[INTERVIEW]

 

[00:00:05] Andrew Rafal: All right, 3, 2, 1. Welcome, Ed Slott, back to the Your Wealth and Beyond podcast. It’s great to see you. How are you?

 

[00:00:15] Ed Slott: Great to be back here at virtual, but great to be back. One day, I’ll come back and we’ll go to that great restaurant again. I don’t even remember the name. I’ve been away so long.

 

[00:00:24] Andrew Rafal: It seems like it was yesterday, but also, it was 10 years ago. It was just last February. T. Cook’s was the name of that restaurant.

 

[00:00:31] Ed Slott: Yeah. In one of the hotels there, right, where– I forget…

 

[00:00:35] Andrew Rafal: Royal Palms.

 

[00:00:37] Ed Slott: Oh, Royal Palms.

 

[00:00:37] Andrew Rafal: Yes.

 

[00:00:38] Ed Slott: I’ve got to get back out in the world.

 

[00:00:40] Andrew Rafal: You haven’t been out in the world, but you’ve been busier than all heck. 

 

[00:00:44] Ed Slott: Oh, yeah. I’ve been out in the virtual world, I’m doing. And you know what? We’re seeing more people than ever before. Programs have a thousand people, hundreds of people, sometimes thousands that never happened before. Like we do your program, yeah, you might get a few hundred people and they’re all from the area. Now, you get thousands. They’re all from all over the country. So, we’re getting the message out.

 

[00:01:05] Andrew Rafal: And the coronaviruses taught you a little bit about a hybrid. Now, you’ve got the virtual thing down. And I think you said you’re going to be back out speaking in– is it June or July?

 

[00:01:15] Ed Slott: July. I booked a couple of things in July to get my feet wet, but from what I read, everything’s at the– I mean, who knows what’s going to be, but the planes are filling up, the hotels are filling up. So, maybe we’ll be back to normalcy soon.

 

[00:01:31] Andrew Rafal: So, today, listeners, the show is really about you, about how you can help diffuse this ticking tax time bomb. So, Ed, you’ve been doing this, is it over 40 years now? You’ve been…

 

[00:01:46] Ed Slott: Well, the IRA thing, probably around 30 years, I’d say late 80s, early 90s, but as a CPA, I’ve been a CPA well over 40 years.

 

[00:01:56] Andrew Rafal: And I think one of the most entertaining CPAs out there, and that’s kind of sometimes an oxymoron, right? It doesn’t exist, here it does, Ed Slott, ladies and gentlemen.

 

[00:02:07] Ed Slott: The only reason you think that, and I’ll give you my super power. Everybody has their own super power. You know what my superpower is? Low expectation. When you say CPA and tax, you think, oh, this is going to be a horror show. I hope I can stay awake. And then, when you say something engaging. It’s oh, that guy is good. No, you just expected so little that anything was fine. So, that’s my superpower. Remember that, low expectation. It will take you a long way in this world.

 

[00:02:39] Andrew Rafal: I’m writing that one down. So, your passion and your inspiration of helping people put more of their hard-earned dollars back in their pocket, I mean, where did that come from?

 

[00:02:50] Ed Slott: Well, I realized early on as a tax accountant, and this was the early days when people were still more focused back in the 80s. IRAs came out in the 70s, and the 401(k) started building in the late 70s and early 80s. And everybody was focused on putting money in, putting money in, building for retirement. That’s, of course, important even today, but then it started turning the demographics, people saying, “Well, now I’m retiring, I want to take the money out.” And nobody knew anything about it.

 

And as an accountant, I was like the typical accountant, a tax preparer. And most tax preparers, unfortunately, I call them history teachers, they only tell you what already happened. Well, that’s no good. And I was sitting there, and people would come in and say, “What you do? You took all this money.” You know, it’s taxable. What you should have done. Oh, if you only did this and every year was this. Woulda, coulda, shoulda. Nobody wants to hear that. So, it hit me. You know what? I have to look ahead.

 

A history teacher is one thing, putting the numbers that already happened, but I have to help people plan out ahead so they can keep more of their money. And then, all of these rules hit in the late 80s, early 90s. And I realized there was a whole new genre of field, a field of expertise. It’s like if you say in the medical profession, they discovered some new medical specialty, and I realized, this is its own area of specialized knowledge because you have to know how to get that out, if you want to keep more of your hard-earned money. Most people don’t realize it until it’s too late, including most advisors and tax advisors, that this money is all loaded with taxes, IRAs, 401(k)s. Remember, we all play by the rules. We put money in 401(k)s, we were told. We got the nice tax deductions. I call it like your deal with the devil. You get the upfront tax deduction, but as with any deal with the devil, there’s a day of reckoning when you pull it out, and all of a sudden, the tax hits in retirement.

 

So, eventually I created the group you’re a part of, for the advisors like you that said, “I have to do better for my clients.” Yeah. I’d love to help them make money. And I think most financial advisors can help people make money, but keeping it is where the real talent lies, where the real skill and the expertise. So, I created this group, which you’re a member of, as an educational study group, which it still is, almost 20 years ago, Ed Slott’s Elite IRA Advisor Group, and you’ve been a member a number of years to get the training to help people do exactly what I teach, what I write about. And you’re studying it, so your clients are in good shape. They have one of the few advisors in the country. Remember, there’s only about 450 advisors in our group out of– I don’t even know how many advisors there are in the country of financial and tax, maybe there are a million.

 

So, what does that say? Only 450 in the country have the level of expertise, and you even have a higher level being at our master’s level than most. So, I would think, if anybody was watching this, you should be thinking, I wonder if my advisor knows how to get the money out, these rollover rules, all the changes at SECURE Act, the CARES Act, the Tax Cuts and JOBS Act. I wonder if they’re up to date on this, because these rules, as you know, Andrew, are not only very complex, but for the most part, they’re rigid and unforgiving. You don’t get a lot of second chances. So, you can’t have an advisor kind of experiment on your retirement accounts. So, let’s try this. Oops, that didn’t work. Then you’re back to go into your account in the next year. Woulda, coulda, shoulda. You know what you should have done. Well, that’s too late because when money comes out of a retirement account, you most likely don’t get a second chance, a second crack at it. You just have to get a seat there and pay the tax bill. And my feeling is not only shouldn’t you have to pay all of that, but you can do planning to keep more and more of it tax free, no matter what happens with the tax laws.

