The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?

For many individuals, a series of well-timed Roth IRA conversions can be the best defense against the Death of the Stretch IRA.

A lot of clients ask me if I manage my own finances the way I recommend they manage theirs, and the answer is definitely “yes”. I realized though, that I have not told you my own Roth IRA conversion story, and how my decision will affect my own family after the Death of the Stretch IRA.

Roth IRA Conversions – The Best Time is in Years of Low Income

Think back to 1998. It was long before we ever had to worry about the Death of the Stretch IRA, and it was the first year you were permitted to make Roth IRA conversions. Back then, if your Modified Adjusted Gross Income was more than $100,000 you were restricted from making Roth IRA conversions. Our family’s income was over $100,000, so I thought my income restricted me and never imagined I’d be eligible to do Roth IRA conversions myself. Then on February 16, 1998, our office was wiped out by a devastating fire that started in a pizza shop located directly below us. Can you imagine this happening to a CPA firm in the middle of tax season?

I learned some valuable lessons from this experience. First, never put your office above a pizza shop. Second, I learned more about the insurance process than I ever cared to know. We had extremely high expenses because everything needed fixed and, even though I was well insured, I didn’t get the check for the damage until 1999. That meant that 1998 was a very tough year for the business financially. I couldn’t take a salary, and for the first time our family’s income was far less than $100,000. Did I get upset? No. I said to my wonderful wife, “Cindy, I think we have an opportunity here”.

My wife and I had about $250,000 in Traditional IRAs between us. I told her that our normal income level would restrict us from making Roth IRA conversions, but our income in 1998 was far below normal – making that year the best time for us to do Roth IRA conversions. I told her that I thought we should convert the entire amount to Roth IRAs and voluntarily pay the tax due the $250,000 conversion amount. After she got over her initial shock, she looked at the mathematical calculations I had done and, being an extremely intelligent woman, she immediately understood that our family would be better off by hundreds of thousands of dollars in the long run. And so we did it – we converted every last dime of our IRAs to Roths. And those Roth IRAs are now worth quite a lot more than they were in 1998.

The law has since changed, and there are no longer any income restrictions on Roth IRA conversions. This means that you can do smaller Roth IRA conversions over a series of years rather than all at once like I did, and by doing so you can convert them at a lower tax rate than I was able to. The best time for many retired individuals is the period after you’ve stopped working, but before you are required to take minimum distributions from your IRAs and retirement plans. And with the Death of the Stretch IRA looming, there are probably even more reasons now for you to consider Roth IRA conversions than I had when my office caught fire in 1998.

Transferring my Roth IRA to My Child

Twenty years later, it is likely that Cindy and I will never spend those Roth IRAs. Some people will argue that, if that’s the case, there was no benefit to us converting our IRAs to Roths. Why pay tax when you didn’t have to, they ask? Well, I guess it’s because, in the long run, I was thinking of what would happen when I die and my Roth IRA is transferred to my child. My daughter Erica was only three years old when we did those Roth IRA conversions. If I die tomorrow and my Roth IRA is transferred to her, she’ll be hundreds of thousands of dollars better off because I did that conversion. And if I live for another twenty years, it’s not unreasonable to think that she’ll be more than a million dollars better off when I die.

When my Roth IRA is transferred to her after my death, Erica will still be required to take minimum distributions from the account every year. If I die before the Death of the Stretch IRA legislation is passed, those minimum distributions can be stretched over her lifetime and the bulk of the IRA can continue to grow in a tax-free environment. If I die after the Death of the Stretch IRA legislation is passed, she’ll be required to withdraw the entire IRA within five years. Although the money will be forced from the tax shelter more quickly, at least the withdrawals will be tax-free to her. And I can’t think of a better present for my little girl.

Stop back soon for more Roth IRA talk!

-Jim

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

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

The Death of the Stretch IRA: Will the Rich Get Richer?

Posted on July 18, 2017 by James Lange in Educational Resources, Inherited IRAs, IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, James Lange, new ira laws, new ira rules, Roth IRAs.

Do Roth IRA Conversions Make the Rich even Richer? Will This Change After the Death of the Stretch IRA?

My most recent blog posts have been about Roth IRA conversions, and how they might benefit you under both existing law and the proposed law that would spell the Death of the Stretch IRA. This post continues this discussion, and outlines the benefits of transferring Roth IRAs to your children.

How Do the Rich Get Rich?

