Getting the Most Out of Your Marginal Decade

As an estate planning attorney my focus is on something many people don’t like to talk about: Their inevitable demise. I make them talk about it and plan for it and the result is almost always a lot of relief.

Despite similar reservations, your marginal decade is also something you need to focus on to make it as pleasurable as possible. Popularized by Dr. Peter Attia, a physician who specializes in longevity, your marginal decade is the final 10 years of your life. It’s important because it is during that decade that most people are likely to experience significant declines in physical and cognitive function. But that’s not a preordained condition. You can protect your assets with a good estate plan; and you can put together a mental and physical health plan to make the most out of the last 10 years of your life. Of course, no one knows when they’ve entered their marginal decade, but it’s never too soon to plan for it. By observing ageing clients over three decades I have personally witnessed the positive impact that mental and physical health planning can have on people.

Preparing for your marginal decade is all about lifestyle choices. There are many exceptional people in their 80s, 90s and beyond. Almost all of them make conscious choices that affect their quality of life. It isn’t just genes or happenstance.

Here are some very important factors to consider:

1. Whether you think it’s decades away or you’ve already entered it, it’s important to plan for what you want your marginal decade to look like. Dr. Attia calls this “back casting.” Come up with what you want to do in the last decade of your life and then work backwards to make that happen. Be able to hold your grandchildren or great-grandchildren. Climb the stands at Comerica Park to catch a baseball game. Play 18 holes of golf and then go back out for 9 more (just ask my wife). Travel to a foreign land. The options are limitless.
2. From the physical side, you need to make sure you have an aggressive plan that includes regular exercise, good nutrition and proper sleep. Regardless of your physical limitations there is a plan out there that you can use. One of the strongest predictors of quality of life and longevity is VO2 max, which is the measure of how efficiently your body uses oxygen that it takes in. Find an aerobic activity to get your heart pumping within your limits. Walking, running and if you can do it, interval training, will increase your VO2 max.
3. Work on your balance to minimize your risk of a devastating fall. Start with something simple like balancing on one leg for 30 seconds or a minute. Once you’ve mastered that, go to Amazon and look for some equipment that focuses on balance. Take a look at the Wanyida ankle and foot strengthener. It’s great for balance and ankle strength.
4. Believe it or not, your grip strength is a very accurate measure of longevity. It is directly linked to your quality of life as you age. It reflects your overall muscle condition and is a lifesaver if you start to fall and need to catch yourself. Start simple but make sure you increase the strength of your grip. A good start is to squeeze a tennis ball.
5. Eat right. You know what your food weakness is. Get control over it and keep your weight down.
6. Socialize. It’s so important to have strong relationships as you age. It has both a physical and mental component and so make sure you find opportunities to consistently interact with others. Loneliness and isolation are now viewed as serious health risks later in life.

When I do retirement planning analyses for my clients I assume they are going to live well into their 90s. I will do my part to make sure your money lasts that long. I only ask that you do your part to make sure that your quality of life is as good as it can be in your marginal decade.

Fun fact: I’m sure you’ve heard about the world’s oldest living person, but do you know about the oldest living animal ever discovered? It is a quahog clam named Ming estimated to be 507 years old when found living on a seabed off the coast of Iceland. Researchers found the clam in 2006. It was estimated to be born in 1499 during the Chinese Ming Dynasty. Researchers counted the rings on its shell like how you count rings on a tree to determine age.

The End of an Era

Warren Buffett is passing the torch. At 94 years old and after delivering extra ordinary investment returns for 60 years, he announced last weekend that he will step down as CEO of Berkshire Hathaway and turn the reigns over to Greg Abel beginning next year. Warren Buffett has been called the epic compounding machine because each dollar he started with at the beginning of his investment career is worth about $365,000 today. $1,000 invested in his Berkshire Hathaway stock in 1964 is worth now about $13 million.

Regardless of your financial acumen and interest in business, the fact that you know who Warren Buffett is tells you all you need to know about his success. He has been to investing what Michael Jordan was to basketball, Muhammad Ali was to boxing and Marie Curie was to physics and chemistry: a once-in-a-lifetime star.

