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

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

by: Matt Schwartz, Esq.

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

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to $5,000,000 adjusted for inflation per person and that the step-up in basis rules on appreciated assets will be repealed with immediate recognition of capital gain at the time of the taxpayer’s passing.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

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

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

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

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

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

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

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

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

 

The Defenses Against the SECURE Act

The Best Defenses Against the SECURE Act by James Lange

photocredit: Getty

 

This blog post has been reposted with permission from Forbes.com

I have posted several articles explaining the most important provisions of the SECURE Act and the devasting effect that its provisions will likely have on individuals who inherit IRAs or retirement plans.  This article will address some of the proactive steps you can take now and after the SECURE Act or something similar becomes law.

Reduce Your Traditional IRA Balance With Roth IRA Conversions

If timed correctly, Roth IRA conversions can be an effective strategic planning tool for the right taxpayer. Often, a well-planned series of Roth IRA conversions will be a great thing for you and your spouse and will be one of the principle defenses from the devastation of the SECURE Act.

You and your heirs can benefit from the tax-free growth of the Roth IRA from the time you make the conversion up to ten years after you die.  One of the advantages of making a series of conversions is that the amount you convert to a Roth IRA reduces the balance in your Traditional IRA, which will reduce the income taxes your heirs after to pay on the Inherited IRA within ten years of your death.

Inherited Roth IRAs are subject to the same ten-year distribution rule after death as Inherited Traditional IRAs under the SECURE Act.  The important difference between the two accounts is that the distributions from Roth IRAs are generally not taxable.  One good thing about Trump’s Tax Cuts and Jobs Act of 2017 is that it temporarily lowered income tax rates, so this year is probably a better than average year for many IRA and retirement plan owners to consider Roth IRA conversions as part of their long-term estate planning strategy. We did several posts on Roth IRA conversions earlier this year and concluded this was a great time to look at Roth conversions.  Now, it is even more important.

In short, it may make more sense for you to pay income taxes on a series of Roth IRA conversions done over a period of years than it would for your heirs to pay income taxes on the accelerated distributions required under the SECURE Act.  The strategy of doing a series of Roth IRA conversions over several years tends to work better because you can often do a series of conversions and stay in a lower tax bracket than if you did one big Roth conversion.  Of course, there is no blanket recommendation that is appropriate for every IRA and retirement plan owner.

Spend More Money

Many of my clients and readers don’t spend as much money as they can afford.  Maybe if they realized to what extent their IRAs and retirement plans will be taxed after they die, they would be more open to spending some of it while they are alive.  Assuming you can afford it, why don’t you enjoy your money rather than allowing the government to take a healthy percentage of it?  Considering taking your entire family on a vacation and pay for everything. My father in law takes the entire family on a four-day vacation in the Poconos every year.  Yes, it costs him some money, but those family memories will be a much more valuable legacy than passing on a slightly bigger IRA – especially if your IRA is destined to get clobbered with taxes after you die.

A variation on the same idea is to step up your gifting plans – not only to charity but also to your family.   Sometimes it makes sense to give a financial helping hand to family members who might need one sooner than later. Not only might you be able to ward off additional troubles for them, but it might help your own peace of mind if you don’t have to worry about them.  What about that new grandbaby?  Consider opening a college savings plan – it could open a whole new world of opportunity for him when he reaches college age.

If you donate to charity, make sure that you “gift smart”.  The Tax Cuts and Jobs Act of 2017 made it more difficult for many Americans to itemize their charitable contributions.  If you fall into this category, you need to know about a provision in the law that allows you to make charitable contributions directly from your IRA.  Known as a Qualified Charitable Distribution (QCD), this strategy allows you to direct all or part of your Required Minimum Distribution (RMD) directly to charity.  The amount of the QCD is not an itemized deduction on your tax return – but it’s even better.  It is excluded from your taxable income completely!  So, if you are required to take RMD’s from your retirement plans and intend to donate to charity anyway, a QCD may be a much more tax-efficient way to do it.

Update Your Estate Plan

Thoughtful estate planning can provide options for survivors that will allow them to make better decisions because they can do so with information that is current at the time you die. Even if you have wills, life insurance and trusts, the changes in the laws suggest you review and possibly update your entire estate plan.   This includes your IRA beneficiary designations too, and that’s particularly true if you have created a trust that will be the beneficiary of your IRA or retirement plan.   Assuming some form of the SECURE Act is passed into law, you would likely improve your family’s prospects by updating your estate plan.

