Why Aren’t Roth IRAs for Everyone?

Some of the features of the Roth IRA make it look like a traditional IRA on steroids. There are no required minimum distributions and you have the ability to take withdrawals before you retire and you can even contribute to your Roth IRA after age 70 ½. However, it’s not for everyone.

A major factor in deciding whether or not to have a Roth IRA or a traditional IRA is your income. If you earn too much, you can’t contribute to a Roth. However, if you are in the early stages of your career and aren’t earning much, you may want to open a Roth now. That way, when you stop working and your income level drops, the Roth will be a great retirement income source because contributions are taxed but withdrawals are not.

Investopedia’s recent article, “When Not to Open a Roth IRA,” explains that both types offer distinct tax advantages for those saving money for retirement. However, they work somewhat differently.

With a traditional IRA, you invest pre-tax dollars and pay income taxes, when you withdraw the money in retirement. You pay tax on both the original investments and what they earned. However, a Roth is the opposite: you invest money that’s already been taxed at the ordinary rate and withdraw it and its earnings tax-free at a later date.

In deciding one over the other, the key question is whether your income tax rate will be higher or lower when you start withdrawing funds. The other difference between the accounts is that RMDs are mandated by traditional IRAs. These are cash withdrawals from the account (on which you pay taxes) that must begin the year following the year in which its owner turns 70½. Roths have no RMDs.

For younger workers who have yet to realize their earning potential, Roth accounts have a definite edge. This is because when you first enter the workforce, it’s quite possible that your effective tax rate will be in the low single digits. Your salary will probably go up over the years. That means you’ll have greater income, and quite possibly be in a higher tax bracket in retirement. There is, therefore, an incentive to front-load your tax burden.

However, the opposite might be true, if you’re in your peak earning years. If you’re in one of the higher tax brackets now, it may have nowhere to go but down in retirement. If that’s the case, you’re probably better off postponing the taxes, by contributing to a traditional retirement account.

For the most affluent investors, the decision may be a moot point, because of IRS income restrictions for Roth accounts.

One thing is sure: there is no one-size-fits-all retirement account. You’ll have to look at your short- and long-term plan for investing and saving before deciding. The most important thing to remember: start saving early, and be consistent about saving, even if you can only put aside a small amount every year.

Reference: Investopedia (October 5, 2018) “When Not to Open a Roth IRA”

Will Stepmother Take Dad’s Money When He Dies?

Here’s a savvy and responsible stepmother—she called for a meeting with the estate planning attorney. At age 57, married to a 72-year old man with three kids from his first marriage and two kids from their marriage, she wanted to make sure that his wealth didn’t become a source of agitation for the family, when he passed. That, says Forbes, typifies how the “new” American family has changed, in the article “How Long Will Stepmom Live? And Other Vexing Estate Planning Questions for Modern Families.”

The stepmother did not want to be seen as rapacious or coming between the kids and their inheritance.

The solution was as follows: money for the stepmother was left to a marital trust with provisions for her benefit, while the children received accelerated inheritances through a series of Grantor Retained Annuity Trusts (GRATs), a qualified personal residence trust for a vacation compound and annual exclusion gifts.

Here’s another example: a male descendent of a wealthy family acknowledged that he had fathered a child without being married to the child’s mother. He had to seek legal determination to ensure that the child would be cared for.

Welcome to today’s new family. They include three-parent families, artificial reproductive heirs and blended families. These are all hot issues in the world of estate planning and attorneys are now addressing these new dynamics.

There are five basic questions that must be addressed when creating an estate plan today:

Who? Who gets your money and your stuff?

How much? How will it be divided among heirs?

When? Will it be at a specific age, or just when you die?

Outright versus in trust? With a trustee, you name a person who will control your assets.

Who represents you? An agent and a fiduciary, with a power of attorney who acts on your behalf, if you become incapacitated, an executor who is in charge of administering your estate, and a trustee who manages any trusts created.