There’s been a lot of media coverage about rich people lately, have you noticed? The rich don’t pay taxes! The rich are getting richer! And so on. Well, I’m going to go out on a limb here and suggest that there are many rich people who don’t deserve all of the abuse they get about their wealth. Are there rich people who get their money from stealing and cheating? Certainly, and I hope the long arm of the law finds every one of them and brings them to justice. But I have many clients who are, by most people’s standards, rich – and not one of them ever failed to pay their taxes, or stole their money from someone else. Most of them had decent but not high-paying jobs, and the vast majority of them didn’t inherit their wealth either. So how do the rich get rich, and how do they continue to get richer?

In the late 1960’s, Stanford University conducted a study where the children who participated could receive a small reward (a marshmallow) immediately, or choose to receive a larger reward (two marshmallows) after waiting a short period of time. Some of the kids, of course, ate the marshmallow immediately. Others, though, waited for what probably felt like a lifetime, and were rewarded with the second marshmallow.

Most of my clients are two-marshmallow people. This means that during their lifetimes, every financial decision they made considered both the short-term and long-term benefits. Could they afford the monthly payment on a Cadillac? Probably, but they opted for Fords instead and banked the difference between the monthly payments. Could they use credit to buy new living room furniture? Yes, but they waited until they had enough money saved up to pay cash because they wanted to avoid paying interest on their purchase. Two-marshmallow people understand that sometimes it makes sense to do with less now, in exchange for a bigger payoff in the future. That’s how many of the rich get rich in the first place, and could be why the rich continue to get richer. And a similar mind set could be a lifesaver for you when the Death of the Stretch IRA legislation is passed, and you are scrambling to find ways to keep your hard-earned money out of the hands of the government.

Roth IRA Conversions: Not Just For Rich People Who Don’t Want to Pay Taxes

Many uninformed individuals think that strategies like Roth IRA conversions are simply tools designed to allow rich people to get richer, and to avoid paying taxes. That’s not exactly true. Roth IRA conversions can help anyone, not just rich people, get richer and avoid paying more taxes than necessary. In fact, I would argue that Roth IRA conversions can be of more benefit to someone who isn’t rich, because an additional $50,000 over the course of their lifetime would probably be far more important than it would be to someone who has more money than they can ever spend. But Roth IRA conversions can make a lot of sense if you are a two-marshmallow person, regardless of how much money you have. And it’s especially true if your money lasts longer than you do, and you end up transferring your IRAs and retirement plans to your children. Roth IRAs can make a significant difference for your heirs in light of the Death of the Stretch IRA.

Transferring Roth IRAs to Your Children

The video in this post compares two individuals – one makes a Roth IRA conversion of $100,000 and the other does not. The conversion provides a small benefit during the Roth IRA owner’s lifetime – so even though he pays taxes on the conversion amount, he still ends up with two marshmallows. But suppose he never spends the money and, at his death, the Roth IRA is transferred to his children? Over the course of their lifetimes, the children get ten marshmallows. And suppose his children don’t spend the Roth IRA, and instead transfer it to their own children (preferably by disclaiming it to a trust). Over the course of their lifetimes, the grandchildren get an entire bag of marshmallows!

So did the rich get richer? Yes. Did they do anything illegal, or anything that you can’t do yourself? No. Roth IRA conversions were the brainchild of the government – they want you to pay taxes sooner than you have to so that they have more money to spend. You may have change your way of thinking to that of a two-marshmallow person, and possibly do with less now in exchange for a greater payoff down the road. But doing so can enable you to create your own family dynasty that will benefit your heirs for generations to come, and help them offset the devastating effects of the Death of the Stretch IRA.

Stop back soon for more Roth IRA conversion talk!

-Jim

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

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

How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass

Posted on July 11, 2017 by James Lange in Educational Resources, Inherited IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement, Roth IRAs.

In my last post, I talked about a concept called purchasing power. If you missed that post, I’d go back and read it because the information contained in it is the key to understanding the benefits of Roth IRA conversions. In short, it explains why you need to consider more than just the dollar value of Roth and Traditional IRAs, in order to determine if a Roth conversion can benefit you.

Las week, we discussed that, if you measure your accounts in terms of their purchasing power rather than their dollar value, it is quite possible that you and your spouse can benefit from Roth IRA conversions. The greater benefit, though, is likely to be recognized by your children and grandchildren. This is true even if the Death of the Stretch IRA legislation does not pass, although I believe it will.

