Las Vegas Trusts and Estates

Why Do I Need Estate Planning?

“Over the years, several high-profile celebrities have died without either properly updating their estate plan or having one at all. The list includes Princess Diana, Prince, Heath Ledger, Michael Jackson and Kurt Cobain, all of whom were worth millions and among the most famous people on the planet at the time of their death.”

Many people who failed to plan their estate with the help of an experienced estate planning attorney have their assets tied up in lengthy, and often messy, legal battles that were decided by people not of their choosing.

Forbes’ recent article entitled “Everyone Needs An Estate Plan: Here's What You Need To Know” says that although many of us don't have quite as much at stake financially, it doesn't mean that estate planning is any less important. In fact, leaving a legacy, passing down wealth and helping family aren’t things that are just for the ultra-rich.

The biggest misstep is not creating an estate plan at all. This is more than just a last will and includes powers of attorney, healthcare directives, a living will and a HIPAA waiver. People put this important responsibility off because they do not want to contemplate their own death. They try to avoid the subject. Some others may have complex family dynamics, and still others are hesitant to confide their complicated relationships with a lawyer. However, all these are just excuses.

We know that life is full of changes, and people get married, divorced, have children and grandchildren, relocate to different states, change careers and get inheritances. Each of these events could make you reconsider your goals. This may necessitate an update to your estate plan.

You need to review the beneficiaries on your IRAs, life insurance policies and pensions. You should look at how you want your heirs to receive your assets and any charitable or philanthropic notions. With powers of attorney, healthcare directives, living wills and HIPAA waivers, you need to think about who you’ll entrust to make important medical and financial decisions for you, if you become incapacitated. You see these critical questions and many others are fluid and prone to change every few years as your life changes.

Remember that your assets receive different treatment from the IRS based on the type and who owns legally owns them. For example, individual retirement accounts (IRAs), Roth IRAs, traditional brokerage accounts, life insurance policies and bank accounts are different than the family home. Therefore, it’s important to be mindful of which assets are left to whom.

Don’t wait. Speak to an experienced estate planning attorney to be certain that you give this process the attention it deserves for the well-being of you and your family.

Reference: Forbes (Feb. 26, 2021) “Everyone Needs An Estate Plan: Here's What You Need To Know”

What Do I Need to Do to Calculate and Correct an Excess IRA Contribution?

“IRAs are a great way to save for retirement, but what happens if you contribute to a Roth IRA and your income is too high? Or you contribute more than you're allowed to a Roth or traditional IRA?”

It would be super if you could put all your money into a Roth and enjoy tax-free growth and withdrawals. However, Uncle Sam restricts the amount you can contribute annually, and eligibility is based on your income. However, if you make too much money, you might be able to use a work-around called a backdoor Roth.

Investopedia’s January article entitled “How to Calculate (and Fix) Excess IRA Contributions” says there’s also a contribution limit for traditional IRAs. However, these income limits concern deducting contributions on your taxes. If you violate a rule and make an ineligible, or excess, contribution, you’re looking at a 6% penalty on the amount each year, until you correct the mistake. However, note that Roth IRAs have an extra restriction: whether you can contribute up to the limit—or anything at all—depends on your modified adjusted gross income (MAGI). If you contributed to a Roth when you made too much to qualify—or if you contributed more than you’re allowed to either IRA—you’ve made an excess contribution, which is subject to a 6% tax penalty.

The $6,000 (or $7,000) maximum is the combined total that you’re allowed to contribute to all your IRAs. Therefore, if you have a traditional IRA and a Roth IRA, your total contribution to those two accounts must be $6,000 (or $7,000). The amount you contribute can't be more than your earned income for the year. If your earned income is $4,000, that’s the maximum you can contribute to an IRA.

The penalty of 6% of the excess amount must be paid when you file your income tax return. If you fail to fix the mistake, you’ll owe the penalty each year the excess remains in your account. If you’re not eligible to take a qualified distribution from your IRA to fix the mistake, you’ll pay an additional 10% early withdrawal penalty on earnings (interest). The IRS has a specific formula to calculate earnings (or losses) attributable to an excess contribution. There are several ways to fix an excess contribution to an IRA:

Withdraw the excess contribution and earnings. You can avoid the 6% penalty, if you withdraw the extra contribution and any earnings before your tax deadline. You are required to declare the earnings as income on your taxes. You may also owe a 10% tax for early withdrawal on the earnings, if you're younger than 59½.