Consider Expanding Your Estate Plan

The changes brought about by the SECURE Act could make life insurance even valuable to your estate plan than in the past.  The idea is you would withdraw perhaps 1% or 2% of your IRA, pay taxes on it, and use the net proceeds to buy a life insurance policy.  The math on this type of policy stays the same as in the past.  The difference is in the past your heirs could stretch the IRA over their lives.  This makes the life insurance option much more attractive because the alternative is worse.  Charitable Trusts might also become a good option depending on the final form of the law.

One idea that we think can be a good strategy for some IRA owners under the SECURE Act are Sprinkle Trusts.  If used in an optimal manner, they can provide families with the opportunity to spread the tax burden from inherited IRAs over multiple generations by including children, grandchildren, and great-grandchildren as beneficiaries.  Sprinkle Trusts have been one of the many “tools” in the sophisticated estate planner’s repertoire for years but have become much more attractive recently because they can offer significant tax benefits to certain IRA owners.   They can also have hidden downfalls, so consider talking with an attorney who has expertise in both taxes and estate planning to help map out a strategy that is appropriate for your situation.

Combine Different Strategies

Perhaps the best response to the SECURE Act involves a combination of strategies.  For example, in some situations the most course of action might be revised estate plans, a series of Roth IRA conversions, a series of gifts, and the purchase of a life insurance policy.

Spousal IRAs

The SECURE Act will not apply directly to an IRA or retirement plan that you leave your spouse.  After your spouse dies and leaves what is left to your children, then the SECURE Act does rear its ugly head.

The SECURE Act is a money grab – an action by Congress that betrays retired Americans.  You will likely be able to at least partially defend your family against its worst provisions by taking action.  This is not one of those posts where you think “great post, now back to watching television”.  It is a post meant to create dread that the IRA you worked so hard to accumulate will get clobbered with taxes after you die unless you take action.  The ideas discussed above are some of our favorite action points.  This post should be the beginning, not the end of your research and action on this enormous problem.

For more information go to https://paytaxeslater.com/next-steps/ to take next steps to protect your financial legacy.

If you’ll be in the Pittsburgh area, go to https://paytaxeslater.com/workshops/ for updates on Jim’s FREE retirement workshops to learn even more about how to established retirement plans that will be beneficial to make the most out of what you’ve got for your family.

 

James Lange

The SECURE Act: Is It Good For You Or Bad For You?

Is The SECURE Act Good for You or Bad For You by CPA/Attorney James Lange on Forbes.com

Will you be able to retire safely under the SECURE Act?

 

This blog post is republished with permission from Forbes.com

My previous post introduced the potential consequences of the SECURE Act, which is being promoted as an “enhancement” for IRA and retirement plan owners.  This is because it includes provisions allowing some workers to make higher contributions to their workplace retirement plans. I think it is a stinking pig with a pretty bow, so I wanted to give retirement plan owners the good and bad news about it.

I am a fan of Roth IRAs because they allow you to have far more control over your finances in retirement than you might have otherwise had.  You are not required to take distributions from your Roth IRA, but the good news is that they’re not taxable if you do take them.  These tax benefits can be a critical factor for seniors, especially if you are suddenly faced with costly medical or long term care bills.   Saving money in a Roth account can offer financial flexibility to many older Americans – and one good thing about the SECURE Act is that it can help you achieve that flexibility.  Here’s how.

The Good News About The SECURE Act

Under the current law, you are not allowed to contribute to a Traditional IRA after age 70½.  (You can contribute to a Roth IRA at any age as long as you have taxable compensation, but only if your income is below a certain amount.)  The age limitation for making contributions to Traditional IRAs is bad for older workers – and that’s an important point because the Bureau of Labor Statistics estimates that about 19 percent of individuals between the ages of 70 and 74 are still in the workforce.  The SECURE Act eliminates that cutoff and allows workers of any age to continue making contributions to both Traditional and Roth IRAs.