When Roth IRA conversions were first introduced, I believed that they could provide a huge benefit to my clients who had large IRAs. It wasn’t just a feeling that I had, I did the math to support my position. Unfortunately, many people were still afraid of this new-fangled idea, and they just didn’t want to hear about it no matter how much it might benefit their families. So I thought to myself, how can I get people to believe me? In 1997, I published the very first peer-reviewed article on Roth IRA conversions. Submitting a paper for peer-review is a daunting process. Imagine a team of CPA’s who are just waiting to find fault with everything you say. Well, guess what? After they read it, they all said “He’s right!” – and my article on Roth IRA conversions was accepted for peer-reviewed publication. It was a ground-breaking idea, and I received a lot of attention by the mainstream media because I was a pioneer. Even to this day I continue to advise several prestigious publications on this topic. But for many individuals who have large IRAs, a series of Roth IRA conversions can provide an enormous benefit when used as part of a well thought out estate plan.

Roth IRA Conversions and Changing Tax Law

Some of you may think that a concept that was peer-reviewed twenty years ago has little relevance in today’s world. Well, it’s true that back then, the tax rates were higher than they are now. That means that, back then, Roth IRA conversions offered a greater benefit than they can under the current tax structure. And now we are facing the possibility that the Death of the Stretch IRA legislation will pass, which would accelerate the income tax due on inherited IRAs.

The changing tax rules are the reason that you must measure your IRAs, whether they are Traditional or Roth, in terms of their purchasing power. For many individuals, paying tax on the amount that you convert to a Roth IRA can provide a benefit to you, and an even greater benefit to your heirs. It goes against my grain to pay income tax even a day sooner than I have to, but I put my own money where my mouth is. Years ago, I paid the income tax due and converted a significant amount of both my own and wife’s Traditional IRAs to Roths. I’m glad I did, because those IRAs have grown tax-free for decades.

Roth IRA Conversion Calculators

So let’s talk about those Roth IRA conversion calculators that are available online. Are they accurate? Well, if you want to try one out, please make sure that you find a calculator that uses the current tax rates. Your results will not be accurate if you unknowingly choose a calculator that uses tax rates from ten years ago! When personal computers first hit the scene, there was a popular saying about them: “garbage in, garbage out”. This was the developer’s way of saying that, while their programs were accurate, they couldn’t prevent you from making errors. So if you were preparing your tax return using a well-known software and accidentally checked a box that said you were single when you were actually married, your tax return would still be right – if only you were single.

Ultimately, all an online calculator can do is estimate whether or not a Roth IRA conversion can benefit you. In my opinion, an estimate is not good enough. Before we make the recommendation to a client that they do Roth IRA conversions, our CPAs do actuarial calculations using several different scenarios. They also calculate your tax return (and the tax returns of your beneficiaries) so that we know for certain whether Roth IRA conversions can benefit you. If the Death of the Stretch IRA legislation passes as I believe it will, Roth IRA conversions will likely become a more important part of many estate plans.

Stop back soon for more Roth IRA talk!

-Jim

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

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

How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA

Posted on July 6, 2017 by James Lange in Educational Resources, Inherited IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement.

This post is part of a series about the Death of the Stretch IRA, and some ideas that you can use to minimize the effects of it.

Are Roth IRA Contributions and Conversions a Good Idea for Older Investors?

There is a lot of debate about whether or not Roth IRAs are a good idea and, in particular, whether or not they are a good idea for older investors. In my opinion, Roth IRAs and Roth IRA conversions are a good idea for both young and old investors. I also believe that Roth IRAs will become even more important after the Death of the Stretch IRA. Why do I believe this? In order to explain it, I have to ask you to change your paradigm about the way you perceive money. And if you can understand the concept I’m about to introduce, you’ll be way ahead of most lawyers, CPAs and financial advisors.

The Roth IRA Advantage: Purchasing Power

Suppose that John and Jim both want to buy a $600,000 vacation home. Jim has $900,000, and to keep things simple, I’m going to assume that his money is invested in a bank certificate of deposit, where there would be no capital gains generated if he cashed it in. John has $1,000,000 in his Traditional IRA and, when measured in dollars, he has an advantage because he clearly has more money than Jim. But John will have to pay tax when he withdraws money from his Traditional IRA, and, in this example, I’m going to assume that John doesn’t have any money outside of his retirement plan to pay the income tax due. That means he has to withdraw even more from his IRA in order to have $600,000 left to spend on his vacation home. Well, since the top tax rate is 39.6 percent, John will have to withdraw his entire $1 million IRA because he’ll owe the IRS almost $400,000. Jim’s vacation home cost him $600,000 because he didn’t have to worry about taxes, but John’s vacation home actually cost him closer to $1 million. So even though Jim didn’t have as much money as John, he had the advantage over him. He had more purchasing power than John because he already paid the income tax that was due on the money he used to buy the house.

