We’re nearing a critical time for many Individual Retirement Account (IRA) owners. Advance IRA planning will be imperative if you want to maximize the after-tax value of your IRA for heirs and avoid the new tax burden Congress has in mind.
As I explained last month, despite the deadlock and division in Washington, the Setting Every Community Up for Retirement Enhancement (SECURE) act moved through the House of Representatives by a vote of 417 to 3 in May. A version of it is likely to pass the Senate and become law later this year. The SECURE Act and its Senate counterpart have a number of provisions designed to expand retirement savings opportunities and would delay required minimum distributions (RMDs).
To make up for the lost tax revenue, the SECURE Act and the Senate version would end the Stretch IRA. The Stretch IRA is a strategy in which children who inherit an IRA make maximum use of the tax code to minimize distributions for years. In many cases, the RMDs are less than the investment return of the IRA, so the IRA not only lasts for decades but increases in value. Under the SECURE Act, beneficiaries (other than minor children and a few other exceptions) would have to distribute and pay taxes on an inherited IRA within 10 years, even Roth IRAs.
My favorite long-term care protection plan is improved and attractive to more people than before. You have more options than ever to help pay for future long-term care, and these newer options are significantly more appealing and rewarding than traditional long-term care insurance.
I’ve covered in the past the many troubles in traditional long-term care insurance (LTCI). Most insurers exited the market. Many of the remaining insurers continue to raise premiums on existing policyholders.
There long has been a group in Congress determined to end the Stretch IRA, and this year they seem intent to have their way. I’ve reported in the past few years that many in Washington were targeting the Stretch IRA. The Obama administration called for an end to this valuable estate planning tool in its annual budgets. A bipartisan group in Congress agreed, and it appears that group is growing.
Their latest vehicles are two retirement bills working their way through Congress. The version in the House of Representatives is called “Setting Every Community Up for Retirement Enhancement” (the SECURE Act). The Senate version is titled “Retirement Enhancement and Savings Act” (RESA). The bills have a number of provisions, many beneficial to retirees and pre-retirees.
One goal is to give more workers, especially small business employees, access to employer retirement plans. Small businesses would receive a credit of up to $500 annually to defray the start-up costs of some retirement plans. Also, long-time part-time workers would be allowed to contribute to their employers’ plans.
Traditional long-term care insurance might be dying, but there are other, and probably better, ways to protect your family and assets from the potentially onerous costs of long-term care.
In 2017, only 66,000 traditional longterm care (LTC policies) were sold. That’s 10% of the number sold 20 years earlier. Steep premium increases on existing policies are the main reason traditional LTC insurance is in decline. In August, regulators in 22 states approved another 58% increase in premiums on some existing Genworth policies. That follows 28% increases in each of the last two years. Other insurers have had significant increases approved in recent years.
Evidence continues to accumulate in favor of including the right kinds of annuities in your portfolio. Annuities have a bad rap in much of the financial media. Some of that’s deserved, because there are annuities that are complicated, charge high fees and have a lot of restrictions. There also are annuities that are sold to the wrong people. The right annuity, however, will increase your financial security and portfolio returns.
Long-term care expenses are one of the great retirement fears. For many people, the cost and uncertainty of long-term care are only one reason for the anxiety. Even more anxiety is triggered by trying to sort through the options to fund potential long-term care expenses. Comparing the choices baffles even many financially savvy people and advisers.
In the past, I've presented different strategies and tools to finance longterm care (LTC). This month, I show you how to analyze several choices and pick the one, or the combination, that is best for you.
New ways to plan for potential long-term care expenses continue to be developed. There are many more ways available to secure their own and their families' financial independence than most people realize.
We discussed in previous issues the problems traditional long-term care policies have had in the past. See our November 2012 issue, for example. Those problems are why many people seeking protection from long-term care (LTC) expenses turned to annuities and life insurance policies with long-term care riders. These approaches often allow you to leverage your cash, providing more in LTC benefits than the money you put into the policy. Yet, unlike traditional LTC policies, you have access to your money and benefits are paid to your heirs in many cases. The policies often are ideal when you have cash invested conservatively for emergency needs such as LTC.
