The SECURE Act Is A Financial Planning “Game Changer”.

And, there are implications many have missed.

Jim Lorenzen, CFP®, AIF®

Why did congress pass The SECURE Act?

Simple.  This major change will bring in $15.7 billion in tax revenue by 2029, according to the joint committee on taxation in their report on the bill, H.R. 1994.   And, guess whose money they want?   Yes, yours.

The administration, of course, is looking for ways to address the debt by raising revenue without actually talking much about the debt.  They’re even kicking the can down the road on taxes, talking about making the current tax-cuts “permanent” – as if Washington had ever passed a permanent tax bill; it’s “Washington-speak”.  The current tax law is set to “sunset”, i.e., expire in 2026, taking us all back to the pre-2017 tax rates.   Permanency would be achieved by removing the sunset date.  So far, so good; but, if you’re one of those planning for the next two decades, you should be thinking about what the next ten congressional elections might bring. 

The Stretch IRA is all but eliminated.  Under the old law, an heir could inherit an IRA and stretch the RMDs over his/her life expectancy.   Okay, considering the inheritance will probably take place during their peak earning years.   So, a $17,000 RMD on a $500,000 IRA (purely hypothetical) won’t make much difference.   However, under The SECURE Act the inheritor must liquidate the IRA by the 10th year.   There’s NO RMD REQUIREMENT, so, the heir could let the IRA grow until the last year—but, then would be required to withdraw ALL funds in one year—talk about playing roulette with what the tax laws will be when the entire balance is added to that year’s income for calculating the tax bill.   Alternatively, the heir could take a 10% yearly distribution, for example.   But, in our example, that would add $50,000 each year to taxable income during what would likely be the heir’s peak earning years!

For the owner of a traditional IRA, remember that RMDs are considered in two other areas:  (1) how much of Social Security income will be subject to taxation, and (2) as income for determining your Medicare Part B premiums.  Oh, yes, high income in retirement means higher Part B premiums.

It’s a good time, especially for those with substantial incomes, to do some planning.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

The Stretch IRA is Gone. Now What?

There are three alternatives you can use!

Jim Lorenzen, CFP®, AIF®

The SECURE Act has changed the game.  I discussed the things you need to know in a previous post; but maybe the biggest game-changer, especially for parents who were planning on leaving substantial nest-eggs to their kids, is the elimination of Stretch IRAs.  The big unexpected inheritor just might be Uncle Sam.

Before the SECURE Act, the child could take required minimum distributions (RMDs) based on his/her own life expectancy.  Theoretically, if they inherited early, the RMD would be so small they could actually continue growing the nest egg in perpetuity – even grandchildren could benefit!   No more.  Now, the inherited IRA has to be liquidated in ten years.

The odds are most boomers will die when their children are in their peak earning years.  So, an inherited $500,000 IRA can create some tax problems!  An inheriting child in their 50s, who before the SECURE Act may have taken RMDs in the neighborhood of $17,000, will now be required to take a first RMD of $50,000…. and that’s in addition to their income during their peak earning years.   Add to that the double-whammy that the current tax law sunsets in 2026 and the old 2017 tax brackets come back into effect, and you have a perfect storm  –  I won’t depress you with the outlook for tax legislation in view of the current national debt.

The elimination of the stretch IRA is expected to add $15.7 billion to the federal budget over the next ten years as baby boomers begin the pass away. 

As you can imagine, this has tremendous estate planning ramifications for those  wishing to pass-on wealth to their heirs.  Now that the stretch is gone, here are three you may want to consider.

  • Roth Conversions:  This is an obvious one.   Traditional IRAs may be tax-deferred, but they really should be called “tax-postponed”… until tax brackets are higher (remember the national debt and politician’s desires to spend tax dollars to gain reelection).  If state inheritance taxes are an issue, a conversion could reduce the size of the estate and reduce tax exposure, too.  A conversion may not be the right move for everyone.  There are current tax bracket shift issues that should be considered.
  • Life Insurance:  Death benefits are generally tax-free, i.e.,  not included in the beneficiary’s income.   Use distributions from the IRA to pay the policy and bingo – money goes to the kids and by-passes Uncle Sam.  Depending on age and insurability, there are even advanced designs that could provide with tax-free income during retirement, as well.   It’s not your father’s – or grandfather’s – life insurance anymore.  It has become the ‘swiss army knife’ of financial tools.
  • Charitable Remainder Trusts (CRTs):  Use your IRA to fund a CRT.  This allows parents to create an income stream for their children with part of the IRA while the rest goes to charity.  While the CRT can grow assets tax-free, the kids do pay tax on the income withdrawn.   There are two types:  an annuity trust and a remainder trust.  The first distributes a fixed annuity and doesn’t allow future contributions; the second distributes a fixed percentage of the initial assets and allows for continued contributions.

