The Death of the Stretch is Back On Congress’ Agenda

Posted on May 21, 2019 by James Lange in Current Events, Estate Tax, Government Programs, Inherited IRAs, Market News, Retirement Planning, Stretch IRA, Tax Law and tagged death of the stretch ira, end of stretch ira, James Lange, Pittsburgh PA, Save Our Stretch IRA, stretch roth ira.

The Death of the Stretch is Back On Congress’ Agenda

This just in.

The House is scheduled to vote on Thursday, May 23, 2019, on the SECURE ACT. Then, it will be in the Senate’s court to vote on RESA. Then the House and Senate will need to reconcile the differences between the bills. Experts, including us, think a compromise will be found and that the “stretch IRA” as we know it, will be gone, dealing a severe blow to IRA and retirement plan owners who were hoping their heirs would be able to continue deferring the distributions on their inherited IRAs and retirement plans for decades.

Here is the story so far.

In mid-April, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., reintroduced their Retirement Enhancement and Savings Act (RESA).

Under this bill, which we’ve been talking about since 2016, the account balance in a defined contribution plan or IRA must be distributed and included in income by the beneficiary five years after the employee’s or IRA owner’s death. Surviving spouses, beneficiaries who are disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or the child of the employee (or IRA owner) who has not reached the age of maturity are excluded from this rule. Plus, an exception to the five-year distribution deadline is provided for each beneficiary to the extent that the balance of the account they receive from the deceased employee or IRA owner does not exceed $400,000.

Also in April, the House Ways and Means Committee passed a bill known as the Secure Act (Setting Every Community Up for Retirement Enhancement Act of 2019). What was remarkable about the Secure Act is that it was fast-tracked and approved with lightning speed, with the intention “To amend the Internal Revenue Code of 1986 to encourage retirement saving, and for other purposes.” And while it does include some incentives for people to participate in retirement plans, it also proposes the “death of the stretch IRA.” The House version of the bill differs from RESA in that it proposes a 10-year time limit on holding an inherited IRA or inherited Roth IRA or other defined contribution plan before all of the funds in the account must be distributed. According to the summary provided by the House Committee on Ways and Means:

Section 401. Modifications to Required Minimum Distribution Rules: The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

We have been anticipating the death of the stretch IRA for years and wrote two books about its consequences. We were pretty convinced it was going to be eliminated in the last round of tax law changes, and frankly, we were surprised when the limit on non-spouse heirs stretching distributions from inherited IRAs over their lifetimes was not included. But, it’s back, and once again the devil is in the details which will have to be hashed out between the two houses. In the next post, I will offer some insight into the consequences and preliminary recommendations.

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 contact 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.

The Best Time for Roth IRA conversions: Before or After the Death of the Stretch IRA?

Posted on July 25, 2017 by James Lange in Inherited IRAs, IRAs, Roth IRA, Roth IRA Conversions, Stretch IRA, Video Resources and tagged death of the stretch ira, end of stretch ira, inhertied iras, James Lange, new ira laws, new ira rules, Roth IRA Conversions, Roth IRAs, stretch ira, stretch ira 2017, stretch ira changes, stretch ira rules 2017, stretch roth ira.

For many individuals, a series of well-timed Roth IRA conversions can be the best defense against the Death of the Stretch IRA.

A lot of clients ask me if I manage my own finances the way I recommend they manage theirs, and the answer is definitely “yes”. I realized though, that I have not told you my own Roth IRA conversion story, and how my decision will affect my own family after the Death of the Stretch IRA.

Roth IRA Conversions – The Best Time is in Years of Low Income

Think back to 1998. It was long before we ever had to worry about the Death of the Stretch IRA, and it was the first year you were permitted to make Roth IRA conversions. Back then, if your Modified Adjusted Gross Income was more than $100,000 you were restricted from making Roth IRA conversions. Our family’s income was over $100,000, so I thought my income restricted me and never imagined I’d be eligible to do Roth IRA conversions myself. Then on February 16, 1998, our office was wiped out by a devastating fire that started in a pizza shop located directly below us. Can you imagine this happening to a CPA firm in the middle of tax season?

I learned some valuable lessons from this experience. First, never put your office above a pizza shop. Second, I learned more about the insurance process than I ever cared to know. We had extremely high expenses because everything needed fixed and, even though I was well insured, I didn’t get the check for the damage until 1999. That meant that 1998 was a very tough year for the business financially. I couldn’t take a salary, and for the first time our family’s income was far less than $100,000. Did I get upset? No. I said to my wonderful wife, “Cindy, I think we have an opportunity here”.

My wife and I had about $250,000 in Traditional IRAs between us. I told her that our normal income level would restrict us from making Roth IRA conversions, but our income in 1998 was far below normal – making that year the best time for us to do Roth IRA conversions. I told her that I thought we should convert the entire amount to Roth IRAs and voluntarily pay the tax due the $250,000 conversion amount. After she got over her initial shock, she looked at the mathematical calculations I had done and, being an extremely intelligent woman, she immediately understood that our family would be better off by hundreds of thousands of dollars in the long run. And so we did it – we converted every last dime of our IRAs to Roths. And those Roth IRAs are now worth quite a lot more than they were in 1998.

The law has since changed, and there are no longer any income restrictions on Roth IRA conversions. This means that you can do smaller Roth IRA conversions over a series of years rather than all at once like I did, and by doing so you can convert them at a lower tax rate than I was able to. The best time for many retired individuals is the period after you’ve stopped working, but before you are required to take minimum distributions from your IRAs and retirement plans. And with the Death of the Stretch IRA looming, there are probably even more reasons now for you to consider Roth IRA conversions than I had when my office caught fire in 1998.

Transferring my Roth IRA to My Child

Twenty years later, it is likely that Cindy and I will never spend those Roth IRAs. Some people will argue that, if that’s the case, there was no benefit to us converting our IRAs to Roths. Why pay tax when you didn’t have to, they ask? Well, I guess it’s because, in the long run, I was thinking of what would happen when I die and my Roth IRA is transferred to my child. My daughter Erica was only three years old when we did those Roth IRA conversions. If I die tomorrow and my Roth IRA is transferred to her, she’ll be hundreds of thousands of dollars better off because I did that conversion. And if I live for another twenty years, it’s not unreasonable to think that she’ll be more than a million dollars better off when I die.

When my Roth IRA is transferred to her after my death, Erica will still be required to take minimum distributions from the account every year. If I die before the Death of the Stretch IRA legislation is passed, those minimum distributions can be stretched over her lifetime and the bulk of the IRA can continue to grow in a tax-free environment. If I die after the Death of the Stretch IRA legislation is passed, she’ll be required to withdraw the entire IRA within five years. Although the money will be forced from the tax shelter more quickly, at least the withdrawals will be tax-free to her. And I can’t think of a better present for my little girl.

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.