Retire Secure!, Third Edition (to be released early 2015) SUMMARY OVERVIEW Employing the best strategies for your IRAs and retirement plans has never been more important after the recent roller coaster ride of the stock market. In the new and revised edition of Retire Secure!, James Lange supplements his tried and true ideas for getting the most out of your IRA and retirement plans with updated information, and offers his latest recommendations for new tax-saving strategies. These strategies can be particularly importance for readers who recently lost money in the stock market. Always a strong proponent of contributing as much as you can to all the tax-deferred retirement plans available to you, Jim makes a convincing case for adding a slight modification to his pay taxes later adage - pay taxes later, except for the Roth. On the accumulation side of the equation, when individuals are working to save money for retirement, he delves into great detail on the differences between traditional and Roth retirement plan options. When it comes time to tap into your retirement savings, Jim revisits determining the appropriate spending order for the different classes of retirement assets, IRS minimum distribution rules, and annuities all with updated information. Jim also discusses proposed legislative changes that, if enacted, will greatly affect the income of retirees. Finally, he addresses the challenges that retirees face when mapping out their estate plan - choosing beneficiaries, reducing federal estate taxes, and leaving legacies for both family and charities. Never one to shy away from looking at both sides of any decision - the pros and the cons - Jim skillfully analyzes the merits of his recommendations and each chapter offers realistic case studies based on his accumulated experience and rigorous analysis. Retire Secure! offers everyone a better chance at accumulating enough money for retirement, but perhaps more significantly, it offers tested strategies for making your retirement money last throughout your life and your spouse s life. The icing on the cake is how to prudently pass on your money to your heirs and charities or, if you prefer, keep it out of the hands of others. PART ONE: THE ACCUMULATION YEARS Fund Retirement Plans to the Maximum Maximizing your contributions to tax-deferred retirement plans such as IRAs, 401(k)s and 403(b)s is the first line of attack in the battle to save for retirement. Tax-deferred investments out pace taking an equivalent amount of money and investing it outside of a retirement plan. If your employer offers a matching contribution to your retirement plan, contribute whatever the employer is willing to match. Roth IRAs differ from traditional IRAs in that Roth contributions are non-deductible. But, investing in the Roth environment offers different advantages that eligible investors should consider. Jim shows when it makes more sense to invest in a traditional IRA, and when it makes more sense to invest in a Roth.
What Makes a Roth IRA, or Any Roth So Great? The key to understanding the advantage of money growing in the Roth environment hinges on a couple of significant factors. Money growing in a Roth account means that you will never have to pay yearly taxes on realized interest, dividends and capital gains as you would if the money were saved in an investment account, or upon taking a withdrawal from a tax-deferred account. While this may not sound like a huge tax reduction, the reality is that the compounding accumulation of that money saved on taxes, growing in the tax-free environment amounts to a huge advantage over time. A second factor, which only applies to Roth IRAs, is that there are currently no Required Minimum Distributions (RMD) for you or your spouse. Jim discusses proposed legislative changes affecting Roth IRAs, and shows you how the Roth can benefit you even if these changes are enacted. Changing tax brackets can complicate evaluating the pros and cons of making Roth contributions and Roth IRA conversions. While Jim provides valuable information in this area, he still recognizes the importance of a good financial advisor to develop a strategic plan that incorporates Roth investments, after-tax investments, tax-deferred investments and when appropriate, life insurance. PART TWO: THE DISTRIBUTION YEARS Optimal Spending Strategies for Retirees Optimizing the order for spending retirement assets can have a profound effect on how long your money lasts. Jim s preferred order is: regular income items that must be taxed anyway such as Social Security and pension income, then after-tax assets (investments subject to taxes annually), then IRAs and retirement plans, and finally, Roth IRAs. However, this order is frequently disregarded because people are often reluctant to spend their after-tax savings before their IRA and retirement plan. This emotional response to not spending our nest egg can be rationally tackled with the evidence in the book. Required Minimum Distribution Rules The government imposes RMDs on IRAs and retirement plans which roughly begin at age 70½. But the key word here is minimum, by limiting yourself to taking the minimum distribution, you maintain the highest possible balance in the tax-deferred environment pay taxes later. Remember, you can always take out more if you need it. Transferring Your 401(k) to an IRA At retirement or after a job change, readers have a choice of what to do with the retirement plan at work, usually a 401(k) plan. Many advisors knee-jerk (and well paying) reaction is to make a trustee to trustee transfer into an IRA. Jim cautions readers, however, that this is not the best option for everyone and several issues must be examined before any transfer takes place. First, are there any after-tax dollars inside the retirement plan or IRA? Also, is there any NUA (company stock) in the retirement plan? If yes, special steps are recommended. One of Jim s
