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House Overwhelmingly Passes Bill that Will Devastate IRA and Retirement Plan Owners
This is a big deal for IRA and retirement plan owners.
- A short video explanation found at paytaxeslater.com/DeathoftheStretchIRAVideo
- Revised workshops incorporating the potential changes, the next two are Saturday, June 29th in Squirrel Hill and again on Saturday, July 20th in the South Hills. See the back of the newsletter for details.
- A webinar on Tuesday, June 25th at 1 p.m. Please go to paytaxeslater.com/Webinar to sign up.
- We have already sent updates to those who have signed up for our e-mail newsletter. We will continue to send out e-mail as developments and our responses to the developments continue. If you have not done so yet, please sign up for our e-mail newsletter by going to paytaxeslater.com.
- Read this newsletter for the breaking news.
The bill is promoted as an “enhancement” for IRA and retirement plan owners because it includes provisions allowing some workers to make higher contributions to their retirement plan. It also eliminates the existing cutoff of age 70 ½ by allowing workers of any age to contribute to Traditional IRAs and extends the required minimum distribution age to 72. The fine print, however, spells massive income-tax acceleration for the families of IRA and retirement plan owners after the death of the IRA owner.
The consequences of this bill will be devastating to people who have worked hard their entire lives, played by the rules, and accumulated significant amounts of money in their IRAs and retirement plans. It will be even more devastating for IRA owners whose IRA and/or retirement plan constitutes the biggest asset in their estate. This proposed massive acceleration of taxes really betrays those conscientious savers who socked money away under the assumption that they would be able to pass that money on to their children in a tax efficient manner.
Under existing law, non-spousal heirs of an IRA owner can “stretch” or extend the taxable distributions of an inherited IRA over their lifetime. The benefit of protracting the distributions of an inherited one-million-dollar IRA could mean as much as a million additional dollars to the heirs of the IRA owner over their lifetime compared to what would happen with the House bill. It’s all about how quickly taxes are or are not collected. Under the Secure Act, the entire IRA or retirement plan would have to be distributed within 10 years of the death of the IRA owner.
The Senate is also proposing changes to the “stretch” rules. In mid-April Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., reintroduced their Retirement Enhancement and Savings Act (RESA). The Senate version proposes a five-year distribution deadline (instead of ten-years) which is even more draconian. This distribution rule is considerably softened by the inclusion of a provision that would exempt the first $400,000 per IRA and retirement plan beneficiary. This exemption, however, would make estate planning extremely complicated for IRA owners who have more than $400,000 in their accounts. Presumably, if the Senate goes on to pass their version, the House and Senate will have to compromise on the details. But, if the resulting compromise includes any of the changes to the distribution rules for inherited IRAs and retirement plans proposed in either of these bills, its passage into law will, to a large extent, spell the end of the “stretch IRA” as we know it.
It is important to note that none of the proposed changes apply to accounts inherited by the surviving spouse; which makes “getting married for the money” much more attractive for older IRA and retirement plan owners who are currently in committed relationships.
The Tax Cuts and Jobs Act of 2017 gave the middle class that consists of roughly 65 million people, a tax cut of $1,370. The top .1% (about 120,000 taxpayers) got an average tax cut of $193,380 (LISI Estate Planning Newsletter#2610). Well, your heirs are going to make up just a small portion of that cut. This threat has been on the horizon for years. Back in 2013 a bill that would have killed the stretch IRA was passed by the House of Representatives and was only narrowly defeated in a 51 to 49 vote by the Senate. Then, in 2016 we saw the reintroduction of similar legislative proposals which enjoyed strong bipartisan support.
So, what can retirement plan owners do to respond to these impending changes? How can they protect the financial legacy they hope to leave for their children and grandchildren?
Of course, no blanket recommendations will cover every IRA and retirement, plan owner. However, action can and should be taken by many taxpayers before the law takes effect. If timed correctly, Roth IRA conversions can be an effective strategic planning tool. Roth IRA conversion planning just got a lot trickier. I will be addressing Roth IRAs and Roth IRA conversions in our 1:00 p.m. workshop, Cut Taxes on Your IRA Withdrawals With the New Trump Tax Laws.
The new law will also bring to the forefront the importance of using optimal strategies when applying for Social Security benefits.
Gifting in various forms could also be a potential partial solution.
Finally, flexible estate planning can be very helpful in providing options for survivors that will allow them to make better decisions with information that is current when the IRA owner dies. It would likely be advantageous to review and possibly update your entire estate plan, including wills, trusts, and IRA beneficiary designations. Lange’s Cascading Beneficiary Plan, the ultimate in flexible estate planning using disclaimers, will be addressed at our 9:30 a.m. workshop, The Best Estate Plan for Married IRA Owners Combined with Optimal Trust Planning for IRAs and Retirement Plans.
I have been on the forefront of this issue for years, first sounding the alarm in the 2015 second edition of my flagship book, Retire Secure!. And I even went on to write a book specifically on how to mitigate the potentially dire consequences of the Death of the Stretch IRA. Now you can have the opportunity to benefit from my strategic recommendations for navigating these impending changes. The e-book is essentially an update of the rewrite of that book. I have been quoted 36 times in The Wall Street Journal, have written 6 best-selling financial books, including Retire Secure! and The Roth Revolution which has been endorsed by dozens of industry greats including Charles Schwab, Larry King, Ed Slott, Roger Ibbotson, Jane Bryant Quinn, Burton Malkiel and 60 other IRA, legal, and financial experts.
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• Providing financial security for the surviving spouse, and potentially saving hundreds of thousands to pass on to your heirs.

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