The Death of the Stretch IRA: Will the Rich Get Richer?

Do Roth IRA Conversions Make the Rich even Richer? Will This Change After the Death of the Stretch IRA?

Do Roth IRA Conversions Make the Rich even Richer? Will This Change After the Death of the Stretch IRA?

My most recent blog posts have been about Roth IRA conversions, and how they might benefit you under both existing law and the proposed law that would spell the Death of the Stretch IRA.  This post continues this discussion, and outlines the benefits of transferring Roth IRAs to your children.

How Do the Rich Get Rich? 

There’s been a lot of media coverage about rich people lately, have you noticed?  The rich don’t pay taxes!  The rich are getting richer!  And so on.  Well, I’m going to go out on a limb here and suggest that there are many rich people who don’t deserve all of the abuse they get about their wealth.  Are there rich people who get their money from stealing and cheating?  Certainly, and I hope the long arm of the law finds every one of them and brings them to justice.  But I have many clients who are, by most people’s standards, rich – and not one of them ever failed to pay their taxes, or stole their money from someone else.  Most of them had decent but not high-paying jobs, and the vast majority of them didn’t inherit their wealth either.  So how do the rich get rich, and how do they continue to get richer?

In the late 1960’s, Stanford University conducted a study where the children who participated could receive a small reward (a marshmallow) immediately, or choose to receive a larger reward (two marshmallows) after waiting a short period of time.  Some of the kids, of course, ate the marshmallow immediately.  Others, though, waited for what probably felt like a lifetime, and were rewarded with the second marshmallow.

Most of my clients are two-marshmallow people.  This means that during their lifetimes, every financial decision they made considered both the short-term and long-term benefits.  Could they afford the monthly payment on a Cadillac?  Probably, but they opted for Fords instead and banked the difference between the monthly payments.  Could they use credit to buy new living room furniture?  Yes, but they waited until they had enough money saved up to pay cash because they wanted to avoid paying interest on their purchase.  Two-marshmallow people understand that sometimes it makes sense to do with less now, in exchange for a bigger payoff in the future.  That’s how many of the rich get rich in the first place, and could be why the rich continue to get richer.  And a similar mind set could be a lifesaver for you when the Death of the Stretch IRA legislation is passed, and you are scrambling to find ways to keep your hard-earned money out of the hands of the government.

Roth IRA Conversions: Not Just For Rich People Who Don’t Want to Pay Taxes

Many uninformed individuals think that strategies like Roth IRA conversions are simply tools designed to allow rich people to get richer, and to avoid paying taxes.   That’s not exactly true.  Roth IRA conversions can help anyone, not just rich people, get richer and avoid paying more taxes than necessary.    In fact, I would argue that Roth IRA conversions can be of more benefit to someone who isn’t rich, because an additional $50,000 over the course of their lifetime would probably be far more important than it would be to someone who has more money than they can ever spend.  But Roth IRA conversions can make a lot of sense if you are a two-marshmallow person, regardless of how much money you have.  And it’s especially true if your money lasts longer than you do, and you end up transferring your IRAs and retirement plans to your children.  Roth IRAs can make a significant difference for your heirs in light of the Death of the Stretch IRA.

Transferring Roth IRAs to Your Children

The video in this post compares two individuals – one makes a Roth IRA conversion of $100,000 and the other does not.  The conversion provides a small benefit during the Roth IRA owner’s lifetime – so even though he pays taxes on the conversion amount, he still ends up with two marshmallows.  But suppose he never spends the money and, at his death, the Roth IRA is transferred to his children?   Over the course of their lifetimes, the children get ten marshmallows.  And suppose his children don’t spend the Roth IRA, and instead transfer it to their own children (preferably by disclaiming it to a trust).  Over the course of their lifetimes, the grandchildren get an entire bag of marshmallows!

