Originally Aired: April 8, 2015
Topic: Retire Secure! for Same Sex Couples
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Retire Secure! for Same-Sex Couples
James Lange, CPA/Attorney
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- Book Introduction
- Why Write This Book?
- The Purposes of Writing the Book
- How much Difference Marriage can Make, Financially Speaking
- IRAs and Retirement Plans for Same Sex Couples
- Testimonials for and Contributors to Retire Secure! For Same-Sex Couples
- Pay Taxes Later
- Big Picture Social Security Advice
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the KQV studio with James Lange, CPA/Attorney and bestselling author. This is a historic time for American civil rights as long-standing laws against same-sex marriage are being struck down across the country. Committed LGBT couples can now claim many rights and benefits of marriage, even if they live in states such as Pennsylvania that don’t yet recognize these unions. This week’s Lange Money Hour will be different from our usual format. Jim Lange has just finished his latest book, Retire Secure! For Same-Sex Couples, which is now out for critical review and comments. And I’ll just stop right here and say we’ve just gotten one in from Ed Slott. It says, “This is the all-new, and Retire Secure! For Same-Sex Couples is your how-to financial guide going forward. No question: this can only benefit people’s lives.” So, if that’s an indication of what’s to come, we’ve got a hit on our hands. So, today, rather than an outside guest, Jim and I will discuss the book and talk about some of the important steps that same-sex couples can take to strengthen their financial situation. As you’ll hear, the differences between being proactive and doing nothing can be dramatic, more than a million dollars over just twenty years. And since today’s show is live, you can join the conversation with your questions and comments by calling the KQV studios at (412) 333-9385, and with that, Jim, let’s get started. Could you tell our readers and our listeners why you wrote a book for same-sex couples?
Jim Lange: Yeah, David. In 2013, there was a Supreme Court case called U.S. versus Windsor that, in part, held that DOMA (that is the Defense of Marriage Act) was unconstitutional. Then, there was a revenue ruling, revenue ruling 2013-17, that essentially gave same-sex couples the same marital rights as opposite-sex couples if they did get married. And what was so unique about that revenue ruling was it didn’t matter what state they were in, as long as they were legally married in a state that did recognize same-sex couples. So, what this meant was, if you were a Pennsylvania resident, you could go to New York or Washington D.C. or Massachusetts or California, or to a state that does recognize same-sex marriage, return and live in Pennsylvania, and for federal income taxes and for federal estate tax, you will be considered married. Now, this was an enormous opportunity because what happens, if you are treated the same as a traditional opposite-sex couple in terms of taxes, and there’s many enormous tax benefits to being married, and I’m not just talking about filing a 1040 on your tax return, but things that are much more important in the big scheme of things. I knew that there were some tremendous opportunities for the same-sex couple community. I also knew that there weren’t going to be a lot of people who really got the big differences. Yes, you can have people talk about the difference between filing jointly (which you’re now actually required to do) on a tax return versus filing single. And there’s other little differences, but the real, you know, hundreds of thousands and sometimes million dollar differences, is really in the area of IRAs and Social Security. Those are the really two big issues.
David Bear: Long-term planning.
Jim Lange: Long-term financial planning, and that’s my forte, and that’s what I’ve been doing for thirty-five years. So, I understand that stuff inside out, and then I said, “Okay, so I understand the IRA laws, and I understand the Social Security laws, and now we have same-sex issues that are all new, based on the case in the revenue ruling.” So, I said, “Okay. Let’s see if we can quantify the differences between doing what I want to do (that is, using our strategies for Social Security and IRAs and retirement plans) and, let’s say, the status quo, which is not doing all these things, and the difference, in many cases, was over a million dollars.” So, I realized, “Hey, the community has to know about this, and you need an IRA and a Social Security expert to write the book, because otherwise, the difference and the degree and the importance of using these strategies would just not really come to light.” So, I felt, you know, I really have to do this myself. So, to me, I have kind of two purposes in writing the book.
3. The Purposes of Writing the Book
David Bear: Tell us about those.
Jim Lange: All right, and the purposes, the first one is I just see an overwhelming need for the same-sex couple community to learn this information, and I’m in the position to provide it. So, I think I can make a dramatic difference in the finances of, you know, tens, preferably hundreds of thousands of LGBT couples, and that is a good thing. I do think that it wasn’t appropriate for me to, in effect, profit from writing a book and selling the book, and the other thing is, I really want this book to have wide distribution, so I am donating all the proceeds, and I don’t just mean the gross proceeds, but every nickel that I get without any costs subtracted, every nickel that comes to me is going to be donated to Freedom to Marry, which is a organization that is doing grassroots work, headed by Evan Wolfson, with the idea that we are going to try to legalize same-sex marriage in, hopefully, all fifty states, but they’re doing it on a state-by-state basis.
