Getting Social Security Benefits Right with the Death of the Stretch IRA

Social Security Planning, Roth IRAs & Death of the Stretch IRA

Social Security Planning Roth IRA Conversions and the Death of the Stretch IRA James Lange

First, I wanted to thank you for your comments and questions about my previous posts.  It’s gratifying to know that my readers apparently care more about the financial future of their families than the latest wardrobe malfunction in Hollywood!  And if you have any questions or comments, please feel free to send them over because I will do my best to address them.

I’ve had a number of people who wrote in to ask about a comment I made in a workshop, in which I said that, with the Death of the Stretch IRA likely being imminent, it’s more important than ever to “get Social Security right”.  Those of you who have been subscribing to this blog for a while probably know the answer but, for the benefit of new readers, I want to back up and explain what I meant by “getting it right”.

Social Security Options Are Changing

There were major changes made to the Social Security rules last year – changes that could potentially mean hundreds of thousands of dollars of difference in your retirement income.  When I learned that these changes were coming, I did everything I could possibly do to get the word out that if you did not get grandfathered under the old Social Security rules by April 26, 2016, you could lose out on a lot of money.  Well, if you didn’t get grandfathered last year in time to take advantage of one excellent Social Security strategy called “Apply and Suspend”, it’s too late.  It’s no longer an option, and people who apply for Social Security benefits after April 29, 2016 can’t do it.  Another technique involving the filing of a Restricted Application for benefits will be going away in 2020.  And while I’m not trying to rub salt in any wounds, the reason I’m reminding you about it is because the Social Security options for many people continue to disappear as Congress tries to fix the nation’s financial problems.  The point that I want to make is that if you do not have the ability to take advantage of the same Social Security strategies as someone – maybe an older friend or family member – who was able to get grandfathered under the old rules, you will probably not be able to collect as much money from Social Security as they did – even if you have similar earnings records.

Social Security and Roth IRA Conversions Work Together

One idea that might benefit you is to consider a series of Roth IRA conversions.  I’ve had people tell me that Roth IRA conversions won’t benefit them because they checked it out using an online calculator.
Well, online calculators are fine if your only source of income is from your IRA – but for most people, it isn’t.  Most people collect Social Security, too. It’s important to understand that Social Security and Roth IRA conversions are complementary, not competing strategies.

The Death of the Stretch IRA Spells Changes Too

Getting Social Security right and using Roth IRA conversions effectively will be even more important if Congress finally does enact the Death of the Stretch IRA legislation.

Don’t think it’s that big a deal?  This short video shows you just how much of a difference “getting Social Security right” and blowing it can make.  The posts that follow this one will address some things that you can still do to maximize your own benefits even if you are not grandfathered under the old rules.  Then I’ll show you how these ideas can be integrated with a series of Roth IRA conversions.  With the possibility of the Death of the Stretch IRA hanging over our heads, it’s important to do what you can to defend your retirement savings!

Please 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

Structuring Your Estate Plan Around President Trump’s Proposed Tax Reform

What will the impact of President Trump’s tax reform mean for you?

President Trumps Tax Reform Proposal and How it Might Affect You James Lange

You can hardly open a newspaper these days without seeing commentary about President Trump and the Republican Congress.  Whatever political side you’re on is irrelevant; the important thing is to stay on top of what the government is doing with respects to tax reform.  Ultimately, it just might mean more money for your family.

Will President Trump Cut Taxes?

What do we know is going to happen?  Since they were part of President Trump’s campaign platform, decreases in personal income tax rates are likely to be a part of a tax reform proposal. Readers who are old enough to remember President Reagan might recall that, during his first term, he implemented new economic policies that were referred to as Reaganomics.  One of the largest cornerstones of Reaganomics was the Economic Recovery Tax Act of 1981.  This Act lowered the top marginal personal income tax bracket by a whopping 20 percent, from 70 percent to 50 percent, and the lowest tax bracket from 14 percent to 11 percent.  Sounds good, right?  To the unsuspecting citizen, perhaps, but here’s the catch:  after the Act was passed and personal income tax rates decreased, the Treasury Department’s annual tax revenues did not suffer at all, as one might expect they would.  Tax revenues actually increased during Reagan’s two-term presidency – from 18.1 percent to 18.2 percent of the country’s Gross Domestic Product (GDP)!  And the reason that those revenues increased was because the Republican Congress quietly passed other laws that raised other types of taxes!  Uh, oh!

