Secure Act

The Secure Act has several provisions in it that will affect most people at one point or another. Once the President signs it, then the Secure Act will go into effect with several of these provisions summarized for easy interpretation.

The required minimum distribution age will be raised from 70 ½ to 72. In addition, there are new minimum distribution tables being prepared that will factor into this change. Right now, if you have an IRA, you can choose to re-calculate your RMD each year and pull out that amount. This is based on an IRS Table and this will be changing to allow people a slight benefit meaning that they will be able to pull less out of their IRA’s and let more of their IRA’s continue to grow. 

A negative impact of the Secure Act is related to Inherited IRA’s for non-spouse beneficiaries. In the past, if you inherited your parent’s IRA account for example, then you could roll it over to an Inherited IRA account and pull out RMD’s based on your age theoretically “stretching” it out over your lifetime. This is why they called it a “Stretch IRA.” Now, with the Secure Act, you are going to have to pull it all out within ten (10) years. I believe that this is going to be effective for Inherited IRA’s after January 1, 2020 and the IRS has to issue guidance in the first quarter of next year. I also believe that there will no longer be any RMD’s required from these Inherited IRA’s. You will just have to pull it all out within 10 years.

There will be penalty free withdrawals for expenses related to the birth or adoption of a child form retirement plans.
 
In regard to 529 plans, they will now be able to be used to pay student loan payments.
 
Small businesses will be able to join forces with other small businesses to establish retirement plans. For example, several small dry cleaners could band together and establish a multiple employer retirement plan thereby becoming eligible for lower costs to administer it and better investment choices. Administrative expenses would be shared among the dry cleaners in this example. Not sure how this will work in real life as competitors may not want to work together, but it could be any small businesses who band together like a dry cleaners shop, an auto repair shop and a small survey company.
 
Lifetime income annuities will be allowed in pension plans. This is the insurance lobby at work and totally unnecessary in my opinion. Lifetime income annuities pay a guaranteed income for as long as you live and once you die, then there is no balance left for heirs. Unless of course, you choose a lower payout for yourself with a beneficiary option. (This means lose cash flow in retirement.) The returns on these income annuities are typically very, very low and any good portfolio manager worth their salt can do better with just systematically paying cash flow from principal. With an annuity, you are giving your money to the insurance company, not your heirs. Beneficiary options will be structured so that your most money paid out to you is while you are living and a poor payout if you want a beneficiary.  Further, there is even a provision that favors insurance companies. Basically, if a retirement plan does not offer lifetime annuities, then you can do an IRA rollover of your 401(k) and purchase the annuity in your IRA rollover account. Again, this favors insurance companies, not you. I would be adamantly against these lifetime income annuities inside of retirement plans and IRA accounts, personally. They simply are not needed.

Unearned income for children in the past was taxed at very high trust and estate rates. Now, this will be changed to the tax bracket of the parents. Unless, there are no parents, then they would still be taxed at the trust and estate tax rates.
 
Next year, retirement plans can be started (adopted) as late as the tax filing deadline. In the past, they had to be established by December 31^st. This will be a benefit to businesses.
 
There is a three-year tax credit for start-up retirement plans for small employers who include automatic enrollment for their employees in their plans. Also, the maximum percentage for automatically enrolling participates will be raised from 10% to 15%. The employer chooses the figure from 1% to 15%.

You will now be able to contribute to an IRA after 70 ½ if you have earned income. In the past, you could not contribute past age 70 ½ if you had earned income.
 
Those are the highlights of the Secure Act. Of course, there are other provisions too numerous to mention, but most do not apply to regular people.

 

Should You Pay the Taxes and Liquidate Your IRA?

As I describe in my book, Keep Your Assets. Take My Advice. It is Easier to Climb Out of a Shallow Hole, there is a way to pay the taxes on an IRA at a lower cost when used in conjunction with a Home Equity Line of Credit or an existing Life Insurance Policy with enough cash values. You are probably thinking...Huh?