David Bear: Now, when you say ‘proceeds,’ you mean from the book?
Jim Lange: Yeah, from the book.
David Bear: Okay.
Jim Lange: Yeah, yeah. All right, and that actually does bring up the second purpose, which is that I do hope to get some clients out of this because I think some people are going to say, “Hmmm, this guy really knows what he’s talking about. He has all the right strategies. He’s using low-cost index funds for investing. He’s been a solid, you know, CPA for thirty-five years. He obviously welcomes LGBT couples. Why not use him for our work?”
4. How much Difference Marriage can Make, Financially Speaking
David Bear: Well, you said that same-sex couples could save hundreds of thousands of dollars, but only if they took certain proactive steps. That sounds like a huge difference, particularly for many of our listeners who are in their sixties or older. Can you document that statement?
Jim Lange: Well, I actually can. In fact, one of the weaknesses of the book, if you will, is that it is pretty quantitative. So, what I try to do in the book is I try to talk about the concepts, and then I talk about the recommended strategies, and then I go into the nitty gritty of why. So, just to answer your question, I will go into the nitty gritty, but I’ll also kind of set it up. So, there were two same-sex couples.
David Bear: These are theoretical couples, right?
Jim Lange: Theoretical couples, because the reason we can’t do it historically is because we didn’t have these laws available until 2013.
David Bear: Right, right, it’s literally cutting edge here.
Jim Lange: It really is. So, you have two same-sex couples, and let’s, to put a name for them (and it’s the same name in the book), call them Dr. Dan and Baker Bob.
David Bear: That’s one couple.
Jim Lange: That’s couple number one. And couple number two is, let’s call them, Carefree Charlie and Chester. So, these couples, and let’s just say, for discussion’s sake, that everybody involved is sixty-two years old. They are identically situated financially. They have the same amount of money. They have the same investments. They have the same tax rates. They have the same earnings record for Social Security. So, really, everything about them is the same except…
David Bear: What was the difference?
Jim Lange: The difference is that Carefree Charlie and his partner Chester didn’t do any of the recommended strategies that I promote. So, let’s be specific. I often recommend that people get married. Specifically, get married in a different state and return to Pennsylvania, or, since I know we have a national audience for this show, get married in a state that legally recognizes same-sex marriage, and then return to your state that does not. And if you’re in a state like Massachusetts or California or New York or Washington, etc., I believe there are about seventeen of those, then you can get married in your state.
David Bear: And even in Kansas, there was a ruling earlier this week that Kansas has to recognize same-sex marriages that have been performed in other states.
Jim Lange: All right, and then, that’s kind of a hybrid. So, apparently, they’re not going to let you get married there, but they’re going to recognize your marriage from a different state, which is better, or more progressive, than Pennsylvania, which says for Pennsylvania purposes, Pennsylvania income tax purposes, inheritance tax purposes, and other laws, they’re not going to recognize marriage. But the importance of the revenue ruling is basically for federal income tax purposes. It is going to be the same.
David Bear: So, let’s get back to Chester and Charlie.
Jim Lange: All right. So, Chester and Charlie, they didn’t get married. They both claimed Social Security at age sixty-two, they didn’t make any Roth IRA conversions, and they didn’t use some of the retirement and estate planning strategies that are outlined in the book, Retire Secure! For Same-Sex Couples. Using reasonable projections (that I’m not going to bore everybody with the details with, but certainly are in the book), they run out of money in twenty-eight years.
David Bear: Well, they still had Social Security, presumably?
Jim Lange: They did have Social Security, but if they have reduced Social Security…
David Bear: Right.
Jim Lange: So, the strategies that I’m recommending are not just money for the short-term. Actually, for the short-term, you have a little bit less money, but it guarantees a higher Social Security…
David Bear: At the back end.
Jim Lange: We’ll get into Social Security quite a bit.
David Bear: Yeah, good, good.
Jim Lange: But anyway, Dr. Dan and Baker Bob, they did everything that I wanted them to do. That is, instead of taking Social Security at sixty-two, they waited until sixty-six and they used a technique called apply and suspend. Now, by the way, apply and suspend is nothing new. We’ve had, I believe, four shows on Social Security…
David Bear: Yeah, yeah.
Jim Lange: We’ve had Kathleen Schneider, who wrote a book. We’ve had Jane Bryant Quinn, who is wonderful. We have had Larry Kotlikoff, and frankly, all of those Social Security experts are in agreement that it does make sense to hold off, and if you’re married, to do apply and suspend. And now, under the new laws, at least in the states that recognize same-sex marriage, and hopefully soon in the states that don’t, you will be able to use these different strategies, and that’s what Dr. Dan and Baker Bob did. So, they did everything right. They got married, they used apply and suspend technique, they used Roth IRA conversions, and they also used our IRA and retirement plan strategies. So, where are they? Again, they’re starting with the exact same amount of money, they’re spending the same amount of money, same tax rate, same everything else. Where are Dr. Dan and Baker Bob after Carefree Charlie and Chester are out of money?
