Let’s face it; people really despise the IRS.
The internal revenue service is in the upper echelon of hated, despised, and downright loathed governmental agencies. Sure, we all fear a day spent in the flailing human drama of the DMV, and we certainly don’t have any love for answering census questions or applying for building permits, but the IRS is a different kind of evil.
Giving the government approximately one third of our paycheck stings, badly, and it creates the sort of resentment that would lead a more primitive sort of American to hijack a ship and throw its tea into a harbor.
But now something even more insidious has been exposed from within the deep and murky depths of the Internal Revenue Service, and it is affecting Americans often in a state of bereavement.
Few noticed when the House of Representatives in May overwhelming passed the imaginatively named “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.” The vote was 417-3. Senate passage was thought to be a mere formality — until Senator Ted Cruz (R-Texas) announced opposition, because the bill no longer includes a provision that would allow tax-free Section 529 college savings account withdrawals to cover homeschooling costs.
But with such near-unanimous support, you would think the SECURE Act is basically nothing but good news for anybody and everybody. Right? Wrong.
Here’s where it gets downright deplorable:
If it becomes law, the SECURE Act would require most non-spouse IRA and retirement plan beneficiaries to drain inherited accounts within 10 years after the account owner’s death. This is an anti-taxpayer change for beneficiaries who would like to keep inherited accounts open for as long as possible to reap the tax advantages.
Under current law, the RMD rules for a non-spouse beneficiary allow you to gradually drain the substantial IRA that you inherited from Uncle Henry over your life expectancy from an IRS table. See this previous Tax Guy column for more info.
And why is this bad, exactly?
For example, say you inherit Uncle Henry’s $500,000 Roth IRA when you are 40 years old. The IRS table says you have 43.6 years to live. You must start taking annual RMDs from the inherited account by dividing the account balance as of the end of the previous year by your life expectancy. So your first RMD would equal the account balance as of the previous yearend divided by 43.6, which would amount to only 2.3% of the balance. Your second RMD would equal the account balance as of the end of the following year divided by 42.6, which translates to only 2.35% of the balance. And so on until you drain the inherited Roth account.
As you can see, the IRS is again taking a step that isn’t meant to enhance the ability of American citizens to grow their wealth – and one must wonder how many more straws this camel’s back can take?
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