That is the way that I would like you to think about your money – not in terms of the amount of dollars you have, but how much purchasing power you have. If you can understand the advantages of purchasing power, you will have the key to unlocking the secret of the Roth IRA treasure.

The Breakeven Point for Roth IRA Conversions

Some professionals insist that there is no advantage to an older investor doing a Roth IRA conversion. This is because they think of the conversion in terms of dollars rather than purchasing power – which means that an older investor may not have a long enough life expectancy to recoup the income taxes he prepaid. Well, that is like comparing apples to oranges. I believe that the breakeven point of a Roth IRA conversion happens on Day 1, and here’s why. Suppose Jim and John both own Traditional IRA s worth $100,000 plus $25,000 in after-tax accounts. If John cashes in his Traditional IRA he will have $100,000 to spend, but he has to use the $25,000 to pay the income tax due on the withdrawal. Jim, on the other hand, does a Roth IRA conversion. He converts his $100,000 to a Roth IRA and, yes, he also uses his $25,000 to pay income tax. On the day he makes the conversion, he has $100,000 – the same amount of money, and the same amount of purchasing power, as John. This means that the breakeven point of a Roth IRA conversion is the day of the conversion. The most significant difference happens in the future. For the rest of his life, all of the gains that Jim earns in his Roth IRA account will be tax free. And even if John just reinvests his $100,000 in a regular brokerage account, all of the future gains that are earned in the account will be taxable.

Roth IRAs can be a great idea for older investors. If you compare apples to apples and measure your purchasing power, rather than your money, the breakeven point for a Roth IRA conversion will happen on Day 1. And better yet, the tax-free feature of your Roth IRA can offer an excellent defense against the Death of the Stretch IRA.

Stop back soon for more Roth IRA talk!

-Jim

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

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

Roth IRA Conversions and the Death of the Stretch IRA

Posted on June 28, 2017 by James Lange in Educational Resources, Inherited IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, new ira laws, new ira rules.

Learn About Roth IRA Conversions & the Death of the Stretch IRA in this Video Blog Post

You’ve been hearing a lot from me about the Death of the Stretch IRA, and so might be happy to hear that the next couple of posts I do will concentrate on Roth IRAs and Roth IRA conversions. Is this because I want you to start thinking about your income tax planning for 2017? Not really – it’s because a series of Roth IRA conversions can, for some people, be the best defense against the Death of the Stretch IRA.

The Most Important Financial Fact About Retirement

If you’re new to my blog, though, I want to take a moment and emphasize what I believe is one of the most important facts that retirees should know about their finances. So here it is. Above all, you should understand that a positive financial outlook in retirement involves far more than just the rate of return you earn on your portfolio.

Surprised? One of my favorite illustrations that demonstrates this involves two hypothetical couples who are the exact same age, have the exact same amount of money when they retire and who invest their money exactly the same way. Everything about these two couples is exactly the same, except for one thing. One couple uses the optimal strategies when applying for Social Security and makes a series of Roth IRA conversions, but the other couple doesn’t. The illustration shows the scope of difference between the couple’s financial outlook during retirement. The couple who understood the most important financial fact about retirement invested in the exact same assets that the other couple did – so they did not earn a higher rate of return. But because they used the optimal strategies for Social Security and Roth IRA conversions, their retirement savings outlived them both and they passed a sizable estate on to their children. The other couple, unfortunately, went broke during their lifetimes.

Understanding the most important financial fact about retirement – that a secure retirement can depend on far more than just the rate of return you earn – can make a huge difference in your financial security.

The Benefits of Roth IRA Conversions

We’ve talked about how Social Security can give you a hedge against the Death of the Stretch IRA, so now let’s look at how Roth IRA conversions might benefit you.

What is a Roth IRA conversion? The simplest way to explain it is with an analogy. Suppose you are a farmer, and the IRS gives you a choice. You can deduct the cost of your seed and pay tax on your entire harvest, or you can forgo the deduction for your seed and reap your entire harvest tax-free. The second option shows the benefit of the Roth IRA. Would you rather deduct the contribution to your retirement plan and pay tax on withdrawals, or forgo the deduction so that you don’t have to pay tax on withdrawals?

