Beyond SSI/SSDI: How to Get the “Chronically Ill” Lifetime IRA Stretch

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Beyond SSI/SSDI: How to Get the “Chronically Ill” Lifetime IRA Stretch

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

Beyond SSI/SSDI: How to Get the “Chronically Ill” Lifetime IRA Stretch

by James Lange, CPA/Attorney

This article has been reprinted with the permission of Forbes.com where Jim is a paid contributor.

A little-known IRA rule may help families preserve lifetime stretch treatment for a loved one who needs substantial supervision, even without SSI or SSDI status.

In my last Forbes.com article, How to Provide for Children Who Fall Between Disabled and Independent, I introduced the basic premise of a little-known pathway that allows families to preserve a lifetime “stretch” on an inherited IRA. This applies to a child, grandchild, or other loved one with a disability or serious medical condition, even when that person does not qualify for Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI). The key is qualifying the beneficiary as an Eligible Designated Beneficiary (EDB) through the “chronically ill” category under IRC §7702B(c)(2), rather than through the more familiar disability route that typically relies on a Social Security Administration (SSA) determination.

Knowing the opportunity exists is only the first step. The natural next question is what pursuing it actually involves. To answer this question, I again turned to Andrew H. Hook, former president of the Special Needs Alliance and one of the country's most experienced practitioners in this area. His firm has successfully navigated the “chronically ill” EDB certification process many times, and what follows draws heavily on his practical guidance.

The Certification: Who Provides It, and What It Must Contain

To be deemed “chronically ill,” an individual must receive formal certification from a licensed health care practitioner. Under the statute, that can be a physician, a registered professional nurse, or a licensed social worker. Generally, the treating physician with the most knowledge of the beneficiary would be the best choice to provide the certification. The certification must reflect the beneficiary's condition as it existed on the date of the account owner's death, and it must be used within a 12-month period after being issued.

Health care practitioners are almost never familiar with this kind of certification. As a result, conversations with a practitioner about these determinations usually involve a meaningful educational component. We recommend sending the treating practitioner a letter explaining the legal standard, describing what the qualifying certification must contain, and providing a sample certification to use as a model. This letter should be drafted with the assistance of an attorney knowledgeable in the area.

Then, ask the practitioner to prepare a draft that will be reviewed by the attorney to make sure it meets the necessary benchmarks and standards.

The IRS final regulations say the certification need not be “overly detailed.” That said, I would err on the side of overexplaining rather than keeping it short. The certification should describe the beneficiary's diagnosis, the nature of the functional limitations, the level of supervision or assistance required, and how those facts support the conclusion that the beneficiary meets the applicable test.

A well-grounded factual narrative not only satisfies the legal standard but also provides a defensible record if the custodian or the IRS ever questions the qualification.

How the Qualifying Tests Play Out in Practice

There are three tests that can establish “chronically ill” status. In Hook's practice, one of them dominates. By far, the substantial supervision test, the cognitive impairment prong, is the most common pathway. This approach focuses on mental capacity and safety rather than the ability to perform tasks.

The beneficiaries who qualify often have conditions such as autism spectrum disorder, traumatic brain injury, intellectual disability, or early-onset dementia. Many of these individuals do not meet the SSA's definition of disability, particularly if they are capable of some form of employment, yet they clearly require substantial supervision to protect their health and safety.

The statute does not require that the beneficiary be incapable of all meaningful activity. A person can hold a job and still qualify. A person can be gainfully employed and still require substantial supervision to protect their health and safety in other areas of daily life. The certification simply has to articulate clearly why supervision is needed and the degree to which the individual depends on others for protection, not merely for convenience or preference.

How is “substantial supervision” interpreted? It is a judgment call, though not an unbounded one. The certifying practitioner applies clinical judgment to the statutory standard, and the strength of the certification comes down to the quality of the factual basis behind it.

The more clearly the practitioner describes the nature of the supervision required, the frequency with which it is needed, and the risks that would arise in its absence, the more defensible the certification becomes.

IRAs and Employer-Sponsored Plans Are Different

One of the most important practical distinctions is between IRAs and employer-sponsored retirement plans, because the process differs depending on which type of account is involved. The rules for employer-sponsored plans are stricter but are not covered in this article. This issue is so important that if you have the option of rolling your retirement plan into an IRA, you should probably do so.

The 2024 IRS rules finalizing the SECURE Act's provisions for inherited retirement accounts, including the “chronically ill” EDB certification process, waived the requirement to submit medical certifications to the IRA custodian. You retain the documentation and provide it only if audited—this addresses privacy and HIPAA issues. This is great news.

That said, in practice, most IRA custodians will have their own documentation requirements. The beneficiary, or the attorney acting on the beneficiary's behalf, should contact the custodian, ask about its specific process, and be prepared to complete whatever forms it requires to set up life expectancy distributions.

Do not assume the regulatory waiver means a custodian will accept verbal instructions to establish the stretch. This issue is so important that you should consider a different custodian if your custodian either won’t provide the certification or will make the process difficult through overly strict documentation requirements.

The “Chronically Ill” Path Is Far Easier Than the SSA Process

The SSA determination process is significantly more time-consuming and difficult. It applies a rigorous definition of disability, requires extensive medical documentation, and often involves lengthy waiting times, initial denials, and appeals. Establishing my own daughter’s eligibility to receive SSDI took hundreds of hours of my wife’s time, not to mention the help of lawyers and health care practitioners.

The “chronically ill” pathway relies on certification from a treating practitioner. When that process is managed properly, with attorney involvement from the outset, a draft certification reviewed before execution, and complete documentation delivered to the custodian per their requirements, the timeline can be substantially compressed.

Creating the Documentation Proving Qualification and Ongoing Requirements

Creating the “chronically ill” exception documentation is like creating documentation for the IRS for income tax purposes. For example, if you deduct mileage for using your car for business, you need to maintain the appropriate documentation, including a mileage log.

Hopefully, the IRS will never question your documentation for qualifying for “chronically ill” designation. If they do, you will have a contemporaneous record helping to prove your position.

You are creating the documentation because your position could be questioned, and this documentation will help you maintain the tax-saving position. If there is one pitfall to avoid, it is submitting a certification to the custodian that lacks a sufficient factual basis.

Don’t underestimate the importance of the task. If you get audited without appropriate documentation for a mileage log and lose, it might cost you several thousand dollars. If the trust or beneficiary gets audited and loses, it could cost hundreds of thousands or more than a million dollars in lost long-term benefits from stretching the inherited IRA.

More bad news. This isn’t a one-and-done deal. Let’s assume you go through this process and have good documentation to support your qualification for the exception. Then, you file a tax return using the inherited stretch IRA distribution schedule and hear nothing from the IRS. You can’t totally relax.

Though the standard for continued documentation isn’t entirely clear, you should update that documentation annually, and at a minimum, include a letter from the appropriate health care provider stating that the condition described in the prior year’s certification has not significantly changed.

It is essential to do a particularly thorough job establishing the certification documentation after the death of the IRA owner and ensuring that there is someone responsible for providing supplemental documentation every year for the life of the beneficiary. Even with all these warnings, the “chronically ill” route is still highly preferable to the SSA route.

Avoiding Costly Mistakes

This is precisely why Hook builds the draft-review step into his process: to catch and correct deficiencies before they become problems that are far harder to fix after the fact. But again, if you think you did a good job with your documentation and the custodian doesn’t accept it, look for a new custodian.

What Families Should Do Now

Because the “chronically ill” condition must be present at the time of the account owner's death, it is critical to maintain a current copy of the beneficiary's medical records and update it regularly. If the account owner dies unexpectedly, a well-maintained record that clearly reflects the beneficiary's ongoing condition and supervision needs will streamline the certification and provide a contemporaneous evidentiary foundation.

The structure that makes the strategy work also has to be in place beforehand. The Special Needs Trust must be properly drafted, and the beneficiary designations need to name the right parties, including the trust as a contingent beneficiary if the plan relies on a disclaimer.

Like any trust that is the beneficiary of an inherited IRA, the language of the trust must meet four specific conditions to qualify for the special lifetime stretch. Failing to meet any one of these four conditions could disqualify the stretch and cost the beneficiary a million dollars or more in lost tax benefits.

The Bottom Line

The “chronically ill” pathway is real; it is workable, and it remains underused. Families with a beneficiary who has a cognitive impairment or other qualifying condition should not assume the ten-year distribution rule is their only option simply because they don’t have SSA EDB status.

That said, this is not a do-it-yourself project. Beneficiary designations, trust drafting, disclaimer provisions, and the certification itself all have to be handled correctly, and a single misstep can undo the entire strategy. The right help generally means a specialized estate planning attorney, and even then, it is still a tedious and time-consuming task for the client.

Qualified counsel can evaluate whether the “chronically ill” pathway is available for a given beneficiary and, if so, manage the certification process in a way that is both legally defensible and administratively efficient. Even so, don’t rely too much on the attorney. You need to understand the process and be an active participant.

For those with a loved one who falls between disabled and independent, that second look could be worth more than a million dollars.

This article draws on the experience of Andrew H. Hook, a Certified Elder Law Attorney, Certified Financial Planner™, and Accredited Estate Planner based in Virginia Beach, Virginia. Andy is a member and former President of the Special Needs Alliance, a Fellow of the American College of Trust and Estate Counsel (ACTEC), a Fellow of the National Academy of Elder Law Attorneys (NAELA), and former editor-in-chief of the NAELA Journal. Andy is Of Counsel to Hook Law Center, P.C.

Can a chronically ill inherited IRA be stretched over the beneficiary’s lifetime?

Who qualifies for a chronically ill inherited IRA?

Does the beneficiary need to qualify for SSI or SSDI?

Who can certify that an inherited IRA beneficiary is chronically ill?

What documentation should families maintain for an inherited IRA?

About James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

How to Provide for Children Who Fall Between Disabled and Independent

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How to Provide for Children Who Fall Between Disabled and Independent.

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

How to Provide for Children Who Fall Between Disabled and Independent

by James Lange, CPA/Attorney

This article has been reprinted with the permission of Forbes.com where Jim is a paid contributor.

If you have a child or grandchild who doesn't qualify for government benefits, but cannot live independently, you might be able to provide for that child better than you imagined.

Families that have a child who qualifies for government benefits, specifically Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), can enjoy life-changing tax breaks by leaving an IRA to the child or special needs trust for the child. Please see my previous Forbes.com article titled How Grandparents Can Best Provide for Their Grandchild with a Disability.

In short, these children fall within an exception of the SECURE Act and are allowed to "stretch" the Inherited IRA over their lifetime. The referenced article showed a projected benefit of over $1 million from redirecting a $500,000 Inherited IRA to my daughter's Special Needs Trust rather than allowing it to pass to my wife outright.

What few people, even disability experts, know is there are millions of IRA beneficiaries who do qualify for the same ability to stretch the Inherited IRA without having to qualify for SSI or SSDI. Parents and grandparents of a child who is "in between" qualifying for SSI or SSDI but not being independent may now be able to change that child's life by taking advantage of the strategy recommended in this article. The key is that the IRA beneficiary must qualify as an Eligible Designated Beneficiary (EDB).