David Bear: Twenty-eight years.
Jim Lange: Twenty-eight years. Dr. Dan and Baker Bob still have $1.4 million, all right?
David Bear: That’s a huge difference.
Jim Lange: Right, and everything is the same. So, one of my missions is to help more same-sex couples retire as millionaires like Dr. Dan and Baker Bob, and avoid running out of money like Carefree Charlie and Chester. Now, I kind of gave you a general answer, but the book actually really, almost to a fault, goes into all the details, showing all the calculations, and why we get to what we’re recommending, and I think that it can be looked at at two levels: one, if you just want to know what to do, you can read the first couple sections of the chapters, and then, if you want to get into the nitty gritty, there’s probably about as much nitty gritty as most people could stand. Now, I will be fair about this. All right, so, $1.4 million, that’s a pretty big difference. Well, what if you’re starting with $300,000 or $400,000 and you have a very small estate, or, at least, relative to starting with maybe a million, which is closer to what Dr. Dan and Baker Bob started with. So, let’s say that there are a lot of same-sex couples out there, and say, “Hey, well geez, I don’t have, you know, one-two-three million dollars. I have a smaller estate. Will the difference really be $1.4 million?” Well, I would say no, because I think that…
David Bear: It’s proportional.
Jim Lange: It is somewhat proportionate, but here’s what I would say for people who have less money, and I would say this to anybody who is using our strategies, even, you know, opposite sex and our more traditional strategies. For you, saving money on taxes and getting Social Security right is even more important than for somebody who has a lot of money. If you have $1.4 million, and then maybe, you know, you’re $100,000 better off because of a particular strategy or something like that, that’s great, but it’s not going to be the difference between you being comfortable and you being broke. If you have a lot less money, and particularly, the issue of Social Security that we’re going to get into, the difference literally can be being comfortable and being broke.
5. IRAs and Retirement Plans for Same Sex Couples
David Bear: You earlier said that it took an IRA and retirement planning expert to write the appropriate book because of the IRA and retirement plan strategies that would be newly available to same-sex couples. Could you expand on that thought and tell our listeners why the treatment of IRAs and retirement plans is so critical for same-sex couples?
Jim Lange: Okay. Now, I’m going to do this, but to get you the best answer, I’m going to go through a little bit of, let’s call it, background information…
David Bear: Okay.
Jim Lange: …that I actually believe is helpful for everybody. So, Jane Bryant Quinn, who is one of my favorite financial writers, I just think she’s wonderful, does a great job, thorough research, and by the way, the other one is Jonathan Clemens, and Jonathan Clemens, and I don’t know if I’m allowed to say this or not, but he is coming back to the Wall Street Journal.
David Bear: Oh!
Jim Lange: So, he was there for eighteen years, and he was somewhere else for maybe about two years, or three years, or some period of time, and now he is coming back, which is really exciting to me.
David Bear: You heard it here first!
Jim Lange: Yeah! I hope I’m allowed to say that! Anyway, so, Jane Bryant Quinn has written that my mantra is “Pay Taxes Later.” You know, I’m sitting there in the lotus position, “Pay taxes later…pay taxes later…”
David Bear: Right.
Jim Lange: That’s a slight exaggeration, and I don’t want to get into the exceptions, which are Roth IRAs and Roth IRA conversions, but to a large extent, she is right. I am a big believer in paying taxes later. So, let’s say that you say, “Okay, pay taxes later. That makes sense. Translate that into a proactive strategy that our listeners can use.” So, let’s say that you are working, and let’s, for the moment, forget about an employer match to a 401(k) or a 403(b) plan because I want to compare apples to apples. So, let’s just say that you have access to a 401(k) or a 403(b) plan at work, and if you want, you can save money through that plan. And let’s assume, for discussion’s sake, that you can afford to save $8,000 before taxes, or roughly $5,000 after taxes. So, you have two people, let’s take Dr. Dan. Dr. Dan says, “Hey, if I put money in the 403(b) or the 401(k), what happens is I don’t have to pay income tax on that money, or looked at another way, I get a tax deduction for that money. Then what happens is, that money grows income tax-deferred. That is, I don’t have to pay any taxes on the interest or the dividends or the capital gains on the money that I put in my 401(k) until I eventually take it out. Now, true, when I eventually take it out, I’m going to have to pay income taxes, but, in the meantime, I was able to put $8,000 in, not have to pay tax on it, or, looked at another way, deduct it, have the money grow tax-deferred, and then, eventually, let’s say, when I’m seventy or when I need the money, I take the money out and it’s all taxable.” So, what you’re doing, in effect, when you’re putting money in a retirement plan and you’re getting a deduction, and you’re having the money grow tax-deferred, that is, you don’t pay tax on the interest, dividends, capital gains, etc., until you eventually take it out, is you are paying taxes later.
