Proposed SECURE Act Make Roth IRA Conversions More Valuable

Posted on March 28, 2022 by Matt Schwartz 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 1^st 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 3^rd and Wednesday, May 4^th at https://PayTaxesLater.com/Webinars

Tax Planning Opportunities During Coronavirus

Posted on March 31, 2020 by Matt Schwartz 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

The Defenses Against the SECURE Act

Posted on August 23, 2019 by James Lange in Beneficiary Designations, Current Events, Economy, Estate Planning, IRAs, Retirement Plan Options, Retirement Planning, Roth IRA, Roth IRA Conversions, Stretch IRA and tagged Beneficiaries, James Lange, Retirement Planning, Roth IRA, Roth IRA Conversion.

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 August 19, 2019 by James Lange 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 death of the stretch ira, James Lange, Retirement, Retirement Planning, Roth IRA, Roth IRA Conversion.

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 1^st 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 July 9, 2019 by James Lange in Current Events, Estate Planning, Inherited IRAs, IRAs, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged Beneficiaries, death of the stretch ira, James Lange, Roth IRA, Roth IRA Contributions, Roth IRA Conversion.

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 Million Traditional IRA inherited by 45-Year Old Married Beneficiary
7% rate of return on all assets
Beneficiary’s salary $100,000
Beneficiary’s annual expenses $90,000
Beneficiary’s Social Security Income at age 67 $40,000

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

Posted on November 6, 2018 by Matt Schwartz in IRAs, Roth IRA, Roth IRA Conversions and tagged Roth IRA Conversions, Tax Cuts and Jobs Act 2017.

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.

Unprecedented 2018 Roth IRA Conversion Opportunities

Posted on October 23, 2018 by Matt Schwartz in Roth IRA, Roth IRA Conversions and tagged Roth IRA Conversions, Tax Cut and Jobs Act of 2017.

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;

Stop the Sneaky Tax!

Posted on September 6, 2017 by James Lange in Beneficiary Designations, Inherited IRAs, QTIP Trusts, Retirement Plan Options, Roth IRA Conversions, Stretch IRA and tagged death of the stretch ira, end of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement, Roth IRA, Roth IRA Conversion, Save Our Stretch IRA, Sneaky Tax, Stop the Sneaky Tax, stretch ira, stretch ira changes, stretch ira rules, stretch roth ira.

It’s Time to Stop the Sneaky Tax!

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

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

You Can Help Stop the Sneaky Tax

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

Write Your Congressman Now

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

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

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

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

-Jim

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

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

Recharacterizing Roth IRA Conversions? – Your Ace in the Hole When the Death of the Stretch IRA Passes?

Posted on August 24, 2017 by James Lange in IRAs, QTIP Trusts, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA and tagged death of the stretch ira, end of the stretch ira, Finance, Financial Advisor, inherited ira, James Lange, new ira laws, Retirement, risk, Roth IRA, Roth IRA Conversions, roth ira recharcterization, stretch ira, stretch ira 2017, stretch ira rules, stretch roth ira.

What Are The Risk of Roth IRA ReCharacterizations?

This post is the last in a series about how you might be able to use Roth IRA conversions as a defense against the Death of the Stretch IRA.

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.

How does a Roth IRA Conversion Work?

Suppose you have an IRA worth exactly $1 million, and that it happens to be invested equally in ten different mutual funds of $100,000 each. Then suppose we run the numbers for you and figure out that $100,000 is the optimal amount for you to convert to a Roth IRA. How does a Roth IRA Conversion work?

Well, one idea would be to start by ranking your funds according to how much you expect them to fluctuate in value. Maybe you are holding a portion of your IRA in Certificates of Deposit at your bank. Most people would expect that money to be “safer” because it generally doesn’t fluctuate in value. Then suppose you have a portion of your IRA invested in large cap stocks. You’ve noticed the value changing as the stock market moves up and down but, in your case, we’ll say this fund fluctuates an “average” amount compared to your other holdings. Then suppose that you also a portion of your IRA invested in small cap stocks, and that fund has been known to lose 20 percent of its value overnight. We’ll call that one the “riskiest.”

