The federal government must be needing more money. And a lot of it. Consequently, it is targeting those who are yet "taxpayers" (a shrinking pool, by the way), to include retirees and those who may receive an inheritance from those retirees.
Hint: Anytime you hear something called a "loophole" by any elected official ... grab your wallet.
It seems three areas are presently under "scrutiny" by the authorities:
- Roth IRA Conversions
- "Stretch IRAs"
- Social Security "Tactics"
This was the subject of a recent Reuters article titled “3 Retirement Loopholes That Are Likely to Close.”
Spoiler alert: Here is what you need to know from the original article.
Back-Door Roth IRA Conversions. After naming the Roth IRA after David Lee Roth, lead singer for the heavy metal band Van Halen, Congress itself created this "loophole" for the Roth IRA.*
How?
By lifting income restrictions from conversions from a traditional IRA to a Roth IRA, but not placing such restrictions from the contributions to the accounts.
As a result, those whose incomes are too high to put after-tax money directly into a Roth IRA so it can grow tax-free, instead are able to fund a traditional IRA with a non-deductible contribution then convert it to a Roth.
Taxes are usually expected in a Roth conversion, but this work-around does not trigger much liability as long as the contributor does not have other money in an IRA.
The Obama 2016 budget proposed that future Roth conversions be limited to pre-tax money only.
The Stretch IRA. People who inherit an IRA can chose to take distributions over their lifetimes, and families converting IRAs to Roths also can potentially provide tax-free income to their heirs for decades because Roth withdrawals are generally not taxed.
Surprise. This completely legal "loophole" irks some lawmakers.
Most of the recent tax-related bills introduced in Congress contain a provision to kill the stretch IRA and replace it with a law requiring beneficiaries other than spouses to withdraw the money within five years.
Anyone thinking about a Roth conversion for the benefit of his or her heirs should speak with an experienced estate planning attorney and decided if this strategy makes sense if those heirs have to withdraw the money within five years.
Social Security and “Aggressive” Tactics. The Obama budget also proposes getting rid of “aggressive” Social Security claiming strategies.
These tactics can let upper-income beneficiaries maneuver the timing of the collection of Social Security benefits to maximize their delayed retirement credits.
While Obama failed to identify which strategies he is eyeing, the original article cites experts who believe he may be alluding to the so-called “file and suspend” and “claim now, claim more later” techniques.
“Claim Now, Claim More Later”
Married people can now claim a benefit based on their own work record or a spousal benefit of up to 50% of their partner’s benefit.
Under the law, dual-earner couples may be able to do both.
Those individuals who choose a spousal benefit at full retirement age (age 66) are now able to switch to their own benefit when that maxes out at age 70.
This is the “claim now, claim more later” technique—it can up a couple’s lifetime Social Security payout by tens of thousands of dollars, according to the original article.
“File and Suspend”
This trick is used typically when one member of a couple has to file for retirement benefits for the other partner to get a spousal benefit.
A person who reaches full retirement age also has the option of applying for Social Security—then immediately suspending that application so the benefit continues to grow—with their spouse still claiming a spousal benefit.
Talk to your estate planning attorney along with your financial advisor about retirement options and strategies as we move into 2016.
It should prove to be an interesting year.
*Just kidding about Congress naming the Roth IRA after David Lee Roth. But, hey, we could use a little levity when the topic turns to taxes, yes?
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: Reuters (June 30, 2015) “3 Retirement Loopholes That Are Likely to Close”
