stretch ira/401k for non spousal beneficiaries law change cut to 10 years

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Submitted by Coronita on December 20, 2019 - 6:44am

I think this passed both the house and Senate on Thursday.

effectively, it accelerates the distribution of an inherited non-spousal IRA/401k to 10 years.

https://www.forbes.com/sites/leonlabrecq...

previously, if your kids inherited your IRA, they could take a distribution over their lifetime and defer income taxes indefinitely .... with the latest rule changes, your kids need to fully deplete your IRA within a 10 year period, and that could put them into a really high tax bracket.

If you plan on passing your assets to your kids do it through some other mechanism. I think you'll start to see more of our government raiding saver's IRAs in the years to come, so for folks who are building a passive income portfolio to generate income during retirement, cough real estate and rental property cough, there is probably even more of an incentive to do this than passing on wealth through inherited IRAs. The other thing people suggest doing is convert traditional IRA to Roth IRA pay taxes up front, and then the inherited RothIRA would be fine under current tax laws. However, key point is current tax laws, which most likely will continue to change. My gut tells me they will be coming to raid inherited Roth IRAs eventually too.

war on savers in America continues, lol.

https://www.google.com/amp/s/www.barrons...

Submitted by Coronita on December 20, 2019 - 7:44am.

Personally, I think a lot of financial planners/advisors that have been giving the cookie cutter advise of "put away as much money into a tax deferred 401k or IRA" might be wrong for people who are well disciplined savers/investors... I think this cookie cutter advise might be for the majority of the american population that generally suck at saving/investing their money, and need some sort of disciplined and easy way to put money off to the side for their golden years...However, easy does not necessarily mean its the best and most tax efficient way for someone that is financially disciplined and doesn't need to to be handheld to bi-weekly put money off to the side to save for their golden years.

For starters, many 401k plans just suck in terms of the high fees, the shitty investment options, and general lack of flexibility. Second, for 401ks and IRAs that are tax deferred, you don't know how much taxes all that taxed deferred investing is really going to be 10, 20, 30 years down the road, and that seems to be a moving target. For many of you that are hard core savers, putting all that money off to the side and letting it compound all these years, you might end up having a very large required minimum distribution RMD when you reach your golden years, and your annual RMD income might end up being larger than your current AGI, putting you into a much higher tax bracket in your golden years than you currently are with your current AGI. Furthermore, I seriously doubt taxes across all tax brackets in the future will be lower than they are now, unless you are just poor. So for hard core savers/investors, it's likely that not only will you be in a much higher tax bracket in the future, the taxes you pay in that bracket will be more than even if you were in the higher tax bracket now.

Which begs the question, what's the point of putting so much money into the traditional tax deferred 401k and IRA anyway, versus just paying taxes now upfront on your earned income and use that money to invest in some more well known, quantifiable taxed asset in present day? Being a disciplined saver, you're not going to piss away that money today anyway, so you might as well get the tax done on it, and work with it present day, where you know how it's going to get taxed.

The one exception might be if your employer offers a matching 401k plan, like mine does. And then, yeah I guess it would make sense to contribute the least amount of money to the 401k as possible, just so you get the full match from the employer....or... some employers now offer both a Traditional 401k and Roth 401k, so if you're hell bent on doing that maximum $19k/year deferral to a 401k ($19.5k/year starting in 2020, whoohoo), you could pay taxes on that $19k up front, and put it all into the Roth 401k part....and gamble that 10-20-30 years from now, our government won't try to tap into the Roth401ks/RothIRAs that were supposedly not taxable at all...maybe....

I don't know...

Kiplinger had a pretty good article toward the end about the elimination of the stretch ira. https://www.kiplinger.com/slideshow/reti...

Submitted by svelte on December 21, 2019 - 10:29am.

Definitely 401K is not for everyone, but it is good for most people.

My employer offers some very good mutual fund choices, but even if they didn't most offer an index fund choice and since those typically come with pretty low fees, that's a pretty safe bet.

And you're also right that the company match adds to the 401K value considerably.