The tax code provides a separate and less widely understood pathway to EDB status for "in between" individuals who the IRS classifies as "chronically ill" that can offer the same potentially life-changing tax benefits for Inherited IRA or retirement plan funds.

An Alternate Path to EDB Status

Under the SECURE Act, most non-spouse beneficiaries must withdraw inherited retirement accounts within ten years. However, certain beneficiaries, classified as EDBs, are permitted to take distributions over their life expectancy, preserving long-term tax deferral.

According to Andrew H. Hook, former president of the Special Needs Alliance and an ACTEC Fellow, "Most families and their advisors have little to no understanding that a beneficiary can qualify as an EDB through the 'chronically ill' category without a formal SSI/SSDI determination of disability." Many advisors default to the SSI/SSDI route because that is the one they know, leaving the "chronically ill" pathway under IRC §7702B(c)(2) largely underused.

The Children and Grandchildren Who Fall "In Between"

Many families have an adult child or grandchild whose situation falls between full independence and still requiring substantial support in daily life. But the child does not exhibit the level of impairment that would qualify for SSI or SSDI. These may include adults or children with:

  • an autism spectrum disorder who holds a job but requires substantial supervision.
  • a traumatic brain injury.
  • a progressive neurological condition.
  • or serious mental illness, among other disabilities.

The "chronically ill" EDB standard uses a different and, in some critical ways, less restrictive standard. There is no Social Security Administration (SSA) involvement required. No lengthy federal administrative process. No initial denial and appeal cycle. It has no earnings test. A person could have income of $100,000 per year and still qualify as "chronically ill" for IRA stretch purposes if they meet the applicable criteria. In addition, to qualify you don't need a letter from a physician (any licensed health care practitioner can certify).

The pathway is faster, less burdensome, and captures a broader population of qualifying individuals, which is precisely why it deserves far more attention than it currently receives.

What Does "Chronically Ill" Mean for EDB Purposes?

Under IRC §7702B(c)(2), an individual is considered "chronically ill" if a licensed health care practitioner (not necessarily a physician) certifies—within the preceding 12-month period—that the individual meets any one of three tests.

  • The individual is unable to perform, without substantial assistance from another person, at least two of the six activities of daily living (eating, bathing, dressing, toileting, transferring, and continence), and the inability is expected to last for an indefinite period. (For EDB purposes, this "indefinite" standard replaces the 90-day standard that appears in the general §7702B(c)(2) definition.)
  • The individual has a level of disability similar to those described above.
  • The individual requires substantial supervision to protect them from threats to health and safety due to severe cognitive impairment.

In our experience, the third test is the most common qualifying pathway. Imagine an adult child on the autism spectrum who functions well enough to hold a part-time job in a supervised setting, but who cannot safely manage their own medical care, finances, or daily living without a structured safety net of supervision. That person would not likely qualify as "disabled" under the Social Security definition. But if a licensed health care practitioner certifies that they require substantial supervision due to cognitive impairment, they could qualify as "chronically ill" and therefore as an EDB entitled to a lifetime stretch of an Inherited IRA.

Note that the certification does not have to come from a physician. Under the statute, any "licensed health care practitioner," which includes registered nurses and licensed social workers, can provide the certification. This is another meaningful distinction from the SSA disability process.

Legally Distinct Standards

It is important to understand that the "disabled" and "chronically ill" categories are legally distinct standards. They are not interchangeable. An individual who qualifies under one may or may not qualify under the other.

As Hook notes, "Families should evaluate both pathways with qualified counsel." But for families who have previously assumed their loved one could not qualify as an EDB because they did not meet the SSA's disability standard, the "chronically ill" category may open a door that appeared to be closed.

How to Provide for Children Who Fall - chart

Why the Financial Impact Can Be Life-Changing

The difference between a ten-year distribution and a lifetime stretch on a $500,000 Inherited IRA can easily exceed $1 million in tax savings, under reasonable assumptions, depending on the beneficiary's age and tax bracket. And because the "chronically ill" definition has no earnings test, this opportunity extends to families who may have never considered disability-related planning.

Families with high-functioning beneficiaries, individuals who hold jobs, live independently in some respects, and have never interacted with the SSA, may nevertheless qualify for one of the most powerful tax preservation strategies available under current law.

To be clear, the tax advantage here is a long-term strategy. The savings build over decades as the Inherited IRA grows tax-deferred. For a detailed illustration of how this can play out, see the Timeline of Projected Benefits graph (shown above) that appeared in my previous Forbes.com article. In that article I describe how redirecting a $500,000 Inherited IRA to a Special Needs Trust is projected to save $1 million in taxes. While the facts of that case involved my daughter, a beneficiary who qualified under the SSDI standard, the underlying tax mechanics are similar.

The Bottom Line

The SECURE Act's ten-year rule reshaped inherited retirement planning for most beneficiaries. But exceptions remain and the "chronically ill" path to EDB status is one.

What's Next: The Certification Process

In my next article, I will walk through the certification process in detail: what the documentation actually looks like, how the process differs for IRAs and employer-sponsored plans, the critical deadlines you need to know, and the proactive steps families should take now to be prepared. If you suspect someone in your family might qualify, that article will give you a clear sense of what pursuing the "chronically ill" EDB designation actually involves and what it takes to do it right.

Attribution

This article draws on the experience of Andrew H. Hook, a Certified Elder Law Attorney, Certified Financial Planner, and Accredited Estate Planner based in Virginia Beach, Virginia. Andy is a former president of the Special Needs Alliance, a Fellow of the American College of Trust and Estate Counsel, and a former editor-in-chief of the NAELA Journal.

Lange Financial Group, LLC • 2200 Murray Avenue • Pittsburgh, PA 15217 • (412) 521-2732

For more relevant content, please see: https://DisabledChildPlanning.com/Free

What is a chronically ill eligible designated beneficiary?

Can my child qualify as a chronically ill eligible designated beneficiary without receiving SSI or SSDI?

Who can certify that someone is a chronically ill eligible designated beneficiary?

What tax benefit does chronically ill eligible designated beneficiary status provide on an inherited IRA?

How does someone meet the chronically ill eligible designated beneficiary standard?

About James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

How Grandparents Can Best Provide for Their Grandchild with a Disability

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How Grandparents Can Best Provide
for Their Grandchild with a Disability

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

I helped implement a tax saving strategy for my recently deceased father-in-law that, given reasonable assumptions, will save our family $1,178,397 in taxes over our daughter’s lifetime. To oversimplify, I redirected what would have been my wife’s $500,000 inherited IRA to our daughter's Special Needs Trust (SNT).

Many grandparents of children with disabilities can take the same tax-cutting steps we did to help protect their grandchild’s long-term financial security and independence.

Please note this strategy could also have significant benefits to grandparents who don’t have a grandchild with a disability. Grandparents with children, who are in a substantially higher tax bracket than their grandchildren, can take similar tax-cutting steps.

If you are skeptical, please note that this strategy was published and attributed to me in The Wall Street Journal on December 22, 2025 in an article by Ashlea Ebeling.

The Common Default

Most grandparents with traditional families name their spouse as the primary beneficiary of their IRA and other retirement plans. Then, typically, they name their children equally as the contingent beneficiaries of their IRAs. That means if their spouse predeceases them, their children inherit the IRAs equally. You may also see the words "per stirpes" on the beneficiary form to indicate that if one of the children predecease their parents, then the share of the predeceased child goes to the child or children of the predeceased child.

The Improvement in the Common Default

I suggest adding flexibility to the documents by including “disclaimers” (see below) and in the case of a grandchild with a disability to allow a child to “disclaim” to a SNT.

Some estate attorneys have been using variations of this disclaimer strategy for more than 30 years. The objective has always been to allow grandparents to set up a flexible estate plan that could direct at least a portion of their IRA to a grandchild or to a trust for one or more grandchildren. Over that time many IRAs were directed or disclaimed to grandchildren, saving hundreds of thousands of dollars or more in taxes.

Disclaimer Planning to a SNT

A disclaimer is a legal way to refuse an inherited IRA (or a portion of an IRA or any other asset) so it passes automatically to the next contingent beneficiary named in the beneficiary designation. You aren’t changing the beneficiary form after death, just allowing a named beneficiary to step aside in favor of a contingent beneficiary. For most traditional families, I often prefer estate plans that have a series of disclaimers built in on several levels.

Specifically in the context of this article, I am recommending you consider giving your child the choice of accepting their share of their inherited IRA or disclaiming it into the SNT for their child.

Why IRAs and Retirement Accounts Are Especially Well-Suited for a SNT

IRAs and retirement accounts are fully taxable when distributed. Under the current law known as the SECURE Act, for deaths after December 31, 2019, subject to exception, inherited IRAs must be distributed and taxed within ten years after the death of the IRA owner. This often results in massive income tax acceleration for grown children who may already be in high-income tax brackets.

However, when an inherited IRA passes directly or via disclaimer to a SNT for a beneficiary with a disability who qualifies as an Eligible Designated Beneficiary (EDB), the beneficiary can "stretch" distributions—deferring taxes—over their actuarial life expectancy. For a child who likely will need lifetime support, this difference can be life changing.

In our family's case, we benefited in two ways. First, we avoided the standard ten-year distribution of the inherited IRA rule that would have forced my wife to pay income taxes on her portion of her dad's IRA over ten years. Instead, our daughter’s trust will enjoy a 50-plus-year “stretch” based on our daughter's life expectancy. In addition, our daughter, who will receive taxable distributions from the trust will be in a lower income tax bracket than my wife and I. Combining both tax benefits with reasonable assumptions*, our daughter will enjoy $1,178,397 in additional savings over her lifetime. (Please see the graph below for a timeline of the projected benefit of the strategy we recommend.)

James Lange How Grandparents Can Best Provide for Their Grandchild with a Disabilty

*Assumptions

  • $500,000 inherited IRA with a 10-year stretch vs. 60-year lifetime stretch
  • 6% rate of return, 3% inflation rate (net rate of return of 3% more than inflation)
  • Parent vs. grandchild annual income = $150,000 vs. $18,000 SSDI (assume all after-tax income is spent by both parent and grandchild except for IRA distributions)
  • Current income tax rates for federal tax purposes
  • 15% tax rate on portfolio income for both parent and grandchild
  • No inheritance, estate, or state income tax are included in the analysis

Note: No information provided should be construed as tax, legal or investment advice. Speak with a qualified professional prior to implementation.

This plan doesn't work nearly as well today if the grandchild doesn't have a disability, however, there is still an opportunity to use trusts to save taxes when the grandchild is not disabled but their tax rate is considerably lower than their parents’.

My strong recommendation for grandparents of a grandchild with a disability is to consider naming a properly drafted SNT as a contingent beneficiary of their IRA or retirement plan. If the grandchild doesn’t have a disability, then consider including disclaimer provisions either to a grandchild directly or a standard minor’s trust to take advantage of the grandchild’s lower tax bracket.

