SECURE Act of 2019 Erodes Future Capital Growth In Order To Pay For The Present Expenses

Leave a reply

Introduction – The SECURE Act aims to: “Set Every Community Up for Retirement Enhancement”

The above tweet references an excellent article by Daniel Kurt, describing the pros and cons of IRA reform. Significantly, the article includes:

One other key change in the new bill is paying for all this: the removal of a provision known as the stretch IRA, which has allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules will require a full payout from the inherited IRA within 10 years of the death of the original account holder, raising an estimated $15.7 billion in additional tax revenue. (This will apply only to heirs of account holders who die starting in 2020.)

Legislative/Socioeconomic Background

There is a “retirement crisis” in North America. Neither Canadians nor Americans are saving enough for retirement. At the same both governments are operating with huge deficits. Individuals have failed to plan for financing their retirements. As a result, any and all honest attempts to improve the situation are welcome. That said, governments seem to reflexively attempt to solve problems by generally increasing taxes. In some cases, governments increase the rate of taxation on income. In other cases governments broaden the tax based by subjecting new things to taxation. There is however a worrisome trend toward governments simply imposing taxation on existing capital. Examples include: the Section 965 transition tax and Section 877A expatriation tax. In both cases these laws create “fake income” by deeming there to be a distribution where there was in actual fact, no distribution to be taxed. The SECURE Act continues the same principle by forcing certain inherited IRAs to be distributed within a ten year period. At a bare minimum, this reinforces the principle that individuals should not be able to easily transfer assets to the next generation and that existing capital pools are fair game for taxation.

Prior To The SECURE Act Certain Inherited IRAs Could Grow For The Life Of The Beneficiary

In an earlier post (with the help of Chris Stooksbury) I had described the tremendous growth and capital preserving opportunity in certain inherited ROTH IRAs.

No more!

How does the SECURE Act Impact Canadian Residents?

Picking up the narrative from Chris Stooksbury (Beacon Hill Wealth Management) …

The Good & The Bad

What the new changes mean for Canadian residents with US retirement plans.

President Trump signed into law the SECURE Act late on Friday and the new rules will become effective Jan 1, 2020. These changes were designed to “Set Every Community Up for Retirement Enhancement” and will affect Canadian residents with US retirement plans. There are 29 provisions in the law, but we are going to focus on the two areas that will affect Canadian residents.

First, the good news:

RMD (required minimum distributions) will begin @ age 72 now, not the previous 70.5. This is a net positive for Canadian residents as it delays the taxable income they must take from their IRA/401k. Regardless of account balance, this should defer income tax owed for everyone.

Now, the bad news:

The “stretch” feature of IRA/ROTH accounts has been changed to a maximum 10 years. Previously, you could name a non-spousal beneficiary (adult child, grandchild, great-grandchild) and that person could “stretch” that account over their lifetime.

Under the new legislation you can still name non spousal beneficiaries, but all the funds must be distributed by the end of year 10 (there is no annual requirement, so you do not have to take any distributions in the first nine years). Note, this does not affect spousal rollovers. You can still name your spouse as your beneficiary of your retirement account, and they can roll your IRA/ROTH into their respective account. Upon the second spouse’s death, they can name any beneficiary they choose and allow them to stretch the account for a maximum 10 years.

This change could have large ramifications for people with large IRA/ROTH accounts and might warrant a review of your estate plans.

**Note, anyone with an inherited IRA/ROTH IRA currently will be grandfathered in under the old rules.

Net/net the changes are good for those with smaller account balances and slightly bad for those with large account balances.

Some of the other changes below are on the whole positive but could get complicated when factoring in the tax treaty and mostly apply to US residents..

You can now contribute to an IRA account past age 70.5

Part time employees can now contribute to a 401k plan (500 hours/year min)

New parents will be able to withdrawal $5,000 penalty free (not tax free) from their plan to offset the cost of delivery or adoption.

Students can use up to $10,000 from a 529 plan to pay off student loans.

Happy Holidays,

Chris, Dixie, Uyen & April

Americans abroad and various tax treaties

Americans abroad are always dual tax residents. Hence, they need understand how U.S. income streams are taxed under the laws where they live – possibly impacted by tax treaties.

The Ugly – Yes, it’s a form of wealth confiscation

So the curtain closes on a tremendous financial planning opportunity allowing for the preservation, growth and retention of capital. The requirement to collapse IRAs bequeathed to non-spouses within ten years is a form of asset confiscation triggered by death. In other words, it’s one more asset appropriation triggered by death. Although this is a matter of tax policy, it’s interesting to note that Congress has once again stolen from the future to pay for the present.

Viewed from another perspective, the abolition of the stretch IRS provision, is punishing those who have saved for retirement under the existing tax rules to reward those who have not saved for retirement.

In a broader sense, as noted by Sovereign Man:

And for a more technical discussion of why this will result in a rethinking of your estate plan:

Happy New Year!

John Richardson – Follow me on Twitter @Expatriationlaw

Leave a Reply