Tax Cuts and Jobs Act of 2017: Ten Huge Take-Aways

Ten Huge Take-Aways from the Tax Cuts and Jobs Act by Jim Lange

 

Ten Huge Take-Aways from the Tax Cuts and Jobs Act of 2017

by James Lange, CPA/Attorney

 

The first thing to consider about the proposed Tax Cuts and Jobs Act is that it is just a proposed tax bill.  It is possible it will face stiff resistance in the Senate and possibly get no votes from the Republicans.  Jeff Flake, John McCain, Bob Corker, and Lisa Murkowski might be on that list of Republican “no” votes. So, like health care it is possible, and even likely, that nothing will happen this year and maybe not in the foreseeable future.

Depending on your personal circumstances, the Tax Cuts and Jobs Act of 2017 could be good or bad for your family.  Critical factors like how many children you have, whether you live in a high-tax state and itemize your deductions or take the standard deduction, whether you own a home or are looking to buy one could sway you from benefiting from these changes or suffering from them.

In fact, there are so many variables to consider that it is difficult to make a blanket statement that the proposal will offer you tax relief.  Corporate America is a clear winner. Reducing the corporate tax rate from 35 to 20 percent, Speaker Paul Ryan argues, will create more jobs and drive up wages.  But critics, even Republican critics, say it is not a given that companies will pass their savings on to workers vs. shareholders through higher dividends.

However, the bill as it stands now is far from becoming law.  Ultimately, the Senate will introduce more changes and what we will end up with and whether it will pass are still great unknowns.  But, going forward it will still be helpful to understand some of the main provisions the bill advances so you can begin to assess the impact on you and your family.

Champions and underdogs in the Tax Cuts & Jobs Act of 2017:

  1. This doesn’t appear to be an overall tax-cut for the middle class, as promised. What we see in this bill is a tax cut for some, and a tax hike for others.  As usual, it all depends on how much you make, how you earn your living, where you live, the mortgage on your home, your property taxes, student loans, etc.  The Tax Policy Center commented that the bill wasn’t really tax reform but rather it was more of a complicated tax cut.  We have compared differences for different hypothetical clients and the results were less dramatic than we thought.  In one case, the elimination of the alternative minimum tax was helpful, but the dis-allowance of state and local income taxes netted out to a tax increase for one client.
  2. The bill reduces the number of tax brackets from seven to four. Currently the brackets are 10-15-20-28-33-35-39.6%.  Under the new provisions there will be a zero bracket (in the form of an enhanced standard deduction according to the bill), and from there the brackets will be 12-25-35-36.9%.  Here is how they break down:
2017 Single Filer 2017 Married Filing Jointly 2017 Head of Household
$0- $9,325 – 10% $0-18,650 – 10% $0- $13,350 – 10%
$9,326- $37,950 – 15% $18,651- $75,900 – 15% $13,351- $50,800 – 15%
$37,951- $91,900 – 25% $75,901- $153,100 – 25% $50,801- $131,200 – 25%
$91,901- $191,650 – 28% $153,101- $233,350 – 28% $131,201- $212,500 – 28%
$191,651- $416,700 – 33% $233,351- $416,700 – 33% $212,501- $416,700 – 33%
$416,701-$418,400 – 35% $416,701- $470,700 – 35% $416,701- $444,550 – 35%
$418,401 + – 39.6% $470,701+ – 39.6% $444,551 + – 39.6%

 

Proposed Single Filer Proposed Married Filing Jointly Proposed Head of Household
$0-$44,999 – 12% $0-$89,999 – 12% $0-$67,499 – 12%
$45,000-$199,999 – 25% $90,000-$259,999 – 25% $67,500-$229,999 – 25%
$200,000-$499,999 – 35% $260,000-$999,999 – 35% $230,000-$499,999 – 35%
$500,000+ – 39.6% $1,000,000+ – 39.6% $500,000+ – 39.6%

Additionally, the bill would eliminate the alternative minimum tax (AMT), a second tax calculation for people earning about $130,000 which reduces the impact of many tax breaks.

