After 10 years or so of “this legislation will pass soon”, at the end of 2019 the Setting Every Community Up for Retirement Enhancement Act finally became law.
Besides a cool acronym, the SECURE Act offers a wide range of changes and “enhancements” to 401(k)s, IRAs, and 529s, as well as a whole slew of incentives for small businesses to add or expand retirement plans to both full and part-time workers.
In my opinion, most of the changes (including the much-touted compression of the stretch IRA) are of limited interested (to the living.)
SECURE Act Changes and Implications
Compression of the Stretch IRA
The biggest change from the SECURE Act is definitely the elimination of the so-called Stretch IRA, which allowed our children and grandchildren to slowly distribute an inherited IRA over their own lifetimes [exciting details(!) – and reader commentary ;) – in the post, Multi-Generational Tax Minimization.]
Now, rather than slowly drawing down an inherited IRA over an entire generation or two, it must be done in 10 years.
The legislators refer to this change as “revenue enhancing”, better known as a Tax Increase.
Naturally, any time there is a potential tax increase the rhetoric becomes a little saucy:
“This is the new Death Tax – Death of the Stretch IRA!” (ooh, scary)
“The difference is instead of your kids having $2 million, your kids will be broke because the income tax acceleration reduces the IRA so much.” (You don’t want no drama. No, no drama.)
“I haven’t done the math yet… but, the ominous tax code of the future is here… seems like America is becoming a Pitchfork Democracy. A Banana Republic and a Greek economy are the likely outcomes!”
Yes, yes, that’s nice. So let’s do the math, shall we?
No quadratic equations were harmed in the writing of this blog post.
A Tax Increase
When I explored the Stretch IRA, I posed a hypothetical situation:
I earmark $200k of my Traditional IRA for Jr’s inheritance upon birth. This grows to $1 million by my 70 1/2 birthday, based on a 7% real cagr, and I start to take RMDs. Even so, the IRA grows to $1.3 million before I leave the mortal plane,
Jr then begins taking (smaller) RMDs based on his own life expectancy and the IRA continues to grow towards untold riches.
As such:
Now, with a 10-year timeline, much larger withdrawals drive the IRA value towards zero.
IRA Withdrawal Comparison
Technically there is no specific requirement for withdrawals other than the IRA be completely vacated within 10 years. I chose to model this as 10 equal withdrawals (using annuity math for a $1.3 million IRA growing at 7% = $172,982.01.)
Bigger withdrawals often means more taxes since the income pushes into the higher tax brackets. In this case, a ~$173k withdrawal will be taxed to the tune of $24,655 (~14%) vs the $809 tax bill on the old RMD value of $32,086 (~2.5% tax rate.)
(Other assumptions: no other income, tax filing as married filing jointly.)
That’s just one year though. We need to look at the withdrawals and taxes over a lifetime.
Tax paid on annual withdrawals – SECURE Act withdrawals vs Old Life-Expectancy RMD
Now to compare we can look at the net present value of this entire series of tax payments (to age 100):
NPV of Old Life-Expectancy RMD tax burden: $136,760 (10.5% of inherited value.)
NPV SECURE Act tax burden: $173,167 (13.3% of inherited value.)
I don’t think Jr will mind paying 13.3% of his inherited IRA in tax, even though it is a ~27% tax increase.
But wait! There is more!
Upon withdrawal the after-tax dollars are invested in a taxable brokerage account. If this generates an annual 2% dividend taxed at 15% (current tax law) that places an additional load on the portfolio of 0.3% annually (2% * 15% = 0.3%.)
We can also calculate the net present value of a lifetime of dividend tax payments:
NPV of Dividend tax on Old Life-Expectancy RMDs: $110,515 (8.5% of inherited value.)
NPV of Dividend tax on SECURE Act withdrawals: $154,428 (11.9% of inherited value.)
Caveat: this is likely overstated as the tax rate on dividends will be 0% if total income is less than ~$100k, as it most likely will be once the inherited IRA is depleted.