The Effect of the Trump Tax Plan

The non-partisan Tax Policy Center expects that there will be $7 trillion added to the federal deficit over the next decade if President Trump’s plan to restructure the personal income tax brackets is made in to law.  With the country’s debt amounting to over 104 percent of our Gross Domestic Product in 2015, a reduction in the personal income tax rates could have a far-reaching and devastating effect unless they get money from somewhere else.  I’ve been talking a lot about the Death of the Stretch IRA, and this is exactly why I believe that it is imminent.  If the President’s promise to change the personal income tax brackets is made into law and the unsuspecting voters are appeased, he and Congress will be looking for new ways to minimize its effects on the country’s cash flow.  With an estimated $25 trillion being held in previously untaxed retirement plans, it seems likely to me that one of the first things they will consider is accelerating the tax bill that will be owed by individuals who inherit that money.  After all, they still have more money than they did before they received their inheritance, right?  Why complain, even if it is less than they could have had?

Tax Reform and the Death of the Stretch IRA

I’ve said it before and I’ll say it again – I believe that the Death of the Stretch IRA legislation will be included as part of a major tax reform bill because it provides a way to pay for the personal income tax cuts that our politicians have promised.  And while any personal income tax reform will receive intense coverage by the media, any included legislation that spells the Death of the Stretch IRA will probably be completely overshadowed by news of the latest celebrity wedding in Hollywood.    If you subscribe to this blog, though, you’ll be notified as soon as it happens, so that you can take whatever steps are appropriate for your own situation.

Impact of Tax Reform

Unfortunately, it’s unlikely that those personal income tax decreases will be permanent.  Historically, when one administration reduces taxes, the next administration does the reverse.  President Reagan’s eventual successor, George W. Bush, famously promised Americans “Read my lips, no new taxes!”, but was unable to keep his word because the Democratic-controlled Congress voted to raise them.  So what will the impact of a major tax reform mean for you?  Even if President Trump is successful in pushing a tax reform bill through Congress, they’re not likely to stay as low as what he has proposed.  Could this mean that Roth IRA conversions might suddenly make sense to far more people than in the past?  We’ll have to wait and see just how low these new tax brackets might go!  Stop back soon for more ramblings!

-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

How Flexible Estate Planning Can Save Your Children Money

Using Flexible Estate Planning as a Possible Solution for the Death of the Stretch IRA

How Flexible Estate Planning Can Save Your Children Money

The previous posts in this series discuss the proposed legislation that would spell the Death of the Stretch IRA, and offer some ideas that you might be able to incorporate into your own estate plan to reduce its devastating effects. This post will show you how flexible planning can minimize the damage that income taxes could do to your childrenís inheritances after the Death of the Stretch IRA.

The $450,000 Exclusion, Use it or Lose it!

I want to go into detail about something that I first mentioned in my post of February 28, 2017, which was the proposed $450,000 exclusion to the Death of the Stretch IRA legislation. The proposed legislation said that each IRA owner would be entitled to their own exclusion of $450,000. Regardless of how many retirement accounts you own, and how many beneficiaries you name on them, it is critical that you donít overlook the fundamental step of making sure that your exclusion can be used after your death. If you donít use it, you will lose it!

Readers who have been around as long as I have may remember estate planning in the late 90ís, when the top federal estate tax rate was an outrageous 55% and only $600,000 of your estate could be protected from it. And in order to protect more of your assets from the IRS, attorneys had to draft elaborate trusts (often referred to as marital, or A/B trusts) which would allow each spouse to have a $600,000 exclusion of their own. That way, a total of $1.2 million of your familyís money could be exempted and would pass to your children without being subject to federal estate tax. Remember those days?

Common Beneficiary Language Can Cause Your Heirs to Lose an Exclusion

Well, now you have to think the same way about the $450,000 exclusion that is proposed in the Death of the Stretch IRA legislation. The proposal says that the change will apply only to the extent that an individualís aggregate account balances exceed the exclusion amount. But what do most people do when they fill out their beneficiary forms? They say, I want my spouse to have this money, and if my spouse dies before me, I want it to go to my children. Sound familiar? Well, suppose you have $450,000 in an IRA, and your spouse has $450,000 in an IRA. You die, your spouse rolls your IRA in to her own IRA, and now she has $900,000. In an earlier post, I told you that your spouse is an exempt beneficiary ñ so any money that you leave to her wouldnít have been subject to the $450,000 exclusion anyway. But suppose your spouse dies a week after you do. Since her IRA was worth $900,000 when she died, your children can only exclude $450,000. So half of her account could be sheltered under the old IRA rules, but the remainder would be subject to the proposed new IRA rules.