File an amended tax return (if you’ve already filed). If you remove the excess contribution and earnings and file an amended return by the October extension deadline, you can also avoid the 6% penalty.

Apply the excess to next year’s contribution. You’ll still owe the 6% tax this year, but you’ll at least stop paying once you apply the excess.

Withdraw the excess next year. If you don't do one of the other options, you can withdraw the excess funds by Dec. 31 of the next year. You can leave the earnings, but you must remove the entire excess contribution to avoid that 6% penalty for the following year.

In addition to the formula, you must correct the excess from the same IRA. Therefore, if you have multiple IRAs, you can't choose the IRA you want to "fix." The last contribution is also an excess contribution. If you made multiple contributions to an IRA, the last is considered the excess contribution. Finally, you are able to distribute the entire balance to correct the excess. If the excess amount is the only contribution you made to the IRA—and no other contributions, distributions, transfers, or recharacterizations occurred in the IRA—you can fix the excess, by simply distributing the entire IRA balance by the applicable deadline.

Most people who make ineligible contributions to an IRA do so by accident, and you could contribute too much if you meet the following criteria:

• You make more money, and it moves you up to an income eligibility range
• You overlook a contribution you made earlier in the year; or
• You contributed more than your earned income for the year.

In a good faith attempt to fund your retirement accounts, you could make an excess contribution. The IRS has considered that this may occur. The agency provides guidelines to help you correct the error.

Reference: Investopedia (Jan.  19, 2020) “How to Calculate (and Fix) Excess IRA Contributions”

What Do I Need to Retire?

“One of the biggest threats to your financial security isn’t the markets, interest rates or even your job security. It is a lack of preparation, particularly for unexpected events, that usually leaves investors reeling when markets swoon. If you haven’t protected yourself from the potential downsides in life, after all, then it’s difficult to maneuver when the unforeseen strikes.”

Research from the Employee Benefit Research Institute’s Retirement Confidence Survey shows a lack of preparation in retirement planning. According to the annual survey, 66% of those 55 years and older said they were confident they had sufficient savings to live comfortably throughout retirement. However, just 48% within the same age group haven’t figured out their retirement needs.

Kiplinger’s article entitled “Ready to Retire? Not Until You've Done These 3 Things” says knowing where you are now and knowing what you’ll need and want in retirement are important to protect your portfolio throughout your golden years. If you want to retire at 65, then age 55 is when you’ll want to start making some important decisions.

Let’s look at three steps to take in your last decade of your working years to help create a safety net for a long retirement:

At 10 years or more before retirement, you should diversify your tax exposure. You may have a large portion of your portfolio in an employer sponsored 401(k) or in IRAs. These tax-deferred accounts give you plenty of benefits now, because you’re not taxed on the contributions. At age 50 and older, you can make additional catch-up contributions that let you put away $26,000 in 2020 in your 401(k) each year. Because you’re probably going to pay a lower tax rate in retirement when you begin taking taxable withdrawals, it gives you a nice tax advantage today.

In the years before your retirement, build assets in tax-free accounts for flexibility, so you can keep tax costs down in retirement. Assets in a Roth IRA or a Roth account within your 401(k) can give you a source of tax-free income in retirement. You paid taxes on the money you put into a Roth, so it grows tax-free and withdrawals after age 59½ are income tax free. If you’re over 50, then you can add up to $7,000 into the account this year.

When you are five years from retirement, create a health care plan. A huge expense in retirement is health care. Plan for out-of-pocket health care costs as well as long-term care. Taking advantage of a health savings account, if you’re in a high-deductible health insurance plan is a good way to save for the out-of-pocket health care expenses that won’t be covered by Medicare or your private health insurance. You can fund an HSA up to $7,100 for families ($8,100 if you’re 55 or older). Contributions are made on a pre-tax basis, so your account grows tax free, and withdrawals are tax- and penalty-free, if used for qualified health care expenses. You should also look at long-term care insurance.

When you’re just a year from retirement, start spending as if you’re already retired. Be sure you can live comfortably, when spending at your retirement budget.