That same provision of the SECURE Act offers a hidden bonus – it means that it will also be easier for older high-income Americans to do “back-door” Roth IRA conversions for a longer period of time.  The back-door Roth IRA conversion, currently blessed by the Tax Cuts and Jobs Act, is a method of bypassing the income limitations for Roth IRA contributions.  The current law prohibits contributions to a Roth IRA if your taxable income exceeds certain amounts.  Those amounts vary depending on your filing status.   But even if you are unable to take a tax deduction for your Traditional IRA contribution, you can still contribute to one because there are no income limitations.  Why bother?  Because, assuming you don’t have any other money in an IRA, you can immediately convert your Traditional IRA to a Roth IRA by doing a back-door conversion.  That’s a good thing because the earnings on the money you contributed can then grow tax-free instead of tax-deferred.

Here’s more good news.  The current law requires Traditional IRA owners to start withdrawing from their accounts by April 1st of the year after they turn 70 ½.  These Required Minimum Distributions (RMDs) can be bad for retirees because the distributions are taxable.  The increase in your taxable income can cause up to 85 percent of your Social Security benefits to be taxed and can also move you into a higher tax bracket.  And once you begin to take RMDs, you are no longer allowed to make additional contributions to your account, even if you are still working.  The SECURE Act increases the RMD age to 72, a change which will allow Traditional IRA owners to save more for their retirements.

There’s a hidden bonus in this change as well.  Increasing the RMD age to 72 will allow retirees more time to make tax-effective Roth IRA conversions.  What does that mean?  Once you are required to take distributions from your Traditional IRA and your taxable income increases, you may find yourself in such a high tax bracket that it may not be favorable to make Roth IRA conversions at all.

Four Ways Women Can Improve Their Outlook in Retirement

Women and Retirement Lange Financial Group Pittsburgh PA

Recent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are.

Recent studies have shown that women, even those who worked outside of the home, are much more likely to slip below the poverty line in retirement than men are. Approximately 8 percent of adults aged 65 and older must rely on food stamps to survive and, of those, two-thirds are women. Why is there such a financial inequity between men and women in their golden years?

In years past, women typically earned much less than men (fortunately, this has started to change). Because they earned less than men, women were not able to save as much for retirement. Federal law establishes the maximum percentages that workers can contribute to retirement plans. Assuming that two workers both contribute the maximum percentage to their retirement plans, a male worker who earns $60,000 will save more dollars than a female worker who earns $40,000. Women must also make what they can save last longer. According to the Social Security Administration, the life expectancy of a man who is 65 today is 84.3. The life expectancy of a female, who is 65 today, is 86.6—a difference of almost two and one-half years.

Many women who are now retired are not as educated about finances as women of subsequent generations. They let their husbands manage the money, and frequently are unintended victims of poor decisions made by their spouses. This is especially true when considering both defined benefit pensions and Social Security elections. Retirees generally have the choice of applying for a higher benefit that lasts for their own lifetime, or a reduced benefit that is paid over the course of both their and their surviving spouse’s lifetimes. Many insist on applying for the higher benefit under the premise that they need a higher income to live on. If they are the first to die, though, their spouses are cut off completely. Many of the primary wage earners also make bad decisions when applying for Social Security benefits, never considering how their actions will affect their spouses. The decisions they make can mean a difference of about $25,000 in Social Security income every year, for their surviving spouses.

The good news is that, even if you are retired now, there are steps that you can take to improve your outlook in retirement. Consider some of these options:

1. If you are saving for retirement, take advantage of qualified retirement plans such as 401(k)s, 403(b)s, and IRAs. These plans offer tax advantages that, in the long run, will provide you with a much larger nest egg in retirement than buying identical investments inside a non-retirement account. Make sure that you manage the money that you do save, well. Many women are afraid to invest their money in anything other than CD’s, and never consider that the low rates of return they offer may cause them to run out of money before they run out of time.

2. If your spouse is entitled to a defined benefit pension when he retires, or if he will receive payments from an annuity, make sure that he chooses the payment option that covers your life as well as his own – especially if you are younger than he is. If he chooses the option that covers only his life, the payments will stop when he dies. If you can’t afford to live on the reduced benefit amount that covers both of your lives, then you can’t afford to stop working.

3. If your spouse earned more money than you did, ask him to think twice about applying for Social Security benefits at age 62. If he does, his benefit will be reduced by 25 percent for the rest of his life. Your spousal benefit, as well as your survivor benefit if he predeceases you, will also be permanently reduced. If it’s possible, encourage your spouse to wait until age 70 to apply for benefits. If he does, his benefit will be increased by 32 percent. If you survive him, the benefit you receive after his death will also be significantly higher.

