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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Will New Inherited IRA Rules Wipe Out your Retirement Savings?

The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA BookAs election time nears, we’re being bombarded with the usual campaign promises from both sides: “Vote for me, and I will fix the country’s financial problems!” Sound familiar? Well, I listen to campaign promises with a cynical ear. Being a financial guy, I’m the one who always looks at the numbers to figure out how they’re planning to pay for all of these grand plans! So I wanted to let my readers know that there is a proposal in the works that just might allow these politicians to pay for all of these things that they promise us. There has been legislation has been written that, if passed, will funnel billions of dollars in revenue into the government coffers. It doesn’t create fair trade agreements or increase taxes on the wealthy. What it does do is accelerate the income tax on your previously untaxed IRAs and retirement accounts! And if this proposed legislation is passed, the cost to your beneficiaries could be devastating.

I am so concerned about the proposed change to the Inherited IRA rules that I have written a new book called “The Ultimate Retirement and Estate Plan for Your Million Dollar IRA.” The book discusses the government’s plan in detail and shows you why it will be so costly for your beneficiaries. Better yet, it offers solutions that you can implement if the proposed legislation is passed.

The book will be available through Amazon on Monday, November 28, 2016, and I encourage you to reserve a copy now by clicking here. I will be posting some general details on my blog about the proposed new inherited IRA rules, but you need to read the book to understand the scope of the problem.
Please stop back soon!

Jim

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Four Ways Women Can Improve Their Outlook in Retirement

Women and Retirement Lange Financial Group Pittsburgh PA

Recent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are.

Recent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are. Approximately 8 percent of adults aged 65 and older must rely on food stamps to survive and, of those, two-thirds are women. Why is there such a financial inequity between men and women in their golden years?

In years past, women typically earned much less than men (fortunately, this has started to change). Because they earned less than men, women were not able to save as much for retirement. Federal law establishes the maximum percentages that workers can contribute to retirement plans. Assuming that two workers both contribute the maximum percentage to their retirement plans, a male worker who earns $60,000 will save more dollars than a female worker who earns $40,000. Women must also make what they can save last longer. According to the Social Security Administration, the life expectancy of a man who is 65 today is 84.3. The life expectancy of a female, who is 65 today, is 86.6—a difference of almost two and one-half years.

Many women who are now retired are not as educated about finances as women of subsequent generations. They let their husbands manage the money, and frequently are unintended victims of poor decisions made by their spouses. This is especially true when considering both defined benefit pensions and Social Security elections. Retirees generally have the choice of applying for a higher benefit that lasts for their own lifetime, or a reduced benefit that is paid over the course of both their and their surviving spouse’s lifetimes. Many insist on applying for the higher benefit under the premise that they need a higher income to live on. If they are the first to die, though, their spouses are cut off completely. Many of the primary wage earners also make bad decisions when applying for Social Security benefits, never considering how their actions will affect their spouses. The decisions they make can mean a difference of about $25,000 in Social Security income every year, for their surviving spouses.

The good news is that, even if you are retired now, there are steps that you can take to improve your outlook in retirement. Consider some of these options:

1. If you are saving for retirement, take advantage of qualified retirement plans such as 401(k)s, 403(b)s, and IRAs. These plans offer tax advantages that, in the long run, will provide you with a much larger nest egg in retirement than buying identical investments inside a non-retirement account. Make sure that you manage the money that you do save, well. Many women are afraid to invest their money in anything other than CD’s, and never consider that the low rates of return they offer may cause them to run out of money before they run out of time.

2. If your spouse is entitled to a defined benefit pension when he retires, or if he will receive payments from an annuity, make sure that he chooses the payment option that covers your life as well as his own – especially if you are younger than he is. If he chooses the option that covers only his life, the payments will stop when he dies. If you can’t afford to live on the reduced benefit amount that covers both of your lives, then you can’t afford to stop working.

3. If your spouse earned more money than you did, ask him to think twice about applying for Social Security benefits at age 62. If he does, his benefit will be reduced by 25 percent for the rest of his life. Your spousal benefit, as well as your survivor benefit if he predeceases you, will also be permanently reduced. If it’s possible, encourage your spouse to wait until age 70 to apply for benefits. If he does, his benefit will be increased by 32 percent. If you survive him, the benefit you receive after his death will also be significantly higher.

4. Many women are not educated about financial and tax strategies they can use to make their money last longer. Consider making a series of Roth IRA conversions during the years after you retire, but before you start taking withdrawals or Required Minimum Distributions from your retirement plans. The money you save in a Roth IRA is not taxable, and so lasts longer than money that is in a traditional retirement plan.

It is important to remember that there is no one-size-fits-all answer to this problem. In order to make sure that you are financially secure, it is imperative that you contact a financial professional that you can trust and discuss these points in detail. A good fee-based advisor will be able to guide you through the best possible choices for pensions, Social Security, investment planning, and retirement expenses.

For more information about the financial challenges affecting women in retirement, please listen to our radio show at “Women Don’t Ask: How Married Women Can Advocate for their Own Financial Protection

 

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Annuities: Good or Bad?

Annuities, Retirement Planning, Pittsburgh Pennsylvania, James LangeThe Center for Disease Control annually publishes a document called the National Vital Statistics Report. This report estimates the life expectancy of men and women in the United States. At birth, the life expectancy for a male is 76.7 years and, for a female, 81.4 years. What is interesting about the report, however, is that it shows that, the longer you do live, the more your life expectancy increases. If you’ve already made it to age 65 and are male, you are likely to continue to live until age 83. If you’re a 65-year old female, you can be expected to live until age 85.5. If you’re a male and you’ve already made it to age 80, you can expect to live until age 88.3; an 80-year old female can expect to live until age 89.7. When your life expectancy continues to increase, how can you possibly make sure that the money you’ve saved for retirement lasts for your entire life?

Financial professionals are sharply divided on the topic of annuities. Some love them, and some hate them.  My goal in the Third Edition of Retire Secure! is to point out the advantages and disadvantages of annuities, and let you make up your own mind as to whether they would be good or bad for your own retirement. There are many different kinds of annuities, but most can be used to provide a guaranteed lifetime income for both you and your spouse. This can provide peace of mind to individuals who are concerned that the Social Security system might go bankrupt after they retire and are no longer able to earn income. As of June 2014, employees are permitted to buy a specific type of annuity called a qualified longevity annuity contract (or QLAC) within their retirement plan. While you can’t avoid taking Required Minimum Distributions completely, this type of annuity allows owners to defer retirement distributions until age 85. This means that owners would receive the maximum pension benefit possible for the rest of their lives. Once distributions are started, the owner receives a guaranteed income for the rest of his or her life. Being able to exempt a portion of retirement income from minimum required distributions from age 70 ½ to age 85 can be a powerful estate planning tool, however, there are rules you have to follow. Those rules are covered in Chapter 8.

Annuities are also playing a growing role in estate planning for adult children. Many retirees have adult children who have been financially devastated because they were not adequately prepared for the cost of sending their own children to college. Others simply live beyond their means and believe that balancing their budget means robbing Peter to pay Paul. For some, the unexpected loss of a steady income from a job can spell financial disaster. Chapter 8 contains some tips on how you can use annuities to put your spendthrift children on a budget or, if necessary, even protect them from their creditors.   In some cases, annuities can offer the means to provide your children with the highest possible degree of financial security.

Check back soon for a tip on how to avoid a common and expensive mistake when taking distributions from a retirement plan that includes company stock!

– Jim

Jim Lange 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.

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Required Minimum Distributions: The Government Wants Their Money!