Warren Buffett’s success as an astute investor has been studied and dissected for decades; with the goal of uncovering the “secret” he must harbor away. I view him differently. I believe he was a great investor because of his timeless life philosophy. The same things that make people great at living life make them great investors, and Buffett’s advice spanned all elements of finding personal success. To prove my point, here are some of his quotes on all sorts of life challenges:

• On education and self-improvement: “The best investment you can make, is an investment in yourself… The more you learn, the more you’ll earn.”
• On budgeting: “Do not save what is left after spending, but spend what is left after saving.”
• On emotional intelligence: “If you cannot control your emotions, you cannot control your money” (I believe you can replace “money” with “relationships”, “professional success” and any number of important goals).
• On the company you keep: “Look for three things in a person. Intelligence, energy, and integrity. If they don’t have the last one, don’t even bother with the first two.”
• On keeping it simple: “You don’t need to have extraordinary effort to achieve extraordinary results. You just need to do ordinary, everyday things exceptionally well.”
• On procrastination: “The only question is whether you’re going to do it today or tomorrow. If you keep saying you’re going to do it tomorrow, you’ll never do it. You have to get on it today.
• On how to approach any type of risk in your life: “Never test the depth of a river with both feet.”

Humble, brilliant, patient, kind. Warren Buffett has always been about the greatest of human attributes. Investment success is simply a byproduct of a proper life philosophy.

Fun Fact: Warren Buffett and his wife live in the same home in Omaha, Nebraska that he purchased in 1956 for $31,500. I suspect there have been some home improvements since that time.

A Brief Guide to Roth IRAs

Individual Retirement Accounts (IRAs) are popular and there are multiple varieties: traditional, rollover, inherited, to name a few. Today I focus on the Roth IRA, which is unique in how it grows tax-free. As we age and move into retirement, distributions that affect income taxes can be a concern. Traditional IRAs and 401ks require you to distribute a taxable amount each year in retirement, which adds directly to your income tax liability. The higher your income tax liability, the more likely that your Social Security will be taxed and your Medicare Part B premium will be increased. Unlike traditional IRAs, withdrawals from Roth IRAs are tax free and thus don’t impact Social Security or Medicare premiums.

There are whole books written on Roth IRAs and the strategies associated therewith. My goal below is to just give you some basic facts that may intrigue you to ask more questions:

1. Unlike traditional IRAs that are funded with pre-tax amounts, Roth IRAs are funded with after-tax amounts and thereafter allowed to grow tax-free. Pay the tax now and fund a Roth IRA vs. delay the tax until later and fund a traditional IRA.
2. Unlike traditional IRAs, there are no required minimum distributions from Roth IRAs for the original owner. Beneficial owners after the death of the original owner do have a 10-year time limit to fully withdraw the funds from the Roth IRA but there’s no tax associated with the withdrawal.
3. There are contribution limits to a Roth IRA. First, you can only contribute an amount equal to or less than your earned income for the year. For 2025 the contribution limit is $7,000 if you’re under 50 and $8,000 if you’re over 50. There’s also a phaseout on your ability to contribute that begins at $150,000 for single filers and $236,000 for married couples filing jointly. For high earners there still may be ways to get around the income limits (see paragraph 5 below).
4. Employer Roth IRAs through a 401(k) plan are becoming more popular. If your employer offers one, the 2025 total employee and employer contribution limit is $70,000 and the employee portion is based on age: $23,500 if under 50, $31,000 if 50 or older, and (just to make things more complicated) there is also a “super” catch up rule for those age 60 to 63 that allows for a $34,250 employee contribution. All those limits are subject to the company 401k plan rules.
5. Outside of a traditional Roth or a 401(k) Roth, there is also the area of Roth conversions. Basically, it’s a process in which you take money that you contributed pre-tax to a traditional IRA and “convert” it to a Roth IRA after paying taxes on the amount converted. Subsets of the Roth IRA conversion have fancy names like the “Back Door Roth Conversion” and the “Mega Back Door Roth Conversion.” The concept is similar in that you are putting money into a traditional IRA or 401(k) and then converting it to a Roth. High earners can use these “back door” approaches to get around contribution limits.  There are several factors to consider in deciding if a Roth conversion is right for you. They include relative marginal income tax rates now and in the future, whether you are in your highest income earning years, and the amount you currently have in tax-deferred traditional IRAs. Since you must pay taxes on the conversion, the source of outside funds available to pay the taxes is also a factor. Note though you cannot make a Roth conversion with an IRA you inherited from someone else. It has to be your original traditional IRA.
6. There are limits to withdrawals from Roth IRAs and their complexity is beyond this weekly newsletter. Many people who look into Roths come across the five-year rule that says you will be penalized if you withdraw funds from the Roth IRA within five years of its creation. That rule is commonly misunderstood. The rule only applies to the growth in the Roth IRA. Your original contribution amount can be withdrawn at any time without a penalty or a tax. Note there are different rules for withdrawals from 401(k) Roths that aren’t so accommodating.