A Better Plan – Use Both Exclusions

A better plan would be to make sure that, if possible, you and your spouse can use both of your exclusions. For example, suppose you have $1 million in an IRA, and your spouse has $1 million in her own IRA. Both of you have estate planning documents that give your surviving spouse the right to disclaim to the next beneficiary in line. You die, and now your spouse has a decision to make. Sheís your beneficiary, and she can accept your IRA if she feels she needs the money. But suppose she doesnít need all of it? She could say, ìIíll be quite comfortable with only $550,000 of this, plus the $1 million from my own IRA.î In that case $450,000 of your IRA would go to the next beneficiary in line ñ your children. Since the amount that your spouse disclaims is within the exclusion amount, $450,000 of your IRA will go to your children and can be distributed according to the old rules. Then when your spouse dies, her entire IRA will pass to your children and they can exclude $450,000 of her IRA from the new rules too.

Flexible Estate Planning is the Key

Flexible estate planning allows your surviving spouse to decide who gets what after your death, and is the key to minimizing the harsh effects that the Death of the Stretch IRA legislation will bring if it is passed. Stop back soon for some more random thoughts!

-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

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

Lange’s Cascading Beneficiary Plan may be a good option to protect your family against the Death of the Stretch IRA

Using Langes Cascading Beneficiary Program as a Possible Solution for Death of the Stretch IRA James Lange

When I meet with new clients for the first time, one of the most aggravating things that I often find is that their existing estate planning documents are “set in stone”, and can cause the estate to be subject to unnecessary taxes.  What do I mean by that?

Let’s say you have Jack and Jill, and their three kids John, James and Judy.   Jack is 87, and Jill is 86.  Jack and Jill both had wills that said, “I want my spouse to inherit everything, but if he or she is dead then I want my children to get everything.”  Sound familiar?   After Jack and Jill both die, their assets will be passed on to their kids as they specified, most certainly.  The problem is that their kids will more than likely end up with less money than they could have.

Why is that?  Jack dies, leaving $3 million to his wife.  Is it really likely that Jill is going to need $3 million to live on for the rest of her life?  Probably not.  The vast majority of wealthy individuals that I’ve worked with are in that position because they have never led an extravagant lifestyle, and in my experience, leopards don’t change their spots all that easily.    More than likely, what will happen is that, a few years down the road, Jill will die with even more money in the bank.  Their hard-earned savings will eventually go to their children as they wanted, but Jack and Jill may have missed the chance to use Lange’s Cascading Beneficiary Plan and possibly save them a significant amount of taxes due on their inheritance.

Using Disclaimers in Your Estate Plan

A disclaimer simply means that your beneficiary says “I don’t want this money that I’ve been given”.  So let’s assume that Jack names Jill as his primary beneficiary, and their three children as contingent beneficiaries.  After Jack’s death, Jill has nine months to think about it and, if she says “I want that money”, she gets it.  But what happens if Jill is terminally ill and doesn’t expect to live much longer?  She can disclaim the money say “I will never live long enough to spend $3 million, but I would like to have $300,000 for my own use.  The remaining $2.7 million can go directly to our kids.”  Jill can’t change what Jack has instructed – meaning that she can’t cause one child to receive more money than what he specified, or ask that some of the money be given to their grandchildren if Jack didn’t include them as beneficiaries.  But she can step aside and say “I don’t need all of this money; give it to the next one in line”.  By disclaiming, Jill allows Jack’s money to be passed directly to their children if she doesn’t need it.  In many cases, disclaiming can be far more tax-efficient than having Jill inherit all of the money, never using it, and then passing on to their children.

Lange’s Cascading Beneficiary Plan (LCBP)

Many years ago, I designed a groundbreaking concept that I call Lange’s Cascading Beneficiary Plan.  It incorporates the use of disclaimers into the estate plan, which allows your surviving spouse to have maximum flexibility after your death.  This type of flexible estate planning can make a huge difference for your beneficiaries after your death.  Assuming that your wills contain the appropriate language that meets both federal and state requirements for a valid disclaimer, your beneficiary can make decisions that are based on your family’s situation and tax laws that are in effect long after your will was prepared.  And the best part is that they have up to nine months after your death to disclaim – so their decision can be based on your family circumstances and the tax laws that are in effect at the time.

