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Trouble in the Chicken House (or Congress’s New Money Grab)

Congress can’t wait to get its hands on America’s retirement account assets.

The House passed the Setting Every Community Up for Retirement Enhancement Act (“SECURE”) in May. According to the Wall Street Journal, the vote was 417-3. Even our own Orange County Congressman Harley Rouda voted for it. The SECURE Act is expected to be passed in the Senate. This new bill would reduce the value of all retirement savings plans: IRAs, 401(k)s, and Roth IRAs.

The biggest problem with the SECURE Act is that it eliminates the stretch IRA which has been the lode star in the financial planning firmament since 1999. The stretch IRA allows savers to leave their retirement accounts to children, grandchildren, or other beneficiaries spread over the beneficiaries’ lifetimes. Under current rules, the recipients can partial out the required minimum distributions from the accounts over the course of their lifetime. Congress now wants to kill the stretch IRA.

The SECURE Act gives non spouse beneficiaries 10 years to pull out all the money in the IRA. The effect of this new law would make more of the IRA subject to higher taxes sooner. As much as one-third more of an inherited IRA will get gobbled up by taxes than under the current rules. It is estimated that this tax apocalypse would cost the American taxpayers about $17 billion in new taxes.

Under the SECURE Act, an IRA owner could still leave his account to a surviving spouse which would remain exempt from the clock but the widow would be paying taxes in a higher “filing single bracket.” For example, the required minimum distribution for a 70-year-old is approximately 4% of the retirement account balance but for a 90-year-old, it is approximately 9%.

Politicians have an insatiable appetite for both taxing and spending. The lopsided vote in the house (417-3) shows how easily access to new taxation down the road passes. Congress are cowards in addressing the required changes to entitlement programs and only make changes when a crisis hits. Many years of your estate planning would be for nothing under the new proposed law.

Beware! Congress is now letting the wolf in your chicken house!

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