Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Thanks for calling attention to this, bee. I read it and then I read 7 other articles on the subject and found them equally vague. No one has addressed an oddity: a person over 72 must now take RMDs from a traditional IRA but now they may make contributions to this same IRA. No mention is made as to whether the contribution limit will change, whether this contribution or a portion of it is still deductible from income tax. So on the face of it an investor can now put all the required RMDs back into the same IRA investment. Assuming one pays income tax on the RMD(s) why not just leave the money in the IRA and pay the tax just as one pays tax on capital gains in a mutual fund without withdrawing the money? It all seems clumsy and ill-planned. But maybe it's just been poorly reported.
Most of your questions aren't discussed in the various articles because the SECURE Act doesn't change much.
RMDs work the same way as always. All that's changed is the age at which they start. Same amounts required as before based on age (though the IRS is separately working on regs to change the life expectancy tables).
Withdrawals from IRAs, whether RMDs or not, remain taxable, just as before. They are not counted as compensation; that hasn't changed either. They affect MAGI for various purposes including taxing SS, being charged IRMAA, being able to make Roth contributions, etc. Same as before.
The deductibility of T-IRA contributions isn't changed by the Act. Likewise, the income limits for Roth contributions aren't affected by the Act.
Starting next year, anyone with compensation (as opposed to just those under 70½) can contribute 100% of their compensation, up to the contribution limits. Those limits aren't changed by the SECURE Act.
It is true that you'll be able to take the cash withdrawn from an IRA and immediately put it back in, but only so long as you've got compensation to back it up. Not that much different from what people over 70½ can already do - take their RMD and put it into their Roth. Again, subject to the condition that they have compensation.
What it sounds like you're asking for is a "deemed" distribution. Where you would be able to say: treat the IRA as if you had just withdrawn your RMD and contributed an equivalent amount. Assuming of course that you had enough compensation to allow the contribution to be made.
That might streamline the process. But otherwise it would still work under the old rules as described above.
Even without looking, I'm pretty certain that something like a deemed distribution isn't in the SECURE Act. It would be too prone to user error:
people thinking that they could keep the RMDs in their IRAs when they didn't have enough compensation to support the deemed contribution;
people thinking that they could keep the full RMD in their IRAs even if that exceeded the $7K contribution limit;
people thinking that they didn't have to declare the paper distribution (even though that's what they do when they reinvest a fund's dividend);
people thinking that they could deduct the deemed contribution regardless of how high their income was, since they had declared the RMD as taxable;
people forgetting that the deemed distribution still adds to their income and could thus disqualify the deductibility of the contribution, or affect IRMAA, or taxation of SS, or ...
Actually you made an astute observation that might have been missed, not in the reporting but in the actual creation of the Act. But a "deemed distribution" appears to present so many opportunities for mistakes that perhaps the House (where the Act originated) really did think it through and just rejected the idea.
There is a real world example of where something like what you suggested was enacted. It happened in 2000, back when capital gains were still taxed at 20%. A law was passed that allowed people who purchased securities after 1/1/2001 and held them for five years to get taxed at 18%. But what to do about securities that people already held before 2001?
The law allowed taxpayers to elect to "mark to market" their investments. They would pay taxes as if they'd sold the securities on January 1, 2001 and had immediately repurchased them. That was just on paper; they'd really just continue holding their investments. These "deemed sales" would let taxpayers reset their costs and start the five year clock running.
This was a lot simpler than "deemed IRA distributions" because there were no restrictions on how much could be bought or sold (unlike IRA contributions), no rules about requiring other compensation to permit this, and so on. Just a nice simple sell/repurchase on paper.
Unfortunately for investors who made the "mark to market" election, the market continued to tank in 2001 and 2002. They paid taxes on the 1/1/2001 price of their securities, and then "repurchased" them, just to see prices plummet. And they did this because they were planning to hold for another five years and sell on a post 2000 gain.
Even worse, it was all for naught, as cap gains were reduced to 15%. So holding securities five years to pay 18% became pointless.
A bit of tax history to show that you are onto a good idea; it's just that sometimes these things don't work out as well as planned.
The Secure Act legislation was posted here in June, but with little fanfare; but with some further discussion more recently.