Lange’s Cascading Beneficiary Plan may become an even more valuable estate planning tool after the legislation that I call the Death of the Stretch IRA is passed.  Please stop back soon for an update.

-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

Using Roth IRA Conversions as a Solution for Death of the Stretch IRA

Concerning the Death of the Stretch IRA, are Roth IRA conversions right for you? 

Roth IRA Conversions are a Possible Solution for Death of the Stretch IRA, James Lange

This post is the tenth in a series about the Death of the Stretch IRA.  It discusses how Roth IRA conversions work, and how they might be able to benefit your family under the current law.  It also explains how Roth IRA conversions might be beneficial to your family if the Stretch IRA is eliminated.

How Roth IRA Conversions Work

Before we get into the benefits, I want to explain the process of how Roth IRA conversions work.  In order to do a Roth IRA conversion, you take money that you have in a traditional tax-deferred IRA account and transfer it to a tax-free Roth IRA account.  There’s paperwork that your IRA custodian has to file so that the IRS knows to expect some tax money from you.

When you contributed to that traditional IRA, you probably received a tax deduction for it.  The IRS obviously won’t let you take a tax deduction for the contribution that you made to your traditional IRA and then get your future earnings tax-free too.  So when you do a conversion, you have to pay tax on the amount that you transfer out of your traditional IRA.  The benefit to converting, rather than simply withdrawing the money and putting it in a standard brokerage account, is that the future gains on the earnings will be tax-free.  But is it worth it to convert?

Roth IRA Conversions and Purchasing Power

In my opinion, the key to understanding the benefits of Roth conversions is to understand the concept of purchasing power.  So let’s look at an example.  You have $100,000 traditional IRA plus $25,000 non-IRA money – for a total of $125,000.  I have $100,000 in a Roth IRA.  Even though I have less money than you, I will argue that we have the same amount of purchasing power.  Here’s why.

Let’s say you want to buy a boat – better yet, a really big boat.  In order to get the money to pay for it, you have to cash in your $100,000 IRA.  Since it’s a traditional IRA, you’ll be required to pay taxes on your withdrawal.  If you’re in a 25% tax bracket, you’ll also be required to liquidate your $25,000 non-IRA account to pay the tax due. Now let’s say that I want to buy the same boat.   I cash in my $100,000 Roth IRA, but I don’t have to have to send money to the IRS for a tax payment like you did.  So even though your account balances were higher than mine when we started, you had to spend more money than I did to buy the same boat.  Because my money was in a tax-free account and yours wasn’t, I had the exact same amount of purchasing power that you did, from the very start.

Is it Worth it to Convert Your Traditional IRA to a Roth?

But is it worth it to pay taxes that you don’t owe right now, just to end up in a tie?  It’s a great question.  For many people, it IS worth it.  I cover Roth conversions in great detail in Chapter 7 of my book, Retire Secure!  One point that I make in the book is that it is very important to actually “run the numbers” to see if it will be advantageous for you to go through the process yourself.  And while there are several online calculators that claim to demonstrate the value of Roth conversions, the truth is that the process is just not as simple as they make it out to be.   The reasons for this are too complicated to get into on this blog, but you can read about them in my book.  The book demonstrates several scenarios where Roth conversions can save families a significant amount of money, and also somewhere it was a bad idea.

Roth Conversions and the Death of the Stretch IRA

Roth conversions can be a very effective solution for many individuals who have large IRAs.  When the Death of the Stretch IRA legislation is finalized, they may become even more important.  Stop back soon to learn why.

-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

 

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

How to Use Gifting and Life Insurance as possible solutions to the Death of the Stretch IRA

Using Gifting as a Soltion for Death of the Stretch IRA James Lange

This post is the ninth in a series about the Death of the Stretch IRA.  If you’re a new visitor to my blog, this post might not make much sense unless you read the preceding posts, which spell out the specifics of the proposed legislation that might cost your family a lot of money.  This post discusses some ways that you can use gifting and life insurance as a possible solution to the Death of the Stretch IRA.

If you’ve been following my previous posts, you know that the Death of the Stretch IRA legislation could spell devastating tax consequences for your beneficiaries (other than your spouse, who is considered exempt).  Strategic planning to minimize those taxes will become very important once this legislation is finalized.  And while the techniques that follow are not for everyone, they can be beneficial for people who are in a position to take advantage of them.