In order to make a Roth IRA conversion, you have to enlist the assistance of the custodian who handles your traditional IRA. They transfer all or part of your traditional IRA to a Roth IRA and file some paperwork with the IRS. The paperwork tells the IRS that you owe them tax on the amount you converted, and that all of the money you earn in your new Roth IRA will be tax free. Some individuals are critical of Roth IRA conversions because you pay taxes before you’re legally required to. That’s very true. But even though nobody wants to give the IRS a helping hand, is there a benefit to prepaying the tax bill that will eventually be due on your traditional retirement plan? Let’s review the Roth IRA rules.

You know that Roth IRAs grow tax-free for the rest of your life. But did you know that they also grow tax-free for the rest of your spouse’s life, and under existing law, your children’s lives too? For those of you who aren’t all that motivated to leave your children in the best possible position because you think they should be happy with whatever you leave them, there’s another feature to the Roth that can provide an enormous benefit just for you. The Roth IRA rules specify that there is no Required Minimum Distribution (RMD) for the original owner or surviving spouse, as there is with a Traditional IRA. This benefit alone can provide you with enormous flexibility and control over your tax picture, especially after you turn 70 ½. Your children will be required to take RMD’s from any IRA that they inherit from you, whether it is a Roth or Traditional account. The difference is that the withdrawals from the Roth are tax free. That is beauty of the Roth IRA for your non-spousal heirs.

If you are concerned about your heirs, the tax-free benefit of the Roth will make all the difference after the Death of the Stretch IRA. This is because the Death of the Stretch IRA will accelerate the RMDs that your non-spousal heirs must take from the IRAs they inherit from you. The entire account must be withdrawn from the IRA within five years. And if you have a large IRA – $1 million or more – your children will have to take very large withdrawals. These withdrawals can potentially throw your children into a much higher tax bracket during those years, unless you had the foresight to convert your traditional retirement plans to a Roth.

We’ll talk more about Roth conversions next week. Stop back soon!

-Jim

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

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

President Trump’s Tax Reform Proposal and How it Might Affect You

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?

How Flexible Estate Planning Can Save Your Children Money

Posted on May 9, 2017 by James Lange in Beneficiary Designations, Educational Resources, Inherited IRAs, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules.

Using Flexible Estate Planning as a Possible Solution for the Death of the Stretch IRA

The previous posts in this series discuss the proposed legislation that would spell the Death of the Stretch IRA, and offer some ideas that you might be able to incorporate into your own estate plan to reduce its devastating effects. This post will show you how flexible planning can minimize the damage that income taxes could do to your childrenís inheritances after the Death of the Stretch IRA.

The $450,000 Exclusion, Use it or Lose it!

I want to go into detail about something that I first mentioned in my post of February 28, 2017, which was the proposed $450,000 exclusion to the Death of the Stretch IRA legislation. The proposed legislation said that each IRA owner would be entitled to their own exclusion of $450,000. Regardless of how many retirement accounts you own, and how many beneficiaries you name on them, it is critical that you donít overlook the fundamental step of making sure that your exclusion can be used after your death. If you donít use it, you will lose it!

Readers who have been around as long as I have may remember estate planning in the late 90ís, when the top federal estate tax rate was an outrageous 55% and only $600,000 of your estate could be protected from it. And in order to protect more of your assets from the IRS, attorneys had to draft elaborate trusts (often referred to as marital, or A/B trusts) which would allow each spouse to have a $600,000 exclusion of their own. That way, a total of $1.2 million of your familyís money could be exempted and would pass to your children without being subject to federal estate tax. Remember those days?

Common Beneficiary Language Can Cause Your Heirs to Lose an Exclusion

Well, now you have to think the same way about the $450,000 exclusion that is proposed in the Death of the Stretch IRA legislation. The proposal says that the change will apply only to the extent that an individualís aggregate account balances exceed the exclusion amount. But what do most people do when they fill out their beneficiary forms? They say, I want my spouse to have this money, and if my spouse dies before me, I want it to go to my children. Sound familiar? Well, suppose you have $450,000 in an IRA, and your spouse has $450,000 in an IRA. You die, your spouse rolls your IRA in to her own IRA, and now she has $900,000. In an earlier post, I told you that your spouse is an exempt beneficiary ñ so any money that you leave to her wouldnít have been subject to the $450,000 exclusion anyway. But suppose your spouse dies a week after you do. Since her IRA was worth $900,000 when she died, your children can only exclude $450,000. So half of her account could be sheltered under the old IRA rules, but the remainder would be subject to the proposed new IRA rules.