  1. The bill doubles the current standard deduction, giving $12,000 to single filers, $24,000 for married filing jointly, and $18,000 for heads of household.
  1. But before you get too excited about a larger deduction, they’ve decided to repeal the personal exemption—currently $4,050 per person—and the deductions for state and local taxes. So, it isn’t as much of a break as you think it is.
  1. They are taking away one of our favorite, and edgiest strategies. No more recharacterization of Roth IRAs. If you’ve heard me talk about Roth IRAs, you’ve probably heard me mention recharacterization.  The ability to recharacterize, basically undo the Roth conversion, adds enormous flexibility in our Roth IRA conversion planning.  This will mean that the days of do-it-yourself Roth IRA conversion calculations will be highly risky.  Having a professional you can trust, who knows the system in and out, and who has the experience to get it right will become incredibly important.
  1. Taxpayers with a net worth of $10 million or more (and their children) have a reason to cheer as the plan almost doubles the current federal estate tax exemption from $5,490,000 to $10,000,000 per individual, with spouses exempt from any limits. The Joint Committee on Taxation has commented that this provision, while being a boon for business owners and wealthier Americans will reduce the federal revenue by around $172 billion over 2018-2027.  Oh, yeah…and after 2023, the estate tax will be repealed all together.  Compensating for that loss of revenue is a huge stumbling block for the proposed tax reform.  Though hard to confirm, rumor has it that originally they were going to eliminate the estate tax entirely but put this provision in to secure the support of Alaska.
  1. While the bill does simplify many areas, it also complicates many areas. It is not a major tax simplification.  I do not fear that our CPA firm will lose business because clients will find it so easy to complete their tax returns.
  1. While corporations and businesses will see a reduced corporate tax rate—from 35% to 20% – it will come with a price¾a much more involved and complicated filing process. New anti-abuse rules, complicated multi-national corporation rules, new tax treatments on interest, and changes in international income rules will make navigating your business tax return much more difficult.  Shareholders of pass through entities, like Subchapter S corporations will get a big break, but the complications for claiming that break are considerable.
  1. The Act is silent on the Death of the Stretch IRA. We still aren’t sure if and when this will happen.  It is very possible that they are holding it in reserve to for future negotiations pertaining to reducing the deficit.  The tax cuts in this bill will massively reduce federal revenue.  We’re talking in the trillions of dollars here.  To get any version of this to pass, it is very likely that the GOP will have to come up with ways to offset some of the deficit.  Killing the ability to stretch IRAs and retirement plans for generations is one way to do that.
  1. Even the Republican’s admit that this bill will increase the deficit by $1.5 trillion dollars over the next ten years, and that is a huge issue. Critics on both sides see increasing the deficit as unacceptable.  Further, the Tax Policy Center and other tax policy commentators on both sides of the aisle think that this estimate is too low or too high, and many do not believe that this bill will provide the economic growth or tax-relief promised to the middle class.

If you want to read an excellent 82-page summary of the bill, check out The Fiscal Times online:

http://www.thefiscaltimes.com/2017/11/02/Read-House-GOPs-Tax-Bill-or-Summary-Key-Points

If you are looking for more of a brief overview summary, these are excellent resources:

https://taxfoundation.org/details-tax-cuts-jobs-act/

http://www.taxpolicycenter.org/taxvox/house-gop-tax-bill-mostly-business-tax-cut-will-create-new-winners-and-losers

As I mentioned above, this bill is simply the first iteration of what the final bill might look like, and it isn’t clear that anything in it is going to become law.  But it bears some scrutiny since some of the main points are likely to provoke debates.  We will continue to watch as the process evolves.  We might even have to interrupt our series on Lange’s Cascading Beneficiary Plan once again!  If that happens, I hope you will bear with us.  But unless there is major news, we will see you next week as we continue exploring the advantages of the LCBP

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

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

 

How Does the Exclusion Amount to the Death of the Stretch IRA Legislation Work?

The Proposed Exclusion Amount to the Death of the Stretch IRA Complicates Planning.

The Exclusions for the Death of the Stretch IRA

This post is the eighth in a series about the Death of the Stretch IRA.  If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the preceding posts related this one.  Those posts spell out the details of the proposed legislation that will cost your family a lot of money.  This post discusses the proposed exclusion amount to the Death of the Stretch IRA legislation and explains how it will be applied to each IRA owner.

When I wrote my book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, I accurately predicted most of what the Senate Finance Committee is proposing to make law.  The one point that I did not predict, though, was that each IRA owner would be permitted to exclude a portion of their retirement plans from the Death of the Stretch IRA legislation.  I don’t know if it was the Committee’s attempt to make the legislation seem not as bad as it is, but it certainly makes things more complicated for individuals who are trying to design an effective estate plan.  So I want to explain how the exclusion amount works.

