By pathdoc @ Shutterstock.com
More sausage is being made down in Washington D.C.—never a good thing especially when “revenue” and “IRA” are used in the same sentence.
It’s called the SECURE Act, which laughably stands for Setting Every Community Up for Retirement Enhancement.
It sailed through the House 417-3 and is expected to pass under unanimous consent by the Senate.
The insurance industry loves the Secure Act.
Uh-oh.
At the heart of their love affair with this foul ball is the introduction of annuities as investment options for 401(k) plans.
The reason they haven’t been offered in the past is because companies didn’t want to be on the hook if the insurer providing the annuity went belly up.
Remember, annuities are insurance products. Their solvency depends on the solvency of the insurer providing them.
They are not a diversified mix of stocks/bonds. They are YOU and the insurer, and perhaps a state guarantee that has hardly been tested.
The reason they’ll begin to be offered in 401(k)s is the insurance lobby saw to it that the Secure Act will not hold 401(k) sponsors liable if an insurer goes bankrupt.
Swell.
Release the hounds! You can bet anyone and everyone who has a 401(k) will be treed by insurance dogs attacking them with the annuity spiel.
Hidden out of site will be their high fees, high surrender charges, and dependency on the solvency of the insurer. No thanks!
Think you’ll understand what you’re buying? Please. The prospectus is about as clear as the tax code.
401(k) investors beware. I’ve never liked a business model that benefits when you die.
OK, then. The other bad news in this pathetic Secure Act is the elimination of the stretch IRA.
A stretch IRA works like this; Let’s say you have an IRA, your wife is your beneficiary and your two children are the secondary beneficiaries.
When you die, your wife takes the required minimum distribution (RMD) on her life expectancy.
Then, when she dies, the kids get it and it’s distributed based on their life expectancy, usually a long time, say 30-years. This long payout allows your children to avoid a massive tax obligation over a short period of time.
That’s gone.
The Secure Act eliminates the secondary beneficiary “stretch” or life expectancy RMD and defaults to 10-years.
That’s it.
You can imagine how this plays out.
Your kids are maybe in their prime earning years and inherit the IRA. They’ll have to clear it out within ten years.
I would make sure you have a conversation with your wife to explain how this works, and then explain to the kids that they will need to be ready for a potential windfall that will show up as taxable income.
Strategies?
There will be many.
My idea is to maybe take all of it over three to five years when the kids can somehow live off dividends and cap gains and drop their income as low as possible.
And the good? Hmmph. There’s a couple crumbs I guess. The RMD age goes from 70 1/2 to 72. Big deal. And there’s no age limit on IRA contributions. Not that you’re going to be contributing much in retirement.
Basically, the Secure Act is a stealth tax and a fee grab courtesy of your elected bozos in Washington and the insurance lobby.
E.J. Smith - Your Survival Guy
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