Proposed SECURE Act Make Roth IRA Conversions More Valuable

Posted on by in 401(k), 403(b), Current Events, Economy, Inherited IRAs, IRAs, Lange’s Cascading Beneficiary Plan, Retire Secure!, Retirement Plan Options, Retirement Planning, Roth IRA, Roth IRA Conversions, Stretch IRA.

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

Optimizing Your Estate Plan Now in the Event of a Biden Presidency and a Democratic Congress

Posted on by in Beneficiary Designations, Current Events, Economy, Estate Planning, Retirement Planning and tagged , , .

Optimizing Your Estate Plan Now in the Event of a Biden Presidency and a Democratic Congress

by: Matt Schwartz, Esq.

Image featured in a blog post by Matt Schwartz, Esq on PayTaxesLater.comAs the 2020 election approaches, a frequent question that I receive as an estate planner is what should I be doing now to maximize what I leave to my family as an inheritance.

One can reasonably assume that if Trump is reelected or the Senate remains Republican that there will unlikely be any sizable tax increases over the next four years.  However, what if Biden is elected and both the House and Senate are Democratic?  In that scenario, it is likely that the estate tax exemption returns to $5,000,000 adjusted for inflation per person and that the step-up in basis rules on appreciated assets will be repealed with immediate recognition of capital gain at the time of the taxpayer’s passing.  In addition, the maximum personal income tax rate will rise to 39.6% on income over $400,000 with capital gains being subject to ordinary income tax rates of 39.6% on income (including the capital gain) over $1,000,000.

What can I do now to be safe no matter what happens in the election?

Consider Recognizing Some Capital Gains Now: Over the years many people have ignored sound economic theory regarding diversification of your financial portfolio because of the extremely adverse tax consequences of capital gain recognition when such capital gain could be forgiven at the time of death.  Perhaps this thinking needs to be reevaluated.  With today’s current low income and capital gains tax rates, perhaps it makes sense to recognize $50,000 to $100,000 of unrealized appreciation through a capital gain if the federal income tax is 15% (or 20% depending on your other income).  For some families, it may make sense to recognize significantly more at 20% if you are looking at a future prospect of having some of this income be recognized at 39.6% at the time of death.  The prospect of recognition of the capital gains tax on the transfer of appreciated assets (especially less liquid appreciated assets such as business interests and commercial real estate) when most of the other assets to pay the tax are retirement assets could be draconian.

Consider Second-to-Die Life Insurance: In recent years, I have been less of a fan of second-to-die life insurance based on the high federal estate tax exemption.  However, life insurance (probably ideal to get before 70 if you are a couple) could be a great asset (income tax-free) to cover the tax that will be due on the transfer of appreciated assets at death where the primary assets remaining to pay this tax in many estates could be retirement assets that are subject to income tax upon withdrawal. 

Consider Transferring Some Appreciated Assets to Lower Income Family Members Now: Traditionally, we have recommended transferring appreciated assets to individuals who are in low tax brackets so that they can recognize the gain with little or no tax consequence.  In addition, to continue transferring a modest amount of appreciated assets to lower-income family members to keep their income down on the recognition of the capital gain, you may want to consider transferring more to them if they can recognize it at current favorable 15%-20% rates compared to having to recognize it at the time of your death at a possible 39.6% rate.

Consider Transferring Appreciated Assets to Charity: It is always a good idea to fund a gift with highly appreciated assets as long as the gift is large enough to be deducted as an itemized deduction.  It will make even more sense to transfer highly appreciated assets to charity if Biden becomes President and both houses of Congress are Democratic.

Consider Roth IRA Conversions Particularly if you are currently Married: We are seeing more and more widows and widowers in the 32% bracket or higher so considering Roth IRA conversions while you are still married to maximize the 24% bracket is a good planning strategy.

The first of these four ideas is a relatively new idea for consideration in light of the understanding of many estate planners including myself that the step-up in basis was a permanent part of the tax law.  So, I would wait until after we know the outcome of the election to act too aggressively on recognizing capital gains.  However, all of the other ideas are good tax, retirement, and estate planning ideas to consider now irrespective of the outcome of the election and I would act on those sooner than later if they are a good fit for your situation.