To the personal side for this house, I presented written concern for the stretched IRA provision to our 2 senators; as this provision is a tax grab towards the middle class for the most part, cutting into the poor man's/woman's self provided estate planning. As this bill was wrapped into the spending package, my comments became worthless. Oh, well.
The below Twitter feed has more discussion for the Secure Act. One doesn't need to have an account to read these public feeds. For this feed, one will find a "pinned tweet" as the top entry, but as you scroll down, you will find the newest time/date feeds. Not all feeds for this subject will be consecutive, but as you scroll down through the feeds you will find other Secure Act related. You may click anywhere within a particular feed to open the feed to find comments from others. To collapse a particular feed after reading, click the "x" at the top/right corner; and then you may continue to the next feed below. Also, some of these feeds will contain clickable links to related information.
Without doubt, there will be more information and interpretation of the provisions of the Secure Act ramifications. The link below is another source that may be of value relative to the IRA side going forward.
A different take from many --- a mid-70s retired friend who has one adult child and who has worked most of his career for the state interestingly explains his new 457b retirement-savings situation:
... my daughter is [the one] screwed over, in that from the point of view of estate planning she would’ve been far better off if I had simply paid my taxes at the time and saved the money to an index fund (Roths didn’t exist then), which would have been included in my estate and be taxed at 0% because I’m well under the $6M threshold . . .
Not that I ever thought of it in terms of estate planning—just a way of supplementing my pension. But the thing is large now, and with my good LTC coverage I’ll be unlikely to ever spend it down significantly.
I get the IRS wanting to recover deferred income taxes somehow, but the 10-year requirement appears to assume the balance in an inherited 457b account will be pretty small (and that any capital gains included in them should be taxed as income, which was always an arguable point anyway).
As I said, a tax on middle class thrift.
The direst case is when the beneficiary is a minor, say five years old . . .
I can live on my pension (for now, there’s no CoLA) and do roll over the DRMD after tax net into an index fund. Between it & the RMD I’m now in 24% MTRB [Massachusetts], wouldn’t take much to put me into 32%. In today’s dollars the new rule would put my daughter in about the same situation over the ten-year withdrawal period. So I might consider withdrawing a bit more, but not much . . . My 457b is almost to half my NW and continues to stay well ahead of the MRDs. That won’t go on forever, obviously, but I’m almost certain to outlive it.
"I presented written concern for the stretched IRA provision to our 2 senators; as this provision is a tax grab towards the middle class for the most part, cutting into the poor man's/woman's self provided estate planning"
Many see something that adversely affects them personally and respond by packaging their objections as a plea for the common man or woman. Often the thinking is that if I'm affected, then so must the masses, since I'm just one of them.
The numbers show otherwise. As I've posted elsewhere, most people either have no retirement savings, or not enough to be worth mentioning. Participants here simply are not typical.
Sure, more middle class than wealthy are affected by this change. That's because there are a lot more middle class families than wealthy ones. But in terms of real dollar impact, it's mostly the wealthy that are affected.
---
So let's focus on the merits. Does it make sense for heirs to get years of tax deferrals (that includes Roths) on for money intended for your retirement? The Supreme Court acknowledged that inherited IRAs are not even retirement vehicles. They're just tax shelters, plain and simple, without a public purpose. That's why they don't get bankruptcy protection provided for retirement accounts.
Your Twitter guy, Jeff Levine, seems to acknowledge that some things are ripe for abuse. Consider how a 71 year old might try to double dip on deductions - taking both a standard deduction and getting a deduction for an out-of-pocket charitable contribution. The person could make a deductible T-IRA contribution and then immediately have the IRA send the same money to a charity as a QCD.
What you're calling estate planning for the middle class - enabling heirs to shelter income on inherited wealth (think stretch Roth) - others would call an abuse of the tax code.
Opponents of curtailing the [stretch IRA] contend the new rules are punitive for taxpayers who have structured their financial plans to leave large inheritances in retirement accounts for children and grandchildren. Proponents of upending the status quo say retirement accounts were never meant for estate-planning.
[A friend wrote:] I get the IRS wanting to recover deferred income taxes somehow, but the 10-year requirement appears to assume the balance in an inherited 457b account will be pretty small (and that any capital gains included in them should be taxed as income, which was always an arguable point anyway).