What Our Family Actually Did

I requested my father-in-law add a SNT for the benefit of our daughter who has a disability as the contingent beneficiary of my wife’s share of the inherited IRA. He did that. After he passed, my wife disclaimed her share of his IRA to the SNT.

With or without disclaimers, if you want to benefit a grandchild with a disability, you usually need a SNT. The SNT can offer protection when an outright inheritance to a grandchild with a disability could threaten eligibility for means-tested benefits like Supplemental Security Income (SSI) and Medicaid. In addition, it can unnecessarily cause a massive income tax acceleration.

How to Enhance This Strategy

What is better than long-term income-tax deferred investments? Long-term tax-free investments. If grandpa or grandma converts some of their IRA to a Roth and that Roth can eventually go to a SNT, the SNT will have the same “stretch” distribution pattern as a traditional IRA, but all the qualifying distributions will be tax-free.

My wife and I made a $250,000 Roth conversion in 1998. That Roth, including the growth from the time that we converted it until our death which will hopefully be a 50-year period, will eventually pass to our daughter, who will stretch that inherited Roth IRA over her lifetime. Our family might get over 90 years of tax-free growth on that Roth conversion. That Roth conversion story, which also created a million dollar plus benefit for our daughter, along with other benefits of Roth conversion planning, was published in Forbes magazine in the February 28, 2019 edition.

Warning

Drafting the trusts, implementing the disclaimers, and taking all the necessary steps to achieve the goals of this article is a minefield where one misstep can cause a massive income tax acceleration. Those considering this strategy are advised to work with a qualified estate attorney and advisor to avoid mistakes.

Furthermore, there is no rush to do anything with the inherited IRA immediately after a death. You have nine months to make a disclaimer. Don’t let the executor, the trustee, the beneficiary, or the financial institution where the money is invested do anything until you have all your ducks in a row, that is, when the strategy and the mechanics of what to do are clearly defined. I have seen a lot of wonderful disclaimer opportunities ruined because someone did something they should not have done after death.

The banker we dealt with would have made a deadly mistake that would have killed the “stretch” for our daughter had I not been so diligent to make sure everything was done right.

The Takeaway

If a family includes a grandchild with a disability, naming a SNT as a contingent beneficiary of an IRA either directly or through a disclaimer is one of the highest impact planning moves available. Converting part of that IRA to a Roth is like adding the cherry on top.

Directing IRAs or retirement accounts—or better yet Roth IRAs—to a SNT can easily save families with a $500,000 IRA or more hundreds of thousands of dollars per beneficiary (sometimes well over $1M in taxes) and provide lifetime support for a grandchild with a disability. The evidence is in the track record of families who got it right, including mine.

How can I leave my IRA to a grandchild with a disability without disqualifying them from SSI or Medicaid?

What is a disclaimer in estate planning, and how can it help my family save on taxes?

Can an inherited IRA be stretched over a lifetime if the beneficiary has a disability?

Why are IRAs and retirement accounts especially well-suited for funding a Special Needs Trust (SNT)?

How can Roth IRA conversions benefit a grandchild with a disability?

About James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

Roth IRA vs Traditional IRA: What Makes the Roth Stand Out?

Posted on by in QTIP Trusts, Required Minimum Distributions.

Roth IRA vs Traditional IRA: What Makes the Roth Stand Out?When planning for retirement, one of the most important decisions you will face is choosing between a Roth IRA and a Traditional IRA. While both accounts are designed to help you build long-term savings, the way each is taxed can significantly affect your future growth, retirement income, and overall purchasing power. Understanding how tax-free growth compares to tax-deferred growth is critical, especially as income levels and tax brackets evolve.

I have been analyzing the mathematical advantages of these accounts since their inception. In fact, in 1998, I authored the first peer-reviewed article on Roth IRAs for The Tax Adviser, the flagship publication of the American Institute of Certified Public Accountants (AICPA). Since then, I have continued to refine the methodology used to compare these two options, helping investors determine which strategy—Roth or Traditional—will best maximize their long-term purchasing power based on their unique tax situation.

The analysis below is an excerpt from my book, Retire Secure! for Professors and TIAA Participants. It explores how Roth IRAs and Traditional IRAs perform under different tax scenarios and why, in many cases, a strategic choice between the two offers a lasting advantage for both your retirement and your heirs.

What Makes a Roth IRA So Great When Compared with a Traditional IRA?

The advantages of compounding interest on both tax-deferred investments and on tax-free investments far outweigh paying yearly taxes on the capital gains, dividends, and interest of after-tax investments. As you saw in Chapter 2, you are generally better off putting more money in tax-deferred and tax-free accounts than in less efficient after-tax investments. Remember that with regular after-tax investments, you must pay income taxes on annual dividends, interest, and, if you make a sale, on capital gains.

The Roth is always a much better choice than the nondeductible IRA. You do not get a tax deduction for either, but all the money in the Roth IRA will be tax-free when it is withdrawn. The growth in the nondeductible IRA will be taxable.

Editor's Note: The contribution limits referenced in the analysis below reflect the limits in place at the time this book was written, when the annual Roth IRA contribution limit was $6,000 (with an additional $1,000 catch-up contribution for those age 50 and over). For the current tax year, the IRS has set the annual IRA contribution limit at $7,500, with an additional $1,100 catch-up contribution for those age 50 and over. The detailed analysis and figures below were calculated using the $6,000 contribution amount and have not been recalculated for current limits, but the underlying mathematics of Roth versus Traditional IRA growth, and the conclusions we draw from that analysis, are not affected by the change.

The advantage the Roth IRA holds over a Traditional IRA builds significantly over time because of the increase in the purchasing power of the account. Let’s assume you make a $6,000 Roth IRA contribution (not including the $1,000 catch-up contribution if over age 50). The purchasing power of your Roth IRA will increase by $6,000, and that money will grow income tax-free.

On the other hand, let’s assume you contribute $6,000 to a deductible Traditional IRA and you are in the 24% tax bracket. In that case, you will receive a tax deduction of $6,000 and get a $1,440 tax break (24% × $6,000). This $1,440 in tax savings is not in a tax-free or tax-deferred investment. Even if you resist the temptation to spend your tax savings on a nice vacation and put the money into an investment account instead, you will be taxed each year on realized interest, dividends, and capital gains. This is inefficient investment growth.

The $6,000 of total dollars added to the Traditional IRA offers only $4,560 of purchasing power ($6,000 total dollars less $1,440 that represents your tax savings). The $1,440 of tax savings equates to $1,440 of purchasing power, so the purchasing power for both the Roth IRA and the Traditional IRA are identical in the beginning. However, in future years, the growth on the $6,000 of purchasing power in the Roth IRA is completely tax free. The growth in the Traditional IRA is only tax-deferred, and the $1,440 you invested from your tax savings is taxable every year.

One of the few things in life better than tax-deferred compounding is tax-free compounding.

Traditional IRA, the tax savings you realize from a Traditional IRA contribution are neither tax-free nor tax-deferred. When you make a withdrawal from your Traditional IRA, the distribution is taxable. But when you (or your heirs) make a qualified withdrawal from a Roth IRA, the distribution is income-tax free.

Should I Contribute to a Traditional Deductible IRA or a Roth IRA?

As stated earlier, a Roth versus a nondeductible IRA is a no-brainer: if given the choice, always go for the Roth. But for those individuals with a choice between a Roth IRA (or work retirement plan) and a fully deductible IRA (or work retirement plan), how should you decide? The conclusion is, in most cases, the Roth IRA is superior to the deductible IRA (and nonmatched retirement plan contributions like 401(k)s).

To determine whether a Roth IRA would be better than a Traditional IRA, you must take into account:

  • The value of the tax-free growth of the Roth versus the tax-deferred growth of the Traditional IRA including the future tax effects of withdrawals.
  • The tax deduction you lose by contributing to a Roth IRA rather than to a fully deductible IRA.
  • The growth, net of taxes, on savings from the tax deduction from choosing a deductible Traditional IRA.

In most circumstances, the Roth IRA is significantly more favorable than a Traditional IRA. (A number of years ago, I published an article in The Tax Adviser, a publication of the American Institute of Certified Public Accountants, which offered the mathematical proof that the Roth IRA was often a more favorable investment than a Traditional IRA.) The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and subsequent tax legislation changed tax rates for all brackets and reduced tax rates for dividends and capital gains. After these tax law changes, I incorporated the changes into the analysis of the Roth versus the Traditional IRA. The Roth was still preferable in most situations, although the advantage of the Roth was not quite as great as before JGTRRA. However, our country is currently facing unprecedented financial challenges, and I would not be surprised to see the government intend to reduce our tax rates any time soon. And, if the tax rates on dividends and capital gains, or even the ordinary tax rates increase, the Roth’s advantage will be even greater.

Roth IRA vs Traditional IRA

 

 

Figure 3.5 shows the value to the owner of contributing to a Roth IRA versus a regular deductible IRA measured in purchasing power.

The amounts reflected in the figure show that saving in the Roth IRA is always more favorable than saving in the Traditional IRA, even if the contributions are made for a relatively small number of years. If tax rates become higher in the future, or if a higher rate of return is achieved, the overall Roth IRA advantage will be larger. Given a long-time horizon (such as when monies are passed to succeeding generations), the Roth IRA advantage becomes even bigger. The spending power of these methods at selected times is shown in Figure 3.6 on page 70.

Roth IRA vs Traditional IRA

The very limited (11-year) contribution period and very conservative (6%) rate of return. In short, it demonstrates that, even with minimal contributions, shorter time frames, and very conservative rates of return, the Roth IRA will still provide more purchasing power than a Traditional IRA.

The Effect of Lower Tax Brackets in Retirement

I will usually recommend the Traditional IRA over a Roth IRA if you drop to a lower tax bracket after retiring and have a relatively short investment time horizon. Under these circumstances, the value of a Traditional deductible IRA could exceed the benefits of the Roth IRA. It will be to your advantage to take the high tax deduction for your contribution and then, upon retirement, withdraw that money at the lower tax rate.

For example, if you are in the 24% tax bracket when you are working and make a $6,000 tax-deductible IRA contribution, you save $1,440 in federal income taxes. Then, when you retire, your tax bracket drops to 12%. Let’s assume that the Traditional IRA had no investment growth—an unrealistic assumption for a taxpayer who chooses to invest his IRA in a certificate of deposit which, at the time of writing, paid historically low interest rates. If he makes a withdrawal of $6,000 from the Traditional IRA, he will pay only $720 in tax—for a savings of $720.

Roth IRA vs Traditional IRA

If you drop to a lower tax bracket after retiring and have a short investment time horizon, I usually recommend the Traditional IRA or 403(b) over a Roth IRA or 403(b).

The advantage diminishes over time. So I ran the analysis again, starting with the same assumptions as in the previous example, except that, beginning at age 66, the ordinary income tax bracket is reduced from 24% to 12%.

