JoeTaxpayer

The proposed 2015 Government Budget is full of tax code changes. Some, bigger and more impactful that others. Today, as the title shows, the budget, if passed will eliminate the stretch IRA.

Stretch IRA? It’s actually a term used by brokers and advisors, but it’s not an IRS term. The stretch refers to the fact that if one dies and leaves their IRA to a non spouse, current law permits withdrawals over the life expectancy of the beneficiary. Here’s the cool thing – if you are, say, 30 years old and inherit an IRA, your first year withdrawal is just under 2% of the account value. To be precise, a $500K IRA and an RMD divisor of 53.3, from IRS Publication 590, result in a required withdrawal of $9381. This small withdrawal will have a small tax impact, for the traditional pre-tax IRA, it’s taxed at one’s marginal rate, but this wont be enough to send the beneficiary into the next bracket or the one after that as would a complete withdrawal of the entire account. Perhaps more important, this withdrawal is far less than one should expect from the market long term, and hopefully the account will continue to grow for years to come.

This may all be in the past. The new budget proposes that a non-spouse will not have the lifetime withdrawals, but must take the assets of the account by the end of five years. What does this mean for our 30 year old? A $100K first year withdrawal. This would easily push a single person in the 15% bracket right into the 25% and 28% brackets, and put the longer term growth in jeopardy.  It’s partially psychological, but money in a non-retirement account is more easily spent.

The impact won’t be on us, but to our loved ones. I Disagree with this proposal and hope to see it deleted from the budget. If the intent is to go after the “Romney” sized IRA accounts, it’s easy enough to offer a maximum account size. Too many people of modest means have trusted the stretch rules to use their IRAs as a “poor man’s” trust, and this should be left in tact.

Even if you have an online business, you should still develop a solid plan for it just as you would with a traditional brick-and-mortar company. Many people might feel as if this is an unnecessary step to take, but there are several key reasons why a business plan should be viewed as a requirement instead of an option.

Get Things Off to a Great Start

One of the most important reasons why you should develop a business plan is to make sure that you get everything off to a good start in a positive direction. Starting with a basic business plan outline will at least set the pace and get the ball rolling for you, allowing you to have a solid idea and full understanding of which steps need to be taken next. Keep in mind that this plan will serve as the blueprint for your business, so do your very best when working through it. Remember, more than 50 percent of small businesses permanently close within 18 months of opening. You don’t want your business to be a part of that statistic. Do everything you can now to lay a good foundation for your future.

You Need to Have a Game Plan

Think about your favorite sports team. Regardless of the actual sport or venue, they have developed a game plan and playbook beforehand so that they can achieve success and victories during their matches, games, and competitions. The same principle applies to the business world, according to Inc., especially since you are going to be competing against hundreds or even thousands of other competitors within the thriving world of eCommerce.

A basic business plan outline will allow you to have all of the necessary elements of a good playbook that will allow you to win much more than you might think. At the end of the day, the business with the best playbook and execution of those plays is the winner.

Qualify for Financial Loans and Investments

There are not very many businesses that can function and grow without applying and getting approved for some sort of third-party financing and funding. However, one of the first things that many investors and banking institutions request to review from potential applicants is the actual business plan, and you will definitely need to have something ready to show them when they ask for it.

They will want to review the plan thoroughly and will expect for it to cover quite a few main points and pertinent details, according to Entrepreneur Magazine. If you do not have a well-developed plan ready to go, you will discover rather quickly that quite a few doors of opportunity in this regard are closed shut. There are several essential items you should include in your business plan.

• Executive Summary: This is where you tell the reader what you want so they know right up front what you’re looking for. The executive summary should also be a short synopsis of the rest of your business plan.
• Market Analysis: How much do you know about your industry and your competitors? You want to come off as an expert in your field so you will be able to establish strategies for success.
• Service or Product: Here is where you describe what it is that you are actually selling or offering as a service. You need to emphasize what’s unique about your product as compared to other similar ones on the market.
• Company Overview: You need to have a description of your company, explaining the management structure, qualifications of your employees, and how everyone will work together toward a common goal.

An Effective Assessment Tool for Your Business

Another reason why you need to develop and periodically update your business plan is simply because it is can be used as an effective assessment tool over time. Keep in mind that you will continuously need to recognize your strengths but pay even more attention to your weaknesses. The last thing that you want to do is to open a business that is heavily flawed from the very beginning. If you make a major breakthrough or invention with the product you are selling, you will need to go back to your business plan and put that in. If your management structure or top employees change, that needs to be revised in your business plan too.

Developing a basic business plan outline will at least provide you with a realistic snapshot that identifies your chances of short-term and long-term success. Address any areas of concern and improvement, because doing so will pave the way toward achieving your goals in the future, according to the Wall Street Journal.

The Bottom Line

When it comes down to it, whether you want to create a business plan or not is up to you. However, if you are serious about achieving success and getting the most value from your hard work and diligent efforts, then this should become and remain a top priority.

The estate tax is a tricky beast. Just 15 years ago, Federal estate taxes kicked in at $650K of an estate’s value. This may seem like a large sum, but consider it included all that you leave behind. Your home, saving, retirement accounts, and perhaps the biggest item, life insurance. Biggest, because even if you are just starting out, newlyweds with no savings yet might easily decide to each have $1M life insurance policies. Just putting this number into perspective.

The exemption amount grew each year, up to $3.5M in 2009, and then the tax was repealed for 2010. As a Klingon might have said “This is a good year to die.” It might have been, expect the step up in basis was suspending that year so beneficiaries of those who passed in 2010 were in a unique position, having to research basis for their windfall. 2011 saw the return of the estate tax with a $5M exclusion, and a generous ‘second to die’ provision, in effect, allowing the spouse to pass along the $5M from the first spouse for a $10M total. In 2013, the exclusion was $5.25M.

Now, the 2015 proposed budget….. let me say this, in 2010 when congress was debating what to do, I suggested they pick a number, and offer a modest inflation rate, but stop the crazy swings up and down. They don’t listen. I am seeing a proposal to roll back the exclusion to the 2009 number of $3.5M, no inflation adjustment. It keeps the spouse portability, fortunately.

I see this as upsetting to those it impacts, but I’m sure that couples with $7M in gross assets including insurance, aren’t going to get much sympathy from my readers. If you fall near this number, it’s time to start gifting the $14K/yr to your loved ones.

This bit of new code could have been avoided. The budget could have simply frozen the number at 2014 levels $5.375M (I believe) and stop messing around. And for Pete’s sake, stop calling any code “permanent.” That’s just nonsense.

I’m back with another proposed change to the tax code pulled from the 2015 Federal Budget.

The current law states that a surviving non-spouse beneficiary under a tax-favored employer retirement plan may roll over assets to an IRA only by means of a direct rollover and that a surviving non-spouse beneficiary under an IRA may move assets to a non-spousal inherited IRA only by means of a direct trustee-to-trustee transfer. This is in contrast to a spouse’s ability to use a 60-day rollover.

The Budget author acknowledges that this difference between how a spouse may treat an inherited IRA vs how a non-spouse is forced to treat it “serve little purpose and generate confusion among plan and IRA
administrators and beneficiaries.”

You might think I’d consider this minor, but it really isn’t. It’s the only bit of code I’ve seen that was written simply to avoid the confusion contained in the original tax code. No change in revenue to the government save for a loss of the penalties it would otherwise have received. I wont hold any hope for this to set a precedent for more cleaning up of our incomprehensible tax code, but it’s there, it’s a start, and a kudo to whoever wrote it.