The Exclusion Amount Applies to All Retirement Accounts

The whole idea behind the exclusion is that a certain portion of your IRAs and retirement plans would be protected from the Death of the Stretch IRA legislation.  Most people would think, “That’s great!  I’m going to apply my exclusion to my Roth IRA so that my beneficiaries can continue to enjoy the tax-free growth for the rest of their lifetimes.”  Well, that’s not how the exclusion amount works.  It has to be prorated between all of your retirement accounts.  Let’s say that you die with $2 million in retirement plans – $1.5 million in your 401(k), $400,000 in a Roth IRA, and $100,000 in a Traditional IRA.  Here’s how the exclusion amount would work.  Your 401(k) accounts are 75 percent of your retirement plans, so 75 percent of the exclusion amount (or $337,500) of that would apply to that account.  Your Roth IRA accounts are 20 percent, so  20 percent of the exclusion amount (or $90,000) would apply to that account.  Your Traditional IRA accounts are 5 percent of your retirement plans, so 5 percent of the exclusion amount (or $22,500) would apply to it.  The bottom line is that the exclusion amount has to be applied to all of your retirement accounts, both Traditional and Roth.

The Exclusion Amount Applies to All Non-Exempt Beneficiaries

I’m going to emphasize one subtle but very important point about the Death of the Stretch IRA and your beneficiaries.  The legislation did provide that some beneficiaries are completely exempt from the new tax rules.  For most of you, the most important exempt beneficiary is your spouse.  You can leave $10 million in retirement plans to your spouse (although I’d prefer that you’d add disclaimer provisions for your children!), and he/she can still stretch them over the rest of his/her life.  Disabled and chronically ill beneficiaries are exempt, as are minor children.   Charities and charitable trusts are also considered exempt beneficiaries.  Now that you know who is considered an exempt beneficiary, I want to talk about the beneficiaries who aren’t exempt.  For most of you, it’s your adult children.  If you have adult children who aren’t disabled or chronically ill, and you name them as beneficiaries on your retirement plans, the exclusion also has to be prorated between them.  You may have preferred to leave the amount that was excluded from your Roth account – in the above example, $90,000 – to the child who would receive the most tax benefit from it, but that’s not how the exclusion amount works.  If you have two children and they are named as equal beneficiaries, then each will receive (and can continue to stretch) 50 percent of the excluded amount– or $45,000.  Both children would also receive $155,000 from the Roth that can’t be stretched, and the account would have to be withdrawn within five years.  Granted, qualified withdrawals from Roth accounts aren’t taxed, but the greater cost is that the bulk of their Roth inheritance will no longer be permitted to grow tax-free.

Planning Opportunities Created by the Exclusion Amount

Oddly enough, there are certain planning opportunities created by the exclusion amount that is proposed in the Death of the Stretch IRA legislation.  If you have a beneficiary who is exempt, then you should remember how the exclusion works.  Suppose that you die with retirement plans that are worth $500,000 and you left 10 percent (or $50,000) to charity and the remainder to your child.  In that case, none of your retirement plans would be subject to the Death of the Stretch IRA rules.  That’s because the charity is an exempt beneficiary, so the $50,000 it received is exempt from the rules.  And the remaining $450,000 that went to your child is within the permitted exclusion amount, so her inheritance can be stretched over her lifetime.

I predict that the proposed exclusion amount will create headaches for financial advisors across the country.  Just imagine the chaos!  Where your beneficiary might have inherited one IRA, now they’ll inherit two – and each will be subject to a different set of rules.  How can they call this “simplified”?

Please stop back soon for my next post on this important legislation!

-Jim

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

 

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

likely to pass?

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

What is the likelihood that the Death of the Stretch IRA legislation will pass?

Why is The Death of the Stretch IRA Legislation Likely to Pass by James Lange

This post is the seventh in a series about the Death of the Stretch IRA. If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the preceding posts related this one. Those posts spell out the details of the proposed legislation that will cost your family a lot of money. This post discusses the reasons I believe it is very likely that this legislation will pass.

To be fair, my critics point out that this idea has been brought up many times before, but hasn’t yet passed. I can’t argue with them on that point. Senate Finance Committee Chairman Max Baucus was the first major proponent of the idea, proposing the elimination of the Stretch IRA as part of the Highway Investment Job Creation and Economic Growth Act of 2012. The American Bar Association followed suit in 2013, recommending their elimination as part of a tax simplification proposal to the Senate and House tax-writing committees. And President Obama was very much behind the idea, including it in every one of his budget proposals since 2013. Even though it’s been proposed over and over again, it’s never passed. So why am I saying it is likely to pass, and soon?

