When Is Flexible Estate Planning with Lange’s Cascading Beneficiary Plan the Best Solution?

Lange’s Cascading Beneficiary Plan:
When is Flexible Estate Planning the Best Solution?

Hi all!  As we edge closer to Halloween, I want to talk a bit more about something that TRULY TERRIFIES me: bad estate planning.  In our scary tale, the villain: Concrete Contract, is trying to trap your beneficiaries into decisions made today—decades prior to your death—based on information and circumstances that will likely be completely different when the time comes to put the estate plan into motion. The devil is in the details, and you don’t want the devil involved!

Luckily, our flexible friend, Lange’s Cascading Beneficiary Plan comes to the rescue! He provides the peace of mind that your beneficiaries will be able to make the best decisions with the facts at hand when the time comes.  Once again, flexible estate planning protects the innocent and saves the day!

Ok… Ok… I know that was a little silly.  But it is still true. Since the mid-1990s, Lange’s Cascading Beneficiary Plan has been saving beneficiaries from being trapped by decisions made decades in the past when an estate plan was drafted. In my opinion, there is no better option for your estate planning, particularly if your family is not a blended family—more traditional, so to speak.  In the accompanying video, I am going to explain my reasons for using this flexible estate plan and describe how it can provide optimal solutions under many circumstances.

As I have touched on before, the biggest problem in estate planning is that we don’t know what is going to happen in the future.  We don’t know when we are going to die.  We don’t know how much money we’re going to have.  We can’t anticipate the future needs of our surviving spouse.  We can’t know the needs of the children and grandchildren—or even whether there will be grandchildren.  We don’t know what the tax laws are going to be.  In point-of-fact, we don’t know what the tax laws are going to be next year much less a couple of decades from now!

A previous blog and video series addressed possible changes in the tax laws regarding retirement plans… and I said then, what I will say now.  The best thing that you can do to protect your family from those changes—not knowing what the future holds—is to make sure you have a flexible estate plan.  If we lose the ability to stretch an IRA, if inherited IRAs are taxed at an accelerated rate, if tax rates become more unfavorable for your family, then they will need flexibility to make financially sound decisions. Managing the tax impact on your legacy is critical.

What do you need to have Lange’s Cascading Beneficiary Plan work for your family?  Trust.  For this plan to work well, you absolutely must trust your spouse. This is really important, because after you die, your spouse will have the power to make a lot of critical decisions—hopefully in conjunction with other trusted family members and a trusted advisor, and armed with your wishes too.

Estate planning with cascading beneficiaries is not a new concept, but I put my twist on it making it work particularly well for IRA and retirement plan owners with traditional families. Then, I started calling it Lange’s Cascading Beneficiary Plan.  After decades of use, I’ve seen this plan serve my clients very well.

The video goes over the details of how this plan should be set up and how to name beneficiaries. I think it is really critical to get this right, and I want to make sure all my readers do get it right. Flexible estate planning has never been more critical as we stand in the shadow of the Death of the Stretch IRA. Good planning could save your family a lot of worry and a lot of money.

Stop back soon for more on Lange’s Cascading Beneficiary Plan.

Jim

Why Flexible Estate Planning Matters, Especially for IRA and Retirement Plan Owners

Why Do We Need Flexible Estate Planning?

Welcome back, Friends! This is the second post in my new video series on Lange’s Cascading Beneficiary Plan—the best estate plan for traditionally married couples, or what I like to call “leave it to beaver couples,” in contrast to blended families where more variables come into play for estate planning.

Why do we need flexible estate planning? Why is it so valuable for IRA and retirement plan owners?  Well, to get there we must think about the unique tax features of IRAs and what happens to an IRA when you die…

Most contributions to IRAs and retirement plans are tax deferred. We will ignore Roths for now. Their status as tax-deferred investments is valuable to you and to your heirs. Under the current law, you can take advantage of a great estate planning tool referred to as “the stretch IRA.” Stretching the IRA means keeping as much money as possible in the tax-deferred environment for as long as possible. We want to    allow as much of the principal in an inherited IRA to grow tax-deferred for as long as possible—currently a child or even a grandchild can stretch distributions from an inherited IRA over his or her lifetime. But, we are looking at a possible change in the laws regulating retirement plans that could really ruin that opportunity.  Having flexibility in your estate planning allows you to roll with the changes, and make good decisions under the new rules. But let’s take a little closer look at how the stretch works.

Bob Smith is a married 69-year-old retiree with a million dollars in his IRA.  On April 1 of the year after he turns 70 ½, Bob must begin taking annual required minimum distributions (RMDs) from his retirement plan.  You see, the government has been letting Bob defer income taxes on his IRA contributions for many years.  But eventually, they want their share! RMDs are calculated using numbers found in IRS Publication 590. Publication 590 gives us a divisor that is based on the joint life expectancy of Bob and someone who is 10 years younger than Bob.  We see that at age 69, Publication 590 says that Bob’s divisor is 27.4 (very nearly 4%).  So, when you do the math, this first year Bob must take out close to $38,000.  So, for the rest of his life Publication 590 is used to determine how much of a distribution Bob is required to take annually.

