Major retirement-savings legislation
working its way through Congress mostly draws praise, but investment advisers are concerned that a provision in the bill that would limit inherited individual retirement accounts will hurt their clients.
The Setting Every Community Up for Retirement Enhancement Act, or
the SECURE Act, would implement the biggest changes to retirement policy in more than a decade. It would allow small employers to more easily band together and offer retirement plans for employees, enable the use of annuities in 401k plans and increase the age for required minimum IRA distributions from 70.5 to 72, among other provisions.
It's the way it pays for those changes that's becoming controversial. The bill would require most non-spouse
beneficiaries of IRAs to take all distributions over 10 years instead of during their lifetimes. The idea is that the change would increase tax revenue.
Several advisers said the policy change would set back clients who intend to leave IRAs to their children.
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"Now those beneficiaries are going to be punished," said Kerrie Debbs, a partner at
Main Street Financial Solutions. "It turns the whole strategy on its head. All this planning you've done is going to be mute."
The change will mostly impact those who have IRAs with substantial balances. That happens to include many of the people advised by Claire Toth, vice president of
Point View Wealth Management.
"My clients are not happy about this," Ms. Toth said. "I understand their unhappiness because you're taking away something they were expecting."
John Ham, an associate adviser at
New England Investment and Retirement Group, said the pay-for provision undermines the theme of the SECURE legislation.
"It kind of goes against what the SECURE Act is trying to accomplish," Mr. Ham said. "By forcing people to draw down retirement accounts over 10 years, rather than their lifetime, it is detrimental to their long-term financial plans."
The shock for those inheriting IRAs would be the tax hit they take after inheriting an IRA in their middle age after a parent dies, said Beth Blecker, chief executive of
Eastern Planning Inc.
"If you have to take that money out in 10 years when you're at your highest income, it will be especially painful for taxes," Ms. Blecker said. "Right now, stretch is a major part of estate planning."
R.W. Baird & Co. is analyzing its data on inherited IRAs to see how many clients might be affected by the stretch provision.
"There's no way to fully
replicate the value of a stretch IRA," said Tim Steffen, director of advanced planning at Baird Private Wealth Management. "Clients are concerned about this. They're asking about it."
The notion of bequeathing IRAs is becoming more prevalent because the baby boomer generation is the first that has built up retirement wealth in IRAs, according to Mr. Steffen. But only beneficiaries of the largest IRAs are likely to notice a real difference under SECURE.
"With smaller IRAs, my guess is they often don't last the full 10 years anyway," Mr. Steffen said.
When the
Wall Street Journal criticized the stretch-IRA provision in an editorial last month, the insurance lobby pushing hard for congressional approval of SECURE punched back.
In a letter to the paper, Wayne Chopus, chief executive of the Insured Retirement Institute, called the provision a
"fiscally responsible" way to pay for SECURE.
"[M]ost IRAs will likely be used by the original retirement account owner as income — exactly how Congress intended when the IRA was established — not as estate planning tools," Mr. Chopus wrote.
The IRI and other insurance groups will continue to try to get SECURE through the Senate when the chamber reconvenes in September after the congressional recess.
Advisers like most of the changes that would be ushered in by SECURE. But the pay-for provision will likely continue to draw criticism.
"It's the Golden Goose," Mr. Ham said. "They're trying to go with the easy-money grab."