No one can see the future, but you may be able to limit the effects of shocks to your retirement savings.  Adding in these layers of protection at least 10 years prior to retirement, can help you secure your retirement goals.

Reference: Kiplinger (Jan. 24, 2020) “Ready to Retire? Not Until You've Done These 3 Things”

You Could Be Hit with Penalty for an Early IRA Withdrawal

“Most financial experts would agree that it is rarely, if ever, a good idea to take an early withdrawal from a traditional IRA or Roth IRA. This is due in part to the high cost of penalties that can hit an account holder for an early withdrawal (not to mention losing out on years of potential earnings).”

Early distributions from IRAs—before you reach 59½—typically are hit with a 10% tax penalty, and you may owe income tax on it. The IRS uses the penalty to discourage IRA account holders from dipping into their savings before retirement. However, the penalty only applies if you withdraw taxable funds, says Investopedia, in its new article entitled “Early Withdrawal Penalties for Traditional and Roth IRAs.”

If you withdraw funds that aren’t subject to income tax, there’s no penalty for distributions taken at any time. The issue of whether the funds are taxable depends on the type of IRA. Early distributions from traditional IRAs are the most likely to incur significant penalties. That’s because you make contributions to this type of account with pretax dollars. These are subtracted from your taxable income for the year, which will decrease the amount of income tax you'll owe. As a result, since you get an upfront tax break when you contribute to a traditional IRA, you have to pay taxes on your withdrawals in retirement.

Nonetheless, the IRS eventually collects taxes on all income. Income tax is assessed on your traditional IRA funds when you withdraw them, which means that all of your traditional IRA account balance is made up of taxable income. Therefore, if you withdraw funds before 59½, the 10% tax penalty probably will apply to the full amount of the distribution. After calculating the effect of the taxes and penalties, early distribution from a traditional IRA is almost never an efficient use of funds.

However, contributions to Roth IRAs are made with after-tax dollars, so you pay income tax on your contributions when you make them. Therefore, withdrawals of Roth contributions aren’t subject to income tax. Your earnings grow tax-free and withdrawals in retirement are also tax-free. If you withdraw an amount equivalent to the sum you put into your Roth, the distribution isn’t considered taxable income, regardless of your age. It is also not subject to a penalty. However, if you withdraw more than that amount and begin dipping into the account's earnings, that amount is usually considered taxable income. It may also be subject to the 10% early-distribution penalty, and the money would be treated as income.

Qualified distributions from a Roth IRA are tax-free and penalty-free. The IRS says a distribution is qualified, if it's been at least five years since you first contributed to a Roth IRA and the withdrawal satisfies these requirements:

• It was made after age 59½;
• It was taken because you have a permanent disability;
• It was made by your beneficiary or estate after you die;
• It was used to buy, build, or rebuild a home that satisfies the first-time homebuyer exception; or
• It was used towards the birth of a new child or adoption (up to $5,000 within the first year).

Non-qualified distributions are any withdrawals that don't meet these guidelines. For these, you'll owe taxes at your ordinary income tax rate (on earnings) and a 10% penalty. However, there are some exceptions. You do pay a penalty (but still must pay the tax), if you take the distribution for the following reasons:

• A series of substantially equal distributions;
• Unreimbursed medical expenses that exceed 10% of your adjusted gross income (AGI);
• Medical insurance premiums after job loss;
• IRS levy;
• Qualified reservist distributions;
• Qualified disaster recovery; or
• Qualified education expenses.

Note that if you contribute and then withdraw within the same tax year, the contribution is treated as if it were never made.

If you have a Roth IRA, you can withdraw contributions at any time without paying taxes and penalties. However, if you remove money early from either a traditional or Roth IRA, you will pay a 10% penalty plus taxes on the income (unless you qualify for an exception).

Reference: Investopedia (Jan. 18, 2020) “Early Withdrawal Penalties for Traditional and Roth IRAs”

Some Estate Planning Actions for 2020

 “This time of the year is a great time to revisit your estate plan, so you can ensure your legacy is protected for years to come.”

Many of us set New Year’s resolutions to improve our quality of life. While it’s often a goal to exercise more or eat more healthily, you can also resolve to improve your financial well-being. It’s a great time to review your estate plan to make sure your legacy is protected.

