Last week in one of my workshops I expressed my opinion, and said that the government isn’t looking out for the middle class. Many of the audience agreed, and one guy asked me to explain further, which I did, as I have outlined in this article.
I continue to see the government take from middle class Americans, and in my opinion, the government has stolen their money. The Secure Act, which is a law that was passed in 2019 became law at the beginning of 2020. With COVID dominating the news in 2020, many people were oblivious to what the Secure Act was meant for them.
Tax Deferred Growth
The American Baby Boomer population are moving into their retirement years, and most of them are middle class folks. A large majority of them have their money in home equity and retirement IRAs and 401k accounts. This is because the boomer generation took the bait of tax deferred growth for retirement accounts. Fifty years ago there was a move away from defined benefit plans and pensions, because they were too expensive. Instead, people were provided with a way to save their own money with tax advantages.
What happened was, if you had a retirement account, you could put money from your pay check into the retirement account before paying income taxes. This allowed you to get investment growth on that money. When you retired, you could pull the money out and you would be taxed on the money and the tax deferred growth. For most people, that was a big win.
Before the Secure Act was Passed
It used to be the case that when you passed away with money in a retirement account, you left it to the next generation. They would then get the tax deferred money as an inherited IRA. Essentially, mom or dad’s retirement account became the kid’s retirement account.
For example, if my dad passes away when I’m 55, and he leaves me a $200,000 retirement account, I would have an inherited IRA. I could take my dad’s retirement money, and let it grow as an IRA, with continued tax deferred growth. I would have to take a little bit of money out every year, but most of it would stay in the account and grow. Assuming I get 7% growth every year, it means that after 10 years, when I’m 65 years old, that money will double and I would get $400,000. If I decide to leave the money to grow further, by the time I am 75 years of age, I would get $800,000.
I would have my own retirement account, as well as the money in my dad’s retirement account. This means there would be a wealth transfer between generations, and I could possibly retire 10 years earlier. I could also pass the money onto my children, so they can pursue their dreams with less stress.
What the Secure Act Did
However, the introduction of the Secure Act cancelled the opportunity for tax deferred growth. This was a major change in tax law, and usually the law is proposed and debated. However, The Secure Act was passed almost unanimously without any public discourse. In 2019 there was a headline in the Wall Street Journal that said the US House of Representatives had passed the Secure Act.
Now when money goes to the child, he has to pull all the money out within the first 10 years. He has also lost out on 20-30 years of tax deferred growth, because the government has stolen his inheritance. Thirty years previously, his inheritance would have been worth a lot more money.
The Rules Have Changed
Most of us are still working at the age of 55, and likely in our highest wage earning years. Since IRA money and 401k money is ordinary income, I could pay 33% income tax on this money. If my dad leaves me $200,000 and I’m 55 years old, I have to pull the money out within the first 10 years. If I am in a high income tax bracket, I will be paying tax on my salary and my IRA. I can forget about getting $800,000, because the IRS is taking it all. When I explain this to people, they get mad because four years later, most people still don’t know about the Secure Act.
We’re currently in an environment where there is no federal estate tax. You can pass away with more than $13 million where that money is likely not IRA money, but capital investments. You could leave this money to your kids and pay no federal estate tax or capital gains tax, because you get a stepped up basis.
The Rich get Richer
It hardly seems fair when you compare a wealthy person with $13 million, with a retired school teacher, who owns her own home and has saved $500,00 in the school 403 B plan. She has worked hard to save this money, and when she passes away, she leaves it all to her kids. However, her kids are going to pay income tax on this retirement account within a defined period of time after she passes away. In my opinion, that is a death tax. Wealthy people don’t pay a federal estate tax, but middle class people pay a death tax, because their money is in retirement accounts. I am not judging wealthy people and would love to be wealthy too. However, I believe that middle-class folks are discriminated against.
Come to Our Workshop
If you found this interesting, come to one of our workshops. We will teach you how to protect yourself, your money and your family by doing asset protection work. We will explain why you need more than just a simple Will. I encourage you to take the time to understand by coming to an estate planning workshop. You will learn that you don’t have to be subjected to these crazy government rules. We look forward to meeting you! Register for a Workshop Here.
