Stretch IRA Question

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Odie
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Stretch IRA Question

Post by Odie » Sun Jan 19, 2020 10:44 am

I'm retired with a 401(k) and pension. I have not done anything with the pension as the company is paying a decent interest rate. I'm not interested in an annuity. The plan was to leave it as is or roll it over into the 401(k). Then at age 71.5 start the RMD tax withdrawal. Then eventually my wife would inherit it followed by my two sons via the stretch IRA. However, Secure Act made changes to IRAs. The age to begin RMDs is now 72 and the stretch IRA was reduced to 10 years. My wife will have no new tax burden but my two sons when they inherit the IRA and have to withdraw the money within 10 years could find themselves in a much higher tax bracket.

So my question is in regards to the pension. Is there a way to roll the pension over to another investment (not 401(k)), without paying taxes on it as a lump sum, and also avoid the 10 year RMD tax withdraw requirement? If so what investment product would that be?

bsteiner
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Re: Stretch IRA Question

Post by bsteiner » Sun Jan 19, 2020 10:59 am

You can replicate the stretch by leaving the retirement benefits (at the surviving spouse's death) to charitable remainder trusts for your children. There are tradeoffs: they're inflexible, and they throw the assets into your children's estates and expose them to their creditors and spouses, though not all at once. They work best where the children will need distributions, don't expect to have taxable estates, and are at low risk of creditors and divorcing spouses, and there's other money available for one-off needs.

Alan S.
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Re: Stretch IRA Question

Post by Alan S. » Sun Jan 19, 2020 11:47 am

Odie wrote:
Sun Jan 19, 2020 10:44 am
I'm retired with a 401(k) and pension. I have not done anything with the pension as the company is paying a decent interest rate. I'm not interested in an annuity. The plan was to leave it as is or roll it over into the 401(k). Then at age 71.5 start the RMD tax withdrawal. Then eventually my wife would inherit it followed by my two sons via the stretch IRA. However, Secure Act made changes to IRAs. The age to begin RMDs is now 72 and the stretch IRA was reduced to 10 years. My wife will have no new tax burden but my two sons when they inherit the IRA and have to withdraw the money within 10 years could find themselves in a much higher tax bracket.

So my question is in regards to the pension. Is there a way to roll the pension over to another investment (not 401(k)), without paying taxes on it as a lump sum, and also avoid the 10 year RMD tax withdraw requirement? If so what investment product would that be?
One decision to make is whether you will do the direct rollover to an IRA, or leave that to your spouse if you pre decease. RMDs for your spouse from the 401k will be considerably higher than from an IRA, where the Uniform Table will apply. Also, note that when your spouse files using single status, taxes will be considerably higher on the same amount of income than when you file jointly, so she will have a new higher tax burden.

The Secure Act will probably increase Roth conversions in some cases, particularly if the taxpayer will pay a lower rate on the conversions than the beneficiary would otherwise pay on compressed distributions to deal with the 10 year rule. This basically a question of how much in additional taxes the IRA owners want to pay in order to relieve the tax burden on their beneficiaries.

With planning, the sons will have an 11 tax year period to manage distributions, but to the extent they inherit a Roth IRA, they would be best served to not take annual distributions and just distribute the entire balance at the end of the 10 year period.

The Secure Act may be "Setting every community up for retirement enhancement", but your kids will have to take advantage of the beneficial features in the Act to a sufficient degree to offset the loss of the life expectancy stretch.

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JoeRetire
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Re: Stretch IRA Question

Post by JoeRetire » Sun Jan 19, 2020 11:52 am

Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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willthrill81
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Re: Stretch IRA Question

Post by willthrill81 » Sun Jan 19, 2020 12:32 pm

JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
Unless the sons need the money now, would it not be better for the OP to do Roth conversions?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Alan S.
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Re: Stretch IRA Question

Post by Alan S. » Sun Jan 19, 2020 1:23 pm

JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
For many children, gifting them too much in their prime working years degrades incentive to work, triggers visions of early retirement and entitlement mentality. Could turn out to be a net negative in the end. Depends on the individual and their motivation.

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JoeRetire
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Re: Stretch IRA Question

Post by JoeRetire » Sun Jan 19, 2020 1:24 pm

willthrill81 wrote:
Sun Jan 19, 2020 12:32 pm
JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
Unless the sons need the money now, would it not be better for the OP to do Roth conversions?
(shrug)

I can't tell if the OP can do both or not, but it appears that tax avoidance is the primary driver of their behavior. Giving away some money may reduce taxes.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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JoeRetire
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Re: Stretch IRA Question

Post by JoeRetire » Sun Jan 19, 2020 1:26 pm

Alan S. wrote:
Sun Jan 19, 2020 1:23 pm
JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
For many children, gifting them too much in their prime working years degrades incentive to work
I guess you have to know your children.
"Motivating the kids' incentive to work" doesn't seem to be a driver in the OP's plan.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

MarkNYC
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Re: Stretch IRA Question

Post by MarkNYC » Sun Jan 19, 2020 2:37 pm

JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
How do you know that he and spouse are not giving money annually to the sons? Perhaps they already are, but he did not mention it in the original post because it's not really relevant to the specific question he wanted answered?