 

So, you’re well versed in it. And I wanted people to know the kind of commitment you made to education over the years. I’m not talking about going to a seminar here and there. As you know, we’re connected with you year-round, almost daily with updates and things that we’re sending you so you can share it with your clients.

 

[00:07:11] Andrew Rafal: And over the last decade, being part of your group, it’s been invaluable, the type of work that we’ve learned, and then having your team behind us every step of the way. So, what we’re going to do, listeners, is, in this action-packed show, try to break down some of the things I’ve learned countless hours over the last 10 years, but break it down into small bites for you. And that’s why we’re going to hit on a lot of points on your new book that just came out, The New Retirement Savings Time Bomb.

 

[00:07:40] Ed Slott: There it is, hot off the press.

 

[00:07:42] Andrew Rafal: And I can’t– is there any behind you there? I thought there might be one.

 

[00:07:45] Ed Slott: Subliminal, subliminal.

 

[00:07:49] Andrew Rafal: So, this book, as you quickly mentioned, there’s been so much changes even over the last year, SECURE Act, COVID, all of these things, and then tying into some of the changes in regards to where we’re going with potential increases to taxes. So, let’s start with this. You’ve always been a big proponent of moving money from always taxed…

 

[00:08:11] Ed Slott: Forever taxed to never taxed. That’s my catchphrase.

 

[00:08:16] Andrew Rafal: So, let’s talk about that. What does that mean to the listener, whether they’re still accumulating their money or they’re getting close to retirement? What does that mean?

 

[00:08:24] Ed Slott: Well, IRAs, as I said, 401(k)s, 403(b)s, they’re tax deferred. And that’s, I think, the big lesson people need to learn. The difference between tax deferred and tax free. Now, that difference, that’s a huge difference depending on the tax rate, but that huge difference comes down to one little word, I like to say, yet, Y-E-T. Tax deferred means you won’t pay taxes on that money yet, but you will at some future date, probably at a higher balance and probably at a higher rate, leaving you with less, as opposed to tax free means you’ll never pay taxes on that money. That’s where you want to be. That’s why I say move from forever taxed, tax deferred, so your IRAs and 401(k)s to tax free vehicles, like Roth IRAs and permanent life insurance. So, you can start growing money a hundred percent for you. You don’t have to share any of it with Uncle Sam. Why should you? It’s not even your real uncle.

 

[00:09:26] Andrew Rafal: And as we look at the low tax rates, at least where we are today, right here in 2021, you and I both don’t know what’s going to happen in 2022, but when we talk about this Roth conversion, because it’s a big topic, we get that question a lot. And a lot of times, people just don’t understand. Does it make sense for me? And we know today, we’re not giving tax advice, but how can somebody, whether they have their do-it-yourself or they have an advisor, and as you said, CPAs are more like history teachers, nobody’s really helping them understand maybe the short-term pain of paying some taxes now for that long-term benefit, not just for them, but maybe their spouse and their beneficiaries. So, how can somebody who doesn’t really understand that formulate that in their mind that it may be okay to pay some taxes today for the long-term benefit?

 

[00:10:16] Ed Slott: You just have the secret to this book. So, there’s over 400 pages here, but that’s the secret. The secret to keeping more of your money. Pay the taxes up front. It’s counterintuitive. How do I pay less tax by paying more upfront? The key point, that’s the secret to the whole book. You don’t have to like some books. They tell you there’s a secret, it’s at the end, you have to get it, or sometimes, they tell you there’s a secret and you have to figure it out. They never tell you what it is. By the way, one of the books I read all the time, the classic from Napoleon Hill, Think and Grow Rich. That’s one of those books. He tells you every chapter, there’s a secret to being rich, but he never tells you what it is. You don’t have to read the book. I’m going to tell you right now what that secret is.

 

Whatever you have in your mind, whatever the mind can conceive, it can achieve. If you come to think it, it can happen, but you have to have a plan and take action. Right now, I told you that whole book, you don’t even have to read it. You don’t have to worry about the secret. That’s kind of the secret to this book. I mean, getting the money out. The key principle in all good tax planning is to always pay taxes at the lowest rates, which may be right now. Plus the Roth IRA, which is my favorite area, and a lot of CPAs, by the way, don’t like the Roth IRA. Do you know why, Andrew? They don’t like clients paying taxes upfront. That’s how we have trained these CPAs.

 

In fact, from the first day in college, in accounting, they hit, they beat you over the head. Never pay a tax before you have to always defer, defer, defer, put it off. I always say, when you were a kid and your mother told you to do something and you said, “Not now, Ma, I’ll do it later,” you would have been an accountant because you were trained to defer, to put things off, but the secret is to get rid of the problem because if you ignore it, let’s say you do nothing, and that’s the accountants. Most accountants are short-sighted thinkers because they think they’re saving clients from paying tax by not having the paying up front, but if it’s a lot less paying, if you do nothing and you just ignore it, and you might love it. Look, your IRA, your 401(K)s going up and up, but what if I told you every time it goes up, it goes up partly for the government, too. They get a cut, they’re a partner.

 

Think of your IRA as a joint account with Uncle Sam. Every time it goes up, they get half until you do something about it. So, you just can’t ignore the problem. It reminds me about a saying you have in my dentist’s office. It’s a common thing. You see it in all the dentist’s offices. It says, ignore your teeth, and they will go away. It’s the same thing here. It’s the same thing. This is why you go to a dentist, and you get your teeth cleaned and fixed up, because if you ignore it, yes, you can avoid some pain now, but it’s not going away. You’re going to have worse problems with root canals and implants and decay and all that. I just got talking from my dentist. I just started going back after a long time. And I gave him a copy of this book, and he told me, he said, “I could write this book. I would call this the new tooth decay time bomb. People are going to lose all their teeth because they’re not doing the maintenance up front.”