So did the rich get richer?  Yes.  Did they do anything illegal, or anything that you can’t do yourself?  No.  Roth IRA conversions were the brainchild of the government – they want you to pay taxes sooner than you have to so that they have more money to spend.  You may have change your way of thinking to that of a two-marshmallow person, and possibly do with less now in exchange for a greater payoff down the road.  But doing so can enable you to create your own family dynasty that will benefit your heirs for generations to come, and help them offset the devastating effects of the Death of the Stretch IRA.

Stop back soon for more Roth IRA conversion talk!

-Jim

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

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

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

How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass

How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass

How Roth IRA Conversions Can Benefit You Even If the Death of the Stretch IRA Doesn’t Pass

In my last post, I talked about a concept called purchasing power.  If you missed that post, I’d go back and read it because the information contained in it is the key to understanding the benefits of Roth IRA conversions.  In short, it explains why you need to consider more than just the dollar value of Roth and Traditional IRAs, in order to determine if a Roth conversion can benefit you.

Las week, we discussed that, if you measure your accounts in terms of their purchasing power rather than their dollar value, it is quite possible that you and your spouse can benefit from Roth IRA conversions.  The greater benefit, though, is likely to be recognized by your children and grandchildren.  This is true even if the Death of the Stretch IRA legislation does not pass, although I believe it will.

When Roth IRA conversions were first introduced, I believed that they could provide a huge benefit to my clients who had large IRAs.  It wasn’t just a feeling that I had, I did the math to support my position.  Unfortunately, many people were still afraid of this new-fangled idea, and they just didn’t want to hear about it no matter how much it might benefit their families. So I thought to myself, how can I get people to believe me?  In 1997, I published the very first peer-reviewed article on Roth IRA conversions.  Submitting a paper for peer-review is a daunting process.  Imagine a team of CPA’s who are just waiting to find fault with everything you say.  Well, guess what?  After they read it, they all said “He’s right!” – and my article on Roth IRA conversions was accepted for peer-reviewed publication. It was a ground-breaking idea, and I received a lot of attention by the mainstream media because I was a pioneer.  Even to this day I continue to advise several prestigious publications on this topic.  But for many individuals who have large IRAs, a series of Roth IRA conversions can provide an enormous benefit when used as part of a well thought out estate plan.

Roth IRA Conversions and Changing Tax Law

Some of you may think that a concept that was peer-reviewed twenty years ago has little relevance in today’s world.  Well, it’s true that back then, the tax rates were higher than they are now.  That means that, back then, Roth IRA conversions offered a greater benefit than they can under the current tax structure.  And now we are facing the possibility that the Death of the Stretch IRA legislation will pass, which would accelerate the income tax due on inherited IRAs.

The changing tax rules are the reason that you must measure your IRAs, whether they are Traditional or Roth, in terms of their purchasing power.   For many individuals, paying tax on the amount that you convert to a Roth IRA can provide a benefit to you, and an even greater benefit to your heirs.   It goes against my grain to pay income tax even a day sooner than I have to, but I put my own money where my mouth is.  Years ago, I paid the income tax due and converted a significant amount of both my own and wife’s Traditional IRAs to Roths.  I’m glad I did, because those IRAs have grown tax-free for decades.

Roth IRA Conversion Calculators

So let’s talk about those Roth IRA conversion calculators that are available online.  Are they accurate?  Well, if you want to try one out, please make sure that you find a calculator that uses the current tax rates.  Your results will not be accurate if you unknowingly choose a calculator that uses tax rates from ten years ago!  When personal computers first hit the scene, there was a popular saying about them:  “garbage in, garbage out”.  This was the developer’s way of saying that, while their programs were accurate, they couldn’t prevent you from making errors.  So if you were preparing your tax return using a well-known software and accidentally checked a box that said you were single when you were actually married, your tax return would still be right – if only you were single.

Ultimately, all an online calculator can do is estimate whether or not a Roth IRA conversion can benefit you.  In my opinion, an estimate is not good enough.  Before we make the recommendation to a client that they do Roth IRA conversions, our CPAs do actuarial calculations using several different scenarios.  They also calculate your tax return (and the tax returns of your beneficiaries) so that we know for certain whether Roth IRA conversions can benefit you.  If the Death of the Stretch IRA legislation passes as I believe it will, Roth IRA conversions will likely become a more important part of many estate plans.

