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