Here is how it works:

I like to keep it simple, or as the late, great Steve Jobs said:

Simplicity is the ultimate sophistication.

Suppose we have a $100,000 IRA. If we either convert it to a Roth IRA or just plain cashed it in, then we would likely owe taxes of $25,000 or more. However, let's keep it simple and assume $25,000 is our tax bill for this transaction.

What are some of the ways that we could pay this $25,000 tax bill?

1. We could pull the $100,000 out of the IRA and just put it in a bank account and write a check from the proceeds for $25,000. This would net us $75,000 and our cost would be a simple 25%. You're not fired up about this idea, are you? Neither am I.
2. Or, we could convert the $100,000 IRA to a Roth IRA and pay the taxes from the Roth IRA. You can always pull your cost basis out of a Roth IRA. Since, we just put $100,000 into it, we can pull out $25,000 as part of our cost basis contribution and pay the taxes. However, we would be in the same boat as number one above. We would owe $25,000 or 25% in taxes. Okay, Rick...when are you going to get to the point?
3. Instead of numbers one or two above, we could take advantage of a Home Equity Line of Credit and leverage these funds to pay our taxes at a lower rate. You borrow the $25,000 to pay the taxes at an Interest Only Rate of say 4%. The $100,000 that you pulled out of your IRA is either now in an Investment Account or a Roth IRA. Either way, it grows for the next 5 years at a rate of at least 4.564%. At the end of 5 years, the $100,000 has grown into $125,000. (My trusty HP12c Platinum Calculator says so!) We take a withdrawal of $25,000 and pay off the Interest Only Loan. What did it cost us to do this?
1. It cost us 4% interest on $25,000 spread out over 5 years, or a total of $5,000. So, to get our $100,000 IRA out of IRA status and either turn it into an investment or a Roth IRA, we paid 5% total on the $100,000 IRA withdrawal. Is 5% spread out over 5 years better than $25,000 or 25%? You bet it is.
2. How easy would the decision to cash in your IRA be if you knew you could do it at 5%?
4. Another alternative is if you have an existing Life Insurance Contract with loanable values of more than $25,000. Most Whole Life and Universal Life policies allow you to borrow money from the policies at either a net 2% or even a net 0% rate. So, what you do is borrow the $25,000 to pay the taxes from the Life Insurance policy. Pay an interest only amount back into the policy for 5 years, like $1,000 a year. (Okay. I know what you are thinking. Why don't I just pay it at the 2% rate or $500? Because you are cheating yourself. That's why.) Then, at the end of 5 years, after your formerly $100,000 IRA has grown either as an investment or as a Roth IRA, then you take a withdrawal and pay back your Life Insurance Policy. The difference using this approach is that instead of the bank keeping the $1,000 in interest, you have paid it into the Life Insurance policy and depending on the policy you have, you may have actually paid yourself interest.
1. Wait a minute. If you paid yourself back the $1,000 a year for 5 years and you had a zero net cost loan rate on your Life Insurance policy, then what did that cost you? Now you are thinking! Instead of costing you 5% to cash in the $100,000 IRA, it cost you 0%!!
2. The truth is that there is some minute costs related to how much your insurance policy is crediting your $1,000 that you are paying back in interest, but it is still a great way to leverage money that you already have to make your IRA into a Non-IRA or better yet, a Roth IRA that grows tax-deferred with tax free withdrawals.

There are some life insurance policies that are structured to do this exact scenario, but I cannot tell you unless you come see me. Their lawyers would kill me if I named the companies without their legal approval. Keep in mind that it may be easier to do this with a Home Equity Line of Credit, because not everyone has over $25,000 laying around inside the cash values of their Life Insurance policies.

Of course, each strategy described here should not be done on your own without fully understanding the entire consequences. Further, I would be able to show you the real numbers and how this all works being the Certified Financial Planner® extraordinaire that I am.

The thing to realize is that any money in an IRA account is taxable when it comes out. If you let your IRA continue to grow, then your tax liability also continues to compound. So, the sooner you can eliminate your IRA by paying the taxes with leveraged money, then the better off you will be.