Stop back soon for more Roth IRA talk!

-Jim

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

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

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

How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA

How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA

The Roth IRA Conversion Breakeven Point and the Death of the Stretch IRA James Lange

This post is part of a series about the Death of the Stretch IRA, and some ideas that you can use to minimize the effects of it.

Are Roth IRA Contributions and Conversions a Good Idea for Older Investors?

There is a lot of debate about whether or not Roth IRAs are a good idea and, in particular, whether or not they are a good idea for older investors.  In my opinion, Roth IRAs and Roth IRA conversions are a good idea for both young and old investors.  I also believe that Roth IRAs will become even more important after the Death of the Stretch IRA.    Why do I believe this?  In order to explain it, I have to ask you to change your paradigm about the way you perceive money.  And if you can understand the concept I’m about to introduce, you’ll be way ahead of most lawyers, CPAs and financial advisors.

The Roth IRA Advantage: Purchasing Power

Suppose that John and Jim both want to buy a $600,000 vacation home.  Jim has $900,000, and to keep things simple, I’m going to assume that his money is invested in a bank certificate of deposit, where there would be no capital gains generated if he cashed it in.  John has $1,000,000 in his Traditional IRA and, when measured in dollars, he has an advantage because he clearly has more money than Jim.  But John will have to pay tax when he withdraws money from his Traditional IRA, and, in this example, I’m going to assume that John doesn’t have any money outside of his retirement plan to pay the income tax due.  That means he has to withdraw even more from his IRA in order to have $600,000 left to spend on his vacation home.  Well, since the top tax rate is 39.6 percent, John will have to withdraw his entire $1 million IRA because he’ll owe the IRS almost $400,000.  Jim’s vacation home cost him $600,000 because he didn’t have to worry about taxes, but John’s vacation home actually cost him closer to $1 million.  So even though Jim didn’t have as much money as John, he had the advantage over him.  He had more purchasing power than John because he already paid the income tax that was due on the money he used to buy the house.

That is the way that I would like you to think about your money – not in terms of the amount of dollars you have, but how much purchasing power you have.  If you can understand the advantages of purchasing power, you will have the key to unlocking the secret of the Roth IRA treasure.

The Breakeven Point for Roth IRA Conversions

Some professionals insist that there is no advantage to an older investor doing a Roth IRA conversion.  This is because they think of the conversion in terms of dollars rather than purchasing power – which means that an older investor may not have a long enough life expectancy to recoup the income taxes he prepaid.  Well, that is like comparing apples to oranges.  I believe that the breakeven point of a Roth IRA conversion happens on Day 1, and here’s why.     Suppose Jim and John both own Traditional IRA s worth $100,000 plus $25,000 in after-tax accounts.  If John cashes in his Traditional IRA he will have $100,000 to spend, but he has to use the $25,000 to pay the income tax due on the withdrawal.  Jim, on the other hand, does a Roth IRA conversion.  He converts his $100,000 to a Roth IRA and, yes, he also uses his $25,000 to pay income tax.   On the day he makes the conversion, he has $100,000 – the same amount of money, and the same amount of purchasing power, as John.  This means that the breakeven point of a Roth IRA conversion is the day of the conversion. The most significant difference happens in the future.  For the rest of his life, all of the gains that Jim earns in his Roth IRA account will be tax free.  And even if John just reinvests his $100,000 in a regular brokerage account, all of the future gains that are earned in the account will be taxable.

Roth IRAs can be a great idea for older investors.  If you compare apples to apples and measure your purchasing power, rather than your money, the breakeven point for a Roth IRA conversion will happen on Day 1.  And better yet, the tax-free feature of your Roth IRA can offer an excellent defense against the Death of the Stretch IRA.

Stop back soon for more Roth IRA talk!

