New IRA Rules -- 2019 Tax Law -- Mandatory Distributions Begin At Age 72 Years Of Age

Updates

December 26, 2019:  For something I thought was relatively simple, it is much more complicated than I ever imagined. From MarketWatch:

Beneficiaries of individual retirement accounts may not see their inheritances for a decade under the newly passed SECURE Act, and when they do get the money, they may be taxed heavily for it.

Under the new retirement legislation, which was signed into law just days before Christmas, beneficiaries of inherited IRAs will need to withdraw that money within 10 years — that is, if they have access to it at all within that time.

Previously, nonspousal beneficiaries could opt to take only required minimum distributions over their life expectancy, rather than taking all the money within five years.

(Required minimum distributions are calculated with factors such as the beneficiary’s age, life expectancy and account balance.) That tax-advantaged possibility disappears with the SECURE Act, which only allows one option: up to 10 years to drain the account.

After the 10th year, any money that is left must be taken and the account closed, regardless of the tax consequences. 

Okay, we knew most of that. The "if one has access to it at all within that time."

I was a bit confused on that, but it appears that the writer suggests that if the beneficiary is held in a trust that dictates when/how the money can be withdrawn there could be problems with the new tax laws.

Imagine a 25-year-old grandson named beneficiary of a trust to include an IRA. Imagine if the grantor of the trust dictated that the proceeds could be not be distributed until the beneficiary was 45 years old, which would be 20 years from now. Under the trust, the grandson would not have access to the trust IRA until age 45, 20 years from now. But the new law says the IRA funds must be completely distributed within ten years.

I may not be interpreting the writer's thoughts correctly, but one gets the idea. My hunch is that either there are provisions in the law to address this, or the IRS will formulate rules. I assume the IRS would say the US tax law supersedes the trust instructions and that the IRA must be liquidated in full upon the tenth year. Ouch.

Be that as it may, a relatively simple-sounding change in the law seems to be a bit more complicated than I thought.

December 26, 2019: from The Wall Street Journal, repeal of the "Cadillac tax."

The 40% levy on high-cost employer health insurance, which was delayed twice, was scheduled to go into effect in 2022. The tax, part of the 2010 Affordable Care Act, represented a decadelong burden for CFOs, who were simultaneously devising strategies to deal with rising health-care costs.

The tax was projected to record gross collections of $96 billion between 2022 and 2029, according to a May report from the Congressional Budget Office. All health-care plans, even ones offering minimum coverage, were expected to eventually hit the thresholds because of the way the tax was structured.

Again, $14 billion / year is a drop in the bucket. 

December 26, 2019: more rambling here -- why was only the traditional IRA targeted; not so much the others?

December 23, 2019: the new retirement tax law makes the Roth IRA look even better -- Forbes. 

December 23, 2019: The WSJ devoted a fair amount of space to the changes. Three of the changes that caught my eye:

Q: I turned 70½ in 2019 and am scheduled to take my first required distribution from my retirement account by April 1, 2020. Can I take advantage of the law’s increase in the age for starting required distributions to 72? A: No. Only account owners who turn 70½ after Dec. 31, 2019, can start mandatory distributions at 72 years old.

Q: The new law makes it easier for employers to offer annuities in 401(k)s. But annuities often have high fees. Should I avoid them? A: It depends.

Q: Who will be affected by the law’s repeal of the age cap, currently 70½, for making contributions to a traditional IRA? A: The growing number of Americans age 70½ or older with wages, commissions, self-employment earnings or other forms of income will be helped. Nearly 20% of 70- to 74-year-olds are working today, up from 11% in 1992, according to the Bureau of Labor Statistics.

Note that in my first note on this subject, I specifically brought up insurance companies as the big winner with the new retirement tax laws. The fact that annuities were brought up by The WSJ in this short article of "what you need to know" corroborated that I was very, very correct.

