“IRAs are over with for wealth transfer and estate planning,” retirement tax structure expert Ed Slott said during the opening session Tuesday of InvestmentNews Retirement Income Summit.
Regulators are continuing to unpack the meaning of the SECURE Act, sometimes splicing interpretations onto well-known IRS guidelines and sometimes surprising the industry with unexpected rules, Slott said. The upshot: Consumer confusion reinforces the importance of a proactive strategy to minimize taxes for retirees, applied well before they start withdrawing money from their accounts.
“Most of these tax rules are rigid and unforgiving. You only get one chance to get it right,” Slott said. The new regulations coincide with upheaval in the job market, with millions taking new jobs or early retirement. The result is a wave of potential clients driven by worry and urgency.
“When people are in transition, the money is in motion, and when the money is in motion, the money is up for grabs for any adviser who can help them,” Slott said.
The new regulations undermine the utility of individual retirement accounts for conveying money to heirs with a minimal tax burden, in Slott’s view.
“With the SECURE Act and accompanying regulations, the stretch IRA is out and replaced by the 10-year rule, with some exceptions,” he said. “The larger the IRA, the greater the chance that they won’t spend it all in their lifetime, and it’s their heirs who will have to deal with all this mess. They’re lousy estate planning vehicles so now you have to look for alternatives.” (Clients with minimal funds or inclination for estate plans are largely unaffected, Slott added.)
A Roth conversion is one way to absorb the tax hit at current rates and avoid a tax hit later, presumably on a larger account and perhaps at higher rates, he said.
“The Roth conversion gives you a chance to get rid of the tax problem now,” Slott said. “The IRA is a compounded debt to the IRS. If you ignore the IRA, it will get decimated by taxes when the client is forced to take it out.” This strategy comes with a big caveat, of course: Working with a qualified tax accountant to project the tax implications for each client.
Life insurance is an often-overlooked tool, both for insulating heirs from taxes and for providing a sort of back-up liquidity, especially for late-in-life health care costs. “Can you be the beneficiary of your own life insurance without dying? Yes. Put in a long-term care rider,” Slott said.
Clients who balk at the complex choreography of reorganizing their accounts to sidestep taxes in retirement might need to be reminded that some classic tools, like trusts, are less powerful than they used to be.
“They’re not getting the customized plan they want because they have to go through all these regulatory hoops” now that complicate structures that used to coordinate well, Slott said. “Take that IRA down and either build it up in a tax-free Roth or life insurance, or both.”
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