A Better Plan – Use Both Exclusions

A better plan would be to make sure that, if possible, you and your spouse can use both of your exclusions. For example, suppose you have $1 million in an IRA, and your spouse has $1 million in her own IRA. Both of you have estate planning documents that give your surviving spouse the right to disclaim to the next beneficiary in line. You die, and now your spouse has a decision to make. Sheís your beneficiary, and she can accept your IRA if she feels she needs the money. But suppose she doesnít need all of it? She could say, ìIíll be quite comfortable with only $550,000 of this, plus the $1 million from my own IRA.î In that case $450,000 of your IRA would go to the next beneficiary in line ñ your children. Since the amount that your spouse disclaims is within the exclusion amount, $450,000 of your IRA will go to your children and can be distributed according to the old rules. Then when your spouse dies, her entire IRA will pass to your children and they can exclude $450,000 of her IRA from the new rules too.

Flexible Estate Planning is the Key

Flexible estate planning allows your surviving spouse to decide who gets what after your death, and is the key to minimizing the harsh effects that the Death of the Stretch IRA legislation will bring if it is passed. Stop back soon for some more random thoughts!

-Jim

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

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

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

Posted on May 2, 2017 by James Lange in Beneficiary Designations, Educational Resources, Inherited IRAs, Lange’s Cascading Beneficiary Plan, Stretch IRA, Video Resources and tagged death of the stretch ira, disclaim beneficiary, inherited ira, Lange's Cascading Beneficiary Plan, new ira rules.

Lange’s Cascading Beneficiary Plan may be a good option to protect your family against the Death of the Stretch IRA

When I meet with new clients for the first time, one of the most aggravating things that I often find is that their existing estate planning documents are “set in stone”, and can cause the estate to be subject to unnecessary taxes. What do I mean by that?

Let’s say you have Jack and Jill, and their three kids John, James and Judy. Jack is 87, and Jill is 86. Jack and Jill both had wills that said, “I want my spouse to inherit everything, but if he or she is dead then I want my children to get everything.” Sound familiar? After Jack and Jill both die, their assets will be passed on to their kids as they specified, most certainly. The problem is that their kids will more than likely end up with less money than they could have.

Why is that? Jack dies, leaving $3 million to his wife. Is it really likely that Jill is going to need $3 million to live on for the rest of her life? Probably not. The vast majority of wealthy individuals that I’ve worked with are in that position because they have never led an extravagant lifestyle, and in my experience, leopards don’t change their spots all that easily. More than likely, what will happen is that, a few years down the road, Jill will die with even more money in the bank. Their hard-earned savings will eventually go to their children as they wanted, but Jack and Jill may have missed the chance to use Lange’s Cascading Beneficiary Plan and possibly save them a significant amount of taxes due on their inheritance.

Using Disclaimers in Your Estate Plan

A disclaimer simply means that your beneficiary says “I don’t want this money that I’ve been given”. So let’s assume that Jack names Jill as his primary beneficiary, and their three children as contingent beneficiaries. After Jack’s death, Jill has nine months to think about it and, if she says “I want that money”, she gets it. But what happens if Jill is terminally ill and doesn’t expect to live much longer? She can disclaim the money say “I will never live long enough to spend $3 million, but I would like to have $300,000 for my own use. The remaining $2.7 million can go directly to our kids.” Jill can’t change what Jack has instructed – meaning that she can’t cause one child to receive more money than what he specified, or ask that some of the money be given to their grandchildren if Jack didn’t include them as beneficiaries. But she can step aside and say “I don’t need all of this money; give it to the next one in line”. By disclaiming, Jill allows Jack’s money to be passed directly to their children if she doesn’t need it. In many cases, disclaiming can be far more tax-efficient than having Jill inherit all of the money, never using it, and then passing on to their children.

Lange’s Cascading Beneficiary Plan (LCBP)

Many years ago, I designed a groundbreaking concept that I call Lange’s Cascading Beneficiary Plan. It incorporates the use of disclaimers into the estate plan, which allows your surviving spouse to have maximum flexibility after your death. This type of flexible estate planning can make a huge difference for your beneficiaries after your death. Assuming that your wills contain the appropriate language that meets both federal and state requirements for a valid disclaimer, your beneficiary can make decisions that are based on your family’s situation and tax laws that are in effect long after your will was prepared. And the best part is that they have up to nine months after your death to disclaim – so their decision can be based on your family circumstances and the tax laws that are in effect at the time.