Now, when Bob dies, the ownership of that IRA is transferred to his wife, Jane Smith. Conveniently in this example, she is the same age as Bob so she begins taking her required minimum distributions exactly as Bob did.  As time goes on, her life expectancy decreases, and the distributions get larger. When Jane dies, however, what’s left in the IRA will go to their children as an Inherited IRA. This is when things can get interesting.

Let’s assume for discussions sake that their child, Sally, is now in her sixties.  Sally will be required to take minimum distributions as well. The difference is that her distributions will be calculated based on her life expectancy. Which, obviously, is much longer than her mother’s was at the end.  So, the dollar value of the distributions drops, and the bulk of the account continues to grow tax deferred for a long time—and Sally benefits from the power of compounding.

You all know that I am a big fan of paying taxes later.  So, if you have done flexible estate planning, like Lange’s Cascading Beneficiary Plan, and if you can afford it, here is an even more dramatic possibility. Since the flexible estate plan allows Sally to disclaim the Inherited IRA (she doesn’t need the money), she can pass it directly to her son, Phillip (her parents’ grandchild). Now, Phillip is in his thirties and his required minimum distribution is even lower.  Think of how long that deferral can run!

And, if you REALLY want to think of something incredible, imagine that this retirement plan is a Roth rather than a traditional IRA.  Now, all those distributions are tax free and we are really talking about building generational wealth.  The video with this post goes into detail about how IRAs are treated after death, and provides examples using specialized software that show how family wealth can grow using inherited IRAs and Roth IRAs—with the caveat is that this is how things work under the current law.

Unfortunately, we still believe that the death of the stretch IRA will pass in 2017 or 2018.  What is going to happen, subject to exception, is that the non-spouse beneficiary will no longer be permitted to stretch distributions of an Inherited IRAs over his or her lifetime. Any amount over $450,000 will be required to be disbursed within 5 years of the IRA owners’ death. Potentially devastating! There are some work-arounds that we have devised in anticipation of the law changing but this is precisely why flexible estate planning is so critical. Enjoy the video.

See you next week!

-Jim

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

The Best & Most Flexible Solution for Your Estate Planning Concerns: Lange’s Cascading Beneficiary Plan

The Ultimate in Flexible Estate Planning:
Lange’s Cascading Beneficiary Plan

The Ultimate in Flexible Estate Planning: Lange's Cascading Beneficiary Plan

This post is the first of series on Lange’s Cascading Beneficiary Plan, the gold standard in estate planning for traditional married couples.

What is Lange’s Cascading Beneficiary Plan?

Estate planning would be so much easier if we just had a crystal ball. We simply cannot predict the future with much confidence. And the unknowns stretch beyond the plan rules, tax laws, and the investment environment. Family and financial circumstances can change dramatically over time as well. So we are faced with questions like: How much money will you have? How much money will you need? How many grandchildren will you have? Who will live the longest?  An estate plan that is intricately thought through and seems in-line with your testamentary intent today could be completely inappropriate once you die.

In the early nineties, I began thinking creatively about this problem. My objective was to revolutionize my firm’s estate planning practice by drafting documents that could accommodate changing circumstances—the key, as I saw it, would be flexibility within a reasonable set of assumptions. Lange’s Cascading Beneficiary Plan, as it came to be called, uses specific language and disclaimers to provide the most flexibility when it is needed the most—at the time of the death of the first spouse when the surviving spouse and the family have the most current picture of their finances and family dynamics.  We were aiming for less guess work decades in advance!

I thought it was the best thing since sliced bread!  And it turns out, I wasn’t alone.  Not only did my estate planning clients love the idea of giving the surviving spouse the option to make important financial decisions at the time of the first death, Jane Bryant Quinn did too.  She picked up on it through an article I wrote and sent out to my email list.  She first published a description of Lange’s Cascading Beneficiary Plan in Newsweek and from there, it has been featured in dozens of major publications like The Wall Street Journal and Kiplinger’s.  The plan is also featured in my flagship book, Retire Secure!, along with other nuggets of my best retirement and estate planning recommendations.  (By the way, you can download a free copy of the book from www.paytaxeslater.com/books or buy it on Amazon if you’d like a hard copy)!

We have been drafting this type of plan now for more than 25 years.  It works beautifully with our other cutting-edge strategies including stretch IRAs, Roth IRA conversions, and inventive gifting plans. Clients are happy knowing they have flexibility built into their plans, and sadly, but realistically, we have had to execute many plans over the years.  Fortunately, we have also been there to witness the peace of mind that the surviving spouse and heirs get from knowing they are making the best decisions possible given the circumstances.

