The Wall Street Journal’s editorial board has challenged a specific “pay for” provision in the SECURE Act. But they’re missing the big(ger) picture.
One of the main reasons the SECURE Act passed the House of Representatives by the large margin of 417-3 was that, as the WSJ acknowledges, it was “paid for.” What that means is that the bill in totality was “scored” by congressional economists as “revenue-neutral” and as such would not increase the deficit.
As you would surmise, provisions such as pushing back the required beginning date of minimum required distributions (to age 72) are “revenue losers” because they delay the taxation of retirement savings. This means that in order to be revenue-neutral, the bill has to include provisions that are revenue raisers to offset the revenue losers. In DC parlance, these revenue raisers are also referred to as “pay-fors.”
Anyway, the general thing about pay-fors is that someone out there is going to dislike them because they are effectively increasing taxes on someone. As former Sen. Russell Long (D-LA) famously said during the debate on the 1986 Tax Reform Act, “Don’t tax you, don’t tax me, tax the guy behind the tree.”
The political exercise generally is to find revenue raisers that impact much fewer people than the number of people who would benefit from the provisions the revenue raisers would “pay for.”
That is certainly the case with the SECURE Act. The provisions to promote retirement savings are estimated to benefit tens of millions of working Americans. One of the main revenue raisers to pay for these provisions promoting retirement savings for working Americans is a provision to curtail something called the “Stretch IRA.” This provision is expected to impact a number of people that can be measured in tens of thousands (not tens of millions).
The Stretch IRA is an estate planning technique used to effectively spread the taxation of an inherited IRA by choosing a grandchild as a designated beneficiary. Under current rules, when an IRA account holder dies, the inherited IRA is generally required to be distributed over the life expectancy of the beneficiary. That would obviously be a long time – or “stretched” – in the case of a grandchild beneficiary.
The SECURE Act would change the rules so that it generally would require inherited IRAs to be distributed – and taxed – within 10 years. However, in the case of beneficiaries who are children, the 10-year period would not run until the child turns 18. So theoretically you could still “stretch” the distribution for 28 years if the grandchild is a newborn, which admittedly is much less than the child’s life expectancy. It is important to note there are broad exceptions to this rule for IRA beneficiaries who are disabled and for surviving spouses.
At the American Retirement Association, we have nothing against estate planning and we certainly don’t have anything against anyone trying to reduce their taxes. However, to get the provisions in the SECURE Act, which we believe will help improve the retirement security of millions of Americans, Congress decided it was necessary for the legislation to be revenue-neutral. There are provisions in the bill that we don’t like – for example, there are substantial increases in the penalties for failing to file, or late filing of, certain retirement plan information returns). But ultimately, we have concluded that the enormous potential benefits of the legislation for retirement savings outweigh the “pain.” Nor are we alone in this determination – the SECURE Act is supported by just about every financial services organization in Washington.
Getting things done in Washington, especially these days, is never easy. And when it comes to getting things done that cost money, it’s that much harder. When things have to be paid for, tough choices have to be made – because, as they say, revenue raisers don’t just grow on trees.
Brian H. Graff is the CEO of the American Retirement Association.