Congress Is Coming for Your IRA

Like grave robbers opening King Tut’s tomb, Congress can’t wait to get its hands on America’s retirement-account assets. The House passed the Setting Every Community Up for Retirement Enhancement Act, known by the acronym Secure, in May. The vote was 417-3. The Secure Act is widely expected to pass the Senate by unanimous consent. While ostensibly helping Americans save for retirement, the bill would actually reduce the value of all retirement savings plans: individual retirement accounts, 401(k)s, Roth IRAs, the works.

The main problem with the Secure Act is that it eliminates the stretch IRA, the fixed star in the financial-planning firmament since 1999. The stretch IRA lets savers leave their retirement accounts to children, grandchildren or other beneficiaries. Under current rules, the recipients can parcel out the required minimum distributions from the accounts over the course of their actuarial lifetimes. Payouts tend to be relatively small for children but grow in size over the decades until the inherited IRA might comfortably provide for the child’s retirement through the power of tax-deferred compounding. A parent could die with the knowledge that, whatever vicissitudes their children might experience in life, they won’t have to worry about retirement.

Congress wants to kill this. The Secure Act gives nonspouse beneficiaries 10 years to pull out all the money in an IRA. The effect would be to make more of an IRA subject to higher taxes sooner, as distributions are made in supersize chunks. As much as one-third more of an inherited IRA would get gobbled up by taxes than under current rules. When the Tax Cuts and Jobs Act expires in 2025, taxes will rise across the board. If President Trump signs the Secure Act into law, the stage will be set for a taxpocalypse sometime in the next decade.

In exchange for its windfall under the Secure Act, Congress will push back the age at which retirees must take their first required minimum IRA distributions from 70½ to 72. This isn’t the deal American savers were promised when they made contributions to their IRAs the last 20 years. Before, the optimal approach was for savers to leave their IRAs to their children or grandchildren and stretch the payouts over decades.

Under the Secure Act, an IRA owner could still leave the account to a surviving spouse, who’d remain exempt from the 10-year clock. But the widow would be paying taxes in the higher “filing single” bracket. The bracket can easily jump from 12% to 25% or from 24% to 35% as the mandatory payout ratios automatically increase with age. For example, the required minimum distribution for a 70-year-old is 3.7% of the retirement-account balance; for a 90-year-old it is 8.8%.

Should a $1 million IRA pass to a high-earning adult daughter, at best she would have to take payouts adding $100,000 of annual income on top of her salary for a decade. If she lives in a high-tax state, half the annual payout’s value could be lost to taxes.

It gets worse. The Secure Act would be a college planning nightmare for middle-income parents. If the parents of college-age children inherit a $500,000 IRA, the resulting highly taxed mandatory distributions—say, $50,000 a year for 10 years—would make them richer on paper than they actually are, eviscerating their ability to qualify for need-based financial aid. If those parents decide to postpone taking the distributions for four years to avoid the financial-aid effect, they would need to double up on distributions after graduation to compensate, which would land them in a higher tax bracket. If the grandparents skip a generation and leave the IRA directly to the college-bound grandchild, the “kiddie tax” would require the distributions to be taxed at the parents’ rates. Whichever way the family turns, they lose.

The Secure Act would be an estate-planning catastrophe for people with significant IRAs. It would take the sensible planning done up until now and stand it on its head. In the past, an IRA owner might have established a trust if his intended beneficiaries were young. Under the Secure Act, IRAs will no longer be subject to annual required minimum distributions, so an IRA of $1 million placed in a trust for the benefit of an 8-year-old could conceivably receive nothing for nine years. Then at year 10, by law, the IRA would have to pay out everything. Now the young beneficiary turns 18, and suddenly he gets a windfall. With a decade of additional compound growth, the original IRA could have grown to $2 million or more. All is delivered in one year, so most of it is taxed in the highest brackets. If the trust language allows the trustee to keep the money in the trust, it will be taxed at the exorbitant federal trust tax rate of 37% on income over $12,500. And don’t forget state taxes.

