What does this mean?

The tax code allows beneficiaries of IRAs to stretch out their distributions for a period of time equal to their life expectance, as defined by the uniform lifetime table.

Assuming the individual doesn’t change tax brackets, this could reduce the taxes paid on his or her inheritance at the time they are received, and consequently could return a larger inheritance over the life of the disbursement. Additionally, it might deliver a steady income stream for years.

Recently, the IRS has said it might do away with the stretch provisions. In the Highway Investment, Job Creation, and Economic Growth Act of 2012, Senate Committee chairman Max Baucus, D-Montana, has proposed a provision that would require inherited IRAs to be distributed within five years of the benefactor’s death. If passed, the new rule would take effect for all deaths occurring in 2013.

On the surface this might seem like a simple way for the government to help raise taxes during a time when more revenue is desperately needed. Congress might even believe it would not have a large effect on the typical American, and that the benefits will far outweigh the consequences. It’s my belief that this proposed revision was developed without complete insight into the effects it could have on Americans.

If the "stretch" provision is removed, it will devastate the $17 trillion dollars held in retirement accounts as it passes to the next generation of account holders. They would be forced to “cash out” within five years, thus eliminating the chance for accounts to continue to grow the way they had previously. Alternatively, stretching the account would allow the money to continue to grow tax-deferred for up to 60-plus years — and even potentially pass between future generations.

It likely would have an even larger impact on Roth accounts, where beneficiaries pay no income tax when receiving Roth accounts through inheritance.

If this legislation passes, it could amount to individuals possibly paying taxes on retirement accounts they inherit at much higher tax brackets, as they will not be able to spread the payments out over many years. This essentially would force people to spend down more of their inheritance sooner.

I believe the government should allow Americans to choose how and when they distribute their own assets and stop going after their savings to make up for shortfalls in the budget.

Joe Wirbick is president of Lancaster financial services firm Sequinox and specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.