The Potentially Dire Consequences to Your Legacy with the “Death of the Stretch” IRA

Posted on May 22, 2019 by James Lange in Beneficiary Designations, Current Events, Economy, Estate Planning, Estate Tax, Financial Scandals, Government Programs, Inherited IRAs, Roth IRA, Stretch IRA and tagged Beneficiaries, inherited ira, James Lange, PA, Pittsburgh, Roth IRA, stretch ira.

The Death of the Stretch IRA is rearing its ugly head again.

As I have written about, this is personal to me. I was hoping that distributions from my Roth IRA and IRA would be “stretched” over the life of my daughter and maybe grandchildren. It could make a difference of well over a million dollars to my family.

If you have a million dollar or more IRA or retirement plan, this threatened (but as yet not totally defined) legislation could be just as devastating to you and your family. Once the two houses reconcile their differences (see the above post for the details of the different proposals), established estate plans will likely need to be reevaluated. This threat increases the merits of Lange’s Cascading Beneficiary Plan or a similar flexible estate plan. It also creates an even greater incentive for IRA owners considering significant Roth IRA conversions.

I wrote two books on this topic based on the proposal that advanced through the Senate Finance Committee beginning in 2016. While the changes to IRA and retirement plan distribution rules weren’t included in the last set of tax changes (much to our surprise), clearly the idea still has a huge bipartisan appeal.

The action points in both books was to reconsider and revisit the idea of converting more of your IRAs to Roth IRAs. This is consistent with my most recent recommendations encouraging higher conversions because of the low income-tax rates we are currently enjoying. The threat of losing the ability to stretch distributions from IRAs and retirement plans for generations only makes looking into Roth IRA conversions more compelling. If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please call our offices at 412-521-2732.

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.

Part II: How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA

Posted on August 10, 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, new ira rules, Retirement, Roth IRA, Roth IRA Conversions, stretch ira, stretch ira changes, stretch ira rules, stretch roth ira.

Roth IRA Conversions and the Death of the Stretch IRA

This post is part of a series about using Roth IRA conversions as a defense against the legislation that I call the Death of the Stretch IRA. If you are new to my blog, you might find it beneficial to back up and read my earlier posts.

The Best Time to Convert a Traditional IRA to Roth

One of the reasons that people can be reluctant to convert a traditional IRA to a Roth is because they have to pay tax on the transaction. Nobody wants to give the IRS one more cent than they’re entitled to, right? And it’s true – any amount that you convert from a traditional IRA to a Roth is taxed, just like a normal withdrawal. But here’s the bigger problem. Not only do Roth conversions increase the amount of tax you owe at the end of the year, it can also increase the rate at which you pay tax. Managing the tax implications of Roth IRA conversions can be a huge problem for people who are looking to protect themselves against the Death of the Stretch IRA, so I want to tell you about the sweet spot that you should look for if you are considering a conversion.

First, I want to clarify that the examples that follow are based on the 2016 tax tables. The IRS has not published the 2017 tables as of this writing, so for purposes of illustration, we’re going to use the 2016 tax tables. But as an example: if you’re married and file a joint tax return with your spouse, you can earn up to $75,300 and stay within a 15% tax bracket. If you earn $1 more – $75,301 – you’ll shoot up to a 25% tax bracket. If you’re a high earner, you can earn up to $231,450 and pay 28% in taxes. If you earn $231,451, you’ll move up a tax bracket, to 33%.

The best way to convert a Traditional IRA to a Roth, therefore, is to first project how much income you’ll have during the year. Let’s say that you’re 64 and still working and, after adding up all of your income sources, you think you’ll end up with $131,450. And then let’s say that you have $1 million in a Traditional IRA. Should you convert all of that into a Roth? For most people, that would be a very bad move. But what you might be able to do is convert $100,000 because, when that amount is added to your other income, you’d still be in a 25% tax bracket. We generally recommend that our clients do series of small Roth IRA conversions that consider their other income sources so that they do not increase their tax bracket. For many people, the sweet spot for their conversion amount will be the difference between their normal income, and the top of their tax bracket.