These strategies take careful planning and analysis and should not be done on your own. If you need help, or want to see how this would work in your situation, then give me a call at 904-547-2913.

Later my friends.

Routine Advice Makes for Difficult Choices Later

For the record, I am not an attorney and I do not provide legal advice.

I still meet people who have no wills, or worse wills that they have not updated in over a decade. Then, of course there are the people who have gone to an attorney's Living Trust Seminar. Generally, they get a Living Trust completed and think everything is fine. I am amazed to see these client's of local attorneys who have Living Trusts, but have not transferred any of their assets into their new Living Trusts. There is a reason for this that I will discuss later. Wills and Living Trusts that are properly designed and implemented are useful tools for the "what if you die" scenario. However, what if you do not die, but rather have a prolonged illness that requires Long Term Care?

The choices to pay for Long Term Care are simple.

1. Long Term Care Insurance.
2. Use your own money.
3. Public benefits like Medicaid or VA that you have to qualify to receive.

I dare to say that none of these choices are choices that anyone really likes. Most people do not buy Long Term Care Insurance, because of the costs. Most people do not want to use their own money to pay for Long Term Care costs and expenses, either. Finally, most people do not want to think of themselves as having to take handouts from the government. Nevertheless, these are the choices. You can plan for it, or not.

Sadly, if you do not have any Long Term Care insurance, then you have to use your own money, unless you can qualify for Medicaid or VA benefits. In order to qualify for Medicaid, you can have about $2,000 in cash. If you have more than that, then the state that you live in expects you to pay your own way.

Here is the inescapable truth: If you do not plan, then you will pay out of our own pocket.

With proper planning however, there are things that you can do to protect your assets.

A lot of older Living Trusts and Wills were what is known as "I Love You" trusts or wills. This means that the husband leaves everything to the wife and the wife leaves everything to the husband, then when they both die, everything goes to the kids. There may be reasons why leaving everything to your spouse could be a bad idea. Especially, if your spouse has qualified for Medicaid and is in a nursing home. Suppose the healthy spouse dies and leaves everything to the Medicaid patient husband in the nursing home! Yikes!!! This would be an irrevocable scenario where the family would receive nothing until after Medicaid was fully reimbursed.

As adult children, we assume that our parents have hired the right attorney, the right financial adviser and the right accountant and everything should be in order. I can tell you that in most cases, everything is not in order. The main reason is that the attorney wants to earn their fee and generally does not work with the financial adviser or accountant. The financial adviser does not want to have roadblocks like attorneys and accountants to get in the way of their advice. The accountant does have any time as it is since most people wait until the last minute to file their taxes. The last thing the accountant wants to do is chase down some attorney or financial adviser on April 15th and tell them what they are filing on behalf of their client. The point is that there is a strong likelihood that your parents financial situation is not in order like you may think. It is worth it to take a look see.

Of course, some people do not have attorneys, accountants or financial advisers at all, but are do-it-yourself-ers. These people go to Legal Zoom® for legal documents, online brokerage firms to manage their own money and they use Turbo Tax® to file their taxes. I can guarantee you these people have not properly planned for a prolonged illness.

We have a process to help you through this complex area of life. Instead of using an attorney to sell you a Living Trust, a financial adviser to recommend investments or an accountant to file your taxes, you might want to think about using someone like us to help you navigate the complexity of what happens if you or a loved one has a prolonged illness requiring you to spend all of your hard earn money. In conjunction with an Elder Care Attorney, we can help devise a plan to protect your assets.

Our next seminars are October 6, 2011 at 2 pm or 6 pm at the aloft Tapestry Park Hotel at the Southeast corner of Southside Blvd and Gate Parkway (across from Claude Nolan Cadillac) in Jacksonville, Florida. R. Kellen Bryant, Elder Care Attorney who is a member of the National Academy of Elder Law Attorneys, WealthCounsel, Medicaid Planning Systems and who is a VA accredited attorney will be the guest speaker. You can RSVP to 800-769-8516.