Please do not hesitate to send me an email to matt@paytaxeslater.com or give me a call at (412) 521-2732 if you are interested in having a further discussion on these topics or any other retirement and estate planning topics.

 

Tax Planning Opportunities During Coronavirus

Posted on by in Current Events, Economy, Income Tax, Roth IRA, Roth IRA Conversions, Tax-Loss Harvesting, Trusts.

Article by Matt Schwartz

Planning Opportunities During Coronavirus a blog by Matt Schwartz on paytaxeslater.com

Two months ago if you’d told me that in a matter of weeks I’d be walking two miles each way to an ATM to deposit a check or walking a mile and a half round trip to the nearest post office box to put a letter in the mail, I would have questioned your sanity or asked you what planet you live on. But this is the reality of Coronavirus and the way it has totally upended our daily lives. At the same time, on these treks to the ATM or the post office box I have connected with neighbors, Mt. Lebanon professional colleagues and potential clients whom I would not have seen but for my walks. Of course, we always make sure to maintain a safe social distance during these impromptu catch-up sessions.

I have really enjoyed these interactions with fellow community members and they have reinforced my belief that connecting with friends, colleagues, and clients is particularly important during this period of social distancing. For our firm, this means finding methods of communication that can be used in place of in-person meetings. I’ve been reaching out to a number of clients by email, Facetime, telephone and even social distance signings at their homes by viewing clients signing in their garages or on their porches.

All of these discussions begin in a similar fashion with me asking the clients how they are doing and feeling very reassured when they tell me that they are doing OK. No one is doing great, but we are all in this together trying to figure things out one day at a time. Once we check in with each other, since clients always want to make sure my family is doing OK too, they ask me what planning opportunities that they should be considering right now.

Here are a few of the strategies I often recommend:

• Roth IRA Conversions – My wife, Beth, completed a Roth IRA conversion about a week and a half ago by making an in-kind transfer of all of the positions in her rollover IRA to her Roth IRA. She did not have to realize a loss by selling positions in her IRA, and she was able just to transfer the funds directly into the Roth IRA. This year clients will have additional opportunities to make larger Roth IRA conversions because of the recently passed Coronavirus, Aid, Relief and Economic Security Act or “CARES Act” (we only get acronyms like this from Congress) waives the requirement for clients to take required minimum distributions from qualified plans. This includes those that were inherited before 2020, whether they are inherited Roth IRAs or inherited traditional IRAs. If you are interested in utilizing this strategy this year, I recommend that you consult with one of the CPAs at Lange Accounting Group who can develop a Roth IRA conversion masterplan for you.

• Tax Loss Harvesting – With the volatility in the market, there are opportunities to recognize losses to offset remaining gains in equities, while buying a similar enough equity to get around the 30-day wash rules which prohibit you from buying back the same exact investment within 30 days. We recommend that you consult with your financial advisor on how you can best pursue this strategy.

• Charitable Giving – With the increased need in the community, the CARES Act allows those who can afford to do so to make cash contributions to public charities up to 100% of their adjusted gross income rather than 60%. Most of us do not have enough savings to be able to afford to do that. But the broader point is that we should consider charitable giving to the extent that we can afford to do so and perhaps even consider bunching (giving more than you normally would so that you can itemize the deductions and help the charities now).

I am confident that we will survive Coronavirus, and the economy will eventually get back on its feet. I also appreciate how difficult a time this is for all of us. At the same time, I encourage you to take advantage of these opportunities before the market really starts to recover.

Best wishes to all of you for what I hope is continued good health. I am looking forward to the time that we can meet again in person.

Best wishes,

Matt

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

The Defenses Against the SECURE Act

Posted on by in Beneficiary Designations, Current Events, Economy, Estate Planning, IRAs, Retirement Plan Options, Retirement Planning, Roth IRA, Roth IRA Conversions, Stretch IRA and tagged , , , , .
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?