Kiplinger provided an example; this was published prior to the new law being passed, but it's probably fairly close to the final bill. Here's the example Kiplinger provided, spend some time studying this graphic, it's quite interesting, my comments below the graphic:

During the transition, during the next couple of years, if folks take advantage of a later withdrawal, the government will -- all things being equal -- take in less taxes from IRA withdrawals.

But within five years -- again, all things being equal -- it appears:

• the government will take in more taxes from IRA withdrawals (because the withdrawals will be larger, for example, $25,809 vs $23,929 at age 75);
• the individual will have a greater year-end balance, for example, $606,373 vs $562,196 at age 85.

At age 80, that discrepancy is even greater (albeit not by much), $622,572 vs $577,215.

Under the old rules, $500,000 grows to $562,196 at age 85, a 12.4% gain.

Under the new rules, $500,000 grows to $606,373 at age 85, a 21.3% gain.

Wow.

So, some bottom line takeaways regarding IRAs and the original owner:

• understanding the aging of America, that Americans are living longer, the legislators wanted to ensure that seniors would have more money, not less money at age 85;
• understanding that the government may take in less money during the transition (over the next 18 months), in the long run (starting in just a couple of years) the government would take in more money from IRA withdrawals (albeit an incredibly small amount in the big scheme of things;

With regard to IRAs being inherited, and the 10-year payout:

• the government will bring in slightly more revenue, but it's such a small amount that this could not have been the impetus to change that part of the law;
• powerful lobbyists convinced legislators IRAs were not meant to be estate-planning vehicles; that may or may not have been a hard sell; but this is where the reasoning came in:
• expediting the payout to 10 years by the inheriting beneficiaries, could push upwards of one trillion dollars into the American economy (I'm still waiting for some economist to do this calculation; until I hear differently, I will use the "one-trillion-dollar" figure)

• But still, if one is watching out for numero uno, i.e., the individual legislator being asked to vote on the bill, putting more money into the economy would not have sold the bill. So, here's the compromise the lobbyists (the insurance companies) offered:
• expedite the payout required by the inheriting beneficiaries (bad news) but increase the amount of money that the average retiree will have in her IRA at age 85 (good news)

December 22, 2019: I neglected to post a few Mitt Romney links. Here they are:

• he did it tax-free and legally; said with a straight face;
• what's really going on with Mitt Romney's $102 million IRA (that was in 2012); 
• he blew it; should have been in a Roth; Forbes, LOL;
• how DID it grow so big; Reuters?
• wild assumptions; we never knew it was so big; we only said $20 million in 2016; wow, were off!
• how to grow an IRA to $100 million plus -- Investopedia;

December 22, 2019: see comments. Do a google search new ira rules winners. No hits. Not yet. We'll start seeing those articles in January, 2020.

December 22, 2019: Who could lose? The mutual funds. There will be a huge out-flow of cash from mutual funds unless those investment firms can convince folks to simply move their RMD-cash to non-IRA accounts in the same investment firm. As of September 30, 2019, an estimated 46 percent of IRA assets were held in mutual funds, while the remaining assets were held in brokerage accounts or managed by banks or insurance companies. In 1993, mutual funds’ share of IRA assets stood at 33 percent. 

December 22, 2019: as a personal example, our father left us a beneficiary IRA when he passed away in 2018; his five living children could have spread the RMDs over the next 30 years or so. But starting next year, one-tenth will need to be taken out and by 2030, the beneficiary IRA will need to be brought to zero. The same will happen when our mother passes away. And we're small potatoes. Think of the Mitt Romney clan. And the Waltons. And the Fords.  [See comments: a reader has it right; I was wrong -- we should be "okay" with our dad's beneficiary IRA but things will change with our mom's beneficiary IRA.]

Original Post

I know the new law affects IRAs, but I don't know how/if it affects Roth IRAs, TSPs, etc. If this is important to you go to the source, the IRS, or your tax advisor. Certainly don't pay attention to what I write; I'm simply thinking out loud and interested in what others thinks.

