You’ve got to hand it to these people– Congress really knows how to bring out the holiday cheer.
They have some sort of pathological need to pass the most absurd legislation at the VERY END OF THE YEAR giving people very little time to react.
Two years ago, for example, they passed comprehensive tax reform in late December 2017… and the new tax code went into effect only a few days later.
Taxpayers had no time to even understand the new law, let alone plan around it.
That’s the funny thing about taxes– people plan their entire lives around the tax code.
They set up special structures, invest in particular assets, and go through all sorts of legal and accounting work, to make sure they’re following the tax code while they take care of their families.
And then, poof, Congress changes the rules overnight.
Well they just did it again.
A few days ago they passed a 643-page spending bill. And, buried deep within that legislation are provisions that were originally part of the SECURE Act.
I told you about this a few months ago– the SECURE Act was intended to ‘help’ Americans save for retirement. And there are certain sections which are great.
For example, they removed the age limit for contributing to an IRA. It used to be that you could no longer contribute to your retirement after the age of 70 ½.
That limit has been lifted… which should prove useful for many people.
They also increased the age for Required Minimum Distributions to age 72, up from age 70 ½. So you have an additional 18-months before you’ll be required to start taking distributions from your retirement account.
On the other hand, they also passed new rules which are really bad for inherited IRAs.
Under the old laws, your IRA could be bequeathed to your heirs when you pass away. And while your heirs were required to take distributions from your IRA over time, they had the option of stretching out those distributions over the course of their entire lives.
This was a really great way to give your heirs a tax-efficient safety net.
If they suddenly needed a lump some of money, for example, to buy a new house, pay for university, or offset a major medical expense, they could tap into the IRA that they inherited from you.
But if they didn’t need the money, they only had to take a small distribution each year, and keep the tax consequences to a minimum.
Those rules have now been torn up.
Under the new rules, almost all inherited IRAs must be fully distributed within 10-years, whether your heirs need the money or not. And that’s going to trigger significant tax consequences for them.
Again, in fairness there are plenty of provisions in this law that many people will find helpful. And other provisions that people will find terrible.
But that’s not really the point. It’s not about whether the law is good or bad. The issue is that Congress doesn’t give people any time to react.
Responsible people plan around their taxes… especially when it comes to retirement and estate planning. People have to plan literally DECADES in advance and think through generational impacts.
So it’s a pretty nasty surprise when Congress tears up the rules at the very end of the year. They’re basically saying, “Unless you die by Tuesday at midnight, everything you’ve planned over the last several decades won’t work anymore. Merry Christmas.”
This highlights a very important reminder: these people can and will change the rules at any time, with no warning whatsoever. And they couldn’t care less how their changes impact you.
Now, all that said, I’m always an optimist– where there’s a will, there’s a way. And there are definitely ways to dull the negative consequences of this new law.
We can explore these in more detail another time. But to give you an example, transferring your IRA to a special type of trust called a charitable remainder unitrust could still ensure that your heirs receive lifelong favorable tax treatment on an inherited IRA.