Under the amortization table approach, the amount remaining in the taxable IRA at the couple’s projected death in 20 years will be approximately $1 million; under the tax table approach the amount remaining in the taxable IRA in 20 years will be approximately $2.2 million.
Now we need to compute the approximate annual withdrawal amount to the children after the couple’s death, under the two approaches, assuming no growth and equal annual withdrawals over 10 years and a 5% growth rate. Consistently under the 30-year amortization table approach, these annual withdrawals (on the approximately $1 million starting base) would be $127,279. Under the tax table approach, these annual withdrawals (on the $2.2 million starting base) would be $280,013.
Now assume the couple has one child, and that this child’s annual taxable income, excluding the equal IRA payments, is $150,000. The child’s total annual taxable income during the 10-year payout period would be $277,279 under the amortization table approach and $430,013 under the tax table approach.
Assuming 2020 tax tables and that the child tax status is married filing jointly (and ignoring for this purpose any potential tax on Social Security payments), the child’s annual tax liability would be $54,706 under the amortization table approach (or $547,060, over 10 years) and $100,094 under the tax table approach (or $1,000,940, over 10 years), a difference of $453,880 over 10 years.
This amount must then be compared to the $118,491 lower lifetime tax amount of the tax table approach versus the amortization table approach, for a net tax savings in favor of the amortization table approach over the tax table approach, over the entire 30 years, of $335,389. This tax savings could be even higher if the child was in a higher income tax bracket.
It can be argued that, while this tax savings in favor of the tax amortization table approach is substantial, it does not reflect the time value of the loss use of the $118,491additional tax payments during the lifetime of the couple. However, this potential loss in the time value of money must be balanced against the potential that one of the two spouses will likely die some years before the other, so by not withdrawing the additional amount earlier, when the couple’s tax bracket was essentially half the tax bracket of the widow or widower, these two competing factors can be viewed as essentially cancelling each other out. Also remember tax rates could rise in the future, so withdrawing a larger amount earlier may also be beneficial from this perspective.
The numbers can obviously be run a variety of ways, and of course there are countless different client fact patterns presented to us as advisors. The purpose of this article is merely to illustrate that traditional Roth conversions strategies need to be challenged in light of the SECURE Act, to ensure that our clients are not foregoing a significant potential family income tax savings by not exploring all of the Roth conversions approaches available to them.
James G. Blase, CPA, JD, LLM, is founder of Blase & Associates LLC, a St. Louis-area law firm practicing primarily in estate planning, tax, elder care, asset protection, and probate and trust administration. Mr. Blase is also an adjunct professor at the St. Louis University School of Law and in the Villanova University Charles Widger School of Law Graduate Tax Program. Mr. Blase is also the author of the 2020 book: Estate Planning for IRAs and 401Ks: A Handbook for Individuals, Advisors and Attorneys.