The SECURE Act has been signed into law and it is changing retirement for us and our heirs ...

[DrMrLordX]

But the bigger thing is that the beneficiaries are getting money for absolutely no work of their own

So what? The contributor worked hard for that money, and it all gets taxed going in (Roth IRA) or coming out (traditional IRA, 401(k)). How many times does it need to be taxed before you're satisfied? If the contributor intends for their hard work to go to their heirs, then why not? Heaven forbid that someone in the lower middle class should finally allow their family to come up in the world by way of intelligent multigenerational investing.

Case in point:

Someone making $50k/year contributes 20% to their 401(k) with 6.7% annual growth and 3% employer match on 100% of the contribution. Assume 1% annual raise and no bonuses:



Building a legacy for your family is not a bad thing. You should want all working-class people to have a plan to come up in the world, in this generation and the next. If the above investor dies in his late 60s or early 70s, he could leave over $3 million to his grandchildren. That's the difference between college and no college. That kind of money lets people buy houses with reduced debt (or no debt). That means being able to buy a car with reduced or no debt. That's meaningful wealth that helps entire families improve their fortunes. It's incumbent upon the contributor to prepare his children and grandchildren to manage the wealth and help it continue to grow, preferably at a rate greater than future generations can spend it. Families that can manage this feat are the bulwark upon which we build our society.

When you tax retirement account inheritances more-harshly, you're pushing people back down into lower income brackets in future generations.

they should start withdrawing more from their IRAs while they themselves are in a lower tax bracket and gift yearly amounts up to the tax-free gift limit to their heirs

An interesting manipulation, but why should that even be necessary?

I don't blame anyone for having planned to leave large IRA balances upon death for their children but to me this new law is more of a "plug a loophole" thing.

If there really is a loophole, then they could have put size caps on IRAs/401(k)s beyond which disbursement would be necessary. They didn't have to force people with smaller inherited IRAs/401(k)s to draw out everything in a 10-year period.

It's been reported Mitt Romney has $100m in his IRA (not a political comment, just a well-known example).

That was never the purpose of IRAs. Again, if someone wanted a cap that tracked with inflation, then so be it. The point of IRAs and 401(k)s were to help working stiffs prepare for their retirement and (hopefully) to build legacy for their family.

Some very wealthy peoples' offspring are no doubt sad about the end of the stretch IRA.

Very wealthy people have numerous ways to hide their money.

 

[PowerEngineer]

As I should probably be setting up some trusts soon to better position myself for old age/senility, the timing of these changes couldn't be much worse. I imagine it will now take a couple of years for financial planners and tax accountants to really sort out all the implications and come up with new "best" strategies to follow. Yet another reason (as if I really needed one) to procrastinate.

What I suppose this does underscore is the risks involved in following a long term financial plan that depends heavily on current government rules and tax laws.

FWIW, I have to agree that passing tax-deferred accounts on as inheritances seems like an abuse of the intent. Even a ten year window to further defer tax payments seems like a gift that IMHO beneficiaries shouldn't complain too loudly about.

 

[Brainonska511]

So what? The contributor worked hard for that money, and it all gets taxed going in (Roth IRA) or coming out (traditional IRA, 401(k)). How many times does it need to be taxed before you're satisfied? If the contributor intends for their hard work to go to their heirs, then why not? Heaven forbid that someone in the lower middle class should finally allow their family to come up in the world by way of intelligent multigenerational investing.

The contributor worked for that money. The beneficiaries did nothing to earn that money beyond winning some birth lottery. There are many ways to leave your progeny money - gift them directly, buy a life insurance policy, open a 529 account (since you seemed so interested in the paying for college for grandkids), etc... And if you die, the money in the retirement account will still go to your beneficiaries - they can invest it for an additional 10 years before they need to withdraw it.

Plus, there are a lot of other beneficiary benefits - such as stepped-up basis in property and investments - meaning they won't have to pay capital gains on the unrealized gains during your own life if they choose to dispose of those assets after your death. So don't worry, there are still many ways to leave large sums of money to beneficiaries.

 

[DrMrLordX]

The contributor worked for that money. The beneficiaries did nothing to earn that money beyond winning some birth lottery.

So you're willing to subvert the will of the contributor to "stick it to" the stereotypical lazy, privileged beneficiaries? By taxing the inheritance a second time? That's not how the SECURE Act was sold by Congress. Full name:


Setting Every Community Up for Retirement Enhancement


It's not named the Closing Retirement Loopholes Act or the Taxing Lazy Heirs Act.