4. Many women are not educated about financial and tax strategies they can use to make their money last longer. Consider making a series of Roth IRA conversions during the years after you retire, but before you start taking withdrawals or Required Minimum Distributions from your retirement plans. The money you save in a Roth IRA is not taxable, and so lasts longer than money that is in a traditional retirement plan.

It is important to remember that there is no one-size-fits-all answer to this problem. In order to make sure that you are financially secure, it is imperative that you contact a financial professional that you can trust and discuss these points in detail. A good fee-based advisor will be able to guide you through the best possible choices for pensions, Social Security, investment planning, and retirement expenses.

For more information about the financial challenges affecting women in retirement, please listen to our radio show at “Women Don’t Ask: How Married Women Can Advocate for their Own Financial Protection

 

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The Aftermath of Brexit

The Aftermath of Brexit

Pros and Cons: What Options Do Individual Investors Have?

The Aftermath of Brexit Pay Taxes Later Blog

What should you do about your own retirement plan in the aftermath of Brexit? Find out why now could be a great time to do a Roth conversion!

On June 23, 2016, a majority of British citizens voted to leave the 28-member European Union – an action referred to as the “Brexit”. The following day, Americans awoke to learn that global stock markets had not reacted well to the news. Our major domestic indices followed suit, with the Dow Jones Industrial Average declining more than 600 points in one day. Trillions of dollars in wealth were estimated to have been wiped out overnight, and more is likely to follow as the world adjusts to the news.

Prior to the historic Brexit vote, I watched with interest as the pollsters interviewed people on the streets and then confidently predicted that Britons would vote to stay in the union. The British pound made gains, and even the lethargic US stock markets seemed cheered at the news. Life, it seemed, would be good as long as the union remained intact. Investors throughout the world thought that the good citizens of Great Britain would never upset the apple cart, and placed their bets accordingly. And guess what? They bet wrong!

Time will tell, but I suspect that much of this market chaos is happening because the investors who relied on the pollsters got caught with their pants down. Plans were made and fund managers structured their portfolios assuming that the citizens of Great Britain would vote to stay – and they didn’t. Now these investors find themselves having to scramble to put their Plan B – assuming they even have one – in place. What does their mistake mean for you?

If you’re clients of ours, you know that we have always advocated using a balanced approach to money management. And we never advocate making changes to your portfolio based solely on what the market is doing. However, for many of you, now would be a great time for you to take that trip to London that you’ve always wanted to do. The US dollar strengthened on the news of the Brexit, and will stretch much further now than it would have a week ago. Or, consider establishing Roth IRAs or college tuition accounts for your grandchildren. If they have ten or more years to wait out a market recovery, you can fund those accounts with equities purchased at prices much lower than they were last week at this time.

What should you do about your own retirement plan in the aftermath of Brexit? If you hold any global funds in your IRA, now could be a great time to do a Roth conversion. By converting when the market value of the fund is low, you pay less in federal income tax than you would when the fund value is high. And if the market continues to drop even further, you can always recharacterize your conversion. I’ll be talking about some of these points on my next radio show on 1410 KQV. You can call in and ask questions during the live broadcast on Wednesday, July 6th, from 7:00 – 800 p.m., or catch the rebroadcast on Sunday, July 10th at 9:00 a.m. You can also read more about Roth conversions by clicking this link on my website: https://www.paytaxeslater.com/roth_ira/

Please call our office soon if you have been thinking about doing a Roth conversion, and we will run the numbers to see if it makes sense for you. And if you do go to London, send me a postcard!

Jim

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Restricted Applications vs File and Suspend – Which is Best?

Restricted Applications vs File and Suspend – Which is Best?

Tony, 72, and Maria, 67 are both still working full time. Tony already applied for Social Security, Maria has not. Should Maria wait to apply?

Thanks again to all of you for your interest in my new book, The Little Black Book of Social Security Secrets. I’ve received a lot of questions about the best Social Security strategies for married couples, and my most recent blogs have given some examples where the File and Suspend strategy might be beneficial. Now I want to cover some examples for those of you who have two-income households, and who might benefit from filing a restricted application for benefits.

Tony, 72, and Maria, 67, read my book and wondered if they should reconsider their Social Security strategies. Both are still working, and full time. Tony applied for his benefits as soon as he was eligible, at age 62. Maria has not applied yet. Should Maria apply for benefits, or should she wait? This question, unfortunately, is not as straightforward as you might hope. Let’s look at all of the facts.


