Table of Contents
It’s Here. Congress and the President Killed the Stretch IRA
by James Lange, CPA/Attorney
The recently passed SECURE Act should infuriate you and motivate action. This new law, unless you literally make a seismic shift in your thinking and take significant action will, subject to exceptions, allow the IRS to confiscate up to one-third of your IRA and retirement plan after you die. This is the final nail in the coffin for the stretch IRA as we have known it.
The ticking time bomb in the SECURE Act is the provision that triggers new rules governing Required Minimum Distributions (RMDs) for Inherited IRAs and retirement accounts. Subject to some exceptions, an Inherited IRA or retirement plan will have to be distributed and taxed within 10 years of the original owner’s death.
To put it bluntly, this law stinks. Tim Grant just quoted me in the Pittsburgh Post-Gazette on the topic of the SECURE Act: “The deal all along was if you put money in an IRA after you die, your kids get favorable tax treatment. Now, the government is saying ‘we changed our mind—too bad for you.’ I think that’s a betrayal.”
For most of my clients, IRAs and retirement plans are the biggest family asset.
All of us made major sacrifices to contribute to our IRAs and retirement plans. On top of mortgages, car payments, living expenses, kids’ braces, and college tuition, you diligently contributed the maximum you could afford into your company-sponsored retirement plans. Luxuries were few and far between. You did this for 30 or 40 years to secure yourself and your family a bright financial future.
Now, for many of us, late in the game, the government pulls the rug out from under us. We were promised a benefit, we acted on that promise in good faith. In contract law, that is called detrimental reliance. Now, we are told “sorry, the terms have changed.” But we can’t sue the government. All we can do is to radically change our planning to protect our families.
This law will not have a significant impact on the exceedingly affluent or even most business owners. It will, however, have a massive impact on the people I serve—the people who are the real heroes of our time—typically the married couples who played by the rules, worked, hard and raised their children to be the next generation of responsible productive citizens.
Depending on how long you have been following my writing and workshops, you know that I have been warning about “the death of the stretch IRA” and making recommendations for more than five years. I wrote about it in Retire Secure!. I wrote three peer-reviewed articles in 2016 and 2017 for Trusts & Estates. Just this year I published articles in Forbes.com (I am a paid contributor), and in the Leimberg Information Service newsletter, which is one of the most prestigious newsletters for estate planners and financial professionals. I specifically wrote a book about it. Then I updated that book and published Retirement Plan Owner’s Guide to Beating the New Death Tax. You should have received a hard copy of that #1 Amazon best-selling book. If you haven’t, or would like another copy or better yet additional copies for your friends and colleagues, then just give Alice a call and request a copy. And I am continuing to offer workshops—some of which are coming up next month (details are in the newsletter).
For years I have been forecasting its demise and making proactive recommendations. I knew this law would eventually pass—the tax revenue was simply too good to pass up. Now it is here.
What You Need to Do to Beat the Death of the Stretch IRA
This would likely be a great time and go back to the book I just sent you, Retirement Plan Owner’s Guide to Beating the New Death Tax, and at a minimum, read the overview and skim the table of contents for the information most relevant for you.
Space constraints in this newsletter won’t allow me to list all the options and recommendations, but that said, here are some guidelines for who should do what:
Assets Under Management Clients
We have known about this law for five years and frankly have worked it into your planning. We have been very pro-active regarding your Roth IRA conversions and most of you have done them.
One area many clients have thought about doing something but have held off until the proposed legislation became law, is increasing gifts to your children. Whether a straight-forward gift of money, a contribution to a 529 Plan, moving forward with a life insurance policy (second-to-die or another version), a gift to be used for your own children’s Roth IRA contributions, or perhaps some combination of gifts, this year might be a good time to pull the trigger. You can review these strategies with us when you come in for your annual review.
Wills, Trusts and Estate Clients
The good news is that, again, we have contemplated these changes for years and have drafted wills, trusts, and most importantly beneficiary designations of retirement plans accordingly. That said, these changes necessitated a review of the roughly 2,800 wills, trusts, and estate plans we have drafted. We have identified roughly 30 of these plans that require changes as soon as possible, and we are in the process of notifying those clients.
There is a second tier of will and trust clients that ideally should make relatively minor changes to their documents. After we get through the first tier, we plan on contacting those clients.