What to expect in this series:

Over the next few weeks, I am going to spell out the details of Lange’s Cascading Beneficiary Plan.  Sure, I might slip in a current event post or two, but I am going to focus on providing you with a full understanding of what I truly believe to be the best in estate planning for traditional married couples.  I’ll explain which situations LCBP is best suited for, walk you step-by-step though the decision making, discuss how it can be adjusted to fit almost any situation to provide the greatest flexibility and tax savings, and tell you why flexibility will be more important than ever.

Let’s face it, tax changes are coming in our near future, but they will also inevitably change again in the more distant future. That is the nature of the beast. So, having a plan that can adjust to changes, that doesn’t fix things in stone, can give you a measure of comfort that you won’t end up with estate planning documents that have to be redrafted with every single change!  In my opinion, one of the best things you can do for your family is to develop a smart and flexible estate plan that saves them from additional stress and anxiety when you are gone.

Thanks for reading, as always, and stop back soon!

-Jim

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

 

Special Alert About the Equifax Data Breach

The Equifax Data Breach:
All You Need To Know

The Equifax Data Breach – What Should You Do

The recent data breach at Equifax has sparked a lot of discussion about how vulnerable the personal information of all Americans may be to theft.  Is there anything you can do to protect yourself in our computer-driven society?  While the Equifax hack was by far the largest in history, it’s not the first and will not be the last.  In 2017 alone, Verizon, Blue Cross Blue Shield/Anthem, Dun and Bradstreet, Chipotle, Washington State University, and even the IRS have discovered that they’ve been hacked – exposing the personal information of millions of Americans to thieves.  The breach at Equifax was so far-reaching that several corporate officers have retired, and many on Capitol Hill are calling for a complete investigation.  With over 143 million Americans at risk of being involved in this massive breach, you could very easily be affected.

What You Can Do If Your Information Has Been Compromised

So what can you do to protect yourself?  You probably know that Equifax has set up a website where you can check to see if your number has been exposed.  If your information was exposed in the breach, you can get free credit monitoring for one year.   In my opinion, that’s like closing the barn door after the horse has gotten out.  They’re happy to let you know that someone has opened up a fraudulent account in your name, but it’s still up to you to clean up the mess if they do!  And what happens when your year of free credit monitoring is over?  If you don’t pay for credit monitoring every year for the rest of your life, you may never know if someone is using your identity at some point down the road.

What Does Freezing Your Credit Report Do?

Some experts are recommending that you place a freeze on your credit files.  A freeze prevents lenders from even accessing your credit report.  The advantage to freezing your file is that, if they do not know your credit history, lenders will not offer credit to a thief who is trying to use your identity.   What are the disadvantages of freezing your credit files?  First, it’s not an easy process.  There are three major credit reporting bureaus, and you will have to place three separate freezes.  You can do so by using these links:

Equifax freeze

Transunion freeze

Experian freeze

If you are a Pennsylvania resident, the law permits the credit bureau to charge you $10 to freeze your file.  Equifax has agreed to waive their fee, but only after public pressure.

Unfortunately, the data breach at Equifax has caused all three credit reporting agencies to be overwhelmed with requests to freeze accounts.  Many consumers are complaining that they can’t even get into the websites or if they do get in, that the site crashes after they fill out the application form.  If you have not already frozen your account, you may have a better chance of getting through if you try before 7:00 a.m., or after 11:00 p.m.  Another disadvantage of freezing your credit files is that if you need to apply for credit yourself – for a car loan, a home equity loan or even a medical credit card – you must first remove the freeze from your files.  You will need a PIN number to remove the freeze and, if you lose your PIN number, you will be facing a time-consuming and difficult process to get another one.

The Equifax Data Breach and Your Tax Return

Opening phony credit accounts in your name, unfortunately, could be just the tip of the iceberg.  The Internal Revenue Service (IRS), which has issued more than $20 billion in fraudulent tax refunds over the past few years, could be plundered unless there is intervention by Congress.  By law, the IRS must process your tax return within a specified period – generally 45 days – or they have to pay you interest on your refund.  To meet those guidelines, they’ve adopted a “pay first, ask questions later” philosophy.  In our practice, it’s not uncommon to see a client get a tax refund check and then an audit notice a year later! The IRS’s system requires little more than a name, date of birth and Social Security number to process tax returns – information which was exposed in the Equifax data breach – and they accept returns as soon as January 1st.   On the other hand, employers aren’t required to submit updated employment information to the IRS until March.  By that time, about half of all of the refund checks have already been issued!