Everyone pushing the legislation went well out of their way to describe how it would improve life for retirees, since it would extend the amount of time they could wait before being forced to take disbursements from their retirement accounts. Nobody openly promoted the Act's features that would enable the Feds to pick off more money from retirement accounts. Congress tends to hide things when they know they're going to be unpopular and/or just plain wrong. Suckering a bunch of people into using government-backed retirement accounts and then later changing the rules for beneficiaries is exactly the kind of thing that would (and should) spark outrage against all politicians. I think 3 members of the House voted against it, and the Senate stuck it into a broader spending package so votes for/against said package might not have had any relation to the SECURE Act itself (23 Senators voted against the spending package as a whole, for what it's worth).

There are many ways to leave your progeny money

Not all of it, and definitely not all of it with as favorable a tax profile as a Roth IRA in particular. Again, the whole point of IRAs, Roth IRAs, and 401(k)s is not so that Mitt Romney (or whoever) can have $100 million in a Roth. A few hundred thousand or more that can be managed ad infinitum by heirs of someone in the lower tax brackets was the whole point. All they had to do was implement an asset cap.

if they choose to dispose of those assets after your death.

Now they're forced into it. There's no choice. Let the dumping of index fund shares commence!

 

[IronWing]

The point of IRAs was never to pass on the money to heirs. It was to provide for the retirement of the contributor and spouse. Using an IRA to dodge income tax and inheritance tax is a feature of the tax code that should go away.

 

[allisolm]

So you're willing to subvert the will of the contributor to "stick it to" the stereotypical lazy, privileged beneficiaries? By taxing the inheritance a second time?

How are they taxing it a second time? Traditional IRAs are usually funded with pretax dollars and the owner of the account, be it the original contributor or a beneficiary, pays tax when withdrawals are made. ROTH IRAs are funded with post tax dollars and the owner, be it the original contributor or a beneficiary, is not taxed on withdrawals. With both types of accounts the taxing is done just once.

 

[DrMrLordX]

The point of IRAs was never to pass on the money to heirs.

Incorrect. The Stretch IRA was specifically designed to do just that.

How are they taxing it a second time?

Roths are taxed going in. If you are forced to pull money out and re-invest it in something that is not a Roth (which is still up in the air; I'm not an accountant, so I'm not absolutely sure how many options you have in rolling your inheritence from an old Roth into a new one), then you're exposed to the usual cap gains. The whole point of the Roth was that once money went in, you wouldn't have to pay tax on it ever again as long as you followed the 5-year rule. Now you're having to pay cap gains on it as the beneficiary assuming you want to keep the money growing as a form of multigenerational investment. As a base of principal on investments, an inherited Roth now has less value due to increased tax liability.

Traditional IRAs are taxed coming out. Holding the money in the IRA longer allows tax deferral, especially if you take disbursements at a lower tax bracket (done correctly, you could reduce tax liability to zero, assuming general deductions apply and other forms of income are low enough for the deductions to cover everything). Being forced to take the money out of an inherited traditional IRA in a 10-year window means I'm probably going to be paying a higher rate when the money does come out. So not technically being "taxed twice", just at a higher rate, which is really not much better.

If you're a 10-year-old getting an inherited IRA/Roth IRA from a grandparent, you're now forced (through your guardians, of course) to wipe out the entire thing by the time you're 20. Can't hold on to it for YOUR retirement, early or otherwise.

 

[brianmanahan]

well, it's just going to take some new planning to optimize the current situation as best as possible

making larger withdrawals to give tax-free gifts while alive will probably help, as will roth conversions

i have a traditional IRA that i plan to convert to roth bit by bit

i might do some calculations on using roth 401k, but i don't think it'll be worth it at this point in time

 

[Brainonska511]

If you're a 10-year-old getting an inherited IRA/Roth IRA from a grandparent, you're now forced (through your guardians, of course) to wipe out the entire thing by the time you're 20. Can't hold on to it for YOUR retirement, early or otherwise.

A minor has 10 years from when they turn 18, not a flat 10 years. Your 10-yo will have 18 years to grow income tax free before withdrawing it.

There are so many ways to avoid this issue and pass money into heirs with little or no taxes, even in the form of investments. Just look at taxable accounts: heirs get stepped up basis - a huge tax benefit when they go to sell those investments at market rate.

 

[PowerEngineer]

Incorrect. The Stretch IRA was specifically designed to do just that.

Well, that is certainly a bit of a stretch too!

There are no provisions for a so-called Stretch IRA in the tax laws. It is instead an estate planning strategy that takes (arguably unfair) advantage of the tax rules. It was "designed" by clever financial planners to deliver a tax advantages to the receivers of inheritances that was never the intent of the law. After all, we are talking here about Individual Retirement Accounts.

I have no problem with people taking maximum advantage of the tax regulations (as I myself try to do), but there really is no basis for crying crocodile tear when those regulations are adjusted to better meet the law's intent by closing loop holes or curbing abuses.