Roth IRAs have their place in an investment portfolio because of their tax-free nature and avoidance of required minimum distributions. However, there are many factors to weigh before determining if a Roth is right for you. The younger you are, the better the Roth option becomes. If you have a friend or loved one in their teens who has a basic job, a wonderful gift is to open a Roth IRA and contribute an amount that equals their wages for the year. Just think of the growth over decades tax-free.

Fun fact: I hope you’ve been following my beloved Pistons basketball team. They are in a playoff dogfight with the New York Knicks and growing into seasoned competitors. The Pistons have won 3 world championships: 1989, 1990 and 2004. They are slowly getting closer to their 4^th!

Financial Lessons From the Series The White Lotus

I suspect some of you have been intrigued by the HBO comedy/drama television series called The White Lotus. For those of you who haven’t watched it, it’s a series that follows the exploits of both guests and staff who spend a week at a global luxury resort chain called “The White Lotus”. Season 3 was filmed in Thailand and the cinematography was quite something. It’s basically a “who done it” with eccentric characters.

There is lots to digest every season, but the $5 million hush money payment in Season 3 was particularly interesting. In a nutshell, two of the characters in Season 3 were also in Season 2. One of them was a prime suspect in the murder of his wife and the other, while not a witness to the murder, was aware of the unusual circumstances surrounding the death. Suffice to say in Season 3 it becomes very obvious to the prime suspect, who has moved to Thailand to avoid investigation, that the person aware of his background knows who he is, what he did, and the fact that he is now hiding in Thailand and living the life of luxury (his deceased wife was wealthy).

In the end, the witness agrees to take $5 million to keep things quiet. She gives her account number and routing number to the suspect and, a few days later when she confirms that the $5 million has been wired to her account, she fades off into obscurity as part of the deal. Just for fun, let’s break down this $5 million hush money payment:

• Will this transaction be reported by the bank? Probably not, because the money was wired to the account instead of being deposited in cash. Banks are only required to report cash transactions exceeding $10,000 via a Currency Transaction Report to the IRS. This transaction would likely not be flagged by the bank.
• Is the transaction taxable? Yes, under a Supreme Court ruling in the 1950s, extortion payments are considered taxable income to the recipient. If this transaction occurred in real life the witness would have to report the proceeds as taxable income. This would not be considered a gift because legally a gift must be made clearly with donative intent and free of any expectation of anything in return. The witness’ silence is the quid pro quo here.
• Is the payment deductible? No. The suspect cannot consider this an ordinary and necessary business expense. This is a hush money payment under personal and non-business circumstances.

While the hush money payment in The White Lotus was purely fictional, it does raise some interesting questions that everyone needs to consider if they received a windfall, inheritance, intended gift, or in this case some kind of hush money payment. As for The White Lotus, I’m looking forward to Season 4. I’m told the setting might be Australia.

Fun Fact: For those of you intrigued by high-end luxury hotels, The Burj Al Arab in Dubai is the world’s first “seven-star hotel” i.e. the most luxurious hotel in the world. It includes a “pillow menu” with seventeen options, six high-end restaurants, a rooftop helipad, and a Rolls-Royce shuttle service from the airport. Each guest is given a 24-karat gold iPad upon arrival that is programmed to include access to all guest services and hotel information.

Don’t Put That 1040 Client Copy Tax Return Away Just Yet

I suspect that most of you have completed your 2024 taxes by now. Tax time is a hassle and most people have the urge to quickly file away the paperwork once their accountant tells them the taxes have been completed.

