The United States' national debt is at an all-time high, estimated at $31.5 trillion in February 2023, further driven by massive public spending due to the COVID pandemic. As a result, the government is constantly looking for new revenue sources. Congress is looking to speed up the clock on realizing the deferred taxes in retirement plans, beginning with the SECURE Act which eliminated the so-called stretch IRA, affecting the ability to transfer wealth to the next generation in a tax efficient manner.
According to Shaun Eck, president of wealth management firm The Quantus Group, the recent legislative changes have made qualified retirement plans one of the worst things to leave to the next generation, as it has become a tax time bomb. With the rally cry of “tax the wealthy” in Congress, the middle class and their heirs have become collateral damage. Retirement plan assets represent 30% of all household financial assets in the US, raising the stakes for the impact these changes can have on American savers.
“The IRS and retirement savers have a social contract. We get to defer taxes on our contributions until we take a distribution and the growth in the account is tax deferred, meaning we’re using money that would have gone to the IRS to invest for our benefit. As attractive as delaying today’s taxes to be paid tomorrow may sound, it does present challenges. We need to understand the the unintended consequences of this social contract.”
The risk of legislative changes is hanging over everyone's heads, as the US government seeks to reduce its ballooning debt by creating new tax revenue streams. For example, a future retiree could have $1 million in their IRA today, but, unless they're able to accurately predict what tax rates will be in the year they take a distribution, they don’t know how much of the account balance is actually theirs. This variable makes financial planning a guessing game.
“We’ve been reduced to sitting on our hands and watching Congress pass legislation significantly impacting our retirement or estate planning. Knowing what is left to live off of or to leave for the next generation after the government takes their share is impossible.” Eck says.
In order to facilitate a more efficient retirement or transfer of wealth, Eck says retirees should employ more strategic methods to “disinherit” the IRS. Quantus Group employs various strategies and investment vehicles that minimize or postpone taxes paid on distribution or inheritance.
One popular solution used by financial advisors is a Roth IRA conversion. However, for a Roth conversion to be successful, the client must have sufficient liquidity to pay the tax bill, or they could take a hit and pay the tax out of their account balance. Eck says that Quantus Group has strategies to navigate around this, which are far more investor-friendly. Instead of having to part with cash or be left with a significantly diminished account balance, Quantus can structure a solution so that the client can pay the IRS and have the money working for them at the same time.
Eck also highlights the concept of provisional income, which encompasses all income earned post-retirement. This includes social security, pensions, 401k distributions, salaries for any jobs still held, even municipal bond income. Provisional income determines a person's Medicare premium and how much of their social security benefit is taxed. According to Eck, up to 85% of the social security benefit can be taxed, even on a modest amount of provisional income.
It is difficult to restrict a retiree’s provisional income by design. On the other hand, there are two possible retirement income sources that are not included in provisional income – these are distributions from the Roth IRA and loans against the cash value of properly designed life insurance policies.
“There is recently passed legislation that's actually to our benefit. The Consolidated Appropriations Act made significant changes to IRC section 7702, the IRS code that determines what is and isn't a life insurance policy for tax purposes. The change allows the owner to fund a policy faster and with more money without increasing the death benefit, allowing for more cash accumulation. For savers looking to reduce their provisional income and build a more tax efficient retirement, while it’s not widely known, this is a big step in the right direction.”
According to Eck, before Quantus embarks on these complex matters on behalf of the client, it makes sure that the client is clear about their motivations and intentions with their retirement dollars. The fork in the road is whether the client needs their qualified plan for lifestyle reasons in retirement, or if they would like to leave the money to the next generation. This determines the path Quantus will take in managing this part of the client's wealth. Also, he advises people to start thinking about this as soon as possible, which opens up more planning opportunites as opposed to postponing it for later in life when there isn’t enough time for some strategies to take hold.
“The sooner we get involved, the more tools we have at our disposal to navigate these issues. If we get in at the last second, then we're pretty limited in terms of what we can do. So it's really important to attack planning around taxes as soon as possible.”
About Quantus Group:
The Quantus Group helps individuals and families effectively manage emerging and established wealth. It was founded in Illinois by Shaun Eck, who has worked for some of the top wealth management firms in the US and has achieved Million Dollar Round Table status. Quantus guides clients in navigating the complexities of the financial world, facilitating the growth, distribution, and transfer of wealth in a tax-efficient manner.
Media Contact:
Name: Shaun Eck
Email: [email protected]
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