Table of Contents
- Read This ONLY If You Have More Than $450,000 in Your IRA - The Potential Tax Savings for You and Your Heirs Could be in the Hundreds of Thousands of Dollars!
- Don’t Fall in the Gap
- Recipe: Asian-Style Beef Stew
One of my worst estate-planning fears for my clients is likely about to become a reality—the “death of the stretch IRA.” You should have already received or will be receiving soon my latest little book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA including How to Protect Your Nest Egg from the Pending “Death of the Stretch IRA.” I encourage you to read it and get in touch with us if you want to take action.
For years, the stretch IRA has provided retirement plan owners with the best vehicle to pass on their wealth to heirs relatively intact and with a great tax outcome—deferred taxes, sometimes for two generations. When (likely “when,”not “if”) Congress kills the stretch IRA, your children and most of your other heirs—your spouse being the main exception—will have to pay income taxes on the balance of the inherited IRA within five years of your death.
That is a massive income-tax acceleration. All that extra income will be subject to taxes and even an heir with a relatively low tax rate would be bumped up into a higher tax bracket—likely even the maximum tax rate which is now 39.6%. Your children could lose onethird or more of your IRA to taxes after you die.
The good news: The proposed change does not apply to surviving spouses. There is also a $450,000 exclusion per IRA owner, not per beneficiary.
Here is how events unfolded:
- I have been warning of the impending demise of the stretch
IRA since 2013, and I have been devising and to some extent,
implementing strategies all along to cope with the eventuality.
I wrote about it in my best-selling book, Retire Secure! (3rd
Edition) and in many of these newsletters.
In addition, I have talked about how to protect your wealth against the end of the stretch IRA at virtually every workshop I presented. I wrote two articles on the topic for the peer-reviewed journal, Trusts & Estates magazine. You should have received both of these articles in the mail.
More recently, I made a presentation to 400 top estate attorneys and professionals in San Diego at one of the year’s most prestigious estate-planning conferences. Clearly, I was the Paul Revere yelling “The Death of the Stretch is Coming.” Now, at last, a growing number of IRA experts are beginning to see the writing on the wall. Few are measuring the damage. Few, maybe none, have peer-reviewed articles with firm recommendations or for that matter, a book with recommendations on how to reduce the impact of the potential “death of the stretch IRA.” Lange Financial Group, LLC is ahead of the curve on this one as we were with Lange’s Cascading Beneficiary Plan and Roth IRA conversions.
- Anticipating the inevitable, I wrote a new book, The Ultimate
Retirement and Estate Plan for Your Million-Dollar IRA,
which includes strategies to deal with the approaching “death
of the stretch IRA,” and the book went to press in August, 2016.
- On September 11, 2016, the Senate Finance Committee
voted 26-0 to eliminate the stretch IRA for non-spouse beneficiaries.
We think this proposal will be included as part of
a bill called the Retirement Enhancement and Savings Act
(RESA). Though Congress has yet to sign the bill, once it
passes, it is likely to apply retroactively to all inherited IRAs
whose owners’ die after December 31, 2016.
Under RESA, your non-spouse beneficiary or beneficiaries will have to pay taxes on an inherited IRA or retirement account within five years of the owner’s death, with an exclusion of $450,000 per IRA owner. More bad news: the $450,000 must be prorated among all inherited IRAs and retirement plans unless the beneficiary is your spouse, a charity or a charitable remainder trust. In other words, you can’t pick and choose which beneficiary and which IRA will get the old favored stretch IRA treatment for the $450,000 exclusion.
- When I wrote the book, which you have or will have soon
for free, I was anticipating the “death of the stretch IRA,” but
I was not anticipating the $450,000 exclusion. To my knowledge,
no one was.
After the proposal was approved with the exclusion, I wrote an Addendum to my new IRA book, and you can download this new information for free. The Addendum presents new planning strategies not covered in the book for taking advantage of the $450,000 per IRA owner exclusion.
If you don’t want to wait for your hard copy of the book, you can download a copy at www.paytaxeslater.com. I did not mail a hard copy of the Addendum, but you can find it at www.paytaxeslater.com/addendum. With that hard copy, I included a cover letter summarizing the actions points you should consider; you can download my letter along with the Addendum.
I have mixed emotions about the proposed new law. The different thoughts I have had include:
- It is an assault on middle-class IRA and retirement plan
owners who worked hard and accumulated money in their
IRA and retirement plan. The rules while you were accumulating
most of these funds were that your heirs could “stretch”
the inherited IRA for many years.
Now, late in the game, they are going to change the rules. I think IRA owners are getting shafted. Though this proposed change doesn’t qualify as an expo facto (after the fact) law, it feels like it. If the government establishes rules and you play by them, they shouldn’t change the rules late in the game which has the result of punishing you, the taxpayer. It feels like they are abusing families that managed to save more than $450,000 in their IRAs and retirement plans.