I think it’s a good idea to take a few minutes to go through the various schedules on the 1040 to confirm all of the assets and liabilities that make up your estate. You can use that review to make sure that you have your assets protected from probate. The 1040 is your opportunity to do an annual review of all of your assets and to update your annual asset list (You do have an asset list that you update annually, don’t you??).

Equally important is your opportunity to review the 1040 of a friend or loved one who is or will be relying upon you to handle their affairs after they pass on. Reviewing that person’s 1040 will allow you to have a snapshot of all their sources of income so that you can make sure they are properly protected from probate. You may find a bank account or a brokerage account that they’ve never talked about and maybe even forgot about.

Your 1040 is only about 2 pages long, but attached to it are various schedules that give details about income and liabilities. The four schedules listed below are important for confirming sources of income. Income comes from an asset and the asset has an owner which is probably the person whose 1040 you are reviewing. Upon death, that asset needs to be co-owned with someone else, held in a trust, or designated with a beneficiary. Otherwise, you risk probate at death. Here are the four schedules to look at carefully:

• Schedule B: “Interest and Ordinary Dividends”: This schedule applies if you have over $1,500 in taxable interest or ordinary income. It’s where bank accounts, CDs and stocks, bonds and mutual funds will be found. Make sure you match up each source of income so you know what you own. If you find a bank or stock that you didn’t know about, now is the time to dig deeper.

• Schedule D: “Capital Gains and Losses”: This schedule addresses transactions related to after-tax investments like brokerage accounts and individual stocks. Go through each entry and make sure you know how the asset is owned and whether it has a beneficiary or it could be subject to probate.

• Schedule E: “Supplemental Income and Loss”: This is where income or loss related to a probate estate, trust, rental real estate or other business arrangements are listed. This is a good place to figure out if someone is a beneficiary on a decedent’s trust or estate.

• Schedule 1: “Additional Income and Adjustments to Income” has two parts: Part One: This is where all sorts of “unique” income shows up, including unemployment, alimony, business income. Gambling winnings and prizes and awards also show up here. Part Two: This has adjustments to income and, for an elderly loved one, check to see if there was any penalty on early withdrawal of savings (e.g. cashing a CD in before maturity). This could be a tipoff that the person doesn’t fully understand the ramifications of their transactions.

Before you file your 1040 away, take a minute to use this as a checklist for assets.

Fun fact: Easter is upon us. When it comes to the largest Easter Egg, the record was set in 2011 in Italy where an Easter Egg measuring 34’ 1.05” was crowned the largest ever chocolate egg at the Le Acciaierie Shopping Centre. The chocolate egg weighed 15,873lbs and had a circumference of 64’ 3.65” at its widest point.

Five Things to Know About Creditors When Someone Dies

The death of a loved one brings forth a lot of emotions. While grieving can last a long time, at some point someone has to take a look at the financial affairs of the decedent. One big concern is debt, which can come in many forms: mortgage, credit card, personal loan, back taxes due, just to name a few. Understanding the basic rules can put your mind at ease if you take on the responsibility of estate/trust administrator. Here are some things to consider:

