Retirement Planning Focus V

by  /  News, Retirement Planning

For the past two years, the Bipartisan Policy Center (“BPC”), a commission (a.k.a., Washington, D.C. Think Tank) made up of 19 high-profile experts from the political, business, academic and investment worlds, has been developing a plan to strengthen the retirement security and personal savings of all Americans. Quoting from its website, “The Bipartisan Policy Center is a non-profit organization that combines the best ideas from both parties to promote health, security, and opportunity for all Americans. BPC drives principled and politically viable policy solutions through the power of rigorous analysis, painstaking negotiation, and aggressive advocacy.” The BPC’s 146-page report (the “Report”) was released on June 10, 2016 and represents a key consideration in our ongoing discussion of retirement issues.

  • The Report addresses changes expansively, ranging from 401(k) plans to savings tax credits to reverse mortgages.
  • Employer funded defined benefit plans (the traditional pension plan) have largely been replaced with defined contribution plans, such as 401(k) plans, that employees have to finance and manage, but only half of private-sector workers who have access to such plans take advantage of them.
  • Nearly half of the respondents to the Federal Reserve’s 2014 household survey indicated they would not even be able to cover a $400 financial emergency without selling assets or borrowing money, let alone actively saving for retirement. [Consider that for a moment].
  • Social security is, by default, the main source of retirement income for older Americans and we are all familiar with funding issues involved with this 1937-vintage program.

The Report recommends fixes for six challenges to retirement security and personal savings:

  • Improve access to workplace retirement savings plans
  • Promote personal savings for emergency and retirement needs
  • Facilitate lifetime income options to reduce risks of outliving savings
  • Facilitate use of home equity for retirement cash flow
  • Improve financial knowledge and capability of the American public
  • Strengthen Social Security’s finances and modernize the Program

The Report’s proposals of interest to higher income taxpayers include:

  • Limit tax deductibility of mortgage interest
    • Mortgage interest deduction is only available to those who itemize their deductions on their Form 1040, generally wealthier taxpayers.
    • Increasing levels of debt, including more mortgage debt for older people, is of great concern to the BPC. More debt in retirement increases retirement risk, when income is lower and positive cash flow is of ultimate import.
    • The Report recommends tax deductibility be removed for mortgage interest when:
      • Home equity decreases, such as with home equity lines of credit;
      • Second mortgages reduce home equity;
      • Mortgage debt is for second homes; and
      • Refinancing transactions.
    • The goal is to encourage homeowners to retain equity in their homes to serve as a safety net of additional cash flow in retirement, through denying existing tax deductions.
  • Cap total assets permitted in tax-advantaged retirement accounts at $10 million
    • This may appear to be one of those “good news” problems, but the Government Accountability Office estimates that 314 taxpayers have more than $25 million in IRAs and 791 taxpayers have between $10 and $25 million.
    • If the reader is one of these 1100 fortunate taxpayers, your deductibility might be limited. Life could be worse…
  • Shrink Social Security benefits for the wealthy
    • Increase the taxable level of annual social security earnings to $195,000 from the current $118,500 level by 2020.
    • Hike the employer and employee payroll tax for social security, each by 0.5 percent, to 6.7 percent (13.4 percent in total).
    • Cap the spousal benefit for wealthy couples.
    • While some of the above provisions burden the ultra-wealthy, these provisions saddle working taxpayers with significant additional payroll taxes. Subjecting an additional $76,500 to 6.7 percent payroll tax results in an additional $5,125 in tax on a worker earning under $200,000 annually. Clearly impact is not limited to the “super-rich.”
  • Close the ‘Stretch’ IRA estate planning loophole—
    • IRA beneficiaries are currently able to ‘stretch’ the distributions from inherited IRAs over their life expectancies, delaying their taxability.
    • The Report suggests that these distributions be required over a five-year period.

The BPC’s co-chairman stated that if the Report’s recommendations are enacted, ”retirement savings for middle-class Americans would be increased by 50 percent by 2065” and old-age poverty would be reduced by one third of today’s levels. Such lofty accomplishments must be paid for by someone and, accordingly, demand a more in-depth inspection, which we will undertake in future submissions.

Remember, it’s not what you make that matters…it’s what you keep!



Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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Retirement Planning Focus IV

by  /  News, Retirement Planning

Before we broaden our investigation into retirement planning, let us take a moment to consider the heated activity on the DoL’s Fiduciary Rule for investment advisors to retirement plans. Please refer back to my previous two submissions if this discussion is new to you. In the two months since the Rule was passed on April 8, 2016:

  • The House passed a bill to revoke the rule on April 28, 2016.
  • The Senate passed a bill to revoke the rule on May 24, 2016.
  • President Obama promised to veto any such bill that reaches his desk.
  • The SEC announced on May 20, 2016, that it expects to release its version of the fiduciary rule in April 2017 [after a new President takes office].
  • Four financial advice trade associations, the U.S. Chamber of Commerce and four other related groups filed a lawsuit on June 1, 2016, in the U.S. District Court for the Northern District of Texas (Dallas), where the Fifth Circuit Court of Appeals is believed to be particularly friendly to the financial industry, rather than consumers.
    • The U.S. Supreme Court’s current 4-4 split could result in them making no decision and leaving the 5th Circuit’s decision as the final word.
    • First, the case will face a three judge appeals panel and then possibly an en banc hearing and decision by the Fifth Circuit.
  • The next day, June 2, 2016, the National Association of Fixed Annuities filed a similar lawsuit in the U.S. District Court for the District of Columbia.
  • Both lawsuits allege that the fiduciary rule, the best interest contract exemption and the other related prohibited transactions are “arbitrary, capricious and violate the First Amendment to the Constitution. The [Rules] should be vacated and the [DoL] should be enjoined from implementing or enforcing them in any nature.” [The Complaint].

The industry plaintiffs argue that they should not have to spend the resources to implement the rule, until courts have approved it, and the next administration is in place. The DoL responds that the rule has had a huge amount of exposure and is lawsuit proof. All parties acknowledge that delaying until after the presidential election could result in the death of the rule, depending on who is elected. Perhaps the industry plaintiffs believe that either new administration will be more user-friendly than the current administration and just want a delay. They had successfully deadlocked the SEC and Congress into no action positions on the fiduciary rule, but who would have thought it could come from the DoL? They were mistaken in their beliefs.

Why, again, do we care about the fiduciary rule?  Why can we not let the brokerage industry operate as they always have, subject to a lower suitability standard and free to charge whatever fee the account will bear?  What is so special about qualified retirement plans and IRAs that they require a separate fiduciary rule and more protection than our individual investments with our brokers? Why should investors have access to the state and federal court system for their complaints, rather than a broker-friendly arbitration system interpreting the contract of adhesion that the modern day brokerage contract has become?

Perhaps a more pertinent question is why has the brokerage industry brought out every possible means of blocking what has been described as a “watered-down,” “toothless” fiduciary investing rule? Why are they so concerned about being held to a fiduciary standard of care in acting on behalf of their clients? What about brokers’ means of compensation is not fair to the client and why do they insist on maintaining these unfair practices? Why should delaying implementation of the fiduciary rule beyond the scheduled April 2017 effective date [thereby giving them time to once again freeze the rule into legislative and regulatory limbo] serve as a victory to those who wish not to be considered fiduciaries to their clients?

When we return to the trials and travails of funding an adequate retirement in the next posting, we will likely appreciate the utility of having our advisors acting in a fiduciary manner, with our best interests in mind, when they handle our precious retirement assets.

Remember, it’s not what you make that matters…it’s what you keep!



Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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