The insurance industry loves the Secure Act’s mandate that annuities be offered as a payout option in all retirement plans. Insurance companies sold more than $230 billion worth of annuities in 2018, and they would like to push that figure higher. Annuitizing retirement-plan assets is generally a bad idea unless the retiree needs all the cash for living expenses and can find a very low-cost annuity that is indexed to CPI-E—the inflation rate facing senior citizens that includes their increasingly expensive medical care. Unfortunately, such an annuity doesn’t exist.

The mandatory offer of an annuity is a first step that could lead to the mandatory annuitization of all retirement accounts. This would shoehorn the distributions into higher brackets, accelerate the collection of tax revenue, and eliminate the “problem” of the inherited IRA. Best of all, politicians would get to accomplish all this without voting to raise taxes.

Ted Cruz of Texas is the Senate’s main holdout against the Secure Act. His concern is that the House version dropped a niche provision that would allow tax-advantaged 529 Plans to pay for home schooling. He might be able to hold out, but it’ll be a stretch.

Workers, Retirees Are Feeling Better About Retirement Finances

Confidence in having enough money for golden years hits all-time high in latest survey

With the U.S. economy strong and stocks near record levels, retirees’ and workers’ confidence in having enough money for retirement have risen over the past year to all-time highs, according to a long-running survey released Tuesday.

According to the annual report by the nonprofit Employee Benefit Research Institute, 82% of polled retirees are optimistic about their ability to live comfortably in retirement, up from 75% last year. The figure closely matches the levels recorded in 2005 and 2017 and is the highest since the survey started in 1990.

.. Mr. Copeland said the strong economy is likely responsible for this year’s optimistic results.“Typically, as the economy improves and workers become more confident in their current situation, it spills over to their confidence” about retirement, he said. In addition, he added, in a strong economy, many people are able to save more and take steps to plan for retirement, which also boost confidence.

.. The survey found that confidence among workers and retirees in having enough for both retiree medical and long-term-care expenses rose: 80% of retirees are very or somewhat confident they will have enough to cover medical expenses in retirement. That is up from 70% last year, when many retirees experienced a steep increase in the standard premium for Medicare Part B, which pays for doctor visits and other types of outpatient care. This year, the standard Part B premium for most people is $135.50, up from $134 last year. In 2017, many people paid about $109.

The survey found that confidence among workers and retirees in having enough for both retiree medical and long-term-care expenses rose: 80% of retirees are very or somewhat confident they will have enough to cover medical expenses in retirement. That is up from 70% last year, when many retirees experienced a steep increase in the standard premium for Medicare Part B, which pays for doctor visits and other types of outpatient care. This year, the standard Part B premium for most people is $135.50, up from $134 last year. In 2017, many people paid about $109.

.. Some 66% of American workers said they or a spouse have saved money for retirement. On one end, 40% of workers reported that the total value of their savings, excluding home equity, is below $25,000. In contrast, 23% said they have saved $250,000 or more.

The New Retirement Plan: Save Almost Everything, Spend Virtually Nothing

A group of younger workers, devotees of the FIRE movement, are seeking ways to duck mistakes made by prior generations

They’re also watching the generation entering retirement struggle with many of the same problems. About 10,000 people turn 65 every day and many are unprepared for the years ahead. Older Americans have high average debt. Their 401(k)-type retirement funds will bring in a median income of under $8,000 a year for a 65-year-old couple.

The younger generation’s radical solution—dubbed Financial Independence, Retire Early—has spawned an ecosystem of podcasts, blogs, books, conferences and informal discussion groups. One online forum dedicated to the concept, known to its followers by the acronym “FIRE,” has more than 450,000 subscribers.