 

So, it’s the same kind of thing. It’s going to be a lot more expensive when you go to that dentist later, root canals and implants and a lot more painful. It’s the same thing. I told him when he said that. I said, “I’m going to use that analogy in my programs.” It’s the same thing with the tax. That’s a decay, that’s like plaque and tartar stuck on your IRA. Think about it that way. Wouldn’t you want to get rid of it, if you could do it at a low cost now? So, there is a cost. You just can’t move from forever taxed to never taxed in a Roth conversion, but you could time it a little over each year to get that money out, bringing that taxable debt. That’s what you have in an IRA. Think of it as a loan, a debt owed back to the government. Sort of like paying off a mortgage on your house, the quicker you do it, the minute it goes to the Roth. Yes, there’s some paying up front, but nothing that will be anything like if we do nothing and it all builds up here, and then you go into collecting retirement.

 

And when you’re the most vulnerable, when the paychecks stop, when you’re going to be the most vulnerable to higher rates, and at that point, that’s not the time to realize, hey, I only have half the money I thought I had, maybe rates went up to 50%. So, you could be in bad shape. So, that’s the theme of the book. Get rid of the problem now. You hit on the very secret. And as you know, that’s what we train. And it’s not for everybody. That’s why they need an advisor like you to evaluate what’s best for most people, but I would say for most people to use another analogy, as you know, with investments, you always hear the saying, don’t put all your eggs in one basket. Don’t invest all your money in one stock, for example. Same thing here. Why would you want all your eggs that you’re counting on for retirement in one big giant taxable basket? Diversify. Have some money, I call it tax risk diversification. Spread the risk out. Have something in tax-free territory as a hedge against the uncertainty of what future higher taxes can do to your standard of living in retirement. And that’s the theme of the book.

 

[00:15:49] Andrew Rafal: And you hit on, instead of having the government plan, have your plan.

 

[00:15:53] Ed Slott: Yeah, I always like to say that. I said, “You want your plan, not the government plan.” Then people ask me, they say, “Ed, what do you mean by the government plan?” Well, I just told you what it is. You know what the government plan is? Doing nothing, sitting there, and letting it happen to you. And every day that goes by, this debt, this unpaid tax in your IRA, that decay, let’s call it that now, the tax decay, is growing, building, compounding in the very money you’re counting on for retirement. So, you’re going to have a decaying account when you need it the most.

 

[00:16:28] Andrew Rafal: And you hit on a good point where a lot of people think, oh, I have to do it all or nothing. This whole premise of doing it a little bit every year, and that’s part of where you have an advisor and you have a team, and we use software, software that can help us show the client. If we do X amount each year, what is it going to do? Because for some, if it’s over 65, they may have some Medicare surcharge penalties, if they do more in that particular year. Obviously, under 65, that’s a big couple of years. If somebody retires at 62, there could be two or three big years where you could do a larger Roth conversion, but just understanding the pros and cons and knowing the facts because you don’t want to be hit with a tax bill at the end of the year that you were not fully aware of. And that’s the type of thing that if you aren’t getting that type of planning, and Ed, you and I both know, you can’t do it on your own.

 

[00:17:16] Ed Slott: Right.

 

[00:17:17] Andrew Rafal: But most advisors, they focus on the investments. And you talked earlier, like if I gave you a 6% return versus an 8%, that’s not going to change your world, that 2% difference, but if we can be smart and save on taxes now and in the future, now we’re bringing some real value to your overall plan that you’ve spent a lifetime building.

 

[00:17:38] Ed Slott: Well, on investment returns, you’re right. You’re talking about 6%, 8%, they’re points. When you lose money in taxes, you don’t lose it in two or three points, you lose it in chunks, 30%, 40%, that’s a big hit. You can actually make a fortune in tax planning. And that’s what the book is about, and that’s what you are well trained on and our advisors are, but you’re right, most advisors are focused only on helping you build, I call that the first half of the game, the building, the accumulating, the saving, the investing. And that’s critical. Obviously, you have to build something because if you have nothing to protect, you don’t have a problem, but that’s only the first half. The first half is accumulation, but then protecting it. So, when you take it out, you can keep more of your hard-earned money. And that has to start like yesterday. If you’re hearing this every day that goes by, you have a bigger problem the next day.

 

[00:18:32] Andrew Rafal: Now, I know you don’t like talking about your net worth, but tell the listeners, how much do you have in pre-tax or traditional earning money?

 

[00:18:41] Ed Slott: Oh, my IRA, yeah. I usually don’t make short statements, but I have in my IRA, I will reveal for the first time…

 

[00:18:48] Andrew Rafal: Hold on, drum roll, please.

 

[00:18:50] Ed Slott: In my traditional IRA, I have zero, that’s my balance. And the reason I did that, because I follow my own advice, 10 years ago, more than 10 years ago, in 2010, when they open the floodgates, if you remember before that, Andrew, if your income was over a hundred thousand, you were not allowed to convert, but in 2010, of course, the government needed money again. So, they opened the floodgates and said, “Let’s get everybody. Everybody can convert. We need money.” And a lot of people, like me, took that deal. And if you were out there seeing me, I said to take that deal then because I gave you the deal of the century. You could convert. I converted everything there in 2010. And you know what I paid on my 2010 taxes on that conversion? Zero. That was the deal.

 

And you got to spread the tax bill over 11 and 12, two years. So, the government gave everybody an interest-free loan to build a tax-free savings account. It was bizarre. And by the way, I keep talking about taxes, I believe, going up, but we don’t know, it’s uncertain, but it’s pretty likely they won’t go down. The Roth benefit is when taxes go up, but it’s a benefit in peace of mind, just knowing once you have money in a tax-free account, you don’t have to worry about these things. In fact, when tax rates go up, anything tax free, like Roth IRAs or permanent life insurance becomes immediately more valuable.

 

You also talked about people that worry about, well, if I convert, my Medicare surcharges will go up, and that’s true. And actually, I get that question in a lot of programs, and it usually goes like this, where you said to convert, but if I convert, that will be an increase in income that year, a spike in my income, and all of a sudden, my Medicare charges are going to go up. And that would make me angry. So, you know what I tell people who say that? I said, “If that makes you angry, then convert anyway.” And then they look at me, “What?” I said, “Because I’d rather have you be angry one year than be angry for the rest of your life, because if you do nothing at 72, now you’re on the government plan, you’re forced to take that money out. Now, it’s built to a higher balance, more tax, and you’re forced to take that money out every year. And the very thing that you complain that makes you angry is going to happen to you every year for the rest of your life.”

