Category Archives: Estate Taxes

Who Cares If Stretch IRAs Are Eliminated?

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Only wealthy people benefit from the “loophole” anyways. Retirement plans were never intended to be an estate planning tool. It won’t impact me. I don’t care. These are some of the comments in the press right now regarding proposed legislation to end the ability of heirs to take inherited IRAs out over their life expectancies (referred to as “stretch IRAs”).

You should care.  My experience is the less wealthy actually benefit as much or more than the truly wealthy from stretch IRAs. For example, lets call my client Mike. Mike’s father left him and his sister each half of his IRA at death. Neither Mike nor his sister would be considered even close to wealthy. Fortunately for Mike and his sister, they now use their required minimum distributions from their stretch IRAs to help pay their mortgages on humble homes. Had they been forced under the proposed legislation to withdraw all stretch IRA funds within five years of their father’s death, I’m sorry to say they probably would have nothing remaining to help them survive in the future. This is at least partially due to the behavioral finance implications of the tax-deferred nature of the stretch IRA.  It provides a barrier to the instant gratification impulse of most people to consume the funds immediately.  If they know they can let the stretch IRA grow tax-deferred but take a minimum amount each year, the long-term incentive is enough to overcome the short-term urge.

Why shouldn’t retirement plans be an estate planning tool?  Is it better for the government to force citizens to cash in stretch IRAs or allow them to grow tax-deferred?  I vote for saving incentives not consumption requirements.  If the stretch IRA owner were forced to liquidate the account under the proposed legislation, they could still invest the after-tax amount.  However,  due to human nature this generally does not happen.  They spend it on unnecessary stuff!

What can you do to help protect the stretch IRA?  Contact your Representative and Senators and let them know you prefer saving incentives over forced consumption.  In the interim, you should check your retirement plan beneficiaries and make certain your intentions are documented correctly. Other than that, we’ll all have to wait and see.

Now That The Fiscal Cliff Was Avoided – How Does It Impact You?

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The American Taxpayer Relief Act of 2012 does the following:

  • Tax Rates – For most individuals it extends the lower federal income tax rates that have existed for the last ten years.  However, if you make more than $400,000 (or $450,000 for joint filers), your top rate will increase to 39.6%.
  • Capital Gain Rates – Again for those under $400,000 things stay the same as in the recent past.  For those in the new top bracket, you will be subject to 20% (instead of 15%) for long-term capital gains and qualifying dividends.
  • Alternative Minimum Tax (AMT) – If you didn’t pay enough under the “normal” tax system, you may be subject to a separate tax system with its own rates and tougher rules.  The Act permanently extends AMT relief by indexing the exemption for inflation in future years.  They also retroactively fixed the patch for 2012.  This is a big deal to tax accountants as the annual patch created many tax planning headaches.
  • photo-1Estate Tax – The Act permanently makes the exemption $5 million (indexed for inflation) for the estate tax and gift tax but increases the top rate from 35% to 40% beginning in 2013.  Portability is made permanent as well (the transfer of any unused exemption from deceased estate to surviving spouse).
  • Phaseout of Itemized Deductions and Personal Exemptions – Since 2010, personal exemptions and itemized deductions have not been subject to a phaseout or limitation.  Beginning in 2013, both will be subject to phaseout beginning at $250,000 ($300,000 for joint filers).
  • Others – There are a handful of other provisions and temporary extensions we won’t get into here.

Bottom-line, if make less than $250,000 ($300,000 for joint filers) your tax situation will not be dramatically impacted either way (a few caveats though, your payroll taxes will go up as the Payroll Tax Holiday of 2% was not extended and some of the provisions of ObamaCare go into effect which could impact you).  For the top earners out there making more than $250,000 ($300,000 for joint filers), you will definitely see your taxes climb on a several fronts.

Post Election – What Happens Now?

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It is the big question – what happens now?  Do we go over the fiscal cliff? What about the estate tax situation?  Interest rates?  What about the economy?

Vanguard put together an interesting analysis yesterday.  https://personal.vanguard.com/us/insights/article/election-11072012?link=topStories&linkLocation=Position1

Bottom line is nobody knows but it is fun to see what the experts predict.