Posted on by in Beneficiary Designations, Current Events, Estate Planning, Estate Tax, Government Programs, Income Tax, Inherited IRAs, IRAs, Retirement Plan Options, Retirement Planning, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged , , , , , .
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.

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The Hidden Money Grab In The SECURE Act

Posted on by in Current Events, Estate Planning, Inherited IRAs, IRAs, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged , , , , , .

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 Death of the Stretch is Back On Congress’ Agenda

Posted on by in Current Events, Estate Tax, Government Programs, Inherited IRAs, Market News, Retirement Planning, Stretch IRA, Tax Law and tagged , , , , , .

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.

Roth IRA Conversions of After-Tax Money: Beware of the IRA Aggregation Rules

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How Do the Tax Cuts and Jobs Act of 2017 Effect Roth IRA Conversions?

With the historic low tax rates under the Tax Cuts and Jobs Act of 2017, we have received many inquiries regarding Roth IRA conversions.  Two of the most common inquiries we receive are as follows:  1) when a client retires and wants to convert after-tax money in their employer retirement plan to a Roth IRA, and 2) when a client is not eligible to make Roth IRA contributions but wishes to get additional savings into Roth IRAs.

Transferring After-Tax Contributions from an Employer Plan to a Roth IRA

If you have after-tax contributions in your employer plan and you are retiring, ideally you want the company to issue one check directly payable to a Roth IRA consisting of the after-tax funds and the balance to a rollover IRA or other qualified plan.  That is the easiest way to convert the after-tax contributions to a Roth IRA.  Unfortunately, some companies will not do a direct transfer of the after-tax funds to a Roth IRA and will either write you a check for the after-tax funds or deposit all your retirement funds including the after-tax contributions into a rollover IRA.  If all the funds are deposited into a rollover IRA, then you cannot segregate the after-tax contributions without meeting special rules.  If you receive a separate check for your after-tax contributions, then you have 60 days to transfer that check to a Roth IRA.  If you do not take advantage of the 60-day period, then those dollars can never be recontributed to a Roth IRA.

How Do you Get Additional Funds into IRAs if Your Income is Above the Roth IRA Contribution Income Eligibility Limit?

If your income exceeds the Roth IRA contribution income eligibility limit, then you can make a nondeductible IRA contribution and then convert it to a Roth IRA.  However, if you have pre-existing IRAs, then those IRAs must be considered to determine the taxation of the conversion.  For example, suppose that you make a $5,500 nondeductible IRA contribution but have a rollover IRA of $94,500.  If you were to convert the $5,500, you would likely be surprised to learn that 94.5% of the $5,500 conversion ($94,500 (amount of taxable IRA) divided by $100,000 (total balance of all IRAs) would be taxable.  That is why it is important if you use this technique either not to have other retirement funds or to have all your other retirement funds in Roth IRAs or qualified plans.  Married couples can often use spousal IRAs when one spouse does not have a rollover IRA and is not currently working or is working somewhere that does not have a qualified plan to utilize this technique.

Please do not hesitate to contact me at (412) 521-2732 or send me an email at the link below if you are interested in creative ways to increase your Roth IRA holdings.

 

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

Unprecedented 2018 Roth IRA Conversion Opportunities

Posted on by in Roth IRA, Roth IRA Conversions and tagged , .

A For Sale sign showing Roth IRA Conversions For Sale

The 2018 Tax Cuts, Jobs Act of 2017 and Roth IRA Conversions

At first glance, the Tax Cuts and Jobs Act of 2017 would have seemed to reduce the desire for individuals to make Roth IRA conversions for the 2018 tax year and beyond because of the inability to recharacterize Roth IRA conversions as non-conversions by your tax return filing date.  However, the historic low tax rates created under the Tax Cuts and Jobs Act of 2017 only last under current law through 2025 so many taxpayers have been willing to take the risk that the market could decline and have been converting their IRAs to Roth IRAs. The creation of the 22% and 24% tax brackets for 2018 effectively replacing the 25% and 28% tax brackets for 2017 along with an elongation of the tax brackets in 2018 have made a compelling case for Roth IRA conversions.

