Proposed SECURE Act Make Roth IRA Conversions More Valuable

Proposed Regulations to SECURE Act Make Roth IRA Conversions Even More Valuable
by Lange Legal Group, LLC

Cartoon depiction of the SECURE Act featured on CPA/Attorney James Lange's website PayTaxesLater.com

Randy Bish

On February 23, 2022, the IRS nonchalantly released 275 pages of Proposed Regulations which shocked the retirement and estate planning professional community. Since the passage of the SECURE Act at the end of 2019, many planners have been reeling over the ten-year payout requirement for inherited retirement accounts created by the Act, subject to limited exceptions.

Families and their retirement and estate planners have been scrambling to minimize the greatly accelerated income tax burden caused by the ten-year payout rule and have been recommending in many cases (particularly with Roth IRAs) to wait until the end of the payout period to withdraw the funds from the inherited retirement account.

The most devastating announcement under the Proposed Regulations was for beneficiaries of retirement accounts who inherited from retirement account owners already receiving Required Minimum Distributions (RMDs)—those who reached their required beginning date for distributions prior to their death, i.e. the April 1st of the year after they reached age 72 or retirement, whichever is later. This group represents most retirement account owners, and these beneficiaries will likely be required to take annual distributions in the first nine years immediately following the year of the IRA owner’s death, and then be forced to take a lump-sum distribution for the balance of the retirement account in the final distribution year. These proposed distribution rules will apply to traditional retirement accounts but not to Roth retirement accounts because Roth retirement accounts never have a required beginning date for distributions.

If the Proposed Regulations are passed in their current form with respect to RMDs from IRA owners who reached their required beginning date before their death, our general recommendations to inherited retirement account owner beneficiaries are as follows:

    • Traditional Retirement Accounts: Consider your likely income tax bracket for the next ten years and then decide whether it is more advantageous to take roughly one-tenth the first year, one-ninth the second year, and so on or take advantage of the limited income tax deferral still available by taking the minimum amount out years 1-9 and take out the balance in year ten. This strategy will most likely make sense on more modest retirement accounts ($500,000 or less) and averaging the income or strategically withdrawing the IRA in some other manner will likely make sense for larger IRAs. Each case should be evaluated based on running the numbers, and our group is well-positioned to help you with that analysis.
    • Roth Retirement Accounts – The advice for Roth retirement accounts is more straightforward. We recommend that Roth IRA beneficiaries wait until year ten and then take out the balance in year ten.

The Proposed Regulations provide important guidance for when a minor child is no longer considered a minor (age 21) and when a beneficiary is considered disabled (defer to the Social Security definition for beneficiaries ages 18 or older and use a common-sense definition for determining disability before age 18 (if an individual has a medically determinable physical or mental impairment that results in marked and severe functional limitations and that can be expected to result in death or to be of long-continued and indefinite duration).

In addition, the Proposed Regulations provide important clarifications for planners regarding what language can and cannot be in a trust to qualify for stretch exceptions and/or the ten-year rule. Finally, the Proposed Regulations do waive the failure to take an RMD penalty (50%) if the missed distribution is taken by the due date of your tax return.

We will alert you to the approved Final Regulations which we anticipate being published later this year. However, we felt that it was crucial that you were aware of this pending additional change regarding inherited retirement accounts.

If you have inherited a retirement account after 2019, will inherit a retirement account in the future, or you’re looking for more information please register to attend Jim Lange’s upcoming webinars on Tuesday, May 3rd and Wednesday, May 4th at https://PayTaxesLater.com/Webinars

The Defenses Against the SECURE Act

The Best Defenses Against the SECURE Act by James Lange

photocredit: Getty

 

This blog post has been reposted with permission from Forbes.com

I have posted several articles explaining the most important provisions of the SECURE Act and the devasting effect that its provisions will likely have on individuals who inherit IRAs or retirement plans.  This article will address some of the proactive steps you can take now and after the SECURE Act or something similar becomes law.

Reduce Your Traditional IRA Balance With Roth IRA Conversions

If timed correctly, Roth IRA conversions can be an effective strategic planning tool for the right taxpayer. Often, a well-planned series of Roth IRA conversions will be a great thing for you and your spouse and will be one of the principle defenses from the devastation of the SECURE Act.

You and your heirs can benefit from the tax-free growth of the Roth IRA from the time you make the conversion up to ten years after you die.  One of the advantages of making a series of conversions is that the amount you convert to a Roth IRA reduces the balance in your Traditional IRA, which will reduce the income taxes your heirs after to pay on the Inherited IRA within ten years of your death.

Inherited Roth IRAs are subject to the same ten-year distribution rule after death as Inherited Traditional IRAs under the SECURE Act.  The important difference between the two accounts is that the distributions from Roth IRAs are generally not taxable.  One good thing about Trump’s Tax Cuts and Jobs Act of 2017 is that it temporarily lowered income tax rates, so this year is probably a better than average year for many IRA and retirement plan owners to consider Roth IRA conversions as part of their long-term estate planning strategy. We did several posts on Roth IRA conversions earlier this year and concluded this was a great time to look at Roth conversions.  Now, it is even more important.