CppCoder
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Re: Stretch IRA Question

Post by CppCoder » Sun Jan 19, 2020 3:16 pm

Alan S. wrote:
Sun Jan 19, 2020 1:23 pm
For many children, gifting them too much in their prime working years degrades incentive to work, triggers visions of early retirement and entitlement mentality. Could turn out to be a net negative in the end. Depends on the individual and their motivation.
I always view money as only degrading an individual's incentive to work for someone else. If I had $100 million, I would still work, just not for my employer. I would argue I would actually be a more valuable member of society, maybe starting my own company, teaching, and/or writing technical books.

That said, I don't consider working a virtue. If I were given $100 million and told I had a binary choice, either continue working for my employer or retire and never work again, I would choose the latter and certainly not feel guilty about it. If given that option of early retirement, why is it a negative?

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willthrill81
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Re: Stretch IRA Question

Post by willthrill81 » Sun Jan 19, 2020 3:37 pm

JoeRetire wrote:
Sun Jan 19, 2020 1:24 pm
willthrill81 wrote:
Sun Jan 19, 2020 12:32 pm
JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
Unless the sons need the money now, would it not be better for the OP to do Roth conversions?
(shrug)

I can't tell if the OP can do both or not, but it appears that tax avoidance is the primary driver of their behavior. Giving away some money may reduce taxes.
I don't see how giving money to their sons saves any taxes. Taxes must be paid on the funds given to the sons.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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JoeRetire
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Re: Stretch IRA Question

Post by JoeRetire » Sun Jan 19, 2020 7:18 pm

MarkNYC wrote:
Sun Jan 19, 2020 2:37 pm
JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
How do you know that he and spouse are not giving money annually to the sons? Perhaps they already are, but he did not mention it in the original post because it's not really relevant to the specific question he wanted answered?
Sure.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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Steelersfan
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Re: Stretch IRA Question

Post by Steelersfan » Sun Jan 19, 2020 9:19 pm

willthrill81 wrote:
Sun Jan 19, 2020 3:37 pm
JoeRetire wrote:
Sun Jan 19, 2020 1:24 pm
willthrill81 wrote:
Sun Jan 19, 2020 12:32 pm
JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
Unless the sons need the money now, would it not be better for the OP to do Roth conversions?
(shrug)

I can't tell if the OP can do both or not, but it appears that tax avoidance is the primary driver of their behavior. Giving away some money may reduce taxes.
I don't see how giving money to their sons saves any taxes. Taxes must be paid on the funds given to the sons.
There's no taxes on gifts of $15,000 per year or less to an individual, $30,000 if the giver is married, $60,000 if both the giver and the recipient are married.

If there are state estate or inheritance taxes, then those taxes will be reduced if the estate is smaller due to gifts made while alive.

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willthrill81
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Re: Stretch IRA Question

Post by willthrill81 » Sun Jan 19, 2020 9:35 pm

Steelersfan wrote:
Sun Jan 19, 2020 9:19 pm
willthrill81 wrote:
Sun Jan 19, 2020 3:37 pm
JoeRetire wrote:
Sun Jan 19, 2020 1:24 pm
willthrill81 wrote:
Sun Jan 19, 2020 12:32 pm
JoeRetire wrote:
Sun Jan 19, 2020 11:52 am
Is there a reason you and your spouse aren't gifting some money to your two sons every year now?
Unless the sons need the money now, would it not be better for the OP to do Roth conversions?
(shrug)

I can't tell if the OP can do both or not, but it appears that tax avoidance is the primary driver of their behavior. Giving away some money may reduce taxes.
I don't see how giving money to their sons saves any taxes. Taxes must be paid on the funds given to the sons.
There's no taxes on gifts of $15,000 per year or less to an individual, $30,000 if the giver is married, $60,000 if both the giver and the recipient are married.

If there are state estate or inheritance taxes, then those taxes will be reduced if the estate is smaller due to gifts made while alive.
That's not what I meant. Funds withdrawn from a tax-deferred account are taxable income even if they are subsequently given to the sons. Giving money to the OP's sons will not reduce anyone's tax burden.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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