The combination of these 2 tax loads is our total tax burden:
Old Life-Expectancy RMD Total tax burden: $247,275 (19% of inherited value.)
SECURE Act Total tax burden: $327,595 (25.2% of inherited value, 32% higher.)
And the value of the brokerage account after all of this tax has been paid?
Jr’s money pile at age 100:
Old method: $442 Million
SECURE Act: $406 Million
Other Scenarios
Now that we have a methodology, we can compare other scenarios – maybe Jr has a job/other income, which will result in higher taxes on IRA withdrawals.
Tax Burden on Inherited IRA Withdrawals
| Other income (2018 tax tables) | NPV of Tax on IRA withdrawls | NPV of Tax on Dividends | Tax Increase from SECURE Act | Brokerage Account value at Age 100 |
|---|---|---|---|---|
| Life-Expectancy RMD | ||||
| $0 / None | $137k | $110k | $442KK | |
| $24,000 (0% bracket) | $188k | " | ||
| $43,050 (Fill 10% bracket) | $206k | " | ||
| $101,400 (Fill 12% bracket) | $283k | " | ||
| SECURE Act 10 years | (% of inherited value) | |||
| $0 / None | $173k | $154k | $80k (6.2%) | $406KK |
| $24,000 (0% bracket) | $211k | " | $67k (5.2%) | |
| $43,050 (Fill 10% bracket) | $230k | " | $68k (5.2%) | |
| $101,400 (Fill 12% bracket) | $280k | " | $41k (3.1%) |
Should We Make Changes to Our Tax-Minimization Plan?
Tax-minimization is largely a game of deferral and marginal rate minimization. Delay paying as long as possible, and then pay as little as possible.
When forced to make large withdrawals in the short term (e.g. within 10 years) we lose a lot of flexibility. The only option to pay less is to have a smaller Inherited IRA.
The following chart shows the marginal tax rate paid on each of the 10 equivalent withdrawals outlined above. If the IRA value approximately doubled (or for Single filers), we would start to fall into the 24% tax bracket. If it dropped to ~$750k, we would stop at the upper edge of the 12% bracket (~$100k/year “RMD”.)
Extrapolating for cases with other income is left “as an exercise for the reader.”
To bequeath a smaller IRA, we could spread the love a little more – leave less money to more people.
Another option is to aggressively Roth convert until the to-be-inherited IRA is <$750k (inflation-adjusted). “Pay 12% now to avoid Jr paying 22% later.”
Which, it turns out, was already the plan.
What about Accumulation?
Does it make sense for somebody in the accumulation phase to avoid making Traditional IRA contributions to reduce tax burden after we are dead for people who may not even be born yet?
Probably not. Unless that is your thing. [no judgement ;) ]
If current incomes are taxed at 22%+, saving through Traditional IRA and 401k continue to be the solid choice. If income and taxes are less than that, and early retirement isn’t a goal, then Roth options are more mathematically sound.
Other SECURE Act Changes
The other changes in the SECURE Act are less interesting. In roughly the reverse order of interest:
Fiduciary Safe Harbor for Selection of Lifetime Income Provider
Prior to the SECURE Act a very small percentage of 401(k)s offered an annuity option within the plan. Supposedly a big reason more didn’t was lawyers were worried if they picked an insurance company (aka an annuity sales company) that made poor investments and failed as a result, that they (the 401k provider) could be sued.
By offering legal protection from such a thing, in theory more 401k plans will offer annuities.
Why you would want an annuity in your 401k is beyond me, but the insurance companies seem to be big fans (as exemplified by the lobbying dollars spent.)
Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption
If your family grows via adoption or birth, it is possible to make a qualified withdrawal of $5,000 (per child.) A qualified withdrawal just means there is no 10% penalty – regular income taxes still apply.
Had it been an option, I would NOT have made this withdrawal when Jr was born. That $5,000 would be better allocated towards a Roth conversion.