Lange’s Cascading Beneficiary Plan may become an even more valuable estate planning tool after the legislation that I call the Death of the Stretch IRA is passed. Please stop back soon for an update.

-Jim

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

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

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

Posted on April 6, 2017 by James Lange in Educational Resources, Inherited IRAs, IRAs, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, new ira rules.

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

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

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

The Politics of the Death of the Stretch IRA

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

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

Is the Stretch IRA safe?

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

Trump and the Death of the Stretch IRA

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

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

Jim

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

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

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

Posted on March 21, 2017 by James Lange in Educational Resources, Index Investing, Inherited IRAs, Social Security, Stretch IRA and tagged death of the stretch ira, inherited ira, new ira rules.

What to do now to protect your heirs from the Death of the Stretch IRA

This post is the fifth in a series about the Death of the Stretch IRA. The four posts that precede this one spell out the details of the proposed legislation that will cost your family a lot of money. In this post, I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA that you should consider now. As I said in my earlier posts, using Lange’s Cascading Beneficiary Plan to take advantage of the existing minimum required distribution rules that allow inherited IRAs to be stretched will, for most of you, produce a much more favorable result than any other option available. The Death of the Stretch IRA legislation is designed to accelerate income taxes on retirement plans, so the Charitable Remainder Unitrust should be your “Plan B” that you consider only after the law changes.

How can Social Security help with the Death of the Stretch IRA?

If you’re considering retiring, the very first thing you should do is evaluate your Social Security benefits. Many people feel that the best age to take Social Security benefits is 62 – get back what you paid into the system before it collapses, etc! I used to agree with that line of thinking until noted economist Larry Kotlikoff brilliantly pointed out the flaw in my logic. Larry told me that the last thing I should worry about was not getting back what we had paid into the system if my wife and I die young. If you die, he said, you will have no financial worries – because you’re dead! Our fear, he told me, should be that we might live a very long time and possibly outlive our money. Wow! What an attitude adjustment! But after thinking about it, I realized Larry was right. Your Social Security benefits will give you a guaranteed income that will last for the rest of your life, so it makes sense to maximize them and get the most you can. I wrote an entire book on that subject – you can get it for free by going to the first page of this website – so I’m not going to cover those techniques in this blog. Or, check out an earlier blog post that talks about my latest Social Security book The Little Black Book of Social Security Secrets, Couples Ages 62-70: Act Now, Retire Secure Later. But, getting the highest Social Security benefit is something that you should be evaluating now, because it will benefit you before and after the Death of the Stretch IRA.

How much can you afford to spend every year in retirement?

Second, know exactly how much you can afford to spend every year during retirement, without having to worry about running out of money. Many financial advisors point to a rule of thumb known as the Safe Withdrawal Rate, which is the amount that you should be able to withdraw from your assets over the course of your lifetime without worrying about running out of money. And while there is certainly validity in knowing how much you can spend during the retirement, the problem with rules of thumb is that they are just that! I have proven that there is also a benefit to spending your savings strategically – I discuss it at length in my flagship book, Retire Secure! – but the idea, sadly, is usually not included in general discussions about Safe Withdrawal Rates. The bottom line? Don’t rely on estimates – talk to someone who is skilled in running the numbers, and then check your numbers regularly. That way, you won’t have to worry about running out of money, no matter when the Death of the Stretch IRA passes.

Are you paying to much to invest your money?

Third, know how much you are paying to invest your money. As more and more people become educated about investment fees, the trend (thankfully) has been to move away from high-cost products such as annuities and front-loaded mutual funds, and from stockbrokers who survive by constantly buying and selling in their client’s accounts. Instead, more people are looking toward low-cost mutual funds that can provide diversification, income and even growth without having to pay huge fees. The cost that you pay to earn a return on your money is so important that I’ve even been known to suggest that it should be included as part of your Safe Withdrawal Rate calculation. In years past, there was an odd prestige associated with the idea of having your money managed by a broker who charged high fees. That is not the case anymore! Americans are moving in droves to low-fee investments because they now fully understand how much they save over the long term. And doing the same will benefit you no matter when the Death of the Stretch IRA legislation passes.

Please stop back soon!