-Jim

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

 

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

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

Roth IRA Conversions and the Death of the Stretch IRA

Learn About Roth IRA Conversions & the Death of the Stretch IRA in this Video Blog Post

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

You’ve been hearing a lot from me about the Death of the Stretch IRA, and so might be happy to hear that the next couple of posts I do will concentrate on Roth IRAs and Roth IRA conversions.  Is this because I want you to start thinking about your income tax planning for 2017?  Not really – it’s because a series of Roth IRA conversions can, for some people, be the best defense against the Death of the Stretch IRA.

The Most Important Financial Fact About Retirement

If you’re new to my blog, though, I want to take a moment and emphasize what I believe is one of the most important facts that retirees should know about their finances.  So here it is.  Above all, you should understand that a positive financial outlook in retirement involves far more than just the rate of return you earn on your portfolio.

Surprised?  One of my favorite illustrations that demonstrates this involves two hypothetical couples who are the exact same age, have the exact same amount of money when they retire and who invest their money exactly the same way.  Everything about these two couples is exactly the same, except for one thing.  One couple uses the optimal strategies when applying for Social Security and makes a series of Roth IRA conversions, but the other couple doesn’t.  The illustration shows the scope of difference between the couple’s financial outlook during retirement.  The couple who understood the most important financial fact about retirement invested in the exact same assets that the other couple did – so they did not earn a higher rate of return.  But because they used the optimal strategies for Social Security and Roth IRA conversions, their retirement savings outlived them both and they passed a sizable estate on to their children.  The other couple, unfortunately, went broke during their lifetimes.

Understanding the most important financial fact about retirement – that a secure retirement can depend on far more than just the rate of return you earn – can make a huge difference in your financial security.

The Benefits of Roth IRA Conversions

We’ve talked about how Social Security can give you a hedge against the Death of the Stretch IRA, so now let’s look at how Roth IRA conversions might benefit you.

What is a Roth IRA conversion?  The simplest way to explain it is with an analogy.   Suppose you are a farmer, and the IRS gives you a choice.  You can deduct the cost of your seed and pay tax on your entire harvest, or you can forgo the deduction for your seed and reap your entire harvest tax-free.   The second option shows the benefit of the Roth IRA.  Would you rather deduct the contribution to your retirement plan and pay tax on withdrawals, or forgo the deduction so that you don’t have to pay tax on withdrawals?

In order to make a Roth IRA conversion, you have to enlist the assistance of the custodian who handles your traditional IRA.  They transfer all or part of your traditional IRA to a Roth IRA and file some paperwork with the IRS.  The paperwork tells the IRS that you owe them tax on the amount you converted, and that all of the money you earn in your new Roth IRA will be tax free.  Some individuals are critical of Roth IRA conversions because you pay taxes before you’re legally required to.  That’s very true.  But even though nobody wants to give the IRS a helping hand, is there a benefit to prepaying the tax bill that will eventually be due on your traditional retirement plan?  Let’s review the Roth IRA rules.

You know that Roth IRAs grow tax-free for the rest of your life.  But did you know that they also grow tax-free for the rest of your spouse’s life, and under existing law, your children’s lives too?  For those of you who aren’t all that motivated to leave your children in the best possible position because you think they should be happy with whatever you leave them, there’s another feature to the Roth that can provide an enormous benefit just for you.    The Roth IRA rules specify that there is no Required Minimum Distribution (RMD) for the original owner or surviving spouse, as there is with a Traditional IRA.  This benefit alone can provide you with enormous flexibility and control over your tax picture, especially after you turn 70 ½.  Your children will be required to take RMD’s from any IRA that they inherit from you, whether it is a Roth or Traditional account.  The difference is that the withdrawals from the Roth are tax free.  That is beauty of the Roth IRA for your non-spousal heirs.