Repeal of Maximum Age for Traditional IRA Contributions
If you have earned income after age 70 1/2, you may now contribute to a Traditional IRA. Previously, Traditional IRA contributions were prohibited once you hit “RMD Age.” This could also be an avenue to more backdoor Roth contributions late in life.
Increase in Age for Required Beginning Date for Mandatory Distributions
The RMD Age is now 72, meaning the first mandatory withdrawal from Traditional retirement accounts is delayed by 1.5 years or so.
But without a corresponding change to the life expectancy tables, this isn’t very exciting – it doesn’t fundamentally change what 401k/IRA values will push us into higher tax brackets – See: Is Your 401k Too Big?
At best we might get one extra year of Roth conversion in before the RMD begins, but one year does not a tax-minimization strategy make.
Other SECURE Act reviews
The Secure Act Section by Section – House Ways and Means Committee (Word doc)
SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges
Congress Just Passed the Biggest Retirement Bill in More Than a Decade. Here’s What You Need to Know
Congress Set To Pass SECURE Act At Last Minute, Impacting Retirement Planning And Increasing Taxes
If you have reviewed the SECURE Act, feel free to link to it in the comments.
Summary
Although touted as massive change I’m not really moved. I guess it takes more for me to (prematurely) roll over in my grave.
By requiring inherited IRAs to be drawn down in 10 years rather than 50, 60, 80 years, more of the IRA will be taxed sooner and at higher rates. In addition, the loss of tax-deferral on the withdrawn funds will (probably) cause more tax to be paid on dividends. Inherited IRAs in excess of ~$750k for married filers will see marginal rates of 22%+.
Yes, it is a tax increase. No, it probably won’t cause societal collapse. Continuing along as before is most likely the best choice.
Not much changes for me for the next 40+ years – we do Roth conversions now at 10-12% tax rates and aim for Jr’s earmarked Traditional IRA to be <$750k.
Interesting – any estimates out there on how much “revenue-enhancing” this stretch IRA elimination is going to do for the federal government?
I think the best defense is to leave less to more people, as you suggested.
Happy Monday & Happy New Year. Off to the office, I go.
The CBO does those estimates (here.)
Looks like ~16 Billion over next decade, most of which pays for the incentives for small businesses to expand 401k offerings.
Good analysis of the SECURE act. I’m not thrilled with it because many people die during their children’s peak earnings years. Now that the kids have to withdraw the money in 10 years, it will probably be taxed at higher rates than the parents would have paid, or the children if they had been allowed to draw it over their own retirement years. Perhaps limiting the stretch IRA to one generation would have been a good solution. Unless the goal was to collect more tax revenue… Oh wait, that was the point.
Yeah, I’m not thrilled either but what can you do…
The worst case situation is probably:
– a single filer
– high tax State
– getting health insurance via the ACA (self-employed?)
– has 10 years left working before they are ready to call it quits
With the old system you could have held on for the decade, taking out the minimum, and then replace the job income with larger IRA withdrawals.
Now you get 24%+ marginal federal rates, 9%+ State tax rates (OR, CA, etc..), and no ACA subsidies (over the cliff.)
So the short list of options to “what can you do” is:
– pay the taxes
– the parents need to be more aggressive with Roth conversions
– quit work early (perverse incentives…)
And/or wait until year 10 and take it all out. A miserable tax year but protects ACA for the other years.
Could be fun. Rule of 72 says the IRA doubles in 10 years, so a $2.6 million withdrawal at end of year 10 generates a nice $900k tax bill.
Does this effect those of us who are already taking RMDs from an inherited IRA?
No
Thanks for doing the math! Going to take me a while to thoroughly digest this.
Some articles on the SECURE act, besides recommending Roth conversions, also say the case for using life insurance to pass money onto heirs has been strengthened.
Do you follow Ed Slott at all? He’s an IRA tax expert who is widely quoted in articles.
You could think of the life insurance premiums (and sales commissions, wink wink) as a tax.
Seems to me that it just makes it a better gift to get as much Trad IRA money converted to Roth funds as possible – minimizing tax risk for heirs. But if I can’t do the conversions at a low enough rate, well, sorry kids. Glad you can share with uncle sugar.