I gave a workshop recently where someone was really having difficulty understanding why you’d want to pay taxes one moment before you had to. He asked, “Why does it matter when I pay the taxes if I’m going to be in the same tax bracket now or later?” And while he was (technically) correct about the amount that he was considering converting, what he’d forgotten about was the future gains. If he doesn’t convert, the gain earned inside his traditional IRA will be taxed when it is withdrawn. If that gain is earned inside a Roth IRA because he converted, the withdrawals will be tax-free. And when the Death of the Stretch IRA finally passes, having that pot of Roth IRA money that you can dip in to without having to worry about the tax consequences can give you enormous flexibility in retirement.

Future Income Sources Affect Roth Conversions

There’s one other point about taxes that I want to make. They frequently change after retirement! Let’s consider another example. Joe’s 65 years old and has just retired from his job. He also took my advice about Social Security and is waiting until age 70 to apply. From the IRS’s perspective, Joe doesn’t have a lot of income. Actually, he’s pretty comfortable because he’s just living on a savings account, but he has no wage income or Social Security income. These are the years when it might be a really good idea for Joe to consider a series of Roth IRA conversions and the best way for him to save some money in taxes! Why? Because when Joe is 70, he’s going to have income from Social Security that is higher because he waited, and he’s also going to have to take required minimum distributions from his retirement accounts. Taxes, taxes, taxes! If he is able to convert some of his traditional IRA to a Roth now, while he is in a low tax bracket, the required minimum distributions from his traditional IRA (if he has any left) will be less. And if he needs more income, he can always tap into his Roth.

Roth IRA conversions can be a great defense against changes in your personal tax situation, and against the Death of the Stretch IRA.

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 Conversions and the Death of the Stretch IRA

Posted on August 3, 2017 by James Lange in Inherited IRAs, IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA and tagged death of the stretch ira, end of stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement, Roth IRA, Roth IRA Conversions, stretch ira, stretch ira 2017, stretch ira changes, stretch ira rules 2017, stretch roth ira.

How Roth IRA Conversions Can Help Protect You Against the Death of the Stretch IRA

Those of you who follow my blog know that I’ve spent a lot of time talking about the Death of Stretch IRA, and some ideas that you can take advantage of that could provide some defense for your own family. The next few posts will continue my discussion about Roth IRA conversions, and how they might benefit your heirs after the Stretch IRA is eliminated.

When Will the Stretch IRA Be Eliminated?

Some of my critics have said that I’m making a lot of noise about something that might never happen. They say that the Stretch IRA won’t be eliminated, and all of this discussion is for naught. I have two responses to that. First, I think it’s completely unrealistic to expect that our legislators will maintain the status quo. We have reached the point where our spending is no longer sustainable. Our national debt is estimated at about $20 trillion, but an even scarier statistic is how it relates to our gross domestic product (GDP). That number is about 106 percent – meaning that we owe more than what the entire country produces. At one point, President Trump suggested that we follow the lead of other countries and simply default on our debt. I would be surprised if he could get that proposal through Congress, but if he plans to return the country to solvency as he promised, he’ll need a lot of revenue to do it. With more than $25 trillion being held in tax-deferred retirement accounts, eliminating the Stretch IRA is a quick and relatively painless way to pump a lot of tax money into the government’s coffers. And that, my friends, is why I believe that the Death of the Stretch IRA will happen soon – possibly before the end of 2017. More than likely, the Death of the Stretch IRA will be included as part of a major tax reform – which, as you might recall, was part of President Trump’s campaign platform. Remember, he promised a simplification of the tax code – and there’s nothing simpler than grabbing all your money by eliminating the Stretch IRA!

Roth IRA conversions – A Great Defense Against the Death of the Stretch IRA

Let’s suppose you die before the Stretch IRA is eliminated. Your family will be in a better financial position because they can withdraw your IRAs using the old rules – and stretch it over their lifetimes. But even if they are able to use the old rules, you could still be better off by doing a series of Roth IRA conversions. In my previous posts, I talked about the concept of purchasing power, and how you and your spouse can be better off during your lifetimes if you convert. We’ve proven this to hundreds of our clients by running the numbers for them, and collectively they’re better off by millions of dollars because they took our advice.