Let’s compare that to, let’s say, Carefree Charlie. Carefree Charlie, again, same earnings, same interest rates, same dividends, same tax rate, everything’s the same, except Carefree Charlie isn’t going to put the money in his IRA or 401(k). So, he earns $8,000 and he has to pay income tax on it. So, now, he only has, say, $5,000 left. He invests the $5,000, but then, there’s interest, dividends, capital gains, etc., on the $5,000, and he has to pay tax on that. So, let’s say that you do this over a career, all right? And over many years, you know, you have this $8,000 plus the income that is earned on it. Basically, over a lifetime, the difference is that Carefree Charlie will have run out of money, he’ll have zero, and Dr. Dan will have $1.5 million. So, that’s a clear example: don’t pay taxes now, pay taxes later in the accumulation stage.
David Bear: Well, okay. Well, let’s take a break right now and we’ll come back.
6. Testimonials for and Contributors to Retire Secure! For Same-Sex Couples
David Bear: And welcome back to The Lange Money Hour. This is David Bear here with Jim Lange, and we’re talking about his new book, Retire Secure! For Same-Sex Couples. Jim, I mean, there’s a lot of exciting news. I mentioned the Ed Slott testimonial earlier, and it’s actually quite a bit longer. Actually, do you mind if I read it now?
Jim Lange: Go ahead. Go for it.
David Bear: All right. I think it’s pretty remarkable from somebody like Ed. “The DOMA decision advanced social opportunities for legally married same-sex couples, but DOMA was also a game changer for tax planning if you know what changed and what to do about it. Luckily for you, IRA and tax planning expert Jim Lange has the answers in Retire Secure! For Same-Sex Couples. Jim provides a comprehensive roadmap to all the new retirement and estate-planning strategies that were not previously available to same-sex couples. But they are now, and couples who wish to take advantage of them to enhance their options, increase their wealth, cut their taxes and live with financial security, should dive into this gem. Jim Lange delves into life’s most critical financial planning aspects, including taxes, retirement benefits, optimizing your joint Social Security benefits, passing wealth to each other and to loved ones, and even helps you with the intricacies of health insurance. This is all-new, and Retire Secure! For Same-Sex Couples is your how-to financial guide going forward. No question, this can only benefit people’s lives.” That’s going to be awful hard to get on the cover of a book!
Jim Lange: Well, it is, and Ed was really nice to give me that testimonial. He’s known as America’s IRA expert, and he is, let’s say, by all objective measures, in terms of number of books sold, speaking fees, his appearance on public radio, he is America’s IRA expert. So, to get a testimonial like that from him (and he has written about same-sex couple issues), really means a lot.
David Bear: Well, and I understand there’s also, perhaps, an AARP here in the issue?
Jim Lange: Yeah. I mean, it’s not official yet, so we can’t…maybe we shouldn’t even say anything, but it looks like we’re going to be an AARP book, which certainly lends a lot of credibility.
David Bear: And a preamble, a preface to the book…
Jim Lange: Yeah, yeah. Evan Wolfson, who is the executive director of Freedom to Marry, who, by the way, has been on this show, and his show is available in the archives.
David Bear: And a classmate of yours at Allderdice.
Jim Lange: And a classmate of mine at Allderdice. 1974, for anybody who is interested. We’ve actually just had out fortieth high school reunion. But anyway, Evan is tentatively going to do the forward. In fact, he has agreed to it, but he wants to do peer review and he’s sending it to a CPA, who, as you can imagine, has a few other things to do before April 15th.
David Bear: Well, and so that’s good.
Jim Lange: I’m virtually certain because we’ve gotten testimonials from highly quantitative tax experts, a bunch that we’re not going to read. So, I think that’s going to happen. It’s a pretty exciting time.
David Bear: Good, good.
Jim Lange: A lot’s going to happen with this book.
David Bear: Well, and also, I understand that, you know, if people go to the website, they can get a free chapter of the book?
Jim Lange: Yeah. So, what we wanted to do, I like to spread a lot of information around. So, the issue on Social Security is one of the, let’s say, less well-known strategies, and we have a whole chapter on Social Security. It’s probably the second longest and toughest chapter, but it has a lot of great information. Again, the easy part at the beginning and the nitty gritty detail afterwards.
David Bear: Right.
Jim Lange: We are offering that, and then, we’re also doing, I think it’s going to be ten weeks. We haven’t shot it yet. But it’s going to be somewhere between an eight and ten week video course. So, I’m talking, maybe, two or three minutes per week, but what we’re going to try to do is to try to hit the high points of the book. So, if somebody goes to www.outestateplanning.com and gives us their e-mail information so we have a place to send it, we will send them the chapter, and we will start the ten-week video program.