- The $450,000 proposed exclusion isn’t that much. If you
apply a simple 4% safe withdrawal rate, that is only $18,000
a year. So, the Committee wants to punish people who may
be withdrawing as little as $18,000 per year or more on their
It seems cruel. I hate that. Under the proposed law, if you name your spouse the primary beneficiary and your children as secondary beneficiaries, your children could get taxed heavily. If you have more than $450,000 or if you are married you now must take legal tax-planning motivated actions to reduce your taxes.
You are in essence being punished for doing the right thing. What did you do? You worked for thirty plus years contributing money in a retirement plan to secure your retirement and with careful planning provide first for your spouse and then for your kids (and in my world with disclaimer provisions for grandchildren also).
- I really hope most of the people reading this have some
variation of Lange’s Cascading Beneficiary Plan (LCBP) as
the underlying premise of their estate plan. Now, more than
ever, flexibility is needed and that is just what LCBP provides.
This is distressing for me personally as our office has drafted
2,423 estate plans with the “stretch IRA” as a major feature in
our planning. My clients’ heirs are going to lose billions of
dollars of purchasing power. Saving money on those taxes was
going to be part of my legacy. So, a major part of that legacy
will be decimated. I have a true sense of loss, both for my
clients and myself.
- I’m pleased that LCBP has stood up so well. I also feel vindicated
because since 2013, I have been warning people and
taking the recommendations into account. Luckily, they are
similar to many of my pre-2013 strategies too.
- That I anticipated the “death of the stretch IRA” feels a bit
like Pyrrhic victory. I am glad we have been developing strategies
for this day but I can’t take much satisfaction in being
right, because it is like knowing something bad is going to
happen and when it does, you knew it was coming. But you
still don’t like that it arrived.
- To be fair, I am not the only guy that has warned about the
“death of the stretch IRA.” I was, however, one of the early
ones and one of the few (maybe the only) to quantify the consequences.
A full explanation of what you need to do now, and when and if the law passes, is outlined in The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA and the newly added Addendum.
I am sorry to be the bearer of the bad news, but rather than sticking my head in the sand, I think it is better to recognize the bad news and respond appropriately.
I think this will be a tumultuous year on many fronts. So, you might take some satisfaction from being able to do something concrete that will work to your advantage and protect your family in the long run.
Make this a year you get your financial house in order. As a start, for those of you who don’t have Lange’s Cascading Beneficiary Plan or some variation of disclaimer-type planning in place, you should at least consider taking care of that.
For families of three generations—you, your kids, and your grandchildren— your documents should provide first for spouse, then to children, and then to grandchildren using disclaimer trusts that have the right language to qualify for the stretch IRA, even if, after the proposed law passes, only up to $450,000 per IRA owner will qualify for stretch IRA treatment. Leaving some money to grandchildren in a trust will still be an important option under the proposed law because the grandchildren will have longer to stretch the inherited IRA using the $450,000 exclusion.
I think we can only anticipate that the market will be volatile. Make sure your investment allocation can stand a stress test—that is a “what if” scenario that projects where your investments would be if we suffered stock market losses.
We like the DiNuzzo Stack Analysis or bucket approach—that is, when you have multiple portfolios of indexed funds for different purposes and time horizons with different risk allocations. But, first and foremost, your basics are covered—roof, car, food, clothing, and repairs no matter what happens to the economy.
On the other extreme, you have long-term investments where you are more interested in growth than short-term safety OR income. That “bucket” might have some small-cap value and even emerging-market stocks and likely be in a Roth IRA.
If you are on top of your investments or you have a wealth advisor you like, great. If not, resolve to either do-it-yourself and really spend the necessary time or find the right person to help you. I think this is going to be an emotional and volatile four years. I feel a recklessness in the air. Get your financial house in order, and I think you will feel better.
On that happy note, I wish you a happy and healthy New Year. Again, should you want to take action and you want our help in doing so, please call Alice at 412-521-2732.
I recently went to Chicago for several days of training with a group I belong to called The Strategic Coach. That was my first real winter experience this year with wind chills below zero and a snowstorm that delayed my return by a day.
I must say, Chicago is a great city to visit. With my free day, I visited The Art Institute of Chicago which is a fabulous world-class museum. Then, I had a one minute walk to a great restaurant for an excellent meal. And then, another one-minute walk to their Orchestra Hall for a wonderful symphony concert that included Prokofiev’s Violin Concerto No. 1.
Cultural enrichment aside, I would like to share one of the lessons I learned from Chicago’s “Don’t Fall in the Gap” conference. I beg a bit of forbearance from those who think I should limit my musings to money and taxes.
The gap is the difference between the ideal and where you are. While the conference focused on business assessments, I think it has relevance on a personal scale too.
