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

More on Retire Secure! Third Edition…Coming Soon!

Retire Secure! Third Edition, A Guide To Making The Most Out Of What You've Got, James LangeThe third edition of Retire Secure!, Retire Secure! A Guide to Making the Most Out of What You’ve Got is set to be released in the coming months, (stay tuned for exact date). This revised Third Edition of Retire Secure! covers how to develop an estate plan that, among other goals, seeks to continue the tax-favored status of your retirement plans or IRAs long after your death using the stretch or inherited IRA—a strategy that has been, and continues to be, threatened by congress. Lange has a history of staying ahead of the curve, seeing trends and changes in the tax laws and developing strategies for his clients in advance to keep them on the right path toward their financial goals. He was among the first to predict the coming changes to the tax law on Roth IRAs and wrote a peer-reviewed article for The Tax Advisor (official journal of the AICPA) that would go on to win article of the year in 1998. He is continuing this trend in this Third Edition by laying out the possibility of the death of the stretch or inherited IRA as we know it, and providing avenues to reach the same or better outcomes for your family including the use of charitable remainder unitrusts, or CRUTS and life insurance.

Lange offers up plenty of new content in this Third Edition including cutting edge analysis on the unique synergy between Roth IRA conversions and Social Security Maximization that his office has been developing. Using Social Security maximization techniques including spousal benefits like “Apply & Suspend,” and timing small appropriate Roth IRA conversions to take advantage of lower tax brackets in retirement can make hundreds of thousands of dollars of difference in your retirement portfolio… and he’s got the study to prove it.

Virtually every chapter of Retire Secure! contains recommendations, analysis, and case studies that have come from a deep understanding of tax law, estate planning, investing, and “running the numbers” and are proven to work.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

Jim LangeA nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train ad educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

Please complete the form below to receive reminders about the upcoming release of Retire Secure! Third Edition

Save

More on Retire Secure! Third Edition… Coming Soon!

Retire Secure! Third Edition, A Guide To Making The Most Out Of What You've Got, James LangeThe third edition of Retire Secure!, Retire Secure! A Guide to Making the Most Out of What You’ve Got is set to be released in the coming months, (stay tuned for exact date). This revised Third Edition of Retire Secure! covers how to develop an estate plan that, among other goals, seeks to continue the tax-favored status of your retirement plans or IRAs long after your death using the stretch or inherited IRA—a strategy that has been, and continues to be, threatened by congress. Lange has a history of staying ahead of the curve, seeing trends and changes in the tax laws and developing strategies for his clients in advance to keep them on the right path toward their financial goals. He was among the first to predict the coming changes to the tax law on Roth IRAs and wrote a peer-reviewed article for The Tax Advisor (official journal of the AICPA) that would go on to win article of the year in 1998. He is continuing this trend in this Third Edition by laying out the possibility of the death of the stretch or inherited IRA as we know it, and providing avenues to reach the same or better outcomes for your family including the use of charitable remainder unitrusts, or CRUTS and life insurance.

Lange offers up plenty of new content in this Third Edition including cutting edge analysis on the unique synergy between Roth IRA conversions and Social Security Maximization that his office has been developing. Using Social Security maximization techniques including spousal benefits like “Apply & Suspend,” and timing small appropriate Roth IRA conversions to take advantage of lower tax brackets in retirement can make hundreds of thousands of dollars of difference in your retirement portfolio… and he’s got the study to prove it.

Virtually every chapter of Retire Secure! contains recommendations, analysis, and case studies that have come from a deep understanding of tax law, estate planning, investing, and “running the numbers” and are proven to work.

Read this upcoming book and make the most out of what you’ve got for your retirement and your family’s future security.

Jim LangeA nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train ad educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

Please complete the form below to receive reminders about the upcoming release of Retire Secure! Third Edition

Save

One Key to Financial Planning… a Roth IRA Conversion

Roth IRA Conversion, James Lange, Lange Financial Group, LLCIf you’re approaching retirement, you might want to consider a Roth IRA conversion. A recent change to tax laws allows for the conversion to Roth IRAs, 401(k)s, and 403(b)s to gain enhanced benefits. For one, the changes made in 2010 have no income cap for Roth IRA accounts. Previously, only incomes of $100,000 were eligible for conversion.

If you’re still not sure, consider these factors that can help lead your family to financial stability.

For the most part, Roth IRAs grow incometax free. Additionally, owners are not required to take distributions at age 70 ½. Roth IRAs grow continuously as long as you or your grandchildren own it; whereas, regular IRAs are tax-deferred. The growth and investment are both taxed when money is withdrawn.

With the income cap of $100,000 gone, the Roth IRA becomes all the more appealing for retirees. At least a partial conversion is recommended, though the converted amount will require tax payment. However, as long as the conversion is strategic, your family can reap the long-term benefits. For example, converting $100,000 today can put you over $51,000 ahead in the next
20 years.