favorite strategies is doing a trustee to trustee transfer of your retirement plan and/or IRA to an individual 401(k). If you meet the requirements to do so, it can be extremely beneficial. There are advantages both in terms of creditor protection and benefits for heirs of the one person 401(k) that exceed the benefits of an IRA. One of the most compelling reasons to transfer money out of the company retirement plan is to take advantage of a broader array of investment choices, but recent legislative changes can also provide a strong argument for leaving the money with your previous employer. Roth IRA Conversions The advantages of a Roth IRA conversion for many, if not most IRA owners, is so powerful that every IRA owner should consider one, and most should adopt a long-term Roth IRA conversion strategy. Jim often recommends a series of small conversions over a period of years rather than one big one. The conversion is usually advantageous for IRA owners, even if older, (a fact many older IRA owners are unaware of) but its greatest advantage will be for heirs who inherit the Roth. Jim likes to use a seed and harvest analogy to conceptualize the advantages of a Roth IRA conversion, You pay income taxes on the seed (the conversion amount) and you (or to greater advantage, your heir) reap the harvest income tax free. The one caveat is if an individual does not have money outside of the IRA to pay the taxes on the conversion, then a Roth IRA conversion is not nearly as favorable and in many cases, not recommended. Using after-tax money to pay the taxes on the conversion means that the aftertax money is no longer subject to further taxes on dividends, interest and growth. The bottom line is that the future tax-savings on the tax-free growth of the Roth IRA ultimately outweigh the benefits of a tax-deferred traditional IRA combined with the after-tax investments that would be used to pay the income tax on the conversion. Jim also discusses the proposed legislative changes affecting Roth IRA conversions, and shows that conversions can still be beneficial if these changes are enacted. Does Annuitizing Your Retirement Accumulations Make Sense? Annuitizing involves surrendering all or a portion of your money in exchange for receiving regular, recurring payments. Annuitizing a portion of your retirement plan or purchasing an immediate annuity for roughly 25% of your retirement assets is often a good strategy to help ensure that you never run out of money. PART THREE: ESTATE PLANNING Reducing Your Federal Estate Tax Burden Jim recognizes that the growing federal estate tax exemptions ($5.43 million in 2015) reduces the number of estates that will be subject to federal tax. For most people, reducing income taxes has become more important than avoiding estate taxes. Notwithstanding, Jim offers strategies for wealthy taxpayers to avoid federal estate taxation.
And don t forget the tried-and-true methods for reducing your estate such as annual gifting, gifts of education, and gifts of life insurance premiums. Financial Security for Your Children: Survivorship Life Insurance Typically, survivorship life insurance (also called second-to-die life insurance) is a type of gift. You and your spouse pay a low fixed-rate guaranteed premium with a high death benefit for as long as you both are alive, and your children get the death benefits income and estate tax free. Generally a survivorship policy is not recommended without confidence that the premiums will continue to be paid until the death of the second spouse. There are tax advantages to having the policy, as well as significant advantages for the children, but Jim highly recommends that you consult with a qualified financial advisor before moving ahead with the purchase of a policy. Is the Stretch IRA Dead? The defining philosophy regarding an inherited IRA used to be pay taxes later. Just as individuals profit from retaining as much as possible in the tax-deferred IRA by only taking RMDs, so should the inheritors of an IRA. Heirs should keep their withdrawals to their mandatory RMDs the younger the beneficiary, the longer the life expectancy and the greater the advantage. This is often referred to as the Stretch IRA, and Jim discusses proposed legislative changes that may severely limit its benefits. One important warning, naming your estate as the beneficiary of your IRA is almost always a mistake because the beneficiaries of an estate do not qualify as designated beneficiaries for purposes of the RMD rules. The consequence is massive tax acceleration. If you have stipulated your estate as the beneficiary, you should revise the beneficiary designation immediately. Disclaimers in Estate Planning and Lange s Cascading Beneficiary Plan (LCBP) The traditional fixed-in-stone estate plan often yields an unfavorable outcome. Jim prefers a much more flexible plan that will leave important decisions up to the survivors, usually the surviving spouse. For example, please assume you have a traditional family with a husband, a wife, children and grandchildren. A traditional plan will establish who gets what at death. A more flexible approach would ensure that the surviving spouse has enough income to live on. Estate planning that incorporates this flexible strategy preserves the safety net for the natural heir of the IRA owner (usually the surviving spouse) but gives him (or her) the option to disclaim to a trust to children or even grandchildren should that be in the best interest of the family. And, if everything is set up appropriately, all of the critical decisions can be made after the death of the first spouse when the full financial picture is clear. The strategy is best reserved for the traditional family of one husband and one wife with their children, but strategies are also presented that benefit non-traditional blended families. Charitable Giving
Some simple planning can provide great value to the charity, great value to your heirs, and eliminate or at least reduce funds going to the IRS. Charities don t care in what form they get their donations because they do not pay income taxes. Individuals do care because of the different tax ramifications. New laws permit charitably inclined taxpayers to direct their RMDs to the charity of their choice, without having to include them in income. Proposed legislative changes regarding Stretch IRAs have also given us reason to implement the use of charitable strategies with all kinds of interesting acronyms: CRUT, CRAT, CLAT, CLUT, that are discussed in the book. The essence of Retire Secure!, Third Edition, is to help IRA and retirement plan owners get the most out of what they ve got.