Ed Slott, the Rockville Centre, New York-based CPA, editor of the newsletter Ed Slott’s IRA Advisor, and author of “The New Retirement Savings Time Bomb” (Penguin Books), to be released in March, recently talked to ThinkAdvisor with some advice about how tax law changes. Here are excerpts from our interview:
THINKADVISOR: One of the biggest regulatory changes of late was the Setting Every Community Up for Retirement Enhancement (Secure) Act. What do advisors need to understand about it?
ED SLOTT: Many things. For example, the age at which you have to start taking money out of a retirement account — the required minimum distribution — moved from 70 1/2 to 72.
There’s a penalty if you don’t do it. In addition, you have to calculate how much needs to come out of every retirement account you own. It can get complicated. If advisors don’t keep up, they could cost clients a fortune in needless and excessive taxes.
The Secure Act also eliminated the so-called “stretch IRA,” which allowed an IRA to be passed on to a non-spouse beneficiary — that is, from generation to generation — while maintaining the tax advantages. But now, many non-spouse heirs will have to empty inherited retirement accounts within 10 years. Why does that matter?
It upends a planning tool that people have counted on for years. It’s a broken promise. Congress pulled the rug out from under us in the ninth inning, if you’ll pardon the mixed metaphor. But there are a few solutions.
For many people, permanent cash-value life insurance is a great replacement for the stretch IRA. It’s actually a better long-term planning vehicle and gives you a larger inheritance, more control, and less of a tax burden.
Even if you’re single or have no dependents, it can be a great vehicle because you can be your own beneficiary, without dying.
The cash value that builds up can be accessed tax-free during your lifetime. And by the way, I don’t sell insurance. This is unbiased advice.
In fact, you call life insurance the “single biggest benefit of the tax code.” Why?
Because the money comes in tax-free, and all of the return is income-tax-free. In addition, unlike IRAs and Roth IRAs, the payout can also be estate-tax-free.
You can leave it to a trust — life insurance is the most flexible vehicle to fund a trust with.
You can use an IRA to fund a trust, but it’s complicated and many people run afoul of the rules, causing excessive trust taxes. Life insurance removes all of those complications and risks.
But life insurance can be expensive, and not everyone qualifies.
Right. Life insurance isn’t for everybody. None of these solutions are one-size-fits-all. You have to customize.