By Kent A. Fitzpatrick, AIFA, GFS

In the January 2022 issue, we wrote about the anniversary of the SECURE Act and some planning ideas related to IRAs (Individual Retirement Accounts). As we shared in a recent MoneyLetter Friends “Moments” post, the House of Representatives voted in favor of the Securing a Strong Retirement Act of 2022 on March 29. If passed by the Senate, and then signed into law by President Joe Biden, this legislation, known as SECURE Act 2.0, could have a major impact on retirement savings for all Americans. 

A few of the major changes include catch-up provisions up to $10,000, gradually raising the required minimum distribution (RMD) age from 72 to 75, student loan repayments from employer matching contributions, Roth matching, auto-enrollment of newly eligible participants in retirement plans, and allowing for collective investment trusts (CITs) in certain nonprofit retirement plans. If passed into law these enhancements, coupled with proper education for the American worker on the importance of savings and investing, can help improve retirement security.

Recently, I had the good fortune of attending a presentation by Ed Slott, CPA. If you’ve seen Ed present on your local PBS channel, you know how passionate and well-versed he is in the laws related to IRAs, minimizing tax, and maximizing proper planning. Ed was named “The Best” source for IRA advice by The Wall Street Journal. As a point of clarification, when he refers to “IRA” he is using it as a general reference to all qualified accounts, such as IRAs, 401(k)s, 403(b)s, pensions, etc. It does not refer to post tax Roth IRAs, Roth 401(k)s or Roth 403(b)s. At the conference, he shared something that I thought was both shocking and amazing. He said, “I do not own an IRA.” Wait…what did he just say? When he made this statement, there was a slight pause in the room, with people looking to their left and right to share their uncertainty. Ed is known as “America’s IRA Expert.” How could this be? Let me explain. 

Ed shared that there are two primary camps for accumulated IRA assets. One, where the account owner will consume the account balance as part of their income for their (and perhaps a spouse’s) lifetime. This is the non-legacy camp. The other is where the account holders have other assets and sources of income, where they want to minimize required withdrawals and leave as much of the accumulated balances for their kids or grandchildren. We will focus on this second “legacy” asset camp. As we have previously written, the original SECURE Act removed the ability to stretch an inherited IRA over one’s lifetime. We have also discussed that IRA assets are not favorable dollars to leave to the next generation because they are subject to both income tax and potentially estate tax. 

We also need to examine current tax rates. What Mr. Slott knows is we are likely in the lowest tax rate environment we will ever see again in our lifetimes. With rising deficit spending and mounting national debt ($30T), it is unlikely taxes will be lower in the future than they are today. You may be better off creating a strategy to get dollars out of your IRAs now, paying taxes at current rates, rather than allowing these accounts to continue growing tax deferred and subjected to future income and estate tax. We want to share three strategies for you to consider: 

  • Roth conversions to eliminate the uncertainty of future, higher tax bills 
  • Life insurance planning using ILIT’s (irrevocable life insurance trusts) after the SECURE Act eliminated the stretch IRA 
  • Charitable planning strategies using Qualified Charitable Distributions (QCDs) 

Roth conversions 

Many people assume that when they distribute IRA assets, the additional taxable income will push them into higher, or even the highest (37%) marginal tax bracket, or immediately subject them to AMT (alternative minimum tax), also known as “bracket creeps.” They fear being pushed into a higher bracket that could trigger phaseouts, which limit or eliminate some types of tax deductions, such as personal exemption and itemized deductions. Fear not. Fine tuning one’s adjusted gross income (AGI) as well as using up the balance of your marginal tax bracket can go a long way to managing any tax impact for a Roth Conversion. For example, let’s say we have a married couple over age 59 ½ (to avoid an extra 10% early withdrawal penalty) filing jointly, who are in the 22% bracket. They would have a $94,600 spread between the bottom of the bracket and the top of the bracket. Creating additional income from a Roth conversion does not automatically escalate their tax rate. 

Visit this page for a useful table: 

With your accountant, one should also familiarize themselves with Schedule 1, part II, line 26, which carries over to line 10 on the front page of your 1040. It will help you better understand allowable adjustments to income. Converted Roth assets can grow tax free and future Roth distributions will not be included in taxable income or effect the taxation of Social Security distributions or amount of Medicare premiums. 

Life insurance planning using ILIT’s 

One of the most efficient assets to leave heirs is life insurance because the death benefits are tax free to the beneficiaries and if held outside of your estate, using an ILIT, could avoid any estate tax as well. The IRA account holder can make gifts to the ILIT and the trustee of the ILIT can use the gifts to fund life insurance that provides a tax-free death benefit to the beneficiaries. The ownership structure could have additional estate and liability protections for those same beneficiaries, such as divorce, lawsuits, or increasing the beneficiaries own gross estate. People are living healthier and longer lives which also means that insurance costs are more competitive, even later in life. Higher longevity means competitive pricing and better estate transference options. What is the source of those gifts to the ILIT? How about the IRA or RMDs that the legacy camp wants to leave to their heirs? Properly designed, insurance can provide tremendous leverage and tax efficient benefits.

Charitable planning strategies 

Using Qualified Charitable Distributions (QCDs) can create not only societal benefits for the non-profit organization that receive gifts directly from the IRA, but also lower taxable income for the IRA owner. A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity, which does not include a private family foundation, donor-advised fund (DAF), or charitable remainder trust (CRT). An individual donor can contribute up to $100,000 per year in QCDs, as long as that individual is 70½ years old or older. For married couples, each spouse can make QCDs up to the $100,000 limit for a potential total of $200,000. The good news is the QCD can be used to satisfy your RMD requirement the year the gift is made. It has the added benefit for someone that takes the standard deduction that they don’t need to itemize deductions in order to get the charitable benefits. Usually, individual itemizers are allowed to deduct up to 60% of their adjusted gross incomes (AGI) for cash donations to qualified charities. But, since nearly 90% of filers use the standard deduction, it can be difficult for the average American to get a tax break for their generosity using IRA dollars. The QCD also does not count towards your itemized gifts limit. A QCD could actually lower your AGI (see reference above to “bracket creeps”) by eliminating the RMD as reportable income. A QCD can be made only from an IRA. Employer retirement plans aren’t eligible for QCDs. 

Combining these strategies can have an even more powerful effect. Consider what your needs and intentions are for your IRA and which camp those accounts are earmarked for, legacy or non-legacy. There could be far better options available to you today. 

As a MoneyLetter subscriber, if you would like to discuss what options may be best for you and your family or receive a summary of Payouts to Beneficiary under the Secure Act, please contact us at 800.707.2060.

Kent is the Managing Director of Asset Strategy and an Accredited Investment Fiduciary Analyst. 

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