So which part of your IRA should you convert? You could convert the CDs or the ones that you consider to be the safest. Or you could convert the small cap stocks – the one you consider to be the riskiest. Maybe you’d like to convert part of each fund that you own. Let’s look at the possible outcomes.

You can certainly convert your CDs but, in my opinion, going through all that paperwork to avoid paying taxes on the one or two percent you’ve probably earned on them doesn’t seem worth the time or trouble. What about converting a little bit from each fund you own? I’d prefer that to converting the CDs, but it still seems like more work than necessary. What about your “riskiest” fund – the one that has the value that fluctuates wildly? Let’s assume that you converted $100,000 of that fund. What position might you be in a year down the road?

Well, suppose that fund doubles in value. You now have a Roth IRA worth $200,000 but you only had to pay tax on a $100,000 conversion. Good for you! But suppose the fund went down in value, and now you have a Roth IRA worth $50,000. Worse yet, you’ve paid $25,000 in income taxes, and now you’re really mad at me.

Recharacterize Your Roth IRA Conversion

Remember, as long as you act by the October tax deadline, you can recharacterize, or undo, your conversion. This flexibility can give you enormous peace of mind while you’re waiting for the details of the Death of the Stretch IRA to be finalized. A recharacterization will NOT get back the money your investment may have lost – you will need to wait for the market to come back up for that. What the recharacterization can do is get back the money you paid in income taxes, if the account goes down in value.

A Risk of Roth IRA Conversions

As beneficial as Roth IRA conversions and recharacterizations can be, there is always one risk I make clients aware of when discussing them. It has to do with the IRS itself. Have you ever known anyone who has gotten tied up in an endless and stupid loop of government red tape? Let me tell you about a married couple I know, who have always filed jointly. The wife, whose name has always been listed second on the tax return, started a consulting business and, as she was required to, made an estimated tax payment for the income she earned. The couple filed a joint return and waited for their refund to arrive. They finally received a letter from the IRS and opened it, only to find that there was no refund enclosed. Worse yet, there was a letter saying that no refund would be coming because they had overstated the amount of tax they had paid – a transgression that not only caused the IRS to completely wipe out their refund but add a significant amount of penalties and interest to their tax bill.

Armed with copies of canceled checks, the wife went down to the local IRS office and demanded they retract their letter – which they eventually did. But do you want to know why it happened in the first place? When the wife made the estimated tax payment for her business, she paid it using her own Social Security number because that was the number shown on the 1099s she’d received for her consulting work. Unfortunately, when they received her check, the IRS didn’t recognize her as a taxpayer. Even though she’s always filed jointly with her husband, her name and Social Security number were listed on the second line of the return, not the first. And because hers was not the first name – even though it was a joint tax return – the IRS could find no record of her, and her tax payment just went into a big black hole!

Unfortunately, we have found that the IRS sometimes has trouble putting two and two together. If both your conversion and recharacterization forms aren’t filled out exactly right, you could risk getting a nasty letter in your mailbox. We fight those battles with the IRS on behalf of our clients, but if you’re a do-it-yourselfer, you need to know that it’s not unheard of for them to have a record of just one form or the other – but not both. If it happens to you, you need to stick to your guns and get it sorted out. A Roth IRA conversion can be your best defense against the Death of the Stretch IRA, and you can change your mind as long as you recharacterize by the deadline!

Thanks for reading, and 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.

Roth IRA Recharacterizations and the Death of the Stretch IRA

Posted on August 17, 2017 by James Lange in Inherited IRAs, IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA and tagged death of the stretch ira, end of the stretch ira, inherited ira, James Lange, new ira laws, Retirement, Roth IRA, Roth IRA Conversions, stretch ira, stretch ira 2017, stretch ira rules, stretch roth ira.

Are Roth IRA Conversions legal? How can you change your mind after making a Roth IRA conversion?

This is one in a series of posts about Roth IRA conversions and the Death of the Stretch IRA. If you have not visited my blog before, it might be helpful to back up and read a few of the preceding posts.