FIRE adherents are often millennials and younger members of Generation X who have college degrees, above-average incomes and the discipline to adopt a strict do-it-yourself approach to retirement. Some say they are saving as much as three-quarters of their income, or five times the 15% savings rate conventional financial advisers often recommend, and growing their own food. Others are taking more modest measures such as living in smaller houses and driving older cars.

.. The downside of FIRE is its inherent paradox: For those seeking financial security, early retirement can be risky. Since many early retirees rely solely on income from stocks, bonds or real estate for living expenses, sudden market downturns can pose a threat to their plans. At the same time, these people have to forecast their cost of living for decades. This means prolonged periods of high inflation can wreck their forecasts and budgets.

.. The self-reliance and thrift embodied by FIRE have roots in American history. Elements of the philosophy can be found in Ben Franklin’s 1758 classic “The Way to Wealth,” Ralph Waldo Emerson’s 1841 essay “Self-Reliance” and Henry David Thoreau’s “Walden,” an 1854 book about living simply in a cabin he built near Concord, Mass.

Many FIRE boosters cite a more recent work: the 1992 book “Your Money or Your Life” by Vicki Robin and Joe Dominguez. This paean to financial independence and anti-consumerism, a business best seller in the ‘90s, found a new audience after the 2008 financial crisis.

.. FIRE enthusiasts gather around the country to discuss ways to save more, spend less, and manage investments. A recent meet-up in Manhattan attracted close to 30 people to an office conference room. The attendees—mostly men in their 20s and 30sseveral with backgrounds in engineering—discussed taxes, index funds and real-estate investing over beer and potato chips.

.. “We are surrounded by consumerism, advertisements and marketing, and there are a lot of easy ways to spend,” said David Rodriguez, 33, a mechanical engineer who helped organize the meeting. “It is important to have a place to find like-minded people.”The interest in thrift is flourishing most visibly online where frugality evangelists amass large followings via podcasts, blogs and conferences. One of the most popular FIRE blogs, Mr. Money Mustache, started in 2011, has attracted about 2.5 million page views in the past 30 days, according to Google Analytics data. A podcast devoted to the topic, ChooseFI, has been downloaded 5.2 million times and been played in 190 countries since its inception in early 2017, according to podcast hosting service Liberated Syndication. This puts it in the top 2% of the more than 50,000 podcasts the service hosts.
.. Some who have tried the path of early retirement say it isn’t always as idyllic as it sounds. Socializing with people who still have conventional jobs can be awkward, said Ed Ditto, 49, who retired at 36 as an energy trader and now writes the Early Retirement Dude blog. His solution is to invite friends and neighbors to backyard potlucks.“I don’t bring up the fact that I don’t have a job,” he said. “If someone is interested, I’ll talk about it, but I don’t want to run the risk of stirring up resentment.”

.. One complaint from readers was that the 33-year-old author and her husband still earn sizable incomes. Nate Thames works for a nonprofit and was paid about $270,000 in 2016,

.. “Now I understand why even with cutting everything to the bone, that we haven’t been able to save like they do,” a reader posted in an online review of the book.

Mr. Sabatier, 33, says his Millennial Money website made $401,000 last year. Blogger Joe Udo, 44, recently disclosed he has made almost $350,000 since starting “Retire by 40” in 2010.

.. “It was hard to go from working every day in an office full of people to sitting in a tiny apartment by myself,” she said. “It is very isolating.”Recently she began taking on more freelance work as a copywriter. “I got a lot more meaning from my work than I had realized,” she said. “It is a lot harder to find meaning than to save 70% of your income.”

.. FIRE proponents say they account for the danger of fluctuating markets by adhering to a rule-of-thumb pioneered by financial planner William Bengen, who concluded retirees should spend no more than 4.5% of their initial nest egg, adjusted annually for inflation, to ensure a high probability of supporting themselves over decades.

.. It took a Category 5 catastrophe for Sylvia Hall to start thinking of changing her approach to her finances. When Hurricane Katrina struck the Gulf Coast in 2005, Ms. Hall, then a New Orleans resident, temporarily lost a home and a paycheck as the first payments were due on $101,600 in law-school debt.