Some people care a great deal about the tax rate paid after they are dead. In that case, aggressive Roth conversions can make sense.
“If current incomes are taxed at 22%+, saving through Traditional IRA and 401k continue to be the solid choice. If income and taxes are less than that, and early retirement isn’t a goal, then Roth options are more mathematically sound.”
Any thoughts on a couple such as my wife and I that’ll be receiving pensions with COLA’s. Combined our pensions will be about $135k per year. I’ll collect 70k starting in 2025 and she’ll collect 65k in 2029.
In 2020 we’ll earn approximately $210k. I plan on retiring in 2025 and she plans on retiring in 2029. We have 3 children, ages 18, 16 and 14.
Since 1996 we have both contributed the max to our traditional 457’s and her 403b- 3 plans in total. In hindsight, I should’ve went the Roth route as we were in a smaller marginal taxbracket and the tax benefit wasn’t as beneficial as it would be now.
We were earning around 60k combined in 1996, and now we are earning 210K combined in 2020, in Illinois.
Do you think this is a sound strategy, switching to Roth accounts or should I continue deferring the maximum into our traditional 457’s and 403b?
In total we have $2.1 million, and 1.2 million is in these tax deferred accounts. The remainder is index funds in taxable accounts and Roth IRA’s.
Thanks for your help!
Now we find ourselves with about 1.1 million in these tax deferred accounts, and considering we won’t need this money, as our pensions should easily cover our living expenses, we decided to stop contributing to these traditional plans in favor of the Roth 457 and Roth 403b.
If we don’t touch these tax deferred accounts until RMD’s, I would imagine the tax we’ll have to pay will be significant considering our pensions will fill up two tax brackets I am guessing.
And even if we did withdraw money from these accounts, our pensions are putting us into the third tax bracket, and any money we pull out depending on the amount, will keep us in the 22% bracket or bump us into the 24% bracket.
Which is why I’m thinking of biting the tax bullet now, and defer our $58,500 into the Roth 457×2, and her Roth 403b.
Tax rate now > tax rate in retirement: Traditional
Tax rate now < tax rate in retirement: Roth
You can experiment with this using our income tax calculator.
Thanks for the link, I’ve used it already but I think the problem I have is a bit more complex.
I believe our tax deferred accounts at 1M are a ticking tax time bomb. Throw in more growth, growing pensions with COLA’s and now RMD’s.
And if one spouse passes, the other may be faced with larger RMD’s and lets not forget the Medicare IRMAA penalty.
Thanks for the link.
I think we can simplify it.
The summary of your problem is you know you’ll have a high marginal tax rate in retirement. (True)
OK, what marginal rate is that for each year of retirement? The first chart in this post is literally a year-by-year RMD $ chart. The tax calc can help you estimate the marginal rate… as can the charts in the post, Is your 401k too big?
You also have a fairly high marginal rate now. The tax calc says 24%. Is that higher or lower than the retirement numbers?
If lower, Roth is better. You could even do some Roth conversions to shrink the tax-deferred accounts using the same marginal rate comparison.
If you want to dive deeper on this, you can post your numbers on the forum. I also do some consulting.
Here is my review. https://financialfreedomcountdown.com/what-is-the-secure-act-and-9-ways-it-will-actually-boost-your-retirement/
I consider it net positive for part time workers and if they are employed by small businesses. Also for grad students (stipends) and care givers
It could be a boost for those groups, assuming they plan to save more than an IRA contribution or the (new) 401k includes matching.
I took a look at the elimination of the stretch IRA and it doesn’t look too bad. Yes, it’ll be less tax efficient for heirs. And for me since I’m likely to inherit an IRA from my parents in the next <40-50 years. Like Jr, if I have $400 million or $450 million after taxes when I'm 100 it won't bother me too much. Nothing changed with my tax strategy as a result.
Agreed. Some large percentage of beneficiaries drain their inherited IRA to zero immediately anyway, taxes be damned I’m paying down this mortgage and going on vacation.
