Kansas and Missouri Estate Planning

Are "Stretch" IRAs in Jeopardy?

The Secure Act may change how people plan with IRAs.

The Secure Act bill passed the House vote and is now in the Senate.

What is the Secure Act?

It stands for “Setting Every Community Up for Retirement Enhancement Act of 2019.”

According to a recent Kiplinger article titled “Secure Act Calls for Changes to IRAs, RMDs,” the act will impact IRA planning.

How so?

It repeals the age cap.

What does this mean?

Currently, individuals can no longer make contributions to a traditional IRA after age 70½.

The new cap removes this limit.

What does this do?

It allows people to continue saving in their traditional IRA in much the same way as they are currently able to save at later ages into a Roth IRA.

How much can be contributed?

Those age 50 or older have a higher contribution limit of $7,000.

If your spouse is retired, you can also make contributions into an account on their behalf.

It increases the RMD age.

Currently, the age at which people must make required minimum distributions is 70½.

With the new bill, it would increase to age 72.

How does this help?

If you are able to cover expenses without tapping in to your IRA, you will not need to do so.

This will only help those who turn 70½ in 2020.

Why?

The bill would not go into effect until December 31, 2019.

Anyone turning 70½ in 2019 or earlier is subject to the old rules.

It negates the “Stretch IRA.”

While the new laws benefit the account owners and spouses, it does little to help non-spouse beneficiaries.

Why?

The heirs will no longer be able to stretch RMDs from IRAs they inherit.

What does this mean?

The RMDs will not be calculated based on the life expectancy of the heir.

Rather, all funds must be withdrawn within 10 years, subject to limited exceptions.

Larger accounts will require larger RMDs.

These larger RMDS will trigger a greater income tax bill for beneficiaries.

With these changes, you may want to review and update your estate plan.

Work with your experienced estate planning attorney to create a plan to satisfy your goals and the new laws.

Reference: Kiplinger (June 14, 2019) “Secure Act Calls for Changes to IRAs, RMDs”

What Happens if I Make a Mistake on My RMD?

Consequences for RMD mistakes vary based on circumstances.

You made a mistake.

You calculated your required minimum distribution for your retirement account.

The problem?

You or your brokerage firm made a mistake.

The figure was too low.

You did not withdraw enough.

What can you do now?

According to a recent Kiplinger article titled “How to Correct a Mistake on Your RMDs from IRAs,” you should contact the IRS immediately to see if they will waive the 50 percent penalty.

You read that correctly.

The penalty is 50 percent of the amount you should have taken.

Calculate the exact amount you should have withdrawn.

Once you have done this, this withdraw it immediately.

Next, you will need to file Form 5329.

If you miscalculated more than one year, you will need a separate form for each year.

Lines 52 and 53 should be filled out with the number you should have withdrawn and the letters “RC”.

What does “RC’ mean?

“RC” means reasonable cause.

On the dotted line next to 54, write the amount of the penalty for which you are requesting the waiver.

If the issue was due to a brokerage firm error, include a short note explaining what happened and how you took corrective steps immediately upon discovery.

The IRS does not need all the details.

Keep it brief.

Wait to send any penalty money until the IRS accepts or denies your penalty waiver request.

If the broker sent a letter informing you of their mistake, keep it in your files.

This note should not be sent to the IRS.

Mistakes happen.

To make them is human, to forgive is divine.

More information on the process can be found in the Instructions for IRS Form 5329.

Reference: Kiplinger (March 22, 2019) “How to Correct a Mistake on Your RMDs from IRAs”

What are “In Kind” Transfers?

Are you at least 70 ½ years old with retirement funds?

If yes, then certainly you are aware that you must satisfy your required minimum distributions (RMD) from those retirement funds before December 31.

Guess what.

Your RMD does not have to be taken in cash.

Really?

What other options do you have?

According to a recent Kiplinger article titled “Retirees, Shift Stock to Satisfy Your RMD,” you can make an “in kind” transfer instead.

A what?

An “in kind” transfer involves moving mutual funds or stock into a taxable account from your IRA.

When would this be a good idea?

1. You are not needing to spend your RMD.
2. Your stocks are probably going to grow in value.

Why might a transfer be smart?

Your money stays invested.

You save money in transaction expenses.

How do you do this?

Calculate our RMD.

Find your account balance on December 31 of the previous year.

Next, divide this number by the IRS factor for your age.

Where can you find this?

The IRS Publication 590-B.

Have the money transferred.

Give the number you calculated to your IRA custodian and ask them to transfer the appropriate funds.

You and the IRS will receive a 1099-R from your IRA custodian detailing the amount and value of the shares on their transfer date.

Unless you made non-deductible contributions to the IRA, you will need to pay taxes on the entire amount transferred.

Be sure to double check with your IRA custodian, regarding the value of the assets transferred.