Protecting Yourself After the Equifax Hack

So what can you do to protect yourself?  If you don’t want to freeze your credit files, then you should be checking your credit reports regularly for fraudulent activity.  Most of the major credit card companies allow you to request that you be notified if a charge is processed on your account that exceeds a certain dollar amount.  You should consider placing an alert for an amount that exceeds your normal spending threshold.   If you are traditionally a procrastinator when it comes to filing your tax return, don’t wait – get it filed as soon as possible.  Even if you owe, you don’t have to pay the IRS until April 15th.  If you have any credit card debt, get it paid off.  Financial institutions that fall victim to fraudsters because of the Equifax data breach will have to pass the cost of their losses on to their customers – and you don’t want to be one of the unlucky ones footing the bill.

Last but not least – whatever you do to protect yourself, make sure that you do the same for those who might not, including children and elderly parents!

Stay safe out there!

Jim

 

The Sneaky Tax – Not Your Mother’s Income Tax

Don’t Let Congress Catch You Sleeping!

Our office is pretty busy right now because of the approaching income tax extension deadline of October 15th.  I was talking to some clients who had come in to pick up their return, and who had received an email from me last week about stopping the Sneaky Tax.  I guess it was just bad timing since their federal tax return was on their mind, but they thought that the term “Sneaky Tax” was somehow related to the tax code simplification that President Trump had promised in his campaign.  And since they both work in the medical field and are in the highest income tax bracket anyway, they assumed that their personal tax situation couldn’t get any worse and didn’t bother to read my email!  For this particular couple, it could have been a very costly mistake.

Who Will Pay The Sneaky Tax?

Most of the information I have written about the Death of the Stretch IRA has been for the benefit of parents who will be leaving their IRAs and retirement plans to their children.  These clients had no children, so they didn’t need to worry about how much their own beneficiaries would pay in taxes after their deaths, right?  Wrong!  These clients were the children – meaning that both had elderly parents who owned IRAs and retirement plans that they would eventually inherit.  So think about this situation for a minute.  This couple is not planning to retire for at least ten years, and the statistical odds are that their parents will pass away before then.  If that happens, the proposed legislation that I call the Death of the Stretch IRA will make them pay tax on their inherited IRAs within five years of their parent’s deaths.  They’re already in the highest tax bracket, so they stand to lose a whopping 39.6% of their inheritance because of the Sneaky Tax!   That’s almost as high as the maximum federal estate tax rate – which most people aren’t subject to anyway because each individual can exclude $5.49 million in assets before it applies.  That’s why I call it the Sneaky Tax – people (erroneously) think they don’t have to worry about it because they don’t have more than $5.49 million.  The Sneaky Tax is not the same as the estate tax – they’re as different as federal income tax and the sales tax you pay when you buy a new car!  And if you don’t watch out, this tax could very well sneak up on you and cost you a lot of money.

Baby Boomers and the Sneaky Tax

If you have elderly parents and are the beneficiary of their IRAs and retirement plans, then the Sneaky Tax will affect you – even if you have no children of your own.  The Death of the Stretch IRA legislation would force you to distribute and pay tax on any IRAs that you inherit (subject to exceptions), within five years of the owner’s death.  If you are required to take distributions from your inherited IRAs and retirement plans at the same time you are receiving income from working, it is quite possible that you’ll be bumped into a higher tax bracket – maybe even the highest possible bracket.  The excessively high tax consequence could affect your standard of living during retirement, or even your ability to retire at all.

Stopping the Sneaky Tax

Unfortunately, if this legislation passes and you subsequently inherit an IRA from someone other than your spouse, there will be little you can do to minimize the astounding consequences of the Sneaky Tax – and I say astounding because it is estimated that this tax will cost IRA beneficiaries trillions of dollars.  If the original owner (presumably your parent) is still alive, he or she might benefit from reading some of the preceding posts that discuss options the owner can use to minimize the tax burden.  If that’s not an option, you might want to take some advice from our first president, George Washington.  He said, ”…make them believe, that offensive operations often times, is the surest, if not the only (in some cases) means of defense.”

Most of you who will inherit your parent’s IRAs can’t afford the Sneaky Tax.  I hope you will join us in sending a shot across the bow to our representatives in Washington.  We have started a petition that we will forward to every legislator in the United States, and hope to collect as many signatures from across the country as we can.  Please forward this to everyone you know who might be affected by the Sneaky Tax, and ask them to sign our petition, and join our Facebook Group.

Thanks for reading, and stop back soon!

-Jim

Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.

Stop the Sneaky Tax!

It’s Time to Stop the Sneaky Tax!

Those of you who follow my blog know that I have been somewhat obsessed with the legislation that I call the Death of the Stretch IRA.  If you’re new to my blog, please read some of the preceding posts – they’ll tell you just how much this legislation will cost IRA owners.  The worst part of the Death of the Stretch IRA is that most beneficiaries (your children and grandchildren) won’t have a clue about how much of their inheritance they have lost to taxes.  When they inherit your IRA after you die, your beneficiaries will suddenly have more money than they had before.  Our government is counting on them to be content with their higher bank balance, and is hoping that they never notice that an enormous chunk of their inheritance ended up in Uncle Sam’s pockets before the remainder found its way to them.   That’s what makes this tax so nefarious and, well, sneaky!

