Is Your Health the Best Reason to Wait to Apply for Social Security?

Is Your Health the Best Reason to Wait to Apply for Social Security?

Should Your Health Affect Your Social Security Decisions James Lange

For the past several months, I have been discussing the looming legislation I call the Death of the Stretch IRA.  This series of posts turns slightly away from that, discussing the likelihood of a reduction and then increase in federal income tax rates which not only affects inherited IRAs but also your Roth IRA and Social Security planning.   For those of you who are currently retired or will be shortly, the elections you make concerning your Social Security benefits, as well as the execution of optimally timed Roth IRA conversions can make the difference between your being financially secure or going broke.  This post discusses how your health could affect your Social Security elections.

Social Security at 66 vs 70 – which is better?

In most cases, I tell my clients that it is better if the spouse who has the strongest earnings record holds off applying for Social Security until age 70 in order to get the maximum amount of delayed retirement credits.  This is key to your tax and retirement planning as it can increase your benefit by up to 8 percent each year, plus cost of living adjustments!  I go into more details in my book, which you can get a free copy of by clicking here.  But if you’ve read my book already, then you know the specific reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible.

Reasons to Wait until Age 70 to Apply for Social Security

Read that last sentence one more time.  Did you notice that I did NOT say that the reason for waiting until age 70 is so that the primary earner will receive more money?  I said the reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible.  It’s an important distinction, and I want to tell you what I mean by that.

Recently I met with a couple who were not yet retired.  The husband, who was older and the higher earner of the family, had recently been diagnosed with a terminal illness and given a life expectancy of no more than five years.  The wife was 55 – ten years younger than her husband.  Both of them thought that the husband should apply for Social Security immediately, so that he could at least get some money during the years he still had left.

I asked him, “But what about her?”   He looked at me and said, “She’ll get my full benefit after I die, won’t she?”

What happens to Social Security after your spouse dies

Let’s do a quick review of what happens to your income from Social Security after one spouse dies.  Suppose the husband is entitled to a monthly benefit of $2,000 at age 66.   His wife is entitled to a spousal benefit of 50 percent but, in this case I’m going to say that she has worked all of her life and her benefit based on her own record is higher – $1,200.  Their monthly household income from Social Security, therefore, is $3,200.

So what happens when your spouse dies?  How much does the survivor get?  The answer is the higher of the two benefits.  In the above example above, the wife’s benefit would increase to $2000 after her husband’s death.  Sound good?  It isn’t!  The problem is that the monthly household income from Social Security will go down – from $3,200 to $2,000!  Think of how critical that is!  That’s the reason that, in most cases, the higher earner should wait until age 70 before applying for Social Security.

In the case of the clients I was talking about earlier, it was especially important that the husband wait to apply for benefits.  She was ten years younger than he was – 55 years old – and the picture of health.  That meant her life expectancy of age 84, or almost 30 years.  Her husband may never see a dime of his Social Security money – if he does, he’ll get a higher benefit for the time he does have left.   But if his wife survives him, which she probably will, she’ll have more than just an inherited IRA and his savings accounts, she’ll have his higher benefit for the rest of her life too.  Remember that, as we discussed before, the timing of your application to Social Security can drastically benefit your retirement planning. especially after the Death of the Stretch IRA.   There is a critical lesson to be learned from this example.  Poor health is not a good reason for the primary earner to apply for Social Security early, unless the spouse is also in poor health.  If both spouses are in poor health and are not likely to enjoy a long retirement, then it could make sense to apply early.  The goal is to make it possible for both of you to enjoy as much income as possible, while you are both alive!

Stop back soon for more Social Security 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

Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex

How Divorce Affects Your Social Security Benefits

Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex

This series of posts discusses the likelihood of a reduction and then increase in federal income tax rates.  For those of you who are currently retired or will be shortly, the elections you make concerning your Social Security benefits, as well as the execution of optimally timed Roth IRA conversions can make the difference between your being financially secure or going broke.  This post will cover some options that divorced individuals may want to consider when filing for Social Security benefits.

Social Security Benefits after Divorce – Your Former Spouse is Still Alive

Let’s say that you were married for ten years but are now divorced.  Did you know that you can get Social Security spousal benefits based on your former spouse’s earnings record?   Suppose that your ex began collecting Social Security at his Full Retirement Age of 66, and that he gets $30,000 every year.  Then suppose that your own benefit is $800/month.  If you’ve never asked Social Security about receiving benefits based on your divorced spouse’s record, you should.  If you meet the requirements, you’re entitled to half of your ex’s benefit amount, which in this example is a lot higher than what you’d receive based on your own earnings record.