And, based on some random data, the avg 401k for people ~age 70 is $200k (median: $60k.) Maybe 2x that for married couples?
This might also include IRAs, I’m not sure, but in any case the typical sums aren’t large.
If I read this right there are going to be people both taking RMD’s and adding to IRA’s at the exact same time (people over 72 with some kind of earned income)?
Yes. It would be interesting to do if you were on the edge of paying a higher marginal rate.
I love your articles and tax strategies. For those who have a pension are there any tax strategies that you would do? I am 51 and have an annual military pension of 79K. My spouse who is 42 works (40K a year) so we are able to contribute to a roth IRA.
Play with the tax calc a bit.
With $79k pension you’ll never pay less than 12% tax on ordinary income. Probably more when SS starts.
You could contribute a bit to a Traditional 401k/IRA to get below the 22% tax bracket, then the max to a Roth 401k (if possible), and then do his/her Roth IRAs, yours with the additional catchup contribution.
Excellent analysis. Not that it would necessarily change the strategy, but I would be curious what this would look like based on a distribution of various sequence of returns. It would be unfortunate if there was a series immediate years with poor returns. Hopefully that would mean that as they bought investments in their taxable account that they would be buying at a discount. And of course, just need to continue to be flexible.
Great write up as usual. In my case the best solution maybe to have my parents skip me and put my kids as the beneficiaries. My two kids are the only grand kids and them receiving 10 years of distributions earlier in their careers my work best. Of course need to run the numbers and adjust beneficiaries as required. Luckily both my kids exhibit their parents frugality and work ethic. Any thoughts?
It’s going to be a case-by-case thing. Single filers early in career might pay higher tax rates than a married couple with 1 moderate income. Non-adults might have to pay at parents’ tax rate due to kiddie tax.
Yes, the living are not concerned about the Secure Act … until when they are 55 and they get diagnosed with terminal cancer and realize that having been lured into packing their 401Ks with the maximum contributions growing to 2M, their soon to be orphaned minor children will be taxed at an even GREATER rate than if they had kept the money out of the retirement account in the first place.
Now how saucy is that for someone reading it while doing chemotherapy in the hospital?
This goes beyond the pitchfork rule of wanting the rich to pay more taxes. It is not simply taking away a once promised tax break. It is pure deception to lure people (even those evil rich FI people) into a “tax sheltered vehicle” to then finally tax their prematurely orphaned children at an even HIGHER tax rate than if the money had never been put in the retirement account in the first place.
This may be one instance but democracies that fall into this more generalized pitchfork rule are unlikely to show much growth, so the people who make lifetime plans on earning 7% average returns in their stock markets run a severe risk of finding themselves in the ditch.
Data please
Data on what? On how it feels to have cancer at 55 and realize that your minor orphan kid with 2M in the 401k taken out over 10 years will have an annual income of $200,000 from the 401k alone and thus be catapulted into the 32-35% marginal federal tax bracket plus 10% if they live in California, as you aspire to, thus about 35% effective tax bracket and thus will end up paying $700,000 of that 2M 401k in taxes — even more than you would have paid had you not put the money in the 401k in the first place because you only made $100k per year average and your tax bracket was a combined 15% effective married filing jointly?
Is it really that difficult to comprehend that I need to make a calculation down to the cent to transmit the enormity of the change, and deception?
Many younger investors, like Curry Cracker, are often outright sarcastic towards those perhaps older investors who are bitter about having been just subjected to the societal deception of the stretch IRA phaseout.
This is because these investors are young and are still building their assets and can thus take corrective action, namely keep their retirement account balances modest as they go through life. Older investors who were not forewarned about the Secure Act during their working lives (how could they possibly know, they thought basic societal ethics would hold up) feel deceived. The older investor’s large money balance is now trapped into the retirement account under the Secure Act awaiting for his (potentially young, even minor) children to be quickly taxed at much higher rates soon after mommy and daddy die. The worse your health is the greater the magnitude of the deception. For a 2M balance that means that your young child (even minor perhaps) will be taxed an additional 600k. This is no small potatoes to present someone with at the end of their lives. In addition, your young child will be pushed into the top tax rates during the 10 year accelerated depletion period and so all income from her work will also be taxed at the top rates. You can imagine the incentive to work (and contribute to the economy) your child may have under these circumstances?