The Tennessean’s recent article entitled “Five estate-planning steps to take in the new year” gives us some common updates for your estate planning.

Schedule a meeting with your estate planning attorney to discuss your situation and to help the attorney create your estate plan.

You should also regularly review and update all your estate planning documents.

Goals and priorities change, so review your estate documents annually to make certain that your plan continues to reflect your present circumstances and intent. You may have changes to family or friendship dynamics or a change in assets that may impact your estate plan. It could be a divorce or remarriage; a family member or a loved one with a disability diagnosis, mental illness, or addiction; a move to a new state; or a change in a family business. If there’s a change in your circumstances, get in touch with your estate planning attorney to update your documents as soon as possible.

Federal and state tax and estate laws change, so ask your attorney to look at your estate planning documents every few years in light of any new legislation. 

Review retirement, investment, and trust accounts to make certain that they achieve your long-term financial goals.

A frequent estate planning error is forgetting to update the beneficiary designations on your retirement and investment accounts. Thoroughly review your accounts every year to ensure everything is up to snuff in your estate plan. 

Communicate your intent to your heirs, who may include family, friends, and charities. It is important to engage in a frank discussion with your heirs about your legacy and estate plan. Because this can be an emotional conversation, begin with the basics.

Having this type of conversation now, can prevent conflict and hard feelings later.

Reference: Tennessean (Jan. 3, 2020) “Five estate-planning steps to take in the new year”

Include These Three Items in Your Will

“A will or trust explains what you want to have happen to your assets when you die, hopefully in a very, very long time. While most people understand that a will explains what to do with money, property, and children, there are other parts you might be surprised by.”

MSN’s recent article entitled “3 surprising things you might not think to include your will” tells about three things to include in your will that you may not have thought about before.

Guardianship and funds for your pet. If you have a pet, you’ll want to make certain that it has care when you’re not around. You can name a guardian to take ownership of your pet, in the event your pet outlives you. You can also set up a pet trust in some states.

An executor for your digital assets. You probably have accounts with data on Facebook, Twitter, Instagram, YouTube and other social media accounts. You may have an account for online gaming, operate an online small business, or own other important digital assets. If so, you should appoint someone to manage your digital afterlife.

A digital executor should be able to access your online accounts and manage closing them down or moving them to a new strategy.

Charitable donations. If you have given to a religious organization, school, or other nonprofit, you can include these charities in your estate plan. Another option is to instruct a family member to make a donation with a part of an inheritance. It’s not legally binding, but could it pass on a tax benefit to the ultimate donor.

In addition, remember to keep your beneficiaries updated on all life insurance policies and retirement accounts, because the listed beneficiary on these accounts supersedes anything you put in your will.

If you get divorced and remarried, update your will and also make certain that your life insurance beneficiary is updated.

Don't procrastinate. Make sure that all of your estate planning documents are up to date.

Meet with your estate planning attorney every year or two, to also be sure your plan reflects any changes in the law or changes in your circumstances.

Reference: MSN (Jan. 10, 2020) “3 surprising things you might not think to include your will”

Turning 65 in 2020? Some Pointers for a Special Year

“Turning 65 is a major milestone for many Americans, as it is the traditional age at which they start thinking seriously about retirement.”

Many things change when celebrating your 65^th birthday. For one thing, if you haven’t already retired, chances are good that you’ve set a retirement date and it’s not too far away. There are a number of things to be considered, advises the article “Points to ponder before turning 65” from Knox News.

The year you turn 65 is the year that you enroll in Medicare. Coverage begins at age 65, and the initial window to enroll opens three months before your 65^th birthday and ends three months after. Miss that deadline, and there may be penalties when you do at last sign up for Medicare.

You can sign up for Medicare, whether you are working or not. If you are turning 65 and already collecting Social Security, you’ll automatically be enrolled in Medicare Parts A and B. You’ll need to sign up for Part D to avoid penalties, unless you have coverage through a spouse’s employer.