Our government has a lot of expensive problems right now – they’re looking to come up with a viable heath care system, build a wall on our southern border and I can’t even begin to imagine how much it will cost to repair the damage done by Hurricane Harvey.  The Treasury doesn’t even have enough money to pay for their day-to-day operations, much less all of this – they’re going to be raising the debt ceiling next month!  I’d bet my own IRA on the fact that the government is planning to include the Death of the Stretch IRA – and the $1 Trillion in revenue that it will generate – as part of an appropriations or budget action that will be voted on before the end of 2017.

You Can Help Stop the Sneaky Tax

If you are a loyal reader, you know that we have been writing our clients and friends to warn them about the sneaky tax, and working on solutions to minimize the damage that this legislation will do.  Now it’s time to send a shot across their bow and tell the government that they’d better find their revenue someplace else besides your IRA.  We are asking your help to start a grass-roots protest against the Sneaky Tax which would kill the stretch IRA—an incredibly useful estate planning tool.  This new law would be so absolutely devastating to so many families across the country, our clients included, that we can’t just sit by and watch it happen.

Write Your Congressman Now

Please help us get the message to our legislators that we will not stand for them picking the pockets of our children and grandchildren.  Please consider going to www.stopthesneakytax.com to add your name to the list of people who are unhappy with this proposed new law and send an email to your Congressmen asking them to say NO to the sneaky tax.  You can also keep up to date with what is going on with this law by joining our new private Facebook group: SOS Save Our Stretch!  Stop the Sneaky Tax!  You can join the group by going to www.saveourstretch.com.  For a limited time, joining the Facebook group will entitle you to a free Advance Reader Copy of Jim’s newest book – The 5 Greatest Tax-Saving Strategies for Protecting Your Family from the New Tax Law.

Sign our Petition to STOP Washington’s Planned Trillion Dollar IRA Sneaky Tax at www.stopthesneakytax.com.

Join our Facebook Group for breaking news and updates at www.saveourstretch.com.

And please forward this to everyone you know who has an IRA!

-Jim

Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.

You can view my previous posts on the Death of the Stretch IRA by clicking the links below;

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA
How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass
The Death of the Stretch IRA: Will the Rich Get Richer?
The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?
Roth IRA Conversions and the Death of the Stretch IRA
Part II: How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA
Roth IRA Recharacterizations and the Death of the Stretch IRA
The Risk of Roth IRA Recharacterizations & The Death of the Stretch IRA

Recharacterizing Roth IRA Conversions? – Your Ace in the Hole When the Death of the Stretch IRA Passes?

What Are The Risk of Roth IRA ReCharacterizations?

The Risk of Roth IRA Recharacterizations and The Death of the Stretch IRA James Lange

This post is the last in a series about how you might be able to use Roth IRA conversions as a defense against the Death of the Stretch IRA.

How does a Roth IRA Conversion Work?

Suppose you have an IRA worth exactly $1 million, and that it happens to be invested equally in ten different mutual funds of $100,000 each. Then suppose we run the numbers for you and figure out that $100,000 is the optimal amount for you to convert to a Roth IRA.  How does a Roth IRA Conversion work?

Well, one idea would be to start by ranking your funds according to how much you expect them to fluctuate in value.  Maybe you are holding a portion of your IRA in Certificates of Deposit at your bank.  Most people would expect that money to be “safer” because it generally doesn’t fluctuate in value.  Then suppose you have a portion of your IRA invested in large cap stocks.  You’ve noticed the value changing as the stock market moves up and down but, in your case, we’ll say this fund fluctuates an “average” amount compared to your other holdings.  Then suppose that you also a portion of your IRA invested in small cap stocks, and that fund has been known to lose 20 percent of its value overnight.  We’ll call that one the “riskiest.”

So which part of your IRA should you convert?  You could convert the CDs or the ones that you consider to be the safest.  Or you could convert the small cap stocks – the one you consider to be the riskiest.  Maybe you’d like to convert part of each fund that you own.  Let’s look at the possible outcomes.

You can certainly convert your CDs but, in my opinion, going through all that paperwork to avoid paying taxes on the one or two percent you’ve probably earned on them doesn’t seem worth the time or trouble.  What about converting a little bit from each fund you own?  I’d prefer that to converting the CDs, but it still seems like more work than necessary.  What about your “riskiest” fund – the one that has the value that fluctuates wildly?  Let’s assume that you converted $100,000 of that fund.  What position might you be in a year down the road?

Well, suppose that fund doubles in value.  You now have a Roth IRA worth $200,000 but you only had to pay tax on a $100,000 conversion.  Good for you!   But suppose the fund went down in value, and now you have a Roth IRA worth $50,000.  Worse yet, you’ve paid $25,000 in income taxes, and now you’re really mad at me.