As I said, a tax on middle class thrift.
The direst case is when the beneficiary is a minor, say five years old . . .
I can live on my pension (for now, there’s no CoLA) and do roll over the DRMD after tax net into an index fund. Between it & the RMD I’m now in 24% MTRB [Massachusetts], wouldn’t take much to put me into 32%. In today’s dollars the new rule would put my daughter in about the same situation over the ten-year withdrawal period.
Your use of acronyms does not encourage careful reading. I'm going to guess that MTRB is really MTRS (which would be consistent with owning a 457(b)) and that the 24% is the percentage of average salary paid as a pension. If so, it's irrelevant. What matters is the statement that the friend is close to the 32% federal bracket.
That's around $160K (single) of ordinary income, after taking a $12K standard deduction, and that doesn't include tax-exempt interest or cap gains/qualified divs. Someone near a 32% bracket is pushing $200K in AGI. That may pass for middle class in Massachusetts, but nationwide, that puts a taxpayer somewhere between the top 10% ($145K AGI) and the top 5% ($208K AGI). IRS SOI Tax Stats: https://www.irs.gov/pub/irs-soi/17in01etr.xls
Everyone wants to say they're just some working stiff, and the wealthy are people making more. We're not even talking about a someone working here, but someone retired making this much, between pension and RMDs, both of which received favorable tax treatment specifically for retirement.
@msf: " The Supreme Court acknowledged that inherited IRAs are not even retirement vehicles. They're just tax shelters, plain and simple, without a public purpose. That's why they don't get bankruptcy protection provided for retirement accounts
In 2005, Congress passed the BAPCA to provide bankruptcy protection for IRAs. Since only IRAs were involved in the case, there was no ruling on 401(k) accounts. But the same reasoning ought to apply.
The court ruled that the bankruptcy protection didn't extend to inherited IRAs because Congress intended to protect retirement accounts, and inherited IRAs weren't retirement accounts.
From the headnotes (summary) of the ruling (I've edited the spacing):
The ordinary meaning of “retirement funds” is properly understood to be sums of money set aside for the day an individual stops working. Three legal characteristics of inherited IRAs provide objective evidence that they do not contain such funds.
First, the holder of an inherited IRA may never invest additional money in the account. ...
Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement. ...
Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and use it for any purpose—without penalty. ...
Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement years. By contrast, nothing about an inherited IRA’s legal characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. ...
Finally, the possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds.
I like the case because it demolishes the idea that inherited "retirement" accounts are for retirement or merit being treated as such. And it was a unanimous ruling.
>> pension and RMDs, both of which received favorable tax treatment specifically for retirement.
The selling point of the 457b (IRAs too) in the 1980s was that one’s retirement tax bracket was going to be lower than one’s working tax bracket. No matching, no taxes then, deferred to later; beyond that no special treatment. A bad bet in some cases, perhaps for anyone who maxed out their pension, and a worse one for a beneficiary. (The Roth option, which didn’t exist yet, would have been the way to go, obvs.)
>> pension and RMDs, both of which received favorable tax treatment specifically for retirement. ... No matching, no taxes then, deferred to later; beyond that no special treatment.
If deferring taxes on investment earnings isn't significant, then why do people obsess over how tax-efficient their regular investments are? How many charts have Vanguard and Bogle put out over the years showing what you lose when you have to pay more in taxes along the way?
They're plugging investments that are somewhat tax efficient. Their charts and figures show that the less you bleed off in taxes, the more (after tax) you have at the end, even when tax rates don't change. Imagine, if you will, a world in which one could bring the taxes bled off all the way down to zero. Not just taxes on dividends and interest spun off, but on capital gains realized when changing one's investments.
Such a world exists. It's the world of retirement plans - IRAs, 401(k)s, 403(b)s, 457s, thrift plans, Keoghs, SEPs, on and on.
Here's another way to view this, which may address people's reactions.
The IRA was created as a retirement vehicle. However, people have used IRAs for other purposes as well. That's okay so long as they're legal. But benefits that are derived from those other uses are tenuous at best. Proceed at your own risk.
