SECURE Act - your thoughts

[audreyh1]

The deferral of RMD's to age 72 is being touted as a benefit. However, wouldn't the IRS construct a new, shorter life expectancy table that will require you to take out more earlier? If that happens, is this really much of a "benefit?"

I'm under the impression that life expectancy tables were updated as well such that it's pretty close to the original table, just shifted out two more years.

 

[BeachOrCity]

I think the 10 year rule is good public policy. Many folks use the IRA / 401K / Roth / back Door game to avoid taxes and pass things on to future generations. 10 years for kids or others (spouses get unlimited time), is completely reasonable to amortize the tax situation.

The public policy of the deferred taxation and ROTH vehicles is to provide for ones retirement, Not to game the estate tax issues.

 

[mpeirce]

The only real trouble I see with this new law is that it'll distort the inheriting kids tax situation for a number of years by pushing them into a higher bracket for (possibly) a decade.

And in many circumstances this will be an event that comes as a surprise - the death of a parent isn't always predictable.

Inheriting taxable assets (below fairly high thresholds) isn't a taxable event for most people, but this will be. So I expect CPAs (or other advisors) will be making money from the heirs of people in this forum.

 

[FIREchief]

Prior to the change to the stretch IRA rules (one Adult child as inheritor for us), I figured we would take the bare minimum from our IRAs when the time came and spend down the taxable amount. Currently, we have far more cash than common sense. Now, I wonder if we'll increase the IRA distribution amounts during the RMD years. Gotta feeling we're going to be seeing a lot of articles and books written on the subject.

Have you considered accelerating Roth conversions? Under the new law, the inherited Roth funds could grow untouched for ten years, with no taxes due at the end of the tenth year.

 

[gerntz]

I think the 10 year rule is good public policy. Many folks use the IRA / 401K / Roth / back Door game to avoid taxes and pass things on to future generations. 10 years for kids or others (spouses get unlimited time), is completely reasonable to amortize the tax situation.

I disagree. The issue to me is that the 10 year rule applies regardless of the age someone dies. So someone who dies at 80-85 has had the chance to distribute a significant amount of the IRA before death, likely at a lower tax rate since the distributions are like 4%/yr, & so the amount that remains is reduced, reducing taxable amount over the 10 years & likely the tax rate.

Whereas, someone who dies at 60 has likely not had the chance to distribute anything & so the distribution amounts each of the 10 years, & thus tax rate on higher amount, is more of a government take. It should be equitable regardless of death age imo.

Net, fairer would be to continue the distribution rates & period of the original owner regardless of death age. No stretch is involved. Everyone treated the same. This system penalizes those who die early. I think you need to be cold-hearted towards those that die early to like this system.

 

[gerntz]

There is sure less incentive to save "tax-deferred" now. Pay me now or pay me later.

 

[statsman]

There is sure less incentive to save "tax-deferred" now. Pay me now or pay me later.

To a point. Worrying about leaving an inheritance should be down the list compared to making sure you don't run out of money in retirement. I also wouldn't want to pass up any company matching by not participating in their 401(k) plan.

 

[aja8888]

There is sure less incentive to save "tax-deferred" now. Pay me now or pay me later.

Based on the fact that taxes keep going up, it appears that the "tax collector" would rather we pay as we make it than give us any method to defer paying tax. It would not surprise me that in some future year IRA's and other tax deferred options will be eliminated.

Notice that trend? Note that itemized deductions are going in the direction of eventual elimination.

 

[pb4uski]

The deferral of RMD's to age 72 is being touted as a benefit. However, wouldn't the IRS construct a new, shorter life expectancy table that will require you to take out more earlier? If that happens, is this really much of a "benefit?"

The same thought occurred to me, but I would expect that to be offset by the 2 extra years to Roth convert before the RMDs hit.

Au contraire... they are working on updating life expectancy tables to be longer.... not shorter.

https://www.kitces.com/blog/irs-proposes-new-rmd-life-expectancy-tables-to-begin-in-2021/

 

[fh2000]

The withdrawal is based on the prior year Dec 31 balance and must occur during the year you turn 72 OR up to April 15 of the following year (still based on Dec 31 2024). But most people avoid the second option as it means taking out two RMDs in the same calendar tax year since the deadlines are end of year after the first RMD.

So - take your first RMD in 2025 based on the Dec 31 2024 combined IRAs value.

Will the RMD distribution table simply shift downwards by 2 years, or the divisors might have new but small changes?

 

[davebarnes]

I read the article in the WSJ this morning.
Annuities in 401Ks does not sound like a good idea to me.

 

[Winemaker]

That's one interpretation... the key question is what the law originally intended... I suggest that the lifetime provisions for non-spouse beneficiaries were originally intended for the next generation... kids, nieces and nephews... and NOT for grandchildren and great-grandchildren which is what was advocated by some clever lawyers and CPAs based on how the law was originally written.