But what if the Death of the Stretch IRA happens during your lifetime? Do you believe, as I do, that the Stretch IRA will be eliminated so that the Congress can put one finger in to the country’s fiscal dyke that is already bursting at the seams? Well, when I give talks about possible solutions to the Death of the Stretch IRA, I tell people that Roth IRA conversions are a tool that can be beneficial in either situation. So it doesn’t matter if you die before or after the Stretch IRA is eliminated – Roth IRA conversions can still be beneficial to your family.

Waiting for the Death of the Stretch IRA

It was less than a year ago that the Senate Finance Committee voted 26-0 to eliminate the Stretch IRA. Congress never got a chance to vote on their proposal because they were consumed by one of the most bitter and contentious election processes in recent history. Well, we’ve been watching Congress’s actions all summer long, and have had ongoing discussions with some individuals who are in the know about the status of the Death of the Stretch IRA. If you subscribe to this blog, you’ll be among the first to know when it finally happens.

Stop back later for the latest updates on the Death of the Stretch IRA!

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.

How Roth IRA Conversions Can Benefit You Even if The Death of Stretch IRA Doesn’t Pass

Posted on July 11, 2017 by James Lange in Inherited IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement, Roth IRA Conversions, Roth IRAs, stretch ira.

In my last post, I talked about a concept called purchasing power. If you missed that post, I’d go back and read it because the information contained in it is the key to understanding the benefits of Roth IRA conversions. In short, it explains why you need to consider more than just the dollar value of Roth and Traditional IRAs, in order to determine if a Roth conversion can benefit you.

Las week, we discussed that, if you measure your accounts in terms of their purchasing power rather than their dollar value, it is quite possible that you and your spouse can benefit from Roth IRA conversions. The greater benefit, though, is likely to be recognized by your children and grandchildren. This is true even if the Death of the Stretch IRA legislation does not pass, although I believe it will.

When Roth IRA conversions were first introduced, I believed that they could provide a huge benefit to my clients who had large IRAs. It wasn’t just a feeling that I had, I did the math to support my position. Unfortunately, many people were still afraid of this new-fangled idea, and they just didn’t want to hear about it no matter how much it might benefit their families. So I thought to myself, how can I get people to believe me? In 1997, I published the very first peer-reviewed article on Roth IRA conversions. Submitting a paper for peer-review is a daunting process. Imagine a team of CPA’s who are just waiting to find fault with everything you say. Well, guess what? After they read it, they all said “He’s right!” – and my article on Roth IRA conversions was accepted for peer-reviewed publication. It was a ground-breaking idea, and I received a lot of attention by the mainstream media because I was a pioneer. Even to this day I continue to advise several prestigious publications on this topic. But for many individuals who have large IRAs, a series of Roth IRA conversions can provide an enormous benefit when used as part of a well thought out estate plan.

Roth IRA Conversions and Changing Tax Law

Some of you may think that a concept that was peer-reviewed twenty years ago has little relevance in today’s world. Well, it’s true that back then, the tax rates were higher than they are now. That means that, back then, Roth IRA conversions offered a greater benefit than they can under the current tax structure. And now we are facing the possibility that the Death of the Stretch IRA legislation will pass, which would accelerate the income tax due on inherited IRAs.

The changing tax rules are the reason that you must measure your IRAs, whether they are Traditional or Roth, in terms of their purchasing power. For many individuals, paying tax on the amount that you convert to a Roth IRA can provide a benefit to you, and an even greater benefit to your heirs. It goes against my grain to pay income tax even a day sooner than I have to, but I put my own money where my mouth is. Years ago, I paid the income tax due and converted a significant amount of both my own and wife’s Traditional IRAs to Roths. I’m glad I did, because those IRAs have grown tax-free for decades.

Roth IRA Conversion Calculators

So let’s talk about those Roth IRA conversion calculators that are available online. Are they accurate? Well, if you want to try one out, please make sure that you find a calculator that uses the current tax rates. Your results will not be accurate if you unknowingly choose a calculator that uses tax rates from ten years ago! When personal computers first hit the scene, there was a popular saying about them: “garbage in, garbage out”. This was the developer’s way of saying that, while their programs were accurate, they couldn’t prevent you from making errors. So if you were preparing your tax return using a well-known software and accidentally checked a box that said you were single when you were actually married, your tax return would still be right – if only you were single.

