After visiting with my CPA the other day, I realized exactly what he means now by a red flag: That’s the amount many of us have left in our bank account after paying taxes. Here in Marietta, Georgia, according to the Tax Foundation, “Tax Freedom Day” comes after settling up with the Federal and State governments in early May for this calendar year. For purposes of this blog, I will not discuss the controversial proposal to cap mortgage and charitable interest deductions as it will most likely affect tax payers at the top brackets the most. Let’s touch, however, on the topic of stretch or inherited IRA’s for a minute which can be vital tools for preserving a legacy, increasing beneficiary income and reducing taxes in a retirement plan.
A Stretch IRA is not a Hebrew Yoga exercise but is defined by Investopedia as a way “that a non-spousal heir of any age, regardless of the type of IRA, is required to take mandatory distributions(RMD) based upon their life expectancy. Therefore, the lower the RMD, the more money remains in the IRA for you and I and the less the IRS collects at normal retirement age. Many savers choose to have their IRA distributed to younger beneficiaries at death over the kids longer life expectancy. This is a little like the accountant who read the nursery rhyme “Little Bo Peep” to his daughter. The little girl asked if her loss of the sheep was deductible to which her dad nodded no but praised her for her proactive thinking. Based on both the House and Trump administrations tax proposals, there is a good chance the “Stretch” IRA will go away rather than stay. The death of the “Stretch IRA” as a tool for reducing taxes and increasing income is a holdover from several Obama budget proposals but is one that is likely to stick as outlined in both the Trump and House proposals.
Many non-spouse beneficiaries would be forced to empty their inherited accounts by the end of the fifth year after the account owner’s death if enacted. This is considerably different than today’s rules in which beneficiaries can extend distributions over their lifetime so that Mom and Day can control their estate taxes from the grave and give Junior a legacy and a break from paying taxes at a parent’s death. The Stretch IRA has been in place since the late 1980s and is a viable, effective retirement planning tool for many American baby-boomer retirees.
This would be the second blow to inherited IRAs in two years as the Supreme Court ruled a couple of years ago, that certain money inherited from IRAS can be taken by creditors to cover the debts of beneficiaries in bankruptcy proceedings. The court seemed to feel and rightly so that the idea of buying a vacation home in Ireland or a sports car immediately after a bankruptcy proceeding went a little too far. If you are thinking about taking Mom and Dad’s inheritance and retiring overseas like many Americans are to save taxes or expenses, see the link below for a tour of the world's tax havens.
If you are staying true to the red, white and blue and want to save your kids and estate some taxes, now may be a great time to sit down with your Financial Sherpa at MasterPlan Retirement Consultants and see how all the proposed changes might affect you. The second half of the year will be dominated by 2017 tax simplification, reform and cuts so make sure you are not surprised. In any event, if you are below age 70 ½ and have not taking required minimum distributions yet, there are several strategies such a Life Insurance Retirement Plan(LIRP) or Split Annuity to lessen the pain and achieve some gain in Tax and Estate Planning.
Don’t let Tax Freedom Day be the day that ordinary Americans send their money to Washington and wealthy Americans send their money to the Cayman Islands. The guy who said that the truth never hurts never got a 1099-R or paid a 50 percent surcharge on their retirement distributions. Don't wait for the impending death of the Stretch IRA.
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Investment advisory services are offered through MasterPlan Retirement Consultants, Inc. doing business as MasterPlan Retirement Consultants. MasterPlan Retirement Consultants is a Registered Investment Advisor in the State of Georgia. Insurance products and services are offered through Fricks and Associates, Inc. doing business as MasterPlan Retirement Consultants. MasterPlan Retirement Consultants, Inc. and Fricks and Associates, Inc. are affiliated companies. All written content is for informational purposes only. Opinions expressed herein are solely those of MasterPlan Retirement Consultants, Inc. and our editorial staff. All information and ideas should be discussed in detail with your individual adviser prior to implementation. MasterPlan is not affiliated with the Social Security Administration or any government agency.
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