David Bear: And the book itself will be available in a couple of weeks?
Jim Lange: Yeah, you know, we’re hoping a couple of weeks. You know, I have an advance copy now, and we’re sending it out to some people in certain situations.
David Bear: And I notice you’re referring to it tonight too!
Jim Lange: Well, I am referring to it tonight. In fact, we actually just got it back from the printer today. Again, not the official version, but the advance version, and unfortunately, if AARP picks it up, that will probably not speed up the process…
David Bear: No.
Jim Lange: …because it has to go through their channels, but I think it’s going through their channels now. So, it will be available, probably in three or four weeks. What we will do is, everybody who signs up for the free chapter and for the video lesson, we will certainly notify them when it’s going to be available. And again, all proceeds to Freedom to Marry. So, it’s kind of an easy decision to purchase.
David Bear: Yeah, wonderful. Well, let’s get back to the book. We were talking before the break about your mantra, “Don’t Pay Taxes Now, Pay Taxes Later.” Does it apply when someone is retired and is drawing money from their portfolio to pay their expenses?
Jim Lange: Yeah, it does. So, the first portion before the break, we talked about while you’re still working, and it also applies after you’re retired. And again, in my quantitative world, I take two people. Let’s use the same people. Let’s use Dr. Dan and Baker Bob as, let’s say, that have ‘X’ amount of dollars in their IRAs and retirement plans, and so much money outside their IRAs and retirement plans. And let’s say that Carefree Charlie and Chester have the exact same amount of money, same interest, same dividends, same investments, same tax rates, everything. The difference in this case is that Dr. Dan and Baker Bob are going to listen to my mantra, “Don’t Pay Taxes.” So, what they’re going to do is they’re going to spend the after-tax dollars, dollars that they have already paid taxes on first. And then, they’re going to keep doing that until they run out of money, and then they’re going to go into their IRAs and retirement plans, all right? Carefree Charlie’s going to do it the opposite way. As soon as he needs money, boom! He’s going to hit his IRA and retirement plan. Now, think about this: you go into your IRA and your retirement plan before you have to. So, what’s going to happen? You’re going to have to take out $1.40. Pay $0.40 in tax, and then you’re left with a dollar to spend. If, on the other hand, like Dr. Dan, you take out after-tax dollars first, other than maybe some capital gains, there’s not going to be a tax. So, one way, you’re depleting your portfolio by $1.40, the other way, you’re depleting your portfolio $1.00. So, what’s the difference? Don’t pay taxes now, pay taxes later. Over a lifetime…again, starting even at age 65, there’s a $200,000 plus difference in just which order you’re paying taxes.
David Bear: Hmmm!
Jim Lange: So, again, don’t pay taxes now, pay taxes later in the accumulation stage and in the distribution, or retirement, stage.
David Bear: Well, I have to ask you about this now. I know you’re a big proponent of Roth IRAs, and it seems to me that in that case, you’re paying taxes now and not paying taxes later.
Jim Lange: That’s correct, and that, of course, is the great exception, and naturally, we talk a little bit about that in the book, but that is the exception. So, really, if I was going to accurately…even name my existing book, which is Retire Secure! Pay Taxes Later, it would more accurately be called Retire Secure! Pay Taxes Later Except the Roth.
David Bear: Okay.
Jim Lange: Because with the Roth, it’s true you’re not paying taxes now, but the money in a Roth is being invested income tax-free…
David Bear: Right.
Jim Lange: …for the rest of your life, the rest of your spouse’s life (and, by the way, that’s another reason to get married, a big difference on the treatment of Roth IRAs), and the lives of your children and even grandchildren. So, that is the exception.
David Bear: Well, I’m glad that there’s an exception to every rule.
Jim Lange: There is an exception to every rule.
David Bear: Okay, I get it now. Don’t pay taxes later, pay taxes in the accumulation stage. Does that mantra apply in the estate planning and after death stage, as well?
Jim Lange: Well, it does, and that’s what I really wanted to get to because the first two, it doesn’t really matter that much whether you are a same-sex married couple or a same-sex unmarried couple, with the exception, by the way, if one of you is working, you could put away a lot more money in retirement plans if you are married. But even forgetting that, the real reason I wanted to get to that is because there is an enormous difference between passing on an IRA or a retirement plan at death to a married spouse versus an unmarried partner. And I don’t think we’re going to have time during this radio program to go into the details, although I certainly do in the book. The difference can literally be hundreds of thousands of dollars over time. So, I am really a big proponent, and this, by the way, for the purposes of IRAs and retirement plans, it doesn’t matter where you live. As long as you get married in a state that recognizes same-sex marriages, you can get married, say, in New York or California or Washington or Massachusetts, return to the state that you live that might not recognize same-sex couples or same-sex marriages, and then, if there is a death and you leave your IRA, the income tax rules are much, much more generous for IRAs and retirement plans left to spouses, or spousal beneficiaries. And that is one of the main reasons why many same-sex couples, particularly when one has a significant IRA or retirement plan, should at least consider getting married.