So younger investors can indeed feel insulated and sarcastic about the tax entrapment that the Secure Act’s Stretch IRA phaseout represents for older investors.
—————
But, do you really think that the Secure Act’s stretch IRA elimination will be the last tax deception? Once a beginning is made and people become jaded about societal trust, expect more to come. So where will YOU young investors place your money under multi-year meticulous advice and planning from Curry Cracker, to see it eventually haircut by future unforeseen taxes, possibly when you are old and frail, perhaps even on your death bed?
What goes around comes around. So, unborn tax vultures that nobody can foresee yet are likely waiting you too at the end of the line. Much of the forward planning you will be meticulously doing reading advice after advice and spreadsheet after spreadsheet year after year from this and other financial sites may quite likely be in vain.
You know the adage: “First they came for … and I said nothing. Then they came for … and I said nothing, then …. … … ‘knock’ ‘knock’, wait someone is at the door”.
But, perhaps more importantly for those seeking financial independence, I’d like to remind that plans based on 7% returns in a society that degenerates to such ethics is quite risky. The growth rate just won’t be there long term to support these returns.
I hope you don’t have to re-read this comment many years from now in hindsight.
err… I guess I should have said, can you focus on the numbers and the objective? I’m sure you make some good points, but it is wrapped in an Infowars-style conspiracy theory rhetoric that overshadows anything you might have to contribute.
Yes, you really need to make a calculation down to the dollar (or cent.) Else you let the subjective and the drama take over.
If I understand the hypothetical situation correctly, a child loses both parents in the same year. One to cancer and the other to not cancer, probably. Thus they are the sole heir of their parents’ IRA. There are no other savings or life insurance.
Even though the child is a minor, they still earn $163k/year from employment such that all of the RMD is taxed at 32%+. But they will give up that $163k/year income because they think taxes are too high.
Once they shutdown the business (has to be a business because who hires a minor child for more than minimum wage?) they would now pay about $40k in federal tax on a $200k withdrawal. Or about 20%. This is 5% higher than the 15% the parents saved on contribution. (*)
Whether a 5% tax increase is reason to burn down society is a subjective matter.
But what if the parents knew the government was going to screw them over post-mortem, and thus never contributed to retirement accounts at all?
Well, they saved a bit less because of no tax deductions, but let’s ignore that for now (they just spent less on their minor child to make up the difference.) They also paid taxes on income from their investments over the years, because they weren’t in tax-deferred accounts. 35 years of 15% tax on 2% dividend yield eats 10% of the portfolio [(1 – 0.15*0.02)^35 = 90%.]
By my math 10% is twice 5%.
But also, cancer treatment is expensive. Let’s say $1 million more than insurance covers. Retirement accounts are protected from creditors, but taxable accounts are not. So the hospital takes about 60% of the inheritance. And since we would have to sell stock to pay the creditors, we would have to pay capital gains taxes. 35 years of 7% growth means nearly all of the sale is a taxable gain, so there is another $150k in tax paid.
Now instead of inheriting $2 million, the minor child gets about $600k.
(*) generally speaking, at a 15% tax rate (now 12% after TCJA) and with no intention of early retirement, the Bogleheads’ standard advice is to target at least a 50/50 Traditional/Roth split. At a 22% tax rate, 100% traditional may work out better, while also saving 2% over the now 20% effective tax rate paid in the above calculations.
PS: I do hope the tax laws change. People like me should pay more taxes.
Mom 48 years old. Dad 55 years old. Daughter 9 years old.
Both mom and dad worked corporate lives saving maximum in 401k s because they were officially promoted by our democracy and its people as great savings vehicles.