The spending power of these methods at selected times is shown in Figure 3.7 on the next page. You can see that, under this particular set of circumstances, the Traditional IRA would be more beneficial to you during your lifetime. Note, however, that the Roth offers more spending power from age 100 on. Of course, most people will not survive until 100, but we show the analysis to point out that even facing a reduced tax bracket, the Roth IRA will become more valuable with time—an advantage for your heirs.

Roth IRA vs Traditional IRA

If you anticipate that your retirement tax bracket will always remain lower than your current tax rate and that your IRA will be depleted during your lifetime, I usually recommend that you use a Traditional deductible IRA over the Roth IRA, but that is rarely what I have observed in practice.

Unfortunately, once the RMD rules take effect for tax-deferred IRAs and retirement plans, many individuals find that they are required to withdraw so much money from their IRAs that their tax rate is just as high as their pre-retirement tax rate. And, when their RMDs are added to their Social Security income, some taxpayers find themselves in a higher tax bracket than when they were working. For these people, a Roth IRA contribution is usually preferable to a Traditional IRA.

These numbers demonstrate that even with a significant tax-bracket disadvantage, the Roth IRA can become preferable with a long enough time horizon. Furthermore, when you consider the additional estate planning advantages, the relative worth of the Roth IRA becomes more significant. (Please see Chapter 15 for a more detailed discussion of making a Roth conversion in a higher tax bracket when you will likely be in a lower tax bracket after retirement.)

Roth IRA vs Traditional IRA: Key Takeaways

When evaluating a Roth IRA vs Traditional IRA, the long-term impact of taxes often matters more than the upfront deduction. While Traditional IRAs can provide immediate tax savings, Roth IRAs offer the potential for tax-free growth and tax-free withdrawals, which may significantly increase purchasing power over time. As shown in the analysis above, factors such as future tax rates, investment time horizon, required minimum distributions, and estate planning goals all play a role in determining which account is more advantageous. Understanding these differences is essential when building a retirement strategy designed to last.

Is a Roth IRA or Traditional IRA better for long-term growth?

Are withdrawals taxed differently in a Roth IRA vs Traditional IRA?

Does a Roth IRA eliminate required minimum distributions (RMDs)?

Can I contribute to both a Roth IRA and a Traditional IRA?

How do income limits affect Roth IRA eligibility?

What happens to a Roth IRA or Traditional IRA when passed to heirs?

Does a Roth IRA protect against future tax increases?

Navigating IRA Withdrawals, RMDs, and the 10-Year Rule: Smart Tax Planning Strategies for Retirement

Posted on by in Required Minimum Distributions.

Navigating IRA Withdrawals, RMDs, and the 10-Year Rule Smart Tax Planning Strategies for Retirement James LangeBy Jim Lange

If you're a retiree, or about to become one, you might be sitting on a ticking tax time bomb without even realizing it.

One of the most common mistakes I see among wealthy retirees is to passively assume that the best tax strategy is to leave retirement money untouched for as long as possible. That decision can backfire. Required Minimum Distributions (RMDs), Social Security payments, the SECURE Act’s 10-year distribution rule for Inherited IRAs, increase the risk of unintended bumps into a higher tax bracket. For your heirs, the stakes could be even higher.

In this post, I’m going to walk you through what I consider the most critical strategies for optimizing your IRA, 401(k), and other retirement account withdrawals. With planning you can minimize bracket creep and taxes, and maximize the legacy you leave behind.

Why This Matters More Than Ever

Retirement planning isn’t what it used to be. If you’re like many Baby Boomers, you may have accumulated significant wealth in tax-deferred retirement accounts—exactly the types of accounts that are now under more scrutiny and tighter withdrawal timelines.

  • The SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries. Now, most heirs must drain Inherited IRAs within 10 years.
  • Missed RMDs can result in up to a 25% penalty—something the IRS is now enforcing more strictly.
  • Changes under the SECURE Act 2.0 delay RMDs for some but also complicate planning.
  • For wealthier retirees, large RMDs can push you into higher tax brackets, affect Social Security taxation, and trigger Medicare Part B and D surcharges known as Income-Related Monthly Adjustment Amount (IRMAA).

And many beneficiaries inherit IRAs without fully understanding the tax traps—leaving them exposed to a significant and avoidable tax hit.

So let’s talk about what you can do to avoid these pitfalls.


Smart Strategies for Managing Retirement Account Withdrawals

Understand the Basics: What Are RMDs?

If you have a traditional IRA or employer-supported plan (like a 401(k) or 403(b)), the IRS requires Required Minimum Distributions beginning at age 73 (or age 75 if you were born in 1960 or later, thanks to SECURE Act 2.0).

The amount is based on your account balance as of December 31st of the previous year and your life expectancy, as defined by the IRS’s Uniform Lifetime Table. And here’s the kicker: your RMD is taxable income.

That’s where things get tricky. A $100,000 RMD may push you into a higher marginal tax rate, make more of your Social Security taxable, and even raise your Medicare premiums. It’s not uncommon for retirees to underestimate just how large these RMDs can become if accounts are left to grow unchecked for too long.

Master the 10-Year Rule for Inherited IRAs

Imagine your adult son inherits your $1 million IRA after you have begun taking your RMD. If you are still thinking that he will be able to stretch his withdrawals over his lifetime, you would be wrong. Under the SECURE Act of 2019 and Secure Act 2.0 of 2022, unless he qualifies as an Eligible Designated Beneficiary (e.g., your spouse, disabled child, etc.) your son must take annual RMDs, based on his own life expectancy, over a 10-year period, that must be liquidated. If your son took distributions during that 10-year period based on his life expectancy rather than taking distributions ratably during the 10-year period, he may have a large tax hit upon liquidation of the account in year 10.

Worse, if he fails to withdraw the funds in 10 years, he could face a 25% penalty on any amount not distributed in time.

If you die before your required beginning date for RMDs, and your son inherits the account he is not required to take annual RMDs in the years 1 through 9 of the 10-year period. He can wait until year 10 to withdraw the entire amount or take withdrawals at any time in the 10-year period. But taking our $1 million in year 10 could land him in a very painful tax bracket.

If you plan ahead, you can reduce the tax burden on your heirs—by reducing the IRA’s size before death through Roth conversions or strategic withdrawals. Then, if you die before reaching age 75, there are additional planning opportunities that your children should take.

Time Withdrawals and Roth Conversions Wisely

The years between retirement and when RMDs kick in (age 73 or later) are a golden window for Roth conversions. During this period, you may be in a relatively low tax bracket which is an ideal time to pay taxes on some of your traditional IRA funds and convert them into a Roth IRA.

Each year, you or your planner can run a tax projection to assess the optimal amount to convert. It is significantly more complicated than how much to convert without jumping into a higher marginal tax rate. These proactive conversions reduce the size of future RMDs and leave your heirs with tax-free Roth money instead of taxable IRA money.

Optimize Withdrawals Based on Tax Brackets

Many retirees withdraw too little or too much—beyond their RMD—in any given year. The secret is taking all the factors into account, not just managing withdrawals to fill, but not exceed, your current tax bracket.

For example, if you’re comfortably in the 22% tax bracket, the simple analysis is to convert to the top of the 22% bracket but it is likely that a significantly higher conversion, even at the 24% bracket is optimal. 

Also consider:

  • Using Qualified Charitable Distributions (QCDs) after age 70½ to donate from your IRA directly to charity—thus avoiding tax on the withdrawal.
  • Coordinating Roth conversions with deductions and exemptions in any low-income years—for instance, the year after you retire but before Social Security, pensions, and RMDs kick in.

Plan Around Other Income Sources

Tax planning for IRA withdrawals can’t be done in isolation. Every dollar you take affects your Modified Adjusted Gross Income (MAGI)—and that in turn affects your:

  • Social Security taxability
  • Medicare premiums (IRMAA)
  • Eligibility for other deductions or tax credits

Suppose you're drawing $40,000/year in Social Security, have a modest pension, and withdraw $70,000 from your traditional IRA. That could expose 85% of your Social Security to taxation and push you into higher IRMAA thresholds.

Mapping out anticipated income streams is critical to tax-smart planning.

Common Mistakes That Can Cost You

Let’s walk through some real-world missteps that cost retirees—and their heirs—thousands.

Mistake #1: Waiting Too Long to Start Withdrawals

Raj delayed all IRA withdrawals until RMDs began at age 73. The result? A $120,000 RMD that boosted his income, pushed him into the 32% bracket, triggered higher Medicare premiums. Taking small withdrawals earlier or executing partial Roth conversions could have mitigated this.

Mistake #2: Skipping Roth Conversion Opportunities

Emma, 65, recently retired. With low taxable income, she could have converted $30,000/year to a Roth IRA, locking in a 12% tax rate. She waited too long, and after RMDs started, she was in the 24% bracket—nearly doubling her tax cost.

Mistake #3: “Going It Alone” Without Professional Input

RMDs and inherited IRA rules now involve detailed calculations, tax projections, coordination with Medicare, and more. One oversight can trigger penalties or tens of thousands in taxes. Always consult with a qualified financial advisor or CPA.


Four Examples That Bring It All Together

Let’s review these lessons with relatable scenarios.

Example 1: Linda Manages RMDs Proactively

Linda, 74, continues teaching part-time, earning $20,000. She times her IRA withdrawals to stay just below the 22% tax bracket threshold, uses QCDs to give $10,000 to charity (satisfying part of her RMD), and converts $15,000 to a Roth.

Result? Efficient tax management and a growing Roth legacy for her children. In Linda’s case, if she converted more into Roth, it would put her in the 24% tax bracket and did not pay off, but in other situations, it does.

Example 2: Knowing the Rules for Inherited IRAs

Jake inherits a $500,000 IRA.

  • Withdraws $50,000/year over the 10-year window = steady annual tax impact.

Knowing the rules made all the difference.

Example 3: The Snowballing RMD

Raj grew his IRA to $1.5 million but took no distributions before 73. His first RMD is almost $75,000, and it keeps rising. Not only does he pay higher income taxes, but his Medicare Part B premiums increase drastically due to IRMAA.

Example 4: Early Roth Conversions Work Wonders

Emma, 65, converts $30,000/year for 6 years before RMDs. Her taxable income remains modest, and she avoids future RMDs on that money. Her heirs inherit over $200,000 in Roth funds—tax free.


What You Can Do Next

Build a Multi-Year Tax Roadmap

The most successful withdrawal plans are crafted years in advance. We help clients model out their income and taxes for the next 5–15 years and start planning strategic withdrawals and Roth conversions during low-income windows.

Review and Update Your Beneficiaries

Don’t assume your wishes will be honored unless beneficiary forms are current. Also, consider whether your heirs understand their responsibilities under the 10-year rule. In some cases, naming a trust as a beneficiary could make sense but it must be done carefully.

Consult a Retirement-Focused Professional

Working with a professional who understands the tax implications of IRA withdrawals, the nuances of inherited account rules, and estate planning coordination is absolutely essential. DIY planning carries significant risk at this stage of life.