If you are concerned about your heirs, the tax-free benefit of the Roth will make all the difference after the Death of the Stretch IRA.  This is because the Death of the Stretch IRA will accelerate the RMDs that your non-spousal heirs must take from the IRAs they inherit from you.  The entire account must be withdrawn from the IRA within five years.  And if you have a large IRA – $1 million or more – your children will have to take very large withdrawals.  These withdrawals can potentially throw your children into a much higher tax bracket during those years, unless you had the foresight to convert your traditional retirement plans to a Roth.

We’ll talk more about Roth conversions next week.  Stop back soon!

-Jim

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

 

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

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

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

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

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

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

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

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

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

Roth IRA Conversions Early in 2016 Present Potential Advantages

Let’s face it. The stock market has declined a lot in the past few months.

Many people wonder if they should move to cash and do nothing with their investments. While we do not recommend trying to time the future moves in the stock market, the reality is that it is better to buy low and let it grow more in the future. This is especially true for Roth IRA conversions which result in long-term advantages when the account grows after the conversion. So maybe the time to convert is now.

Lange Roth IRA Money Nest Egg

But, what if the market continues to decline after you convert? One good thing about the current tax law is that you can undo a 2016 conversion as late as April 15, 2017 and perhaps even to October 15, 2017. This gives you a long time, over a year, to see if it grows. If it really dives after you convert, you can even do another conversion at a lower price and undo the first conversion later. The technical term for the undoing of a conversion is a recharacterization, because the Roth IRA is recharacterized as a traditional IRA by moving it back to the original or a different traditional IRA account. Converting early in the year is often recommended as it gives the account more time to grow before a decision must be made on a potential recharacterization.

We have written many articles about Roth IRAs and Roth conversions and included discussions of the extensive advantages they provide. We discuss conversions in our book Retire Secure! and we have written an entire book on Roth IRAs called The Roth Revolution. Both of these books can be purchased on Amazon, but we would be happy to send you a copy for free. To receive a free copy, call us at 412-521-2732, or email admin@paytaxeslater.com and ask for one. Just reference this newsletter offer! These articles and discussions go into much deeper detail on the many strategic ways to do Roth conversions to your advantage, depending on your current situation.

The Roth conversion amount will add to your taxable income, so there are many tax traps to consider when deciding how much to convert, such as …

  • Higher tax rates and related tax surcharges and phaseouts of deductions first implemented for 2013 could result in extra tax if you convert too much.
  • For people who are covered by Medicare parts B and/or D, and pay Medicare premiums, converting too much in 2016 can raise the Medicare premiums in 2018.
  • Also, for medium- or lower-income people who get Social Security income, a conversion can make more of the Social Security subject to tax and also can turn tax-free long-term capital gains and qualified dividends into taxable amounts.

However, paying extra tax can sometimes be worth it in the long run if the Roth IRA account grows a lot after the conversion. These are just some of the things that should be considered in determining the best conversion amount.

Other considerations include the current and future financial and income tax situations of you and your beneficiaries. As we move further into an election year, the possibility of tax law changes looms ahead. Since future tax laws can affect the long-term success of a conversion early in 2016, they should also be considered.

Due to all these considerations and more, we stress the importance of “running the numbers” to be certain that the decisions you are making about Roth IRA conversions are absolutely right for your situation. In general, we like Roth IRA conversions for taxpayers who can make a conversion and stay in the same tax bracket they are currently in, and have the funds to pay for the Roth conversion from outside of the IRA. It is best to run the numbers to determine the most appropriate time and amount for your situation. This is a service that we have provided for hundreds of clients and currently offer free for our assets under management clients. We like to do these number running sessions with the clients in the room. This allows them the opportunity to bring up questions, adjust the scenarios, and feel extremely comfortable with the final decisions.

We usually find many people hesitant to make any changes in their investments when they decline in value. However, you should not pass up the opportunity to do a Roth conversion in a troubled market, as it could provide you and your family more financial security in the long run. Because of the many things to be considered when doing a Roth conversion, we suggest you discuss how much to convert in 2016 with your qualified advisor.