If you get a letter or a call from us recommending a change to your documents, please respond quickly and promptly. We apologize, but we have so much to do that we will not be able to continually remind clients who don’t respond to our recommendation to update your documents. In many cases, it will not require any meetings other than a meeting to sign and notarize the updated documents.
That said, updating your wills and/or trusts is only one of the recommended courses of action to take in response to this new law. This would be a great time to consider using some of the other services our firm offers such as managing assets or running the numbers. Please note we have very limited availability to exclusively “run the numbers” until after May. I am available to talk to will and trust clients who may be interested in having a least a portion of their portfolio managed using low-cost index funds, which requires running the numbers, and the full service is provided for one low fee.
Income Tax Preparation Clients
This might be a great time to consider expanding the scope of the services our firms offer. Please call Alice if you are interested in wills, trusts, and estates, running the numbers, or becoming an asset under management client.
Forbes.com
As many of you know, I am a paid columnist for Forbes.com. I posted my response to the SECURE Act which was published on December 26, 2019. As per my contract with Forbes.com, after an appropriate waiting period, I am permitted to republish that article. Since adequate time has passed, I can offer you a link to that article, PayTaxesLater.com/Forbes.
A common theme among these recommendations is to die with a lower balance in your traditional IRA or retirement plan so it will not be clobbered with taxes so quickly after you die.
In the Forbes.com post, you will find more details on these various strategies to help you beat the new death tax:
- more opportunities for “backdoor” Roth IRA conversions,
- Roth IRA conversions,
- linking Social Security and Roth conversion strategies,
- using disclaimers in your retirement beneficiary designations,
- gifting,
- charitable gifting,
- trusts, and
- one of my favorite recommendations—that I have made some headway on with many of our clients—take your family on a vacation which will leave a better legacy than a bigger IRA that will get clobbered with taxes.
Things Your Beneficiaries Should Know
This limitation robs IRA beneficiaries of decades upon decades of tax-deferred or tax-free growth. Even more importantly, it subjects the beneficiaries of traditional (tax-deferred) retirement plans to massive income-tax acceleration. This will be especially brutal if the beneficiaries of the Inherited IRA are working and have income of their own. If so, the added income from the acceleration of withdrawals from the Inherited IRA could be taxed at an even higher rate.
The best time to take a taxable withdrawal from a Traditional Inherited IRA is when the beneficiary is in their lowest tax bracket, as long as it is within ten years of the death of the IRA owner. If the beneficiary inherits a Roth IRA, they should consider maintaining the tax-free growth in the account for ten years after the death of the original owner.
Contact Us if You Need Help
Perhaps most importantly, what does my history with predicting and analyzing the consequences of the death of the stretch IRA mean to you?
You will be hearing a lot about the SECURE Act from a rash of Johnny-come-latelies who won’t have the background or experience to provide you with the best strategies. We have “run the numbers” for hundreds of clients and have developed peer-reviewed and proven strategies that retirement plan owners can use to blunt the consequences of this devastating tax law change. If you are interested in having us update your wills and trusts, run the numbers to establish a financial masterplan, or becoming an asset under management client, please call Alice at 412-521-2732 so we can help you avoid the disastrous consequences of this change.
It might prove to be your best decision of 2020.
Please note the times and dates of our upcoming workshops on the back of this newsletter.
Free educational workshops will be held on the first, second and last Saturdays in February.
Finally, A New Year’s Resolution You Can Keep―“I’m Going to Get My Financial House in Order”
From the desk of James Lange, CPA/Attorney…
New Year’s resolutions…we always have such noble intentions.
We resolve to exercise more and then next thing we know, our only exercise is writing another check for a membership fee to a gym we don’t go to.
Or we buy all those fresh, healthy vegetables, only to find ourselves composting the spoiled remains from the refrigerator.
How about this one?
“I’m going to get my financial house in order.”
Well, we can’t help you get to the gym, or make you eat your vegetables…
…But we can transform your financial planning, especially in light of the SECURE Act. Whether it is a revamped retirement and estate plan, re-balancing your financial portfolio, managing your taxes, planning for retirement, funding your grandchildren’s education, or updating your wills, trusts, or beneficiary designations, we can help you accomplish your goals.