What is a Gift?

When estate planners talk about gifts, they’re not talking about the presents you exchange on birthdays and holidays.  Generally, they’re referring to gifts of assets – cash, investments, etc. – that, when transferred to someone else, can reduce your current tax bill and, ultimately, the tax that your beneficiaries will pay after you die.  Current IRS rules allow you to gift a maximum $14,000 every year, tax-free, to each of your children.  Your spouse can also gift $14,000 to each child and, if you wanted to, both of you could also gift $14,000 to your child’s spouse.  Let’s say that you have three children, and they’re all married.  This means that you and your spouse could gift $56,000 to each of their families, tax free.  It also means that you’ve just reduced the size of your own taxable estate by $168,000.  Gifting can help reduce the amount of income tax that you owe now, and can be an effective solution to help manage the taxes that will be due at your death.

Maximizing the Tax Benefits of your Gift

But why not maximize the value of your gift by making it tax-efficient for the beneficiary too?  One idea would be to fund a Roth IRA for each child.  Roth IRAs are not tax-deductible, but the future earnings on the account are, under current law, completely tax-free.  A gift of a $5,500 Roth IRA to a 25-year old could make a significant difference in his standard of living when he retires.

If you have grandchildren who are of school age, a gift of a college savings plan could be an excellent tax-savings strategy.  While the contributions to a Section 529 plan are not deductible on your own federal tax return, the withdrawals are tax-free as long as the proceeds are used for qualifying expenses incurred by a student who is enrolled at a qualifying institution.

But what happens if your family situation is such that, even if you gift the maximum amount legally possible to all of your beneficiaries, taxes will still be a concern after your death?  In that case, you may want to consider life insurance as a possible solution.

Using Life Insurance as a Solution for Problems After Your Death

I don’t recommend life insurance just so that your heirs will receive even more money when you die.  Rather, I recommend it so that your heirs, and not the government, will get the money you’re leaving behind.  Here’s why.  Monthly payments such as pensions, annuities and Social Security that you rely on for cash flow, will likely change (if your spouse survives you) or stop completely when you die.  Your bills, though, will keep coming until they’re settled by your executor.  Many of these bills will be caused by taxes.  Your executor will have to file an income tax return on April 15th, and estate and inheritance taxes are generally due nine months after you die.  If your assets are not liquid by nature (for example, if you own real estate or a family business), or if you owned investments that happened to have declined in value at the time of your death, life insurance can provide sufficient cash to pay those taxes.  Without it, your heirs may be forced to liquidate your assets for far less than what they are worth.  The proceeds from life insurance, if it’s set up properly, are free of state and federal estate, inheritance and transfer taxes.

Remember, life insurance is a gift – and if you can’t afford to give your children a cash gift, then it isn’t likely that you can afford to give them a gift of life insurance either.  If you can afford to give them a gift, though, then life insurance is an option that you might want to consider.

Gifting and the Death of the Stretch IRA

When the Death of the Stretch IRA legislation is finalized, gifting (and especially life insurance) will likely become even more effective solutions than they have been in the past.  Please stop back soon, because my next post will go into the details!

-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

How Does the Exclusion Amount to the Death of the Stretch IRA Legislation Work?

The Proposed Exclusion Amount to the Death of the Stretch IRA Complicates Planning.

The Exclusions for the Death of the Stretch IRA

This post is the eighth in a series about the Death of the Stretch IRA.  If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the preceding posts related this one.  Those posts spell out the details of the proposed legislation that will cost your family a lot of money.  This post discusses the proposed exclusion amount to the Death of the Stretch IRA legislation and explains how it will be applied to each IRA owner.

When I wrote my book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, I accurately predicted most of what the Senate Finance Committee is proposing to make law.  The one point that I did not predict, though, was that each IRA owner would be permitted to exclude a portion of their retirement plans from the Death of the Stretch IRA legislation.  I don’t know if it was the Committee’s attempt to make the legislation seem not as bad as it is, but it certainly makes things more complicated for individuals who are trying to design an effective estate plan.  So I want to explain how the exclusion amount works.

The Exclusion Amount Applies to All Retirement Accounts

The whole idea behind the exclusion is that a certain portion of your IRAs and retirement plans would be protected from the Death of the Stretch IRA legislation.  Most people would think, “That’s great!  I’m going to apply my exclusion to my Roth IRA so that my beneficiaries can continue to enjoy the tax-free growth for the rest of their lifetimes.”  Well, that’s not how the exclusion amount works.  It has to be prorated between all of your retirement accounts.  Let’s say that you die with $2 million in retirement plans – $1.5 million in your 401(k), $400,000 in a Roth IRA, and $100,000 in a Traditional IRA.  Here’s how the exclusion amount would work.  Your 401(k) accounts are 75 percent of your retirement plans, so 75 percent of the exclusion amount (or $337,500) of that would apply to that account.  Your Roth IRA accounts are 20 percent, so  20 percent of the exclusion amount (or $90,000) would apply to that account.  Your Traditional IRA accounts are 5 percent of your retirement plans, so 5 percent of the exclusion amount (or $22,500) would apply to it.  The bottom line is that the exclusion amount has to be applied to all of your retirement accounts, both Traditional and Roth.

The Exclusion Amount Applies to All Non-Exempt Beneficiaries

I’m going to emphasize one subtle but very important point about the Death of the Stretch IRA and your beneficiaries.  The legislation did provide that some beneficiaries are completely exempt from the new tax rules.  For most of you, the most important exempt beneficiary is your spouse.  You can leave $10 million in retirement plans to your spouse (although I’d prefer that you’d add disclaimer provisions for your children!), and he/she can still stretch them over the rest of his/her life.  Disabled and chronically ill beneficiaries are exempt, as are minor children.   Charities and charitable trusts are also considered exempt beneficiaries.  Now that you know who is considered an exempt beneficiary, I want to talk about the beneficiaries who aren’t exempt.  For most of you, it’s your adult children.  If you have adult children who aren’t disabled or chronically ill, and you name them as beneficiaries on your retirement plans, the exclusion also has to be prorated between them.  You may have preferred to leave the amount that was excluded from your Roth account – in the above example, $90,000 – to the child who would receive the most tax benefit from it, but that’s not how the exclusion amount works.  If you have two children and they are named as equal beneficiaries, then each will receive (and can continue to stretch) 50 percent of the excluded amount– or $45,000.  Both children would also receive $155,000 from the Roth that can’t be stretched, and the account would have to be withdrawn within five years.  Granted, qualified withdrawals from Roth accounts aren’t taxed, but the greater cost is that the bulk of their Roth inheritance will no longer be permitted to grow tax-free.

Planning Opportunities Created by the Exclusion Amount

Oddly enough, there are certain planning opportunities created by the exclusion amount that is proposed in the Death of the Stretch IRA legislation.  If you have a beneficiary who is exempt, then you should remember how the exclusion works.  Suppose that you die with retirement plans that are worth $500,000 and you left 10 percent (or $50,000) to charity and the remainder to your child.  In that case, none of your retirement plans would be subject to the Death of the Stretch IRA rules.  That’s because the charity is an exempt beneficiary, so the $50,000 it received is exempt from the rules.  And the remaining $450,000 that went to your child is within the permitted exclusion amount, so her inheritance can be stretched over her lifetime.

I predict that the proposed exclusion amount will create headaches for financial advisors across the country.  Just imagine the chaos!  Where your beneficiary might have inherited one IRA, now they’ll inherit two – and each will be subject to a different set of rules.  How can they call this “simplified”?

Please stop back soon for my next post on this important legislation!

-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

likely to pass?

Why is the Death of the Stretch IRA legislation likely to pass?

What is the likelihood that the Death of the Stretch IRA legislation will pass?

Why is The Death of the Stretch IRA Legislation Likely to Pass by James Lange

This post is the seventh in a series about the Death of the Stretch IRA. If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the preceding posts related this one. Those posts spell out the details of the proposed legislation that will cost your family a lot of money. This post discusses the reasons I believe it is very likely that this legislation will pass.

To be fair, my critics point out that this idea has been brought up many times before, but hasn’t yet passed. I can’t argue with them on that point. Senate Finance Committee Chairman Max Baucus was the first major proponent of the idea, proposing the elimination of the Stretch IRA as part of the Highway Investment Job Creation and Economic Growth Act of 2012. The American Bar Association followed suit in 2013, recommending their elimination as part of a tax simplification proposal to the Senate and House tax-writing committees. And President Obama was very much behind the idea, including it in every one of his budget proposals since 2013. Even though it’s been proposed over and over again, it’s never passed. So why am I saying it is likely to pass, and soon?

The Politics of the Death of the Stretch IRA

When the idea was first proposed to the Senate by Max Baucus in 2012, it was defeated by an uncomfortably close margin of only 51-49. That vote, interestingly, was mostly along political party lines. President Obama presented the idea in every one of his budget proposals since 2013, but couldn’t get it past a House of Representatives that was controlled by the Republican Party. But on September 21, 2016, the Senate Committee on Finance voted 26-0 to effectively kill the Stretch IRA. And what was especially interesting about that vote was that it had unanimous bipartisan support.

So why isn’t it the law now? Well, think back to what it was going on in the fall of 2016. The nation was locked in a tumultuous political battle over who would be our next President, and Congress was busy dealing with allegations of malfeasance by both candidates. And before we knew it, the election came and went, and then the 114th United States Congress quietly adjourned without ever having time to consider the Finance Committee’s recommendation.

Is the Stretch IRA safe?

Does this mean, then, that the possibility of the Death of the Stretch IRA is overblown? I don’t think so, and here’s why. With the exception of Senators Schumer and Coats, all of the veteran members Finance Committee of the 114th Congress received the same Committee assignment after the election last fall. That means that 24 out of the 26 individuals who voted to recommend this legislation to the 114th session of Congress are in a position to make the same recommendation to the new Congress. And do you really believe that, considering the current political climate, it’s likely that they’re going to change their minds?

Trump and the Death of the Stretch IRA

What about the fact that we’ve got a new (and very rich) President? Won’t he protect his own ass(ets) by fighting the Death of the Stretch IRA? With the exception of an Executive Order, the President doesn’t create laws. He signs (or vetoes) legislation that has been voted on by Congress. However, President Trump has made several campaign promises that, if he has any hope of making good on them, will require a lot of money. The nation is already dangerously in debt, so borrowing to finance them could mean political suicide for him. However, the President has also promised to simplify the nation’s overly complicated tax code. It seems quite possible to me that, in exchange for getting Congress’ support on a major tax reform issue, he might have to compromise and allow the Death of the Stretch IRA legislation to be a part of the overhaul. It’s all in the art of the deal!

Please stop back soon for my next post on this important legislation!

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

 

How Does The New DOL Fiduciary Rule Affect You?

What happens in the future concerning the DOL Fiduciary Rule could be life-changing for you and your family.

How the Fiduciary Rule Affects You by James Lange

This post is the sixth in a series about the Death of the Stretch IRA.  The five posts that precede this one spell out the details of the proposed legislation that will cost your family a lot of money, as well as some possible solutions to the problems that will be caused by the Death of the Stretch IRA legislation that you should consider now.  This post will discuss DOL fiduciary rule, and how it could affect your estate and retirement plans.

What are the current laws concerning the DOL Fiduciary Rule?

You might be surprised to learn that the current laws permit your insurance agent or financial advisor to recommend an investment that has higher fees for which they receive a sales commission than an alternative.  That’s right!  As long as the investment is deemed “appropriate” for your situation, it’s perfectly legal for your advisor to recommend that you buy something that might cost you thousands of dollars in fees, rather than a comparable but cheaper alternative.

President Obama wanted to level the playing field for investors.  He first proposed a common fiduciary rule in 2010, and the Department of Labor released new guidelines in April of 2016 that gave financial services companies a year to comply with them.  The new rule was scheduled to take effect next month, but President Trump has asked the Department of Labor to review it and potentially rescind it.

How would the DOL Fiduciary Rule affect you?

How would the DOL fiduciary rule affect you?  To give you an example, suppose that you inherited $1 million that you wanted to invest.  One advisor might tell you that an annuity is the way that you should go, another might recommend mutual funds, and yet another might recommend individual stocks.  If there is no fiduciary rule to guide you, who should you believe?   The advisor who seems the nicest?

If the DOL fiduciary rule was in place, the advisor who recommended the annuity would be required to tell you up front that he would make as much $100,000 from your $1 million purchase.  And while he might have valid reasons for saying that an annuity is the best option for you, he’ll have to be able to prove why the benefit to you is greater than the $100,000 payday he’ll realize from your purchase.  And if you knew exactly how your advisor is paid, do you think you might be inclined to ask more questions before you sign on the dotted line?

We have always been fiduciary advisors.  A fiduciary advisor does not get paid for recommending one product over another, but generally charges a fee for advice or for managing the account as a whole.  In my practice, I have to provide my clients with services such as Social Security analyses, Roth Conversion calculations, tax projections, etc. for roughly twenty years to make the same amount of money that a non-fiduciary advisor could make from selling a product.  That’s twenty years of money that stayed in my client’s pockets, and I’m happy that it did.

Regardless of whether the DOL fiduciary rule is overturned or not, you should ask whether the individual(s) who manage your money are fiduciary advisors.  While what’s happened in the past is water over the dam, what happens in the future could be life-changing for you and your family.  The proposed Death of the Stretch IRA legislation means that billions of dollars will be passed to the next generation within the next twenty years.  The government is looking to get their hands on as much as possible, and the taxes that will be due after the Death of the Stretch IRA will have a devastating effect on your family’s inheritance.  Don’t add to that problem by choosing the wrong advisor.   Put your trust in one who adheres to a fiduciary standard, whether the government makes it the law or not.

Please 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

What You Should Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

What to do now to protect your heirs from the Death of the Stretch IRA

What Should You Do Now About the Death of the Stretch IRA James Lange

This post is the fifth in a series about the Death of the Stretch IRA.  The four posts that precede this one spell out the details of the proposed legislation that will cost your family a lot of money.  In this post, I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA that you should consider now.  As I said in my earlier posts, using Lange’s Cascading Beneficiary Plan to take advantage of the existing minimum required distribution rules that allow inherited IRAs to be stretched will, for most of you, produce a much more favorable result than any other option available.  The Death of the Stretch IRA legislation is designed to accelerate income taxes on retirement plans, so the Charitable Remainder Unitrust should be your “Plan B” that you consider only after the law changes.

How can Social Security help with the Death of the Stretch IRA?

If you’re considering retiring, the very first thing you should do is evaluate your Social Security benefits.  Many people feel that the best age to take Social Security benefits is 62 – get back what you paid into the system before it collapses, etc!  I used to agree with that line of thinking until noted economist Larry Kotlikoff brilliantly pointed out the flaw in my logic.  Larry told me that the last thing I should worry about was not getting back what we had paid into the system if my wife and I die young.  If you die, he said, you will have no financial worries – because you’re dead!  Our fear, he told me, should be that we might live a very long time and possibly outlive our money.  Wow!  What an attitude adjustment!  But after thinking about it, I realized Larry was right.  Your Social Security benefits will give you a guaranteed income that will last for the rest of your life, so it makes sense to maximize them and get the most you can.  I wrote an entire book on that subject – you can get it for free by going to the first page of this website – so I’m not going to cover those techniques in this blog.  Or, check out an earlier blog post that talks about my latest Social Security book The Little Black Book of Social Security Secrets, Couples Ages 62-70: Act Now, Retire Secure Later.   But, getting the highest Social Security benefit is something that you should be evaluating now, because it will benefit you before and after the Death of the Stretch IRA.

How much can you afford to spend every year in retirement?

Second, know exactly how much you can afford to spend every year during retirement, without having to worry about running out of money.  Many financial advisors point to a rule of thumb known as the Safe Withdrawal Rate, which is the amount that you should be able to withdraw from your assets over the course of your lifetime without worrying about running out of money.  And while there is certainly validity in knowing how much you can spend during the retirement, the problem with rules of thumb is that they are just that!  I have proven that there is also a benefit to spending your savings strategically – I discuss it at length in my flagship book, Retire Secure! – but the idea, sadly, is usually not included in general discussions about Safe Withdrawal Rates.  The bottom line?  Don’t rely on estimates – talk to someone who is skilled in running the numbers, and then check your numbers regularly.  That way, you won’t have to worry about running out of money, no matter when the Death of the Stretch IRA passes.

Are you paying to much to invest your money?

Third, know how much you are paying to invest your money.  As more and more people become educated about investment fees, the trend (thankfully) has been to move away from high-cost products such as annuities and front-loaded mutual funds, and from stockbrokers who survive by constantly buying and selling in their client’s accounts.  Instead, more people are looking toward low-cost mutual funds that can provide diversification, income and even growth without having to pay huge fees.  The cost that you pay to earn a return on your money is so important that I’ve even been known to suggest that it should be included as part of your Safe Withdrawal Rate calculation.  In years past, there was an odd prestige associated with the idea of having your money managed by a broker who charged high fees.  That is not the case anymore!  Americans are moving in droves to low-fee investments because they now fully understand how much they save over the long term.  And doing the same will benefit you no matter when the Death of the Stretch IRA legislation passes.

Please 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