In designing retirement tax plans, Congress intended to confer tax benefits to participants saving for retirement. This is why, as noted in the CBO piece I cited elsewhere, Congress imposed a 10% premature (early) withdrawal tax on IRAs. That tax not only discourages participants from taking out money before age 59½. It also claws back some of the tax benefits conferred on the savings when they aren't used as Congress intended, i.e. for retirement.
It wasn't until 1987 that Congress extended the 10% tax to employer-sponsor plans (401(k)s, etc.). Congress had not intended qualified plans to be used for anything other than retirement, and thus later added this clawback tax. While the dollar impact of that change was likely smaller than the elimination of the stretch IRA, the changes are qualitatively similar. Congress had not intended qualified plans or traditional IRAs to be used for anything other than retirement, and thus later added clawbacks for "off label" uses.
How much in taxes have people saved by using IRAs as tax shelters for non-retirement money? It's not just a matter of taxing the money as it comes out, but reclaiming the benefit of decades of tax deferrals. The method isn't perfect. As the CBO noted regarding the 10% excise tax, for some "it will constitute only a partial repayment", while for others, it "will represent a penalty tax".
Because of progressive taxation, that penalty will fall most heavily on the higher income beneficiaries, while the middle and lower income beneficiaries will wind up making "only partial repayment[s]".
Was wondering how a transfer of say a agricultural operation or private cooperation or even a private business or some other tax shelters to relatives will be treated. Looks like the working stiff is being backhanded compared to other transfers. Just my observations!
Gary, I would expect that the things you mentioned above would more likely be placed in a trust or similar rather than in an IRA but I have no way of knowing that for sure.
>> pension and RMDs, both of which received favorable tax treatment specifically for retirement.
The selling point of the 457b (IRAs too) in the 1980s was that one’s retirement tax bracket was going to be lower than one’s working tax bracket.
I'm glad you mentioned the 1980s. It took me quite some time to dig up details on changes that Congress made back then. With these changes, Congress made it clear that people should not count on IRAs for estate planning.
IRAs used to be exempt from estate taxes. "An IRA you inherit from an owner who died after October 22, 1986, will be included in the estate of the decedent." IRS Pub 590 (1994). Another estate tax change on IRAs (and employer plans) mentioned in the Pub was that "For decedents dying after December 31, 1986, the estate tax [was] increased by 15% of the excess retirement accumulation".
Essentially, if all a decedent's retirement accounts added together were large enough, the amount above a threshold would be subject to an estate surtax. Not all that dissimilar to what the SECURE Act will do - for modest inheritances, the 10 year payout period won't have a significant impact, but for "excess retirement accumulations" it could kick them into higher brackets.
I don't know what happened with that latter 1986 change (I had never heard of it before), but IRAs are included in estate calculations to this day.
Earlier in the 1980s, Congress began reigning in tax benefits for inherited IRAs. It used to be that any beneficiary could roll over an inherited IRA into their own. But in 1982 Congress passed TEFRA. That stated that starting in 1984, only spouses could treat inherited IRAs as their own.
"If, however, you inherit an IRA from someone who died after December 31, 1983, and you are not the decedent's spouse, you cannot contribute to that IRA, because you cannot treat it as your own. Emphasis in original. Ibid. See also #20 in this description of TEFRA changes.
Not only could you not roll over an inherited IRA or contribute to it, but it was taxed more severely. The options and life expectancies used for them were different than for regular IRAs. (The whole set of distribution options for IRAs, even your own, were much more complicated back then and I'm not going to try to understand them, let alone detail the differences for inherited IRAs.)
It seems that another change that TEFRA made that I wasn't aware if pertained to employer plans. These days, you don't have to take RMDs from your 401k, etc. if you're still working for your current employer and you're not a 5% owner. Apparently even 5% owners were allowed to defer distributions until TEFRA came along. https://www.financial-planning.com/news/irs-modifies-rules-for-required-ira-minimum-distributions
Tax benefits for retirement plans when used for estate planning purposes have been substantially curtailed in the past, especially in the 1980s. The SECURE Act is just another such change. Taxpayers have been on notice for decades.
Comments
RMDs work the same way as always. All that's changed is the age at which they start. Same amounts required as before based on age (though the IRS is separately working on regs to change the life expectancy tables).
