RMDs: We’re Baaaack!

The 2020 RMD waiver is coming to an end. They begin again in 2021!

Jim Lorenzen, CFP®, AIF®

 

The headline says it all.  But, this is a blog; so I guess I’d better elaborate a little.

RMDs do NOT apply to Roth IRA owners, unless it’s inherited.  

If you take more than the required minimum distribution, that’s not a problem; but, distributions of less than the required amount will result in a penalty:  50% of the RMD shortfall!  For example, if your RMD for 2021 is $25,000 and you take only $20,000, you’ll still have to take the $5,000 remainder and the IRS will take 50% of that shortfall amount: $2,500… money you could have used to buy more masks.   

There’s a new age for taking RMDs, brought on by The SECURE Act, which I’ve covered in a couple of previous posts.  See The Game Changer and this overview.  Those two posts should bring you up to speed for most issues.

By the way, if an IRA was inherited in 2020, including a Roth IRA, an RMD must be taken for 2021 if the beneficiary is an eligible designated beneficiary is taking distribution over his/her life expectancy.  There are rules and exceptions, so be sure to get professional guidance.  IRAs inherited in 2021 and forward come under the 10-year rule, covered in the above previous posts.

RMD penalties are high and requesting waivers can result in headaches.  It’s best to do it right instead of having to do it over.

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-based 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.

Opinions expressed are those of the author.  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.

Systematic Roth Conversion Strategies Can Be Powerful….

… especially when they’re tied to a plan.

 

Jim Lorenzen, CFP®, AIF®

Do you know what a systematic Roth conversion is?  It’s worth knowing!

Even at modest growth rates, the results of a systematic Roth conversion can be surprisingly impressive over time.   Take a look at this example from Debra Taylor, a tax attorney and advisor in Franklin Lakes, New Jersey, comparing no conversion to systematic conversion.  What would the traditional IRA and the Roth IRA (funded with systematic conversions) look like?

Using a modest growth rate of 5% per year over a ten-year period, here are the results beginning with a $500,000 IRA and converting just $17,500 per year.

With no conversion, the traditional IRA has grown to $1,026,744.  Not bad, except that all that money doesn’t belong to the IRA owner.  Some of it belongs to Uncle Sam – it’s his IRA, too.  How much, of course, depends on what tax rates are in effect when withdrawals occur.

Using a ten-year systematic conversion plan instead, that $500,000 IRA ends-up with only $336,158 at the end of 10-years.   That means lower required minimum distributions (which impact how much your Social Security is taxable and your Medicare premium amounts) and lower taxes, too.  How much lower?  Pick a bracket and do the math on both – you’ll likely be surprised.

Instead, using a systematic Roth conversion strategy, those ten annual $17,500 conversions resulted in a tax-free Roth IRA value of $1,405,285!   Combined with the traditional IRA, results in two retirement accounts now worth a total of $1,741,443 – that’s $714,699 (70%) more!   And, 81% of the owner’s retirement money – the money in the Roth IRA – is tax free!

The best time to begin a strategy like this is after age 59-1/2  and the age when required minimum distributions (RMDs) begin.  That age depends on your birth date under the SECURE Act.  The age is 72 if born on or after July 1, 1949.  It’s 70-1/2 for all others.  Once RMDs begin, you can’t use RMDs to fund Roth conversions; you’ll have to take your RMD first, then take the conversion amount.  Secondly, the strategy works only if you convert the entire amount and pay any tax due from other funds.

It goes without saying – or maybe it doesn’t – that any strategy should be tied to a solid financial plan that can ‘stress-test’ outcomes and probabilities.   Nothing beats experienced and informed guidance.

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-based 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.

Opinions expressed are those of the author.  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 the Markets On Their Way Back?

Markets always do; but strategies in the future will have to be different.

iStock Images

Jim Lorenzen, CFP®, AIF®

Maybe. You might think so. 

While the S&P was down 10.5% year-to-date as of Friday, it’s still UP 1.1% for the last 12 months while foreign stocks actually lost 13.1%.  Who’d a thunk it?   And, the real surprise is the NASDAQ index of small stocks, down only 3.3% for the year and actually UP 9.3% for the last 12 months as of Friday’s close[i].  The 10-year Treasury has gained 17.9% as the yield plummeted to just 0.65%[ii].

The core consumer price index (CPI) is holding at 2.1%[iii]; but, as we see huge stimulus spending driving up the debt, the inevitable result may be too much money chasing too few goods and services, thus driving up inflation – an argument to get the economy moving again in order to drive up production while increasing the job numbers and sources of revenue.  Debt as a percentage of the GDP will be the key figure to watch.

A key worry is a debt spiral. Treasury secretary Mnuchin is already trying to fund the growing budget deficit – the $2.2 trillion stimulus package is the largest ever passed.   John Briggs, head of strategy for the Americas at Natwest Markets, thinks the sheer amount of debt coming is really a war-time sort of funding.

The government has been selling short-term debt (Treasury bills that mature in one year or less) virtually as fast as possible – and more is coming.

The fiscal 2020 deficit – a deficit that needs to be funded somehow – will be four times as large as last year’s $3.8 trillion – almost 19% of GDP, according to the Committee for a Responsible Federal Budget, a non-partisan group.  Few on ‘the hill’ see a need for caution right now, given the threat of the virus, but there is little doubt corrective action will be on the horizon.

Economists at JPMorgan Chase & Company say GDP will shrink an annualized 40% in the second quarter, according to a feature in Bloomberg News.   That, of course, means a huge amount of debt is coming in the second quarter. 

Having a solid formal financial plan with the right allocation is now more important than ever.  The markets will come back, but because of the CARES Act and the SECURE Act – and added market volatility – the strategies that used to work are now changing.

Jim

[i] Source: MacroBond Financial AB. S&P 500 is represented by the S&P 500 Index, DJIA is represented by the Dow Jones Industrial Average, NASDAQ is represented by the NASDAQ Composite Index, Foreign Stocks are represented by the MSCI EAFE Index and Emerging Markets are represented by the MSCI Emerging Markets Index. Sectors based on S&P 500 Index sector indexes. You cannot purchase an index.

[ii] Source: MacroBond Financial AB, Morningstar Inc., Bloomberg LP. 10-Yr Treasury is represented by the MacroBond 10-Year Treasury Bond Index.

[iii] Source: MacroBond Financial AB, Federal Reserve (Fed Funds Rate), US Department of Labor (Inflation and Unemployment) and US Bureau of Economic Analysis (GDP).

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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.

Opinions expressed are those of the author.  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 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.