Another option?

Sell the stock and use the payout from your IRA to repurchase the shares in a taxable account.

Market values can fluctuate.

If the amount transferred does not satisfy the RMD on the date of the transfer, you will need to make up the difference or pay a 50% penalty.

What happens with tax basis?

The tax basis will change based on the time of transfer.

What does this mean?

Shares worth $15,000 at the time of the transfer will be taxed on this amount rather than the value when they were in your IRA.

If this sounds like something you might want to pursue, do not delay.

This can be a long process, especially at the end of the year.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger’s (December 2016) “Retirees, Shift Stock to Satisfy Your RMD”

What Should I Know about Required Minimum Distributions (RMDs)?

Not taking required minimum distributions on time will cost you.

Big time.

You worked hard for years.

You also took advantage of your employer 401(k) and utilized your own traditional IRAs to plan for retirement.

Good job!

But your work is not over.

You still need to protect your IRA and 401(k).

Why?

As the recent Kiplinger article titled “FAQs About Required Minimum Distributions for Retirement Accounts,” points out, you must take required minimum distributions (RMDs) if you are 70 ½ or older.

To avoid an IRS penalty these must be taken by December 31.

If it is your first year, you have a grace period until April 1 of the following year.

What happens if you fail to do this?

You will be hit with a 50 percent tax penalty for the amount you failed to take out.

Yes.

Your read correctly.

The penalty is half of your RMD for the year.

How can you protect your money from the penalty?

Thankfully, the article also provides some useful advice.

Begin immediately.

Do not delay.

Start working with your financial service advisors early.

The end of the year is one of their busiest times.

Give them plenty of notice, especially if it involves selling holdings.

Markets are closed on holidays.

Give to charity.

You can give up to $100,000 from your RMD directly to charity.

There is no time frame for this qualified charitable distribution, but you must do it right.

You can literally make the donation any time during the year as long as it is before December 31.

Get your financial advisors involved here, too.

Know your birthday.

Were you born between January and June?

If yes, then you will have your "half birthday" within the same calendar year.

Consequently, if the year is 2016, you will need to take your RMD by April 1, 2017.

On the other hand, if your birthday is between July and December, your half birthday will be in the following calendar year.

If the year is 2016, you will not need to take your first RMD until April 1, 2018.

Whew.

Remember, if you wait until April to take your first distribution, you will still need to take the second distribution by December 31 of the same year.

Find out the RMD rules for 401(k)s.

401(k) RMDs are a little different.

Are you already retired?

If yes, then you will need to make the withdrawal according to the same rules as the traditional IRA.

If you are still working, you can usually wait until you retire to take your first RMD.

The caveat?

You cannot own more than 5 percent of the company.

Yes, these rules can get a little complicated.

By following this general advice and the specific advice of your financial advisors, you will be able to save your traditional IRA and 401(k) from unnecessary penalties.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger’s (November 23, 2016) “FAQs About Required Minimum Distributions for Retirement Accounts”

What Financial Issues Should I Consider as Year-End Approaches?

November means the end of the year is almost upon us.

Do we really have just two months before 2017?

Yes, we do.

According to The (Hot Springs, AR) Sentinel-Record article “Check this list -- twice -- before year-end,” you should schedule an appointment with your professional advisor to discuss your long-term investment goals.

What are factors could affect your goals?

RMDs.

If you have a traditional IRA, you will need to take required minimum distributions (RMDs).

Failing to do so will incur you a 50% penalty on the amount you did not take.

Talk with your advisor about whether these options would be valuable for you.

Set your RMD to be withdrawn automatically.

Avoid being penalized because you merely forgot.

Delay your first RMD.

The first year you are required to take an RMD is the year you turn 70 ½; however you can delay this until April 1 of the following year.

The caveat?

You must take two RMDs the second year, possibly placing you into a higher tax bracket.

Transfer your RMD to charity.

You could avoid having your RMD counted toward your adjusted gross income by transferring up to 100,000 from your IRA to qualified charities.

A win-win.

Tax harvesting.

What is tax harvesting?

Tax harvesting involves offsetting portfolio gains or establishing a deduction up to $3,000 by selling a losing an investment.

If the loss is great enough, it could be rolled over into the future.

What should you consider?

• Reduce short-terms gains first because they are taxed at a higher rate.
• Harvesting losses should not compromise your long-term investment strategy.
• Remember, new purchases prior to or after a security sale can be impacted by “wash-sale” rules.

Wash Sale.

You may be asking, “What is ‘wash-sale’?”

There is a 30 day window after selling a security at a loss where a purchase of a “substantially identical” security would disallow your loss deduction.

In short, you would cancel out your loss.

Income and deductions.

Being close to a higher tax bracket means small changes could bump you up.

What should you do?