Filing a Restricted Application for Spousal Benefits

Tony is already receiving his Social Security checks, so he doesn’t have a lot of options. But what options does Maria have? Because she was Full Retirement Age (FRA) on December 31, 2015, she can file a restricted application for benefits and specify that she only wants to receive a spousal benefit. Her spousal benefit is a percentage of the benefit based on Tony’s earnings record. In order to be able to file a restricted application for spousal benefits you must be at least FRA, so in this case Maria will receive the maximum spousal benefit of 50 percent. Filing a restricted application for spousal benefits allows Maria to collect some income from Social Security while the benefit payable based on her own earnings record grows by Delayed Retirement Credits (DRCs). When she turns 70, she can switch to her own benefit if is higher than her spousal benefit.

Suppose Tony was only 60, and had not yet filed for his own benefit? Maria wouldn’t be able to file a restricted application for spousal benefits unless Tony has filed for his own benefit. She could apply for benefits based on her own earnings record, but then she’d miss out on those DRCs.

Suppose Tony is 67, and regrets that he started taking his benefits at 62. Can he suspend them without affecting Maria’s spousal benefits? The answer is yes, but only because we’ve changed Tony’s age and are now assuming that he’s 67. You have to be at least FRA, but not yet 70, in order to suspend your benefits after you’ve started collecting them. Why even bother then? Think about it for a minute. If Tony was able to suspend his benefit, the couple could still receive some income from Social Security (Maria’s spousal benefit), while at the same time allowing Tony’s to grow by DRCs. When he unsuspends them, Tony could receive a higher benefit amount, and for the rest of his life. (Don’t forget – if Tony wants to suspend his benefit, he needs to do so by April 29, 2016!)


Restricted Application Deadline

Many people have asked what the deadline is for them to file a restricted application, and unfortunately the answer is not as straightforward as for those who want to file and suspend. The rule is that, if you were at least 62 on December 31, 2015, you can file a restricted application when you reach your FRA. What if Maria is 63? In that case, she couldn’t file a restricted application for benefits right now, but she could do so when she reaches her FRA (for our purposes here, 66). What if Maria is 60? If she is, she will never be able to take advantage of this technique because she was not at least 62 on December 31, 2015.

In real life, my advice would not stop at telling Maria that she should probably file a restricted application. In the original scenario, Maria is 67 and is not collecting Social Security benefits of any kind right now. She could have filed a restricted application for spousal benefits as soon as she turned 66, and she wouldn’t have affected Tony’s benefit or the benefit based on her own earnings record at all. Maria’s missed out on a lot of money! The first thing I would tell her is that, when she files her restricted application, she should ask for retroactive spousal benefits. Retirement claims can be paid for up to six months retroactively.


Changes When Filing a Restricted Application

I’d also want to take a closer look at Tony and Maria’s tax picture, and point out some possible changes that they may not have considered. They have income from their jobs, income from Tony’s Social Security, minimum required distributions from his IRAs, and now they’ll have even more income from Maria’s spousal benefits. Just how bad will the news be for them on April 15th?

Interestingly enough, Tony and Maria have some options available to them that non-working couples do not. Assuming that they don’t need Maria’s Social Security income to live on, I would ask them to consider putting that money right back in to their retirement plans at work. Most of you who read this column regularly know that, once you turn 70 ½, you are generally required to start taking minimum distributions (RMDs) from your IRAs. Some of you may not be familiar with the exception to the rule, though, that applies to individuals who are still working at that age. If you are still working, you are not required to withdraw money from your work retirement plan when you turn 70 1/2. You’re not required to withdraw anything from your work plan at all, until you stop working. There is an exception to this exception, and it applies if you own more than 5 percent of the company. If this is the case, you must take RMDs from your retirement plan at work when you turn 70 ½, even if you are still working.

Here’s another idea for those of you who are still working, and who have IRAs in addition to a work retirement plan. Assuming that the rules of your own plan allow it, you can roll any IRAs that you have in to your work retirement plan. You would not be required to take minimum withdrawals from the plan, or any of the IRAs that you rolled in to it, until you stop working.