Roth IRA Conversions – a Legal Way to Beat the Death of the Stretch IRA?

As you might know, I do a lot of presentations for legal and financial professionals, as well as plain old normal people, about Roth IRA conversions and the Death of the Stretch IRA. One question that comes up a lot in my presentations involves the legality of Roth IRA conversions. People look at the numbers I show them and say, “It doesn’t seem right that you can do this because your family is so much better off. It seems too good to be true. Is it legal to do this?”

In order to answer that question, I’d like to refer you to this quote from Judge Learned Hand said “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

I definitely do not advocate doing anything illegal – in fact, I applaud you if you were one of the people who asked the question – but, like Judge Learned Hand, I certainly believe that you should take advantage of every tax break that you’re allowed to. Would you worry about taking a tax deduction for a Traditional IRA contribution that you made, or for a donation to a charity? Of course not! Roth IRA conversions are no different. They’re definitely legal – they’re permitted by the US Tax Code, and the IRS even has a specific form that your CPA has to use when you do one. The problem is that they’re very complicated, and most people don’t like the idea of having to deal with even the most basic tax maneuvers – much less the complicated ones. So yes, Roth IRA conversions are definitely legal, and you don’t have to worry about bringing the IRS down on your head if you do one. But I still want to talk to you about how you can possibly get hurt when you go through the process.

Roth IRA Recharacterizations – Your Safety Net

Suppose you’ve read my books and my blog, and you’re rightly concerned about the Death of the Stretch IRA. You convert $100,000 of your Traditional IRA, and, because you’re in the 25% tax bracket, you paid $25,000 from your after-tax money. You now have a Roth IRA worth $100,000 and your savings account is $25,000 lighter. Then the market crashes, and suddenly your Roth IRA is worth only $60,000. You paid all those taxes for nothing! Or did you?

At the risk of making a complicated topic even more complicated, you need to know about Roth IRA recharacterizations. If you make a Roth IRA conversion, the IRS gives you until October 15th of the year following the year that you made the conversion, to change your mind. So if you make a Roth IRA conversion in 2017, and the value of your account goes immediately down, you have a fairly long time where you can wait it out and see if the market recovers. But suppose it doesn’t recover? Well, as long as you act by October 15^th of 2018, you can recharacterize, or “undo”, your conversion. I like to give my clients as much time as possible to decide whether or not the Roth conversion was a good idea, so I generally suggest that they ask for an extension on their tax return so that they don’t file it before that October 15^th date. In most cases, a drop in the stock market that happens right after a Roth conversion and causes so much chagrin will work itself out within a year, and my client is happy that they made the change after all. But if there is a long-term drop in the stock market, like there was in 2008, it is good to know that you can change your mind. There is one thing I do want to point out, though. If you recharacterize your Roth conversion, you’ll get back the money you paid in taxes. You won’t get back the money you lost in the market – at least not because of the recharacterization. You might get your money back eventually, but you’ll have to wait until the market comes back up.

Like Judge Learned Hand said, you are not obligated to pay more tax than the law requires. Roth IRA conversions can provide you with a hedge against the Death of the Stretch IRA, and save your family an enormous amount of money in taxes over the long term. And the ability to recharacterize, or “undo” your conversion should give you the peace of mind in knowing that you do not pay a nickel more in tax than you have to.

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.

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

Reduce Your Traditional IRA Balance With Roth IRA Conversions

Spend More Money

Update Your Estate Plan

Consider Expanding Your Estate Plan

Combine Different Strategies

Spousal IRAs

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

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

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

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

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

It’s Time to Stop the Sneaky Tax!

You Can Help Stop the Sneaky Tax

Write Your Congressman Now

What Are The Risk of Roth IRA ReCharacterizations?

How does a Roth IRA Conversion Work?

Recharacterize Your Roth IRA Conversion

A Risk of Roth IRA Conversions

Are Roth IRA Conversions legal? How can you change your mind after making a Roth IRA conversion?

Roth IRA Conversions – a Legal Way to Beat the Death of the Stretch IRA?

Roth IRA Recharacterizations – Your Safety Net

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