1. The first thing to understand is that taking on the responsibility of trustee or personal representative does not in any way make you personally liable for the decedent’s debts. Some collection agencies might try to coax you into thinking you have to pay from your own pocket, but it’s just not so. As long as you don’t personally guarantee a debt and you don’t try to hide the debt or do something illegal, you are never personally responsible.
2. Many, but not all debts are negotiable. This holds true for credit card debt in particular. Once the credit card company finds out the card holder has died, they typically sell the debt (at a very reduced rate) to a collection agency. If they contact you, it is appropriate for you to try to negotiate down the balance owed. I’ve seen the final negotiated bill be as little as one-third of the original bill, but there is no standard rule. Debt negotiation is an art form, and the more experience you have, the better chance you have to get the debt down. Your leverage increases if there is no need for probate (e.g. a living trust holds all assets). That’s because the collection agency then has to open a probate case themselves if they want to collect and that is time consuming and expensive for them. A quick settlement on the phone makes much more sense to them in that situation.
3. An outstanding mortgage is much less negotiable. The mortgage company has collateral they can get at — i.e. the home. By definition, a mortgage is simply a loan that is secured by real estate. Two things to know with a mortgage: First, you can call the mortgage company, and they are typically very flexible when it comes to mortgage payments. They will usually be compassionate and accommodating, but in the end, they will need their debt paid. Second, if the house is worth less than the outstanding mortgage, they will work with you because it is costly for them to try to recoup more than they can get for the house sale.
4. If the decedent had a trust or some of the estate was probated, then you are required to file a Notice to Creditors in a county legal newspaper. That is a good thing because in Michigan a 4-month deadline starts for unknown creditors to contact you. The deadline runs from the date the Notice to Creditors was first published and once the 4-month time period is up, even a creditor with a valid bill is out of luck – You don’t have to pay. I’ve used this effectively many times for medical bills that first show up after the 4-month period expires. Note that this legal debt cut-off only applies to bills you first learned of after the 4-month deadline.
5. Tax debt is different. The IRS is powerful, and the laws play in their favor. Take the initiative to make sure there is no outstanding tax debt before fully distributing the estate. The Notice to Creditors won’t protect you here either so check with the decedent’s tax preparer to make sure things are correct.
   It’s never easy to deal with the affairs of a deceased loved one. I hope the information above makes it a little more tolerable.

Fun Fact: After driving to and from Florida recently I got to wondering about our roadway system. I found it surprising that the United States has 3.9 million miles of roadway, of which 3 million miles are rural roads. The Interstate System accounts for only 1.2% of total mileage but carries 24.1% of total travel. I think most of those interstate travelers were congregated around Atlanta and Tampa when I was driving home last week!

COVID-19 PREPAREDNESS AND RESPONSE PLAN Prepared: May 22, 2020

Jeffrey R. Saunders, P.C./Saunders Financial, LLC COVID-19 Preparedness and Response Plan

In accordance with Executive Order 2020-59, Jeffrey R. Saunders, P.C./Saunders Financial, LLC (“Company”) institutes this COVID-19 Preparedness and Response Plan (“Plan”) which is on file and available for members and clients.

Jeffrey R. Saunders is hereby designated as the person responsible for implementing, monitoring, and reporting on COVID-19 control strategies, including training members as to workplace infection control practices and the proper use of personal protective equipment (PPE).

Company is continually monitoring guidance from local, state, and federal health officials and implementing workplace and Plan modifications where appropriate.

1.   Prevention Efforts and Workplace Controls

a.   Cleanliness and Social Distancing

Members of Jeffrey R. Saunders, P.C./Saunders Financial, LLC will whenever feasible, perform their essential duties remotely.
Company provides members with, at a minimum, non-medical grade face coverings.

In addition, Company is instituting the following cleanliness measures:

• Performing routine environmental cleaning and disinfection of workspaces;
• Requesting that the landlord disinfect all common areas frequently and regularly; and
• Where available, providing hand sanitizer.

Members will minimize COVID-19 exposure by:

• Frequently washing hands with soap and water for at least 20 seconds;
• Utilizing hand sanitizer when soap and water are unavailable;
• Avoiding touching their face with unwashed hands;
• Avoiding handshakes or other physical contact;
• Avoiding all contact with sick people;
• Practicing respiratory etiquette, including covering coughs and sneezes;
• Seeking medical attention and/or following medical advice if experiencing COVID-19 symptoms; and
• Complying with self-isolation or quarantine orders.

b.   Supplemental Measures Upon Notification of COVID-19 Diagnosis and/or Symptoms

A member with a COVID-19 diagnosis or who displays symptoms consistent with COVID-19 will self-isolate for at least 14 days and until symptoms are resolved.

c.   Member’s Self-Monitoring

Members will not report to the office work site if they:

• Display COVID-19 symptoms, such as fever, cough, shortness of breath, sore throat, new loss of smell or taste, and/or gastrointestinal problems, including nausea, diarrhea, and vomiting, whether or not accompanied by a formal COVID-19 diagnosis;
• In the last 14 days, have had close contact with and/or live with any person having a confirmed COVID-19 diagnosis; and
• Who, in the last 14 days, have had close contact with and/or live with any person displaying COVID-19 symptoms, such as fever, cough, shortness of breath, sore throat, new loss of smell or taste, and/or gastrointestinal problems, including nausea, diarrhea, and vomiting.