Modern families don’t want old-school estate planning solutions. They want to know that their estate plan will work for their situation, which may not match the old “Mom, Dad, Brother, Sister, Brother” construct. So, how should you handle the distribution of wealth for non-traditional families? If a child dies, and a live-in partner is rearing the children, should there be money for the children in a trust? What about taking care of the surviving partner, even if they were not married?

What about late-in-life marriages? If there’s a huge gap in years between grandparents and grandchildren, how will family wealth be passed down? Funding 529 trusts is one answer, and trusts are another. If the age gap is so big that grandparents never meet their grandchildren, a statement of intent in documents can be used to convey the goals and wishes the grandparents have for their grandchildren.

Providing for all children equally isn’t always the goal of the modern family. Some might think their ex-spouse will provide for children and leave them fewer assets than they would have, if that were not a factor. However, don’t assume that, even if you can’t have that conversation with your ex. If your intention is to distribute assets in unequal portions, you may save your loved ones a lot of pain and fighting, by either talking with them about it while you are still living or leaving a letter behind explaining your decision-making process.

It’s hard to tell what changes will come to families in the future, but one thing will remain the same: the need for an estate plan, done with the guidance of an experienced estate planning attorney, is essential.

Reference: Forbes (Jan. 29, 2019) “How Long Will Stepmom Live? And Other Vexing Estate Planning Questions for Modern Families”


Just What are the Responsibilities of a Financial POA?

The concept of a power of attorney sounds simple but there is a lot to know about this important part of an estate plan, says the Rushville Republican in “Financial power of attorney responsibilities.” Whether you are named as someone’s power of attorney or you are considering who to name on your behalf, it is important to understand the terminology, the role and the responsibilities.

The person who signs the POA is called the “principal” and the person to whom authority is given, is often referred to as the “attorney in fact” or the “agent.”

What powers are given to the person who becomes the agent? In some POAs, there are limits placed on the person, but in most cases the power is “general.” In these cases, the agent can do whatever the individual would do. That includes opening bank accounts, buying and selling property, managing investments, filing taxes, cashing checks and closing accounts. An agent is a considered a fiduciary of the principal, which means that he has a legal duty to act in the principal’s best interest.

The agent may not change the principal’s will and he is not permitted to transfer such authority to act as an agent for the principal to anyone else, unless specifically authorized in the POA itself.

There are different types of POAs. When they become effective, depends on their type.  A financial POA is typically effective the moment it’s signed by the principal. However, a “springing” POA becomes effective, only when a specific event, which is described in the POA document, takes place. If the springing POA is to take effect when the principal becomes incapacitated, usually one or more physicians must agree that the principal can no longer make decisions on their own behalf. If you have been named a POA, talk with the principal about their intentions.

The POA generally is not recorded in a courthouse. If you are signing a document for the principal that does have to be recorded with the county, like a deed to a house, then you will need to present and record the POA with the county recorder, before the document can be recorded. The laws in your state or county may be different, so check with your estate planning attorney to be certain.

Some people decide to have more than one agent. It’s not unusual, but it can lead to some complications. The wording should include the agents being appointed “severally,” so that they can act independently of one another, if that is appropriate under the circumstances. If one person is on the West Coast while the principal and another agent live on the East Coast, not having the ability to act independently could create problems for the agent and the principal.

The POA should remember to keep his assets and the principal’s assets separate. Money should not be intermingled in bank accounts or investment accounts. This is a very important point, since the fiduciary responsibility is a serious matter. The POA can be changed or revoked by the principal at any time, as long as she is mentally competent.

The POA ends with the death of the principal. It is meant to be used as a helpful tool, while the person is living. After the person dies, the executor takes over as the personal representative of the person’s estate.

Speak with your estate planning attorney about making the decisions as to who should be your Power of Attorney. This is a very important role and it must be someone who you can trust implicitly and who is also willing to take on the responsibilities.

Reference: Rushville Republican (Jan. 22,2019) “Financial power of attorney responsibilities”