 

[00:21:11] Andrew Rafal: And we show that because a lot of our clients, business owners, they’ve been able to put $2 or $3 million into IRA accounts and show them at 72, you’re going to have $160,000-plus on top of your social, on top of your pension. So, forever, you’re going to have the Medicare surcharge. So, these are the things that they don’t see, they don’t conceptualize. So, we have to show it to them. People are visual creatures, so being able to show them and then they look at it and they are not happy with that. So, if we could show them, let’s have to pay now for the next five years, and then you don’t have that surcharge based on today’s rules, right? Obviously, they could change them, but these are the type of things where you’re saving them potentially $10,000-plus a year from penalties. And I don’t know, that’s real money to me. I don’t know with anybody else out there, but that’s over a lifetime. That could be hundreds of thousands of dollars.

 

[00:21:58] Ed Slott: You also hit on the common myth. People say, “Well, I’ll be in a lower bracket in retirement,” exactly what you just said, not if you do nothing. If you’re on the government plan and you do nothing at all, so you build up this big account. I can’t tell you how many clients over the years that came in for taxes and they’d say, “How is this possible, Ed? My income is higher than my best working years.” I thought you’d supposed to be in a lower bracket. That’s because of those large RMDs, and they’re just going to go larger.

 

So, you’ll probably be in a higher bracket. And if they raise taxes, it’ll be worse. And if you’re a widow, I talk about that in the book, something called the widow’s penalty, you’re filing at single rates, now the tax rate goes through the roof. So, it’s best to deal with it now. It’s kind of like paying off a mortgage on your IRA. The minute you own it outright, free and clear, like a home, then it all grows tax free for you for the rest of your life.

 

Another thing people say, Andrew, they say– I’m trying to say it nicer than what people say to me. When I talk about the Roth, people say, “Well, can I trust the government to keep that word that the Roth will always be tax free?” My answer to that is, “Of course not. You can’t trust these guys as far as you could throw them,” but the opportunity is here now. They’re not going to double tax the money. Once you have it, you have it. They can trim around the edges. Maybe they’ll say, like with municipal bonds, tax-free income goes into our calculation to see what else can be taxable, but the opportunity is here now. We know, we have certainty now. That’s what peace of mind is, having certainty. We know what the 21 rates are now, and now is the time to take action. When you know what the tax bill will be, and there’s a good chance, whatever it is now, it’s going to be more later. Even if the tax rates don’t change, you may have more later.

 

[00:23:53] Andrew Rafal: And I think you’ve coined the term, it’s tax insurance. That’s what it is.

 

[00:23:57] Ed Slott: Right.

 

[00:23:57] Andrew Rafal: The tax insurance side.

 

[00:23:58] Ed Slott: You find tax insurance as a hedge against what future higher taxes can do to your retirement savings.

 

[00:24:04] Andrew Rafal: I know we talked about the secret of your book already, but really, it breaks down to five things. You talk about timing it, secure it, Roth it, insure it, and avoid the debt tax or debt trap. So, let’s talk about the secure now, the SECURE Act, they changed the rules and it was a big detriment, in a sense, to long-term planning, the legacy planning. So, let’s talk about that, make sure people understand the risks that are out there and some of the things that they can do to make sure that they’re protecting themselves and their future money that distributes to their beneficiaries.

 

[00:24:36] Ed Slott: Yeah. So, one of the things I say in the book, and you’ve heard me say this in our training programs, though, in my 40 years of being a tax advisor, I’ve noticed one constant. Whenever Congress creates a new law, whatever they name it, you can almost always bet it will do exactly the opposite. My favorite example, the Deficit Reduction Act, it was a great one. Look at the deficit now. So, now we have the SECURE Act. As soon as I heard the name of the SECURE Act, I said to myself, “Hold on to your wallets, it’s coming.” So, what the Congress did, they actually put the provision I’m going to talk about now, the elimination of the stretch IRA. That provision in the SECURE Act is at the end of the SECURE Act. Why is that at the end? Because that’s where the revenue raisers are. It’s under revenue provisions. That’s where it is in the SECURE Act because they want to get more money. They don’t want to wait to get the money Congress. So, they really downgraded the IRA as a wealth transfer or estate planning vehicle. Congress felt that IRAs and retirement accounts should be for your retirement, not to pass on to beneficiaries. So, they downgraded it by saying, no more stretch IRA.

 

For those who don’t know what it is, before 2020, remember, the SECURE Act is in effect. Now, some people forgot with COVID, and the CARES Act overshadowed it, but for anybody who had died in 2020, these new rules are impacting people right now. So, before 2020, they had something called the stretch IRA, not really in the tax code. It’s just the name we gave it. In fact, I remember years ago having a client call me. I told them about the scratch, and he called me. So, he said, “I’m at the bank. You said, get a stretch IRA. They don’t have them.” I said, “Go to Bed Bath & Beyond, they have everything. I guess this would be in the Beyond section, okay,” but it’s just the term that came up to describe the ability for any person you named as a beneficiary, like a child or a grandchild to stretch or extend distributions over their lifetime, 50, 60, 70, even 80 years for like a two-year-old.

 

So, this deferral would build and build over time, it would be an amazing legacy. Congress said, “No more of that 10-year rule for just about everybody, except for spouses are exempt and other minor exemptions, but most people will be subject to a 10-year rule,” which means now all the tax will be accelerated within 10 years after death to your beneficiaries. That may not be a good scenario, and that’s why I said secure and hold on to create a new beneficiary plan. And two great ways to do that, we’re back to moving it, getting rid of the problem now with Roth IRAs or life insurance, get it to tax-free vehicles to eliminate that big building, I call it the ticking tax time bomb. Say that three times fast.