Suppose Tony and Maria both work for a large employer, such as the local university? If they are still working, they can still contribute to their work retirement plans regardless of their ages. If they are not already contributing the maximum possible to their work retirement plans, they can use Maria’s new income from her spousal benefits to increase their contributions. If their employer offers them a choice of pre-tax and Roth accounts in their plan, they can allocate their contributions strategically once they have evaluated their short-term and long-term goals. Increasing their contributions to the pre-tax account might help their current tax situation, but increasing contributions to the Roth might be more beneficial in their later years. This is because, as of this writing, you are not required to take minimum distributions from a Roth account. And, if you do take distributions from a Roth account, they will most likely be tax-free.

Suppose Tony and Maria are self-employed, and have a SEP or a SIMPLE retirement plan for their business? In that case, they would fall under the 5% ownership rule, and must take minimum distributions from that plan when they turn 70 ½. But they still might be able to manage Maria’s new income from Social Security more effectively than by just allowing it to accumulate in the bank. If you have earned income, the IRS permits you to contribute to an IRA. In 2016, the annual contribution limit is $6,500. Assuming that Tony and Maria both earned more than $6,500 they could each contribute the maximum to an IRA. But wait! Isn’t it against the rules to contribute to an IRA after you turn 70 ½? Well, you can’t contribute to a traditional IRA after you turn 70 ½, but you are allowed to contribute to a Roth IRA regardless of your age as long as you meet certain income guidelines. So Tony could contribute to a Roth IRA, and Maria could contribute to either.

What if Tony became ill, and was no longer able to work? If Maria is still working, and assuming that she earns enough money, she can still contribute to her own IRA. She can also contribute to a spousal Roth IRA for Tony. The amount that Maria can contribute to both IRAs is limited to the amount of taxable compensation that they report on their tax return. But if she made more than $13,000 in 2016, it would be possible for her to put $6,500 in her own IRA, and $6,500 in Tony’s Roth IRA.

So what’s the bottom line? Even if you are worried about how collecting Social Security will affect your tax picture, you can minimize the impact – especially if you continue to work.

Please check back soon for my next post, which will answer some really complicated scenarios that readers have posed. Thanks for the questions!

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Are you confused about how the File and Suspend or Restricted Application strategies can benefit you? Please do not ask your local Social Security office for advice, because they can only present your options about government benefits! The decisions that you make about this affect far more than just your Social Security benefits, and could have unintended complications and/or repercussions if they are not made considering the big picture.

Getting your Social Security decision right is important, but it is even more important that you have the right strategies for all of your planning. To find out if your entire financial house is in order, fill out this pre-qualification form by clicking here to see if you qualify for a free consultation. Western PA residents only please.

Don’t delay. Go to www.paytaxeslater.com/ss to get your free digital copy of The Little Black Book of Social Security Secrets, and then talk to a professional about your options before it’s too late.

 

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Time is Running Out to Maximize Your Social Security Benefits

The Little Black Book of Social Security Secrets, James LangeThere were two married couples, the Rushers and the Planners, with identical earnings records and investments. The Rushers didn’t read this book and during retirement, they ran out of money. Bad news. The Planners, however, took the time to read this short little book, implemented the recommended strategies, and when the Rushers were barely scraping by, they still had $2,013,881.

If you want to be a Planner and not a Rusher, please go to www.paytaxeslater.com/ss and sign up to receive your free digital copy of The Little Black Book of Social Security Secrets on the day it comes out.

Eligible married couples must act by April 29, 2016 to take advantage of the two strategies that will allow them to maximize their income from Social Security.

Why?

Because a certain provision buried in the fine print of the Bipartisan Budget Act of 2015 eliminates the two strategies: Apply and Suspend and Restricted Applications for Benefits.

If you are married and will be at least 66 by April 29, 2016, you should read this book to learn whether it would benefit you to apply for and suspend your benefits by the deadline.

The Potential Benefits of Apply and Suspend for Social Security, James Lange, CPA/Attorney, Pittsburgh, PAApply and Suspend works this way. You file an application for benefits at age 66 (or later) and then suspend them – meaning that you will not receive monthly checks. There’s good reason to consider doing this. For each year that your benefit remains suspended, it grows by 8 percent (up to a maximum of 32 percent), plus cost of living adjustments. When you finally begin collecting checks at age 70, they’re significantly higher than they would have been if you had begun collecting them at age 66 – and they stay that way for the rest of your life. If you change your mind and want to start receiving your checks after you’ve suspended them, you can do so at any time.

Better yet, your spouse will be eligible to apply for spousal benefits—which can be as high as 50 percent of your benefit at age 66—as soon as she is age 62. This will give your family some income from Social Security during the years that your own benefit is suspended. (If her own benefit is higher, then a different strategy should be used).