David Bear: And also, in case of having children and other next generation beneficiaries.
Jim Lange: Well, yeah. Actually, there’s a huge difference. So, even before we get to the beneficiaries, you know, what I have found is that most people are very interested in providing for children and grandchildren, etc., but they’re more interested in providing for their partner. Let’s say you have…again, and let’s use Dr. Dan and Baker Bob. So, they’re married, and Dr. Dan dies and he leaves Baker Bob a million dollars in his retirement plan, all right? Maybe about twenty-five years later, Baker Bob has about $500,000 more than Carefree Charlie’s partner, and the difference, again, it’s the same amount of money, same interest rates, same dividends, same tax rates, same everything else, but the laws are so much more favorable for a spouse inheriting an IRA that it ends up being about a half million dollars. Now, if you take it to the next level, the next generation, whether it’s a child or a niece or a nephew or anybody, but let’s say the next generation, then you’re talking about differences in the, you know, millions and millions of dollars.
David Bear: And wasn’t it really this issue that was the basis of the Supreme Court case that struck down DOMA?
Jim Lange: Well, actually, the Supreme Court case that struck down DOMA (you’re referring to U.S. versus Windsor) was actually not an income tax case. It was actually an estate tax case.
David Bear: Well, that’s what I mean.
Jim Lange: Well, no, no. When I was talking before about the differences, I was only talking about income taxes.
David Bear: Okay.
Jim Lange: So, you have to remember the difference. Income taxes are what we file every year with our 1040, etc. Estate taxes, or gift taxes or transfer taxes, that is a tax on the transfer of assets. Now, for federal purposes, with a $10.6 million exemption these days, I’m not all that worried about federal estate tax. Now, yes, it was true. It was that case that opened up the whole ball of wax, but really, much more important to me, and for the planning purposes of my clients, is not U.S. versus Windsor. It’s U.S. Revenue Ruling 2013-17 that basically said if you get married in a state that recognizes same-sex marriages and return to a state that doesn’t, that for federal income tax purposes, you’ll be treated as married, and this big difference in the IRA world is really an income tax issue, not an estate tax issue. So, that is one of the major, major reasons why I thought that you can’t have a non-IRA expert write the book…
David Bear: Right.
Jim Lange: …because they just don’t get the differences in terms of quantity, and they don’t know what to do in terms of setting up wills, trusts, etc…
David Bear: Right.
Jim Lange: …where that’s what we’ve been doing for thirty-five years.
David Bear: You’re in a position to put all the pieces together, basically.
Jim Lange: Yeah.
David Bear: So, right now, we’ll take a break one more time, and when we come back, we’ll continue the conversation.
8. Big Picture Social Security Advice
David Bear: And welcome back to The Lange Money Hour. I’m David Bear, here at KQV with Jim Lange, who has just published his latest book, which is called Retire Secure! For Same-Sex Couples, and in addition to the book coming out, listeners, if they’d like to get a free sample chapter of the book, they can go to the website outestateplanning.com, and also, they’ll soon find details about a ten-week video course on the same subject at the same place. So, Jim, let’s get back to the book. You said you want many same-sex couples to get married because there’s an enormous difference in the treatment of IRAs and retirement plans between married spouses and non-married couples at death. What’s the other big picture of advice and piece of advice that you can give to same-sex couples?
Jim Lange: Well, the other really big picture is Social Security. So, here’s the deal with Social Security. So, first, I’m going to start talking about just some general Social Security concepts, something that a lot of people don’t want to hear. This, by the way, applies to everybody. So, let’s assume, for discussion’s sake, that you can start taking your Social Security at age 62. All right? You’ve worked hard. You’re a little bit uncomfortable about whether Social Security’s going to be there in the future. You want to make sure you’re going to get what you’re going to get, so you apply and you start taking the money at 62. Right now, I’m not even going to get into the married issue. Or you could wait until your full retirement age, which is age 66, or you could even wait past that and wait until you’re age 70. So, if you wait until 70, you actually get a 76% plus the cost of living adjustments, more rather than if you took it at age 62. But if you take it at 62, and let’s say you start…and to compare apples to apples, which is what I always try to do in the book, comparing different strategies, comparing apples to apples, we’re going to reinvest the money that you received at age 62, and we’re going to put it in a, let’s say, savings account or an investment account that’s going to earn 4%, but what’s going to happen is, we’re going to compare that to somebody who starts at age 70. They get 76% more, but they’re starting at zero.