Here are some details:

• Part A covers hospital care and is generally free for enrollees.
• Part B covers diagnostic and preventive care. You pay for it with a monthly premium.
• If you’re still working at age 66 and have health insurance through your employer, you may choose not to enroll in Part B. You can sign up for Part A, at no cost, and delay Parts B and D.
• If you’re still working past 65 and have creditable coverage through your employer or your spouse’s employer, then you can defer Medicare.

Note that you may not get a full monthly benefit, if you claim Social Security right away. You can begin collecting Social Security at the young age of 62, but you won’t get the full monthly benefit that you otherwise would get unless you wait until you reach full retirement age. That date depends upon your date of birth. For most people turning 65 in 2020, that means full retirement age is 66 plus two months. Is it worth the wait? Your monthly benefit shrinks by 7.8%, if you file for benefits at age 65.

This is the time to check on your estate planning documents. If you don’t have these already, speak with an estate planning attorney to make sure that you and your family are protected by the following:

• General Durable Power of Attorney for Finances
• Durable Power of Attorney for Healthcare
• HIPAA release
• Revocable Living Trust
• Advanced Health Care Directive
• Last Will and Testament

It’s a great birthday to celebrate but be certain that you take care of the estate planning, Medicare and Social Security aspects of your life, as you prepare for this milestone.

Reference: Knox News (December 26, 2019) “Points to ponder before turning 65”

Suggested Key Terms: Social Security, Medicare, Part A, Part B, Estate Planning Attorney, Power of Attorney, Revocable Living Trust, Health Care Directive, Last Will and Testament

Is It Time for a Roth IRA or a Roth 401(k)?

“Roth accounts may make more sense than traditional, pre-tax ones, when savers believe their tax rate is lower now than it will be in retirement.”

This may be the best of all possible times to take advantage of the Roth IRA or Roth 401(k). These special retirement accounts let savers put away money after it has been taxed, which means that withdrawals are tax free. Contributions to a traditional IRA or 401(k) are made with pre-tax dollars, explains CNBC in the article “Why now might be a good time to save in a Roth 401(k) or Roth IRA” and taxes are paid on withdrawals made during retirement. The taxes paid on withdrawals are hoped to be lower because retirement income is usually lower than working income. However, with today’s historically low tax rates, there’s only one way for taxes to go—up—and that might mean that withdrawals from traditional accounts could actually be taxed higher than they are now.

The Tax Cuts and Jobs Act reduced income tax rates for individuals. The top marginal income tax rates for individuals dipped from 39.6% to 37%. However, the national budget deficit has grown to nearly $1 trillion in 2019, largely because of spending increases and big reductions in revenue because of the changes to the tax law. How’s this for size: the U.S. budget deficit is larger, as a share of its economy, than that of three dozen—yes, 36—other developed countries in the Organization for Economic Co-operation and Development.

Many experts think that this level is unsustainable and will have to lead to tax increases in the near future to bring in more revenues. One advisor noted that there’s a “giant economic storm that’s brewing,” and says there will be pressure to raise taxes.

Roth accounts would shelter savers from increases to the income tax rate. This won’t protect savers from non-income tax increases, such as a consumption tax or a wealth tax.

Nearly 18% of U.S. households have a Roth IRA, totaling $800 billion in assets nationally. By comparison, 26% of household have a traditional IRA, with a total value of $7.5 trillion. More companies are offering employees Roth 401(k)s to their workers.

Unless lawmakers extend the Tax Cuts and Jobs Act, income-tax rates for individuals are scheduled to increase to pre-tax law levels in 2026. Will lawmakers extend them? It is not likely, given the deficit levels. Therefore, saving in a Roth now could be a smart move.

Another viewpoint is that trying to outsmart the tax laws won’t pay off at all, and that Congress might decide to tax Roth accounts, if the government gets desperate for revenue.

That school of thought says that savers should divide their retirement savings in a 50/50 split and put the money in both Roth and traditional retirement accounts. The goal is to “tax-diversify,” just as you diversify investments.

Reference: CNBC (Dec. 27, 2019) “Why now might be a good time to save in a Roth 401(k) or Roth IRA”

Saving for Retirement through Ages and Stages

“You have to think about what future you want to hear, who’s in the car with you and (at the risk of sounding morbid) how long the playlist needs to be, to get you to your final destination.”