I can understand your preference to rental units vs 401K especially since switching employers often complicates the 401K situation - it is hard to know how future employers will have their 401Ks set up. But it is also hard to know how laws will affect rental properties also, witness this years rent increase limitations.

Thanks for the heads-up on the inherited IRA proposed changes. I'm in that boat. Luckily it appears I will be grandfathered in, but the upcoming changes may influence my decision on how to flow $$ to my kids once I pass.

Submitted by outtamojo on December 21, 2019 - 1:25pm.

You can gift 15K annually from each parent tax free.
Yes peanuts for you high rollers : )

Submitted by Coronita on December 21, 2019 - 1:39pm.

outtamojo wrote:
You can gift 15K annually from each parent tax free.
Yes peanuts for you high rollers : )

messes up financial aid considerations. I'm kidding.

We do, problem is not sure I want to give money to a kid without an assurance kid can manage well.

Submitted by Myriad on December 21, 2019 - 8:49pm.

I'm sure a lot of the advice is for people that haven't saved enough in their 401k, IRA/Roth 401k, IRA. Since the majority of Americans haven't saved enough in general.

For those that have significant amounts in a tradition 401k/IRA, moving money prior to RMD requires a lot of planning. Converting as much as possible prior to RMD to lower AG taxable income.
It's hard to imagine tax rates for the 0-90% of income really going up more than a few % points. There would pretty much be riots in the streets if it goes up by 5%. More likely, the step-up basis will be eliminated - a stealth estate tax for the relatively wealthy.

As for real estate, prices are pretty high now and lots of places in SD/CA are cash flow negative. And if interest rates ever go up, the appreciation will be pretty limited.

Submitted by Coronita on December 22, 2019 - 12:26am.

Myriad wrote:
I'm sure a lot of the advice is for people that haven't saved enough in their 401k, IRA/Roth 401k, IRA. Since the majority of Americans haven't saved enough in general.

For those that have significant amounts in a tradition 401k/IRA, moving money prior to RMD requires a lot of planning. Converting as much as possible prior to RMD to lower AG taxable income.
It's hard to imagine tax rates for the 0-90% of income really going up more than a few % points. There would pretty much be riots in the streets if it goes up by 5%. More likely, the step-up basis will be eliminated - a stealth estate tax for the relatively wealthy.

As for real estate, prices are pretty high now and lots of places in SD/CA are cash flow negative. And if interest rates ever go up, the appreciation will be pretty limited.

It won't be cash flow negative if the property is free and clear. Then it's more or less simply cash on cash return

Hyothetically, one can spend $300k on a 1/1 in MM that rents for $1600 month. Factoring in HOA, insurance, and ptax costing $450/month, that's still
$13800/300000 or 4.6% return

Submitted by Myriad on December 23, 2019 - 12:34pm.

flu wrote:

It won't be cash flow negative if the property is free and clear. Then it's more or less simply cash on cash return

Hyothetically, one can spend $300k on a 1/1 in MM that rents for $1600 month. Factoring in HOA, insurance, and ptax costing $450/month, that's still
$13800/300000 or 4.6% return

Well, don't have that much cash. But continuing on with your #s, you have some good assumptions on that. A few places I looked at have HOA around $250ish. Add in the other costs, and I think I never managed to get above 3%. Add in all the non-$ costs associated with managing a local property, seems like there are better investments (stocks, non-CA property)

Submitted by Coronita on December 26, 2019 - 11:31pm.

This might help.

https://www.forbes.com/sites/jlange/2019...

For the time being, it might be better to nudge contributions leaning slightly more biased to a Roth 401k of you split between traditional and Roth.

Submitted by Coronita on December 27, 2019 - 2:09pm.

CNBC article about maybe diverting more money into a Roth 401k versus traditional 401k....

same concept I mentioned earlier. Tax on taxable income maybe lower now with all these tax law changes than in the future, so maybe take the tax hit now while it's a known now, versus unknown later...

https://www.cnbc.com/2019/12/27/why-now-...

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