 

[00:27:39] Andrew Rafal: Yeah, that is the inherited Roth. It still means you have to take it out over 10 years, but you have the ability to let it in for most of our clients who are going to have that. Let’s let it grow and grow and grow and grow until probably that 10th year. In regards to the inherited IRA, now, the beneficiaries have to play the tax game, and look at when they should start pulling out. I know you had said something recently that they may be throwing in, making it where… 

 

[00:28:02] Ed Slott: I don’t even want to go there. The IRS came up with an interpretation that is bizarre, and I don’t think it’s going to be– it was a technical rule about the 10-year rule. Basically, the funds have to come out by the end of the 10th year. The IRS was toying around with how they should come out within the 10th year. Nobody’s really in agreement with that. The point is, at the end of the 10 years, everything is going to be taxed, if you leave your beneficiaries a taxable account, the best thing you can do is hopefully leave them more tax-free money.

 

[00:28:32] Andrew Rafal: So, if you were taking notes, scratch that last part, ladies and gentlemen, on that. So, with the SECURE Act 2, one thing is in regards to trusts, and I know we don’t want to get into too much detail on it right now that the book goes into it, but why is it important to review your estate plan with how trusts were created for beneficiaries and now with this 10-year rule, how they could be, in a sense, violation of that rule because of how the trust was worded?

 

[00:28:59] Ed Slott: Well, not so much violation, but the old trust won’t work. Let’s go back. The reason people named trusts, I start my chapter in the book with this quote from the– I use it all the time because people always ask, “Ed, when do you name a trust?” And I say, “You name a trust when you don’t trust. They should have called it “I don’t trust” because if you trusted them, you wouldn’t need trust.” That’s when people named trust. They have large IRAs, like you said, maybe a million, two, three million in an IRA. They worked hard for that money. Maybe it took them 30, 40 years to accumulate it. So, clients would come in and say to me, “I want to get it to my kids and grandkids, but I don’t want them blowing it. I worked too hard for that money.”

 

I have a saying, I always tell people, the one who earns it is always more careful with money than the one who inherits it, which is absolutely true. And they are worried about, especially young grandchildren squandering it, or maybe any beneficiary is not good with money, or maybe they have creditors after them, or divorce, bankruptcy, lawsuits, or maybe they just are easy prey to people. Sometimes beneficiaries get their hands on money, they become very vulnerable with it, especially now online financial predators and things like that. So, anyway, they leave it to a trust which in the past, before the SECURE Act, could qualify to be one of these stretch IRAs, but now, even with the trust, all the funds will still have to come into the trust within the 10 years. And if you want to keep that money protected in the trust, you could still do it, but now, the cost of doing that is through the roof because any money you’re protecting the trust now will be taxed at a high trust tax rate. That was true before, but before, at least you could pass it out through the trust of 40 or 50 years. Now, in 10 years, it’s all going to come in there. And the last thing you want is that grandchild we just talked about, getting their hands on five million bucks in 10 years in one shot. That’s the very thing most clients don’t want.

 

So, if you have a large IRA you’ve named to trust, I would say immediately talk to somebody like Andrew that knows what they’re doing or your attorney or both, an advisor that has the knowledge. And again, it’s a specialized area of knowledge, and that trust probably won’t work anymore. You may be sitting with a trust that will not carry out the wishes that you thought it would. It was probably fine before 2020, but now, at a minimum, it has to be reviewed, probably revised and maybe even scrapped altogether for a better plan.

 

[00:31:41] Andrew Rafal: And the one caveat, you and I know this, but it’s just making sure people know, a spouse has a lot more options when it comes to inheriting an IRA. So, that, again, just know that you don’t have to do the inherited IRA. Sometimes it makes sense if they’re under 59 and a half, but just know as a spouse, a lot of options that are available, before you do anything, make sure you talk to somebody, a team that knows what they’re doing regarding beneficiaries. So, I mean, for the 10 years that I’ve been in your group, every time we talk about beneficiaries…

 

[00:32:12] Ed Slott: I can’t say enough.

 

[00:32:13] Andrew Rafal: So, beneficiary form, so…

 

[00:32:14] Ed Slott: Check beneficiary forms.

 

[00:32:16] Andrew Rafal: So, let’s talk about that.

 

[00:32:17] Ed Slott: Yeah, I mean, this is where the biggest single error in leaving money to the next generation, your kids or grandkids, is faulty beneficiary forms. People never check them. Remember the movie, it’s about 20 years old, The Sixth Sense with Bruce Willis. You remember the key line, the iconic line from that movie?

 

[00:32:41] Andrew Rafal: I see dead people.

 

[00:32:42] Ed Slott: Yeah, the kid says I see dead people. Yeah, that’s what I see on beneficiary forms, I see dead people. They’re so old. I look at them. Oh, my wife’s the benefi– well, she died 20 years ago. Why aren’t these things updated? So, I tell you up to and especially with new laws, so whenever you have a life event– now, in our classes, you know, Andrew, that’s the first thing you learn. It’s in our modules, in our checklist. It’s number one to check beneficiary forms. Any time there’s what I call a life event, you have a birth, a death, a marriage, a divorce, a remarriage, you had a new grandchild, change in the tax law. That happens all the time. These things need to be updated to make sure your wishes will be carried out.

 

Otherwise, first of all, you can have long and expensive litigation, and then the lawyers become the beneficiaries. And your money, your legacy that you wanted may not even go to the intended beneficiaries. I’ll give you an example. A case just kind of happened, it comes out all the time, but the most recent one we’re covering in some of the programs now is a guy who married, had a second marriage. He had three kids from his first marriage. He had a big 401(k). He died and he didn’t name a beneficiary. And now, he wanted his kids. His plan was for his kids from his first marriage to get it, but he didn’t have a beneficiary form, so it went to court. This went on for over four years. PS, the spouse who wasn’t supposed to get it, his second wife, she got everything because when there’s no beneficiary under his plan, he worked for a company called Kinder Morgan, it’s a big company, under their plan, if there’s no beneficiary named, it goes to the spouse. That’s it.

 

In fact, they said in the case, well, now that we’re sure he had no beneficiary for him, we know it goes to the spouse. The kid sued. It took four years. They lost anyway because it was clear. Now, all of these four years, this mess, the kids, go into the wrong money, hundreds of thousands of dollars could have been fixed within five minutes with somebody like Andrew Rafal checking the beneficiary form for ten minutes. Can you imagine the savings in emotion, in just a tragedy, financial tragedy, and what these people went through in court costs and lawyers? And the wrong beneficiary walked away with the money, with the court’s blessing, all because they didn’t spend those ten minutes with a financial advisor to update beneficiary forms.

