Economy
Related: About this forumCongress Is Coming for Your IRA
Like grave robbers opening King Tuts tomb, Congress cant wait to get its hands on Americas 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 childs 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 wont 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 payouts 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 distributionssay, $50,000 a year for 10 yearswould 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
(6,252 posts)PoliticAverse
(26,366 posts)people passing money tax-free to their kids.
In other news, the WSJ has bad things to say about the estate tax.
question everything
(47,476 posts)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
(34,661 posts)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
(33,643 posts)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
(26,366 posts)mr_lebowski
(33,643 posts)question everything
(47,476 posts)I can't believe I am on the same side with Ted Cruz who put a "hold" on it.
PSPS
(13,594 posts)Trust fund babies might have to actually pay taxes. Oh noes!!11!1!
question everything
(47,476 posts)mr_lebowski
(33,643 posts)PSPS
(13,594 posts)This is the WSJ. The "your" in their headline is referring exclusively to the parasite class.
question everything
(47,476 posts)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
(25,183 posts)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
(47,476 posts)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
(25,183 posts)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
(2,146 posts)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
(25,183 posts)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.