I sometimes find myself thinking, “Oh, I wish I would have started out in financial services sooner. Just think where I would be today!” You see, I spent the first 25 years of my career doing traditional accounting work as a CPA and traditional estate planning as an attorney. Of course, back then and to this date, our CPAs and attorneys bring a lot of innovative strategies to the table so we never really practiced conventional accounting or law. But, on a more formal basis, I didn’t get into financial services or become a true wealth advisor until 15 years ago. Though I like the accounting work and the legal work, puzzling out the different financial strategies that clients can put in place to get the most out of what they’ve got is my favorite work. I derive the most satisfaction from devising strategies that combine tax, retirement and estate planning, and investments. It is also more lucrative, which is a plus. It calls for imagination and creativity—though ultimately the ideas must be backed up with proof and vetted for sustainability, preferably with our “running the numbers” process.
So, immersed in the gap mentality, I am not looking at my successful trajectory from my actual point A to my actual point B, but rather I am comparing where I might have been if only I had done something different—both hypotheticals.
Whereas, the reality is: 16 years ago, I had no assets under management. Today, we have $450,000,000 under management. Fifteen years ago, we had prepared approximately 1,000 estate plans. Today, we have prepared 2,343 estate plans. Fifteen years ago, we prepared approximately 300 tax returns, and today we prepare 525 tax returns.
I am at a fortunate point in my career that I could stop marketing and taking on new clients, and my family and I would be financially fine. But, I like my work and l like looking for win/win/win situations, meaning it is good for the client, good for me, and good for my team who may be the estate attorneys, the CPAs, or P.J. DiNuzzo and his team of money managers.
But, instead of thinking about how grateful I should be, I often fall into the gap of thinking how it could have been so much better if only...
It is the old, had I known then what I know now, I would have done things differently. But, I didn’t know and instead of focusing on what “could have been,” I should feel grateful for having the good fortune to be in the wonderful position I am today.
Falling into the gap can happen in your personal life as well as your business life. I sometimes think, “Oh, poor me. I have psoriatic arthritis and my knees sometimes ache. I live on a very restricted diet, and if I don’t maintain a strict regimen of both resistance training as well as aerobic training, bad things will happen. I eat no sugar, no dairy, no gluten, with no exceptions…no fun. I go to a party and eat carrots and sip Perrier while watching friends indulge in guilty pleasures.
It is easy to fall in the gap and think poor me. But, I should have nothing but gratitude. I was born into an age where Western medicine has some great drugs for psoriatic arthritis and the truth is I am doing fine. I just rode 60 miles on my bicycle. I lost 20 pounds. I have a wonderful wife, daughter and business. I should feel nothing but gratitude and stay out of the gap. To quote Edith Piaf, the great French singer, “Je ne regrette rien” (I have no regrets), or to qualify that a little, I can quote Frank Sinatra “Regrets, I’ve had a few, but then again, too few to mention.”
I have clients who, by most objective measures, are doing very well. They have a substantial IRA or 401(k) in a diversified portfolio of index funds. They’ve put two kids through college, paid off the house, and currently enjoy relatively good health. They’ve even helped with the grandchildren’s education. Okay, the blood pressure may be a little high and perhaps they could stand to lose a few pounds. Sure, they have certain problems or issues. But, ruminating over the gap between where you could be if the annoyances and problems weren’t there, and where you are casts long shadows over all the good things that are present in life.
One of my new year’s resolutions is to spend more time being grateful for what I have rather than repeatedly falling in the gap. I hope the coming year provides you with many opportunities to enjoy what you have accomplished, and a fewer occasions to dwell on “what could have been.”
Happy New Year!
See solutions at the bottom of this page.
Prep. Time: 15 minutes
Cook Time: 1 hour and 45 minutes
- 1 ¼ pounds grass-fed beef stew, cut into 1-inch pieces
- 1 large daikon radish, peeled and cut into 1-inch pieces
- 4 scallions, white parts cut into 2-inch lengths, green parts thinly sliced
- 2 tablespoons minced fresh ginger
- 3 tablespoons brown (hatcho) miso
- 2 small zucchini, diced
- 2 small yellow summer squash, diced
- 7 ounces enoki mushrooms, trimmed and separated into smaller pieces
- ½ teaspoon freshly ground black pepper
Combine the beef, daikon, scallion whites, and ginger in a large saucepan. Add 4 cups water; the water should just cover the ingredients. Bring to a boil over high heat. Skim and discard any foam that accumulates on the surface.
Meanwhile, whisk the miso with ½ cup of warm water in a small bowl. Stir into the pot, reduce the heat to low, cover, and simmer until the beef is very tender, about 1 ½ hours.
Gently fold in the zucchini, squash, mushrooms, and black pepper. Simmer until the squash are crisp-tender, about 10 minutes. Ladle into four soup bowls, garnish with the scallion greens, and serve.
Recipe © Dr. Mark Hyman’s book, The 10-Day Detox Diet Cookbook.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.