The Politics of the Death of the Stretch IRA

When the idea was first proposed to the Senate by Max Baucus in 2012, it was defeated by an uncomfortably close margin of only 51-49. That vote, interestingly, was mostly along political party lines. President Obama presented the idea in every one of his budget proposals since 2013, but couldn’t get it past a House of Representatives that was controlled by the Republican Party. But on September 21, 2016, the Senate Committee on Finance voted 26-0 to effectively kill the Stretch IRA. And what was especially interesting about that vote was that it had unanimous bipartisan support.

So why isn’t it the law now? Well, think back to what it was going on in the fall of 2016. The nation was locked in a tumultuous political battle over who would be our next President, and Congress was busy dealing with allegations of malfeasance by both candidates. And before we knew it, the election came and went, and then the 114th United States Congress quietly adjourned without ever having time to consider the Finance Committee’s recommendation.

Is the Stretch IRA safe?

Does this mean, then, that the possibility of the Death of the Stretch IRA is overblown? I don’t think so, and here’s why. With the exception of Senators Schumer and Coats, all of the veteran members Finance Committee of the 114th Congress received the same Committee assignment after the election last fall. That means that 24 out of the 26 individuals who voted to recommend this legislation to the 114th session of Congress are in a position to make the same recommendation to the new Congress. And do you really believe that, considering the current political climate, it’s likely that they’re going to change their minds?

Trump and the Death of the Stretch IRA

What about the fact that we’ve got a new (and very rich) President? Won’t he protect his own ass(ets) by fighting the Death of the Stretch IRA? With the exception of an Executive Order, the President doesn’t create laws. He signs (or vetoes) legislation that has been voted on by Congress. However, President Trump has made several campaign promises that, if he has any hope of making good on them, will require a lot of money. The nation is already dangerously in debt, so borrowing to finance them could mean political suicide for him. However, the President has also promised to simplify the nation’s overly complicated tax code. It seems quite possible to me that, in exchange for getting Congress’ support on a major tax reform issue, he might have to compromise and allow the Death of the Stretch IRA legislation to be a part of the overhaul. It’s all in the art of the deal!

Please stop back soon for my next post on this important legislation!

Jim

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

 

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

 

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.

 

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

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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.

 

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

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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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Donations to Charity: Is There Still a Tax Benefit if I Donate?

donations-to-charity-james-lange-the-roth-revolution-blogImagine 100 years in to the future: Two people are playing a word association game. One player gives the clue, “Bill Gates.” Today, you’d probably say, “The founder of Microsoft,” right? Well, I’m going to go out on a limb and suggest that, 100 years from now, Microsoft’s importance will have faded because of ever-evolving technology and many people will not recognize the company name, much less know who its founder was. However, I’m confident that Bill Gates will still be a household name. Why? It is because Bill and his wife Melinda have donated, and continue to donate, the vast majority of their immense wealth to charity. The impact of their generosity is astonishing. Thanks to their largesse, it is possible – maybe even likely – that diseases such as malaria will be eradicated within our lifetimes. Certainly, their philanthropy will save millions of lives, and improve the lives of virtually everyone on the planet. My own charitable gifting is nowhere near the scale of Bill and Melinda’s, but, even so, I can see how my donations benefit others. And it makes me happy to think that I can make someone else’s life better, even in my own small way.

The American Taxpayer Relief Act of 2012 reinstated a phase-out of itemized deductions for high income taxpayers. For those individuals, it meant that they were unable to receive the full benefit of their charitable contributions on their tax returns, and they were very unhappy. A few taxpayers didn’t care. I have a client who donates an unusually significant amount of her annual income to charity every year, and who steadfastly refused to give me a list of the donations so that I could deduct them on her tax return. She felt that it was morally wrong for her to receive any benefit from them. It was an admirable position, to be sure, but then I pointed out that the government does not do a very good job of dealing with social problems in this country. I told her that I believe that the reason charities don’t have to pay taxes is because they do a much more efficient job of distributing money and services to the needy than our government does. Under those circumstances, it seemed wasteful to me to not deduct the donations. She listened to me, and the following year presented me with hundreds of donation receipts, which I deducted on her return. She received a significant tax refund, which she promptly used to donate even more to charity!

If donating to charity is important to you, you may find it worthwhile to review the ideas discussed in Chapter 18. Many readers will be surprised to learn that there are strategies available that can give them far more bang for their charitable buck than they may have thought possible. Charitable gifting does not necessarily have to come at the expense of family members either, and in some instances it may even benefit them! Your distant dreams of establishing a scholarship fund, building a bicycle trail, or providing ongoing medical care to people in need are more achievable than you may realize. The secret is to take advantage of all of the gifting strategies that are available to you.

See you 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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