Attention, Savers: Congress Can Always Change Retirement Breaks
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What is the main topic discussed in this episode?
With your money briefing, I'm Charlie Turner at The Wall Street Journal. Retirement savers take note. Those tax breaks that you've enjoyed might be targeted by Uncle Sam.
One of our tax experts said, you know, the tax code is written in pencil, and people should not put all their eggs in one tax basket. They should stay flexible. So I thought it would be interesting to think about what Congress could do in the future.
The Wall Street Journal's Laura Saunders will join us.
Late last year, Congress limited tax benefits on so-called stretch IRAs.
What happened to Stretch IRAs and how did Congress change the rule?
More retirement breaks could be on the chopping block. Let's bring in Wall Street Journal special writer Laura Saunders for the details. Laura, what is a stretch IRA and how did Congress limit the tax break?
Well, the stretch IRA allowed people who leave IRAs to younger heirs, your child, your grandchild.
How did Stretch IRA changes cut heirs' tax-free growth from decades to 10 years?
It allowed the heirs to take that money out over several decades, maybe even 50 years. So that was a lot of tax-free growth. And Congress pulled that back from maybe 50 years to 10 years. All money to non-spouse heirs has to come out within 10 years, with a few exceptions.
And I would understand that a lot of retirement savers with these stretch IRAs were pretty upset about this. Why did Congress do this? Was it to save money?
Well, Congress made an argument to itself. It wanted money for other things. They wanted to expand other kinds of retirement breaks.
Why did lawmakers justify limiting Stretch IRAs and who was affected?
You know, they raised the age for taking money out to age 72 from 70 and a half. And so they had to raise money from somewhere. And they made an argument to themselves that they bought that said that, well, you know, IRA shouldn't be used for transferring wealth across generations. It should be for the saver and the saver's spouse. And so that was a good reason to pull it back. But they didn't put in any kind of grandfather or transition rule. And if people made careful plans maybe 10 or 20 years ago, these plans were completely derailed.
All right. That's basically the argument for limiting the benefit. What is the main argument or arguments for keeping the benefit?
Well, keeping the benefit is just that they made a promise and that they should have, if they had changed it, they should have changed it going forward and not affecting plans that people had already made. So, you know, retirement planning is a long game.
Which other retirement tax breaks is Congress considering changing next?
You do things decades ahead of time. And so if you can't trust Congress to keep the rules the same, maybe it's going to discourage people from using certain kinds of accounts and things like that.
And Laura, the reason that we're talking about this is that Congress may consider limiting other retirement breaks and investors might want to prepare for possible changes. What other changes has Congress talked about enacting?
Well, let's just talk about this. Now, the change to stretch IRAs had been on the shelf, as it were, in circulation for at least five years, maybe six or seven or eight years. It had been around. Usually when there's a tax law that changes, somebody has proposed it a long time ahead of time. So I thought it would be interesting to look and see what else is on the shelf that Congress could change in the future. And one of our tax experts said, you know, the tax code is written in pencil and people should not put all their eggs in one tax basket. They should stay flexible. So I thought it would be interesting to think about what Congress could do in the future.
How could proposals like ending backdoor Roths or annual Roth payouts impact savers?
you listed basically four other possible changes that Congress may or may not enact.
Exactly. You know, we don't know if Congress will do these things or in what form or anything else or when. We just know that there are proposals out there. One of them would end backdoor Roth IRAs, and people should read about that in my story. Another one would make Roth IRAs have annual payouts. And that would be pretty hard on Roth IRAs. Right now, when the money comes out, it's tax-free, and you don't have to take it out when you're older than 72. If you make people take it out annually the way they do with traditional IRAs, then that would take away a lot of the flexibility.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:06–0:41
2
What happened to Stretch IRAs and how did Congress change the rule?
0:41–1:02
3
How did Stretch IRA changes cut heirs' tax-free growth from decades to 10 years?
1:02–1:39
4
Why did lawmakers justify limiting Stretch IRAs and who was affected?
1:39–2:32
5
Which other retirement tax breaks is Congress considering changing next?
2:32–3:32
6
How could proposals like ending backdoor Roths or annual Roth payouts impact savers?
3:32–5:09
7
What practical steps should retirement savers take knowing Congress can change rules?
5:09–6:01
Speakers
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