Overruling Retirement
Life is complicated enough without Congress and the Internal Revenue Service trying to help us save for and inherit individual retirement accounts.
It all started simple enough. In 1974 Congress passed the Employee Retirement Income Security Act (commonly called ERISA) and created the first Individual Retirement Account (IRA). The contribution limit was the lesser of $1,500 or 15% of household income, contributions were not tax deductible, and they could only be opened through banks.
No one needed a professional to guide them in administering retirement accounts. Life was easy.
But over the years, Congress has undertaken to “upgrade” the humble IRA by adding layer upon layer of complex new rules. They added SEP IRAs (1978), SARSEP IRAs (1986), and SIMPLE IRAs (1996) for employees and business owners. They created Roth IRAs (1997) with a completely different set of rules and then expanded Roth options to SEP IRAs and SIMPLE IRAs (2022). Then they created catchup contributions for those age 50 or better and super-catchup contributions for those ages 60-63.
No retirement account has been more victimized by Congress’ compulsion for overruling than the innocent SIMPLE IRA. I worked as a legislative assistant in the U.S. House of Representatives when Congress created the SIMPLE IRA. The concept was to provide a low-cost retirement plan for small businesses that would be extremely easy to administer with minimal regulatory requirements and only two options for employer matching contributions. The contribution limits for all employees was the same. Think really simple.
Today’s SIMPLE IRA is a convoluted mess of complexity thanks to Congress’ “improvements” over the years. Instead of two employer matching choices with universal employee contribution limits, business owners and employees must now make the following decisions before starting a SIMPLE IRA plan or making contributions:
- Employers have three matching contribution options
- There are two different base employee contribution limits depending on employer size and matching contribution policy
- Employees age 50 or better can make catchup contributions above the base
- Employees age 60, 61, 62, or 63 can make super catchup contributions above the base
- Employees may designate all or some of their contributions as Roth
- Employees may designate all or some of their employer contributions as Roth
What started as a simple, easy individual retirement account in 1974 is now a tangled overruled mess which requires professional help to navigate. And that is just on the saving side for IRA – the rules on the inheriting side have also ballooned.
When I first started serving clients 26 years ago, I thought the rules for IRA beneficiaries were a bit complicated. There were three different options that varied depending on whether the inheritor was a surviving spouse or not – roughly six different rules that could apply.
Today, by my count, there are at least thirteen different rules that you could fall under if you are inheriting an IRA or Roth IRA. Which rule applies depends on the age of the original account owner; which of the Required Minimum Distribution (RMD) rules was in effect for the original account owner; and whether you meet the prescribed definition of an Eligible Designated Beneficiary (EDB), a Non-Eligible Designated Beneficiary (NEDB), or a Non-Designated Beneficiary (NDB).
It appears to me that Congress is intentionally commingling abbreviations to further increase beneficiary confusion. Needless to say, responsibly inheriting a retirement account is not for the faint of heart.
Whether you are saving for retirement or inheriting a retirement account, the rules of the road have compounded at a blistering pace since the IRA’s humble beginnings.
If you or someone you care about would appreciate some help in ensuring you are following the right retirement rules and maximizing tax efficiency, our experienced advisors are here to help distill overcomplicated retirement rules into your best personal path forward.
Quote of the week: E.F. Schumacher: “Any intelligent fool can make things bigger and more complex. . . . It takes a touch of genius – and a lot of courage – to move in the opposite direction.”
Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.
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