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

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

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

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

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

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

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

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

Are you paying to much to invest your money?

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

Please stop back soon!

Jim

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

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

Can a Charitable Remainder Unitrust Protect Your Heirs From the New IRA Tax Rules James Lange

This post is the fourth 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 three posts, How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?, Are There Any Exceptions to the Death of the Stretch IRA Legislation?, & Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA? immediately before this one.  Those posts spell out the details of the proposed legislation that will cost your family a lot of money.  If you’re familiar with the specifics of the legislation, then please read on, because I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA.

What is the best way to protect my IRA, once this Stretch IRA legislation is passed?

Many people have asked me, “What is the best way to protect my IRA, once this legislation is passed?  Well, the Senate Finance Committee did say that some people could be excluded from the new tax rules – my post of February 28th discusses them – so let’s look at how they might figure into your game plan.

I firmly believe in providing the surviving spouse with as much protection as possible, so I usually recommend that you name your spouse as your primary beneficiary and give him the right to disclaim your IRA to someone else.  If your spouse needs the money, that’s great.  He is excluded from the legislation, so he can still “stretch” your IRA after your death.

But suppose you have no spouse, or that your surviving spouse will not need your IRA because he has sufficient assets of his own?  In that case, your IRA will likely go to your child or children.  And the problem with that is that children are not excluded from these new rules unless they are disabled or chronically ill.   So here is one possible solution that can protect your children from the harsh new tax structure.

Let’s assume that you have an IRA that is worth $1.45 million, and that your beneficiary is your child.  Under the proposed new rules, your child can exclude $450,000 of your IRA and stretch it over the remainder of her life.  The remaining $1 million, though, will be subject to the new rules and will have to be withdrawn from the IRA within five years.  Even if she tries to spread the withdrawals out over five years to minimize the tax bite, she’ll still have to include about $200,000 in her income every year.   Depending on her income from other sources, that will probably push her up into a higher tax bracket.  The current maximum tax rate is 39.6 percent, so it’s possible that your child would have to pay $400,000 in federal income taxes – even more, if the state you live in taxes IRA distributions.

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA?

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA, and protect your child from these taxes?  If you look at my post on February 28th, you’ll see that charities and charitable trusts are excluded from the five-year rule! And while the CRUT has to comply with certain IRS rules regarding how and when money can be withdrawn, the IRA that is inside the trust is not subject to tax UNTIL you take withdrawals from it.  So if your child receives the minimum possible from the trust every year, it is possible that he can avoid much of the income tax acceleration that will happen once this legislation is passed.

Will your child have more money over the long term with the income from the $1 million that goes into the trust, or if he has to follow the new IRA rules and has to withdraw your IRA and pay taxes within five years, leaving him with an after-tax amount of about $600,000?  I’ll answer like a lawyer – it depends.   One of the very real problems with a charitable trust is that, once the beneficiary dies, any money that is left over goes directly to the charity.  So if your child dies after receiving just one distribution from the trust, the charity will end up receiving more money from your IRA than your family will.  There are some possible ways to manage this risk, though, such as taking out a term insurance policy on the life of your child.  So if he does die prematurely, the proceeds of the life insurance can replace the money that will go to the charity.

For some people, a CRUT can be a bad idea.  There is a cost to draft the legal documents, but that cost is nothing compared to the cost of maintaining the CRUT over the long term.  The Trustee must file a tax return for the CRUT to show the IRS how much has been paid to the beneficiary.  The CRUT’s tax return produces a form that has to be included with the beneficiary’s tax return, just like a W-2 or 1099, and the extra paperwork means a higher tax preparation fee for the beneficiary every year.  My rule of thumb is that it’s not worth the money or headaches to establish a CRUT and name it as your beneficiary if your IRA balance is below $1 million.

I encourage you to watch this short video to learn more about the pros and cons of Charitable Remainder Unitrusts, and how they can be used to help shield your retirement savings from the Death of the Stretch IRA legislation.  However, do not take action and establish a CRUT until the final legislation has passed.  If you are using Lange’s Cascading Beneficiary Plan, the current Stretch IRA rules will produce a far more favorable result than the trust.