Anyway, it’s going to take the person who waited until age 81 to catch up to the person who took it at 62. So, the way I used to look at this is, “Well, gee. If I think I’m going to make it to age 81 or beyond, you know, then maybe I should wait. If I think I have a very short life expectancy, maybe I should take it at 62, and if I’m not sure, then it’s a tougher call.” Anyway, one of the benefits of having this radio show is that I get all these wonderful experts on the line, including Larry Kotlikoff, an economist, and I thought that he was going to more or less agree with what I said, and he said, “No, no, no! You have it all wrong, Lange! Here’s the deal: for planning purposes, for financial planning purposes, you don’t fear an early death. If you die, you’re dead! You don’t have financial problems. What you fear is living a long time and running out of money.” So, he is a big advocate of holding off on Social Security until age seventy, as is Jane Bryant Quinn, Kathleen Schindler, who wrote a book on Social Security, and also Jonathan Clements. All these people who really get the issue, in general, like to hold off. But that’s kind of like the basic Social Security issue, and that doesn’t have to do with same-sex couples.
Here’s the real killer: there are wonderful spousal benefits involved for Social Security. Unfortunately, we’re probably not going to have time to go into them all. Maybe we’ll get into a little bit of apply and suspend, which is my favorite one, but there are benefits specifically available to spouses, and that can literally just make a huge difference. So, for example, right now, I’m looking at a section of the book that compares two people. Again, they have identical Social Security earnings records, identical savings rates, identical spending, identical everything. All right, but in the first case, they don’t take advantage of any of these married strategies, they don’t do apply and suspend, and the other thing they don’t do is they don’t have the spousal benefits, both when the spouse is alive, and perhaps even more importantly, even after a spouse dies. So, in general, subject to some exceptions, let’s say we go back to Dr. Dan and Baker Bob. If Dr. Dan holds off on his Social Security, or uses the apply and suspend technique, and he has a really strong, let’s say, $30,000 or $35,000 per year benefit when he is seventy years old, and he dies, and he is married to Baker Bob, then Baker Bob can get the same Social Security benefit. Now, by the way, we still have a law that needs to be passed for that to happen in Pennsylvania, but I think it will soon, and there’s very good reasons why you should get married and apply for Social Security before that happens. But basically, we can provide Baker Bob with that financial security of…let’s say, his record is $5,000 a year, and Dr. Dan’s is $30,000 a year, we can get him an extra $25,000 a year for the rest of his life, but only if he’s married and only if he takes the appropriate steps. So, this issue of Social Security is really big and it is really a compelling reason.
Now, right now, if you live in one of those states like New York, or Washington D.C., or California, or Massachusetts, etc., right now, the federal government will give you the spousal benefits. That is, they’ll give you the right to do a spousal benefit to use the techniques that we talk about, my favorite being the apply and suspend technique, the other one being claim less now, claim more later, and the simple spousal benefit, and perhaps more importantly, the spousal death benefit if you are married. Now, at this moment in time in 2014 when we are doing this show, that doesn’t apply to Pennsylvania residents. However, just like the DOMA case that was referring to estate taxes, very, very soon after that, the treasury department issued a ruling saying, “Hey, as long as you’re married in a jurisdiction or a state that allows and recognizes same-sex marriage, for income tax purposes, that’s what we’re going to do.” Virtually everybody I’ve talked to, at some point, maybe not in a year or two, but hopefully soon, does expect that to happen with Social Security. Otherwise, it’s going to be an administrative nightmare. There’s also good reasons to get your application in now, that again, I’m not going to have time to go into, but it isn’t something that you should just sit and wait and do nothing, because, again, the difference here, you know, is…I mean, here, I’m looking at about a two million dollar difference, and the only difference is Social Security.
David Bear: Right.
Jim Lange: Now, again, for a number of years, you’re going to be a little bit worse off because if you’re both taking it at 62 as opposed to holding off and doing apply and suspend like my advice, for a couple years, you’re worse off, but I’m more interested in your long-term security, and I want to see you retire as millionaires and have growing portfolios rather than Carefree Charlie who ran out of money.
David Bear: Well, and it’s also safe to point out that there are pending cases in Pennsylvania at the moment that may, you know, change things in the near future, but even then, it makes sense to do this because even if that happens, you’ll, you know, put whatever proactive steps will also apply.
Jim Lange: Well, actually, even Social Security said that if, for example, the apply and suspend technique makes sense that it might make sense to apply now, and then they will give you retroactive to the date that you applied.
David Bear: Wow! Right.
Jim Lange: Now, again, I’m not telling people to go out and do it because you have to run the numbers and know what you’re doing before you do anything with Social Security, but if it does make sense, it often makes sense to do it now, and the difference might be between getting retroactive benefits, that is, from the date that you applied to the date that they changed the law, versus getting nothing until they actually change the law. So, again, that is also a big issue in the book. The two big issues, really, are the treatment of IRAs and retirement plans and the treatment of Social Securities. Now, do I cover income taxes? Absolutely. Do I cover healthcare? Yes, because, by the way, there’re new laws in the affordable healthcare act that are very germane to same-sex couples, and frankly, sometimes have an impact on whether you want to get married or not. So, for example, we have one couple who is not getting married because if they get married, they will no longer qualify for the cheap premiums under Obamacare, but if they stay single, they can. So, we go through some of those nuances.
