2020: The Year President Trump Killed the Roth IRA
Dear Rich Lifer,
For many years, I was a huge proponent of Roth IRAs.
After all, these special retirement accounts allow your money to grow tax-free for as long as you want… without requiring you to ever take minimum distributions… and without owing any future taxes even upon withdrawal of any of the proceeds.
On top of that, by using a few little-known tricks it was entirely possible to:
A. Get massive amounts of money into a Roth IRA despite the conservative contribution limits, commonly called a “backdoor” Roth strategy, and…
B. Leave a future heir a lifetime of (tax-free) distributions in what is commonly called a “stretch” IRA strategy.
All of this made Roth IRAs a solid option for rapidly building, and then passing along, big piles of money.
In the back of mind, however, was always a little warning bell: The idea that lawmakers could – and, ultimately would – change the rules.
And once I started seeing them do it in other areas, especially in the realm of my favorite Social Security strategies, I changed my tune regarding Roth IRAs.
For many years now, in fact, I have been ratcheting up my warnings related to these accounts – highlighting not just their unique advantages but also the likelihood that some of those advantages would disappear.
As we start 2020, that has now happened after the so-called “SECURE” act was signed into law by President Trump and became effective on January 1st.
I first mentioned this piece of legislation – officially titled “Setting Every Community Up for Retirement Enhancement” (gag me with a spoon!) – when it was still a draft floating around Congress back in April.
Now that it has been finalized and signed into law, here are some of the biggest changes it brings:
- Allowing annuities in 401(k) plans
- Altering 401(k) and IRA age limits by raising the start of mandatory RMDs to age 72 and eliminating the maximum age for traditional IRA contributions
- Increasing tax credits to small businesses that start up retirement plans with automatic enrollment features
- Easing restrictions related to multi-employer retirement plans
- Allowing more long-term, part-time employees to participate in employer-sponsored retirement plans
- And, with a few rare exceptions, requiring non-spousal inherited IRAs to be drained within 10 years of receipt.
Now, most of these are good developments.
Except that last one.
And to me, it’s a big negative.
What Does the Change Mean for You?
Just to illustrate the difference it makes, under the old rules, someone other than a spouse who inherited an IRA had two basic choices:
A. Withdraw the whole amount by December 31 of the fifth year after your death
B. Begin receiving minimum distributions based on their own life expectancy.
In the latter case, that could have amounted to many decades of tax-free distributions from a Roth IRA (which would have continued growing along the way).
Now, it means all money must come out by the end of year ten.
For someone who was saving and planning under the old rules, the result is terrible.
Just imagine someone who was going to leave behind a Roth IRA to their grandchild:
Instead of inheriting a tax-sheltered nest egg that would continue compounding for many years, and kicking off nice little distributions for a lifetime, that young person is now going to get a big lump sum and have to start all over again.
Meanwhile, the benefit to the government is rather minimal – they aren’t going to get any new guaranteed tax revenue either way!
It’s a broken promise for no good reason.
Which leads me to a bigger concern…
The Future of Roth IRAs
The idea that someday Congress will roll back the tax protection currently given to Roth IRAs.
As retirement account balances grow… as our national debt continues to explode… and as resentment toward savers and wealth builders escalates… it’s only a matter of time before someone in Washington decides to take an even closer look at Roth IRAs.
A very probably outcome of that examination?
Some new type of restriction on these accounts. Perhaps a limit as to how much of a balance can be maintained before taxes kick in again.
A similar thing already happens to Social Security benefits.
And although it would represent a complete betrayal of public trust, it will be easily justified to the masses as “only applying to an arbitrary percentage (Top 1% sound familiar?) of ‘wealthy’ Americans.”
Wanna bet that this sort of change isn’t coming?
If you do… keep funding your Roth IRA.
To a richer life,