Your estate isn't likely to be subject to the federal estate tax, so you don't need life insurance. Right? Maybe not.
Permanent life insurance was a mainstay of estate planning when even most middle class families faced the federal estate tax. It ensured taxes were paid and loved ones had a legacy.
Most of you have a slug of "safe money" on which you'd like to earn a higher return without risking your principal. You also would like to protect your estates from long-term care expenses without the use-it-or-lose-it feature of standalone long-term care insurance policies. There are tools available to help you reach these goals.
In the past we've discussed indexed annuities. (See our April 2014 visit.) Several times in past visits we've also discussed the combo policies, such as annuities with long-term care benefits. Longtime readers know that I don't favor most policies that combine life insurance or annuities with LTC. They have shortcomings such as low returns, high costs for the LTC features, and less-than robust LTC benefits. Once in a while an exception comes along that's worth considering.
Let's start with a review of the basics of indexed annuities.
Let's begin the year by revealing the facts behind some rather questionable marketing pitches. Have you heard of the Secret 770 Account? The President's Account? What about Banking on Yourself® or Infinite Banking? Becoming Your Own Banker, The Personal Bank, or The Retirement Miracle?
If you read financial publications, especially online, you almost certainly have heard of some of these. You've been told these financial tools are confidential, new, revolutionary, and of course, Wall Street's hidden secret. You're told that only a privileged few of the well-connected have used them, including presidents, major corporations, and the very wealthy. You might be told banks and Wall Street don't want you to know about them.
A fiscal pain for many retired Americans are required minimum distributions from traditional IRAs and other qualified retirement plans. Calculating the distributions and withdrawing the money are chores. People worry about making a mistake that will trigger the 50% penalty. The problems are likely to get worse in coming years as Congress grabs for more revenue.
The tax code requires you to begin distributions after age 70.5, whether you need the cash or not. Each year as you get older, the RMD schedule increases the percentage of the IRA that must be distributed. That's fine when your spending needs equal or exceed the RMDs. But many people have multiple sources of income and large IRAs. They don't need all of the forced distributions. The distributions increase income taxes and can push you into a higher income bracket that triggers higher Medicare premiums and other problems. Many people simply want to let their IRAs accumulate so they can serve as emergency spending accounts or legacies for their heirs.
Forecasts and predictions will pour forth in the next few months. It’s the time of the year when the financial media are filled with the experts telling us what next year is going to be like. Also, many experts will issue their own detailed forecasts for 2016. Ignore these predictions or treat them as entertainment.
Before considering new forecasts, take a look at past forecasts. You won’t find too many from last year that were very accurate.
For example, a widely-promoted forecast the last few years said the recent federal legislation on foreign bank accounts would cause a collapse of the dollar almost overnight. Readers of the forecast were urged to buy gold and other non-dollar assets. The legislation went into effect and caused disruptions for some people and banks, but it didn’t cause any of the serious effects in the forecast. The dollar’s done quite well while gold’s declined.
The good news about long-term care is that the cost is rising at a slower rate. Yet, LTC still is ex-pensive and its cost is rising at a faster rate than general inflation.
The latest annual Cost of Care Survey from Genworth, the leading LTC insurer, at www.genworth.com, found that when LTC is needed the average length of care is about three years.
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Preserving IRA wealth for children and other younger beneficiaries is a goal of many people. That’s because a large percentage of their wealth is in IRAs and other qualified retirement plans. Two forces, however, stand in opposition to that goal and need to be defeated.
One force is the required minimum distributions (RMDs). After age 70½, annual distributions must be taken from most IRAs and other qualified retirement plans. These are designed to steadily deplete an IRA during the owner’s lifetime, and the percentage of the IRA that must be distributed each year increases. See our March 2015 visit for details about RMDs.