 

So, I have a whole chapter on that, why that is critically important, especially after a divorce. This is the most common area where we see the problems. People get divorced. They split up all their property, but they never update the beneficiary forms. And in most cases, the beneficiary form trumps the will. I mean, if the ex-spouse is on in most cases, they’re going to get it. Now, there are some states that revoke that designation, but again, you got to go to court to have that happen. The court shouldn’t be creating your estate plan, you should be doing it.

 

[00:35:44] Andrew Rafal: Yeah. And divorces are hard enough. So, now, you’re putting salt in the wounds. We’ve also seen stories, too, of a son who had mom or dad listed as the beneficiary, gets married, dies early. The parents are the beneficiary, they are legally entitled to that. And then, obviously, that was probably meant for the spouse. And now, it becomes a battle, and families are potentially ruined. Relationships are ruined forever.

 

[00:36:10] Ed Slott: I saw that early on in my practice. For some reason, I had a lot of young police officers as tax clients years ago. I guess, one tells another, and now, they think I’m a specialist on police officers because I can write off their guns and ammo. You know, really, the guy’s brilliant. You can’t even do that anymore. They changed the law. So, I used to have all these young police officers, and it was that situation. I always had to ask them, who’s your beneficiary? Even if they were married five, ten years, oh, it’s my mother.

 

[00:36:43] Andrew Rafal: Yep. And sometimes, they’re like, I want to leave it to the mother, but same thing with life insurance. I know in the book, you talk about insurance, so beneficiary and life insurance, but let’s kind of high-level talk about where you see with now some of the changes with the SECURE Act beyond Roth conversions, the Roth tax free, why do you look at life insurance as a potential strategy, as a piece of the puzzle to help somebody and their family make sure if something does happen that they’re going to be protected and protected from taxes?

 

[00:37:13] Ed Slott: Well, you raise a good point. In my book here, let me show you what I call my chapter on life insurance. Can you see the title there?

 

[00:37:24] Andrew Rafal: The Power of Life Insurance, Chapter 8.

 

[00:37:27] Ed Slott: Yeah. That’s why I call that chapter, The Power of Life Insurance. Remember when I said IRAs because of the SECURE Act eliminating the stretch of being downgraded as a wealth transfer or estate planning vehicle? Well, it did the opposite for life insurance. I’m talking about permanent/cash value, not term life insurance. It brought that to the top of the list. See, Congress is always playing catch-up, if you have a good advisor that can give you these strategies, and again, just in case you’re listening or watching, I’m a CPA, I’m a tax advisor. I do not sell life insurance. I don’t sell stocks, bonds, funds, insurance, annuities, none of that, but as a tax advisor, I have to tell you, the tax exemption for life insurance is one of the single biggest benefits in the tax code, and it’s not used nearly enough.

 

All Congress did with the SECURE Act is shine a light on this. And now, they’ve incentivized us to do probably the better planning we should have been doing all along anyway. Better to take that money down, remember, is similar to the Roth IRA. When you take it down, you pay some tax and you put it into the tax-free Roth. Well, the life insurance can be like a super Roth, we can put a lot more in there, and it can grow the cash value tax where you have access to it, depending on the policy. I have this myself, I have a policy that has– I have lifetime access if I want for long-term care, for example. A lot of new policies have that.

 

So, you can actually have lifetime benefits. I usually joke with people, I throw out a question. I think I did this in your seminar. I said to the people, “Can you be the beneficiary of your own life insurance without dying?” And the answer is yes, there are lifetime benefits, most people don’t realize that, but if you want to leave a legacy to your children, the three things you get with the life insurance plan, which is better than IRA, is you get larger inheritances, more control for those people that want the trust. Life insurance is a much better and more flexible asset to leave to our trust. You don’t have all of those complicated IRA and RMD tax rules, and the money comes in tax free. That’s a big difference.

 

[00:39:35] Andrew Rafal: Yeah, tax free.

 

[00:39:36] Ed Slott: So, you have a larger inheritance, more control, and less tax. You got everything you want. So, here’s where the mindset has to change. People used to rely on their IRA for that as the vehicle to get them there, but that vehicle, thanks to the Congress and the SECURE Act, has blown up. You’re not married to the IRA. It’s a vehicle, like a car on a trip. It’s an old jalopy now, that IRA, it pokes out now at death. Switch vehicles, get rid of the IRA jalopy, move to a limousine, a life insurance limousine, a luxury life insurance limousine for the rest of the ride. Beneficiaries will have more, you can have more control and less tax. And here’s the solution. Congress just gave us the opening.

 

[00:40:23] Andrew Rafal: And you tapped into something important on these policies over the last decade, plus the evolution of them, these accelerated death benefits.

 

[00:40:30] Ed Slott: Yes.

 

[00:40:31] Andrew Rafal: The ability to take money out tax free, basically getting the death benefit before you die to help the family pay. And a lot of them are more lenient than a normal long-term care policy. You can be at home as long as you can prove the specs, two of six of the daily living activities you can’t perform or cognitive impairment, but think about the power there. Instead of having to take money out of your IRA or sell a property or take money out of the Roth, now you can get a portion of that death benefit tax free. So, we like to call it the somebody-is-going-to-win bucket, right? Either you’re going to die, maybe somebodies have cash value you can get out of it, or more importantly, it’s like you’re paying for something that you may need in the future versus regular long-term care policy that people hate paying into because they may never use it.

 

So, these are the key things. It’s leveraging, it’s just understanding. Nothing’s perfect, but if we can create little pieces of the puzzle to cover all the what ifs, now you’re doing and building a real plan that’s going to give you that peace of mind, which I think is the most important thing now and in retirement, it’s simplicity and peace of mind.