If you are interested about learning about whether a Roth IRA conversion is right for you, please click here and fill out our pre-qualification form. If you qualify, we will contact you to schedule an appointment with either James Lange or one of his tax experts.

Unfortunately, this Free Second Opinion is for qualified Western Pennsylvania residents only.

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4 Reasons Why We’re Excited that Retire Secure! is Interactive on the Web!

If you haven’t made your way to www.langeretirementbook.com yet, now is the time!

Here at the Lange Financial Group, LLC, we are very excited to bring you an interactive version of Retire Secure! A Guide to Getting the Most Out of What You’ve Got.

Reason #1 – The entire book is on this website. Yes, all 420 pages of the book, including the front and back covers, all about the best strategies for retirement and estate planning.

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Reason #2 – The book is divided into chapters for ease of reading. Meaning, you don’t have to flip through 400-some pages to get to Chapter 11 – The Best Ways to Transfer Wealth and Cut Taxes for the Next Generation.

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Reason #3 – We honestly haven’t seen anything like this before. Granted, I’ve read magazines on viewers where you can flip the pages as you read. But not a website for a book that includes a viewer, as well as a forum where readers can engage with each other.

The comments are moderated by the Lange Financial Group, LLC staff and myself. One of us will reply to your comment as soon as we can. To leave a comment, all you need to do is connect with your Amazon, Facebook, or LinkedIn account. This measure is for your protection, as well as ours. We don’t want spammers posting comments or incorrect information about such an important topic.

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Reason #4 – We are hoping this interactive website encourages you to purchase the book! Retire Secure! is available from Amazon and JamesLange.com. Once you’ve read the book, feel free to return to LangeRetirementBook.com to ask questions, as well as Amazon and Goodreads to review the book for the benefit of others.

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Disclaimers: Who on Earth Would Refuse to Accept an Inheritance?

inheritance stretch ira james lange the roth revolution blogWho on Earth Would Refuse to Accept an Inheritance?

Plenty of people!

The concept of disclaiming, which means that you refuse to accept an inheritance, is often surprisingly difficult for clients to accept. Who on earth would refuse to accept an inheritance? When I get this question, I have to laugh because the obvious assumption is that the beneficiary is turning away a rare opportunity to increase his or her wealth with little or no effort. So let’s look at a hypothetical situation. Suppose your rich uncle wrote his will twenty years before he died, and the will provided that, at his death, you would inherit a small apartment building that he owned. In the twenty years since his will was written, though, your uncle’s health declined and he did no maintenance at all on the building. The angry tenants moved out long ago, and the building has been vacant for ten years. Vandals broke the windows and stripped the building of its plumbing and wiring. The city has condemned it because it is a nuisance, and the owner is going to have to pay to have it demolished. Do you still want your inheritance now?

Beneficiaries always have the right to disclaim (or refuse) all or part of an inheritance. This idea has traditionally been a cornerstone when planning for the multi-generational benefits of a Stretch IRA. Under the current law, if the named beneficiary chooses to disclaim an IRA or retirement plan, the contingent beneficiary is able to use his or her own life expectancy to determine the Required Minimum Distribution from that account. In a case where a surviving spouse disclaims to children, this allows the IRA to be “stretched”, allowing maximum growth as well as income tax savings.

If the Stretch IRA is eventually eliminated, disclaimers will likely play less of a role in estate settlements. There is, however, a rapidly growing group of attorneys (including me) who use and will continue to use at least some form of disclaimer in the estate plans of most clients. I have used them in my practice for years, and have found that they can give families a lot of flexibility during what is usually a very stressful time.

One final note about disclaimers: beneficiaries who are on Medicaid may be disqualified from their benefits if they receive an inheritance. They may be able to refuse the inheritance and keep those benefits, but this depends on the laws of the state that they live in and the terms of the grantors will.

These ideas are presented in Chapter 14.

My next post will continue to expand on the concept of the Stretch IRA, but will specifically address the ramifications of choosing one beneficiary over another. Stop back soon!

Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

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