Withdrawals from IRAs, whether RMDs or not, remain taxable, just as before. They are not counted as compensation; that hasn't changed either. They affect MAGI for various purposes including taxing SS, being charged IRMAA, being able to make Roth contributions, etc. Same as before.
The deductibility of T-IRA contributions isn't changed by the Act. Likewise, the income limits for Roth contributions aren't affected by the Act.
Starting next year, anyone with compensation (as opposed to just those under 70½) can contribute 100% of their compensation, up to the contribution limits. Those limits aren't changed by the SECURE Act.
It is true that you'll be able to take the cash withdrawn from an IRA and immediately put it back in, but only so long as you've got compensation to back it up. Not that much different from what people over 70½ can already do - take their RMD and put it into their Roth. Again, subject to the condition that they have compensation.
What it sounds like you're asking for is a "deemed" distribution. Where you would be able to say: treat the IRA as if you had just withdrawn your RMD and contributed an equivalent amount. Assuming of course that you had enough compensation to allow the contribution to be made.
That might streamline the process. But otherwise it would still work under the old rules as described above.
Even without looking, I'm pretty certain that something like a deemed distribution isn't in the SECURE Act. It would be too prone to user error:
There is a real world example of where something like what you suggested was enacted. It happened in 2000, back when capital gains were still taxed at 20%. A law was passed that allowed people who purchased securities after 1/1/2001 and held them for five years to get taxed at 18%. But what to do about securities that people already held before 2001?
The law allowed taxpayers to elect to "mark to market" their investments. They would pay taxes as if they'd sold the securities on January 1, 2001 and had immediately repurchased them. That was just on paper; they'd really just continue holding their investments. These "deemed sales" would let taxpayers reset their costs and start the five year clock running.
This was a lot simpler than "deemed IRA distributions" because there were no restrictions on how much could be bought or sold (unlike IRA contributions), no rules about requiring other compensation to permit this, and so on. Just a nice simple sell/repurchase on paper.
Unfortunately for investors who made the "mark to market" election, the market continued to tank in 2001 and 2002. They paid taxes on the 1/1/2001 price of their securities, and then "repurchased" them, just to see prices plummet. And they did this because they were planning to hold for another five years and sell on a post 2000 gain.
Even worse, it was all for naught, as cap gains were reduced to 15%. So holding securities five years to pay 18% became pointless.
A bit of tax history to show that you are onto a good idea; it's just that sometimes these things don't work out as well as planned.
2001 IRS Publication 550 - see p. 63 ("New 18% Rate Beginning in 2006")
SEC's Mutual Fund FAQs - see Question #4 for how mutual funds were to handle these deemed sales.
To the personal side for this house, I presented written concern for the stretched IRA provision to our 2 senators; as this provision is a tax grab towards the middle class for the most part, cutting into the poor man's/woman's self provided estate planning. As this bill was wrapped into the spending package, my comments became worthless. Oh, well.
The below Twitter feed has more discussion for the Secure Act. One doesn't need to have an account to read these public feeds. For this feed, one will find a "pinned tweet" as the top entry, but as you scroll down, you will find the newest time/date feeds. Not all feeds for this subject will be consecutive, but as you scroll down through the feeds you will find other Secure Act related. You may click anywhere within a particular feed to open the feed to find comments from others. To collapse a particular feed after reading, click the "x" at the top/right corner; and then you may continue to the next feed below. Also, some of these feeds will contain clickable links to related information.
Twitter feed, Jeff Levine, Kitces.com
Without doubt, there will be more information and interpretation of the provisions of the Secure Act ramifications. The link below is another source that may be of value relative to the IRA side going forward.
Ed Slott IRA discussion forum
Have a good remainder.
Catch
... my daughter is [the one] screwed over, in that from the point of view of estate planning she would’ve been far better off if I had simply paid my taxes at the time and saved the money to an index fund (Roths didn’t exist then), which would have been included in my estate and be taxed at 0% because I’m well under the $6M threshold . . .
Not that I ever thought of it in terms of estate planning—just a way of supplementing my pension. But the thing is large now, and with my good LTC coverage I’ll be unlikely to ever spend it down significantly.
