rules as if the IRA owner died before the RBD. In other words, all IRAs would be treated similar to Roth IRAs, in that beneficiaries would be able to use their life expectancy to stretch distributions on their inherited IRAs, regardless of when the IRA owner died. The Five-Year Rule would also be available even if the IRA owner died after his RBD. Under current law, the Five-Year Rule only applies when the IRA owner dies before his RBD.
Remember that none of this is law yet. These are only tax proposals, but it appears that they have strong Congressional support and the President is likely to sign it into law. 
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