Leverage Smart Tools and Resources

We encourage readers to:

  • Use the IRS RMD calculator to estimate future withdrawals.
  • Review current tax bracket thresholds and plan accordingly.

Next Steps

Retirement account withdrawals are no longer a simple matter of “wait as long as possible.” Between RMD rules, the SECURE Act’s 10-year requirement for heirs, and Medicare/IRMAA thresholds, poor timing can erode both your income and your legacy.

If you’d like me to help you evaluate whether your withdrawal strategy is on track—and explore whether a more complete financial plan could strengthen your retirement and estate outcomes—the first step is to see if you qualify for a complimentary Retire Secure Consultation.

Learn more at: PayTaxesLater.com/Consult

 FAQS

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How can Roth conversions help my heirs?

Converting portions of a traditional IRA to Roth in relatively low-income years pre-pays tax at known rates. Heirs then inherit Roth assets they can withdraw tax-free (still within 10 years), avoiding a big taxable spike later.

See also: Time Withdrawals and Roth Conversions Wisely
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How do IRA withdrawals affect Social Security and Medicare?

More taxable IRA income can make up to 85% of Social Security benefits taxable and can push you into higher Medicare premium brackets (IRMAA). That’s why bracket-aware withdrawals and conversions matter.

See also: Plan Around Other Income Sources

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Navigating IRA Withdrawals, RMDs, and the 10-Year Rule

What is the SECURE Act’s 10-year rule for Inherited IRAs?

For most non-spouse beneficiaries, an inherited IRA must be fully distributed within 10 years of the original owner’s death, and future RMDs  will be based on the life expectancy of the beneficiary.  Compressing withdrawals into a decade can push heirs into higher tax brackets if they’re in peak earning years.

If a non-spouse beneficiary inherits the IRA before the original owner has begun taking RMDs the beneficiary is not required to take RMDs and could potentially withdraw the full amount in year 10—a potential tax nightmare.

Planning ahead by reducing traditional IRA balances during your lifetime or planning post-retirement withdrawals strategically  can soften the tax impact.

See also: Master the 10-Year Rule for Inherited IRAs

a

Should heirs spread Inherited IRA withdrawals?

Spreading withdrawals across the 10-year window usually reduces bracket “spikes.” Consider increasing withdrawals during lower income tax rate years.

See also: Knowing the Rules for Inherited IRAs

a

What are Qualified Charitable Distributions (QCDs) and why use them?

After age 70½, you can donate up to the annual limit directly from your IRA to charity. QCDs count toward RMDs but don’t increase taxable income—helpful for controlling brackets, Social Security taxation, and IRMAA tiers.

a

What are the first practical steps I should take?

Map a multi-year tax plan, review beneficiaries, test bracket-fill and conversion amounts with projections, and coordinate decisions with your advisor, CPA, and estate attorney.

See also: What You Can Do Next

a

What are the most common mistakes with RMDs and Inherited IRAs?

Waiting too long to start withdrawals, taking an Inherited IRA as a lump sum, skipping Roth conversion windows, or ignoring beneficiary/trust updates. DIY missteps can be costly; periodic reviews help.

See also: Common Mistakes That Can Cost You

a

What does it mean to “fill a tax bracket”?

Each year, consider withdrawing or converting just enough to top off your current tax bracket without spilling into the next one. This keeps lifetime taxes lower and tames future RMDs.

See also: Optimize Withdrawals Based on Tax Brackets

a

When do RMDs start, and why does timing matter?

RMDs generally begin at age 73 (and 75 for some younger cohorts under SECURE 2.0). RMDs are taxable income and can increase your marginal rate, make more of your Social Security taxable, and trigger Medicare IRMAA surcharges. Coordinated withdrawals and Roth conversions can help control these effects.

See also: Understand the Basics: What Are RMDs?

a

When do trusts make sense as IRA beneficiaries?

Trusts can protect minors, special-needs heirs, or spending-risk beneficiaries. Conduit trusts pass out distributions annually; accumulation trusts can retain them but face high trust tax rates. Draft language carefully under post-SECURE Act rules.

Bill Bengen’s New 30-Year Safe Withdrawal Rate: A 17.5% Raise for Retirees

Posted on by in Forbes.com Articles, QTIP Trusts.
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Bill Bengen’s New 30-Year Safe Withdrawal Rate: A 17.5% Raise for Retirees

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

Bill Bengen’s research on retirement withdrawals has shaped financial planning for decades. He is widely recognized as the originator of the “4% rule,” a guideline that has been referenced in countless academic papers, financial planning articles, and media discussions about how retirees can safely draw income from their portfolios.

In his latest research, Bill unveils an updated safe withdrawal rate for a traditional 30-year retirement horizon—raising it from 4.0% to 4.7%. This increase effectively represents a 17.5% raise for retirees who follow the framework. The updated guidance is explained in detail in his book A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

This article draws heavily on Bill Bengen’s groundbreaking research and recent updates. Bill was kind enough to review this article, and his insights are incorporated throughout.

The Math Behind the Change from 4.0% to 4.7% — A 17.5% Raise

The increase from 4.0% to 4.7% stems primarily from updated assumptions. In the past, Bill based his calculations on a simple 50/50 portfolio of U.S. stocks and bonds. His new model assumes a well-diversified portfolio consisting of multiple asset classes.

For retirees, the impact can be meaningful. In the first year of retirement, a retiree with $1 million in savings could withdraw $47,000 instead of $40,000. That $7,000 increase represents a 17.5% raise in spending power.

Reminder of How Bill’s Safe Withdrawal Rate Works

The method begins by withdrawing 4.7% from your retirement portfolio during the first year. In each following year, you increase that initial withdrawal amount by the annual inflation rate—regardless of how the market performs.

For example, if you withdraw $47,000 in year one and the portfolio declines to $850,000 by the end of that year while inflation runs at 3%, your year-two withdrawal would still be based on the first-year withdrawal amount. In this case, you would increase the $47,000 by 3%, resulting in a withdrawal of $48,410 in year two.

Why Investment Horizons Matter

Few retirees have a perfectly defined 30-year investment horizon. Some individuals will need retirement income for only a few years, while others may require income for forty or even fifty years.

Bill’s updated research includes a chart showing safe withdrawal rates for investment horizons ranging from 3 to 50 years. The chart, reproduced from page 81 of his book, provides a practical roadmap for retirees who want to match their withdrawal strategy to their own realistic planning horizon rather than relying on a one-size-fits-all rule.

For example, someone with a ten-year investment horizon could safely withdraw about 8.894%, while someone planning for twenty years could withdraw about 5.464%.

Bill Bengen Safe Withdrawal Rate ChartWhat the Chart Reveals and Why it Could Be Life Changing

The chart illustrates withdrawal percentages over a 50-year timeline using the experience of retirees who began retirement on October 1, 1968—the worst retirement start date in recorded U.S. history.

Those retirees experienced both a severe bear market and the high inflation of the 1970s. Even under those historically difficult conditions, the updated withdrawal rates held up. This makes the projections conservative, meaning that most retirees are likely to experience outcomes that are even better.

The Practical Impact for Retirees

Understanding safe withdrawal rates allows retirees to estimate how much they can confidently spend without worrying about running out of money.

Beyond the math, the lifestyle implications can be significant. Safely spending more may allow retirees to travel more frequently, pursue hobbies, or enjoy meaningful experiences with family.

My father-in-law, who is 101 years old, sponsors an annual family vacation for all of his children, spouses, grandchildren, and now great-grandchildren. What a legacy! Experiences like these often provide far greater long-term satisfaction than material purchases.

Alternatively, some retirees may choose to make financial gifts to their children when they need it most rather than leaving everything as an inheritance later. Even if you ultimately decide not to increase your spending, the updated research may at least reduce the fear of outliving your money.

If Leaving a Legacy Is a Goal

If you want to preserve assets for heirs, you can adjust your withdrawal rate accordingly. For example, one projection assumes a starting portfolio of $1,000,000 with a 30-year horizon. By reducing the withdrawal rate from 4.67% to about 4.21%, the model suggests you could leave a legacy of at least $500,000 in today’s dollars.

Caveats and Conclusion

No financial model is immune to risk. A historically unprecedented sequence of poor market returns could disrupt even the most carefully constructed framework. Bill himself acknowledges that other withdrawal methods also exist.

However, his framework remains one of the most widely recognized and extensively studied approaches to retirement spending. After more than thirty years of analysis and testing, it continues to provide a practical foundation for retirement planning.

Whether your planning horizon is 3 years, 30 years, or 50 years, Bill’s updated research offers retirees a valuable roadmap for spending confidently while minimizing the risk of running out of money.

Additional Planning Considerations

While Bill’s research focuses on withdrawal rates, a comprehensive retirement plan should also consider tax planning and estate strategies. The suggestions below are not Bill’s, but mine, and there are many exceptions.

  • Optimize Social Security planning so that the spouse with the stronger earnings record waits until age 70 to collect.
  • Consider the equity in your home by evaluating options such as a HELOC or reverse mortgage.
  • Evaluate the potential role of immediate annuities for retirees with long life expectancies.
  • Consider a series of Roth IRA conversions.
  • Spend after-tax dollars first, then traditional IRAs, and Roth IRAs last.
  • Prepare estate planning documents utilizing Lange’s Cascading Beneficiary Plan℠.

When it comes to determining how much money you can safely withdraw from your retirement portfolio, Bill Bengen’s research remains one of the most influential frameworks available. Applying his insights can help retirees pursue both financial security and a fuller, more enjoyable retirement.

We have also created an online companion calculator available. You can enter your planning horizon and portfolio value to estimate your first-year withdrawal amount. Please keep in mind this does not include taxes.

Is the 4% rule for retirement withdrawals still accurate?

How much can I safely withdraw from my retirement savings each year without running out of money?

How can I calculate my safe withdrawal rate if my retirement will be shorter or longer than 30 years?

Why did Bill Bengen change his 4% rule to 4.7%?

How do I determine my retirement investment horizon?

Can I really spend more in retirement than the 4% rule suggests?

About James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

Homeowners: How to Generate $2,400/Month for Life from Your House

Posted on by in Forbes.com Articles.
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Homeowners: How to Generate $2,400/Month for Life from Your House

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

The Problem

In today’s volatile economic environment, even well-prepared retirees are feeling anxious. Many investors now fear a prolonged downturn in the market and are tempted to reduce their market exposure. But they know that at least historically investors who stay in the market do better. As a result, articles appearing in respected journals are not necessarily recommending wholesale changes to portfolios but are cautioning investors to reduce spending.

I don’t like that advice, especially for homeowners over the age of 62 who want to continue enjoying their retirement without cutting back on meaningful experiences like travel, making lifetime gifts to their children and grandchildren, and sponsoring those treasured multi-generational family vacations. If you fall into that category and own your home outright or have only a modest mortgage remaining, there may be a potentially powerful solution available to you.

