This is essentially a large money grab by Congress as the super saving baby boomers and the prior generation begin to retire, die and leave retirement accounts to beneficiaries. It will accelerate distributions, and therefore taxation, to millions of inheritors of IRAs.
In May, by a vote of 417-3, the House of Representatives passed The Secure Act.
Secure stands for Setting Every Community Up for Retirement Enhancement. If you have any type of retirement account, you’ll quickly learn that this Act does anything but help secure a better retirement for your heirs.
Some parts may help some Americans save for retirement, but if you’ve finished saving for retirement this is a slap in the face.
As you know, retirement accounts are held in your individual name, where you get the opportunity to name a beneficiary. The beneficiary is the person(s) who get that retirement account when you die. For many, that first beneficiary is a surviving spouse. The current and proposed rules allow a surviving spouse to rollover a deceased spouse’s IRA to one for themselves and spread the required distributions from that plan over the survivor’s life expectancy.
If, on the other hand, a decedent with an IRA did not have a spouse, and a proper beneficiary election was made, that beneficiary would also be able to inherit the IRA as a decedent IRA. That beneficiary could spread the distributions out over their life expectancy without penalty for any beneficiary who is under the magic age 59½. This is a definite tax advantage, especially for inheritors who are in their prime earning years and perhaps in a higher tax bracket than they’ll be during retirement. As the beneficiary of an IRA, you can take as much as you want whenever you want … but you’ll pay income taxes on the amounts withdrawn.
Under the Secure Act, Congress is stripping the ability to spread inherited IRA distributions over life expectancy.
The new limit, if passed by the Senate, will be a maximum spread of ten years. I suppose that is better than what would happen if you named no beneficiary, and the payments are forced out over five years… but not by much.
This is essentially a large money grab by Congress as the super saving baby boomers and the prior generation begin to retire, pass on and leave retirement accounts to beneficiaries. It will accelerate distributions, and therefore taxation, to millions of inheritors of IRAs.
To some, it may sound like I’m whining about a luxury problem, but this may hurt every day taxpayers and low income taxpayers in a very expensive way. Imagine that you’re working for low pay and have two children about to enter college. You may feel that you are a good candidate for some sort of financial aid. But then, your Dad has the bad taste to die and you are forced to add income to your tax return for the next ten years. This alone may indeed disqualify you for financial aid.
For high net worth families, this would be even worse as their estate plans may be based in part of smart distribution planning from their qualified plans. Suffice it to say, if this bill goes through I believe that it is not good for anyone and may require a re-work of your retirement and estate plans.