Republicans Are Caught in a Trump Bind as the Midterms Approach

Confining Trump to a Trappist monastery for three months might help a bit. But it might not: much of the damage has already been done.

.. Balderson probably owes his win to a late endorsement ad cut by GOP Gov. John Kasich, not a late rally by President Trump,

.. Trump’s support among white voters without a college degree fell from fifty-seven per cent in June to forty-nine per cent in July.

And his disapproval rating went from thirty-six per cent to forty-seven per cent.

.. But there is no such doubt about how Trump turns off many affluent, college-educated Republicans.

.. “This is all of a piece with the intuition nationally that college-educated whites are turning away from the Republican Party in reaction to Donald Trump’s presidency,”

.. White House aides are now “mapping out plans for the fall that would offer a variety of options to Republican candidates, including visits by the president’s daughter Ivanka Trump to blue states and presidential tweets to bolster red-state allies.”

.. the thinking is to use Trump to boost turnout in areas where he is popular, but to keep him away from latte-sipping Republicans in the ’burbs

.. It’s fanciful to imagine that he could spend September and October whipping up his diehard supporters at rallies in places such as Charleston, West Virginia, and Bismarck, North Dakota, without entering the consciousness of Republican voters in the areas surrounding Chicago, Columbus, and Philadelphia.

.. it’s looking like House Speaker Paul Ryan and roughly three dozen other House Republicans knew what they were doing when they announced that they would retire instead of seek reëlection this year.

 

Why you can’t fix retirement without fixing wages

Millennials needn’t worry about retirement, Alicia Munnell, 75, writes, as long as they “are willing and able to work longer than their parents and grandparents did.”

It may not be surprising that younger Americans, who will largely be responsible for cleaning up the financial wreckage the boomers are leaving behind, are not particularly enthusiastic at the prospectof working longer and harder for the same quality of life enjoyed by previous generations.

.. the proximate causes of millennials’ financial difficulties, such as the Great Recession and the dot-com bubble: “Millennials entered the labor market during tough times.

.. The “good news,” as she calls it, is that retirement is a long way off and that simply by working into their 70s, millennials will be able to make up a lot of lost ground.

.. Between 1989 and 2016, the real median income of houses headed by people younger than 35 increased by just 4 percent. That’s just about enough to keep pace with overall inflation.

.. The problem is, however, that many prices have been rising much more rapidly than the pace of inflation. Prices are rising fastest for the things that are absolute necessities: Health care. Food. Housing. Education. Things you literally need to survive. As a result, households have to take on more debt to make ends meet.

.. Overall compensation has been largely stagnant since the 1970s, even as productivity has increased. Median household debt has roughly doubled since 1989.

.. By asking millennials to work to age 70 you’re treating the symptom, not the underlying disease.

.. Selling American elites, who tend to be older and wealthier, on the notion that the young just need to work harder is easy. But the idea that workers urgently deserve an across-the-board pay raise — a raise that would come, often, from higher payments from those same older and wealthier people — is a much tougher sell.

What has Trey Gowdy been smoking?

Gowdy, chairman of the House Oversight Committee, dismissed the notion, propagated by President Trump, that the FBI had a “spy” in the Trump campaign. He said the FBI did what it “should have done” and that informants such as the one used by the FBI are used “all day, every day by law enforcement.”

Gowdy told Fox News on Tuesday that, after a classified briefing on the subject, “I am even more convinced that the FBI did exactly what my fellow citizens would want them to do.”

.. Earlier, Gowdy took issue with his fellow Republicans’ claims that Russia didn’t try to help Trump win the election, saying it was “clear based on the evidence” that Russia sought to defeat Hillary Clinton. And he didn’t join other Republicans in their categorical claim that there was no Trump campaign collusion with Russia.