 

[00:41:35] Ed Slott: That’s the key piece of mind. I’ve done this myself. I have Roth, as you know, I have life insurance, and I love that feature. And the reason I love that access, the long-term care, because the reason I did it, those policies just started coming around the last 10 years or so, is because if it turns out I need long-term care and these things are big ticket items, thousands, tens of thousands, sometimes a month, who knows? If I need that kind of care, the last thing I want to do is rely on my kids to come up with the thousands of dollars needed every month for my care. If I leave it up to them, who the heck knows where I’ll end up, probably chained up in their basement or something. I want to know this is taken care of. So, that’s why I did it.

 

[00:42:18] Andrew Rafal: Yep.

 

[00:42:19] Ed Slott: And you know what? They’ll get less. Who cares? They’re still going to get a windfall from whatever’s left. They’ll still be left with more. I just wanted to know it’s taken care of, and I think that’s an important point.

 

[00:42:31] Andrew Rafal: Such an important point. And then, again, it always is first and foremost about the client. Let’s take care of you first, you first, and then whatever is left, which we, usually you and I, know there’s going to be a lot left, they’re never going to run out of money if they’ve been planning and living within their means, but the key is let’s cover both. So, let’s tap into one more thing before we end today. So, these acronyms, QCDs, HSAs, but let’s talk about QCDs because many people that follow you and a lot of our clients, they are somewhat aware of the QCD, but we think it’s one of the most powerful instruments because of you ask as a tax preparer, I mean, what do you think 90% of people donate something in a given year, right? It may not be a lot, but they do donate to charities. So, let’s talk through on the power of the QCD, the qualified charitable distribution, and how it can play into the overall ability for you to keep more money in your pocket and less in Uncle Sam’s?

 

[00:43:26] Ed Slott: Well, you’re right. I mean, as a tax preparer, I have to say, over my 40 years as a tax preparer, I never had anybody who didn’t give to charity. I mean, can you imagine– did you give to charity? Oh, yeah. Even if they didn’t, I mean, I just saw this, when you said you give to charity, somebody sent me this from, I guess, church or something like that. It says, as a pastor reminded us in church before collecting the offering, let us give generously, and also, in accordance to what we report on our income tax forms. Can you imagine if people gave what they say they gave?

 

[00:44:10] Andrew Rafal: It wouldn’t have any crises anymore?

 

[00:44:12] Ed Slott: Right, right, right. Anyway, so the point is people do give to charity. When they give as much as they say, that’s a different story. So, if you’re giving to charity, you’re not getting the tax benefit you used to get before that Tax Cuts and JOBS Act increase the standard deduction. Over 90% of people who file returns take the standard deduction because it’s higher. Other itemized deductions are limited unless you give a fortune to charity, which most people don’t. You’re not getting any tax benefit, you’re getting a benefit of the charitable gifts because of the good that it does, but you’re not getting a tax benefit. Why not get a tax benefit, too?

 

So, they created a provision years ago that has been around for years, called QCDs, qualified charitable distributions. It was the ability to take right from your IRA, has to be a direct transfer from your IRA to charity, as long as you’re giving anyway, that’s the way to give. The only downside with this whole QCD is that it doesn’t apply to enough people, it only applies to IRA owners and IRA beneficiaries who are 70 and a half years old or older. So, it won’t work if you have your money in a 401(k) or if you’re 65 or under 70 and a half, but if you qualify, this is the way to give to charity because you’re not getting a tax benefit anyway. Here, you get better than a deduction, you get an exclusion from income, and it can offset the income, the tax on the income you pay on RMDs, if you’re subject to required minimum distributions. So, this is the way to do your giving.

 

The problem is, luckily, Andrew, you’re familiar with this, but most advisors, if you say, are not familiar, and unfortunately, most charities, they take a long time to get with it. You could help your charity by just bringing it to their attention. I found a few people that have brought it to their church or educational institution and got them on board. The charities are collecting more money than ever before because now it’s on automatic pilot. It comes out of the IRA every year, and you’re excluding that from your income. You’re getting that, plus the standard deduction. So, it’s the way to give to charity, plus you’re giving money that would have been highly taxed. The IRA is the best money to give.

 

If you remember at the beginning, Andrew, when we started, I said the foundational principle of keeping more of your money, saving taxes, especially in an IRA, is to always pay tax at the lowest rates, get that money out at the lowest rates. With QCD, you get IRA money out at zero, and that’s money you would have given to charity anyway. I’m not saying to give to charity just to pay less tax. If that was the case, give all your money, you’ll have no tax. I’m saying, the amount that you would have given anyway, give it this way. If you qualify, age 70 and a half and have an IRA, give it that way and the charity will get all the money, they don’t pay tax, but you’ll save tax.

 

[00:47:15] Andrew Rafal: And we just had somebody in yesterday who were looking at the QCD for them, even though they’re over 72, because it’s going to allow them to actually– they’re taking out their RMD, they’re going to do the QCD, but now we can actually look at the tax brackets and we’re going to do the Roth conversion up to the 32%. So, we’re going to fill that bucket up, but we’re also, if we take $20,000 and we do QCD with it, they’re doing what they always do, which is to give to charity, but now they’re able to do another bigger portion of the Roth conversion.

 

[00:47:46] Ed Slott: Right.

 

[00:47:47] Andrew Rafal: And I don’t care if it’s $20,000 or if it’s a thousand, why would you want to not get a deduction on that thousand dollars? Because as you said, most people aren’t at that $26,000 to $27,000. So, it’s not many no brainers, but this is a no brainer. The key is you have to make sure that you tell your CPA because when you get the 1099, the custodian is not going to break down and say, “You gave $500 there and $500 there, you need to tell the CPA or your tax preparer or if you do it on your own because it’s not going to be broken down.” So, again, just the little minutia because you don’t want to do the QCD, do it all. Everything’s right. Went to the charity directly and then you don’t get the deduction because you didn’t tell the proper person. Having a team, we would make sure that doesn’t happen. We always send out a questionnaire. Hey, did you do the QCD? Make sure you tell your CPA. These are the types of things having a full team behind you will make sure that you don’t mess up.

