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Broken promise ???
Old 03-04-2021, 12:36 PM   #1
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Broken promise ???

I started reading a book “beating the new death tax” by James Lange,cpa/attorney. I’m interested in looking for possible new ways to structure my distributions in retirement to possibly be more tax efficient. I’m in the part of the book where he mentions that if I die first my traditional Ira monies will pass to my wife first. After she dies whatever is left will go to our children (as per the beneficiary setup). What bothers me is that once the money is passed down to the children they must pull out distributions within a 10 year window. This may be a time in their lives where they might be making good money and this additional required distribution might throw them in a higher tax bracket. The CARES ACT deleted the “stretch Ira” feature. I feel that I have been saving for over 40 years so my kids might be able to prolong these distributions per their longevity numbers. Now all of a sudden the govt is looking for money to pay for all their programs, etc and deleting the stretch Ira features. This seems like a broken promise - to change the rules of the game. I understand the govt needs money to pay for programs but why not grandfather this up to 2020 so that those that saved for the intended purpose of utilizing the stretch Ira don’t get screwed? If people still want to contribute, fine but don’t keep changing the rules when convenient for one side. I feel the govt broke its initial promise to us.

Rant over.. what are your thoughts?
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Old 03-04-2021, 12:59 PM   #2
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My thoughts are that the government can never be trusted to keep its promises. Sucks when it happens, but that’s just the way it is. Hopefully something was implemented that helped you in other ways. For example, the RMD requirement moving to 72, at least temporarily.
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Old 03-04-2021, 01:01 PM   #3
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I get your frustration. However, I'm not sure that stretch IRAs have been around for 40 years. I see some reference to 1999 for that. I can't find definitive wording to confirm.

In any case, tax law is not a promise, it's just the current law. Nobody promised it would stay that way forever. But, if they do away with the step up basis of taxable assets, I'd probably have the same kind of rant.

It would seem fair that contributions made under the stretch law plan be grandfathered in, but it would seem awfully complicated to determine which part of your IRA was before the stretch law came into being, which part is during, and which part after it went away. And it's your heirs that have to know. My IRA has been at 4 or more places, if you count the original 401K which is where nearly all of my IRA contributions were done.
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Old 03-04-2021, 01:03 PM   #4
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This change in the law is one reason there have been a number of threads recently on Roth conversions and whether or not those with heirs should convert into higher tax brackets now to allow more tax free growth for our heirs. If you're concerned about possible changes to the Estate tax laws too, then it strengthens the argument for conversion.
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Old 03-04-2021, 01:12 PM   #5
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Several thoughts:

It was the SECURE Act, not the CARES Act. And it left in place the stretch IRA for people who died before 1/1/2020, as well as in a few minor exception cases going forward so there was some grandfathering.

The government enacts laws, not promises. They can change the rules any time by enacting new laws as long as those laws comport with the Constitution. And this is true even for things that have been in place for a long while, such as the stretch IRA and, to point out another example, Social Security.

While the SECURE Act elimination of the stretch IRA had adverse impacts on my family, I reluctantly agree that IRAs are designed for individual retirement, not intergenerational wealth transfer.

The only things I figure I can do is keep abreast of the changes, be flexible and agile, and respond to the government's rule changes as cleverly as I can.

Depending on your financial situation and goals, you may want to look at leaving your traditional IRA directly to your children rather than to your wife. As long as she has enough other assets, it may let your kids take out the funds at an earlier and lower-earning income stage of their lives.

You may also want to look at Roth conversions. If estate taxes are an issue for you, you may also want to look at annual gifting to your kids and/or QCDs. Finally, if you have grandkids they open up some additional options.

I understand it's frustrating, though.
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Old 03-04-2021, 01:50 PM   #6
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Originally Posted by RunningBum View Post
I get your frustration.

In any case, tax law is not a promise, it's just the current law. Nobody promised it would stay that way forever. But, if they do away with the step up basis of taxable assets, I'd probably have the same kind of rant.

DH inherited an IRA in 2020, so we now have the 10 year max deferral. I do not like it either.


RunningBum, I hate to say this, but since the government required brokers to start tracking basis (in 2012 I think), I am guessing we are not to far from no longer having a step up basis.
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Old 03-04-2021, 02:00 PM   #7
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While the SECURE Act elimination of the stretch IRA had adverse impacts on my family, I reluctantly agree that IRAs are designed for individual retirement, not intergenerational wealth transfer.

+1!

Perhaps I am biased because the concept of inheriting an IRA (or anything else, really) was never a possibility. In any case, once I learned about stretch IRAs, I felt that they were an abuse of the system.
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Old 03-04-2021, 02:02 PM   #8
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We've debated this ad nasuem. I don't view it as a broken promise at all. The basic promise was that you could save money for retirement and then pay tax on it when you took it our for retirement... it made perfect sense that promise would extend to both people in a married couple... but then there was the issue of what to do when the second person died and the stretch was born out of necessity but IMO it wasn't really part of the promise.

Then some clever accountants and lawyers figured out that there was a loophole and that rather than having your kids inherit an IRA and have it stretch that you could designate grandchildren or even great-grandshildren as beneficiaries... and the super-stretch was born.

Finally, Congress came along and the SECURE Act made it clear that they didn't intend any super-stretch and closed off the loophole. IMO, they overshot a bit... I would have preferred that non-spouse beneficiaries use the remaining life of the decedent in the year that they died from the RMD table rather than 10 years, but 10 years doesn't seem ourtageously unreasonable to me.