Naturally, you should discuss anything you’re considering with your financial, tax, and legal advisors before making any moves.   It pays to plan.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Think Giving To Charity Steals From Your Heirs?

Here’s a possible solution!

Jim Lorenzen, CFP®, AIF®

Giving to charity can create significant tax advantages. Many people use real estate and securities to gain these advantages.

If you were to SELL an appreciated asset, the gain would be subject to capital gains tax. However, by donating the appreciated asset to a charity, however, you can receive an income tax deduction equal to the fair market value of the asset and pay no capital gains tax on the increased value.

Example: Alan purchased $25,000 of publicly-traded stock several years ago. That stock is now worth $100,000. If he sells the stock, he must pay capital gains tax on the $75,000 gain. However, Alan can donate the stock to a qualified charity and, in turn, receive a $100,000 charitable income tax deduction. When the charity then sells the stock, no capital gains tax is due on the appreciation.

This may create a problem, however. When Alan made this gift to charity, his family is deprived of those assets that they might otherwise have received.

Potential solution: In order to replace the value of the assets transferred to a charity, the Alan establishes a second trust – an irrevocable life insurance trust – and the trustee acquires life insurance on Alan’s life in an amount equal to the value of the charitable gift. Using the charitable deduction income tax savings and any annual cash flow from a charitable trust or charitable gift annuity, Alan makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At Alan’s death, the life insurance proceeds generally pass to the his heirs free of income tax and estate tax, replacing the value of the assets that were given to the charity. Not bad!

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Losing A Spouse Can Be Expensive…

… you could get hit with the widow’s penalty tax!

Few people think about this – and I wish I could be the smart guy that thought of this for this post, but I wasn’t[i].   It’s something called the widow’s penalty tax; it affects the surviving spouse.

After a spouse’s death, the survivor usually goes from a joint return to filing as a single filer, usually resulting in an increase in the survivor’s tax bracket.   This happens because often the survivor’s income can be almost as much as they were filing when using a joint return – Bingo! – a large tax bill.  One advisor’s client went from a 24% bracket (filing jointly) to a 32% bracket as the survivor[ii]

How to protect yourself?

A series of partial IRA conversions (to Roth IRAs) over several years, keeping the amounts low enough not to change your tax bracket, can help.  Do this after age 59-1/2 but before taking Social Security benefits.   The distributions will avoid the 10% penalty and, at the same time, take advantage of the low joint rate.   By the way, it’s worth mentioning that the current tax law, which has lower brackets than prior law, sunsets in 2026, meaning brackets are set to return to their previous higher rates.   Another benefit:  the conversions will reduce your taxable income when you are forced to begin your required minimum distributions (RMDs) after age 70-1/2.

Good idea, huh?

Jim

[i] Donald Jay Korn, Financial Planning, August 2019

[ii] Bob Morrison, founder of Downing Street Wealth Management in Greenwood Village, Co., cited in the same article.

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742. IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Financial Planning for Special Needs Children is Different!

Preschool Children SeriesFew families aren’t touched by this issue.

According to Financial Planning magazine, more than 5% of school-age children are diagnosed with a disability of some type – seeing, hearing, talking, walking, or thinking; and, planning for their future can not only be complex, but demanding.  Indeed, many parents feel overwhelmed!

What makes it so difficult is that the planning isn’t only for the parents – it’s also for after the parents and caregivers are long-gone, which can be another 30 to 50 years! Continue reading

What Will “Medicare for All” Really Cost?

Politicians don’t live under the same health care or retirement systems the rest of us do – so promises, for them, are easy to make.

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Jim Lorenzen, CFP®, AIF®

I’m not sure how many of the candidates who are running on government supported Medicare for everyone majored in economics or finance – it maybe explains the obvious their all-to-obvious failure to address the question directly.

Sen. Elizabeth Warren, for example, promised that it won’t cost the middle class “one penny” – a feat that hasn’t been accomplished by any country now offering universal health care.  According to an inciteful Advisor Perspectives article by Rick Kahler, CFP® and registered investment advisor based in Rapid City, S.D., the middle class in those countries pay income taxes of up to 40% and a national sales tax equivalent to 15-25% of income.

While Senator Warren estimates the cost over a decade at $20 trillion in new federal spending – a cost the middle class is somehow to avoid – Estimates from six independent financial organizations put the figure in the $28-36 trillion range.

A Forbes article describes the tax increases aimed at wealthy individuals.  Included are:

  • Eliminating the favorable tax rate on capital gains
  • Increasing the “Obamacare” tax from 3.8% to 14.8% on investment income over $250,000
  • Eliminating the step-up in basis for inheritors
  • Establishing a financial transaction tax of 0.10%

The capital gains tax increase, the step-up in basis, and the financial transaction tax will all affect middle class investors – potentially anyone with a 401(k) or an IRA.  Rick Kahler points out that the American Retirement Association estimates that the financial transaction tax alone will cost the average 401(k) and IRA investor over $1,500 a year.