Required Minimum Distributions, The Government Wants Their Money, James Lange - The Roth Revolution BlogOver the years, I’ve met with many clients who have managed to accumulate small fortunes over the course of their working careers – even though their incomes were never even high enough to put them in the top two or three tax brackets. I call these clients my “savers.” These individuals seem to share one trait – mainly that they simply don’t feel the need to spend money if they don’t have to. Instead, they set the money aside for the times when they absolutely must spend and, more often than not, they spend far less than what they could.

It’s these clients who seem to suffer the greatest shock when they turn 70 ½ and are required to start withdrawing money from their qualified retirement plans. They object, “But I don’t need the money! I just want to leave it sit there in case I need it some day!” And I have to tell them that it doesn’t matter if they need the money or not. The money that they squirreled away in their retirement plans for a rainy day has grown all these years without being taxed, and now the government wants their tax money!

There’s no avoiding the Required Minimum Distribution rules on traditional retirement plans. Failure to take a distribution when required, in fact, will cost you a penaly tax of 50% on the amount not withdrawn. Individuals who hate the RMD rules and have a spiteful streak might enjoy an interesting (and legal) tip presented in Chapter 5 that allows them to take advantage of the withholdings on the distribution to wait until the very last minute to pay the IRS their due, while also avoiding a late payment penalty. They can also learn of a possible way to completely avoid tax on their Required Minimum Distributions – and also a general increase in their tax bracket – by sending their RMD direct to a charity. I encourage everyone, though, to read Chapter 5 so that you have a good understanding of the RMD rules. Later chapters address proposed legislative changes to the rules that may not strike you as being significant, and unless you have a good understanding of how they currently work.

My next post will talk about rolling your old retirement plan to an IRA. There have been a lot of changes in the laws about this, so I hope you will stop back to get a summary of what you can expect.

Happy Reading!

Jim

Jim Lange 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.

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Our Debut Show was a Big Success!

Thanks again to Ed Slott, ‘America’s IRA Expert,’ for taking the time to join us for the premiere of our radio show “The Lange Money Hour: Where Smart Money Talks” which aired on March 25th. Ed was a great guest and Jim and Ed ended up covering a lot of excellent tax-saving strategies. If you missed it, be sure to check out the audio that’s posted on retiresecure.com.

In their first appearance together, Jim and Ed explored how seniors can exploit the new law suspending required minimum distributions for 2009, Roth IRA conversion strategies for 2010, how to protect your IRA by using life insurance, planning for after-tax dollars inside a retirement plan after retirement and how to pick a good financial advisor. They even chatted about Bill Mazeroski and his 1960 ninth-inning, World Series-winning, home run against the New York Yankees (believe it or not, it’s a baseball analogy that relates to IRA investors today.) Come to think of it, it’s amazing that they were able to cover all of that in just one hour!

By the way, Ed Slott’s latest book Stay Rich For Life: Growing and Protecting Your Money in These Turbulent Times comes with a companion workbook that is very helpful. Jim was actually using it during the show!

Exciting news for the next show which is scheduled to air on Wednesday, April 8th from 7-8 p.m. ET on KQV 1410am. One of our Lange team members has agreed to join Jim to talk about taxes. Steve Kohman is a CPA, Certified Specialist in Estate Planning, Certified Valuation Analyst and a Resident Insurance Provider. He’s also an incredible “numbers-runner” – crunching the numbers to determine the best plan of action for you.

One week from the tax deadline, Jim and Steve will explain why it’s not too late to do something about your 2008 return. They’re happy to take your questions, so feel free to call the studio line at 412-333-9385.

Catch Jim and Steve on Wednesday, April 8th from 7-8 p.m. ET with a rebroadcast on Sunday, April 12th from 9-10 a.m. ET. Thanks to everyone who’s been listening around the country online at kqv.com. We’ve recently had listeners check in from Florida, Michigan, New Jersey, Ohio and Texas – we love hearing from you!

Keep listening!

Don’t forget that the audio to all of these shows is always posted on retiresecure.com.