But you must Apply and Suspend by the deadline, April 29, 2016, to be grandfathered under the old rules. If you do not apply for and suspend your own benefits by April 29, 2016, your spouse will not be allowed to collect a spousal benefit unless you are also collecting your own benefit.

The second strategy, called a Restricted Application for Benefits, allows you to file for benefits and specify that you only want to receive whatever spousal benefit to which you might be entitled. Depending on your age, it could mean a monthly check as high as 50 percent of your spouse’s benefit, while your own benefit continues to grow by 8 percent, plus cost of living adjustments, every year. When you turn 70, you can then switch to your own benefit if it is higher than your spousal benefit.

If you were at least 62 years old as of December 31, 2015, you will be able to file a Restricted Application for Benefits. In order to file a restricted application, you must wait until your Full Retirement Age – which is 66 for those who will be able to take advantage of the strategy before it is eliminated.

Clearly, maximizing Social Security benefits is to your advantage. What many people do not realize is just how important it can be to the surviving spouse. If you are the higher earner and you make the right choices, your spouse will be eligible to receive a survivor’s benefit which, at maximum, will be as high as your own benefit amount. But, two of the strategies that you can use to maximize your benefits are being eliminated.

Don’t delay. Go to www.paytaxeslater.com/ss to get your free digital copy of The Little Black Book of Social Security Secrets, and then talk to a professional about your options before it’s too late.

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Roth IRA Conversions Early in 2016 Present Potential Advantages

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. 

Let’s face it. The stock market has declined a lot in the past few months.

Many people wonder if they should move to cash and do nothing with their investments. While we do not recommend trying to time the future moves in the stock market, the reality is that it is better to buy low and let it grow more in the future. This is especially true for Roth IRA conversions which result in long-term advantages when the account grows after the conversion. So maybe the time to convert is now.

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But, what if the market continues to decline after you convert? One good thing about the current tax law is that you can undo a 2016 conversion as late as April 15, 2017 and perhaps even to October 15, 2017. This gives you a long time, over a year, to see if it grows. If it really dives after you convert, you can even do another conversion at a lower price and undo the first conversion later. The technical term for the undoing of a conversion is a recharacterization, because the Roth IRA is recharacterized as a traditional IRA by moving it back to the original or a different traditional IRA account. Converting early in the year is often recommended as it gives the account more time to grow before a decision must be made on a potential recharacterization.

We have written many articles about Roth IRAs and Roth conversions and included discussions of the extensive advantages they provide. We discuss conversions in our book Retire Secure! and we have written an entire book on Roth IRAs called The Roth Revolution. Both of these books can be purchased on Amazon, but we would be happy to send you a copy for free. To receive a free copy, call us at 412-521-2732, or email admin@paytaxeslater.com and ask for one. Just reference this newsletter offer! These articles and discussions go into much deeper detail on the many strategic ways to do Roth conversions to your advantage, depending on your current situation.

The Roth conversion amount will add to your taxable income, so there are many tax traps to consider when deciding how much to convert, such as …

  • Higher tax rates and related tax surcharges and phaseouts of deductions first implemented for 2013 could result in extra tax if you convert too much.
  • For people who are covered by Medicare parts B and/or D, and pay Medicare premiums, converting too much in 2016 can raise the Medicare premiums in 2018.
  • Also, for medium- or lower-income people who get Social Security income, a conversion can make more of the Social Security subject to tax and also can turn tax-free long-term capital gains and qualified dividends into taxable amounts.

However, paying extra tax can sometimes be worth it in the long run if the Roth IRA account grows a lot after the conversion. These are just some of the things that should be considered in determining the best conversion amount.

Other considerations include the current and future financial and income tax situations of you and your beneficiaries. As we move further into an election year, the possibility of tax law changes looms ahead. Since future tax laws can affect the long-term success of a conversion early in 2016, they should also be considered.

Due to all these considerations and more, we stress the importance of “running the numbers” to be certain that the decisions you are making about Roth IRA conversions are absolutely right for your situation. In general, we like Roth IRA conversions for taxpayers who can make a conversion and stay in the same tax bracket they are currently in, and have the funds to pay for the Roth conversion from outside of the IRA. It is best to run the numbers to determine the most appropriate time and amount for your situation. This is a service that we have provided for hundreds of clients and currently offer free for our assets under management clients. We like to do these number running sessions with the clients in the room. This allows them the opportunity to bring up questions, adjust the scenarios, and feel extremely comfortable with the final decisions.