What are the requirements for Social Security spousal benefits if you’re divorced?  First, your ex must still be alive (for an important reason I’ll cover shortly) and must be entitled to receive Social Security retirement or disability benefits.  Your marriage to your former spouse had to have lasted ten years or longer.   The final requirement is that you must be at least age 62, and unmarried.  If you remarried, you are still entitled to spousal benefits, but they will generally be awarded based on the earnings record of your new spouse – not the individual who you are divorced from.

Not all divorces are amicable, unfortunately, so I want to give some peace of mind to those of you who believe you probably qualify for benefits from a former spouse but are reluctant to ask about them.  First, your filing for spousal Social Security benefits will have absolutely no impact on your ex’s monthly check.  In fact, if your former spouse remarried and divorced five times, and each of his spouses meets all of the requirements listed above, every single one of them can collect Social Security spousal benefits based on his record.  And every former spouse is entitled to receive the same amount of money as the current spouse – with no reduction in anyone’s benefit!

Suppose that you meet all of the requirements, but you are not on the best of terms with your former spouse?  Well, it will probably take longer if you don’t have your former spouse’s Social Security number, but you can still apply for spousal benefits.  You’ll just need to give the Social Security Administration your former spouse’s name and place of birth, and both of his parent’s names.

Social Security Spousal Benefits From Former Spouse Who Is Still Working

What if your divorced spouse is not currently collecting Social Security?  If your ex is eligible for retirement benefits but has chosen not to file for them yet, you can still collect a spousal benefit based on his record as long as you were married for at least ten years, and have been divorced for at least two years.

Social Security Survivor Benefits after Divorce – Your Former Spouse is Dead

I said earlier that it was important that your former spouse be alive, in order for you to be able to collect spousal benefits on his record.   But what happens to your spousal Social Security benefits when your former spouse dies?  Well, if your marriage ended on very bad terms, you’ll probably be happy to hear that your ex could be worth more to you dead than alive.  If you are collecting spousal benefits based on a divorced spouse’s record, and that spouse dies, you are eligible to receive the same survivor benefits as his current spouse – which is his full monthly benefit amount.  Again, the requirement is that your marriage had to have lasted at least ten years, in order to collect survivor’s benefits based on a former spouse’s earnings record.

Divorce and Social Security Benefits

The bottom line is that if you were married for at least ten years and have not remarried, you should make sure that you investigate what benefits you might be entitled to after your divorce –benefits that are based on your former spouse’s earnings record.  This is true whether your former spouse is alive, has remarried or even if he or she has passed on.  Getting the most you can out of your Social Security benefits is even more important now, with the likely Death of the Stretch IRA.

Stop back soon for more Social Security 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

Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

In this blog post find out more about 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 James Lange

Last week, I talked briefly about the best age to apply for Social Security benefits.  It’s a more important question than many people realize, unfortunately.  The prestigious Center for Retirement Research at Boston College estimates that 90% of all Social Security recipients apply at the wrong age.  Social Security is one area where you could very well be better off if you do not go along with the majority, and I want to explain why.

What is Full Retirement Age?

First, let’s start with Social Security’s official definition of the term Full Retirement Age.  I am admittedly sloppy on that point; I generally define it as being “Age 66” but it is really not that simple.  Social Security defines Full Retirement Age as the age at which a person may first become entitled to full or unreduced retirement benefits.  That’s the key – if you wait until your Full Retirement Age, your benefits will not be reduced.

But what age is Full Retirement Age?  Years ago, the answer was simple – age 65.  But as an influx of baby boomers entered the work force, the government looked at the Social Security system and projected what they called “a funding gap”.  I think it was their polite way of saying “we’d better do something now, or else we won’t have enough money to pay all these people.”  Raising taxes is never a popular option, especially with a presidential election right around the corner.  So in 1983 Congress just decided to make it harder for workers to collect when they applied for benefits decades into the future, and hope that nobody noticed.  And nobody noticed – until now – that the age of which you will be paid full benefits is going up.

Individuals who are retiring within the next decade are subject to a changing Full Retirement Age that, depending on your year of birth, is somewhere between age 66 and age 67.   The video that is attached shows exactly how it is calculated.  But it seems likely to me that, as our population ages and more people apply for benefits, they could raise the Full Retirement Age again.  Is it possible that your children and grandchildren won’t be able to collect full benefits until age 68 or 69?

Applying for Social Security at Age 62

If you were born after 1937, Social Security currently allows you to apply for benefits as early as age 62 – but should you do so?  Last week, I talked about the Social Security breakeven point, and whether or not it makes sense to apply for Social Security at age 62.  Most of you know that, if you do so, your benefits will be reduced. What you may not know is that, if you do so, the reduction in your benefit amount will be greater than it is for people who were born before 1938!