.. He also defended the broad mandate of the Mueller investigation, and he delivered a blunt message to Trump to talk to Mueller and give him time and independence: If Trump is innocent, then “act like it.”

.. Actually, we know exactly what Gowdy is smoking: the sweet herb of retirement.

.. Several of the 48 departing House Republicans have, like Gowdy, become last-minute truth tellers about Trump on their way out, including Thomas J. Rooney, Charlie Dent, Ryan Costello and Ileana Ros-Lehtinen.

.. The conspiracy crowd denounced him when the Benghazi committee, which he led, failed to validate their dark theories about Clinton.

.. But he was, in his eight years, one of the great GOP flamethrowers. He referred to his lengthy Benghazi probe as a “trial” of Clinton, and after a promising initial hearing, it quickly devolved into a partisan fight that singled out bugbears of the right such as Clinton aides Sidney Blumenthal and Huma Abedin.

.. He spearheaded the effort to hold Internal Revenue Service official Lois Lerner in contempt of Congress, and he claimed that the Obama administration’s refusal to cooperate with Congress was “proof” that President Barack Obama knew about the botched gun-running program “Fast and Furious.”

.. Gowdy, though undertaking three investigations into the Trump administration, has been rather more forgiving of this administration’s refusal to cooperate. Democrats on his committee say he hasn’t issued a single subpoena to the administration. When I asked Wednesday about Gowdy, Elijah E. Cummings (Md.), the top Democrat on the committee, was grudging: “We now live in a kind of alternate universe when individual Republicans get massive praise just for acknowledging the obvious and restating basic facts.”

 

Paul Ryan’s Retirement in 7 points

It would be difficult to overestimate the meaning of Paul Ryan’s decision to retire from Congress even as he occupies the office of Speaker of the House. So let’s estimate.

Twice in the past three years, the sitting Speaker has walked away from the office. Ryan only became Speaker because John Boehner, his predecessor, quit rather than suffer through a challenge from the bomb throwers in the Republican House conference. There’s no precedent for this in American history. The Speakership has been one of the most powerful offices in the world. Now it’s apparently more agony than ecstasy for a Republican.

.. A Republican likely won’t be elected speaker after the 2018 midterms. Ryan’s decision suggests he and others have seen enough internal data to know their capacity to hold their 23-seat majority is slipping away.

.. That makes 42 GOP retirements among the 237 Republican members of the 115th Congress—a number vastly higher than any recent Congress’s.

.. the Ryan retirement isn’t just a sign. It’s like a fireball from the sky. And it will occasion more retreats and embolden more Democrats.

.. the GOP is Trump’s party now, not Ryan’s.

.. His mercurial nature and habit of punching down have combined with general GOP support for Trump personally to prevent any such rump from emerging in the Congress. He’s already claimed the scalps of two Republican senators—Bob Corker and Jeff Flake—who attempted to do just that. How did their standing athwart Trump help them or anyone?

.. some of the GOP’s wonkier agenda items are being implemented by the Trump administration–notably, in the sphere of deregulation. So, yes, it’s Trump’s party, but there’s an extent to which it’s also Ryan’s party, the conservative policy wonk’s party. Except, of course, for two big things.

The first big thing is entitlement reform, which is the issue nearest to Ryan’s heart.

.. No matter what happens, no matter the growth of the economy or the glories of #MAGA, the remorseless logic of the actuarial charts showing the government going bankrupt from the cost of Medicare and Medicaid sometime around 2030 is unyielding

.. The second big thing is the massive federal deficit, which is projected to stay above the $1 trillion mark for God knows how long. The bitter irony here is that the Tea Party–whose ab nihilo existence began the Republican resurgence in the House and Senate, and whose anti-Establishment ethos was the precursor to Trump–was obsessed with the idea that Barack Obama was breaking the bank, and rightly so. Now, the Tea Party forms the hard schist of the Republican base, and it’s clearly decided not to hold Trump accountable