Ultimately, all an online calculator can do is estimate whether or not a Roth IRA conversion can benefit you. In my opinion, an estimate is not good enough. Before we make the recommendation to a client that they do Roth IRA conversions, our CPAs do actuarial calculations using several different scenarios. They also calculate your tax return (and the tax returns of your beneficiaries) so that we know for certain whether Roth IRA conversions can benefit you. If the Death of the Stretch IRA legislation passes as I believe it will, Roth IRA conversions will likely become a more important part of many estate plans.

Stop back soon for more Roth IRA 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.

How Roth IRA Conversions can help Minimize the Effects of the Death of the Stretch IRA

Posted on July 6, 2017 by James Lange in Inherited IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement, Roth IRA, Roth IRA Conversions, stretch ira.

This post is part of a series about the Death of the Stretch IRA, and some ideas that you can use to minimize the effects of it.

Are Roth IRA Contributions and Conversions a Good Idea for Older Investors?

There is a lot of debate about whether or not Roth IRAs are a good idea and, in particular, whether or not they are a good idea for older investors. In my opinion, Roth IRAs and Roth IRA conversions are a good idea for both young and old investors. I also believe that Roth IRAs will become even more important after the Death of the Stretch IRA. Why do I believe this? In order to explain it, I have to ask you to change your paradigm about the way you perceive money. And if you can understand the concept I’m about to introduce, you’ll be way ahead of most lawyers, CPAs and financial advisors.

The Roth IRA Advantage: Purchasing Power

Suppose that John and Jim both want to buy a $600,000 vacation home. Jim has $900,000, and to keep things simple, I’m going to assume that his money is invested in a bank certificate of deposit, where there would be no capital gains generated if he cashed it in. John has $1,000,000 in his Traditional IRA and, when measured in dollars, he has an advantage because he clearly has more money than Jim. But John will have to pay tax when he withdraws money from his Traditional IRA, and, in this example, I’m going to assume that John doesn’t have any money outside of his retirement plan to pay the income tax due. That means he has to withdraw even more from his IRA in order to have $600,000 left to spend on his vacation home. Well, since the top tax rate is 39.6 percent, John will have to withdraw his entire $1 million IRA because he’ll owe the IRS almost $400,000. Jim’s vacation home cost him $600,000 because he didn’t have to worry about taxes, but John’s vacation home actually cost him closer to $1 million. So even though Jim didn’t have as much money as John, he had the advantage over him. He had more purchasing power than John because he already paid the income tax that was due on the money he used to buy the house.

That is the way that I would like you to think about your money – not in terms of the amount of dollars you have, but how much purchasing power you have. If you can understand the advantages of purchasing power, you will have the key to unlocking the secret of the Roth IRA treasure.

The Breakeven Point for Roth IRA Conversions

Some professionals insist that there is no advantage to an older investor doing a Roth IRA conversion. This is because they think of the conversion in terms of dollars rather than purchasing power – which means that an older investor may not have a long enough life expectancy to recoup the income taxes he prepaid. Well, that is like comparing apples to oranges. I believe that the breakeven point of a Roth IRA conversion happens on Day 1, and here’s why. Suppose Jim and John both own Traditional IRA s worth $100,000 plus $25,000 in after-tax accounts. If John cashes in his Traditional IRA he will have $100,000 to spend, but he has to use the $25,000 to pay the income tax due on the withdrawal. Jim, on the other hand, does a Roth IRA conversion. He converts his $100,000 to a Roth IRA and, yes, he also uses his $25,000 to pay income tax. On the day he makes the conversion, he has $100,000 – the same amount of money, and the same amount of purchasing power, as John. This means that the breakeven point of a Roth IRA conversion is the day of the conversion. The most significant difference happens in the future. For the rest of his life, all of the gains that Jim earns in his Roth IRA account will be tax free. And even if John just reinvests his $100,000 in a regular brokerage account, all of the future gains that are earned in the account will be taxable.

Roth IRAs can be a great idea for older investors. If you compare apples to apples and measure your purchasing power, rather than your money, the breakeven point for a Roth IRA conversion will happen on Day 1. And better yet, the tax-free feature of your Roth IRA can offer an excellent defense against the Death of the Stretch IRA.