Roth IRA Conversions – The Benefits of Being Married and Filing Jointly

For example, suppose that you are married filing jointly and had $100,000 of taxable income in both 2017 and 2018.  Further, suppose that you were comfortable making a conversion if your marginal tax rate did not exceed 25%.  In 2017, you could make a $53,100 conversion at 25% and then the next dollar would be taxed at 33%.  In 2018, you could convert $65,000 at a 22% rate and then another $150,000 at a 24% rate.  In this example, a married filing jointly taxpayer can convert an additional $161,900 at a rate of 25% or less in 2018 compared to 2017.

In effect, the current tax law is the equivalence of a “tax sale” so families (grandparents, parents, children, etc.) should collaborate to reach the best strategic Roth IRA conversion answer for their family. Please do not hesitate to contact me at (412) 521-2732 x211 if you would like to discuss a coordinated Roth IRA conversion strategy for your family or;

Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

When Is Flexible Estate Planning with Lange’s Cascading Beneficiary Plan the Best Solution?

Posted on by in Estate Planning, Lange’s Cascading Beneficiary Plan, Retirement Planning, Video Resources and tagged , , , , .

Lange’s Cascading Beneficiary Plan:
When is Flexible Estate Planning the Best Solution?

Hi all!  As we edge closer to Halloween, I want to talk a bit more about something that TRULY TERRIFIES me: bad estate planning.  In our scary tale, the villain: Concrete Contract, is trying to trap your beneficiaries into decisions made today—decades prior to your death—based on information and circumstances that will likely be completely different when the time comes to put the estate plan into motion. The devil is in the details, and you don’t want the devil involved!

Luckily, our flexible friend, Lange’s Cascading Beneficiary Plan comes to the rescue! He provides the peace of mind that your beneficiaries will be able to make the best decisions with the facts at hand when the time comes.  Once again, flexible estate planning protects the innocent and saves the day!

Ok… Ok… I know that was a little silly.  But it is still true. Since the mid-1990s, Lange’s Cascading Beneficiary Plan has been saving beneficiaries from being trapped by decisions made decades in the past when an estate plan was drafted. In my opinion, there is no better option for your estate planning, particularly if your family is not a blended family—more traditional, so to speak.  In the accompanying video, I am going to explain my reasons for using this flexible estate plan and describe how it can provide optimal solutions under many circumstances.

As I have touched on before, the biggest problem in estate planning is that we don’t know what is going to happen in the future.  We don’t know when we are going to die.  We don’t know how much money we’re going to have.  We can’t anticipate the future needs of our surviving spouse.  We can’t know the needs of the children and grandchildren—or even whether there will be grandchildren.  We don’t know what the tax laws are going to be.  In point-of-fact, we don’t know what the tax laws are going to be next year much less a couple of decades from now!

A previous blog and video series addressed possible changes in the tax laws regarding retirement plans… and I said then, what I will say now.  The best thing that you can do to protect your family from those changes—not knowing what the future holds—is to make sure you have a flexible estate plan.  If we lose the ability to stretch an IRA, if inherited IRAs are taxed at an accelerated rate, if tax rates become more unfavorable for your family, then they will need flexibility to make financially sound decisions. Managing the tax impact on your legacy is critical.

What do you need to have Lange’s Cascading Beneficiary Plan work for your family?  Trust.  For this plan to work well, you absolutely must trust your spouse. This is really important, because after you die, your spouse will have the power to make a lot of critical decisions—hopefully in conjunction with other trusted family members and a trusted advisor, and armed with your wishes too.

Estate planning with cascading beneficiaries is not a new concept, but I put my twist on it making it work particularly well for IRA and retirement plan owners with traditional families. Then, I started calling it Lange’s Cascading Beneficiary Plan.  After decades of use, I’ve seen this plan serve my clients very well.

The video goes over the details of how this plan should be set up and how to name beneficiaries. I think it is really critical to get this right, and I want to make sure all my readers do get it right. Flexible estate planning has never been more critical as we stand in the shadow of the Death of the Stretch IRA. Good planning could save your family a lot of worry and a lot of money.

Stop back soon for more on Lange’s Cascading Beneficiary Plan.

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/.