Making those golden years truly golden and relatively worry free, takes some planning that starts ideally with the first job, says the Skimm’s article “9 Retirement Questions from Skimm’rs, Answered.” Let’s see how the road to retirement runs:

Pay off a student loan or contribute to a 401(k)? Start paying off those student loans the moment the grace period ends. If income is tight, make saving a few months’ worth of income a priority, so you can stay on track with loan payments, if you lose your job or change jobs. Once your income is steady and there’s a little breathing room in your budget, then start contributing to the 401(k) plan at work. If your employer matches your contributions, take advantage of that: it’s free money!

I’m 35 and I’ve only got $15,000 saved—what now? At the mid-thirty mark, you’ve still got time to save for retirement. If you have a 401(k), you can put away as much as $19,000 a year for retirement. Save what you can and try to bump it up every year.

How much should I have saved by age 40? One theory is that you should have half of your salary saved in retirement accounts by age 30, twice your salary by age 40, four times your salary by age 50 and six times your salary by age 60. Most Americans don’t hit those numbers, but they are a good goal. One thing to try, is to trim expenses. If you are able to live on less when you are earning income, you may be better prepared for retirement. Many people increase their spending, when their earnings increase. That’s a mistake. Save more now, and you’ll have more retirement savings later.

Want to hit a precise target? If you can get into the habit of saving 10-20% of every dollar you earn once you start working, you’ll be all set when retirement comes. This is one of those good habits that will serve you well throughout life. It will be easier to increase savings, as your paycheck increases.

Is there a good annual retirement salary target? Here’s what most people don’t realize—not everyone spends less in retirement. There’s more free time, and that often means more spending. Health care costs also go up in retirement. You should plan to need anywhere from 70-90% of your current income in retirement.

What about retirement accounts, like IRAs and Roths? A SIMPLE IRA is an employer-sponsored retirement account. Employers are required to contribute on the employee’s behalf, whether or not the employee contributes. These are often used in small businesses or self-employed businesses. A Roth IRA is a retirement account opened by an individual. You must have “earned income” to start one, and the maximum annual contribution is $6,000 in 2019. It is $7,000, if you are over age 50.

Roth or traditional IRA? The answer to this question depends on your income situation. If you’ve just started out in the workforce and have decades of savings in front of you (and if you’re under the IRS income threshold), the Roth may be best. However, if you are in a high income tax bracket and want to defer paying taxes on retirement savings to when you take withdrawals from these accounts, then a traditional IRA is your best choice.

Resource: the Skimm (Sep. 16, 2019 “9 Retirement Questions from Skimm’rs, Answered”

Retirement: The Best of Times or the Worst of Times?

Retirement can go many ways, including very well or badly.

A number of problems can arise in a lifetime that can have a negative impact on your plans to prepare for retirement. However, there are five tips that may be helpful along the way, according to The Motley Fool in “5 Retirement Tips for 2019—and Beyond.”

Some tips that may be helpful to follow:

For starters, don’t center your retirement finances on Social Security. Many workers can’t or don’t set aside enough funds for their retirement. They think that they’ll be able to rely on Social Security. Doing so will put a tight crimp on your retirement lifestyle. Social Security’s average yearly benefit for most Americans is $17,532. If you can live on that, wonderful, but most people can’t. The program was designed to replace 40% of most people’s income, and most seniors need more than double that amount to live, as they did during their working years. Focus on retirement savings throughout your career.

Most retirement income is taxable. The things you paid taxes on while you were working, are still taxable when you retire. If you’re used to receiving deductions on a paycheck, having to pay quarterly taxes may be a bit of a surprise. You will need to pay taxes on IRA or 401(k) withdrawals, unless your retirement savings are all in Roth accounts. Gains from investments held in non-retirement accounts are also subject to taxes. If you can convert your IRAs or 401(k)s into Roth’s, you’ll pay taxes when you do the conversion, but not on the withdrawals.

Try to retire with friends and family. The sad truth is, retirees are 40% more likely to become depressed than working people. If that doesn’t make sense to you, consider the social aspects of your working life. Having too much time on your hands can lead to boredom and restlessness. You want to make sure that you have friends or family members who are also retired to socialize with. If no one else in your circle is ready or willing to retire, what will you do every day after the initial two-month retirement honeymoon?