In short, it may make more sense for you to pay income taxes on a series of Roth IRA conversions done over a period of years than it would for your heirs to pay income taxes on the accelerated distributions required under the SECURE Act.  The strategy of doing a series of Roth IRA conversions over several years tends to work better because you can often do a series of conversions and stay in a lower tax bracket than if you did one big Roth conversion.  Of course, there is no blanket recommendation that is appropriate for every IRA and retirement plan owner.

Spend More Money

Many of my clients and readers don’t spend as much money as they can afford.  Maybe if they realized to what extent their IRAs and retirement plans will be taxed after they die, they would be more open to spending some of it while they are alive.  Assuming you can afford it, why don’t you enjoy your money rather than allowing the government to take a healthy percentage of it?  Considering taking your entire family on a vacation and pay for everything. My father in law takes the entire family on a four-day vacation in the Poconos every year.  Yes, it costs him some money, but those family memories will be a much more valuable legacy than passing on a slightly bigger IRA – especially if your IRA is destined to get clobbered with taxes after you die.

A variation on the same idea is to step up your gifting plans – not only to charity but also to your family.   Sometimes it makes sense to give a financial helping hand to family members who might need one sooner than later. Not only might you be able to ward off additional troubles for them, but it might help your own peace of mind if you don’t have to worry about them.  What about that new grandbaby?  Consider opening a college savings plan – it could open a whole new world of opportunity for him when he reaches college age.

If you donate to charity, make sure that you “gift smart”.  The Tax Cuts and Jobs Act of 2017 made it more difficult for many Americans to itemize their charitable contributions.  If you fall into this category, you need to know about a provision in the law that allows you to make charitable contributions directly from your IRA.  Known as a Qualified Charitable Distribution (QCD), this strategy allows you to direct all or part of your Required Minimum Distribution (RMD) directly to charity.  The amount of the QCD is not an itemized deduction on your tax return – but it’s even better.  It is excluded from your taxable income completely!  So, if you are required to take RMD’s from your retirement plans and intend to donate to charity anyway, a QCD may be a much more tax-efficient way to do it.

Update Your Estate Plan

Thoughtful estate planning can provide options for survivors that will allow them to make better decisions because they can do so with information that is current at the time you die. Even if you have wills, life insurance and trusts, the changes in the laws suggest you review and possibly update your entire estate plan.   This includes your IRA beneficiary designations too, and that’s particularly true if you have created a trust that will be the beneficiary of your IRA or retirement plan.   Assuming some form of the SECURE Act is passed into law, you would likely improve your family’s prospects by updating your estate plan.

Consider Expanding Your Estate Plan

The changes brought about by the SECURE Act could make life insurance even valuable to your estate plan than in the past.  The idea is you would withdraw perhaps 1% or 2% of your IRA, pay taxes on it, and use the net proceeds to buy a life insurance policy.  The math on this type of policy stays the same as in the past.  The difference is in the past your heirs could stretch the IRA over their lives.  This makes the life insurance option much more attractive because the alternative is worse.  Charitable Trusts might also become a good option depending on the final form of the law.

One idea that we think can be a good strategy for some IRA owners under the SECURE Act are Sprinkle Trusts.  If used in an optimal manner, they can provide families with the opportunity to spread the tax burden from inherited IRAs over multiple generations by including children, grandchildren, and great-grandchildren as beneficiaries.  Sprinkle Trusts have been one of the many “tools” in the sophisticated estate planner’s repertoire for years but have become much more attractive recently because they can offer significant tax benefits to certain IRA owners.   They can also have hidden downfalls, so consider talking with an attorney who has expertise in both taxes and estate planning to help map out a strategy that is appropriate for your situation.

Combine Different Strategies

Perhaps the best response to the SECURE Act involves a combination of strategies.  For example, in some situations the most course of action might be revised estate plans, a series of Roth IRA conversions, a series of gifts, and the purchase of a life insurance policy.

Spousal IRAs

The SECURE Act will not apply directly to an IRA or retirement plan that you leave your spouse.  After your spouse dies and leaves what is left to your children, then the SECURE Act does rear its ugly head.

The SECURE Act is a money grab – an action by Congress that betrays retired Americans.  You will likely be able to at least partially defend your family against its worst provisions by taking action.  This is not one of those posts where you think “great post, now back to watching television”.  It is a post meant to create dread that the IRA you worked so hard to accumulate will get clobbered with taxes after you die unless you take action.  The ideas discussed above are some of our favorite action points.  This post should be the beginning, not the end of your research and action on this enormous problem.

For more information go to https://paytaxeslater.com/next-steps/ to take next steps to protect your financial legacy.

If you’ll be in the Pittsburgh area, go to https://paytaxeslater.com/workshops/ for updates on Jim’s FREE retirement workshops to learn even more about how to established retirement plans that will be beneficial to make the most out of what you’ve got for your family.

 

James Lange

The SECURE Act: Is It Good For You Or Bad For You?

Is The SECURE Act Good for You or Bad For You by CPA/Attorney James Lange on Forbes.com

Will you be able to retire safely under the SECURE Act?

 

This blog post is republished with permission from Forbes.com

My previous post introduced the potential consequences of the SECURE Act, which is being promoted as an “enhancement” for IRA and retirement plan owners.  This is because it includes provisions allowing some workers to make higher contributions to their workplace retirement plans. I think it is a stinking pig with a pretty bow, so I wanted to give retirement plan owners the good and bad news about it.

I am a fan of Roth IRAs because they allow you to have far more control over your finances in retirement than you might have otherwise had.  You are not required to take distributions from your Roth IRA, but the good news is that they’re not taxable if you do take them.  These tax benefits can be a critical factor for seniors, especially if you are suddenly faced with costly medical or long term care bills.   Saving money in a Roth account can offer financial flexibility to many older Americans – and one good thing about the SECURE Act is that it can help you achieve that flexibility.  Here’s how.

The Good News About The SECURE Act

Under the current law, you are not allowed to contribute to a Traditional IRA after age 70½.  (You can contribute to a Roth IRA at any age as long as you have taxable compensation, but only if your income is below a certain amount.)  The age limitation for making contributions to Traditional IRAs is bad for older workers – and that’s an important point because the Bureau of Labor Statistics estimates that about 19 percent of individuals between the ages of 70 and 74 are still in the workforce.  The SECURE Act eliminates that cutoff and allows workers of any age to continue making contributions to both Traditional and Roth IRAs.

That same provision of the SECURE Act offers a hidden bonus – it means that it will also be easier for older high-income Americans to do “back-door” Roth IRA conversions for a longer period of time.  The back-door Roth IRA conversion, currently blessed by the Tax Cuts and Jobs Act, is a method of bypassing the income limitations for Roth IRA contributions.  The current law prohibits contributions to a Roth IRA if your taxable income exceeds certain amounts.  Those amounts vary depending on your filing status.   But even if you are unable to take a tax deduction for your Traditional IRA contribution, you can still contribute to one because there are no income limitations.  Why bother?  Because, assuming you don’t have any other money in an IRA, you can immediately convert your Traditional IRA to a Roth IRA by doing a back-door conversion.  That’s a good thing because the earnings on the money you contributed can then grow tax-free instead of tax-deferred.

Here’s more good news.  The current law requires Traditional IRA owners to start withdrawing from their accounts by April 1st of the year after they turn 70 ½.  These Required Minimum Distributions (RMDs) can be bad for retirees because the distributions are taxable.  The increase in your taxable income can cause up to 85 percent of your Social Security benefits to be taxed and can also move you into a higher tax bracket.  And once you begin to take RMDs, you are no longer allowed to make additional contributions to your account, even if you are still working.  The SECURE Act increases the RMD age to 72, a change which will allow Traditional IRA owners to save more for their retirements.

There’s a hidden bonus in this change as well.  Increasing the RMD age to 72 will allow retirees more time to make tax-effective Roth IRA conversions.  What does that mean?  Once you are required to take distributions from your Traditional IRA and your taxable income increases, you may find yourself in such a high tax bracket that it may not be favorable to make Roth IRA conversions at all.

The Hidden Money Grab In The SECURE Act

Capitol Building Washington DC used in Pay Taxes Later Blog Photo Courtesy of Delgado Photos

*Please note this blog post is a repost with permission from Forbes.com

On May 23, 2019, the House of Representatives overwhelmingly passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). A more appropriate name for the bill would be the Extreme Death-Tax for IRA and Retirement Plan Owners Act because it gives the IRS carte blanche to confiscate up to one-third of your IRA and retirement plans.  In other words, it’s a money grab.

The SECURE Act is wrapped with all kinds of goodies that are unfortunately of limited benefit to most established IRA and retirement plan owners.  But if you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax-efficient manner after you are gone, you need to be concerned about one provision in the fine print that could cost them dearly. Non-spouse beneficiaries of IRAs and retirement plans are required to eventually withdraw the money from its tax-sheltered status, but the current law allows them to minimize the amount of their Required Minimum Distributions by “stretching” them over their own lifetimes.  This is called a “Stretch IRA”.  Distributions from a Traditional Inherited IRA are taxable, so the longer your beneficiaries can postpone or defer them (and hence the tax), the better off they will be.   The bad news is that the government wants their tax money, and they want it sooner than later.  The ticking time bomb buried in the SECURE Act is a small provision that changes the rules that currently allow your beneficiaries to take distributions from Traditional IRAs that they have inherited and pay the tax over their lifetimes,  virtually cementing “the death of the Stretch IRA.” (The provisions of the SECURE Act also apply to Inherited Roth IRAs, but the distributions from a Roth IRA are not taxable.)

If there is any good news about the SECURE Act, it’s that it does not require your beneficiary to liquidate and pay tax on your entire Traditional IRA immediately after your death.  For many people, that would be a costly nightmare because they would likely be bumped into a much higher tax bracket.  Under the provisions of the SECURE Act, if you leave a Traditional IRA or retirement plan to a beneficiary other than your spouse, they can defer withdrawals (and taxes) for up to 10 years.   (There are some exceptions for minors and children with disabilities etc.) If you leave a Roth IRA to your child, they will still have to withdraw the entire account within 10 years of your death, but again, those distributions will not be taxable.  But any way you look at it, the provisions of the SECURE Act are a huge change from the old rules that allow a non-spouse heir to “stretch” the Required Minimum Distributions from a Traditional Inherited IRA over their lifetime and defer the income tax due.

That’s not the end of the bad news.  Once your beneficiary withdraws all the money from your retirement account, it will no longer have the tax protection that it currently enjoys.  In other words, even if your children inherited a Roth IRA from you and the distributions themselves weren’t taxable, the earnings on the money that they were required to withdraw are another story.  Even if they wisely reinvest all the money they withdrew from their Inherited Traditional or Roth IRA into a brokerage account, they’re still going to have to start paying income taxes on the dividends, interest and realized capital gains that the money earns.

I know there are readers out there who are thinking “it can’t be all that bad”.  Yes, it is that bad.  Here is a graph that demonstrates the difference between you leaving a $1 million IRA to your child under the existing law, and under the SECURE Act:

Child Inherits Stretched IRA Under Existing Law versus Child Inherits 10 Year IRA Under SECURE Act Reprinted with Permission from Forbes.com for Pay Taxes Later website

Child Inherits Stretched IRA Under Existing Law versus Child Inherits 10 Year IRA Under SECURE Act – James Lange

This graph shows the outcome if a $1 million Traditional IRA is inherited by a 45-year old child, and the Minimum Distributions that he is required to take are invested in a brokerage account that pays a 7 percent rate of return.  Other assumptions are listed below*.  The only difference between these two scenarios is when your child pays taxes! The solid line represents a child who can defer (or “stretch”) the taxes over his lifetime under the existing rules. At roughly age 86, that beneficiary who was subject to the existing law in place still has $2,000,000+.  The dashed line represents the same child if he is required to take withdrawals under the provisions of the SECURE Act.  At age 86, that same beneficiary has $0. Nothing. Nada. The SECURE Act can mean the difference between your child being financially secure versus being broke, yet Congress is trying to gloss over this provision buried in the fine print. I don’t think so!

The House of Representatives passed the SECURE Act by an overwhelming majority, so the probability that the Senate will pass a version of this legislation is quite good. In 2017, the Senate Finance Committee recommended the Death of the Stretch IRA by proposing the Retirement Enhancement and Savings Act (RESA).  In true government fashion, RESA was unbelievably complicated. It allowed your non-spouse beneficiaries to exclude $450,000 of your IRA and stretch that portion over their lifetime – but anything over that amount had to be withdrawn within five years and the taxes paid. And if you had more than one non-spouse beneficiary, the amount that they’d be able to exclude from the accelerated tax would have depended on what percentage of your Traditional IRA they inherited.  Imagine trying to plan your estate distribution around those rules!

The Senate is now floating an updated RESA 2019 that seems to say that it will change the original exclusion amount to $400,000.  It will be a good change if it is passed.  That is because instead of each IRA owner getting a $400,000 exclusion, the new version includes language to allow a $400,000 exclusion per beneficiary. When I first read that provision I thought I had either read it wrong or that it was a typo.    That little detail would be extremely valuable (and make estate planning for IRAs and retirement plans far more favorable), especially for families with more than one child. But even in the Senate version, anything over and above that exclusion amount will have to be distributed (and the taxes paid) within five years of your death (instead of ten years like the House version).

Unfortunately, our “peeps” think the House version of the bill (which has a 10-year deferral period, but no exclusion) will be what eventually becomes law. This is particularly troubling because the Senate version would allow room for far more creative planning opportunities (and tax savings, because of the $400,000 per beneficiary exclusion).  As of the time of this post, Senator Cruz is attempting to hold up the bill, but his reasons have nothing to do with the fine print that affects Inherited IRAs.  The original version of the Act contained provisions about college tuition (Section 529) plans, but those provisions were stripped in the version the House voted on and Senator Cruz wants them restored.  Unfortunately, no one is arguing about the biggest issue with the SECURE Act, which is the massive acceleration of distributions and taxes on your IRA after your death.  And unless someone in Congress objects to the provision in the SECURE Act about Inherited IRAs, your non-spouse beneficiaries will find out the hard way that their elected officials have quietly arranged to pick your pockets upon your death.

I have been a popular guest on financial talk radio lately. Many of the hosts want to blame one political party or the other. I blame all of Congress. This is one of the few truly bipartisan bills that has potential devasting consequences, at least for my clients and readers, and it is highly likely to pass both sides of Congress.  I wonder how many of our legislators in the House actually read this bill or understood what is was they voted for.  Did they realize they are effectively—by accelerating income-tax collection on inherited IRAs and other retirement plans—imposing massive taxes on the families of IRA and retirement plans owners – even those with far less than a million dollars?    Or perhaps they did understand it and hoped that the American public wouldn’t.

If you can’t tell by my tone, I am upset. I am also motivated to examine every strategy that we can use to legally avoid, or at least mitigate, the looming hammer of taxation on your Traditional IRAs and retirement plans. I’m going to address these strategies in a series of posts, so please read them to see how this proposal could affect someone in your specific situation.  Even though the Senate version has a five-year tax acceleration instead of a ten-year, the Senate version could be better for most readers because of the value of the exclusion – especially if you have multiple beneficiaries.

Please check for follow-up posts on this subject.   I will show you some strategies to protect your family from the Death of the Stretch IRA and keep more of your hard-earned money in your hands.

James Lange

  • Assumptions used for Graph
  1. $1 Million Traditional IRA inherited by 45-Year Old Married Beneficiary
  2. 7% rate of return on all assets
  3. Beneficiary’s salary $100,000
  4. Beneficiary’s annual expenses $90,000
  5. Beneficiary’s Social Security Income at age 67 $40,000

 

The Potentially Dire Consequences to Your Legacy with the “Death of the Stretch” IRA

The Death of the Stretch IRA is rearing its ugly head again.

 

Death of the Stretch Inherited IRAs by James Lange CPA/Attorney in Pittsburgh, PAAs I have written about, this is personal to me. I was hoping that distributions from my Roth IRA and IRA would be “stretched” over the life of my daughter and maybe grandchildren.  It could make a difference of well over a million dollars to my family.

If you have a million dollar or more IRA or retirement plan, this threatened (but as yet not totally defined) legislation could be just as devastating to you and your family.  Once the two houses reconcile their differences (see the above post for the details of the different proposals), established estate plans will likely need to be reevaluated.  This threat increases the merits of Lange’s Cascading Beneficiary Plan or a similar flexible estate plan. It also creates an even greater incentive for IRA owners considering significant Roth IRA conversions.

I wrote two books on this topic based on the proposal that advanced through the Senate Finance Committee beginning in 2016. While the changes to IRA and retirement plan distribution rules weren’t included in the last set of tax changes (much to our surprise), clearly the idea still has a huge bipartisan appeal.

The action points in both books was to reconsider and revisit the idea of converting more of your IRAs to Roth IRAs. This is consistent with my most recent recommendations encouraging higher conversions because of the low income-tax rates we are currently enjoying.  The threat of losing the ability to stretch distributions from IRAs and retirement plans for generations only makes looking into Roth IRA conversions more compelling. If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please call our offices at 412-521-2732.

The Death of the Stretch is Back On Congress’ Agenda

The Death of the Stretch is Back On Congress’ Agenda

This just in.

Stretch IRA James Lange Pittsburgh PennsylvaniaThe House is scheduled to vote on Thursday, May 23, 2019, on the SECURE ACT. Then, it will be in the Senate’s court to vote on RESA. Then the House and Senate will need to reconcile the differences between the bills. Experts, including us, think a compromise will be found and that the “stretch IRA” as we know it, will be gone, dealing a severe blow to IRA and retirement plan owners who were hoping their heirs would be able to continue deferring the distributions on their inherited IRAs and retirement plans for decades.

Here is the story so far.

In mid-April, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., reintroduced their Retirement Enhancement and Savings Act (RESA).

Under this bill, which we’ve been talking about since 2016, the account balance in a defined contribution plan or IRA must be distributed and included in income by the beneficiary five years after the employee’s or IRA owner’s death. Surviving spouses, beneficiaries who are disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or the child of the employee (or IRA owner) who has not reached the age of maturity are excluded from this rule. Plus, an exception to the five-year distribution deadline is provided for each beneficiary to the extent that the balance of the account they receive from the deceased employee or IRA owner does not exceed $400,000.

Also in April, the House Ways and Means Committee passed a bill known as the Secure Act (Setting Every Community Up for Retirement Enhancement Act of 2019). What was remarkable about the Secure Act is that it was fast-tracked and approved with lightning speed, with the intention “To amend the Internal Revenue Code of 1986 to encourage retirement saving, and for other purposes.” And while it does include some incentives for people to participate in retirement plans, it also proposes the “death of the stretch IRA.” The House version of the bill differs from RESA in that it proposes a 10-year time limit on holding an inherited IRA or inherited Roth IRA or other defined contribution plan before all of the funds in the account must be distributed.  According to the summary provided by the House Committee on Ways and Means:

Section 401. Modifications to Required Minimum Distribution Rules: The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

We have been anticipating the death of the stretch IRA for years and wrote two books about its consequences.  We were pretty convinced it was going to be eliminated in the last round of tax law changes, and frankly, we were surprised when the limit on non-spouse heirs stretching distributions from inherited IRAs over their lifetimes was not included. But, it’s back, and once again the devil is in the details which will have to be hashed out between the two houses. In the next post, I will offer some insight into the consequences and preliminary recommendations.

If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please contact our offices at 412-521-2732.

The Essence of Lange’s Cascading Beneficiary Plan

The Essence of Lange's Cascading Beneficiary Plan

Learn how Lange’s Cascading Beneficiary Plan can help ease your worries for your family’s financial future.

Somewhat tongue-in-cheek, I refer to “Leave it to Beaver” families as the perfect candidates for the Lange Cascading Beneficiary Plan (LCPB). Just to be clear about what I mean by that, I am showing you a basic version of the family tree for that type of family. Blended families with children from different unions sometimes need to have estate planning with more complicated beneficiary designations. It is not that the LCBP cannot work, but it is not as straightforward. With that in mind, let’s look at the essence of Lange’s Cascading Beneficiary Plan.

Lange Cascading Beneficiary Plan example photo

It is important to think long-term with financial planning using the Lange Cascading Beneficiary Plan.

In previous content of the Lange Cascading Beneficiary Plan series, I have discussed the tax and long-term estate planning benefits of leaving your IRA and retirement accounts, when possible, to the youngest members of your extended family to get the longest stretch possible. Remember, keeping money in the tax-deferred environment (traditional IRAs and retirement plans) or the tax-free environment (Roth IRA etc.) for as long as possible works to your heirs’ advantage.

But, let’s be realistic. Even if you understand that the tax benefits are greater when you leave your IRA to your grandchildren, most couples want to ensure that their surviving spouse will be financially sound with enough discretionary money to lead a happy and fulfilling life. So, if we take that attitude, it might seem that the simplest and safest route is to simply leave all your money to your surviving spouse.

Or, you make some calculations and decide your surviving spouse will probably be fine with most of your IRA but some of it could go to the kids upon the first death. Maybe your plan works out perfectly, but maybe it doesn’t.  Let’s look at an example. You have a two-million-dollar IRA, and you think, based on future calculations that your spouse will only need about $1,500,000.

You could make your children the beneficiaries of $500,000 at your death. Conducting your estate planning in this manner could provide your children with some inheritance after the death of the first parent. It might be very useful to them, especially if they have children of their own that will be needing money for school or facing other monetary challenges associated with raising a family.

The financial market is in constant flux, keep that in mind when making plans.

That sounds like a great plan but what happens if the market takes a big dive? The two million you thought was going to be there has dropped to 1.5 million, and you have designated $500,000 of that to go to the children. Now, your surviving spouse has less money to live on, and you fail to meet your objective of providing for your spouse. That would be horrible. Divvying up an estate appropriately is one of the biggest hurdles of estate planning.

So, you go back to square one, and leave everything to your surviving spouse outright.  Down the road, your family will likely have to give up more in taxes. Furthermore, if changes in the tax code modify the advantages of the stretch IRA, you could potentially forfeit the tax advantages that might be offered to compensate a bit for the loss. There was talk, for instance, of allowing $450,000 of an Inherited IRA to be stretched over a lifetime, and this exemption allowance would be available to both spouses.

If your estate planning leaves everything to your spouse, you forfeit one $450,000 exemption. Whereas, if the first spouse to die leaves $450,000 to the kids (giving them the advantage of the stretch), then when the second spouse dies, the children can take advantage of the second exclusion and stretch another $450,000. That is a big difference.

This is why the Lange Cascading Beneficiary Plan is right for you.

What we come back to time and again, is that we don’t have a crystal ball that allows us to plan for the future with any confidence that we are making decisions that will be appropriate for the circumstances at that time. That is precisely why the LCBP is so effective. You can draft the documents in such a way that your surviving spouse (with the help of an advisor and perhaps the grown children) can make good decisions about allocating the estate that are both tax-savvy and in the best interest of the family.

Picking up on our previous example where the stock market took a dive and there is less money overall for the surviving spouse. Under the terms of the LCBP, he or she could say, “Hey, I’d love to help the kids out, but I need all the money.” End of story, surviving spouse just keeps everything and we get a good result.

The essence of the LCBP will put you at ease.

Alternatively the surviving spouse has more than enough money for long-term security and a comfortable lifestyle, so he or she decides that money should go to the kids. So, with the cascade in place, divided among the children equally, and with disclaimers available, the surviving parent can look at each child’s situation and help them in the way that makes the most sense. Perhaps one child has a bright financial future, and it would make more sense to pass money onto their children (the grandchildren). In that instance, the first child could disclaim their portion directly to their children via well-drafted trusts.

Second child would love to do the same, but actually, he or she could use the money.  So, he or she accepts the inheritance, and does not disclaim to his or her children. Flexibility works. And, a further advantage is that none of these decisions must be made quickly. The family has nine months after the first death to finalize all decisions. A little breathing room after a crisis can be very welcome.

With documents that offer flexibility, you don’t have to predict the future to provide for your family in a way that makes sense for the time. Lange’s Cascading Beneficiary Plan allows for terrific post-mortem planning that can make an enormous difference for the family.

Next week, we will examine estate planning with the potential $450,000 exclusion in more detail.

See you soon!

P.S. If you want to do a little advanced study on this topic before the next post and video, go to https://paytaxeslater.com/estate-planning/.

The Incredible Tax Advantage of Young Beneficiaries

Let’s Talk About Your Kids:
The Advantage of Estate Planning with Young Beneficiaries

The Incredible Tax Advantage of Young Beneficiaries

Let’s talk about your beneficiaries, your kids and grand kids.

In the second video in this series, we learned that estate planning that leaves retirement assets directly to children and grandchildren offers extraordinary tax advantages to your family.  The basic premise being that a young beneficiary has a long life-expectancy, and sustaining money in the tax deferred environment for an extended period allows for the most growth. At least this is how things work under the current law.

I think we can agree that, in drafting estate planning documents, the primary concern for most couples is to provide for the surviving spouse. As we have discussed, transferring assets to a spouse is a fairly straightforward process and does have some tax advantages. Then, they hope that when they are both gone, there will be something left for their kids, and then for their grandchildren.  But, I am suggesting that, depending on family circumstances, it might be smart to leave money to kids or grandkids at the first death.

Let’s say that after you die, your spouse is in good health and has more money than he or she will ever need.  Under those circumstances, you have met our first criteria for an estate plan:  providing for the surviving spouse.  In this case, leaving at least a portion of your IRA to your children is perhaps a viable and tax-savvy option.  With their longer life expectancy, they will have lower required minimum distributions which means more of your money will continue to grow tax-deferred.  Flexible estate planning at its finest! It’s a winning scenario, especially if you look at the family as a whole with the idea of establishing a legacy.

If we take it one step further with your beneficiaries.

It’s even better, tax-wise, to name your grandchildren.  Imagine the advantages of minimizing tax-free distributions from an inherited Roth account over a long lifetime! If you scroll up to video two in the series, you can watch me run the numbers for just that scenario.  It’s a game-changing strategy.

We cannot over-stress, however, that naming minor children or grandchildren as beneficiaries will also require some additional estate planning to protect them from themselves—no Ferrari at 21 for you my grandson—and, potentially, creditors.  We recommend that all minors’ shares are held in well-drafted trusts.  Additionally, it is critical that the trust meets five specific conditions to qualify as a designated beneficiary of an IRA or a Roth IRA (you can find reference to the five conditions in my book, Retire Secure! on Page 307, and you can download a copy of the book at www.paytaxeslater.com/books. Under current law, a well-drafted trust will allow them to stretch an inherited IRA or Roth IRA over their lifetime. If the trust doesn’t meet all five of the conditions, then the trust will not qualify as a beneficiary and income taxes will be accelerated. Without attention to the details, it could go from an estate planning dream to a nightmare.

So, let’s pull it all together.

Even if you have specific bequests that you want to see honored—a gift to a charity or a cause or a family friend—I suspect that it is still safe to say that your primary beneficiaries will be your surviving spouse, your children, and your grandchildren.  That being the case, stay tuned to learn why Lange’s Cascading Beneficiary Plan is probably the best estate planning solution for you.

Until next time!

-Jim

 

P.S. If you want to do a little advanced study on this topic before the next post and video, go to https://paytaxeslater.com/estate-planning/.

The Sneaky Tax – Not Your Mother’s Income Tax

Don’t Let Congress Catch You Sleeping!

Our office is pretty busy right now because of the approaching income tax extension deadline of October 15th.  I was talking to some clients who had come in to pick up their return, and who had received an email from me last week about stopping the Sneaky Tax.  I guess it was just bad timing since their federal tax return was on their mind, but they thought that the term “Sneaky Tax” was somehow related to the tax code simplification that President Trump had promised in his campaign.  And since they both work in the medical field and are in the highest income tax bracket anyway, they assumed that their personal tax situation couldn’t get any worse and didn’t bother to read my email!  For this particular couple, it could have been a very costly mistake.

Who Will Pay The Sneaky Tax?

Most of the information I have written about the Death of the Stretch IRA has been for the benefit of parents who will be leaving their IRAs and retirement plans to their children.  These clients had no children, so they didn’t need to worry about how much their own beneficiaries would pay in taxes after their deaths, right?  Wrong!  These clients were the children – meaning that both had elderly parents who owned IRAs and retirement plans that they would eventually inherit.  So think about this situation for a minute.  This couple is not planning to retire for at least ten years, and the statistical odds are that their parents will pass away before then.  If that happens, the proposed legislation that I call the Death of the Stretch IRA will make them pay tax on their inherited IRAs within five years of their parent’s deaths.  They’re already in the highest tax bracket, so they stand to lose a whopping 39.6% of their inheritance because of the Sneaky Tax!   That’s almost as high as the maximum federal estate tax rate – which most people aren’t subject to anyway because each individual can exclude $5.49 million in assets before it applies.  That’s why I call it the Sneaky Tax – people (erroneously) think they don’t have to worry about it because they don’t have more than $5.49 million.  The Sneaky Tax is not the same as the estate tax – they’re as different as federal income tax and the sales tax you pay when you buy a new car!  And if you don’t watch out, this tax could very well sneak up on you and cost you a lot of money.

Baby Boomers and the Sneaky Tax

If you have elderly parents and are the beneficiary of their IRAs and retirement plans, then the Sneaky Tax will affect you – even if you have no children of your own.  The Death of the Stretch IRA legislation would force you to distribute and pay tax on any IRAs that you inherit (subject to exceptions), within five years of the owner’s death.  If you are required to take distributions from your inherited IRAs and retirement plans at the same time you are receiving income from working, it is quite possible that you’ll be bumped into a higher tax bracket – maybe even the highest possible bracket.  The excessively high tax consequence could affect your standard of living during retirement, or even your ability to retire at all.

Stopping the Sneaky Tax

Unfortunately, if this legislation passes and you subsequently inherit an IRA from someone other than your spouse, there will be little you can do to minimize the astounding consequences of the Sneaky Tax – and I say astounding because it is estimated that this tax will cost IRA beneficiaries trillions of dollars.  If the original owner (presumably your parent) is still alive, he or she might benefit from reading some of the preceding posts that discuss options the owner can use to minimize the tax burden.  If that’s not an option, you might want to take some advice from our first president, George Washington.  He said, ”…make them believe, that offensive operations often times, is the surest, if not the only (in some cases) means of defense.”

Most of you who will inherit your parent’s IRAs can’t afford the Sneaky Tax.  I hope you will join us in sending a shot across the bow to our representatives in Washington.  We have started a petition that we will forward to every legislator in the United States, and hope to collect as many signatures from across the country as we can.  Please forward this to everyone you know who might be affected by the Sneaky Tax, and ask them to sign our petition, and join our Facebook Group.

Thanks for reading, and stop back soon!

-Jim

Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.

Stop the Sneaky Tax!

It’s Time to Stop the Sneaky Tax!

Those of you who follow my blog know that I have been somewhat obsessed with the legislation that I call the Death of the Stretch IRA.  If you’re new to my blog, please read some of the preceding posts – they’ll tell you just how much this legislation will cost IRA owners.  The worst part of the Death of the Stretch IRA is that most beneficiaries (your children and grandchildren) won’t have a clue about how much of their inheritance they have lost to taxes.  When they inherit your IRA after you die, your beneficiaries will suddenly have more money than they had before.  Our government is counting on them to be content with their higher bank balance, and is hoping that they never notice that an enormous chunk of their inheritance ended up in Uncle Sam’s pockets before the remainder found its way to them.   That’s what makes this tax so nefarious and, well, sneaky!

Our government has a lot of expensive problems right now – they’re looking to come up with a viable heath care system, build a wall on our southern border and I can’t even begin to imagine how much it will cost to repair the damage done by Hurricane Harvey.  The Treasury doesn’t even have enough money to pay for their day-to-day operations, much less all of this – they’re going to be raising the debt ceiling next month!  I’d bet my own IRA on the fact that the government is planning to include the Death of the Stretch IRA – and the $1 Trillion in revenue that it will generate – as part of an appropriations or budget action that will be voted on before the end of 2017.

You Can Help Stop the Sneaky Tax

If you are a loyal reader, you know that we have been writing our clients and friends to warn them about the sneaky tax, and working on solutions to minimize the damage that this legislation will do.  Now it’s time to send a shot across their bow and tell the government that they’d better find their revenue someplace else besides your IRA.  We are asking your help to start a grass-roots protest against the Sneaky Tax which would kill the stretch IRA—an incredibly useful estate planning tool.  This new law would be so absolutely devastating to so many families across the country, our clients included, that we can’t just sit by and watch it happen.

Write Your Congressman Now

Please help us get the message to our legislators that we will not stand for them picking the pockets of our children and grandchildren.  Please consider going to www.stopthesneakytax.com to add your name to the list of people who are unhappy with this proposed new law and send an email to your Congressmen asking them to say NO to the sneaky tax.  You can also keep up to date with what is going on with this law by joining our new private Facebook group: SOS Save Our Stretch!  Stop the Sneaky Tax!  You can join the group by going to www.saveourstretch.com.  For a limited time, joining the Facebook group will entitle you to a free Advance Reader Copy of Jim’s newest book – The 5 Greatest Tax-Saving Strategies for Protecting Your Family from the New Tax Law.

Sign our Petition to STOP Washington’s Planned Trillion Dollar IRA Sneaky Tax at www.stopthesneakytax.com.

Join our Facebook Group for breaking news and updates at www.saveourstretch.com.

And please forward this to everyone you know who has an IRA!

-Jim

Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.

You can view my previous posts on the Death of the Stretch IRA by clicking the links below;

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?
Are There Any Exceptions to the Death of the Stretch IRA Legislation?
How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?
Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?
What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?
How Does The New DOL Fiduciary Rule Affect You?
Why is the Death of the Stretch IRA legislation likely to pass?
The Exclusions for the Death of the Stretch IRA
Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA
Using Roth Conversions as a Possible Solution for Death of the Stretch IRA
How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA
How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA
President Trump’s Tax Reform Proposal and How it Might Affect You
Getting Social Security Benefits Right with the Death of the Stretch IRA
The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA
Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex
Is Your Health the Best Reason to Wait to Apply for Social Security?
Roth IRA Conversions and the Death of the Stretch IRA
How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA
How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass
The Death of the Stretch IRA: Will the Rich Get Richer?
The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?
Roth IRA Conversions and the Death of the Stretch IRA
Part II: How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA
Roth IRA Recharacterizations and the Death of the Stretch IRA
The Risk of Roth IRA Recharacterizations & The Death of the Stretch IRA