It’s a Stretch

Richard Quinn

FROM LISTENING TO financial talk radio shows, it seems the hot topic these days is the SECURE Act and how it’s hurt the middle class. One caller had $2 million in his IRA, and was worried about the impact of the stretch IRA’s elimination on his children and grandchildren.

What am I missing here? I thought IRAs were a vehicle to help average Americans save for their retirement, not an estate-planning tool. Under the new law, surviving spouses aren’t adversely affected, so that’s not the problem.

Instead, the SECURE Act affects those who want to pass along their IRA’s tax advantages to their children and grandchildren. Got so much money in your retirement accounts that you don’t believe you’ll spend much of it? Yes, the new law is aimed at you—but, no, you aren’t truly middle class. If you want to leave a nice sum to your children and grandchildren, you should be using life insurance or holding investments outside of retirement accounts, not funding an IRA.

On the one hand, we hear about pitiful savings rates, as well as tiny 401(k) and IRA balances. On the other hand, we’re now hearing about the unfairness of cutting off extended tax-deferred savings through multiple generations. For whom is this a problem, except upper-income folks? Me thinks thou doth protest too much.

What’s the worst-case scenario? Some 50-year-old children get to defer taxes for only 10 years after their parents’ death. They then put their largess in a taxable investment account or tax-free bonds and carry on.

Alternatively, to avoid bequeathing a big IRA, the parents might leave a brokerage account funded with large retirement account withdrawals. The children then get taxable account money, with everything income-tax-free, thanks the step-up in cost basis upon death. The way the federal debt is going, paying those income taxes sooner rather than later might be a good thing.

The angst being demonstrated over this issue seems to substantiate the SECURE Act’s intent. Sure, folks could die before they’ve spent much of their retirement accounts and their beneficiaries will lose some tax flexibility when handling a large IRA or 401(k). But I’m guessing the majority of people funding these accounts today aren’t worried about the money they won’t spend.

My advice: Keep calm and carry on—and keep funding those retirement accounts.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Going WithoutGetting Catty and Give Until It Hurts. Follow Dick on Twitter @QuinnsComments.

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