Under that view, the SECURE Act is just closing that loophole... but I'll concede that with 10 years that they probably overdid it.

As I mentioned long time ago on another thread about the same subject, these clever lawyers will now contrive to make up "401k marriages" to circumvent this latest money grab. Regardless of whether it was contrived in 1974, or by tax judge, it has been the law of the land for 20 years. Consistency breeds good planning, good thoughts and good economics. Judge Learned Hand said we didn't have to pay anymore than the legal tax, but that has been changed. So may God strike me dead before January 1st, so that the millions I've earned, saved, invested, and retained, can be passed on to my legal heirs before they're robbed.

 

[pb4uski]

I think the 10 year rule is good public policy. Many folks use the IRA / 401K / Roth / back Door game to avoid taxes and pass things on to future generations. 10 years for kids or others (spouses get unlimited time), is completely reasonable to amortize the tax situation.

The public policy of the deferred taxation and ROTH vehicles is to provide for ones retirement, Not to game the estate tax issues.

I disagree. The issue to me is that the 10 year rule applies regardless of the age someone dies. So someone who dies at 80-85 has had the chance to distribute a significant amount of the IRA before death, likely at a lower tax rate since the distributions are like 4%/yr, & so the amount that remains is reduced, reducing taxable amount over the 10 years & likely the tax rate.

Whereas, someone who dies at 60 has likely not had the chance to distribute anything & so the distribution amounts each of the 10 years, & thus tax rate on higher amount, is more of a government take. It should be equitable regardless of death age imo.

Net, fairer would be to continue the distribution rates & period of the original owner regardless of death age. No stretch is involved. Everyone treated the same. This system penalizes those who die early. I think you need to be cold-hearted towards those that die early to like this system.

I think you are both right. I'm glad that they closed the stretch loophole that allowed the wealthy to pass tax-deferred IRAs to their grandchildren or great-grandchildren and was an abuse from a public policy perspective. At the same time, this arbitrary 10 years is onerous in some cases... not so for the person who lives an normal life expectancy (~82 if we believe the SS crossover point) but crazy for someone who dies prematurely (say at 60). I would have like to seen a more well thought out alternative.

 

[pb4uski]

There is sure less incentive to save "tax-deferred" now. Pay me now or pay me later.

That was the whole idea even to begin with... pay 28% or more "now' (back then) or presumably less than 28% later (in retirement). In my case it worked out splendidly.... I avoided paying 28% or more, will pay 8-9% between ER and when SS starts and 22% after that.... saving 6%-20% or more.

 

[prudent_one]

I feel for people who will be adversely affected by the 10-year IRA distribution change, but I think the new rules make more sense. I don't know why it was ever allowed to hand it over to others tax-free. It was designed for an individual to use in retirement - tax-defer when working, withdraw in retirement when tax brackets are likely to be lower.

 

[REWahoo]

That was the whole idea even to begin with... pay 28% or more "now' (back then) or presumably less than 28% later (in retirement). In my case it worked out splendidly.... I avoided paying 28% or more, will pay 8-9% between ER and when SS starts and 22% after that.... saving 6%-20% or more.

^ Same here.

 

[aaronc879]

That was the whole idea even to begin with... pay 28% or more "now' (back then) or presumably less than 28% later (in retirement). In my case it worked out splendidly.... I avoided paying 28% or more, will pay 8-9% between ER and when SS starts and 22% after that.... saving 6%-20% or more.

You say that as if the current tax rates are locked in for the rest of your life. Chances are very high that at some point the Federal tax rates will go up significantly. You may still save money on taxes but you can't really know how much you may save. Things change.

 

[pb4uski]

You say that as if the current tax rates are locked in for the rest of your life. Chances are very high that at some point the Federal tax rates will go up significantly. You may still save money on taxes but you can't really know how much you may save. Things change.

True, tax rates go up and go down... they are broadly lower today than when I was working... given my other sources of retirement income it is very unlikely that the incremental tax that I pay on tIRA withdrawals and RMDs will ever be higher than what I saved when I deferred that income... and I think most retirees could say the same.

If not, then it is a nice problem to have.... there were no guarantees that the tax would be lower in retirement... so what is your point?

 

[gwraigty]

I've skimmed through page 644 of the document so far, and I still get the impression that all inherited IRAs will be affected, not just ones inherited after December 31, 2019.

Post #102 in THIS THREAD lists the relevant text in the bill. Post #105 lists exactly where you can find the text in the bill.

 

[gwraigty]

The public policy of the deferred taxation and ROTH vehicles is to provide for ones retirement, Not to game the estate tax issues.