If tax rates increase, the conversion to Roth IRA sees the benefits, because conversion at a lower tax can help cut back taxable income as rates increase. While you’re planning a financial future for your loved ones, keep in mind that your living will and trust don’t necessarily establish who will inherit your IRAs, Roth IRAs, and retirement plans. Specify your IRA and retirement plan beneficiaries. For those still unconvinced, Lange Financial Group makes a limited number of free consultations available to Western PA residents. Because each case is different, it’s important to run the numbers on a case-by-case basis to find a solution that best fits you. If you want to further discuss the benefits of Roth IRA conversions, call Alice Davis, our Client Services Coordinator, at 412-521-2732 to schedule an appointment.

Save

Save

Back Door IRA, The Conclusion

Roth-IRA-conversions,James-LangeRecharacterizations

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

Converting to a Roth IRA also comes with another very unique advantage. The IRS allows you a one-time opportunity to recharacterize or “undo” this conversion by October 15th of the following tax year. IRS publication 590 states that, “a recharacterization allows you to ‘undo’ or ‘reverse’ a rollover or conversion to a Roth IRA. To recharacterize, you generally instruct the trustee of the financial institution holding your Roth IRA to transfer the amount back to a traditional IRA (in a trustee-to-trustee or within the same trustee). If you do this by the due date for your tax return (including extensions), you can treat the contribution as made to the traditional IRA for that year (effectively ignoring the Roth IRA contribution)”. In the case of a Backdoor Roth IRA, you probably won’t think about recharacterizing. However, if you want to explore this option, we are here to help assist you, because like many of the other rules involved this can be complicated.

Conclusion

While Backdoor Roth IRAs can be beneficial to many investors, they aren’t for everyone. They come with their limitations and complications. There are precautions that need to be taken to reap the full benefits of any financial decision. This is an area where a highly informed financial advisor can help you make an educated and calculated decision. You should always consult with your financial advisor and tax professional to help avoid tax ramifications.

As always, we are here to help and can look at your specific financial situation and chart the right path for you. If you are interested in learning more about whether or not a Backdoor Roth would be right for you and your specific situation, please call us and we would be happy to discuss this with you. As always, we enjoy the opportunity to assist you in addressing your financial matters.

Financial Check-Up

 

Complimentary Financial Check-up

If you are currently not a client of The Lange Financial Group, we would like to offer you a complimentary, one-hour, private consultation with one of our professionals at absolutely no cost or obligation to you.

To schedule your financial check-up, please call 412-521-2732 or fill out our Pre-Qualification Form here.

Thank you,
James Lange

 

 

This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a lawyer or financial professional.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

Roth IRA account owners should consider the potential tax ramifications, age and contribution deductibility limits in regard to executing a re-characterization of a Roth IRA to a Traditional IRA.

The views stated in this letter are not necessarily the opinion of The Lange Financial Group, LLC, and should not be construed, directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. © Academy of Preferred Financial Advisors, 2014

 

Backdoor Roth IRAs: How Does the Backdoor Roth IRA Conversion Work?

The backdoor Roth conversion consists of two simple steps:

1)      You make a nondeductible contribution to your traditional IRA.

2)      Within a couple of days you convert this IRA into a Roth IRA (potentially paying little to no taxes on the conversion).

There’s one big caveat: This strategy works best tax-wise for people who don’t already have money in traditional IRAs. That’s because in conversions, earnings and previously untaxed contributions in traditional IRAs are taxed—and that tax is figured based on all your traditional IRAs, even ones you aren’t converting.

For an investor who doesn’t already hold any traditional IRAs, creating one and then quickly converting it into a Roth IRA will incur little or no tax, because after a short holding period there’s likely to be little or no appreciation or interest earned in the account.  However, if you already have money in traditional deductible IRAs, you could face a far higher tax bill on the conversion.

If you choose to, you can contribute to a non-deductible IRA for 2014 (the maximum is $5,500 or $6,500 for those age 50 or older). Remember, you must contribute to your IRAs prior to the April 15 2015 tax deadline. This non-deductible IRA can then be used for your backdoor Roth IRA conversion (please call us prior to doing so because the rules for Roth conversions can be complicated).

Want to learn more? Give us a call at 412-521-2732.

Examples of a Backdoor Roth IRA coming soon.

– James Lange

Backdoor Roth IRAs: A Potential Way for High Income Earners to Participate

The traditional contribution (“front door”) for Roth IRAs is currently not available for higher income earners. Married couples earning $191,000 or more and singles earning $129,000 or more in 2014 are still barred from contributing directly to Roth IRAs.

In 2010, Congress changed the rules and since then anyone can convert a traditional IRA to a Roth IRA. However, higher income earners are still ineligible to contribute to a Roth IRA.

A Backdoor Roth IRA is a strategy for some higher income earners to participate in Roth IRAs.  It is a way for higher income earners to put money into a traditional IRA and then roll that into a Roth IRA, getting all the benefits.  While this strategy sounds simple, there are several rules that you must know and follow to make sure you do not incur unintended tax consequences.  This is where working with a knowledgeable financial or tax professional can provide some great guidance and value.

One of the primary benefits of a Roth IRA is that any money contributed grows tax-free and is withdrawn without any further income taxation. In addition, unlike a traditional IRA, Roth IRAs have no required lifetime minimum distributions. Another benefit of a Roth IRA is it can be passed on to your heirs income tax free. This allows your funds to grow and compound tax free over many years.

