Changing the rules halfway through the game (IRA)

[pmac]

I know it's pure speculation about what will happen with inherited IRA's if the SECURE ACT passes, but, it makes me wonder.

We're all here shoveling money into IRA's/401k's, and Congress can just completely change the rules just as we're embarking on the biggest transfer of wealth from one generation to the next.

Knowing this, how do we prepare?

What happens when Congress decides that ROTH withdrawals are not tax free???

Is anybody else thinking about these issues? Would love to hear how to plan for changing rules in the game of retirement planning.

[DadJokes]

Going from the items proposed in the SECURE Act to Roth withdrawals being taxed is quite a stretch. Most of items in the SECURE Act are favorable, with the exception of stretch IRAs, and the proposal there would just encourage more people to do Roth conversions.

[MDM]

Knowing this, how do we prepare?

1. Take your best guess.  Note that "no change" is often a good guess.
2. Act accordingly.
3. Go back to step 1 when new information is available.

[reeshau]

Knowing this, how do we prepare?

Like dealing with any risk, diversify your tax position.  Don't put all your eggs in one basket.

[beltim]

Going from the items proposed in the SECURE Act to Roth withdrawals being taxed is quite a stretch. Most of items in the SECURE Act are favorable, with the exception of stretch IRAs, and the proposal there would just encourage more people to do Roth conversions.

I agree that Roth withdrawals being taxed is quite unlikely.  However, I'm not sure what you mean that the proposal would encourage people to do Roth conversions.  It's not allowed to convert an inherited IRA into a Roth IRA.

[terran]

Going from the items proposed in the SECURE Act to Roth withdrawals being taxed is quite a stretch. Most of items in the SECURE Act are favorable, with the exception of stretch IRAs, and the proposal there would just encourage more people to do Roth conversions.

I agree that Roth withdrawals being taxed is quite unlikely.  However, I'm not sure what you mean that the proposal would encourage people to do Roth conversions.  It's not allowed to convert an inherited IRA into a Roth IRA.

If you know your heirs are going to have to withdraw an IRA over a short time resulting in large withdrawals you may prefer to leave them a Roth IRA so the withdrawals aren't taxable. If that's your goal, you might convert more to Roth during your lifetime.

[SeattleCPA]

I say this as a hardcore tax guy who regularly works with pending tax legislation... It is really hard to predict tax law changes even when one part of the legislative branch has actually already voted... Yikes.

The only actionable response I think makes sense (and it's pretty low as a priority to me personally) is trying to "tax diversify" so you have stuff in a variety of "tax" locations: taxable, tax-deductible-tax-deferred, Roth-style-tax-deferred etc.

FWIW, I get nervous anytime someone gets really jacked up about Roth-style accounts because they so rarely make sense. (Case in point: The current Bogleheads thread about Roth-style accounts working if you just wait long enough.) I will refrain from sharing my usual links to blog posts that explain why Roth accounts don't make sense for most taxpayers...

P.S. If you wanted to tax Roth-style accounts, and you're in Congress, the easiest way to do that would be reenact the old excise tax on large withdrawals from tax-deferred accounts. That tax hasn't been around for years. Maybe decades. But it used to be that really large distributions (by memory) over $150K were subject to a 10%-ish excise tax. This was something to be alert to back in the day because threshold wasn't indexed for inflation and it was very likely that someone running a Bogleheads-type retirement plan would get hit.

[Telecaster]

I know it's pure speculation about what will happen with inherited IRA's if the SECURE ACT passes, but, it makes me wonder.

We're all here shoveling money into IRA's/401k's, and Congress can just completely change the rules just as we're embarking on the biggest transfer of wealth from one generation to the next.

Knowing this, how do we prepare?

What happens when Congress decides that ROTH withdrawals are not tax free???

Is anybody else thinking about these issues? Would love to hear how to plan for changing rules in the game of retirement planning.

IRA's/401k's mostly benefit rich people.  That's just math.  Who writes the tax laws?  Rich people.   I don't see the benefits being reduced much.   

The other group that it benefits is people who save lots.  That's not very many people. 

[pmac]

P.S. If you wanted to tax Roth-style accounts, and you're in Congress, the easiest way to do that would be reenact the old excise tax on large withdrawals from tax-deferred accounts. That tax hasn't been around for years. Maybe decades. But it used to be that really large distributions (by memory) over $150K were subject to a 10%-ish excise tax. This was something to be alert to back in the day because threshold wasn't indexed for inflation and it was very likely that someone running a Bogleheads-type retirement plan would get hit.

Let's just hope that doesn't come back into play!

[Another Reader]

Changing the rules on inherited IRA's demonstrates that the revenue-hungry folks in DC are on the prowl.  Your IRA's are in their prison and therefore prime meat.  While I would not expect them to tax withdrawals for the original owner, the rules for Roths could be changed in some way for inheritors.  After all, the inheritors shouldn't benefit from a tax deduction granted the decedent...blah, blah, blah... or something similar. 

[joshuagraham_xyz]

This is an intentional screw job on mid-upper class folks whose parents were the same, but have an early demise.  If the parent passes on while the heir child is still working, he's going to get socked with a big income while he is at a high rate because of his own income.  Of course, some children may decide to FIRE at that point.

I presume that the heir can pick and choose just when within that 10-year period to distribute the accounts?

The one thing I don't like - although maybe I am wrong in this presumption - is that this will kill the idea of a conduit IRA, which is a great way to continue to keep the bankruptcy-exemption attribute of an inherited IRA (i.e., a regular inherited IRA is now no longer bankruptcy-exempt).  Everyone should keep in mind the ability to file for bankruptcy in case he runs into an inner-city bus, etc. (hopefully, the driverless car, with its being indemnified by the manufacturer, will be around so that folks don't have to worry about that possibility).