Relax. The Government Doesn’t Want to Take Over Your IRA or 401K…but some changes could be on the way
Have you heard that the government wants to take over your IRA and 401k and convert them into accounts managed by the Social Security Administration? Have people you know been insisting that the Obama administration wants to create a “national retirement system”? The rumor mill appears to have started churning thanks to a 2010 article from the National Seniors Council. A little research shows that the group’s claims are based on deliberate distortions of key facts.
As described in FactCheck.org’s report on the “IRA takeover” issue, part of the controversy arose when writers and bloggers misrepresented testimony before the US House Ways and Means Committee by David C. John, Senior Research Fellow at the Heritage Foundation. During his testimony, Mr. John proposed what he called an Automatic IRA – a plan supported by both John McCain and Barack Obama during the 2008 presidential election. Mr. John suggested that employers above a certain size, who do not currently sponsor employees’ retirement planning, should facilitate their employees’ savings, without being obligated to match any contributions or comply with fiduciary standards. As John puts it, an employer would “simply act as a conduit, remitting a portion of their employees’ pay to an Automatic IRA, preferably by direct deposit.” Employees could opt out. The Automatic IRA idea did not involve any sort of “takeover” as the article from NSC suggests.
However, the Senate considered changing rules about IRAs in February 2012, with the introduction of S. 1813, a transportation bill that, curiously enough, included a provision about inherited IRAs. As detailed in the Wall Street Journal, the originally-proposed measure would have limited the allowed IRA withdrawal period to just 5 years for inherited IRA’s, instead of letting beneficiaries stretch withdrawals across their life expectancies. Withdrawing funds from an inherited IRA subjects them to taxation, and reducing the permitted withdrawal period would have a number of repercussions on investment planning, estate planning, and retirement planning. The measure was later stripped from the bill, which is a good thing for those who want to minimize income taxation for their heirs. Limiting the tax-free accumulation period by requiring a full withdrawal in only 5 years would have had tremendous effects for investors and their families.
Both the rumored “government takeover” of retirement funds and the failed proposal to limit stretch IRAs for heirs illustrate just how dynamic the estate planning process can be. As the government continues its efforts to reduce the budget deficit, IRAs and 401k’s remain potential sources of tax revenue. We may yet see legislation that could radically change investment and retirement planning.