A Potential Solution You Probably Have Not Considered

One strategy worth examining is the thoughtful use of your home equity to support your cash flow needs. The equity in your home can be tapped tax-free to create a liquid reserve, provide a steady monthly income stream, or serve as a buffer during periods of market downturn. You can draw on it only when needed, or structure it to provide supplemental income without dipping into your investment portfolio. In essence, it allows you to utilize a portion of your home equity to support current or future spending in retirement.

This idea is not new, and it’s not fringe. Even the most aggressive variation of using the equity in your house for income―a reverse mortgage―is a $1.93 billion dollar market and is expected to expand to $3.2 billion dollars by 2033. In an article I wrote for Forbes.com, Let the Equity of Your Home Pay for Your Roth IRA Conversion, I explored how, in certain circumstances, home equity could be used to fund tax-saving strategies without increasing IRA withdrawals.

At first glance, these ideas might seem counterintuitive, especially to those of us who grew up believing that the ultimate financial milestone was owning your home free and clear. But in many cases, using your home as a financial safety valve may offer more freedom, flexibility, security, and peace of mind than you previously imagined.

Though there are many variations, I will look at a few.

Home Equity Line of Credit (HELOC)

You could take out a home equity line of credit. A HELOC gives you access to tax-free funds if the need arises in the future. If the market goes down and you want to avoid drawing from your portfolio, you can borrow from your HELOC to cover living expenses temporarily. Applying for a HELOC can be a relatively low-cost and noncommittal transaction. Of course, once you draw from it, you must begin making payments. These typically start as interest-only and later include both principal and interest.

Reverse Mortgage

Another strategy, one that often receives more skepticism, is taking out a reverse mortgage. But before we evaluate the pros and cons, let’s start with a couple of real-world examples with identifying details changed to preserve confidentiality.

 

Two Reverse Mortgage Successes

One of my clients got a reverse mortgage that has paid him $2,000/month for over 20 years and he will continue to receive that payment for the rest of his life. That monthly income allows him to stay in the home he loves and fund the lifestyle he enjoys.

Let’s say he lives another 10 years and dies in his home. He will have spent an additional $540,000 during his retirement, and when the house is sold, the loan is satisfied, and the remaining equity will be distributed to his estate. The estate will be smaller, but the income gave him the freedom to enjoy his life and help out his kids while they were younger.

Another client, recently widowed, lived in a high-maintenance condominium that she loved. After her husband’s prolonged expensive illness, her savings were no longer sufficient to cover taxes, insurance, condo fees, and other living expenses. A reverse mortgage allowed her to stay in her home and live comfortably, even if she lives beyond age 100.

Before I go any further, let me be clear: a reverse mortgage is not the right move for everyone. But for some retirees—particularly those seeking additional monthly income or access to liquidity without tapping investment accounts—it might be a powerful tool. At the very least, understanding how reverse mortgages work can provide peace of mind just knowing that a back-up option exists.

So, what might this actually look like? Let’s walk through a couple of realistic examples, using current numbers.

 

Scenario 1: A Couple, Both Age 70, with a $1 Million Paid-Off Home

A married couple, both 70, own their home outright and want to supplement their monthly income by about $2,000 without drawing down their IRA or brokerage accounts.

Here is what a reverse mortgage could provide based on current conditions:

  • Monthly payout: $2,389 for the life of the surviving spouse
  • Alternative option: $375,000 line of credit (LOC)
  • Upfront closing costs: approximately $33,700 (can be financed)
  • LOC growth if unused:
    • Year 5: $522,000
    • Year 10: $726,500
    • Year 15: Just over $1 million

Even if the loan balance grows significantly over time due to compounding interest, any remaining equity after the home is sold belongs to the couple or their estate. And thanks to FHA insurance, if the home sells for less than the loan balance, the estate and heirs are not responsible for the shortfall.

Scenario 2: A Couple, Both Age 80, with a $1 Million Paid-Off Home

At age 80, a couple would qualify for more favorable terms because reverse mortgage payouts increase with age:

  • Monthly payout: $3,356 for the life of the surviving spouse
  • Alternative option: $448,000 LOC
  • Upfront closing costs: roughly $33,700 (can be financed)

As in the earlier scenario, an unused LOC will continue to grow, providing a flexible and inflation-resistant source of funds.

A Note if Your House Isn’t Worth $1 Million

Reverse mortgages aren’t just for million-dollar homes. A fully paid-off home worth $440,000 would support a $1,000 per month payment for life under current assumptions.

What if it Passes the Math Test but Flunks the Stomach Test?

For a financial strategy to “work,” it must pass both the math and the stomach test. Our office “ran the numbers” that supported a great return on home equity solutions, but the wife wasn’t comfortable. They worked and sacrificed for 30 years to get their mortgage paid off. That was the end of the discussion.

What Our CPAs Think

Before uploading this article to Forbes.com, I ran the idea by two of our CPAs. They agreed that the strategy makes sense in the scenarios outlined in this article and saw the potential value of using a reverse mortgage under other appropriate conditions as well. But they also pointed out that $33,700 is a lot to pay upfront—especially if you aren’t sure you’ll ever need or use the funds.

So, their primary caution was that reverse mortgages involve meaningful upfront costs and if the line of credit is never tapped, the benefit may not justify the expense. Fair point! That said, when integrated thoughtfully into a long-term cash flow plan, especially in volatile markets, the strategy can offer real advantages.

Why Pay the Cost if You Don’t Plan to Use it Right Away?

There are several reasons. You are essentially locking in access to a tax-free source of funds that grows over time and does not require repayment as long as you remain in the house. The loan amount or income stream can increase, even if housing prices stagnate. The LOC can serve as an emergency reserve or supplement your income at a time when other buckets (like stocks) are temporarily down. And the closing costs can be financed.

Key Advantages of Reverse Mortgages

  • No monthly payments required
  • Proceeds are not taxable income
  • You retain ownership and enjoyment of living in your home
  • Guaranteed ability to remain in your home for life (provided you pay the property taxes and insurance)
  • Flexibility to access funds via monthly payment, lump sum, or growing LOC

Important Caveats

  • If you expect to move or downsize within five years, the upfront costs will likely outweigh the benefits may not be justified.
  • If your highest priority is leaving the largest possible estate, this may not be the best fit.
  • Not all properties (especially condos) are FHA-approved.
  • The FHA lending limit currently caps eligible home value at $1.2 million in Pennsylvania.
  • You must qualify based on income, credit, and other factors.

Final Thoughts

“Buyers beware”―not all FHA reverse mortgages are the same. As with anything, costs, interest rates, and terms vary widely among lenders. The difference can significantly impact how much you can borrow and how much equity is eventually retained by you or by your heirs. Comparison shopping is essential.

Whether or not you decide to pursue a HELOC or reverse mortgage, knowing that these options are available can increase your financial confidence and reduce the pressure to pull funds from investments at the wrong time.

To help evaluate the potential benefits, I consulted Craig Schweiger, Co-Founder and Partner at Federated Reverse Mortgage. I chose Craig because he and his firm had excellent client reviews and a strong reputation for ethical, client-first advice. Craig provided the quotes and calculations cited in this article and also contributed helpful editorial feedback.

Of course, there are many options and providers of home equity type loans. Craig is just one option. I do not receive any compensation from Craig or any other mortgage broker.

Did I Do It Myself?

I used a variation of utilizing the equity of my home to fund expenses in the past. I refinanced several times and used the proceeds of the loan to not only pay off a prior loan but to finance additional spending. I didn’t do a reverse mortgage, but did enjoy the tax-free proceeds of the mortgages. I still have a balance on the mortgage at a low rate making a reverse mortgage unattractive.

Another reason I didn’t go for a reverse mortgage recently is because our estate planning is shaped by the need to provide long-term support for our daughter with a disability.

Variations of using the equity in your home to finance additional spending takes a variety of forms but often is an effective strategy. Even if you decide not to take action, just knowing that at some point in the future, you could potentially borrow money using the equity of your home gives you additional options.

Special thanks to Erika Hubbard for her assistance with writing this article.

The foregoing content reflects the opinions of Lange Financial Group and is subject to change. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.

Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past.

Can I really generate income for life from my house without selling it?

How much monthly income can I generate from my house?

What are my options for generating income or liquidity from my home equity?

Is a reverse mortgage the only way to generate income for life from your house?

Is a reverse mortgage safe, and will my heirs still inherit anything?

About Your Presenter: James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

Run the Numbers, Then Check Your Gut

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Run the Numbers, Then Check Your Gut

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

There are things in life that are not a matter of opinion. They are a matter of math.

We do not believe that financial decisions, whether they are about Roth IRA conversions, a snowbird lifestyle, or a gifting program for your children and grandchildren, should be based on an inclination or an unexamined “gut feeling.” Financial decisions should be based on a combination of goals and math. That isn’t to say ignore your gut either. Do the math yourself or get professional help and then decide.

If no one “runs the numbers” and you make critical financial decisions based on your gut, you will likely fail to optimize your and your family’s wealth and security.

We believe in using peer-reviewed mathematical principles and adhering to proven academic data-driven planning to enhance your finances. Yes, the results will depend on the assumptions used to make the projections. But you can begin by using assumptions that you think are reasonable, then you can or someone you hire can “run the numbers” using alternate assumptions to test multiple options. The goal of running the numbers is to arrive at the best solution given your personal goals, values, and your individual financial situation.

 

Roth Accounts

I have a reputation for being a strong advocate for Roth IRA conversions for people of all ages. But that generalization doesn’t reflect what I really believe. I like to find the best mathematical solution consistent with a client’s values. It just so happens for most clients, at some point in their lives, the client and their family can benefit considerably from a series of Roth IRA conversions. Running the numbers and doing the math can also help you determine the appropriate timing and the amount of a Roth conversion.

I will be the first to admit that Roth IRA conversions are not beneficial for every person or every situation. But follow the math. If you run the numbers projecting the growth for not only your life expectancy, but also for the life expectancy of your children, you will likely get a better result than your gut might have led you to believe.

 

The Desire to be a Snowbird

Roth conversions are only one example where doing the math can make a major difference. What if you want to rent or buy a second home. Can you afford it? Do the math. Just recently a client who never considered spending several months in Florida every year because he didn’t think he could afford it found out he could easily afford it after doing the math.

 

Using Disclaimers in Beneficiary Designations is Also About Numbers

I also think that doing the math is very important when it comes to estate planning. Disclaimers allow named beneficiaries to “disclaim” a bequest and then that bequest goes to the “next in line.” A common disclaimer option would be to allow the surviving grandparent to disclaim to their children or at least make a partial disclaimer instead of accepting the bequest themselves. Their children, in turn, could then further disclaim into a trust for their children if that made sense financially.

Disclaimers have been a staple of our estate planning recommendations for many years. But the rubber meets the road after a death. The survivor has nine months to think about and assess their financial situation before they decide whether to either keep, disclaim, or partially disclaim a bequest.