Such members may only resume in-person work upon meeting all return-to-work requirements, defined below.

d.   Return-to-Work Requirements

Members who were themselves diagnosed with COVID-19 may only return to work upon confirmation of the cessation of symptoms and contagiousness, proof of which may be acquired via the test-based strategy or the non-test-based strategy.

The test-based strategy is preferred but relies upon the availability of testing supplies and laboratory capacity. Under this strategy, members may discontinue isolation and return to work upon achieving the following conditions:

• Resolution of fever without the use of fever-reducing medications;
• Improvement in respiratory symptoms (e.g., cough, shortness of breath); and
• Negative results of an FDA Emergency Use Authorized molecular assay for COVID-19 from two consecutive nasopharyngeal swab specimens collected at least 24 hours apart.

Under the non-test-based strategy, members may discontinue isolation and return to work upon achieving the following conditions:

• At least 3 days (72 hours) have passed since recovery defined as resolution of fever without the use of fever-reducing medications;
• Improvement in respiratory symptoms (e.g., cough, shortness of breath); and
• At least 7 days have passed since symptoms first appeared.

Members who came into close contact with, or live with, an individual with a confirmed diagnosis or symptoms may return to work after either 14 days have passed since the last close contact with the diagnosed/symptomatic individual, or the diagnosed/symptomatic individual receives a negative COVID-19 test.

2.   Conduct of Office Meetings

When working on-site at the physical office, Company abides by the recommended social distancing and other safety measures and establishes the following:

• All meetings will be limited to six persons maximum;
• Everyone is required to maintain physical distance no less than six feet apart; and,
• Everyone is required to wear a non-medical grade face covering.

3.   Plan Updates and Expiration

This Plan responds to the COVID-19 outbreak. As this pandemic progresses, Company will update this Plan and its corresponding processes.

This Plan will expire upon conclusion of its need, as determined by Company and in accordance with guidance from local, state, and federal health officials.

FDIC/NCUA Insurance for Revocable Living Trust Accounts at Banks and Credit Unions

Created after the 1929 market crash, the Federal Deposit Insurance Corporation (FDIC) insures bank deposit accounts like checking, savings, and CDs in case of bank failure. The basic insurance amount is currently $250,000 per customer account. If a bank becomes insolvent, the FDIC steps in and pays on insured accounts up to the account limit set forth above.

What FDIC insurance does cover:

• All types of savings, checking, money market and CD deposits.
• Cashiers checks and certified checks.

What FDIC insurance does not cover:

• Investment accounts like stock, bond or mutual funds.
• Annuities
• Life insurance
• Safe deposit boxes.
• Credit unions. BUT NOTE: Credit unions have separate but similar insurance coverage though the National Credit Union Association and thus have NCUA insurance with the same limits as FDIC insured accounts.
• Robberies and thefts. Banks and credit unions have separate “blanket bond” insurance to cover things like robbery, embezzlement, fire or flood.

People who have large amounts of cash in bank or credit union accounts sometimes become concerned if the amount they have on deposit is greater than the $250,000 insurance limit. Utilizing a living trust-based estate plan can substantially increase FDIC or NCUA insurance coverage.

When a revocable living trust is named as either the owner or the pay on death (POD) beneficiary of a checking, savings or CD account at an FDIC or NCUA insured institution, then calculating the amount of insurance coverage is determined by the number of beneficiaries the trust creator(s) named in the trust. If the trust creator(s) named 5 or fewer beneficiaries, then the insurance coverage is determined by multiplying $250,000 times the number of beneficiaries named. So, for example, if Bill and Mary Jones have a joint revocable living trust that names their 3 children as beneficiaries, any FDIC or NCUA insured account that is either owned by that trust or names that trust as the POD beneficiary has 3 x $250,000= $750,000 of FDIC or NCUA coverage.

If the trust names 6 or more beneficiaries, then the insurance amount might be calculated differently. If all the beneficiaries are entitled to an equal share, then the same calculation applies: Multiply the number of beneficiaries by $250,000. However, if the shares are not equal, the insurance is the greater of either (1) the sum each beneficiary’s interest up to $250,000 for each beneficiary, or (2) at least $1,250,000.

