Congress is about to wallop the American people with a huge middle-class tax hike, which can change the way that you look at your IRA accounts.

And it’s quite sneaky the way they’re doing it.

To understand what I mean, you first need to understand the Required Minimum Distribution (RMD) rules. Most of us know that when we turn 70½ we have a fixed amount that we must withdraw from our traditional IRA accounts. These amounts increase as we age.

But what happens to the remaining balances of our IRAs when we die? If we name a spouse as our primary beneficiary, then she can roll over the IRA into her own account. If she is over age 70½, then she also must make RMDs based on her own schedule.

But then what happens when our surviving spouse dies and leaves the IRA to a child, grandchild or other loved one? When we leave an IRA account to a non-spouse beneficiary, then it becomes an “Inherited IRA.”

Under current rules, a non-spouse beneficiary can “stretch” the RMDs of an Inherited IRA over their lifetime. This allows the IRA to continue to grow tax deferred. If the beneficiary is wise with the investments and doesn’t take more than his RMDs, then the IRA balance can grow for his or her retirement.

But that may all change. The “Setting Every Community Up for Retirement Act” (known as the “Secure Act”) gives non-spouse beneficiaries only 10 years to pull out all the money from an IRA account.

The effect would be to make more of an Inherited IRA subject to higher taxes sooner, as distributions would be made in larger amounts. As much as one-third more of an Inherited IRA would be consumed by taxes than what the current law provides.

If Trump signs the Secure Act into law, it will set the stage for much higher taxes in the coming decade, especially when the Trump Tax Act signed in 2017 expires in 2025. Assume, for example, a $1 million IRA left to a middle age daughter. She’d have to withdraw roughly $100,000 annually, pushing her up into a higher tax bracket. If she lives in a state with a state income tax, more than half of the IRA distribution could be lost to taxes.

If she has college-age children, the additional income would likely affect their aid applications adversely. If instead the IRA were left to the grandchildren, this would also adversely affect their college aid applications, and because of the “kiddie tax” would results in the same tax consequence as if the account were left to the parents.

In exchange for this windfall under the Secure Act, Congress will push back the age at which retirees must take their first RMD from 70½ to 72.

The Secure Act would be an estate-planning catastrophe for people holding significant IRAs. It would take the sensible planning performed up to now and require an entire re-think of the plan.

Typically trusts are used for Inherited IRAs to young recipients. The “identifiable beneficiary rules” require that the trusts satisfy certain requirements for the young beneficiaries to “stretch out” the IRA RMDs. Under the Secure Act, significant trust income would be trapped inside, resulting in the highest marginal federal income tax bracket. And don’t forget state taxes.

The Senate also seems poised to pass the Secure Act, which would land it on the President’s desk. Personally, I’m finding it tiresome how Congress names legislation (Setting Every Community Up for Retirement Act) exactly opposite of that legislation’s effect on our citizens.

This is a tax not only on the wealthy, but hurts the middle class, who’s retirement savings are largely vested in IRA and 401(k) accounts. It’s an estate tax on everyone. Should you so desire, it’s not too late to write your Senators to speak up against this legislation.

© 2019 Craig R. Hersch. Originally published in the Sanibel Island Sun