 

[00:48:42] Ed Slott: Well, that’s why you’re in our IRA Advisor Group, and a member of our highly– it’s the highest level of education. People should know this kind of specialized training, it’s a specialized field. I equate it with the kind of education Andrew has and our other members, which is less than 1% of advisors. Think about that, 99-point something percent of advisors don’t have this level of education, so they don’t have the skills to help you with that. In fact, many of them are dangerous. Why? Because they don’t know that they don’t know, that’s dangerous. Now, it doesn’t mean all our advisors, like Andrew, know everything, but they know what they don’t know, and they have us. And my team of IRA experts is Andrew talked about before when there’s a question. First of all, they know to ask a question, that’s the beginning of knowledge. They have a team behind them to make sure you get the right answer the first time. This is critical. You don’t get a lot of second chances.

 

[00:49:38] Andrew Rafal: Yeah. And the amount of time we spend with you and your team, I mean, it’s not just like you said, we’re going for two hours. It’s two and a half days. And we’re locked in a room with other CPAs and CFPs and advisors, and we’re getting into the weeds. And most everybody in there loves rolling up their sleeves and getting a little dirty and figured out most of our clients would fall asleep about an hour in, no matter how funny that you are, because for the consumer, you do it a little differently, right? Yeah, maybe you’re able to mix that up.

 

[00:50:09] Ed Slott: More stick.

 

[00:50:10] Andrew Rafal: Yeah, a little bit more stick with them. So, as we finish up, I know there may be some younger listeners on, if they made it through all this way. So, what if I’m just getting out there, I’m in my mid-20s, 30s, where should I be putting my money? If I’ve got a 401(k) or they offer the Roth 401(k), what should I be doing, if I’m just starting to grow my money, but maybe not making a lot of income right now?

 

[00:50:32] Ed Slott: You use the word, just a couple of minutes ago, slam dunk with the QCDs, Roth IRAs, but young people slam dunk. It’s not even generally, it’s always low. If you are starting out, you should only be contributing to a tax-free retirement, a Roth IRA, a Roth 401(k) at work. Imagine if somebody like me or a young guy like Andrew there, we’re able to build– look at what we’re doing to get money from forever taxed to never taxed. Imagine if it was built from the first seed, the whole tree was built tax free. That’s what young people have the ability to do.

 

The greatest money making asset any individual can possess is time. And young people have more of it than anyone else. Use that time to compound for your own good, tax free. Start with a Roth every– yes, you don’t get a deduction, big deal. It’s not even worth that much when tax rates are low. So, forget the deduction, you won’t miss it anyway. You’ll like having all that money grow tax free for the rest of your life. That’s a lot of years of snowballing, compounding 100% for your tax free. That is the deal of the century.

 

[00:51:46] Andrew Rafal: Well, the other deal of the century is the HSA, the health savings account. If you qualify a high deductible plan, you get the triple combo, put the money in tax deduction, grow it hopefully, tax deferred, down the road, it can come out or doesn’t have to be down the road for medical prescriptions, etc., tax free. So, that’s the Cadillac, getting all three, the Roth, and then the HSA. These are little wins, little wins, but if you could put $7,200 in or over $8,000 if you’re over 50, I mean, why would you not want to get that straight tax deduction, and then be able to get it out tax free. Those are the type of things you listeners have to look at, little wins become huge wins in the future.

 

[00:52:29] Ed Slott: Yep, small steps equal big victories. And here’s a little tip for grandparents. If you have young children or grandchildren, those young grandchildren, I should say, in their 20s, getting their first job, you know what I just said? Put money into a Roth. They probably don’t have the $6,000 to put into a Roth. You can give them that money. I know grandparents love making gifts like that because generally, older grandparents don’t like just giving money because they’re always afraid it’s going to be wasted. You’ll spend it on whatever, but when they know that the gift is building a retirement account for their grandchildren, that’s the intended purpose. They see the value in their gift. So, for grandparents, what a great gift to help a grandchild fund a Roth IRA every year. They’ll always remember you help them plant that tree.

 

[00:53:17] Andrew Rafal: Yeah, my daughter, who’s 14, she works for me over the summers and then after school. So, I was able to start funding her Roth. And it was funny, I put $6,000 in, and we bought a bunch of stocks that she knew. And like within two weeks, it was up to like $6,200 dollars. She’s like, let’s sell it all, and I was like, we got to think long term. We’ve got these good companies in here, but we’re getting her started on understanding what the power of that time and getting her in that mindset that we’re putting money away, not for now that she could go and buy Lululemon stuff or go to the mall, but this is money that’s going to be there.

 

So, we got to teach our own kids, our own family, especially those in our industry. We got to do what we preach. So, all those things you talked about today where you did what you preach, same thing for me. I can show a client this is exactly what we do, and then showing my own kid, hey, this is what we do when we get to get you started early. So, I’ve always wanted to say this, as Howard Stern says, “Ed, you said it all, you did it all. I love that.”

 

So, tip of the iceberg today, guys, we hit a high level. There’s going to be a special offer in the notes in regards to Ed’s book and a Roth conversion review from our team here at Bayntree, our team of advisors and CFPs. So, we’re going to have a special offer. We got a lot of books that we’re going to be able to get out to those that are listening and want to chat with us. And the key here, Ed, is you keep doing what you’re doing. We’ll keep doing what we’re doing, and we’re going to help educate those that are out there. And there’s no better time, they need us now. The government, the stimulus, the deficit, it’s just going to get probably worse. So, now is the time to take action.

 

[00:54:58] Ed Slott: That was a counterstrike, to take advantage of it. And I hope soon, maybe within a year, I’ll be back in Arizona with you. We’ll do it in person, live.

 

[00:55:07] Andrew Rafal: I will love that. I guess we’ll see in a couple of weeks here at the virtual workshop that you’re doing.

 

[00:55:12] Ed Slott: Yeah.

 

[00:55:13] Andrew Rafal: And then we’ll see towards, hopefully, the fall, you’ll have an in-person one, too.

 

[00:55:17] Ed Slott: Yeah, the whole thing, we’re planning on it now.

 

[00:55:19] Andrew Rafal: Keep our fingers crossed. Well, listen, I appreciate it. I appreciate you, your group. Thanks for all you do. And I’m sure we will be talking real soon. Thanks so much.

 

[00:55:28] Ed Slott: Alright, thanks, Andrew.

 

[00:55:30] Andrew Rafal: Alright. Listeners, stay tuned for another episode of Your Wealth and Beyond later this month. Happy planning, everybody.

[END]