Please stop back soon,
Jim

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

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

What does your required minimum distribution look like now and after the Stretch IRA is no more?

The Nitty Gritty Details of the Stretch IRA James Lange

Those of you who have read by books know that I am a believer in paying taxes later, rather than paying taxes now. Even if you do your best to stick to that game plan, though, you will eventually have to withdraw money from your IRAs and qualified retirement plans because the IRS wants their tax money. This post goes into the nitty gritty details of how those required minimum distributions are calculated, and how you can use the current rules to your advantage.

How do the required minimum distribution rules affect you?

As of this writing, you’re required to begin taking distributions from your IRAs by April 1st of the year following the year that you turn 70½. The IRS won’t let you decide how much you want to take out. In their Publication 590, they spell out the rules, provide factors that you have to use, and let you know how much it will cost you in penalties if you don’t do the math right. There are three tables that they have created that contain the factors you have to use. The most popular is Table III, which is for unmarried individuals and married individuals whose spouses are not more than 10 years younger. Table II is for IRA owners who have spouses who are 10 or more years younger, and Table I is for beneficiaries of IRAs. The factors in those tables are based on an average life expectancy and have nothing to do with your own health and life expectancy. So when you turn 70 ½, you have to look up the factor that you must use, divide it into your IRA balance as of December 31st, and that will give you the required minimum distribution you must take by April 1st.

These required minimum distributions can cause huge problems for retired people because they can increase your tax bracket, cause more of your Social Security to be taxed, and even make your Medicare premiums go up. And while you can’t generally avoid them while you’re living (unless you continue to work), you can use the rules to your advantage to minimize the tax bite that your surviving spouse and children will have to pay. Under the current rules, your children are allowed to take only the required minimum distributions from your IRA after your death. The good news is that, since they have a longer life expectancy, their required minimum distributions will be lower. Keeping more money inside the tax shelter of the IRA for a longer period of time is what the Stretch IRA is all about.

If you’ve always been the kind of person who enjoys numbers, then you may find this short video interesting. It walks you through required minimum distribution calculations for your own IRA or retirement plan, as well as the calculations your beneficiaries will use after your death. It also discusses the tax implications of those distributions. The Senate Finance Committee, though, has voted 26-0 to eliminate the Stretch IRA for most beneficiaries. When it is enacted into law, your children will have to withdraw your IRA and pay tax on it within five years. Even your Roth IRAs aren’t safe – your children will have to withdraw the entire Roth account within five years of your death. And even though withdrawals from Roth accounts aren’t taxable, the greater loss is that the future growth on your IRA money will no longer be tax-free.

This is big news, and I want to make sure that you stay informed about the latest developments. Please stop back soon!

-Jim

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

What Are the Exceptions to the Death of the Stretch IRA Legislation?

Death of the Stretch IRA Who is Excluded From the Five Year Rule James Lange IRA Expert

If you’ve been following my blog, you know that the Senate Finance committee has voted 26 0 to eliminate the Stretch IRA. The idea makes sense – the billions of dollars they’d make in tax revenue would help the new administration pay for promises made on the campaign trail. I believe that it will pass, and so I wanted to spend a little bit of time today and discuss the exceptions to the proposed new Inherited IRA rules.

If there is any good news in this mess that Congress has dumped on us, it is the fact that they have protected your spouse from the new rules affecting Inherited IRAs. So everything that you read in Retire Secure! about taking minimum distributions from your spouse’s retirement plans still holds true. If you die and leave all of your IRA money to your spouse, she can still stretch it over the course of her lifetime. But don’t get too comfortable, because the new rules have a catch. Even though she can still stretch your IRA, it might not be the best idea to leave your spouse all of your money – a concept that is so complicated that I’ll have to devote an entire future post to it.

Some beneficiaries can still benefit from Stretch IRAs

Disabled and chronically ill individuals are excluded from the new rules, as are beneficiaries who are not more than ten years younger than you – such as siblings or an unmarried partner. The privilege isn’t extended to their beneficiaries. Once they die, their own beneficiaries will have to pay taxes according to the new rules. Minors are also excluded from the five year rule, but only while they are minors. Once they reach the age of majority – which varies depending on which state they live in – they have to pay accelerated taxes according to the new rules. This could open up a Pandora’s Box of problems during their college years, because the distributions they’d have to take from the inherited IRA could make them ineligible for any type of financial aid!