They now have 3.0M in their retirement accounts and that is most of their savings. Mom knows she will likely die in her mid 50’s because of genetic predisposition in her family. Dad who otherwise comes from a long lived family gets diagnosed with cancer at 55 and has a 2 year life expectancy. Thus daughter is expected to be orphaned around age 16.
Pre “Secure” act:
Even though the parents now know that their child will be orphaned young, they at least feel “secure” (pardon the pun) that their offspring will be financially ok through college and early adulthood. Actuarial life expectancy of daughter at time she inherits: 66 years per Social Security tables. Daughter’s RMDs from 3M retirement accounts: 3M/66 = $45,500. As a teenager daughter is a fan of Curry Cracker, as did her parents, and is convinced that she can be financially independent on $45,500 per year, which sweetens the pill of being orphaned in her teens and the money also helps her guardians not be financially burdened by her. Daughter’s pre-Secure Act annual tax from the $45,500 annual RMD: ~$2850 Federal + $600 California = ~ $3500 per year total tax for 66 years. Total tax on all withdrawals over her lifetime: 3500*66 years = $231,000
Enter “Secure” act:
Daughter’s RMDs from 3M retirement accounts: 3M/10 = $300,000 per year for 10 years. Daughter’s annual tax in those 10 years: $76,000 federal + $27,000 California = $103,000 per year for 10 years. So total tax on all of the daughter’s withdrawals: $103,000 * 10 = $1,030,000
Tax difference pre vs post Secure Act on orphaned minor daughter: $1,030,000 – $231,000 = $799,000
So daddy finds out while doing chemotherapy at the hospital that the people of his country have decided to tax his soon to be orphaned daughter an additional $800,000 — but he still loves his country, his daughter grows up with great confidence in societal ethics, and they both think that Curry Cracker who advocates they should pay even more taxes is just a great guy.
Thanks for focusing on the #s. Based on this I can see why someone might be upset. It’s probably good news then that THIS IS COMPLETELY WRONG.
Generically, the SECURE Act is a tax increase. All else being equal, especially single filers / high earners / very large IRAs (e.g. $3 million) will pay more tax and have less flexibility. But it isn’t some 5x tax increase.
Just looking at the Federal taxes in this example, these numbers are close enough – the net present value of the taxes on 10 years of equal withdrawals would be about $750k (~28% effective tax rate.) At age 26, the daughter would have a portfolio worth about $4 million throwing off $80k+/year in dividends.
For the pre-SECURE Act numbers we can’t look at just Year 1 (the smallest withdrawal year.) We would need to look at the withdrawals and tax payments for all future years, similar to the 3rd chart above (Tax paid on annual withdrawals.) One example, at age 65 the RMD would be greater than $1 million. When we do that for the simple scenario of just following the single life table for inherited IRAs, the net present value of all future tax payments is… ~$750k.
So the taxes paid in both scenarios is roughly THE SAME on the withdrawals. Both pre/post SECURE Act, at age 100 the portfolio exceeds $400 million, with the post-SECURE Act scenario being smaller due to more years of dividend tax drag.
>his daughter grows up with great confidence in societal ethics, and they both think that Curry Cracker who advocates they should pay even more taxes is just a great guy.
This is optional, of course, but a postive attitude never hurts.
Were the parents truly GCC fans, knowing about the hereditary illness and with only a 15% tax rate (12% post-TCJA), the family would have focused retirement savings to have a Roth component larger than zero. Not just for the inherited IRA, but for the very real death tax when one spouse passes.
Hope that helps.
Thanks
Is there any merit to creating a trust to pass on wealth to beneficiaries? That wouldn’t change anything on the pre-tax side (401k and Tira) because the IRS assumes post-tax money is used, right? And on the post-tax side, everything (value of a house, Roth IRA, brokerage account, etc) is tax free up to like $11 million, right? I just don’t know enough about this, but I’m guessing you might…
I’m not completely sure – I think no, but this isn’t something I’ve explored enough to say for sure.