David Bear: Every case is different.
Jim Lange: Yeah, it is. I wish it was easier, but it’s not, so we do what we can, and then we also…what we try not to do is, it’s not a touchy-feely book that talks about how wonderful it is to get married and all the emotional reasons and all that kind of stuff. I’m going to leave that to…
David Bear: To the individuals, yeah.
Jim Lange: …to the individuals and other people who talk about that. Certainly, Evan Wolfson does a very compelling argument for why same-sex couples should have the legal right to marry, and call it ‘marriage.’ Don’t call it a ‘civil union.’ That’s not really what the emphasis of the book is at all. It’s really about money, and given that you are in a committed long-term relationship with a same-sex partner, one of the issues that I see is a) should you get married, and if so, b) what proactive steps can you do to protect yourself, protect your partner, and potentially other heirs down the road, and that’s what this book really is about. And by the way, I hate to correct you, but the book is officially not available as of this moment.
David Bear: Oh, all right.
Jim Lange: We have an advance version out. An advance version means it’s not for sale. We’re sending it out for testimonials like we did to Ed Slott and other people. In certain circumstances, we could get an advance copy out to certain individuals. So, for example, if anybody came to my office, I would certainly give them a copy without charge.
David Bear: And there is that chapter on the website.
Jim Lange: And you can get the chapter on the website, and you could also get the ten-week video course, which is…I think it’s going to be pretty good because we have boiled down, let’s say, the essence of the book into about ten charts and graphs, and we go through each one of them in that course. So, that will be useful. But I don’t want people to think that they could go out and go to Amazon and pick it up tomorrow.
David Bear: In a couple of weeks.
Jim Lange: Yes.
David Bear: Good! Well, is there anything else about the book that you want to tell people? We have a couple more minutes here.
Jim Lange: Well, I don’t know if it’s necessarily about the book, but here’s the thing, and I’ll use the analogy of an opposite-sex couple, and this is a true story. I’m going to change some of the details to protect confidentiality, but I had a situation where there was a healthy couple in their fifties, and one of them had a fair amount of money and the other one did not, and I mentioned, you know, if the one that had a lot of money died that there would be enormous taxes. Back then, there were estate taxes and there was a big difference in taxes in the IRA treatment, etc., so there would be a huge difference in the quality of life for the survivor. And they did get married, and the wealthy one did die young and the survivor is far better off. The survivor was able to set up a charitable trust in the name of their deceased spouse. They were able to spend a lot more. They just had a much better life.
David Bear: Or having, actually, probably.
Jim Lange: Right, and they’re still around. So, a lot of times, sometimes, and I’m a little bit guilty about this too, you know, I get into the numbers and I say, “Oh, if you do this, you’re $1.2 million better off and blah, blah, blah,” but it really makes a difference in people’s lives, and that’s really what I want to do. Again, am I looking for additional clients for our firm? Certainly, and I’m not going to say that I have no financial motivation to do this.
David Bear: Western Pennsylvania clients…
Jim Lange: Yeah, western Pennsylvania clients. For other clients, I’m going to make them jump through a few hoops because that’s a little bit tougher, but for western Pennsylvania clients that do qualify, I do offer a free consultation, and that’s who I want to work with, and frankly, I’ve attracted a lot already and I find the people I’m working with to be very nice and thoroughly enjoy it. But I really want to make a difference in people’s lives, so again, I’m going to encourage you, go to the website, get the chapter, get the video course, when the book comes out, get that, but don’t just read it as an intellectual exercise. Read it and do the stuff, whether it’s with me or somebody else, and live a better life and take advantage of the new laws that will now make you equal to an opposite-sex couple, married couple, who knows all the appropriate strategies.
David Bear: Well, on that note, I think we have to quit, and I want to say thank you to the listeners for listening to this edition of The Lange Money Hour. Thanks to Dan Weinberg, our in-studio producer, and Lange Financial Group program coordinator, Amanda Cassady-Schweinsberg. As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and you can also access the audio archive of past programs, including written transcripts, at the Lange Financial Group website, www.paytaxeslater.com. Click on ‘Radio.’ You can also call Lange directly at (412) 521-2732. And there’s the www.outestateplanning.com website, which is also another resource. Finally, mark your calendar for next Wednesday, April 16th at 7:05, and the next new edition of The Lange Money Hour, when we’ll welcome back Charlie Smith, Principal and Chief Investment Officer of Fort Pitt Capital Group.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.