Charities and Charitable Remainder Unitrusts (CRUTS) are also excluded from the five year rule. This exception can provide some planning opportunities for the right individuals, but it’s also a topic so complicated that I’m going to devote an entire future blog post to it as well.

Current proposal about Stretch IRAs offers some protection with an exclusion

The other interesting news is that the proposed new rules give each IRA owner a $450,000 exclusion – meaning that their beneficiaries can exclude (and therefore, continue to stretch) a certain portion of the account. Granted, they may change this amount, but as it stands now, you have nothing to worry about if the total IRA balance in your family is less than $450,000. If you have a $1 million IRA, your beneficiaries will be able to stretch $450,000 but will have to pay accelerated taxes on $550,000. The exclusion has to be prorated between all of your retirement accounts – including Roths. And while distributions from Roth accounts aren’t taxable, the greater damage is that your beneficiaries will lose the benefit of the future tax free growth. You can’t even choose which of your beneficiaries gets to use the exclusion – it’s prorated between your beneficiaries!

These new rules for Inherited IRAs will be an administrative headache for all of your beneficiaries. The exceptions to the rules, however, provide planning opportunities that if possible, you should take advantage of while both you and your spouse are alive. I encourage you to watch the short video attached to this post, and stop back soon to learn more about the things you can do now to minimize the effects of this devastating legislation.

Jim

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

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

New Rules for Inherited IRAs and the Death of the Stretch IRA

Death of the Stretch IRA

Now that the dust has settled from the election and President Trump has taken over the reins of the White House, voters are asking the question, “Just how does he plan to pay for his tax cuts?” At the risk of sounding like a broken record, I’m going to ask readers to refer to my latest book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA. In that book, I warned readers about the legislation that proposed the Death of the Stretch IRA and offered solutions that you can implement to minimize its devastating effects.

Shortly after the book went to press, the Senate Finance Committee proved to me that I am on the right track. In September of 2016, in a stunning bipartisan show of support, they voted 26-0 to eliminate the stretch IRA. The Senate, however, adjourned for the year before they could vote on the Finance Committee’s proposal, so the legislation will have to be reintroduced on their 2017 legislative calendar.

What is a stretch IRA?

What is a stretch IRA, and why should you care if it goes by the wayside? The stretch IRA refers to the ability of your heirs to continue the tax-deferred status of your retirement plans long after your death. The current inherited IRA rules permit your beneficiaries to take very small minimum distributions over the course of their lifetimes, allowing more of their inheritance to remain in the protected tax-deferred account for a longer period. The new rules for inherited IRAs, on the other hand, will require that your children and grandchildren remove the money from the account within five years and pay income taxes on the withdrawals. Depending on the size of your IRA and other factors, these harsh new rules could throw your beneficiary into a higher tax bracket. Ultimately, they may even make the difference between your child being financially secure for the rest of their lives, and going broke.

I think that the election of President Trump will spell the end of the stretch IRA as we know it. The idea was introduced every year since as part of Obama’s budget but never had quite enough support to become law. Our new president wants to cut taxes for the majority of Americans and needs to find a way to pay for his plan. Since most people don’t think about taxes unless they’re associated with money they’ve earned themselves, eliminating the stretch IRA could be an easy way for the government to force billions in previously untaxed retirement accounts into their coffers. I believe that the Finance Committee’s proposal will reappear in 2017, but as part of a much larger tax reform bill – which is precisely what our new president has promised. In previous years, a bipartisan and unanimous recommendation by a Senate Committee would almost guarantee passage by Congress, but whether that still holds true after one of the most bitter and contentious elections in history remains to be seen. In any event, I will be offering a series of short video clips over the upcoming months that keep you up to date on the status of the legislation and provide insights as to what a change to the inherited IRA rules will mean to your beneficiaries. Remember, the key to smart planning is not trying to avoid estate tax, but income tax.

Please stop back soon! Jim

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

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