Utilizing a revocable living trust for estate planning purposes not only avoids probate but can also have the advantage of maximizing your bank account or credit union account protection in case of financial institution insolvency.

How the SECURE Act Affects Your Retirement

The SECURE Act stands for Setting Every Community Up for Retirement Enhancement Act of 2019. It was signed into law on December 20, 2019 by President Trump. The intended goal of the act is to increase access to tax-advantaged accounts and prevent older Americans from outliving their assets.

As traditional defined benefit pensions leave the workplace and are replaced by defined contribution plans such as 401ks, employees are increasingly required to plan for and fund their own retirement. Unfortunately, many people at or near retirement have not saved enough to supplement their Social Security benefit so they can maintain an adequate retirement lifestyle. According to a recent Vanguard study, the median 401k balance for those age 65 or older is less than $60,000.  The SECURE Act encourages employers who formerly found the establishment of a 401k for their employees to be too burdensome to revisit the idea.

Here are some things the SECURE Act does:

•  Makes it easier for small businesses to enroll employees in automatic contribution arrangements by increasing the contribution limit from 10% to 15% after the first year of plan participation.
• Provides a $500 annual tax credit for employers who create 401ks or SIMPLE IRAs with automatic plan enrollment.
• Encourages retirement plan sponsors to include annuities in plan options by reducing liability on insurers.
• Pushes back the age for required minimum distributions (RMDs) from 70 1/2 to 72 for those who are not 70 1/2 by December 31, 2019.
• Allows the use of 529 college savings plans for qualified student loan repayments (up to $10,000 annually).
• Removes the age limit of 70 1/2 to contribute to an IRA. Now anyone at any age to contribute to an IRA as long as they have earned income.

One significant down side of the SECURE Act is the removal of stretch IRAs, which allowed non-spouse beneficiaries inheriting an IRA or 401k to stretch out taxable distributions over their lifetime. The act now requires full payout from the inherited IRA within 10 years of the death of the original owner.  This change amounts to a tax increase and it is estimated the rule with bring in an additional $15.7 billion in tax revenue. NOTE: Beneficiaries who inherited IRAs from account holders who died on or before December 31, 2019 are subject to the old rules and can still stretch out the IRA distributions over their lifetime.

The broad changes found in the SECURE Act should be the impetus for a review of your estate and financial plan. Anyone who has utilized sophisticated IRA “conduit” trusts to provide supervision over IRA distributions to beneficiaries must now revisit the effectiveness of that type of planning and explore options, including the switch to an IRA “accumulation” trust.

Caution Required in Naming Beneficiaries on Tax-Deferred Retirement Accounts

March 27, 2019

Millions of Americans save for retirement by contributing pre-tax income into tax-deferred accounts such as IRAs, 401ks, TSAs and 403bs.  Systematic contributions to a tax-deferred retirement account over a career can result in a substantial pre-tax balance at the time of retirement.

Eventually, money in tax-deferred retirement accounts must be withdrawn and taxed.  Typically, a required minimum annual withdrawal begins when the account owner reaches age 70 1/2 and continues until death.  If an account balance remains at the account owner’s death then that account balance passes to those persons and/or entities named as beneficiaries by the account owner.  The potential then exists for those beneficiaries to continue a substantial portion of tax deferral over many more years, commonly called a “stretch out” of the taxable distributions.

Beneficiaries must be designated very carefully on tax-deferred accounts so that the stretch out of taxable distributions is not compromised.  An improper or incomplete beneficiary selection can accelerate taxable distributions from the account thereby severely reducing the potential account value over the lifetime of the beneficiary.

The ability to stretch out taxable distributions over many years is only allowed for what the IRS calls “designated beneficiaries.”  Most individuals satisfy the requirements to be considered “designated beneficiaries” but trusts and other entities may not satisfy the requirements.

Before naming a trust or entity such as a charity as a beneficiary on your tax-deferred retirement plan it is strongly advised that you meet with an estate planning attorney to review such a selection and to make sure you are not jeopardizing the tax-deferred benefits you worked so hard to achieve.