Disclaimers can be advantageous if the first named beneficiary doesn’t really need or want all the money left to them. The consequences, if they have never considered a disclaimer strategy, could easily lead to higher taxes. Furthermore, through the use of disclaimers, the secondary beneficiaries (usually your children equally), will likely benefit from the funds (after the first death) while they are younger and perhaps need it more to improve their immediate living circumstances. The impact of a bequest earlier in their lives might be much greater than if they had to wait until the second death to receive any inheritance.

But the entire point of the disclaimer discussion is, we think, using math to inform your decisions. It plays a critical role in deciding whether to or how much or which assets to disclaim. That doesn’t mean you should never follow your gut―just let your gut be led by an informed decision.

 

Minimizing Taxes by Considering the Tax Consequences to the Beneficiary

We also advocate for a strategy we call “who gets what.” Once again math plays a key role. When thinking about a will or bequests to family and charities, most people will seek an outcome that all beneficiaries will accept as fair and in character with the decedent’s character. But what is often forgotten in the quest for fairness and generosity is consideration of the tax implications of those bequests. This argument parallels the logic behind the disclaimer technique mentioned above.

We love employing the calculation strategy of “who gets what.” Yes, it takes a bit more thought and evaluation, and perhaps even requires the help of a financial professional to be thorough, but the benefits to your heirs can be significant.

 

Some Common Examples of Varying Tax Consequences

In most cases, Traditional IRAs, subject to exception, are going to be fully taxable to your heirs. The SECURE Act, that subject to exception, effectively killed the stretch IRA, stipulates that income taxes will be due on your IRA within ten years after your death. But the SECURE Act’s restrictions don’t apply if you leave your IRA to your spouse. After-tax dollars and life insurance proceeds are generally not subject to income taxes. Tax exempt charities don’t pay taxes on any bequest. All these different types of inheritances have different tax implications for your beneficiaries.

 

Who Gets What: Spouse vs. Children

Doing the math might lead you to leave certain assets to certain beneficiaries and/or the survivor might choose to disclaim certain assets. For example, assume you have a large IRA and a large after-tax brokerage account. Assume your spouse doesn’t need all your money. You can plan either outright or by disclaimer to leave the IRA to your spouse (where she can get a bigger stretch than your kids) and the after-tax dollars (or at least some of them) to your children.

 

Who Gets What: Charity vs. Children

On this topic, first, let me focus on the smartest solution for donations or inheritances that are left to charity after you and your spouse pass. The drafting mistake of leaving after-tax money to charity is one of the most common errors we see in wills we have not drafted.

In most cases, Traditional IRAs are going to be fully taxable to your heirs. A 501(c)(3) charity that is recognized by the IRS as being tax-exempt does not care in what form they receive an inheritance. They never have to pay taxes on the money they receive. To them, a dollar is a dollar. So, a charity will look at bequests of Traditional IRAs, Roth IRAs, after-tax dollars, or life insurance in the same light. In sharp contrast, your heirs will face substantially different tax implications depending on the type of asset they receive and their financial circumstances.

So, if you were planning to leave $100,000 of your after-tax dollars to a charity but change the plan and instead leave $100,000 of your Traditional IRA money to that charity, you are in effect leaving your beneficiaries an extra $24,000 all at Uncle Sam’s expense! (That assumes your beneficiaries are in the 24% tax bracket.)

This is a simple tweak to your estate plan that can be very beneficial to your heirs. On a smaller bequest, smaller savings. On a bigger bequest, even larger savings. Again, this isn’t rocket science, just math. But the vast majority of estate planners miss it.

 

Who Gets What: Children in Different Tax Brackets

Many IRA owners have children who can reasonably be predicted to be in significantly different tax brackets. The different income tax brackets of your beneficiaries may create an opportunity for tax savings by simply changing who gets what. For example, imagine you have two adult children, and one child is in the 12% tax bracket and the other in the 32% bracket.

Consider increasing the purchasing power of both of your children after you die and reducing the share going to Uncle Sam by switching who gets what.

Let’s keep it simple and assume you have a $1,000,000 Roth IRA and a $1,400,000 Traditional IRA. The status quo is each of your children will receive 50% of both assets. If you forget growth, each child will get a $500,000 Inherited Roth and a $700,000 Inherited Traditional IRA. The IRS will get $308,000 which represents the taxes both kids will have to pay on the Inherited Traditional IRA. ($700,000 times 12%= $84,000 and $700,000 times 32% = $224,000.)

Let’s assume instead you leave the $1,000,000 Roth IRA to the child in the 32% bracket and the $1,400,000 in your Traditional IRA to the child in the 12% bracket. The IRS would get only $168,000 in taxes. This means your children would get an extra $140,000 worth of purchasing power, which is the difference between the amount paid to the IRS in the two scenarios. Of course, if you include future growth, both from the time you draft your documents to death and the years following, the benefits are even greater.

Did I oversimplify this example and not take into consideration many things that would cause this estimated tax savings to change? Yes. But I wanted to make the point clearly. By doing the math and shifting who gets what, there might be significant tax savings that could benefit both your children.

There will be times when your gut overrules the math. For example, if you don’t have after-tax dollars to pay for a Roth IRA conversion, in many cases the mathematically optimized plan might be to take out a home equity loan and use those proceeds to pay for the conversion. But that option may not sit well with you. That is okay. But, that said, I have had many clients face that situation and though their gut told them not to do the conversion, after seeing the math, they decided to tap into a home equity loan to pay the taxes and make the conversion.

I am not saying you should never do what your gut is telling you. But, if you, or with the help of an appropriate financial professional, run the numbers and do the math at least you will have a lot more information to work with, and chances are you will make better decisions.

 

Disclaimer: Lange Accounting Group, LLC offers guidance on retirement plan distribution strategies, tax reduction, Roth IRA conversions, saving and spending strategies, optimized Social Security strategies, and gifting plans. Although we bring our knowledge and expertise in estate planning to our recommendations, all recommendations are offered in our capacity as CPAs. We will, however, potentially make recommendations that clients could have a licensed estate attorney implement.

Asset location, asset allocation, and low-cost enhanced index funds are provided by the investment firms with whom Lange Financial Group, LLC is affiliated. This would be offered in our role as an investment advisor representative and not as an attorney.

Lange Financial Group, LLC, is a registered investment advisory firm registered with the Commonwealth of Pennsylvania Department of Banking, Harrisburg, PA. In addition, the firm is registered as a registered investment advisory firm in the states of AZ, FL, NY, OH, and VA. Lange Financial Group, LLC may not provide investment advisory services to any residents of states in which the firm does not maintain an investment advisory registration. Past performance is no guarantee of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any strategy will be successful. Indexes are not available for direct investment. If you qualify for a free consultation with Jim and attend a meeting, there are two services he and his firms have the potential to offer you. Lange Accounting Group, LLC could offer a one-time fee-for-service Financial Masterplan. Under the auspices of Lange Financial Group, LLC, you could potentially enter into an assets-under-management arrangement with one of Lange’s joint venture partners.

Please note that if you engage Lange Accounting Group, LLC and/or Lange Financial Group, LLC for either our Financial Masterplan service or our assets-under-management arrangement, there is no attorney/client relationship in this advisory context.

Although Jim will bring his knowledge and expertise in estate planning, it will be conducted in his capacity as a financial planning professional and not as an attorney. This is not a solicitation for legal services.

Can running the numbers help me plan for income for life from your house?

Why do so many retirees miss out on valuable financial opportunities?

Should home equity be part of my overall financial plan?

How does estate planning connect to my home equity strategy?

What if the numbers support a strategy but my gut says no?

About Your Presenter: James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

Dying Rich is a Bad Plan

Posted on by in Forbes.com Articles.
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Dying Rich is a Bad Plan

by James Lange, CPA/Attorney

Reprinted with permission from Forbes.com where Jim is a regular contributor.

One of the most common mistakes financially savvy people make is dying with too much money. They fail to come up with a long-term spending and distribution plan. To some extent, we fall back on familiar patterns. If we have enough money to do what we want to do, and we do not feel as if we are depleting our savings, we do not give sufficient thought to gifting and distribution planning. But we should! 

Without a thoughtful spending and distribution plan, you may accumulate too much money. And after your death, that money won’t all go to your kids. Uncle Sam will take a huge cut—especially after the SECURE Act. Your children, who may be in their sixties (if not older) when you die, will inherit what is left after taxes. 

Furthermore, their inheritance later in life will not be as meaningful as smaller gifts received earlier. I suspect you are giving some monetary gifts to your children and even funding 529 plans for your grandchildren. But it is also likely that your “spending and gifting efforts” are far too conservative. Do not die with the regret that had you spent more and gifted more earlier, that money could have made a huge difference to you, your spouse, and your kids and grandkids as well as your favorite charities. 

Face it. Dying with too much money is a lousy plan for someone as bright and thoughtful as you. 

I am not saying you should spend flagrantly. Hope for the best and prepare for the worst—including a potential long downturn in the market, an expensive illness, or a long period of incapacitation. But so many investors save much more than they will need, even accounting for these and other contingencies. 

A much better plan would be to try to gauge how much you can actually afford to spend and gift—and then start doing it or at least move in the direction of spending and/or gifting more. 

Think about this for a minute. Let's say that somebody gave you or you inherited $100,000 tomorrow. Would it have a significant impact on your life? Or would it just add more to your investments? Would you suddenly decide to eat out more often or go on one more vacation? Not likely. But think of receiving a gift of that amount (adjusted for inflation roughly $50,000) 30 years ago. How would that have changed your life? 

Well, your children might be in that same situation now. 

Parents also frequently underestimate their children’s stress level about money. Adult children don't necessarily want to count on an expectancy (that is the amount that you'll leave them after you die). With an uncertain job market and the expense of raising kids and college tuition, it is very possible that your adult children may be facing significant financial stresses. Wouldn’t it be a good idea to help them now, when they truly need help? 

For example, maybe they could buy a house or move to an area that they cannot afford right now that has good public schools. Or alternatively, they could use some money for private schools or parochial schools. Or maybe they could just use some money for some things that you denied yourself when you were their age. 

Wouldn’t it be a better plan to use some of that money while you are alive so you and your kids can experience additional enjoyment, stress reduction and a better life all around? 

Many parents worry that giving too much money too early may reduce motivation. How early is too early? Is your kid an irresponsible 20-year-old or a responsible 50-year-old with an excellent work ethic and a history of thoughtful saving and spending? You can decide and make decisions based on your good judgment. And you can also make recommendations for how your gift is to be used, such as providing money for Roth IRAs and retirement plan contributions. I am confident you can think of ways that will help your kids no matter their circumstances. 

And literal gifting is not the only option. I have long recommended sponsoring a family vacation annually, if you can manage to corral the extended family, or whenever it is possible. Or, what about just taking a month or two and heading South in the winter without the kids. Yesterday I was speaking to a thoughtful client who would love to do just that and could clearly afford to do that. It wasn’t even on his radar. Another client could afford to spend an extra $10,000/month. He bragged to me that he was going on an expensive vacation in Europe. I asked him if he was traveling business or first class and of course his answer was no. Well, at least I got them thinking about it. 