I get the IRS wanting to recover deferred income taxes somehow, but the 10-year requirement appears to assume the balance in an inherited 457b account will be pretty small (and that any capital gains included in them should be taxed as income, which was always an arguable point anyway).
As I said, a tax on middle class thrift.
The direst case is when the beneficiary is a minor, say five years old . . .
I can live on my pension (for now, there’s no CoLA) and do roll over the DRMD after tax net into an index fund. Between it & the RMD I’m now in 24% MTRB [Massachusetts], wouldn’t take much to put me into 32%. In today’s dollars the new rule would put my daughter in about the same situation over the ten-year withdrawal period. So I might consider withdrawing a bit more, but not much . . . My 457b is almost to half my NW and continues to stay well ahead of the MRDs. That won’t go on forever, obviously, but I’m almost certain to outlive it.
Many see something that adversely affects them personally and respond by packaging their objections as a plea for the common man or woman. Often the thinking is that if I'm affected, then so must the masses, since I'm just one of them.
The numbers show otherwise. As I've posted elsewhere, most people either have no retirement savings, or not enough to be worth mentioning. Participants here simply are not typical.
Sure, more middle class than wealthy are affected by this change. That's because there are a lot more middle class families than wealthy ones. But in terms of real dollar impact, it's mostly the wealthy that are affected.
---
So let's focus on the merits. Does it make sense for heirs to get years of tax deferrals (that includes Roths) on for money intended for your retirement? The Supreme Court acknowledged that inherited IRAs are not even retirement vehicles. They're just tax shelters, plain and simple, without a public purpose. That's why they don't get bankruptcy protection provided for retirement accounts.
Your Twitter guy, Jeff Levine, seems to acknowledge that some things are ripe for abuse. Consider how a 71 year old might try to double dip on deductions - taking both a standard deduction and getting a deduction for an out-of-pocket charitable contribution. The person could make a deductible T-IRA contribution and then immediately have the IRA send the same money to a charity as a QCD.
But Congress recognized this possibility, and plugged the loophole. Levine writes that the rule Congress added to plug this is "an anti-abuse thing."
https://twitter.com/CPAPlanner/status/1207853289053835264
What you're calling estate planning for the middle class - enabling heirs to shelter income on inherited wealth (think stretch Roth) - others would call an abuse of the tax code.
CNBC: Lawmakers are killing this popular retirement tax break for the wealthy
That's around $160K (single) of ordinary income, after taking a $12K standard deduction, and that doesn't include tax-exempt interest or cap gains/qualified divs. Someone near a 32% bracket is pushing $200K in AGI. That may pass for middle class in Massachusetts, but nationwide, that puts a taxpayer somewhere between the top 10% ($145K AGI) and the top 5% ($208K AGI).
IRS SOI Tax Stats: https://www.irs.gov/pub/irs-soi/17in01etr.xls
Everyone wants to say they're just some working stiff, and the wealthy are people making more. We're not even talking about a someone working here, but someone retired making this much, between pension and RMDs, both of which received favorable tax treatment specifically for retirement.
What did they say about 401-k accounts ?
You did present some interesting points .
Thanks Derf
The court ruled that the bankruptcy protection didn't extend to inherited IRAs because Congress intended to protect retirement accounts, and inherited IRAs weren't retirement accounts.
From the headnotes (summary) of the ruling (I've edited the spacing): I like the case because it demolishes the idea that inherited "retirement" accounts are for retirement or merit being treated as such. And it was a unanimous ruling.
Derf
MTRB to oldtimers, although he's not a teacher.
Massachusetts Teachers’ Retirement Board: MTA article last week: https://massteacher.org/news/2019/12/gorrie-and-naughton-win-re-election-to-mtrb
Doubt his AGI is close to your conclusions but have no idea, will inquire, and it is a puzzle. Will also ask him to feed me if so.
The selling point of the 457b (IRAs too) in the 1980s was that one’s retirement tax bracket was going to be lower than one’s working tax bracket. No matching, no taxes then, deferred to later; beyond that no special treatment. A bad bet in some cases, perhaps for anyone who maxed out their pension, and a worse one for a beneficiary. (The Roth option, which didn’t exist yet, would have been the way to go, obvs.)
