We all had a deal with the taxman, and Congress just reneged. Why? Because, as usual, the government needed money. When Congress passed the SECURE Act on Dec. 20, 2019, we lost out on the three-part deal that many retirees and their beneficiaries had been banking on, literally.
These were the terms many savers counted on when they planned their retirement strategies:
1- We would save for our retirement and, along the way, receive tax deductions for our contributions.
2- Then, in retirement, we would pay back that tax but in small increments over our lifetimes.
3- Any funds we didn’t use could continue being withdrawn by our beneficiaries over their lifetimes. In some cases that could be decades or generations.
This deal, commonly known as the stretch IRA since distributions and tax deferral could extend over lifetimes, was all perfectly legal under the tax code. It required no loopholes or abusive tax tactics.
Many of us hinged our financial planning around that arrangement because we not only wanted to save for ourselves but also for our children and grandchildren. Then Congress went ahead and changed the rules that had been in place when we plotted out our strategy maybe 20, 30, or more years ago. This was a classic bait and switch. We fell into their trap.
The SECURE Act stepped up Congress’s neverending raid on our retirement accounts and punished diligent savers by breaking the stretch IRA promise made decades earlier. The new tax laws derailed the plans of people like you who have worked, sacrificed, and saved, making careful, disciplined investments, and setting up calculated plans for yourselves and your beneficiaries.
Then, at the last minute, Congress went looking for money to fill government coffers, and of course the low-hanging fruit was our retirement savings. Because most retirement savings are tax-deferred (meaning the funds haven’t yet been taxed), this money often looks to Congress like the perfect remedy for revenue shortfalls—a big, juicy steak.
After constantly encouraging us to save for our retirement years (so that they won’t have to come in and bail us out like they do for the banks, CEOs, and Wall Street), Congress turned the tables on us. Whenever we do a good job saving, it seems Congress wants us to bail them out! Once again, our tax system has penalized savers, and that should be a crime.
These days, the number one question people ask me is: Can I trust the government to keep its word that these will be the rules? My answer: Of course not! The fact is, Congress can change the rules again anytime.
There’s an old saying in accounting: “The tax code is written in pencil.”
Given that uncertainty, it’s important to keep in mind which direction tax rates are headed so you can plan accordingly. (Hint: Not down.)
From The Retirement Savings Time Bomb Ticks Louder by Ed Slott, published by Penguin Books, an imprint of Penguin Publishing Group, a division of Penguin Random House, LLC. Copyright © 2021, 2024 by Ed Slott.
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