I am not advocating spending and being generous to the point of putting yourself in financial jeopardy, but with your help, you and your family will have a much better life if you have a good distribution plan. 

There are other ways to spend money too. I often hear, “I have everything I want. What else should I spend money on?” Personally, I’m also a big believer in spending money on personal healthcare. 

I like having the services of a concierge MD, and I suspect you would too. Any time I have a problem, I call or email and get a response, and, if needed, an appointment. I also spend money on supplements and other things that are not covered by health insurance. 

Without my personal trainer, I would not keep on top of my strength training, which is particularly important as we get older. 

I work with a nutritionist who, after getting results of a variety of tests, developed my ideal eating plan. Of course I don’t strictly follow the plan, but I am eating more healthier meals than I ever have―selected with my wellness in mind. I schedule tests not covered by insurance to get helpful information. For example, one test revealed I had dangerously high mercury levels. I paid good money for a treatment plan that was also not covered by insurance, but significantly reduced my mercury readings. To me that was money well spent. 

The bottom line is that you need to look realistically at your finances. Speak with your financial advisor or work out how much you can safely spend. Map out what you might conceivably need for your long-term security, even overestimate what you think you will need. Then think about your kids and the charities you support and come up with a plan to distribute some money in a manner that will have the biggest impact. 

So, please consider these observations. Hopefully, this article will at least get you thinking and gifting more. If you do, I believe you and your family will live a happier life.

Why do so many retirees end up dying with too much money?

What are the risks of not having a retirement spending and gifting plan?

How do I know how much I can afford to spend and gift in retirement?

Will gifting money to my children early reduce their motivation to work?

What are some overlooked ways to put a retirement spending and gifting plan into action?

About Your Presenter: James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.

SECURE 2.0 Helps You Shift From Taxable To Tax-Free Savings— But Your Employer Must Change Retirement Plan Documents To Allow The Option

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SECURE 2.0 Helps You Shift From Taxable To Tax-Free Savings— But Your Employer Must Change Retirement Plan Documents To Allow The Option

by James Lange, CPA/Attorney

Reprinted with permission of Forbes.com where Jim is a paid contributor.

Parents-with-their-kids.webp

SECURE 2.0 improves Roth retirement options, including allowing employer matching contributions direct to a Roth retirement plan and delays Required Minimum Distributions (RMDs) for many.

On December 29, 2022, as part of the omnibus spending bill, President Biden signed into law the SECURE 2.0 Act of 2022 (SECURE 2.0). The law contains significant changes to employer-provided retirement plans and individual retirement plans and has particularly meaningful changes for Roth accounts. I colorfully described the original SECURE Act of 2019 as a stinking pig wrapped in ribbon (primarily due to the death of the stretch IRA), but SECURE 2.0 actually lives up to its name. It provides significant savings enhancements for retirement planning and allows for increased Roth contributions and conversion opportunities including:

  • Match and Nonelective Contributions Can Now Be Roth
  • Roth SIMPLE and SEP IRAs
  • Student Loan Matching Contributions Permitted
  • No More Roth 401(k) RMDs

I have long been a proponent of Roth IRAs and SECURE 2.0 will allow many more Roth saving options, which I will highlight below. As I have written before, the Roth IRA (or work Roth retirement plan) is superior, in most cases, to the deductible IRA (or work traditional retirement plan). And depending on the investment period and your current and future tax brackets, even making the most conservative of assumptions, the Roth IRA will often provide more purchasing power than a traditional deductible IRA. See Figure 3.5 below.

Assumptions for Figure 3.5: Roth IRA Savings vs. Traditional IRA Savings

  • Contributions to a Roth IRA are made in the amount of $7,000 per year, beginning in 2022, for a 55-year-old investor, for 11 years until he reaches age 65.
  • Contributions to a regular deductible IRA are made in the amount of $7,000 per year by a different 55-year-old investor, for 11 years until he reaches age 65. This investor’s IRA contribution creates an income tax deduction for him of 24 percent, or $1,680. I will give the best-case scenario and say that this investor did not spend his tax savings. Instead, he invested his tax savings into his after-tax investment account and did not spend it.
  • The investment rates of return on the Traditional IRA, the Roth IRA and the after-tax investment accounts are all 6 percent per year.
  • For the after-tax monies, the rate of return includes 70 percent capital appreciation, a 15 percent portfolio turnover rate (such that much of the appreciation is not immediately taxed), 15 percent dividends, and 15 percent ordinary interest income.
  • Ordinary income tax rates are 24 percent for all years.
  • Tax rates on realized capital gains are 15 percent.
  • Beginning at age 72, the RMDs from the Traditional IRA are reinvested into the after-tax savings account.
  • The balances reflected in the figures reflect spending power, which is net of an income tax allowance of 24 percent on the remaining Traditional IRA balance. If the full amount was actually withdrawn in one year, however, the tax bracket may be even higher and make the Roth IRA appear more favorable.

Employees and Employers, Take Notice

The first huge change for people who are still working is that employers will now be able to provide employees with the option to receive matching and nonelective contributions to a Roth account for their 401(k)/403(b)/457(b) plans. Under prior law, all employer contributions had to be deposited to a traditional account (pre-tax), not a Roth—employees could choose a Roth account for their contribution, but the employer could not.

This is an optional provision for employers. Employers must change their plan documents to provide this option. Employees won’t have this option immediately unless their employer has changed their plan offerings since the beginning of the year. Employers are not required to provide the options.

One of the purposes of this article is to not only educate employees, but also to encourage all employers, both in the for profit and not for profit worlds, to amend their plans immediately. In most cases, every month employers delay amending their plan, it is hurting their employees. Plan documents without this vital plan amendment will limit valuable options for employees to save for their retirement in the most effective manner. Plus, this additional feature comes at no cost to the employer.

All taxes on Roth contributions will be the employee’s responsibility and the match will be immediately vested. Almost all younger workers should take advantage of this provision and most mid and even some late-career employees should also.

I had the pleasure of interviewing Burton Malkiel earlier this year and he kept stressing the importance of regular Roth contributions, especially for younger workers. Systematic contributions to a retirement plan act like dollar cost averaging and doing it with Roths is usually more effective than with traditional contributions. Again, while this provision is effective for 2023, employees will not have the option if their employer has not updated plan documents and payroll systems.

We are updating our 401(k) at Lange to allow our employees to take advantage of this option, and I hope all employers do the same.

It is understood that if your employer offers matching contributions for your retirement plan, you should contribute at least the amount necessary to receive the full amount that the employer is willing to match. Both under the old law and under the new law, the employee’s contribution can be to a Roth or a traditional account. After you pay the taxes on a Roth matching contribution, it will grow income-tax free with no taxes due when the money is withdrawn. Traditional contributions will be made on a pre-tax basis, and taxes will be owed when the money is withdrawn.

The employer match provides an immediate positive return on your investment and is the easiest way to maximize your retirement savings. It is a win-win scenario.

For employees who want to contribute the most possible, allow me to frame the “Roth versus a traditional contribution” scenarios. Let’s assume the employer has a 50% match policy and the employee contributes $30,000 per year in 2023 ($22,500 maximum plus the $7,500 catch up if age 50 or older).

The employer’s contribution would be $15,000. If the employer’s contribution goes to the traditional portion of the plan, the employee, in effect, receives $10,000 in immediate purchasing power because of the 33% income tax liability when the funds are withdrawn. If the employer’s share goes to the Roth, then the employee is receiving $15,000. The employee will need to pay the tax on the contribution—he can’t deduct the contribution—but in effect, the contribution is $5,000 higher when measured in purchasing power, not including the income-tax free growth on the contribution.

SEPS and SIMPLEs

SECURE 2.0 also expands the opportunity for some employees to save to a Roth account. One such opportunity, starting in 2023, is to allow employee contributions to SIMPLE and SEP IRAs to be Roth and in an analogous manner, employees are also allowed (if offered by the plan) to treat their employer SEP contributions as Roth. I usually prefer a 401(k) plan to a SIMPLE or SEP, but still welcome the change.

Student Loan Match

Starting in 2024, employer’s will be permitted to offer matching contributions for employees who are paying off student loans without additional contributions from the employee. Under these circumstances, the employer match can be based on the qualified employee student loan payments—it will be as if the loan payments were elective deferrals into the plan. Again, it is up to the employer to allow this option, but it would be a huge benefit to help an employee participate in an available employer match who would otherwise not be saving. It is very imaginable that these individuals might feel overwhelmed by the debt and unable to mark additional money to save for retirement. On the other hand, this will cost an employer money if they choose to add this option to their retirement plan.

No RMD for Roth 401(k)s and Roth 403(b)s

Finally, starting in 2024, SECURE 2.0 aligns employer-sponsored Roth plans with Roth IRAs and now the employer plans will also be exempt from the RMD requirements (just as Roth IRAs are) while the participant is alive. This avoids the extra effort and hassle of rolling over a 401(k) or 403(b) to a Roth IRA just to avoid the RMD. The process will be much simpler and not force an employee out of an employer plan who otherwise may want to remain.

Increased Age for RMDs (and Additional Time for Roth Planning)

Currently, the age for RMDs is 72 (before the SECURE Act, the RMD age was 70½). Under SECURE 2.0, the ages for RMDs have changed again:

  • If you were born before 1950, RMDs started at age 70½
  • If you were born in 1950, RMDs start at age 72
  • If you were born between 1951 and 1959, RMDs start at age 73
  • If you were born in 1960 or later, RMDs start at age 75

Note: There is a discrepancy within the bill that needs to be corrected. For those individuals born in 1959, the bill inadvertently reads that they have two ages to begin taking their RMDs: age 74 and 75. The table above reflects how experts perceive the intention of the bill. Stay tuned for a technical amendment in the future. For some, you will now have an extra three (3) years for additional planning considerations, including accelerating more Roth conversions and/or smoothing out Roth conversions over a period of time to lower Income Related Monthly Adjusted Amount (IRMAA) for Medicare charges, net investment income taxes, and possibly, capital gains tax brackets.

The important part about the increased age for RMDs from a Roth conversion standpoint, is obviously there will be a longer window to make lower cost Roth IRA conversions.

In conclusion, employers please update your documents to better serve your employees. For people still working, assuming that Roth accumulations make sense for you, when your employer does offer the Roth option for the employer portion, strongly consider taking advantage of it.

 

What is SECURE 2.0 and how does it affect retirement planning?

Does SECURE 2.0 allow employer matching contributions to go into a Roth account?

How does SECURE 2.0 impact required minimum distributions (RMDs)?

Does SECURE 2.0 create new Roth opportunities for workers?

What should employers know about SECURE 2.0 plan changes?

About Your Presenter: James Lange, CPA/Attorney

James-Lange

Jim is the author of 10 best-selling financial books and has been quoted 37 times in The Wall Street Journal. He has published 21 articles for Forbes.com.