Recharacterize Your Roth IRA Conversion

Remember, as long as you act by the October tax deadline, you can recharacterize, or undo, your conversion.  This flexibility can give you enormous peace of mind while you’re waiting for the details of the Death of the Stretch IRA to be finalized. A recharacterization will NOT get back the money your investment may have lost – you will need to wait for the market to come back up for that.  What the recharacterization can do is get back the money you paid in income taxes, if the account goes down in value.

A Risk of Roth IRA Conversions

As beneficial as Roth IRA conversions and recharacterizations can be, there is always one risk I make clients aware of when discussing them.  It has to do with the IRS itself.  Have you ever known anyone who has gotten tied up in an endless and stupid loop of government red tape?  Let me tell you about a married couple I know, who have always filed jointly.  The wife, whose name has always been listed second on the tax return, started a consulting business and, as she was required to, made an estimated tax payment for the income she earned.  The couple filed a joint return and waited for their refund to arrive.  They finally received a letter from the IRS and opened it, only to find that there was no refund enclosed.  Worse yet, there was a letter saying that no refund would be coming because they had overstated the amount of tax they had paid – a transgression that not only caused the IRS to completely wipe out their refund but add a significant amount of penalties and interest to their tax bill.

Armed with copies of canceled checks, the wife went down to the local IRS office and demanded they retract their letter – which they eventually did.  But do you want to know why it happened in the first place?   When the wife made the estimated tax payment for her business, she paid it using her own Social Security number because that was the number shown on the 1099s she’d received for her consulting work.  Unfortunately, when they received her check, the IRS didn’t recognize her as a taxpayer.  Even though she’s always filed jointly with her husband, her name and Social Security number were listed on the second line of the return, not the first.  And because hers was not the first name – even though it was a joint tax return – the IRS could find no record of her, and her tax payment just went into a big black hole!

Unfortunately, we have found that the IRS sometimes has trouble putting two and two together.  If both your conversion and recharacterization forms aren’t filled out exactly right, you could risk getting a nasty letter in your mailbox.  We fight those battles with the IRS on behalf of our clients, but if you’re a do-it-yourselfer, you need to know that it’s not unheard of for them to have a record of just one form or the other – but not both.  If it happens to you, you need to stick to your guns and get it sorted out.  A Roth IRA conversion can be your best defense against the Death of the Stretch IRA, and you can change your mind as long as you recharacterize by the deadline!

Thanks for reading, and stop back soon!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA
How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass
The Death of the Stretch IRA: Will the Rich Get Richer?
The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?
Roth IRA Conversions and the Death of the Stretch IRA
Part II: How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA
Roth IRA Recharacterizations and the Death of the Stretch IRA
The Risk of Roth IRA Recharacterizations & The Death of the Stretch IRA

 

Roth IRA Recharacterizations and the Death of the Stretch IRA

Are Roth IRA Conversions legal? How can you change your mind after making a Roth IRA conversion?

Roth IRA Recharacterizations and The Death of the Stretch IRA James Lange

This is one in a series of posts about Roth IRA conversions and the Death of the Stretch IRA.  If you have not visited my blog before, it might be helpful to back up and read a few of the preceding posts.

Roth IRA Conversions – a Legal Way to Beat the Death of the Stretch IRA?

As you might know, I do a lot of presentations for legal and financial professionals, as well as plain old normal people, about Roth IRA conversions and the Death of the Stretch IRA.  One question that comes up a lot in my presentations involves the legality of Roth IRA conversions.  People look at the numbers I show them and say, “It doesn’t seem right that you can do this because your family is so much better off.  It seems too good to be true.  Is it legal to do this?”

In order to answer that question, I’d like to refer you to this quote from Judge Learned Hand said “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury.  There is not even a patriotic duty to increase one’s taxes.  Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible.  Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

I definitely do not advocate doing anything illegal – in fact, I applaud you if you were one of the people who asked the question – but, like Judge Learned Hand, I certainly believe that you should take advantage of every tax break that you’re allowed to.  Would you worry about taking a tax deduction for a Traditional IRA contribution that you made, or for a donation to a charity?  Of course not!  Roth IRA conversions are no different.  They’re definitely legal – they’re permitted by the US Tax Code, and the IRS even has a specific form that your CPA has to use when you do one.  The problem is that they’re very complicated, and most people don’t like the idea of having to deal with even the most basic tax maneuvers – much less the complicated ones.   So yes, Roth IRA conversions are definitely legal, and you don’t have to worry about bringing the IRS down on your head if you do one.  But I still want to talk to you about how you can possibly get hurt when you go through the process.

