Plan on Change

John Yeigh

IN MY ONGOING EFFORT to reduce our accumulated stuff, I was trolling through our collection of old thumb drives to see what I should download, save or toss. Among them, I discovered the 258-page presentation from a two-day retirement course that my old employer sponsored in 2006.

I wondered how the advice had—17 years on—stood the test of time. As I reviewed it, I found some excellent suggestions and some that were lacking, though I hesitate to fault the presentation’s authors.

I felt the course deserves an “A” for its detailed discussion of retirement lifestyle choices and investment planning. Company benefits were also exhaustively reviewed. We were told what benefits we were entitled to, and I recall employees and their spouses found those discussions comforting.

In addition, most—but not all—Social Security issues were thoroughly reviewed. The tradeoff between claiming early at age 62 or waiting until an employee’s full Social Security retirement age, which would be 65 to 67, was covered. The potential for higher benefits by delaying claiming until age 70 wasn’t highlighted, however. The benefits of the “file and suspend” strategy for married couples also weren’t discussed—but, then again, this loophole was eliminated before I retired in 2017.

I would give the presentation a “C” for its coverage of supplemental health and life insurance coverage. My employer later reduced those benefits, so these discussions are irrelevant now.

Four areas deserve only a “D” grade. The course spent little, if any, time on the so-called stretch IRA, withdrawal rates, sequence-of-return risk, and strategies for taking income from a mix of taxable, tax-deferred and Roth accounts.

What overall grade would I award the presentation? You might think it would average out to a “C” or maybe a generous “B.” But unfortunately, I’d give the course only a “D”—because, as time progressed, I simply couldn’t rely on much of the advice.

To be fair to the authors, many topics became outdated because of a surprising number of subsequent tax-law changes. It’s tough to execute a plan when the referees change the rules in the middle of the game.

For example, the presenters touted the net unrealized appreciation strategy when selling company stock. I find this strategy is of marginal value now because of the narrower spread between today’s income tax and capital gains rates—especially if the capital gains tax rate is topped off with a 3.8% Medicare surcharge on investment income.

Indeed, as I look back, it’s amazing how rapidly the rules have shifted under our feet. Here are nine changes made since 2006 that would upend even the most carefully crafted retirement plan:

  • In 2007, the Medicare Modernization Act added IRMAA Part B surcharges for higher-income taxpayers.
  • In 2010, the Tax Increase Prevention and Reconciliation Act eliminated the income limits on converting traditional IRAs to Roths. This enabled “backdoor” Roth conversions.
  • In 2010, the Affordable Care Act added an IRMAA Medicare Part D surcharge, plus the 3.8% investment income surcharge on higher-income taxpayers.
  • In 2010 and 2012, the Tax Relief and Job Creation and the American Taxpayer Relief acts extended earlier tax cuts, a variety of tax credits, the $5 million estate-tax exemption and the 40% top estate-tax rate. Income limits were also lifted for Roth conversions within 401(k) and 403(b) plans beginning in 2013.
  • In 2015, the Bipartisan Budget Act eliminated the “file and suspend” Social Security claiming strategy.
  • In 2017, the Tax Cuts and Jobs Act significantly lowered federal tax rates. The expanded 22% and 24% tax brackets are particularly helpful to taxpayers doing Roth conversions, and who earlier would have paid a 28% or 33% marginal tax rate. The 2017 law also doubled the estate-tax exemption from $5 to $10 million. It has since grown to $12.92 million, thanks to inflation adjustments. For married couples, this has greatly reduced the need to create trusts to reduce estate taxes.
  • In 2019, the SECURE Act raised the required minimum distribution (RMD) starting age from 70½ to 72. It also required most non-spouse inheritors to empty inherited retirement accounts within 10 years, thus eliminating the stretch IRA.
  • In 2020, the CARES Act provided a one-year RMD waiver. The act also provided more generous withdrawal and loan provisions from retirement plans.
  • In 2022, the so-called SECURE Act 2.0 increased the RMD starting age to 73, and then to 75 after 2033. Retirement plans were enhanced for those still working by raising the size of catch-up contributions, among other things.

As a result of these changes, my wife and I hope to convert 20% of our tax-deferred assets to Roth accounts by age 73, when our RMDs must start. These conversions will be taxed at a federal rate of 24%, rather than the 28% or 33% hit that would have been triggered before.

Yet, I don’t celebrate too much, as these tax savings are significantly offset by higher Medicare surcharges. Our sizable Roth conversions push us into higher IRMAA premiums and trigger the 3.8% Medicare surcharge on investment income. While I wish we could have converted more money before age 65 when the IRMAA surcharges kicked in, Roth conversions are still a game-changer for us because they’ll reduce our future RMDs and grow tax-free.

In addition, our children’s inheritance will currently incur no federal or state estate taxes, and our growing Roth accounts will be inherited income-tax-free. On the other hand, our children will be required to not only empty, but also pay taxes on our other retirement accounts in just 10 years, rather than over their entire life expectancy, which was the case before.

What have I learned from reviewing the 2006 retirement presentation? It’s never safe to get too comfortable with any retirement plan. And further changes are coming. For example, today’s lower income-tax rates are slated to sunset after 2025, as are those high federal estate-tax exclusions created by 2017’s legislation.

Retirement and estate plans have incurred seismic tax changes—both positive and negative—since 2006. No doubt, Washington will continue to tinker with the rules, especially when the current income-tax rates sunset. That uncertainty rests atop the already unpredictable returns from the investment markets. The upshot: It’s futile to draw up precise cash-flow projections for retirement—because those projections simply won’t hold up over the years.

John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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