The 0.10% financial transaction tax, for example, would apply to all securities sold and purchased within a mutual fund or ETF, in addition to any purchases and sales of the funds themselves by investors.  Mr. Kahler estimates these costs can run 0.20% to 0.30% a year to fund investors.   When you consider some index funds charge only 0.10% in total expenses, the increase comes to 200% or more.

Eliminating the step-up in basis and the favorable capital gains treatment will certainly cost middle class investors more than a penny.  A retiree leaving an heir $200,000 with $100,000 in cost basis, could easily cost the middle class inheritor $10,000 to $20,000 or more in taxes.

Candidates can promise – that doesn’t cost anything – but it’s the electorate who needs to do the math.  After all, our elected representatives don’t live in the same health care world the rest of us do.

Jim

 

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group.  He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

Are Risk Questionnaires Meaningless?

Do they really add value?

Jim Lorenzen, CFP®, AIF®

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor.   Frankly, I’ve always felt they were a little stupid. Continue reading

YOU Are an Acutary!

Bet you didn’t know that.

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Jim Lorenzen, CFP®, AIF®

There was a time – for those of you old enough to remember – when companies would promise you a pre-determined retirement benefit, then do all the calculations required to figure out just how much they would have to fund your plan in order to achieve the promised results. 

Not easy.  They had to start with the ending value and work backwards, making capital markets assumptions for expected portfolio returns, based on how their investment portfolio was allocated.

Problems arose, however, when their projections were too optimistic resulting in many under-funded pension plans and an inability to pay promised benefits.

Goodbye pensions; hello 401(k).  Companies decided they didn’t need the liability risk:  You figure it out.

Now you get to decide how much funding is required.   Can you calculate the time-value of money?   Pensions promised a fixed benefit; but, in the real world, we have inflation and tax-law changes.   Pensions never even considered those factors.

Not only do you need to factor-in additional inputs; you also need know how to manage portfolio risk, too!  You might find this report somewhat enlightening, if not helpful.

Enjoy,

Jim


Jim Lorenzen, CFP®, AIF®

 

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

When A Loved One Dies

It can be helpful if you know what has to be done in advance.

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Jim Lorenzen, CFP®, AIF®

Earlier this past week I talked about Managing an Inheritance and provided a Lifeguide; but, a few readers emailed me asking if there was a checklist addressing what to do when a loved one dies.

This is a subject my wife an I can relate to, having lost both our parents between 2005 and earlier this year.   So, I thought many of you might find a fillable Lifeguide Helpful.

You can access it a 22-page guide here..

Hope this helps,

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Ageing Issues Make Financial Planning More Important than Ever!

Jim Lorenzen, CFP®, AIF®

When I was a  kid, no one I knew had Alzheimer’s.  Heck, no one my parents knew had it.  In fact, I don’t think anyone even knew what it was!

There may have been a few special-needs children around, but I never saw one in either elementary or high school.   Attention deficit disorder (A.D.D.)?  Never heard the term.

What a difference a generation of changes make:  changes  in health care advances as well as in people’s lifestyles.  People are living longer – that’s a good thing; but new challenges face us all.

According to the Alzheimer’s Association, Alzheimer’s is now the 6th leading  cause of death in the U.S.  Between 2000 and 2016, deaths from heart disease actually declined by 11%; but deaths from Alzheimer’s increased 123%!

5.7 million Americans are living with Alzheimer’s today.  One in three seniors dies with Alzheimer’s or another form of dementia.  16.1 million Americans are providing 18.4 billion hours of unpaid care for loved ones suffering from Alzheimer’s and dementia.  It’s not covered by Medicare, and all those politicians who want to “reform” health care are  amazingly silent about solving this problem.

Virtually every family I know has been touched by Alzheimer’s (including my own) or special needs issues affecting children or grandchildren (again, including my own).

Many ‘baby-boomer’s’ have become known as the ‘sandwich’ generation – taking care of both parents and children or even grandchildren, due to the combination of increased longevity coupled with these new medical challenges families are facing.

It’s never been more important to have a long-term multi-generational financial plan in-place.   Many parents, for example, don’t realize that may have created plans for their special-needs child’s financial security that will actually disqualify the child’s eligibility for government benefits in the future… and that their plan needs to preserve that eligibility while seeing that the child will be secure all the way through the child’s own retirement.  Who pays the rent and utilities when the child is older and the parents are gone?  Where  does the child  live?  Who pays the rent or mortgage.. or property and other taxes?   How about transportation – for life?

Indeed, the challenges today are greater than  ever before because the issues are different.  When should a person begin planning?  Now.  It doesn’t  matter your age.  Do it now.

It’s not about being an investment guru; it’s about having a strategy tied  to a plan – and arranging assets to accomplish long-term objectives.

Do it now.   Okay, I’ll shut up.

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.