I spent 2 days last week at a continuing education conference with Ed Slott & Company. This is my third year in the program. Slott has been a thought leader in retirement and distribution planning for over thirty years. My Master Elite membership gives me full access to his team of tax, legal, and financial professionals covering a wide range of planning strategies designed to help strengthen and build your financial security.
At this conference we reviewed many of the “proposed” changes to the tax code. The difference between proposed changes and law can be worlds apart. It’s useful to get a current view of the range of planning options that won’t change, those that might go away, or that might be created as a result. Let me give you a high level summary of some items discussed. Rest assured anything applicable to your situation, we either have or we will address soon.
All of the learnings focus on how to make your money work even better for you and your goals. In addition to the policy and planning reviews, they break out different case studies when taxpayers have tried to challenge the IRS. Some successful. Some not. Of course, we never want to be in a position where we have to spend time, money, and aggravation to fight your case in court. Hence, the planning and preparation.
IRA, 401(k), and Tax Planning
During the withdrawal and distribution stages tax-efficiency is a must. The complex and changing rules that govern our tax system make it vital to stay current and plan ahead. Many taxpayers overlook various deductions every year that cost them thousands of dollars. With some advanced planning we can leave you with more flexibility or more money in your pocket. Or both.
Most of the proposed IRA changes will not affect most people. For the most part, Congress looks to be targeting mega large IRA balances.
The Case of Pete Thiel
For example, billionaire Pete Thiel, Paypal founder, Facebook, and tech mogul has a ROTH IRA worth $5 billion. How does that happen? In 1999, when his income was under the ROTH income limitations, he purchased 1.7 million shares of Paypal at $0.001 per share (before it went public). eBay acquired PayPal and his ROTH IRA ballooned to $28.5 million in 2002. Thiel never contributed any more, but he reinvested into several different private company ventures. Today, that initial $1,700 contribution is worth over $5 billion. It appears Thiel followed the ROTH IRA contribution rules. Once he is 59 ½ he’ll be able to pull money out tax-free. However, IRS is raising questions about the valuation of the securities he initially bought and is investigating whether there was self-dealing or other prohibited transactions (which would trigger taxation).
Other targets are IRA’s with balances of over $10 million and income thresholds over $400,000. They may eliminate the backdoor ROTH completely. It seems unlikely ROTHs will go away. They generate too much current tax dollars. And Congress likes to find revenue wherever they can.
NOTE: what will not change is that this isn’t just about the deductions and deferrals. How your various accounts are structured today, can make a big difference in your tax obligations in the future. Some assets are better located in IRAs, tax-deferred, or tax-free accounts; some are better in taxable accounts. There isn’t a precise, one-size fits all formula, but strategic advanced planning can help create even more efficient use of your money.
Estate planning: The Generous Act of Thinking about Your Heirs
It appears that the step-up in basis will remain intact, though many practitioners feared it would get the axe. It has been repealed in the past only to be reversed because of the nightmare it created in trying to get accurate tax basis on hard to value assets or assets that didn’t have a paper trail from one generation to the next. It does appear that the gift and estate tax exclusions will be reduced. They were slated to come down by 2025, but the Biden plan may lower them earlier.
The Powers of Attorney discussion was conducted by Estate Planning attorney Shannon Evans. For those who have not yet established a trust, it is always advisable to establish both a Financial Power of Attorney and a Medical Power of Attorney. Every state has its own form, and this no cost solution makes sense for anyone who does not have a trust (which typically includes the appropriate powers of attorney). The reason to get these in place is that in the event of incapacity, you have a trusted source of your choosing to make financial or medical decisions for you. Otherwise, someone will have to go to the time, hassle, and expense of guardian court.
Charitable Giving
Qualified Charitable Distributions (QCDs), gifting appreciated assets, and Charitable Remainders Trusts (CRTs) were discussed. Which of these is most appropriate for you depends on your age, charitable intent, who your beneficiaries will be, and what your specific goals are for leaving a legacy. In general, IRAs are great assets to leave to charity because neither you nor the charity have to pay tax on the money that is gifted. That is not the case, however with ROTHs. You have already paid the tax on ROTH IRAs, so it doesn’t make sense to leave them to a charity.
In any case, with all these items its best to get the input of your tax professional, so we have a full perspective of your situation.
Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com.
PLEASE NOTE: Nothing herein constitutes investment, legal, or tax advice. For details please see Disclosure.