P.S. It's a little disingenuous to suggest that the prospect of intergenerational wealth transfer was an important factor in your decision to do tax deferred saving in 1980! For me it was just an interesting tax rate arbitrage opportunity... defer while working to later withdraw when retired and in a lower tax bracket... that was the pitch... I was much more focused on chasing women than on intergenerational wealth transfer... heck, at that time I didn't even have a next generation to transfer to!
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Old 03-04-2021, 03:13 PM   #9
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+1!

Perhaps I am biased because the concept of inheriting an IRA (or anything else, really) was never a possibility. In any case, once I learned about stretch IRAs, I felt that they were an abuse of the system.
This!
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Old 03-04-2021, 03:14 PM   #10
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We've debated this ad nasuem. I don't view it as a broken promise at all. The basic promise was that you could save money for retirement and then pay tax on it when you took it our for retirement... it made perfect sense that promise would extend to both people in a married couple... but then there was the issue of what to do when the second person died and the stretch was born out of necessity but IMO it wasn't really part of the promise.

Then some clever accountants and lawyers figured out that there was a loophole and that rather than having your kids inherit an IRA and have it stretch that you could designate grandchildren or even great-grandshildren as beneficiaries... and the super-stretch was born.

Finally, Congress came along and the SECURE Act made it clear that they didn't intend any super-stretch and closed off the loophole. IMO, they overshot a bit... I would have preferred that non-spouse beneficiaries use the remaining life of the decedent in the year that they died from the RMD table rather than 10 years, but 10 years doesn't seem ourtageously unreasonable to me.
... and this!
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Old 03-04-2021, 03:17 PM   #11
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Tax laws are not promises, and I don't any of us have complained about broken promises whenever taxes were reduced.
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Old 03-04-2021, 04:06 PM   #12
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First rule of taxation: Tax laws will change, they always have and they always will.

That said, while I was not thinking of heirs 40 years ago, I WAS thinking of this 15 years ago when I took a lump sum distribution from my pension plan when the company was sold. Still not a bad decision, but the stretch IRA was a consideration.

What the elimination of the stretch has done is to put inheritance as the primary factor in Roth conversions, for us.

I was satisfied converting up to the 12% bracket max prior to this. Now I am going into the 22% bracket, but below the IRMAA cliff (for an effective rate of 16%), since I estimate DS and DDIL would pay about a 31% effective rate if we both died tomorrow.

There is also a smaller benefit to our future tax rate, and a little more benefit if/when one of us passes.

Just can't get the nerve for mega-conversions ($300k/year). Paying more in taxes than my normal spend excluding taxes just does not feel right. But if we get a huge pull back in the market, I could change that tune. Market timing? maybe?
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Old 03-09-2021, 10:40 PM   #13
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Can you copy some text from any gov't document or IRS website where they promised you this feature forever? My guess is no. Laws are always subject to change...roll with the punches.
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Old 03-10-2021, 07:32 AM   #14
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If I had my way, the estate tax would be 100% and this entire topic would be irrelevant.
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Old 03-10-2021, 08:09 AM   #15
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Things change all the time...remember a few years ago when a trial balloon was floated about imposing a hard cap (~$3 million, IIRC) on the amount you could have in retirement accounts?
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Old 03-10-2021, 08:10 AM   #16
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If I had my way, the estate tax would be 100% and this entire topic would be irrelevant.
I'm not voting for you!
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Old 03-10-2021, 08:27 AM   #17
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If I had my way, the estate tax would be 100% and this entire topic would be irrelevant.
Can you explain your reasoning?
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Old 03-10-2021, 09:11 AM   #18
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Can you explain your reasoning?
Dynastic wealth is bad for society. It exacerbates inequality and stifles ambition. Make as much as you want and spend as much as you want, just don't pass it on to your children. Everyone should stand on their own two feet, not on the shoulders of their parents and grandparents, and should run their own race through life. The children who grow up in wealthy households already have more advantages - typically better education (both the formal and the informal kind), better connections and better support systems - than those who grow up in poor households. They don't need additional wealth that has not been taxed (which is what happens with the step up basis).
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Old 03-10-2021, 09:40 AM   #19
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It seems like the ultra-wealthy agree... from what I have read, Buffett's kids are getting pretty modest inheritances. I suspect the same for Gates.

It would penalize family businesses where offspring have been groomed to takeover... Steve Forbes comes to mind.
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Old 03-10-2021, 09:59 AM   #20
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Dynastic wealth is bad for society. It exacerbates inequality and stifles ambition. Make as much as you want and spend as much as you want, just don't pass it on to your children. Everyone should stand on their own two feet, not on the shoulders of their parents and grandparents, and should run their own race through life. The children who grow up in wealthy households already have more advantages - typically better education (both the formal and the informal kind), better connections and better support systems - than those who grow up in poor households. They don't need additional wealth that has not been taxed (which is what happens with the step up basis).
That's a pretty wide brush you are painting with. Only 5% of people in the US are really wealthy, and I don't think they are all are responsible for "inequality". My special needs grandson may need the wealth I created w*rking in a coal mine for 35 years, to have a decent standard of living.

Yes, I feel the "pay to go to good school" scandal is criminally wrong, paying for one's grandkids education, is an advantage that was created by blood/marriage lines.

But I will agree with you on one point, the current goofiness and attention paid to the "royals" who gave up their cushy life, and are complaining about the attention and lack of a cushy life.
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