Stop back soon for more Roth IRA 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.

Roth IRA Conversions and the Death of the Stretch IRA

Posted on June 28, 2017 by James Lange in Inherited IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, new ira laws, new ira rules, Roth IRA, Roth IRA Conversions, stretch ira.

Learn About Roth IRA Conversions & the Death of the Stretch IRA in this Video Blog Post

You’ve been hearing a lot from me about the Death of the Stretch IRA, and so might be happy to hear that the next couple of posts I do will concentrate on Roth IRAs and Roth IRA conversions. Is this because I want you to start thinking about your income tax planning for 2017? Not really – it’s because a series of Roth IRA conversions can, for some people, be the best defense against the Death of the Stretch IRA.

The Most Important Financial Fact About Retirement

If you’re new to my blog, though, I want to take a moment and emphasize what I believe is one of the most important facts that retirees should know about their finances. So here it is. Above all, you should understand that a positive financial outlook in retirement involves far more than just the rate of return you earn on your portfolio.

Surprised? One of my favorite illustrations that demonstrates this involves two hypothetical couples who are the exact same age, have the exact same amount of money when they retire and who invest their money exactly the same way. Everything about these two couples is exactly the same, except for one thing. One couple uses the optimal strategies when applying for Social Security and makes a series of Roth IRA conversions, but the other couple doesn’t. The illustration shows the scope of difference between the couple’s financial outlook during retirement. The couple who understood the most important financial fact about retirement invested in the exact same assets that the other couple did – so they did not earn a higher rate of return. But because they used the optimal strategies for Social Security and Roth IRA conversions, their retirement savings outlived them both and they passed a sizable estate on to their children. The other couple, unfortunately, went broke during their lifetimes.

Understanding the most important financial fact about retirement – that a secure retirement can depend on far more than just the rate of return you earn – can make a huge difference in your financial security.

The Benefits of Roth IRA Conversions

We’ve talked about how Social Security can give you a hedge against the Death of the Stretch IRA, so now let’s look at how Roth IRA conversions might benefit you.

What is a Roth IRA conversion? The simplest way to explain it is with an analogy. Suppose you are a farmer, and the IRS gives you a choice. You can deduct the cost of your seed and pay tax on your entire harvest, or you can forgo the deduction for your seed and reap your entire harvest tax-free. The second option shows the benefit of the Roth IRA. Would you rather deduct the contribution to your retirement plan and pay tax on withdrawals, or forgo the deduction so that you don’t have to pay tax on withdrawals?

In order to make a Roth IRA conversion, you have to enlist the assistance of the custodian who handles your traditional IRA. They transfer all or part of your traditional IRA to a Roth IRA and file some paperwork with the IRS. The paperwork tells the IRS that you owe them tax on the amount you converted, and that all of the money you earn in your new Roth IRA will be tax free. Some individuals are critical of Roth IRA conversions because you pay taxes before you’re legally required to. That’s very true. But even though nobody wants to give the IRS a helping hand, is there a benefit to prepaying the tax bill that will eventually be due on your traditional retirement plan? Let’s review the Roth IRA rules.

You know that Roth IRAs grow tax-free for the rest of your life. But did you know that they also grow tax-free for the rest of your spouse’s life, and under existing law, your children’s lives too? For those of you who aren’t all that motivated to leave your children in the best possible position because you think they should be happy with whatever you leave them, there’s another feature to the Roth that can provide an enormous benefit just for you. The Roth IRA rules specify that there is no Required Minimum Distribution (RMD) for the original owner or surviving spouse, as there is with a Traditional IRA. This benefit alone can provide you with enormous flexibility and control over your tax picture, especially after you turn 70 ½. Your children will be required to take RMD’s from any IRA that they inherit from you, whether it is a Roth or Traditional account. The difference is that the withdrawals from the Roth are tax free. That is beauty of the Roth IRA for your non-spousal heirs.

If you are concerned about your heirs, the tax-free benefit of the Roth will make all the difference after the Death of the Stretch IRA. This is because the Death of the Stretch IRA will accelerate the RMDs that your non-spousal heirs must take from the IRAs they inherit from you. The entire account must be withdrawn from the IRA within five years. And if you have a large IRA – $1 million or more – your children will have to take very large withdrawals. These withdrawals can potentially throw your children into a much higher tax bracket during those years, unless you had the foresight to convert your traditional retirement plans to a Roth.

