FEELING LESS SECURE …
On a podcast with Joe Rogan, infamous NSA whistleblower Edward Snowden discussed 2007’s “Protect America Act” and said “that (the name of the act) should have been our first indication this is a very bad thing, because they never named a law something like that unless it’s something terrible.”
Poignant discourse providing a backdrop to the SECURE (Setting Every Community Up for Retirement Enhancement) act which the U.S. House passed in May, 2019 by a bipartisan 417-3 vote.
While the bill is currently stalled out on the Senate floor with Republican holdouts from Ted Cruz (TX), Mike Lee (UT) and Pat Toomey (PA) preventing the SECURE act from passing.
Proponents of the bill believe the stall is more “logistical than substantial” and experts claim the bill has a good chance to pass early next year.
The SECURE act is advertised as a fix-all solution to messy 401k’s and sticky rules regarding withdrawing money.
It sets up more lenient “safe harbor” retirement plans for small businesses which grant flexibility for said businesses to open up their own retirement plans. It grants long term part-time workers eligibility for certain 401(k) plans. The act switches up the minimum-age distribution from 70.5 to 72 years old.And changes the deadline for businesses to claim these programs allowing flexibility. All positive clauses according to Senior Financial Advisor of Mammoth Wealth Management, Eric Wasserman.
And then there is Section 401.
Section 401 of the SECURE act is a provision that affects the distribution process for stretch IRA’s.
A stretch IRA is an estate planning strategy where the deceased passes on the IRA to a non-spouse beneficiary. It allows the beneficiary to inherit an IRA that continues generating tax-deferred growth.
The current way a stretch IRA is distributed is one of two ways. The first is a five year liquidation of the IRA where a person takes out about 20% of the IRA every year until it is completely gone. The second, and more commonly used, is a calculation based on how many years you are estimated to have in your life. Say you are 30 and inherit a $100,000 stretch IRA. Projecting a 50 year average life span, you’d be required at the outset to take out 1/50th, or $2,000, in year one. In succeeding years, you would gradually take out increasing sums until it is gone.
Under the SECURE act, the beneficiary will have one option: liquidate the IRA in 10 years. In addition, the SECURE act increases the monetary punishment for not complying with the withdrawal rules.
“It is overtly negative. There is no doubt about that,” said Wasserman.
Wasserman detailed that Stretch IRA’s also have a third option currently that allows families to create a long-term deferred growth IRA that accumulates compounding interest for a long period of time. In the example a 75 year old woman who dies with an IRA balance of around $103,000 and passes it on to her daughter who is 55 at the time. If the 55-year old woman does not need the retirement money she has a nine month window to disclaim her interest and would then pass it on to the contingent beneficiary, her 28-year old daughter. Because the daughter can stretch the IRA to 55.3 years (IRS calculation) she would hypothetically receive $564,071, based upon an average investment return of 5% compounded annually, raising the ceiling of the IRA by a multiple of five.
The Sheet asked financial Advisor Darin Kaylor, of Oram & Kaylor, how often he sees stretch IRA’s. “I recommend them all the time but I don’t know how often people actually listen to me,” he joked.
And if it is not clear why changing the withdrawal rules matter, Kaylor explained, “Say someone is making $20,000 a year, well if they inherit a $200,000 IRA and they have to claim all that money in ten years then they will double their salary, possibly pushing them into a different tax bracket.”
On why the law might be passed, Kaybelieves the government senses it’s missing out on a revenue bonanza.
“I have people come into my office all the time who have not withdrawn from their inherited IRA and have no clue that that is what they should be doing.” Kaylor continued to describe how the government could legally go after those people now, but if they pass a new bill then it brings the issue into the pulse of society. They could then collect their unearned tax revenue and penalties because the issue would be center stage.
The SECURE act still has a chance of not going through depending on what 2020 brings but the Stretch IRA alteration alone would transfer a significant amount of wealth from normal people straight into the hands of the government.
