Attention, Savers: Congress Can Always Change Retirement Breaks

Summary

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WSJ Your Money Briefing — "Attention, Savers: Congress Can Always Change Retirement Breaks"

Date: January 17, 2020
Host: Charlie Turner
Guest: Laura Saunders (WSJ Special Writer)

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Episode Overview

This episode of WSJ’s "Your Money Briefing" explores the uncertain future of retirement-related tax breaks in light of recent Congressional changes. Featuring WSJ’s Laura Saunders, the conversation centers on the recent limitation of "stretch IRAs," considers the arguments for and against such changes, and reviews additional retirement breaks that Congress could target next. The message is clear: retirement savers should be cautious and flexible, as Congress can—and does—alter the landscape.

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Key Discussions & Insights

1. Recent Change: The Stretch IRA Limitation

[01:24 – 02:40]

• What is a Stretch IRA?
  Laura Saunders explains that stretch IRAs allowed savers to pass IRA assets to younger heirs, who could then withdraw those funds gradually over decades, benefiting from substantial tax-deferred growth.

  "The stretch IRA allowed people who leave to younger heirs, your child, your grandchild, it allowed the heirs to take that money out over several decades, maybe even 50 years." — Laura Saunders [01:24]

• What Did Congress Change?
  The new rule drastically shortens the withdrawal period for non-spouse heirs to 10 years, meaning all inherited funds must be withdrawn (and taxed) within a decade, with a few exceptions.
  This eliminates the potential for decades of tax-free growth.

• Why Did Congress Make This Change?
  Congress needed to raise additional revenue to fund new retirement incentives (e.g., raising the required minimum distribution age from 70½ to 72) and argued that "IRAs shouldn't be used for transferring wealth across generations."
  Notably, Congress did not include any grandfathering or transition provisions, suddenly upending plans made long ago.

  "If people made careful plans maybe 10 or 20 years ago, these plans were completely derailed." — Laura Saunders [02:26]

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2. Arguments For and Against Changing Retirement Breaks

[02:40 – 03:15]

• For Limiting the Benefit:
  Congress justified the stretch IRA change by insisting the accounts should serve the retirement needs of savers and their spouses—not as multi-generational tax shelters.

• Against Limiting the Benefit:
  Opponents argue that such retroactive changes violate the implicit promises made to savers who planned decades in advance. The unpredictability could discourage people from using retirement accounts altogether.

  "Retirement planning is a long game. 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." — Laura Saunders [03:04]

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3. Other Potential Changes Congress Could Make

[03:15 – 05:58]

Laura highlights four other "on the shelf" proposals Congress may consider:

• a) Ending “Backdoor” Roth IRAs
  Congress could close this loophole, which currently allows some savers to bypass Roth income restrictions through indirect contributions.

• b) Requiring Annual Payouts from Roth IRAs
  Currently, retirees aren't forced to withdraw money from Roth IRAs during their lifetime. Mandating required minimum distributions (RMDs), as with traditional IRAs, would reduce flexibility and tax advantages.

  "...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." — Laura Saunders [04:30]

• c) Limiting Tax Deduction Values for Traditional Accounts
  For higher earners, the value of tax deductions could be capped (e.g., instead of deducting based on their bracket, they'd get a flat or reduced deduction value).

  "There was a proposal...that would limit for higher earners the values of these deductions to say, $0.28 on the dollar, even if you're paying tax at 35 or 39 cents on the dollar." — Laura Saunders [05:03]

• d) Capping Total Size of Tax-Favored Retirement Accounts
  Proposals have circulated to cap the size of tax-advantaged retirement account holdings—e.g., a total of about $3.4 million per person.

  "Why do we let people save so much millions of dollars in IRAs? ...They might put a limit of how much you could save. ...That's really quite a lot of money. But still, you never know what Congress is going to enact." — Laura Saunders [05:27]

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4. The Takeaway: Stay Flexible and Informed

[05:58 – 06:24]

• The unpredictability in tax rules demands that savers remain vigilant and flexible in their planning.

