Why Is Making Money and Generational Wealth Such a Bad Thing?


This post is by Jeff Carter from Points and Figures


Click here to view on the original site: Original Post




Don’t know if you noticed it or not but the House of Representatives just voted almost unanimously to tax the crap out of your IRA.  The Senate looks like it’s on board with the plan except Texas Senator Ted Cruz is holding it up.  Thankfully.  Maybe cooler heads will prevail but I doubt it.

The sad thing is this is bipartisanship in action and when that happens it usually means American’s get fleeced a little bit more.  There is $14 trillion in assets tied up in baby boomer retirement accounts and those are going to move to the next generation.  Congress and the government just can’t keep their hands out of the till.

Ayn Rand, George Orwell and Ray Bradbury would be pretty happy at the way they named the new act.  It’s the Secure Act.  Or, Setting Every Community Up for Retirement

Act.  Personally, I always thought my retirement would be my responsibility.  I didn’t know it was a community thing.  The act would automatically reduce the value of every 401(k), Roth IRA, Self-directed IRA, and the rest of it.  Of course, it won’t affect the fabulously wealthy like the Kennedys or Pritzkers who have off shored the bulk of their money.

But it will hit the upper middle class big time.  Defined benefit pensions will be unaffected of course since those are mostly private and public union employees.

Funny thing about a lot of politicians, they talk about how tax cuts stink but they do everything they can to avoid them.  Illinois Governor Pritzker took the toilets out of his Illinois house and said it was uninhabitable.  He got his property taxes reduced and then put the toilets back in.  Former Congressman Luis Guiterrez paid $275 a year in property taxes while his next door neighbor was paying $5000.  Joe Biden just went through the trouble of setting up several S-Corporations to avoid paying taxes on book and speaking royalties.  How come they are going to great lengths to avoid paying taxes?  I can’t wait until they lecture me about what’s fair.

I will tell you why.  It’s a basic economic fact.  Demand curves slope down.

Here is some of the WSJ article I linked to above talking about why this is such a bad deal.  Remember, when boomers were given the option of an IRA in 1980, they planned their entire lives around it.

In exchange for its windfall under the Secure Act, Congress will push back the age at which retirees must take their first required minimum IRA distributions from 70½ to 72. This isn’t the deal American savers were promised when they made contributions to their IRAs the last 20 years. Before, the optimal approach was for savers to leave their IRAs to their children or grandchildren and stretch the payouts over decades.

Under the Secure Act, an IRA owner could still leave the account to a surviving spouse, who’d remain exempt from the 10-year clock. But the widow would be paying taxes in the higher “filing single” bracket. The bracket can easily jump from 12% to 25% or from 24% to 35% as the mandatory payout ratios automatically increase with age. For example, the required minimum distribution for a 70-year-old is 3.7% of the retirement-account balance; for a 90-year-old it is 8.8%.

Should a $1 million IRA pass to a high-earning adult daughter, at best she would have to take payouts adding $100,000 of annual income on top of her salary for a decade. If she lives in a high-tax state, half the annual payout’s value could be lost to taxes.

It gets worse. The Secure Act would be a college planning nightmare for middle-income parents. If the parents of college-age children inherit a $500,000 IRA, the resulting highly taxed mandatory distributions—say, $50,000 a year for 10 years—would make them richer on paper than they actually are, eviscerating their ability to qualify for need-based financial aid. If those parents decide to postpone taking the distributions for four years to avoid the financial-aid effect, they would need to double up on distributions after graduation to compensate, which would land them in a higher tax bracket. If the grandparents skip a generation and leave the IRA directly to the college-bound grandchild, the “kiddie tax” would require the distributions to be taxed at the parents’ rates. Whichever way the family turns, they lose.

This is essentially an estate tax in disguise that is impossible to get around.  It will be a boon to wealth managers, estate planners, lawyers, and accountants in the form of higher fees.

The rules around money in the US are super constricting.  The government says who can invest in what out of fear.  It’s for our protection, they say.  I hear people like Obama tell me that “I didn’t build that” but they never took the risk or earned it either.  Government never created anything that made people wealthier.  Government doesn’t create. Private industry does that.  Government only sets up the boundaries for a civil society and provides for a strong defense in case another country wants to infringe upon it.

Of course, if you have enough money it doesn’t matter.  It takes around $50MM in wealth to make it worthwhile to set up a family office.  That’s the tipping point where you start to look to places like Switzerland, Bermuda and the Caymans to set up entities to shelter any wealth and income from any government.  This is also an opportunity for cryptocurrency in the long run by the way.

Government has gone way too far.  That’s why Trump was elected.  The pundits miss that because they have no clue about government going too far.

So, tell me why is generational wealth is so bad?  Why not be able to pass along money to a family member?  Many of us didn’t inherit a lot of money from our parents.  We earned it by working hard and taking risk.  Why does the government deserve a third or more of it?  Remember, we paid taxes during our lifetimes as well.  Some of the money was double or triple taxed depending on how it flowed.

  • Don’t we want the next generation paying for college out of their own pockets?  Or do we want them deep in debt to the government on a government loan?
  • Don’t we want them buying homes at an early age to create a stable society?  Maybe they will start getting married sooner and having children sooner.  One for the “data dogs” out there.  The data shows that kids from two parent households do a lot better than kids from one parent households.
  • Don’t we want them to take the entrepreneurial leap and start a business?  Or, do we want them dependent on a government hand out?  Do we want them living in fear instead of starting a business off of a secure base?  Or, is this tax grab designed to set up a universal basic income which is a horrible idea.
  • Don’t we want people in our society to build wealth and improve their standard of living?  Isn’t that the point of a capitalistic society?  Or should we wallow, stuck in the mud and just take it?
  • Don’t we want people with enough money to invest in things?
  • Don’t we want people with enough money that they are secure enough to donate to charity?
  • Don’t we want the next generation to be able to use the money to have more wealth than the prior generation so that they can create even more wealth?
  • What’s wrong with a new generation creating new wealth?  This plan will make it harder.
  • The Secure Act creates a disincentive to save for retirement.  Do we want everyone on a government plan?

Nope. Politicians are always trying to move an agenda.  It’s especially true today since it seems like the ones that are elected are incredibly fringey in their ideas.  The Democratic platform is rife with socialistic ideas.    They don’t even understand the basic history of why the country came to be in the first place.  The agenda creates more dependency on centralized government authority.  It comes in the form of taxes and regulation.  The people in those positions are not altruistic angels.  Demand curves slope down for them too. In their case the currency is power.

One thing about having a secure amount of money in the bank politicians don’t like; it creates independent people.  As the Framers knew, independence is scary to governments.

(photo of the day from Deeryard Lake; Rugosa Rose just bloomed)