Roth IRA Recharacterizations – Your Safety Net

Suppose you’ve read my books and my blog, and you’re rightly concerned about the Death of the Stretch IRA.  You convert $100,000 of your Traditional IRA, and, because you’re in the 25% tax bracket, you paid $25,000 from your after-tax money.  You now have a Roth IRA worth $100,000 and your savings account is $25,000 lighter.  Then the market crashes, and suddenly your Roth IRA is worth only $60,000.  You paid all those taxes for nothing!  Or did you?

At the risk of making a complicated topic even more complicated, you need to know about Roth IRA recharacterizations.  If you make a Roth IRA conversion, the IRS gives you until October 15th of the year following the year that you made the conversion, to change your mind.  So if you make a Roth IRA conversion in 2017, and the value of your account goes immediately down, you have a fairly long time where you can wait it out and see if the market recovers.  But suppose it doesn’t recover?  Well, as long as you act by October 15th of 2018, you can recharacterize, or “undo”, your conversion.  I like to give my clients as much time as possible to decide whether or not the Roth conversion was a good idea, so I generally suggest that they ask for an extension on their tax return so that they don’t file it before that October 15th date.  In most cases, a drop in the stock market that happens right after a Roth conversion and causes so much chagrin will work itself out within a year, and my client is happy that they made the change after all.  But if there is a long-term drop in the stock market, like there was in 2008, it is good to know that you can change your mind.  There is one thing I do want to point out, though.  If you recharacterize your Roth conversion, you’ll get back the money you paid in taxes.  You won’t get back the money you lost in the market – at least not because of the recharacterization.  You might get your money back eventually, but you’ll have to wait until the market comes back up.

Like Judge Learned Hand said, you are not obligated to pay more tax than the law requires.  Roth IRA conversions can provide you with a hedge against the Death of the Stretch IRA, and save your family an enormous amount of money in taxes over the long term.  And the ability to recharacterize, or “undo” your conversion should give you the peace of mind in knowing that you do not pay a nickel more in tax than you have to.

Stop back soon for more Roth IRA Conversion talk!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA
How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass
The Death of the Stretch IRA: Will the Rich Get Richer?
The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?
Roth IRA Conversions and the Death of the Stretch IRA
Part II: How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA

Part II: How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA

Roth IRA Conversions and the Death of the Stretch IRA

Part II How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA James Lange

This post is part of a series about using Roth IRA conversions as a defense against the legislation that I call the Death of the Stretch IRA.  If you are new to my blog, you might find it beneficial to back up and read my earlier posts.

The Best Time to Convert a Traditional IRA to Roth

One of the reasons that people can be reluctant to convert a traditional IRA to a Roth is because they have to pay tax on the transaction.  Nobody wants to give the IRS one more cent than they’re entitled to, right?  And it’s true – any amount that you convert from a traditional IRA to a Roth is taxed, just like a normal withdrawal.  But here’s the bigger problem. Not only do Roth conversions increase the amount of tax you owe at the end of the year, it can also increase the rate at which you pay tax.   Managing the tax implications of Roth IRA conversions can be a huge problem for people who are looking to protect themselves against the Death of the Stretch IRA, so I want to tell you about the sweet spot that you should look for if you are considering a conversion.

First, I want to clarify that the examples that follow are based on the 2016 tax tables.  The IRS has not published the 2017 tables as of this writing, so for purposes of illustration, we’re going to use the 2016 tax tables.  But as an example: if you’re married and file a joint tax return with your spouse, you can earn up to $75,300 and stay within a 15% tax bracket.  If you earn $1 more – $75,301 – you’ll shoot up to a 25% tax bracket.  If you’re a high earner, you can earn up to $231,450 and pay 28% in taxes.  If you earn $231,451, you’ll move up a tax bracket, to 33%.

The best way to convert a Traditional IRA to a Roth, therefore, is to first project how much income you’ll have during the year.  Let’s say that you’re 64 and still working and, after adding up all of your income sources, you think you’ll end up with $131,450.  And then let’s say that you have $1 million in a Traditional IRA.  Should you convert all of that into a Roth?  For most people, that would be a very bad move.  But what you might be able to do is convert $100,000 because, when that amount is added to your other income, you’d still be in a 25% tax bracket.   We generally recommend that our clients do series of small Roth IRA conversions that consider their other income sources so that they do not increase their tax bracket.  For many people, the sweet spot for their conversion amount will be the difference between their normal income, and the top of their tax bracket.

I gave a workshop recently where someone was really having difficulty understanding why you’d want to pay taxes one moment before you had to.  He asked, “Why does it matter when I pay the taxes if I’m going to be in the same tax bracket now or later?”  And while he was (technically) correct about the amount that he was considering converting, what he’d forgotten about was the future gains.  If he doesn’t convert, the gain earned inside his traditional IRA will be taxed when it is withdrawn.  If that gain is earned inside a Roth IRA because he converted, the withdrawals will be tax-free.  And when the Death of the Stretch IRA finally passes, having that pot of Roth IRA money that you can dip in to without having to worry about the tax consequences can give you enormous flexibility in retirement.