They're plugging investments that are somewhat tax efficient. Their charts and figures show that the less you bleed off in taxes, the more (after tax) you have at the end, even when tax rates don't change. Imagine, if you will, a world in which one could bring the taxes bled off all the way down to zero. Not just taxes on dividends and interest spun off, but on capital gains realized when changing one's investments.
Such a world exists. It's the world of retirement plans - IRAs, 401(k)s, 403(b)s, 457s, thrift plans, Keoghs, SEPs, on and on.
Well, you did say that these things were "sold"
The IRA was created as a retirement vehicle. However, people have used IRAs for other purposes as well. That's okay so long as they're legal. But benefits that are derived from those other uses are tenuous at best. Proceed at your own risk.
In designing retirement tax plans, Congress intended to confer tax benefits to participants saving for retirement. This is why, as noted in the CBO piece I cited elsewhere, Congress imposed a 10% premature (early) withdrawal tax on IRAs. That tax not only discourages participants from taking out money before age 59½. It also claws back some of the tax benefits conferred on the savings when they aren't used as Congress intended, i.e. for retirement.
It wasn't until 1987 that Congress extended the 10% tax to employer-sponsor plans (401(k)s, etc.). Congress had not intended qualified plans to be used for anything other than retirement, and thus later added this clawback tax. While the dollar impact of that change was likely smaller than the elimination of the stretch IRA, the changes are qualitatively similar. Congress had not intended qualified plans or traditional IRAs to be used for anything other than retirement, and thus later added clawbacks for "off label" uses.
How much in taxes have people saved by using IRAs as tax shelters for non-retirement money? It's not just a matter of taxing the money as it comes out, but reclaiming the benefit of decades of tax deferrals. The method isn't perfect. As the CBO noted regarding the 10% excise tax, for some "it will constitute only a partial repayment", while for others, it "will represent a penalty tax".
Because of progressive taxation, that penalty will fall most heavily on the higher income beneficiaries, while the middle and lower income beneficiaries will wind up making "only partial repayment[s]".
https://www.forbes.com/sites/kristinmckenna/2019/12/27/want-to-leave-your-kids-an-inheritance-they-may-only-have-10-years-to-take-it/#f258b2a6a14d
IRAs used to be exempt from estate taxes. "An IRA you inherit from an owner who died after October 22, 1986, will be included in the estate of the decedent." IRS Pub 590 (1994). Another estate tax change on IRAs (and employer plans) mentioned in the Pub was that "For decedents dying after December 31, 1986, the estate tax [was] increased by 15% of the excess retirement accumulation".
Essentially, if all a decedent's retirement accounts added together were large enough, the amount above a threshold would be subject to an estate surtax. Not all that dissimilar to what the SECURE Act will do - for modest inheritances, the 10 year payout period won't have a significant impact, but for "excess retirement accumulations" it could kick them into higher brackets.
I don't know what happened with that latter 1986 change (I had never heard of it before), but IRAs are included in estate calculations to this day.
Earlier in the 1980s, Congress began reigning in tax benefits for inherited IRAs. It used to be that any beneficiary could roll over an inherited IRA into their own. But in 1982 Congress passed TEFRA. That stated that starting in 1984, only spouses could treat inherited IRAs as their own.
"If, however, you inherit an IRA from someone who died after December 31, 1983, and you are not the decedent's spouse, you cannot contribute to that IRA, because you cannot treat it as your own. Emphasis in original. Ibid. See also #20 in this description of TEFRA changes.
Not only could you not roll over an inherited IRA or contribute to it, but it was taxed more severely. The options and life expectancies used for them were different than for regular IRAs. (The whole set of distribution options for IRAs, even your own, were much more complicated back then and I'm not going to try to understand them, let alone detail the differences for inherited IRAs.)
It seems that another change that TEFRA made that I wasn't aware if pertained to employer plans. These days, you don't have to take RMDs from your 401k, etc. if you're still working for your current employer and you're not a 5% owner. Apparently even 5% owners were allowed to defer distributions until TEFRA came along.
https://www.financial-planning.com/news/irs-modifies-rules-for-required-ira-minimum-distributions
Tax benefits for retirement plans when used for estate planning purposes have been substantially curtailed in the past, especially in the 1980s. The SECURE Act is just another such change. Taxpayers have been on notice for decades.