We usually find many people hesitant to make any changes in their investments when they decline in value. However, you should not pass up the opportunity to do a Roth conversion in a troubled market, as it could provide you and your family more financial security in the long run. Because of the many things to be considered when doing a Roth conversion, we suggest you discuss how much to convert in 2016 with your qualified advisor.

If you are interested about learning about whether a Roth IRA conversion is right for you, please click here and fill out our pre-qualification form. If you qualify, we will contact you to schedule an appointment with either James Lange or one of his tax experts.

Unfortunately, this Free Second Opinion is for qualified Western Pennsylvania residents only.

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4 Reasons Why We’re Excited that Retire Secure! is Interactive on the Web!

If you haven’t made your way to www.langeretirementbook.com yet, now is the time!

Here at the Lange Financial Group, LLC, we are very excited to bring you an interactive version of Retire Secure! A Guide to Getting the Most Out of What You’ve Got.

Reason #1 – The entire book is on this website. Yes, all 420 pages of the book, including the front and back covers, all about the best strategies for retirement and estate planning.

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Reason #2 – The book is divided into chapters for ease of reading. Meaning, you don’t have to flip through 400-some pages to get to Chapter 11 – The Best Ways to Transfer Wealth and Cut Taxes for the Next Generation.

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Reason #3 – We honestly haven’t seen anything like this before. Granted, I’ve read magazines on viewers where you can flip the pages as you read. But not a website for a book that includes a viewer, as well as a forum where readers can engage with each other.

The comments are moderated by the Lange Financial Group, LLC staff and myself. One of us will reply to your comment as soon as we can. To leave a comment, all you need to do is connect with your Amazon, Facebook, or LinkedIn account. This measure is for your protection, as well as ours. We don’t want spammers posting comments or incorrect information about such an important topic.

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Reason #4 – We are hoping this interactive website encourages you to purchase the book! Retire Secure! is available from Amazon and JamesLange.com. Once you’ve read the book, feel free to return to LangeRetirementBook.com to ask questions, as well as Amazon and Goodreads to review the book for the benefit of others.

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The Third Edition of Retire Secure has Finally Arrived!

The new edition of Retire Secure! A Guide to Getting The Most out Of What You’ve Got is the distilled and concentrated version of the recommendations we have developed over 30 years. It is particularly useful for IRA and retirement plan owners.

We will soon be sending our clients a copy with a personalized note directing you to what we think will be the most relevant sections for you to read. This personalization has been a huge project, but it’s something that I think will be enormously helpful to you.

Retire Secure! will be available for purchase in bookstores and on Amazon in October. However, if you absolutely cannot wait, the book is available for Kindle and Amazon pre-order here.

Amazon Kindle Pre-Order Retire Secure! James Lange

The core concepts of the current edition are similar to the two previous editions (Wiley, 2006 and 2009). Recent legislative changes, however, have led to important strategy adjustments that are incorporated in the latest edition.

  • In Part 1, The Accumulation Years, we include some new strategies that were not available in 2009.
  • In Part 2, The Distribution Years, we cover how to spend down retirement funds in the right order to manage your assets wisely, but that area is more complicated than ever because of some of the new tax laws. We have also updated recommendations for Roth conversions, and the impact of a potential new law for IRA and retirement plan owners and their families — the death of the stretch IRA. It could be devastating for your children. Though there is no perfect answer, I do address some of the best strategies I know to reduce the pain of the likely changes in the IRA law.
  • In Part 3, we’ve updated the Eddie and Emily Estate Planning case study. Essentially, it incorporates the updated Lange’s Cascading Beneficiary Plan, which many of you already have in your wills and trusts.

If you’ve read previous versions of Retire Secure!, I hope you’ll find the updates and changes enlightening. To make the new material easier to find, I have included a section that highlights the changes. And if you’re new to the book, I hope you’ll take this as an opportunity to really educate yourself on these principles and sound practices. There’s mathematical proof that optimizing the strategies you use to approach saving, investing, estate planning, and distributing assets could mean a dierence of millions of dollars over your lifetime and for your heirs.

It’s my fervent wish that Retire Secure! will help you live a happier, healthier, and more secure life!

Jim