Our government is at it again. They are working on changing the rules for retirement plans, which include 401k, 403b, 457, IRAs of all types, etc. They have issued six different proposals, which is their way of saying, “Here’s what we want to do, unless everyone rises up in protest.”
What is really happening is that two roads are coming together.
The first road represents how our government’s overspending ways are becoming a real problem and they want to collect more tax money. They see your retirement plan as a nice big piece of un-taxed steak and they want to take a bite out of it as soon as they can.
The second road is really all about what retirement plans are really for, and what they are not for. The purpose of retirement plans are to allow an individual to save money for their retirement and then to actually use that money in retirement to supplement their income.
They were never intended to be a wealth transfer device.
Yet, smart financial planners got together with tax planners and estate planners and the next thing you know, stretch IRAs became the norm. The problem with this is that the government doesn’t get their tax money for years and years, and they don’t like it.
So, with all of that in mind, this week, I’m sharing the first three of the six proposals.
Proposal 1 Automatic Enrollment into IRAs
Basically, our government doesn’t like the low rate at which people save in this country. They are worried that they are going to have to take care of you when you get older. They don’t want to do that.
So, the idea here is that they are going to force everyone to contribute a certain percentage of their income toward retirement savings. Actually, when you think about it, it’s probably not a horrible idea, unless you’re the type of person that doesn’t need Uncle Sam telling you how to live your life.
Proposal 2 Retirement Savings Cap
This one is nothing more than a penalty on those who save too much money in their retirement plan. The idea is that our government believes your retirement plan is for the purpose of supplementing your income during your retirement. And they are saying that if you have so much money in your plan that it generates more than a couple hundred thousand dollars per year of income, then you are simply using it as a tax shelter and not for the purpose intended. In other words, you end up getting penalized for either saving too much or investing too well.
Proposal 3 5-Year Rule For Non-Spousal Beneficiaries
This is a big one. This proposal says that a non-spousal beneficiary must withdraw the entire plan balance (and pay the applicable taxes) within five years. This proposal represents the death of the stretch IRA concept. Again, we see our government’s position that your retirement plan is for you and your spouse, it’s not for your children, grandchildren, etc. After you and your spouse are gone, then the plan is done, they want it cashed out and any tax liability settled.
Next week, I’ll share the other three proposals with you. You should expect the same theme. It’s your plan, not your children’s, and the government wants to get paid.