From The WSJ:

Now many IRA heirs will have to withdraw the assets within 10 years, rather than based on their own life expectancy. The law takes effect for deaths of IRA owners after Dec. 31, 2019, so IRAs inherited before then still benefit from prior law.

So, a bit of rambling.

This is quite interesting.

Spousal beneficiaries fall under the old rules:

The new legislation has exceptions to the 10-year payout. IRA heirs who are surviving spouses are still covered by the old rules. So are heirs who are disabled or chronically ill, or who are no more than ten years younger than the IRA owner.

Under the previous law, if I died next year, non-spousal beneficiary heirs affected by this new law would need to start taking RMDs in 2021 but could use their own life expectancy divisor which could be as much as 50 or more (a 40-year-old child, for example).

Under the new law, the divisor the very first year will be 10; non-spousal beneficiary heirs will have to take 1/10th of all the assets in the IRAs  rather than 1/50th (or less) based on their own life expectancy.

Let's say one has $1,000,000 in total inherited retirement assets that needs to be dispersed:

• under the old law, first year, $1 million / 50 = $20,000.
• under the new law, first year, $1 million / 10 = $100,000.

From the linked WSJ article:

The new limits on Stretch IRAs are estimated to raise $15.7 billion from 2019-2029, according to the Joint Committee on Taxation. Current data on inherited IRAs isn’t available.

The new law will raise about --- let's round it up to $20 billion -- over ten years from 2019 to 2029, or about $2 billion / year.

This new law clearly had nothing to do with income for the government. Two billion dollars against a debt of $20 trillion -- well, let's do the math --- $2,000,000,000 / $20,000,000,000,000 = a really, really small number. If I did the math correctly, it equals 0.0001 or 0.01% of the national debt.

The most recent budget number was $1.4 trillion. $2 billion / $1.4 trillion = 0.00143 or 0.14% -- again, a drop in the ocean, as they say, or do they say, a drop in the bucket?

So, why was this law passed? Simply out of "fairness," punishment, resentment? I don't think so.

That was my first thought. But the people most likely negatively affected by this will be the same folks who voted for it -- our federal representatives.

Whenever I can't explain something, I google it or follow the money. In this case, I follow the money.

Who are the winners? Wow, this is easy.

The non-spousal beneficiary heirs. They are forced to take a huge amount of money out of their inherited assets instead of spreading it over 50+ years and perhaps even stretching it to third-generations heirs. If family members are squabbling about when to take their IRA inheritance, well, the government has helped settle that problem in a big way.

So, heirs are going to start taking larger amounts of cash out of their inherited IRAs starting next year.

Some of the money of course, will be spent (all of it will be taxed, I guess), but most of those folks who were counting on spreading that inheritance out over 50+ years won't need all that money that they are now required to take out.

Winners.

Watch the insurance companies start advertising annuities like crazy in 2020.

I think the insurance companies were the big lobbyists on this. A lot of life insurance companies may be in deep trouble. Their amortization tables often assume an 8% return on premiums, and insurance companies, dreading risk, made a lot of that up in bonds. Bonds are now paying well below that 8%. I could be wrong, but my hunch is that a lot of insurance companies were in trouble, and this new IRA tax law was a bailout, which I am not using in a derogatory sense.

But there will be other winners. The banks, of course. Folks will put their RMDs into checking/savings accounts while they try to figure out what to do with all that money.

But the really big winner? Schwab.

Not Schwab specifically, but Schwab in the broad sense: commission-free brokers.

Of course, it goes without saying that tax preparers will also benefit from the new law. But their take will be minimal. Mostly it allows them to give another advertising spin.

Tectonic:

Whenever something this big occurs -- in this case, re-writing the tax law on retirement accounts, there are going to be incredible opportunities. This will be fascinating to watch.