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Don’t Gut the 'Stretch IRA'


The Ways and Means Committee of the U.S. House of Representatives passed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019) earlier this year in a supposed attempt to help workers save more for retirement. A provision included in this lofty-sounding moniker works directly against the goal of increasing retirement income security.

A provision in the bill would force the distribution of an inherited Retirement Account within 10 years for most non-spouse beneficiaries. This would throw cold water on a strategy known as the "Stretch IRA,” which currently allows beneficiaries to withdraw the funds over their own life expectancy.

The House version of the bill would force a distribution of the account's value within 10 years. The Senate version would force distribution of the account in five years if the beneficiary is not a spouse and if the account value exceeds $400,000 as of the date of death of the original account owner. Both proposals make exceptions for spouses and a few other special cases.

Why would Congress include contradictory concepts in this supposedly well-meaning proposal? The only reason we can see is that requiring inherited accounts to be distributed faster accelerates collection of income taxes on the distributions. Once again, Congress is placing its excessive spending priorities ahead of what is good for American citizens. This time, they are trying to hide their ulterior motive in plain sight.

Fortunately, should this provision of the SECURE Act be passed into law, there are alternative planning strategies to delay distribution of the inherited funds. Unfortunately, these techniques are complex and expensive. We see no compelling reason to alter the “Stretch” provisions that were welcomed by financial advisers and their clients when Congress voted them into law several years ago.

Most Americans have woefully little retirement savings. Congress repeatedly indicates a willingness to encourage saving for retirement, while at the same time testing the political climate for raising taxes. These concepts cannot peacefully co-exist.

We at Van Wie Financial have a better idea. Why not raise contribution limits for retirement savings plans, including IRAs, 401(k)s, and 403(b)s? After all, a wealthier retired population will pay more in taxes throughout their retired years. That would be a more responsible long-term goal for our elected officials.

Van Wie Financial is fee-only. For a reason.