One of the advantages of a multi-disciplinary firm like ours is that we can address all these issues individually or in concert. For instance, making appropriate changes due to the SECURE Act, rethinking Roth IRA conversions and gifting, re-balancing your portfolio, taking your retirement investments into account, and optimizing Social Security planning are best considered collectively.
Truth-be-told, a coordinated financial masterplan, where the right hand is intimately aware of what the left hand is doing, can put hundreds of thousands or even millions of additional dollars in your hands and in the hands of your heirs.
The newly enacted SECURE Act gives the IRS carte blanche to confiscate up to one-third of your IRA and retirement plan in taxes at your death. Thankfully, there are actions you can take now to reduce the impact it will have on your family.
Our firm can help you to plan and execute proactive steps that will help protect the financial legacy you plan to leave to your children and grandchildren.
Positioning yourself appropriately in response to these changes could mean the difference between your family being broke and being financially secure. (If you are interested in learning more about the SECURE Act and how to combat its potential consequences, you can start by requesting your copy of my latest book, Retirement Plan Owner’s Guide to Beating the New Death Tax, by sending an email to requests@paytaxeslater.com.)
Our team members bring a full range of expertise to the table, and together, we can make 2020 the year you finally get your financial house in order. There is a big advantage to having both a tax expert and a Social Security expert down the hall when thinking about Social Security and Roth IRA conversions in your retirement planning.
Your biggest challenge is just picking up the phone and making the appointment.
Once that is done, we’ll guide you through the rest.
“80% of success is showing up.” ― Woody Allen
If you would like to take advantage of a truly integrated approach to estate, tax, and retirement planning, please call Alice Davis at 412-521-2732 to see if you qualify for a free Retire Secure Initial Consultation. She will schedule an appointment with me or an appropriate member of our team who will facilitate all your planning. Together we can beat the odds and fulfill a worthy New Year’s resolution.
FREE WORKSHOPS
Saturday, February 1, 2020
Comfort Inn & Suites Salon D
180 Gamma Drive, Bldg. B
Pittsburgh, PA 15238
Saturday, February 8, 2020
Crowne Plaza Pittsburgh South Keystone Room
164 Fort Couch Road
Pittsburgh, PA 15241
Saturday, February 29, 2020
Courtyard by Marriott Monroeville Meeting Room A/B
3962 William Penn Highway
Monroeville, PA 15146
Reserve your seat today by calling 412-521-2732 or go to PayTaxesLater.com/Workshops to RSVP.
9:30 – 11:30 a.m.
The Best Estate Plan for Married IRA Owners Combined with Optimal Trust Planning for IRAs and Retirement Plans After the SECURE Act: Our Tax-Savvy Thinking
1:00 – 3:00 p.m.
How to Stop Changes in Tax Laws from Taking Up to 1/3 of Your IRAs and Retirement Plans in Taxes After the SECURE Act
3:15 – 4:00 p.m.
Solving the Investor’s Biggest Dilemma: How to Stop Market Volatility from Crushing Your Retirement Nest Egg in the Next Downturn
Client Corner – Roger Dannenberg
I’d like to take a moment to recognize and spotlight a longtime client and friend, Roger Dannenberg.
Roger, a Professor of Computer Science at Carnegie Mellon University, is also an accomplished trumpet player and composer who manages to combine his life-long passion for music with his scientific leanings. He is an authority in the field of computer music, which covers everything from digital sound synthesis to getting computers to compose tunes.
Most recently, Roger has co-written an opera that premiered in Spain, was performed again in Mexico, and now Roger is producing the premiere of a new English translation here in Pittsburgh. The Mother of Fishes is based on an ancient Valencian folk tale about a magic fish, a fisherman, two sons who find adventures with a dragon, a beautiful princess (of course), and an evil witch. His performances with professional singers and orchestra will be February 15 & 16, 2020, in CAPA Theater downtown. You can find more information at TheMotherOfFishes.com.
I’m extending a special offer for my clients who are interested in attending the performance on Saturday, February 15, 2020 opening night at 7 p.m. I will be purchasing tickets to the show and hosting a dinner at a nearby restaurant prior to that evening’s performance for all clients who call Alice at 412 521-2732 no later than February 3, 2020, to reserve their seats. I think it will be a wonderful evening full of delightful entertainment and I look forward to spending time with those of you who choose to attend!
*When discussing clients, we must state that our mentioning Professor Dannenberg should not be misconstrued as an endorsement of our services.