Let’s look at just how much your Social Security benefit will be reduced if you sign up at age 62.  If your Full Retirement Age is 67, your benefit will be reduced by about 30 percent.  So if your full benefit amount is $2000/month and you apply at 62, your check will be reduced by 30 percent to about $1400.  If you apply at 63, the reduction is only 25 percent.  So there is a benefit to waiting until age 66 or 67 to apply for benefits.

Benefit of Waiting to Apply for Social Security

There’s an even greater benefit to waiting beyond your Full Retirement Age to apply for Social Security.  You get an eight percent raise for every year you hold off!  If your Full Retirement Age is 66 and you wait until 70 to apply, you’ll get 132% (plus Cost of Living Adjustments) every year.  So let’s go back to the previous example, where your benefit at Full Retirement Age is estimated at $2000.  If you wait until you are 70 to apply, your monthly benefit will go up to $2640 – and that doesn’t even include Cost of Living Adjustments.

The government offers a great resource where you can see the options that are available to you specifically.  You can access it by clicking here: www.ssa.gov/estimateyourbenefit

Remember, the timing of your Social Security application and any Roth conversions that you might want to do are synergistic.  Ultimately, both could benefit your long-term retirement planning, especially after the Death of the Stretch IRA.

Stop back soon for more Social Security 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

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

What is the best age to apply for Social Security benefits after the Death of the Stretch IRA? Find out in this video blog post.

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

This is the second in a series of posts about planning for Social Security benefits in retirement.  It will give you some ideas on how you can get the maximum Social Security benefit possible.  It will also cover some mistakes that you need to avoid when filing for Social Security benefits for the first time.

Getting The Best Social Security Advice You Can

Tell me the truth – deep down, you’re sick of working.  You really want to quit your job and retire, no matter what the cost.  And part of your plan relies on the income that you’ll receive from Social Security.   I need to give you fair warning – you might not like what I’m going to say about your plan.  But before you disregard the advice that follows, you should know that I authored a best-selling book on Social Security.  I’ve been quoted on CNBC, and many of the top financial experts in the nation agree with me.  And I think my advice will be an eye-opener for many people who will be applying for Social Security benefits in the next few years.

The Best Age to Take Social Security

“What is the best age to take Social Security?”  “Taking Social Security at 62 vs 66 – which is best?”  I’ve heard those questions more times than I can count.  And while every situation is different, I’ll tell you that, for most people, the best age to apply for Social Security benefits is definitely not “as soon as you’re eligible”.  I know, I know – all of your friends are telling you that the Social Security program is going broke and you need to get your money back out of it while you can.  Well, are your friends going to be there with handouts for you, if it turns out that you made a huge mistake and end up going broke yourself?

The Social Security Breakeven Point

Figuring out the best age to take Social Security depends on several variables, but yes, there is a breakeven point where, if you live long enough, in hindsight you’ll know whether or not you made the right decision.  The short video snippet that is included with this post shows how that breakeven is calculated.  In the video, the assumptions that I have used results in a breakeven point that occurs at about age 82.

However, I’m going to pass along a piece of advice that I got from noted economist Larry Kotlikoff that made me change my attitude about the breakeven question.  As he pointed out, if you take your Social Security benefits as soon as you’re eligible and then die before your breakeven point, yes, you’ll have more money than if you had delayed applying.  But what good does it do you?  You’re dead, and dead people don’t have financial problems!  What he told me is that the last thing I should worry about is how much money I’ll have if I die early.  Instead, he told me, I should be worrying about living a long time and running out of money.  So if you understand Larry’s way of thinking, the breakeven point should not be a major factor if you’re trying to figure out the best age to apply for Social Security.  Suppose your primary concern is coming out on the right side of the breakeven point.  You delay applying for Social Security and then die before receiving any benefits.  In hindsight, yes, you would have gotten more money from the Social Security system if you applied earlier.  But why on earth would that be your primary concern?  If you apply as soon as you are eligible, your benefits are significantly reduced.  And what happens if you do live beyond your breakeven point, and have to spend your golden years just getting by on your meager Social Security check?  Social Security can provide you with a guaranteed monthly income, and the decisions you make can make a significant difference in your standard of living during retirement.   And truthfully, that was the best Social Security advice I have ever heard.  Thanks, Larry!

Last but not least, the decisions you make about claiming Social Security will become even more important when you consider the legislation that may spell the Death of the Stretch IRA.  I’ll cover more about that in a later post.

Stop back soon for more Social Security 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

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

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