Is Congress Stealing a Chunk of Your IRA?

The backbone of every family’s retirement planning is, well, their qualified retirement plan, whether it be a 401k, IRA, Roth, or similar plan.  We’ve been told we need to invest in a qualified plan because:

  • Often you receive a matching employer contribution. You put in $200 per pay period, and they match it with $100 per pay period…or some similar program.
  • Your money is invested before taxes are paid (or you receive a tax deduction for your contribution as with an IRA).
  • Your money grows tax-deferred, meaning you don’t have to pay current income taxes on interest, dividends, or profits.

You don’t pay taxes until the money is withdrawn, typically during retirement.  And if you don’t need the money, you can postpone taking any withdrawals until age 70½ at which time you’re required to take Required Minimum Distributions (RMDs) based on a government table of your life expectancy.  Your first required withdrawal is around 3% so if you’re earning, say, 6%, your total account balance will continue to grow.

The Stretch IRA

A lot of people die with money in their IRA account.  One of the great family financial strategies is to leave your IRA to a child or grandchild where they can use their own life expectancy for purposes of RMDs.  Using a (much) longer life expectancy allows the inheritor of your IRA to keep the money growing, tax-deferred, for decades longer with potentially dramatic financial results.  For example, say 68-year-old dies, leaving his $100,000 IRA to his 10-year-old grandchild.  Assuming the grandchild earned 6% and withdrew only the required minimum distribution.  By his age 68, the number of withdrawals he received would total approximately $650,000, and his remaining balance would exceed $600,000 for a total benefit exceeding $1.2 million!  That is tremendous financial leverage and a great way to leverage the grandfather’s estate to a future heir.

Congress Eliminates the Stretch IRA

The House of Representatives just overwhelmingly passed the Secure Act which requires a non-spouse beneficiary withdraw inherited retirement funds over a period not to exceed ten years.  This creates enormous income tax issues as well, and family financial planning issues.  Think about it for a moment…instead of spreading the unpaid IRA income taxes over thirty to fifty years, they’ll now all be due within ten years.

In addition to eliminating the stretch IRA, they are proposing that you purchase annuities with your IRA…another bad idea.  Congress is promoting this as if they are doing us all a favor when what they are really doing is accelerating tax revenue.  One positive outcome: They plan to postpone RMDs until age 72 versus age 70½. It still has to pass the Senate and be signed by the President, but based on the strong bipartisan support, it appears this horse has left the barn.

What you should do

If you were planning to leave your IRA to a downstream beneficiary, clearly this new law is detrimental to your goals, and you should meet with your financial advisor to map out your best options.

If you’re so inclined, you might also express your displeasure with your senator.  But hurry, this one seems to be on the fast track.

Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.

Fox6 Talking Points

“Congress: Stealing Your IRA?”

  • House passes the SECURE ACT
  • Eliminates ‘Stretch IRA’
  • Requires 10-year payout (non-spouse beneficiaries)
  • IRAs and ROTH IRAs included


Stewart H. Welch, III, CFP®, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States.  He is the author or co-author of six books including  J.K. Lasser’s New Rules for Estate, Retirement, and Tax Planning– Sixth Edition (John Wiley & Sons, Inc.);  THINK Like a Self-Made Millionaire; and 100 Tips for Creating a Champagne Retirement on a Shoestring Budget. For more information, visit The Welch Group.Consult your financial advisor before acting on comments in this article.