We’ll talk more about Roth conversions next week. 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.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

President Trump’s Tax Reform Proposal and How it Might Affect You

Getting Social Security Benefits Right with the Death of the Stretch IRA

The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

Part II: The Best Age to Apply for Social Security Benefits after the Death of the Stretch IRA

Social Security Options After Divorce: Don’t Overlook the Possibilities Just Because You Hate Your Ex

Is Your Health the Best Reason to Wait to Apply for Social Security?

Posted on June 20, 2017 by James Lange in Retirement Planning, Social Security, Stretch IRA, Video Resources and tagged death of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Social Security, Social Security Benefits, social security strategies, stretch ira.

For the past several months, I have been discussing the looming legislation I call the Death of the Stretch IRA. This series of posts turns slightly away from that, discussing the likelihood of a reduction and then increase in federal income tax rates which not only affects inherited IRAs but also your Roth IRA and Social Security planning. For those of you who are currently retired or will be shortly, the elections you make concerning your Social Security benefits, as well as the execution of optimally timed Roth IRA conversions can make the difference between your being financially secure or going broke. This post discusses how your health could affect your Social Security elections.

Social Security at 66 vs 70 – which is better?

In most cases, I tell my clients that it is better if the spouse who has the strongest earnings record holds off applying for Social Security until age 70 in order to get the maximum amount of delayed retirement credits. This is key to your tax and retirement planning as it can increase your benefit by up to 8 percent each year, plus cost of living adjustments! I go into more details in my book, which you can get a free copy of by clicking here. But if you’ve read my book already, then you know the specific reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible.

Reasons to Wait until Age 70 to Apply for Social Security

Read that last sentence one more time. Did you notice that I did NOT say that the reason for waiting until age 70 is so that the primary earner will receive more money? I said the reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible. It’s an important distinction, and I want to tell you what I mean by that.

Recently I met with a couple who were not yet retired. The husband, who was older and the higher earner of the family, had recently been diagnosed with a terminal illness and given a life expectancy of no more than five years. The wife was 55 – ten years younger than her husband. Both of them thought that the husband should apply for Social Security immediately, so that he could at least get some money during the years he still had left.

I asked him, “But what about her?” He looked at me and said, “She’ll get my full benefit after I die, won’t she?”

What happens to Social Security after your spouse dies

Let’s do a quick review of what happens to your income from Social Security after one spouse dies. Suppose the husband is entitled to a monthly benefit of $2,000 at age 66. His wife is entitled to a spousal benefit of 50 percent but, in this case I’m going to say that she has worked all of her life and her benefit based on her own record is higher – $1,200. Their monthly household income from Social Security, therefore, is $3,200.

So what happens when your spouse dies? How much does the survivor get? The answer is the higher of the two benefits. In the above example above, the wife’s benefit would increase to $2000 after her husband’s death. Sound good? It isn’t! The problem is that the monthly household income from Social Security will go down – from $3,200 to $2,000! Think of how critical that is! That’s the reason that, in most cases, the higher earner should wait until age 70 before applying for Social Security.

In the case of the clients I was talking about earlier, it was especially important that the husband wait to apply for benefits. She was ten years younger than he was – 55 years old – and the picture of health. That meant her life expectancy of age 84, or almost 30 years. Her husband may never see a dime of his Social Security money – if he does, he’ll get a higher benefit for the time he does have left. But if his wife survives him, which she probably will, she’ll have more than just an inherited IRA and his savings accounts, she’ll have his higher benefit for the rest of her life too. Remember that, as we discussed before, the timing of your application to Social Security can drastically benefit your retirement planning. especially after the Death of the Stretch IRA. There is a critical lesson to be learned from this example. Poor health is not a good reason for the primary earner to apply for Social Security early, unless the spouse is also in poor health. If both spouses are in poor health and are not likely to enjoy a long retirement, then it could make sense to apply early. The goal is to make it possible for both of you to enjoy as much income as possible, while you are both alive!

Stop back soon for more Social Security 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.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA