SECURE Act 2019 was Congress playing “The Grinch” – for ‘The Sequel’ is Congress now trying to play Santa Claus?
In movies, the sequel is rarely better than the original, and even the original movie is never quite as good as the book, right? Well, in this case Congress, a collection of midgets, is trying to make up for their prior sins of neglecting a suffering pandemic populace and economy by playing Santa Claus with tax revisions of our retirement accounts.
SECURE Act 1.0: A Sneaky Trade-Off
Act 1 Scene 1: On January 1, 2020, the original SECURE Act (Setting Every Community Up for Retirement Enhancement) became law. The mere name should have alerted the masses that malice was afoot. It did not.
What was the “gift” of this legislation? If you asked a hundred citizens, you’d be lucky if even four know what it was. Congress moved the RMDs from age 70 ½ back in time to 72. [I love the technical lingo that puffs up professional ego at the cost of the lowly ‒ for the benefits of “normal folks” RMD means Required Minimum Distribution, the amount you are required by law to withdraw yearly from your IRA/401(k) once you reach a certain age.] This commutation of RMDs, the beginning of taxation on your lifelong savings in a 401K or IRA plan, merely delayed for a short time the ultimate payday to the IRS on those long deferred taxes.
So, one should have asked ‘Hmm, how will the Treasury pay for such a gift?’ I know I did. Well, the original Secure Act drove a wooden stake through the “Inherited IRA,” more commonly referred to as The Stretch IRA.
Grandma and Granddad, you’d better read slowly through this paragraph: Killing the Inherited IRA was the biggest tax grab of retirement accounts in history. If you leave any IRA, 401k, or TSP to a ‘non-spouse’ (that means your children or grandchildren), the 2019 original Secure Act demands a very early distribution on the entire balance subject to taxation at the higher tax rates of your beneficiaries. Now, if your IRA has only $50,000 in it, so what? It will be long gone during YOUR life. However, if you have saved for a lifetime, invested wisely, sacrificed for your retirement and the benefit of your family and you have two or more children, then mathematically the IRS will get the largest share of your savings, NOT your heirs.
(Shocked by this news? Contact our office about our “October Club” and our strategy to avoid excess early taxation on your legacy.)
So that’s the prologue, but now let’s focus on the pending legislation.
Secure Act 2.0: New and Improved?
As you now know, the original Secure Act was a “Robin Hood” piece of legislation that WILL take huge chunks of IRA distributions and re-direct them (much earlier and subject to much larger tax brackets) AWAY FROM your children and TO the US Treasury.
The sequel, the proposed SECURE Act 2.0, attempts to take the approval rating of this Congress, which is lower than a used car salesman’s, off the floor by appearing to grant everyone of all ages something for nothing. A classical magician’s use of misdirection if ever I saw one. Well Virginia, could there really be a Santa Claus this time? Hang your stockings and hope it’s not coal on Christmas morning.
Who Stands to Benefit?
- College Grads with Student Loans, ‘The Young”
Section 110 of the Act calls for the ‘treatment of student loan payments as elective deferrals for purposes of matching contributions.’ Employers could make matching contributions under 401k,403b, or SIMPLE IRAs while employees make student loan payments. If only the IRS code would also do that for mortgage payments (housing boom) or SUV payments (politically correct hybrids only, of course). The goal is politically popular with all. It would allow grads to BOTH pay off student loans AND start earlier saving in a retirement account.
- Post-Retirees, ‘The Old’
SECURE Act 2.0 further commutes the start of taxation of retirement accounts back from its current age 72 years to age 75. Taxpayers who did NOT turn 70.5 years in calendar year 2019 would now have an extra three years at reduced tax rates (they WILL go up for you when RMDs start, right?) to strategically and methodically implement a Roth Conversion strategy at those rates. Don’t wait.
- Pre-Retirees, The ‘Not-so-Old” 60 years+
The Catch-Up provision allowed older workers over the age of 50 to add more tax deductible funds to retirement accounts above the cap for younger workers. The 2021 cap on Catch up is $6,500.00; now it is proposed to raise it to $10,000.00 per year for those over 60.
- Savers Credit, The “Low Wage Earners”
The law currently allows low wage earners to contribute funds to a retirement account and take a TAX CREDIT. I did NOT say a tax deduction here. The SECURE Act 2.0 would give a single simple tax credit rate of 50% of the contribution amount off their 1040 tax return. It would also raise the maximum tax credit from $1,000 to $1,500.00.
- New Employees, The ‘Formerly Unemployed’
This provision would have new employees AUTOMATICALLY enrolled into employers retirement programs. Employees could opt out if they choose, but if they participate, an employer’s match and getting an early start on retirement savings is always a good thing.
On paper, at least, this sequel IS much better than the original in many ways. Let’s hope this recipe comes out looking and tasting much better than its predecessors.