Overhaul Of The American Retirement System -- 2019

I track this 2019 retirement overhaul at this post. 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)