Future Income Sources Affect Roth Conversions

There’s one other point about taxes that I want to make.  They frequently change after retirement!  Let’s consider another example.  Joe’s 65 years old and has just retired from his job.  He also took my advice about Social Security and is waiting until age 70 to apply.  From the IRS’s perspective, Joe doesn’t have a lot of income.  Actually, he’s pretty comfortable because he’s just living on a savings account, but he has no wage income or Social Security income.  These are the years when it might be a really good idea for Joe to consider a series of Roth IRA conversions and the best way for him to save some money in taxes!   Why?  Because when Joe is 70, he’s going to have income from Social Security that is higher because he waited, and he’s also going to have to take required minimum distributions from his retirement accounts.  Taxes, taxes, taxes!  If he is able to convert some of his traditional IRA to a Roth now, while he is in a low tax bracket, the required minimum distributions from his traditional IRA (if he has any left) will be less.  And if he needs more income, he can always tap into his Roth.

Roth IRA conversions can be a great defense against changes in your personal tax situation, and against the Death of the Stretch IRA.

Thanks for reading, and stop back soon!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA
How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass
The Death of the Stretch IRA: Will the Rich Get Richer?
The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?
Roth IRA Conversions and the Death of the Stretch IRA

Roth IRA Conversions and the Death of the Stretch IRA

How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA

Roth IRA Conversions and the Death of the Stretch IRA James Lange Pgh

Those of you who follow my blog know that I’ve spent a lot of time talking about the Death of Stretch IRA, and some ideas that you can take advantage of that could provide some defense for your own family.  The next few posts will continue my discussion about Roth IRA conversions, and how they might benefit your heirs after the Stretch IRA is eliminated.

When Will the Stretch IRA Be Eliminated?

Some of my critics have said that I’m making a lot of noise about something that might never happen.  They say that the Stretch IRA won’t be eliminated, and all of this discussion is for naught.  I have two responses to that.  First, I think it’s completely unrealistic to expect that our legislators will maintain the status quo.  We have reached the point where our spending is no longer sustainable.  Our national debt is estimated at about $20 trillion, but an even scarier statistic is how it relates to our gross domestic product (GDP).  That number is about 106 percent – meaning that we owe more than what the entire country produces.   At one point, President Trump suggested that we follow the lead of other countries and simply default on our debt.  I would be surprised if he could get that proposal through Congress, but if he plans to return the country to solvency as he promised, he’ll need a lot of revenue to do it.  With more than $25 trillion being held in tax-deferred retirement accounts, eliminating the Stretch IRA is a quick and relatively painless way to pump a lot of tax money into the government’s coffers.  And that, my friends, is why I believe that the Death of the Stretch IRA will happen soon – possibly before the end of 2017.  More than likely, the Death of the Stretch IRA will be included as part of a major tax reform – which, as you might recall, was part of President Trump’s campaign platform.  Remember, he promised a simplification of the tax code – and there’s nothing simpler than grabbing all your money by eliminating the Stretch IRA!

Roth IRA conversions – A Great Defense Against the Death of the Stretch IRA

Let’s suppose you die before the Stretch IRA is eliminated.   Your family will be in a better financial position because they can withdraw your IRAs using the old rules – and stretch it over their lifetimes.  But even if they are able to use the old rules, you could still be better off by doing a series of Roth IRA conversions.  In my previous posts, I talked about the concept of purchasing power, and how you and your spouse can be better off during your lifetimes if you convert.  We’ve proven this to hundreds of our clients by running the numbers for them, and collectively they’re better off by millions of dollars because they took our advice.

But what if the Death of the Stretch IRA happens during your lifetime?  Do you believe, as I do, that the Stretch IRA will be eliminated so that the Congress can put one finger in to the country’s fiscal dyke that is already bursting at the seams?  Well, when I give talks about possible solutions to the Death of the Stretch IRA, I tell people that Roth IRA conversions are a tool that can be beneficial in either situation.  So it doesn’t matter if you die before or after the Stretch IRA is eliminated – Roth IRA conversions can still be beneficial to your family.

Waiting for the Death of the Stretch IRA

It was less than a year ago that the Senate Finance Committee voted 26-0 to eliminate the Stretch IRA.  Congress never got a chance to vote on their proposal because they were consumed by one of the most bitter and contentious election processes in recent history.  Well, we’ve been watching Congress’s actions all summer long, and have had ongoing discussions with some individuals who are in the know about the status of the Death of the Stretch IRA.  If you subscribe to this blog, you’ll be among the first to know when it finally happens.

Stop back later for the latest updates on the Death of the Stretch IRA!

Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA
How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass
The Death of the Stretch IRA: Will the Rich Get Richer?
The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?