Aren't estate taxes a different issue?

I disagree. The issue to me is that the 10 year rule applies regardless of the age someone dies. So someone who dies at 80-85 has had the chance to distribute a significant amount of the IRA before death, likely at a lower tax rate since the distributions are like 4%/yr, & so the amount that remains is reduced, reducing taxable amount over the 10 years & likely the tax rate.

Whereas, someone who dies at 60 has likely not had the chance to distribute anything & so the distribution amounts each of the 10 years, & thus tax rate on higher amount, is more of a government take. It should be equitable regardless of death age imo.

Net, fairer would be to continue the distribution rates & period of the original owner regardless of death age. No stretch is involved. Everyone treated the same. This system penalizes those who die early. I think you need to be cold-hearted towards those that die early to like this system.

You make an excellent point. My father died at 67. He'd been taking monthly distributions from his TSP since he retired at 62. When I rolled over his TSP into an inherited IRA, I was given the option to clean out the account in 5 years, or do the stretch option. For reasons that aren't important, I chose the 5 year option on my inherited account application. I had second thoughts soon after, and called TD Ameritrade to ask if I could do the stretch instead. I hadn't yet taken a distribution and barely a month had passed since making my election. I was told I couldn't make the change. (I don't know if TDA was right or if they were just being lazy in not allowing me to change my election.)

The balance I inherited was around $80K. Our tax bracket jumped from 15% to 25% for those 5 years. If I'd chosen better in the first place, we'd have stayed in the 15% tax bracket with minimal RMD amounts. When DH's salary eventually put us in the old 25% bracket anyway, then I could have chosen to empty the inherited IRA faster, with no extra punitive tax consequences. My bad though.

I think you are both right. I'm glad that they closed the stretch loophole that allowed the wealthy to pass tax-deferred IRAs to their grandchildren or great-grandchildren and was an abuse from a public policy perspective. At the same time, this arbitrary 10 years is onerous in some cases... not so for the person who lives an normal life expectancy (~82 if we believe the SS crossover point) but crazy for someone who dies prematurely (say at 60). I would have like to seen a more well thought out alternative.

+1 See my above comment. They could have allowed a stretch option for the next generation of descendants from the original account holder, but no further.

I feel for people who will be adversely affected by the 10-year IRA distribution change, but I think the new rules make more sense. I don't know why it was ever allowed to hand it over to others tax-free. It was designed for an individual to use in retirement - tax-defer when working, withdraw in retirement when tax brackets are likely to be lower.

It's not a given that tax brackets are lower in retirement, though that's the way traditional IRAs are usually marketed. Anyway, IRAs aren't inherited by anyone tax-free. I don't know why you think that. Heirs/beneficiaries have to take distributions and pay the income tax, unless it's a Roth, which has different rules.

 

[gerntz]

What this is going to do for/to me, is to cause me to increase my number of IRA heirs. That way the amount any one person might receive will be lower & thus the increase in each's income & possibly tax rate will be lower.

 

[Ready-4-ER-at-14]

I think the 10 year rule is good public policy. Many folks use the IRA / 401K / Roth / back Door game to avoid taxes and pass things on to future generations. 10 years for kids or others (spouses get unlimited time), is completely reasonable to amortize the tax situation.

The public policy of the deferred taxation and ROTH vehicles is to provide for ones retirement, Not to game the estate tax issues.

Although I agree with you about 10 years being a reasonable time at first thought, I have to look at other things in law that perpetuate wealth distributions to heirs such as copyrights or corporations. The original idea was if a person collects assets or creates marketable stuff the person, the spouse and the immediate kids benefitted. Now only corporate or Disney stuff goes out 50 or 75 years.. Hmm shouldn't that be ten years too or have I missed something?

 

[CardsFan]

That was the whole idea even to begin with... pay 28% or more "now' (back then) or presumably less than 28% later (in retirement). In my case it worked out splendidly.... I avoided paying 28% or more, will pay 8-9% between ER and when SS starts and 22% after that.... saving 6%-20% or more.

Same here. I avoided 25-28%, to be taxed at about 10% now (for conversions), and 22%-25 later.

I am ahead of the game.

I think you (pb4uski) said it earlier, if I pay more, it is a success tax.

 

[Alexi]

Trump just signed the defense spending bill during a military ceremony at Andrews base [it was on C-Span.] Not sure if he has signed the other part of the spending bill ??

 

[Bamaman]

Will the RMD distribution table simply shift downwards by 2 years, or the divisors might have new but small changes?

The lifespan will remain the same, which means I expect the withdrawal percentage will be a little higher.

I turn 70 May, 2020, and this will divert the RMD's for me 2 years. Fortunately our lifestyle doesn't require any withdrawals at this time.