The Top 5 Tax Bombs That Could Be Heading Your Client’s Way

DALLAS -- One of these years, Congress will come together on tax reform and actually pass some things.

Joe Ross, vice president of sales productivity and business development for AIG, is convinced it will happen. After all, he has seen some tax change proposals in the past six or seven budgets.

"This is both parties working together. They want this stuff to happen," he said, adding, "They're going after these high-net-worth investors."

Ross led a presentation Thursday at the National Association of Independent Life Brokerage Agencies (NAILBA) annual conference in Dallas.

He gave the audience several "tax bombs" that could be coming soon and will target high-net-worth clients. Here are the top five:

1. The IRS wants to eliminate IRA "stretching" for non-spouse beneficiaries.

This is a simple one and a problem Congress did not foresee: people saving too much money. But with the move away from pensions, some high-net-worth savers ended up with huge IRA balances they could pass on to their heirs.

Under the current laws, those heirs could "stretch" that inheritance over decades by taking a minimum amount each year. As a result, the potential exists for the original IRA to snowball into a substantial account.

The IRS misses out on a lot of tax revenue in the process.

Although the government has heartily encouraged saving for retirement, "they don't care what happens when the investor dies and these assets go to their beneficiaries," Ross said.

Eliminating this stretch IRA option "has been in the budget proposal for seven consecutive years," Ross said. "I expect this will happen."

2. Mandate required minimum distributions (RMDs) from Roth IRAs.

Tax law requires minimum withdrawals from traditional IRAs, SEP IRAs, SIMPLE IRAs and retirement plan accounts at age 70 1/2. There are no RMDs required from Roth IRAs.

The IRS wants to change this so it can tap into tax revenue, Ross said.

3. Eliminate "back door Roth IRAs."

A "back door IRA" is a technique for contributing to a Roth IRA when your income exceeds the limit. There is no income limit with nondeductible traditional IRA contributions, so owners can stash additional money here, then immediately convert it to a Roth IRA.

There is no tax due on the conversion because it is considered an after-tax conversion. The IRS wants to change this.

4. Eliminate NUA (Net Unrealized Appreciation).

To demonstrate NUA, Ross used AIG stock as an example. If you bought $100,000 worth of AIG stock at the company's low point in 2009, it would be worth about $3 million today. Through careful investment moves, a new retiree can avoid paying hefty taxes on the earnings.

The NUA option is a secret to many in the tax business, Ross said. "This has been on the tax books since 1955," he said. "Why isn't anybody telling us about this?"

5. Maximum IRA funding.

This change would cap IRAs at $3.4 million. If you have more than that in an IRA account, no more contributions would be allowed, meaning more money exposed to the tax man.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.

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