Want to learn more? Give us a call at 412-521-2732.

More on this subject in the coming weeks.

– James Lange

Tomorrow’s Radio Show: Supporting the Four Corners of your Financial House

Join us tomorrow evening at 7:05 pm on KQV 1410 AM. Program also streams live at www.kqv.com. Encore presentations air EVERY SUNDAY at 9:05 am.

Most people recognize that proper asset allocation is essential to the long-term financial success of their retirement planning, but too many investors fail to consider all the factors of their situation.

For perspectives on making sure all four corners of your financial house are supported with leading edge solutions, tune in tomorrow evening, Wednesday, June 18th, at 7:05 p.m. when The Lange Money Hour welcomes P.J. DiNuzzo, CPA, PFS®, AIF®, MBA, MSTx back to the show.

A nationally recognized expert in investment management, P.J. has been featured in numerous business publications and TV shows. Approved as one of the first 100 Dimensional Fund Advisors (DFA), he is rated a 5-Star Advisor by Paladin Registry/Investor WatchDog, ranking in the top 1% of America’s more than 800,000 investment advisors. Based in the Pittsburgh area, his firm, DiNuzzo Index Advisors, also consistently ranks among the county’s top 500 investment companies.

Among other topics, Jim and P.J. will discuss are the “Advisor Alpha” and the benefits of “one stop shopping.”

Since tomorrow’s show will be live, you can join the conversation by calling the KQV studios at 412-333-9385 after 7:05 p.m. Email questions in advance by clicking here.

In addition to being broadcast at KQV 1410 AM, the show will be simultaneously live-streamed at www.kqv.com.  KQV will also rebroadcast the show this Sunday, June 22nd, at 9:05 a.m. The audio will also be archived on our web site at www.paytaxeslater.com/radioshow.php, along with a written transcript.

Finally mark your calendar for Wednesday, July 2nd at 7:05 p.m., when Jim will welcome back Larry Kotlikoff, a nationally recognized Social Security expert, to the next new edition of The Lange Money Hour.

 

Some things to consider about your Retirement Plan

In 2013, the maximum 401(k) contribution is $17,500 (plus a $5,500 catch-up contribution for those 50 or older by the end of the year). If you are self-employed, you have other retirement savings options. We will review these alternatives with you when you come in for your appointment. One of my favorites for many one person self- employed businesses is the one person 401(k) plan.

In light of the new increased tax rates effective in 2013, plus the addition of the new Medicare surtax on Net Investment Income, higher income taxpayers may want to consider switching from Roth 403(b) and Roth 401(k) elective deferral contributions back to tax deductible contributions. The current savings may outweigh the benefits of tax-free growth on the Roth accounts. As mentioned earlier, the focus moving forward for higher income taxpayers is toward reducing adjusted gross income.

You can also contribute to an IRA for 2013 up through April 15, 2014. The maximum is $5,500 with a catch-up (for taxpayers 50 or older) provision of $1,000.

– Excerpt from Jim Lange’s 2013 Year-End Tax Report

retirement-james-lange-financial-group-ira-asset-management-savings

The Hazards of Naming Different Beneficiaries for Different Accounts

It is quite common in my practice for clients to say they want one particular account to go to one beneficiary and a different account to another beneficiary. The accounts might reflect the relative proportionate value that the client wants each of the different beneficiaries to receive, but I think this can turn into a nightmare.

• You will have a terrible time trying to keep track of the different
distribution schedules.

• As the different investments go up or down, the amount going to the different heirs would also go up and down, which is probably not the intent.

• A beneficiary designation may say, “ I leave my Vanguard account to beneficiary B and my Schwab account to beneficiary A. ” If during your lifetime you switch or transfer money from Vanguard to Schwab, you have, in effect, changed who is going to get what, and that may not be your intention.

In general, I prefer one master beneficiary designation for all IRAs, retirement plans, 403(b)s, 401(k)s, and the like. In it I describe distributions as I would in a will or irrevocable or revocable trust. That way, we can avoid mistakes and simplify estate administration after the retirement plan owner dies.

I recognize that, for investment purposes, people use different accounts for different beneficiaries. For example, you might treat the investments of a grandchild beneficiary differently from those of a child or spouse. Under those circumstances I would be willing to bend and accept different beneficiaries for different accounts.

The one area where it might make sense to direct certain money to particular beneficiaries is FDIC insured deposits. At press time, the amount that the FDIC would insure rose from $ 100,000 to $ 250,000 through 2009. Assuming the money is outside the IRA (there are different protections for IRAs) one way to get more FDIC insurance is to have different beneficiaries with different paid on death designations. If you are a parent with four kids and you have four $ 250,000 CDs, you can do a pod account for each child and have the entire amount federally guaranteed. If the money was in an IRA, you are also insured up to $ 250,000 but you can ’ t get additional coverage by naming additional beneficiaries.

Retire Secure! Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition, James Lange, page. 271-272 https://www.paytaxeslater.com/