By Pam Martens and Russ Martens: December 30, 2019 ~
Five days before Christmas, while the impeachment debate distracted voters, the President signed into law the so-called Secure Act – which was a sickening bi-partisan attack on the wealth-building capability of the middle class.
Making the dirty deed even more Grinch-worthy, the attack on the assets of the middle class comes after the Trump tax overhaul in 2017 gave a windfall to the super wealthy by doubling their estate tax exclusion from $11 million per couple to $22 million. Now someone has to pay for that and both Democrats and Republicans in Congress have stealthily decided it’s going to be Millennials – who are already buried under student loan debt with a meager average net worth of $8,000.
The only people that will gain security from the Secure Act are the Wall Street wealth advisors who are already looting two-thirds of the average 401(K) over a worker’s career through fees; the insurance industry that browbeat members of Congress into signing the legislation into law and got an insurance annuity payout option included; and the lawyers who will rack up millions of new billable hours from rewriting trusts that no longer make any sense as a result of this wholesale sell-out of the middle class in America.
Under the mantra of increasing 401(k) participation for workers and adding a paltry year and a half to when workers must take mandatory distributions from their sheltered retirement accounts (from age 70 ½ to age 72), the addled brains and/or corporate lapdogs in Congress just removed one of the most critically important avenues that the middle class have for accessing the benefit of tax-sheltered compounding over decades in order to maximize wealth building for those who can’t afford estate planners, tax attorneys and CPAs.
Under long-established legislation, when an IRA account owner died, he or she would typically have named their spouse as the beneficiary of the IRA. That meant that the spouse could simply roll over the decedent’s IRA and continue taking the Required Minimum Distribution (RMD) based on their own life expectancy and the new dollar amount of the account. When the final spouse died, the adult children were typically named as the heirs to the IRA. In many cases, this introduced the next generation to their first clear understanding of the magic of compound interest in a tax-sheltered vehicle – the most efficient form of wealth building that there is.
Under the Secure Act, nothing has changed when the first spouse dies. The surviving spouse retains the same benefits previously held. The sneak attack occurs when the final spouse dies and attempts to leave the children with a wealth-building vehicle for life.
Under the insidiously named Secure Act (Setting Every Community Up for Retirement Enhancement) the children who could previously inherit their parent’s IRA and take the Required Minimum Distribution based on their own age – effectively giving them the ability to compound that inherited IRA over their own lifetime on a tax-sheltered basis – will now be required to reduce the account to zero (yes, ZERO!) over a period of ten years. This former provision was previously known as the “Stretch IRA.” Now it’s become the “Shrink IRA.”
In addition to wiping out one of the best chances that debt-strapped Millennials ever had to obtain a decent standard of living, the Secure Act will also involuntarily push that Millennial into a higher tax bracket in the years he is forced to take outsized distributions from a large, inherited IRA.
For both the original owner of an IRA and the eventual beneficiary, distributions from an IRA are taxed as ordinary income. Since the Millennials will likely be in their peak earning years when their parent dies and names them a beneficiary to the IRA, that means that one-tenth of the total IRA account will have to be added to their taxable income each year or an even larger lump sum added to their income and taxed in the tenth year. No matter how you slice it, for large IRA accounts, the Millennial is bleeding wealth to taxes.
According to the Congressional Research Service, tax revenues raised from this change in the well-settled law would result in an extra $15.7 billion flowing to the deeply indebted Federal government – which has gotten itself into deeper debt by allowing hedge fund owners and billionaire traders to pay a lower tax rate than nurses and school teachers, while also allowing some of the most profitable corporations in America to escape paying any taxes.
But that $15.7 billion raised on the backs of the Millennials is just a drop in the bucket in terms of the wealth it is erasing from those Millennials. Much of the money that is removed during that ten-year period from their inherited IRA could have compounded on a tax-sheltered basis in that account for another 30 to 40 years as they themselves entered retirement and took only the small mandatory distributions annually. We are potentially looking at Millennials losing trillions of dollars in stolen wealth.
This brazen sellout of the middle class was so repugnant that even the typically pro-Wall Street Editorial Board of the Wall Street Journal savaged the idea, writing that it “upends 20 years of retirement planning and sticks it to the Middle Class.”
And if you’re looking for villains to blame, you can start with the AARP which had the unmitigated gall to take the heat off of Congress and endorse the passage of this assault on the little guy’s wealth.
The real brainchild pulling the levers behind a dark, grimy curtain is the Insured Retirement Institute (IRI), a trade organization of Wall Street investment banks and insurance companies (the same ones that received trillions of dollars in bailouts after they crashed the U.S. financial system in the crisis of 2007 to 2010 and escalated the national debt by forcing the federal government to engage in years of fiscal stimulus to keep the economy from sinking into a depression.) On the Board of the IRI are executives from AIG, the giant insurer that went belly up during the crisis and had to be temporarily taken over by the federal government; the investment bank Morgan Stanley which secretly received more than $2 trillion in revolving loans from the New York Fed; Merrill Lynch which also got bailed out to the tune of $1.9 trillion by the New York Fed; and Goldman Sachs, the Wall Street bank that is currently under a criminal probe for looting a Malaysian sovereign wealth fund and was fined $550 million during the financial crisis for allowing a hedge fund to select investments designed to fail in order to make $1 billion shorting them while Goldman packaged and sold the deal to its customers as a worthy investment.
The Secure Act legislation was so despicable that the U.S. Senate first attempted to pass it under a rule called “unanimous consent” which would have eliminated floor debate. When that maneuver failed, the House version of the bill was shoved into the must-pass spending appropriations bill to keep the government running. President Donald Trump signed that into law on Friday, December 20.
Just when one thinks they could not become any more disillusioned with the state of affairs in Washington, along comes something like this to jolt us into the realization that the average American is being sold out daily in startling new, devious ways as the wealth of the nation is, drip by drip, transferred to the one percent.