• The lack of warning on stretch IRA changes took many by surprise.

  "It seems like Congress wants to get all this money into IRAs and 401s and retirement plans and then they want to tax the money that's in there when it's trapped." — Analyst quoted by Laura Saunders [06:14]

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Notable Quotes & Memorable Moments

• "The tax code is written in pencil and people should not put all their eggs in one tax basket. They should stay flexible."
  — Tax expert (referenced by Laura Saunders) [00:45, 03:41]

• "A lot of people who had stretch IRAs were unprepared. And one analyst retirement expert that you talked to called it a sucker punch."
  — Charlie Turner [06:09]

• "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."
  — Laura Saunders [03:04]

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Timestamps for Key Segments

• 00:36 – 01:24: Episode introduction, topic tease
• 01:24 – 02:40: Stretch IRA changes explained
• 02:40 – 03:15: Arguments for and against changing retirement breaks
• 03:15 – 05:58: Discussion of four other potential retirement/tax changes
• 05:58 – 06:24: Lessons learned and final reflections

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Conclusion

This episode illuminates the ongoing risks facing retirement savers due to shifting Congressional priorities. Whether considering stretch IRAs or other popular tax breaks, the message is to expect uncertainty and to avoid reliance on any single long-term strategy. Stay informed, stay flexible, and recognize that the only constant in retirement rules is change.

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Transcript

[A]

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[B]

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.

[C]

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.

[B]

The Wall Street Journal's Laura Saunders will join us. Late last year, Congress limited tax benefits on so called stretch IRAs. 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 the stretch IRA and how did Congress limit the tax break?

[C]

Well, the stretch IRA allowed people who leave to younger heirs, your child, your grandchild, 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.

[B]

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?

[C]

Well, Congress made an argument to itself. It wanted money for other things. They wanted to expand other kinds of retirement breaks. 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, IRAs shouldn't be used for transferring wealth across generations. It should be for the saver and the saver speed 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.

[B]

All right, that's basically the argument for limiting the benefit. What is the main argument or arguments for keeping the benefit?

[C]

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. 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.

[B]

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?

[C]

Well, let's just talk about this now. The, 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 con could do in the future.

[B]

You listed basically four other possible changes that Congress may or may not enact.

[C]

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 that's. 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 of 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. So that's something to think about.

[B]

And another one you list is possibly limiting the value of deductions for traditional IRAs and 401 s. Yes.

[C]

Right now you get a full deduction. So if your tax rate is 30%, the value of your deduction to your 401 plan would be about 30% cents on the dollar. So. But there was a proposal floating around that would limit for higher earners the values of these deductions to say, $0.28 on the dollar, even if you're paying tax at 35 or 39 cents on the dollar. So that could happen.

[B]

And the final possible change you list is capping the total size of tax favored retirement plans.

[C]

Yeah. There's some people who might be saying, especially if we get a different Congress or a different president, these some people might be saying, you know, why do we let people save so much millions of dollars in IRAs? That's not the best use of our tax benefits. And so they might put a limit of how much you could save. In total. One version of this limit would come out to about $3.4 million, we think per person. That's really quite a lot of money. But still, you never know what Congress is going to enact.

[B]

And again, the point is that, you know, people who have these types of retirement savings might want to keep this in mind that, you know, changes may or may not come. But I guess a lot of people who had stretch IRAs were unprepared. And one analyst retirement expert that you talked to called it a sucker punch.

[C]

Yeah. She said it seems like Congress wants to get all this money into IRAs and 401s and retirement plans and then they want to tax the money that's in there when it's trapped.

[B]

Wall Street Journal special writer Laura Saunders, Thanks a lot.

[C]

Thank you.

[B]

And that's your money briefing, Charlie. I'm Charlie Turner at the Wall Street Journal.

[A]

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