Work with your advisor to reduce some of your taxable income before 2017.

How?

Give to a charity.

Accelerate deductions.

Defer income.

Contribute to a 401(k).

Review your income sources.

Life Changes.

Any change in life will affect your estate plan and your finances.

If you moved to a new state or welcomed a new family member, you will want to make the necessary adjustments.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: The (Hot Springs AR) Sentinel-Record (October 8, 2016) “Check this list -- twice -- before year-end”

How do I Handle IRA Distributions when My Spouse is (>10 Years) Younger than I Am?

For starters, if this is not your first spouse, then make sure no ex-spouse is still the designated beneficiary of your IRA.

Now, back to your question.

Yes, if your spouse is more than 10 years your junior, then there are some special steps to take when calculating your annual required minimum distribution (RMD) from your IRA.

This subject was taken up by Kiplinger's in an article titled "Retirement Distributions When Your Spouse Is Much Younger."

As the article explains, most people use Life-Expectancy Table III, the Uniform Lifetime Table, in Appendix B of IRS Publication 590 to calculate their required minimum distributions ("RMD"). In the general population, most people taking RMDs are within 10 years of their spouses age-wise.

So, how does it work if your spouse is younger by more than a decade?

If your younger spouse is your sole primary beneficiary (i.e., your are not including your children from a previous marriage in a share off the top), then you should use Life-Expectancy Table II, the Joint Life and Last Survivor Expectancy, to determine your RMD.

What is the difference between Table III and Table II?

The latter requires you to withdraw fewer dollars each year than if the age of your spouse was within 10 years of your own.

Here is an illustration from the original article:

If you are 70½ in 2016 and need to take your first RMD, then you would divide your account balance as of the end of 2015 by 27.4.

Consequently, you would need to pull $3,649.64 from your $100,000 IRA.

But what if your sole beneficiary is your spouse, age 53?

In that case, the calculus is in your favor. You would divide your account balance by 32.6 and only pull $3,067.48 from that IRA.

In Life-Expectancy Table II, look for your age on the left side of the table, then find where that line intersects your spouse's age on the top.

Some RMD calculators will let you input your spouse's birthdate to determine your RMD, even if you need to use the different life-expectancy table.

You should also make sure your IRA administrator knows your spouse's birthdate, so it will use the correct table when calculating your RMDs—particularly if you have automatic RMD withdrawals.

By the way, if you did not get around to it before 2015 slid into the record books, this would be an excellent time to review your beneficiary designations and make sure they are up-to-date.

Did you know that the beneficiary designations on your retirement accounts and life insurance take precedence over the information in your will?

They do indeed.

Even if you have updated your will, your IRA will go to your designated beneficiary. This will be the case even if you have been divorced, married, or wanted to change your beneficiary for any other reason.

An experienced estate planning attorney can help you ensure that everything is buttoned up nice and tight when it comes to your estate. 

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger (December 16, 2015) "Retirement Distributions When Your Spouse Is Much Younger"

Of RMDs, MAGI, Medicare and Heirs

Retirement funds are wonderful things. They are fed pre-tax, then grow tax-deferred exponentially via that miracle of tax-deferred compounding. Can there be any downsides to this equation? 

Yes.

Some day all of the tax-deferred funds must be taxed. Without careful planning, those taxes can pack a whallop for you and your loved ones.

So, are there any workarounds to mitigate the tax bite?

A recent article in Financial Planning, titled "Estate Planning: Smart Roth Conversion Trick," explains that some individuals choose to have partial Roth IRA conversions. As a result, they remain in their current income tax bracket and decrease other taxes and charges. Along with a Medicare surtax and deduction phase-outs, Medicare Part B premiums are also part of the mix.

What is the big deal?

Medicare enrollees typically pay about $105 monthly for Medicare Part B. This covers doctor bills and some other medical expenses. However, seniors who have a modified adjusted gross income (MAGI) above $85,000 (or $170,000 on joint returns) will pay anywhere from roughly $145 to $335 a month for that same coverage.

Why?

This is because Roth IRA conversions increase an individual's MAGI. The original article advises those in this situation to take an annual series of partial conversions now to thereby limit future taxes, as well as “stealth” taxes like extra Part B premiums.

A partial Roth IRA conversion also serves to reduce an individual’s traditional IRA, taxable RMDs, and the taxable account ultimately passing on to beneficiaries.

The key is to plan to pay the income tax now—at a relatively low rate—instead of later at a potentially higher rate. Accordingly, it might be wise to start looking at this well before you are even thinking about RMDs.

This might sound a little confusing, and it can be. You should discuss your IRA situation and how it affects your retirement and estate planning with an experienced estate planning attorney.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.

Reference: Financial Planning (August 19, 2014) "Estate Planning: Smart Roth Conversion Trick"