Jim

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

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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

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

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

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

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

Posted on March 14, 2017 by James Lange in Charitable Remainder Unitrust, Educational Resources, Inherited IRAs, QTIP Trusts, Stretch IRA and tagged crut, death of the stretch ira, inherited ira, new ira rules.

Can a Charitable Remainder Unitrust Protect Your Heirs From the New IRA Tax Rules James Lange

This post is the fourth in a series about the Death of the Stretch IRA. If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the three posts, How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?, Are There Any Exceptions to the Death of the Stretch IRA Legislation?, & Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA? immediately before this one. Those posts spell out the details of the proposed legislation that will cost your family a lot of money. If you’re familiar with the specifics of the legislation, then please read on, because I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA.

What is the best way to protect my IRA, once this Stretch IRA legislation is passed?

Many people have asked me, “What is the best way to protect my IRA, once this legislation is passed? Well, the Senate Finance Committee did say that some people could be excluded from the new tax rules – my post of February 28^th discusses them – so let’s look at how they might figure into your game plan.

I firmly believe in providing the surviving spouse with as much protection as possible, so I usually recommend that you name your spouse as your primary beneficiary and give him the right to disclaim your IRA to someone else. If your spouse needs the money, that’s great. He is excluded from the legislation, so he can still “stretch” your IRA after your death.

But suppose you have no spouse, or that your surviving spouse will not need your IRA because he has sufficient assets of his own? In that case, your IRA will likely go to your child or children. And the problem with that is that children are not excluded from these new rules unless they are disabled or chronically ill. So here is one possible solution that can protect your children from the harsh new tax structure.

Let’s assume that you have an IRA that is worth $1.45 million, and that your beneficiary is your child. Under the proposed new rules, your child can exclude $450,000 of your IRA and stretch it over the remainder of her life. The remaining $1 million, though, will be subject to the new rules and will have to be withdrawn from the IRA within five years. Even if she tries to spread the withdrawals out over five years to minimize the tax bite, she’ll still have to include about $200,000 in her income every year. Depending on her income from other sources, that will probably push her up into a higher tax bracket. The current maximum tax rate is 39.6 percent, so it’s possible that your child would have to pay $400,000 in federal income taxes – even more, if the state you live in taxes IRA distributions.

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA?

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA, and protect your child from these taxes? If you look at my post on February 28^th, you’ll see that charities and charitable trusts are excluded from the five-year rule! And while the CRUT has to comply with certain IRS rules regarding how and when money can be withdrawn, the IRA that is inside the trust is not subject to tax UNTIL you take withdrawals from it. So if your child receives the minimum possible from the trust every year, it is possible that he can avoid much of the income tax acceleration that will happen once this legislation is passed.

Will your child have more money over the long term with the income from the $1 million that goes into the trust, or if he has to follow the new IRA rules and has to withdraw your IRA and pay taxes within five years, leaving him with an after-tax amount of about $600,000? I’ll answer like a lawyer – it depends. One of the very real problems with a charitable trust is that, once the beneficiary dies, any money that is left over goes directly to the charity. So if your child dies after receiving just one distribution from the trust, the charity will end up receiving more money from your IRA than your family will. There are some possible ways to manage this risk, though, such as taking out a term insurance policy on the life of your child. So if he does die prematurely, the proceeds of the life insurance can replace the money that will go to the charity.

For some people, a CRUT can be a bad idea. There is a cost to draft the legal documents, but that cost is nothing compared to the cost of maintaining the CRUT over the long term. The Trustee must file a tax return for the CRUT to show the IRS how much has been paid to the beneficiary. The CRUT’s tax return produces a form that has to be included with the beneficiary’s tax return, just like a W-2 or 1099, and the extra paperwork means a higher tax preparation fee for the beneficiary every year. My rule of thumb is that it’s not worth the money or headaches to establish a CRUT and name it as your beneficiary if your IRA balance is below $1 million.

I encourage you to watch this short video to learn more about the pros and cons of Charitable Remainder Unitrusts, and how they can be used to help shield your retirement savings from the Death of the Stretch IRA legislation. However, do not take action and establish a CRUT until the final legislation has passed. If you are using Lange’s Cascading Beneficiary Plan, the current Stretch IRA rules will produce a far more favorable result than the trust.

Please stop back soon,
Jim

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

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

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

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

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

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

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

How Does The New DOL Fiduciary Rule Affect You?

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

The Exclusions for the Death of the Stretch IRA

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