Congress Is Coming for Your IRA

[question everything]

Like grave robbers opening King Tut’s tomb, Congress can’t wait to get its hands on America’s retirement-account assets. The House passed the Setting Every Community Up for Retirement Enhancement Act, known by the acronym Secure, in May. The vote was 417-3. The Secure Act is widely expected to pass the Senate by unanimous consent. While ostensibly helping Americans save for retirement, the bill would actually reduce the value of all retirement savings plans: individual retirement accounts, 401(k)s, Roth IRAs, the works.

The main problem with the Secure Act is that it eliminates the stretch IRA, the fixed star in the financial-planning firmament since 1999. The stretch IRA lets savers leave their retirement accounts to children, grandchildren or other beneficiaries. Under current rules, the recipients can parcel out the required minimum distributions from the accounts over the course of their actuarial lifetimes. Payouts tend to be relatively small for children but grow in size over the decades until the inherited IRA might comfortably provide for the child’s retirement through the power of tax-deferred compounding. A parent could die with the knowledge that, whatever vicissitudes their children might experience in life, they won’t have to worry about retirement.

Congress wants to kill this. The Secure Act gives nonspouse beneficiaries 10 years to pull out all the money in an IRA. The effect would be to make more of an IRA subject to higher taxes sooner, as distributions are made in supersize chunks. As much as one-third more of an inherited IRA would get gobbled up by taxes than under current rules. When the Tax Cuts and Jobs Act expires in 2025, taxes will rise across the board. If President Trump signs the Secure Act into law, the stage will be set for a taxpocalypse sometime in the next decade.

(snip)

Should a $1 million IRA pass to a high-earning adult daughter, at best she would have to take payouts adding $100,000 of annual income on top of her salary for a decade. If she lives in a high-tax state, half the annual payout’s value could be lost to taxes. It gets worse. The Secure Act would be a college planning nightmare for middle-income parents. If the parents of college-age children inherit a $500,000 IRA, the resulting highly taxed mandatory distributions—say, $50,000 a year for 10 years—would make them richer on paper than they actually are, eviscerating their ability to qualify for need-based financial aid. If those parents decide to postpone taking the distributions for four years to avoid the financial-aid effect, they would need to double up on distributions after graduation to compensate, which would land them in a higher tax bracket. If the grandparents skip a generation and leave the IRA directly to the college-bound grandchild, the “kiddie tax” would require the distributions to be taxed at the parents’ rates. Whichever way the family turns, they lose.

More..

https://www.wsj.com/articles/congress-is-coming-for-your-ira-11562713559 (paid subscription)

[Va Lefty]

1. Had not heard about this. Thanks for posting!

[PoliticAverse]

2. "until the inherited IRA might comfortably provide for the child's retirement" - this is about rich

people passing money tax-free to their kids.

In other news, the WSJ has bad things to say about the estate tax.

[question everything]

4. It is not tax free

When you withdraw funds from IRA you have to pay tax on it at your regular income level.

Many worked hard to save for their retirement so that their kids do not have to support them.

Why shouldn't their kids benefit?

[Wellstone ruled]

10. This is no surprise what's so ever.

In 1999 there was a segment of the Senate who wanted those IRA's to be consumed in a fixed time frame. Thus any and all monies would be taxed at the 28% rate. The Chatter at the time was,we need those dollars to cover for Tax Breaks for a certain Class of Tax Payers in order to balance the National Budget.

And the Balance Budget sicko argument once again will come back into play.

[mr_lebowski]

6. It sounds like it's not about 'avoiding taxes' but rather deferring them for a longer period

In the end the government gets more taxes as the IRA will have gathered more value by the time it's distributed. Granted, money in the future is worth less than money now inherently, but ...

I think I'm on the WSJ's side on this one myself. People should be able to pass on their retirement accounts to kids who would then wait to w/d the money until they retire.

[PoliticAverse]

8. Deferring taxes for as long as possible is a key strategy of the well off. n/t

[mr_lebowski]

9. Yes. It should also be a key strategy for anyone trying to become well-off. n/t

[question everything]

12. Just wrote to my senators to vote NO

I can't believe I am on the same side with Ted Cruz who put a "hold" on it.

[PSPS]

3. This is the WSJ. The correct headline would be "Congress might thwart a tax giveaway to the rich"

Trust fund babies might have to actually pay taxes. Oh noes!!11!1!

[question everything]

5. It is not "tax giveaway." Withdrawals from IRA are taxable.

[mr_lebowski]

7. Exactly. If the withdrawals are made later when the IRA is worth more, gov't gets more taxes (nt)

[PSPS]

15. Yes, and this would make trust fund babies pay more taxes. Oh noes!!11!

This is the WSJ. The "your" in their headline is referring exclusively to the parasite class.

[question everything]

17. Oh, thank you. I and many here have IRAs and 401Ks

We know that we need to prepare for retirement to continue be contributing citizens and paying our taxes.

You, I suppose, will rely on government giveaway, on all the "freebies" that many of our candidates are offering. And, who, exactly belongs to the "parasite class?"

[customerserviceguy]

11. Sounds like a tool

for the wealthy to pass money to the next generation without paying taxes. I'm not so sure that I'm against this bill.

My kids will be lucky if there's a dime left in my IRA by the time I croak.

[question everything]

13. Please read above comments. This is not tax free

When you withdraw funds from an IRA - whether it is your or the beneficiary - the funds are fully taxable.

Same here. Will probably exhaust the funds during my life time but still..

[customerserviceguy]

14. I used to be

enrolled to practice before the IRS. Yes, I understand the difference between tax exemption and tax deferral. I suppose I should have used the latter term to describe how I feel about this.

In any case, the heirs can take the taxable money, and fund their own retirement accounts with after-tax dollars. IRA's were established to help people plan for their own retirements, and not to be a vehicle to cause multi-generational tax deferral. That was just a feature sneaked into the legislation that was a giveaway to the well-off.

[AncientGeezer]

16. Wait..you just said...".. and fund their own retirement accounts with after-tax dollars"

An admission that those funds were taxed. but you say.." the heirs can take the taxable money"...... How many more times?
My Mom was a NYS County employee for 30+ yrs....with an IRA..."well off", she didn't live in squalor by any stretch..but she wasn't Buffet.
Why should her grand kids college money be hit again?

[customerserviceguy]

18. Yes, if they have to withdraw

the IRA in the ten years since the ancestor who left it to them died, it will be taxed. And during that ten years, not thirty, forty, or fifty years later. There are tax deferred investment vehicles for after-tax income.

It's only going to get taxed ONCE. But, defend the rich if you like.