Keep an open mind about returning to work. No matter how well you’ve saved, life happens. Your home may need a major repair, or you or a spouse might experience a health crisis. It’s a good idea to have a plan to be able to return to work, either on a consulting basis to a prior employer, working part time or even starting a business on your own.

Don’t skimp on the important details, like preparing your estate plan. If you created an estate plan years ago, now is the time to review it to make sure it still works for your retirement life. If you’ve never had a will prepared, call a qualified estate planning attorney and get it done. You’ll also need a power of attorney and a health care proxy, so that your family and your spouse are protected in the event of anything unexpected happening to you.

Finally, ask yourself what you want to do with the next ten or twenty years of your life. Retirement can be a fulfilling and enjoyable experience, especially if you are pursuing your dreams. That might be going fishing every day, writing a novel or dedicating yourself to grandchildren or the community. Embrace it!

Reference: The Motley Fool (June 2, 2019) “5 Retirement Tips for 2019—and Beyond”

Stretch IRA Is Useful but May Become Tool of the Past

You can call your Congressional representative but there is little else you can do.

A proposed change in Congress may make it more difficult for those who wish to provide a tool for their children to build wealth and security, according to nj.com in “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress.”

For years, non-spouse beneficiaries who inherit IRAs have had the ability to stretch out required distributions over their lifetimes. That meant that inherited IRAs could say safe and sound out of the IRS’s reach, except for annual distributions that were quite small. If a grandchild inherited the IRA, the wealth stretched even further.

Depending on the final details of the legislation, the only people who will be able stretch an IRA will be spouses.

Current rules require non-spouse beneficiaries to take required minimum distributions (RMDs) every year over the course of their life expectancy, as per the IRS life expectancy tables. Because they are taken over the lifetime of a younger beneficiary, they can be small. This means the impact of the distribution on the individuals’ income taxes are minimal and the IRA can grow tax deferred over a long period of time.

Congress is looking for revenue, and the wealth of Americans in IRA accounts is in their sight lines.

First, the House passed the SECURE Act, which says that beneficiaries must completely empty their inherited IRAs within 10 years of ownership. The Senate then passed the RESA Act, which is a little different. It would allow a stretch for the first $450,000 of aggregated IRAs, then anything over thatwould have to be distributed within five years.

Both bills call for changes to apply to inherited IRAs and inherited Roth IRAs for deaths after December 31, 2019. What’s the bottom line? The Joint Committee on Taxation expects that these changes, if they become law, will yield $15.7 billion—with a “B”—in additional tax revenue through 2029.

The government would eventually get this money anyway, but this speeds things up considerably.

Let’s compare and contrast. An 80-year old woman has a traditional IRA worth $1 million. She dies and her 55-year-old daughter is the primary beneficiary. Under the current rules, the daughter’s first RMD is roughly $35,000. If the 25-year-old granddaughter was the beneficiary, the RMD would be roughly $18,000.

If the account earns an average of 5% annually, under the current rule, the granddaughter would have distributions of some $220,000 over ten years. If she had ten years to take the money out, she’d have about $1.3 million in distribution. Under the current rule, the account would have a $1.3 million balance after ten years, since the principal would continue to appreciate. Under the proposed rules, after ten years, it would be zeroed out.

The forced larger distributions will push heirs into higher tax income brackets. That will be followed by increased Medicare premiums as heirs retire with higher income. Add to that: higher capital gains rate, from as low to zero to as high as 20%. If that’s not bad enough, it could also trigger the 3.8% net Investment Income tax.

One option is to move funds from a regular IRA to a Roth IRA, assuming the investor meets all the requirements to do so. The Roth IRA distributions would not be taxable (unless those laws change) but that also requires the current owner to pay taxes on funds moved to the Roth IRA.

Another option is to consider a Charitable Remainder Trust (CRT) that names a charity as the IRA beneficiary. Upon the death of the owner, the IRA is distributed to the CRT, and the IRA owner’s heir would receive a fixed percentage of the CRT’s value for the remainder of their lives. When the heir dies, the money in the CRT goes to a charity or charities designated by the IRA owner, when the trust was created.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and can include protecting your IRA savings for you, as well as your family.

Reference: nj.com (June 10, 2019) “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress”