Few documents are as complicated and can have as much of an impact on your financial well-being than the US tax code. Many financial advisors don’t know the rules as well as they think they do, and this can lead to costly mistakes for their clients.
This is why Ed Slott is on a mission to help you keep more of your hard earned money. He’s a nationally recognized speaker, the host of The Safe and Secure Retirement on public television, and the founder of Ed Slott’s Elite IRA Advisor Group – an educational program that helps advisors learn the nuances of retirement tax rules.
Today, Ed joins the podcast to share the horror stories that made him passionate about tax planning and to tell you how to take advantage of the golden era of low taxes we’re currently living in. We also get into how to avoid the unfixable mistakes so many retirees make that lead to big tax headaches – and even bigger financial losses.
In this podcast interview, you’ll learn:
If you enjoyed this podcast, click here for your own Roth Conversion Guide, and for more information about our upcoming event together on October 22nd click here.
Andrew: Welcome back, everybody, to another episode of Your Wealth & Beyond. And, listeners, today I’m honored to have a guest on that I’ve known a long time I respect both personally and professionally, and we’ve got a great show lined up full of nuggets so make sure that you grab a pen, grab a paper. Ed Slott, welcome to the Your Wealth & Beyond Podcast. How are we doing today?
Ed: Great being here, Andrew.
Andrew: You know what, summertime. I know New York. Is it starting to get a little humid there for you, guys?
Ed: Not here. I’m in an air-conditioned room and I don’t go out much so it’s okay.
Andrew: That’s right. You’re spending the time studying the tax code and helping your consumers and financial advisors. Well, listeners, most of you probably know Ed Slott. He’s a nationally recognized speaker, has a wonderful show on public TV called The Safe and Secure Retirement and really Ed is an expert in helping you keep more of your hard-earned money and keeping less from Uncle Sam. So, Ed, where did the passion come from to help consumers and financial advisors ensure that they keep more of their hard-earned money?
Ed: That’s an easy one. My background is I’m a CPA, a tax accountant by trade for many years. I still have a small CPA practice still in New York. The one thing that got me going on this was about 30 years ago just the pure horror stories of people moving the IRA and planned money that was kind of new then and the incredible mistakes people were making. And remember, when they came to me to do the taxes, the damage was already done. I hate to say it, but many tax preparers like me are basically history teachers. We tell you what already happened. Well, that’s no good when somebody’s sitting in front of you and you have to say, “Oh, you know what you should’ve done? Oh, too bad, you did that. If only you could’ve done that.” Who wants to hear that? And it hit me at that point, I no longer want to be the messenger giving the bad news and being reactive and I turned everything around and became proactive and started doing planning, in other words, before it hits the fan. That’s what I call planning.
And I saw with these retirement accounts, they were relatively new people, didn’t know the rules and then I would ask and I said, “Well, using a financial advisor, oh yeah, we have a big company but they didn’t guide us,” or even if they had a small financial advisor, they weren’t educated on the rules. It hit me there was a huge void and it was only going to get worse, and over the years I created the group that you’re now a member of, Ed Slott’s Elite IRA Advisor Group. It’s a highly advanced educational program for advisors to learn the nuances of these retirement tax rules. Most financial advisors are not familiar with them. Even now many years later, a financial advisor that might help you make money, but when it comes to retirement planning, that money eventually has to come out and that’s when the horrors begin. It’s what you keep that counts after taxes and if you make these expensive tax mistakes, many of them are not fixable. The tax code is unforgivable in this area. These are costly dents in your retirement savings.
So, I realize that this is a big area, it’s not being addressed, and it’s still not being addressed. Andrew, you’re a member of this advanced study program and you have been for a few years. In fact, you’re in our master’s program and that’s the top I’d like to say 1% of advisors in the country but less than 1% of advisors have this knowledge. That means if you’re listening, there’s a good chance even if you’re happy with your investment returns and who isn’t in a nice stock market, even if you’re happy with your advisor, chances are 99% of people do not have advisors that can take them the rest of the way when they come into retirement and have to withdraw those funds and fix all these rollover rules and tax rules and RMD rules and so many complex transactions. Any one of them could have a huge tax impact or even penalties. And remember, if you’re losing your hard-earned money to unnecessary or excessive taxes and penalties, that’s less you’ll have for what it was intended for, for retirement.
So, I want people to have more and pay less, but to do that, they have to have a plan and to have a plan you first have to have an advisor that has the knowledge to take you all the way through to the end of the game. So, that’s why I started Ed Slott’s Elite IRA Advisor Group and if you look at our website, it’s IRAHelp.com and you look for our advisors. We show all the advisors around the country that have this specialized knowledge. It’s way less than 1% and Andrew is one of those in the Arizona area.
Andrew: And you talk about you said you hit on a point where almost two decades working with clients it’s this reactive versus proactive tax planning. Most people they wait to that 23rd hour. It’s already March of the next year and they missed out and it’s not that the CPAs are doing things they shouldn’t be doing. They’re just busy and they’re not planners. Same thing on the investment advisory side. The time that I spend going to your workshops, it stays away the office but it’s invaluable. You know, there’s I think over 400 of us and getting in a room which was spearheaded by you and your team but then just the interaction of other CPAs and investment advisors and CFPs. I mean, we spent two-and-half-days where most people, Ed, would probably fall asleep but we’re passionate and it’s just incredible the amount that we learn and learn from that mistakes that the people make and help each and every one of our clients shift that money from that pretax or the ticking tax timebomb over to the most tax-efficient place which if we can get tax-free, that’s going to be huge.
Ed: You know what I think of and I don’t know if you ever think of this at those meetings, I say, “What do people do whose advisors are not here learning this stuff?” And that’s where I said that’s 99% of people. They don’t know their advisors don’t know and the really scary part is most financial advisors while they may be good at investments when it comes to this critical tax planning that determines how much you get and how much goes to the government, they don’t know that they don’t know. So, your retirement savings, your life savings are at high risk of being lost.
Andrew: Dan, I mean, you think about the billions of dollars that are in pretax and you know when you have an advisor as you’re working and accumulating, that’s the easy part, accumulating assets. The key differentiation I think of the advisors that that work within your group and what we specialize in is helping those in the deaccumulation phase, and that’s something where it’s a specialized niche understanding where to take their money from, understanding how to ensure there’s income, but then also providing the ability to leave a legacy and that’s something that unfortunately most advisors just aren’t ready to handle that. And for us, it doesn’t happen overnight. I mean, we’re spending time not just money but we’re spending time at your workshops, but then exams and studying and then the wealth of information that you provide to us is just second to none. And I love, Ed, the fact that I could email your team and I get a response. If we have a complex case, I get a response within 24 hours, if not maybe four hours and that’s the value of having that camaraderie and learning from the best.
So, I appreciate everything you guys do, and I know, listeners, if you’ve ever seen Ed on PBS, you can’t hide his passion for this. This isn’t made up. This is real and he gets excited and it exudes to all of us, so I appreciate it.
Ed: Well, you have to have a place to go. The people listening have to know they have a place to go where their retirement savings is getting the right planning and being protected properly and it’s really not the case for most people. That’s why I got into this. That’s why you got into this because you want to see your clients keep more of their hard-earned money. That’s what it comes down to.
Andrew: We look at this environment we’re in right now. The Tax Cuts and Jobs Act, which I know you indicate and firmly believe that this is the golden era in our lifetime where we can’t guarantee anything, but we can be I think pretty confident. This is going to be the lowest tax environment we’re going to see over the next six, seven years. You agree with that?
Ed: Well, that comes down to math and that’s absolutely right. Look at the deficits we’re bringing up. I mean, yeah, you mentioned the Tax Cuts and Jobs Act, the debt has piled another over $1 trillion into the deficits and the deficits can only be fixed by tax revenue at some point. At some point, the government is going to wake up and rates are going to go back to where they were before, not maybe all the way back, because you may recall back in the 70s and 80s, the top tax rate actually exceeded 90% that went down to 70% then it went down in the 80s so about 50%. Now, that seems high but back then you got to see everything is relative where it came from. Back then when it hit 50%, the whole country did a happy dance because it was the first time in their lives, they were equal partners with the government on their own money and they thought that was fantastic. We’re even lower now but it’s not going to stay that way and it’s do the math exactly as you said. The tax rates will have to increase.
I think it was Mark Twain said history doesn’t repeat itself, but it rhymes and we’re going to see that happening. But now, as you said under the Tax Cuts and Jobs Act while we’re still doing this big giveaway, the tax rates are unusually low, the lowest we have ever seen in our lifetime, and now it’s the time to strike and get some of that money out with the least amount of tax possible. The way to have more, obviously, is to pay less tax and you can do that now. But that won’t last.
Andrew: So, with the listeners, high level, what are some of the strategies that they should be looking at whether they’re a do-it-yourselfer or they’ve got an advisor that maybe hasn’t gone through this? What are some things that something is getting closer to retirement should start looking at to take advantage of where we are with the Tax Cuts and Jobs Act?
Ed: Well, everybody with an IRA, a plan, should be looking, not doing, but evaluating with a qualified advisor, somebody like you that is taking the training. Not just any advisor. It should be evaluating the benefits and drawbacks of a Roth conversion. A Roth conversion moves money from what I always like to say from accounts that are forever taxed to accounts that are never taxed. That’s the big benefit. Once the funds are in the Roth, they are protected from any future higher tax rates. It removes the uncertainty of what future higher rates could do to your retirement savings, but you pay a price. You pay tax on the funds you convert. Now, you should know the Tax Cuts and Jobs Act, our most recent tax reform made these Roth conversions permanent. So, if you do that, you can’t go back. So, that’s why you need to be extra double careful before you do a Roth conversion. I’m not saying not to do a Roth conversion, but you must do it with guidance, with professional guidance.
I wouldn’t you mentioned, Andrew, do-it-yourselfers. That might be for fixing cars in your home but not for a Roth conversion because once you do the Roth conversion, you can’t go back. You will owe the tax. Now, that’s not a bad thing. There are reasons to do a Roth conversion, reasons not to do it but if you think your future taxes in retirement might be higher, and some people actually think that they’ll be lower because they’ll say, “Well, I won’t have income,” but you don’t know that. It could be that in retirement the low rate is a higher rate than it is today.
Andrew: Yeah. And you bring up a good point of without the recharacterization. What we’re doing right now is helping to gauge if it makes sense running that analysis, but I think it probably makes sense for most people to wait until the fall to do the conversion just because they don’t know where their income may lie.
Ed: Right. No, I would even go further. I would say wait until after Thanksgiving because you may have bonuses or extra payments. A lot of the mutual funds throw up dividends in November, capital gains, I should say, dividends and capital gains. And sometimes these are much larger than people expected. So, you really have to have a good projection, but many people can fall in the 24% or 22%, very low brackets at high income. That’s why you have to look at these tax brackets, sit down with an advisor that has the specialized knowledge. That’s the group we are talking about, Ed Slott’s Elite IRA Advisor Group, and I’m telling you, these guys like Andrew and advisors all over the country we drum that into that. As you know, Andrew, constantly we give you the benefits and drawbacks pluses, minuses, whatever you want to call them, pros and cons of every tax move so you have all that information.
For example, a Roth conversion, you might be better off you don’t have to – it’s not an all or nothing. You might be better off over time doing a series of annual smaller conversions using up those lower tax brackets. Those newer lower tax brackets are like gold. If you don’t use them, they’re lost, and they never come back so I would say use them or lose them. That’s first. You might have big tax losses or big deductions. Maybe it’s a good year to do more Roth conversions, but you need to sit down and do a projection and see what other things on your tax return might be affected and you have to know that you will have to write a check for the tax on the Roth conversion, but you should know how much that is. That’s what I’m saying. Have a good projection. But the big benefit is tax-free retirement funds forever and the bigger item is once the money is in a Roth, there are no more lifetime required minimum distributions at 70.5 or maybe 72 depending on what the law eventually is but that money can just grow tax-free forever. And even if you never touch it, it’s tax-free to your beneficiaries so you’re getting something for your money.
Andrew: Yeah. We call it controlling your tax destiny. One perfect example too is if somebody, you indicated, has a year or maybe they didn’t have as much income or we have a lot of clients who retire at 64, 65 and they’ve got after-tax money they can live off of. Imagine going for making 250,000 a year to zero. And if you build up a seven-figure IRA, well, now we can play within the tax brackets and really what we call, we know how much – let’s figure out how much pain we want to have right now really pay taxes and then being able to project out and show a scenario of by doing it for maybe four or five years and doing the systematic conversions, how much they’re going to save over the rest of their lives. And that’s where, as you hit on this analysis, we show scenarios and we just show our plans. If you do nothing, here’s the potential of how much you’ll have to pay in the future. If you do decide to pay a little tax now, take advantage of the low rates, here’s where you’re going to save for the rest of your life.
And you mentioned the required minimum distributions, but the other thing is as RMDs, listeners, required minimum and Ed’s team has a great, great back sheet that shows exactly how much you have to take out each year. Every year that goes up. So, by the time you’re in your 80s, it’s over 6% that you have to take out and then, Ed, as you know, a lot of the other ramifications if our income is higher than Social Security could be taxed more. We could potentially have a Medicare surcharge. So, these are the factors that you need to look at, listeners. It’s not cut and dry. There’s so many moving parts and that’s where if you don’t have a plan and you don’t have an advisory firm that’s working for you and working with your CPA, I think you’re missing out and if you can save on tax dollars each year, that means we’re starting off the year ahead of the game.
Ed: Well, the number one fear in America is living too long and running out of money. I hear it everywhere. I speak to hundreds of thousands of consumers all over the country for public television and other conferences, seminars, and that’s the number one item. Most people are worried about losing money in the stock market. That could be too, but they don’t realize probably the biggest risk is the taxes. In the stock market, if it goes down, you lose your money. You can wait it out, it comes back but with taxes, if you lose money to unnecessary or excessive taxes, you’re never getting that money back. That’s a one-way street. So, you’ve got to have professional expertise from the get-go that this is not do-it-yourselfer material and it’s not even enough to use say an average advisor that just does investments. If they’re not doing their tax planning, your retirement savings are at risk.
Andrew: And you think about when individuals we got a question a lot, “Hey, I can’t do a Roth conversion because I make too much money.” So, listeners, the one thing to remember is, yeah, there is a limit on contributing to a Roth IRA based on income. But remember, it doesn’t matter how much you make. You have the ability to do a Roth conversion. Obviously, it just means you’re going to pay more in taxes, but that is a common question that we get. So, just know that the conversions are there and it doesn’t matter how much you make and then a lot of companies now we offer to our team here at Bayntree but, listeners, you got to find out if your 401(k) plan, your qualified retirement plan or your TSP which does offer it, doesn’t offer a Roth 401(k) option. And so, that allows somebody who’s making more income than would allow them to contribute to regular Roth IRA, they can put into a Roth 401(k).
I mean, for instance, Ed, based on learning from you all these years, I actually put half of my 19,000. I put it in the after-tax to Roth. Now, I don’t get the deduction but now I have a vehicle where I can grow money tax-deferred and as you said tax-free in retirement. That is the name of the game. So, that’s definitely something to look at.
Ed: Now, again, you do have to pay the tax up front but there are situations where really like now I give you one situation. Let’s say you’re out there listening and maybe you’ve done well and have a large IRA, very large, maybe even a million or more, and chances are you will probably advise because it’s so large to leave that IRA to a trust. Well, you could have some serious tax problems with that plan. A Roth conversion could alleviate the trust tax for your beneficiaries. Yes, it means you might play a big chunk of tax now but then never again and then if your plan is to leave your Roth IRA now to a trust, you can eliminate the trust tax forever really, other than earnings after it goes in there, but you can eliminate a huge trust tax problem. Remember, just to give you an idea for those of you who have trusts with large IRAs, under the tax law, an individual probably wouldn’t hit a 37, the top bracket, until after over 500,000 of taxable income. But our trust hits that top-rate after just 12,750.
So, some of these IRA trust especially where they’re set up like most of them are so that the trustee can hold some of that money back especially if the beneficiaries might be young, a lawsuit problem, a marriage, a divorce, of creditors, or whatever, some kind of problem with management of money, of squandering it. If the trustee holds that in trust, if the Roth conversion is not done then that’s a huge trust tax so you might protect it for the beneficiaries, but you lose it to the government. So, this is just one of the many situations where doing a Roth conversion during your lifetime would really work well with the IRA trust plan.
Andrew: And you talked a little earlier about RMDs. Right now, as we all know, it’s 70.5 but let’s dig in a little bit on the bill that the House passed. It doesn’t mean that it’s set in stone, listeners, but the secure retirement bill, I want to hit on a couple of the points that are going to be very important for those that are getting close to retirement and also for just legacy planning. So, what’s going on? What is the house or what are we waiting on the Senate to do and what are the key takeaways that are going to be very, very important moving forward with the secure retirement bill that comes to fruition?
Ed: Well, it’s called the SECURE Act. It’s just an acronym. Most of them are meaningless. I won’t even go into it. They always find some cute name but anyway it’s a bunch of retirement provisions in there. It has a past that, who knows when somebody might be listening to this broadcast but as I would think, stamping, I don’t know if you want to do that, Andrew, but as of July in the beginning of July let’s say, nothing has happened. It passed the house and that’s it. Obviously, if you know how things work, it has to pass the Senate. It has to go to the president. He’s always busy with other things. So, let’s see. Some things may happen or may not, but the big item is the elimination of so-called stretch IRA, which is a big part of many people’s IRA plans, especially those of the accumulated large IRAs that want to leave the lion’s share of beneficiaries. So, the current law beneficiaries have been named on the beneficiary form. Another thing, advisors like Andrew in our program we bang them over the head every program, right, Andrew?
Check beneficiary forms. Most people don’t do it. Most advisors don’t do it. Most financial institutions leave you on your own. If you named on the beneficiary form under current law, you can so-called stretch and it’s just a made-up word. It’s not in the tax law. It’s just the ability of a beneficiary to extend distributions over their lifetime. For younger people, it could be 50, 60, 70 years. So, Congress doesn’t like that. Congress feels that the IRA was set up as a retirement account. They happen to be Roth not as an estate-planning vehicle to leave a legacy to your heirs. They don’t need it for retirement. This is your retirement. This is not me saying. This is what Congress is saying and that kind of makes sense. So, they propose to eliminate this extension after death of going out 50, 60, up to 80 years and replace it with a 10-year payout except for certain special exceptions, like a spouse or a disabled person or even a child.
So, what does that mean? I talked about trust performing. Most in the IRA trust set up now won’t work so they need an advisor to review and create a different plan. You’ll have to see a lot of that tax will be forced out 10 years after the death, another reason you might want to do a Roth conversion now and lock in a 0% tax rate. So, even if it is pushed out in seven years, at least you won’t have a big or the beneficiaries won’t have a big tax hit later on. That’s one of the big provisions and all the planning will have to change. In fact, a better solution of what’s going to happen, Congress never really sees that far ahead. They take the eliminating the stretch IRA will bring in revenue and probably won’t because advisors like Andrew and other advisors that are trained in the tax planning will find better solutions because we trained a lot of these things. That’s what we do and it’s a lot to lead IRA advisor through and it’s training unlike anything else. There’s nothing else like it in the country. Nobody else has a program like it. That’s for sure.
Actually, people have tried but they didn’t have the expertise to run the program. So, clients of Andrews and clients of our other elite advisors will be learning solutions like life insurance for example. That will move to the top of the list as an estate-planning vehicle and replace the planning for IRAs because IRAs just won’t be worth it if they have to be cash. Now, worth it as an estate planning vehicle oppose that vehicle and life insurance you could do a lot better where we’ll be telling our advisors like Andrew is to maybe scrap the IRA. Take it down. Pay low tax now and instead put part of it in a life insurance policy. The bottom line is the beneficiary will have a larger inheritance with less tax, no complex rules, no warranties. They could still put it in trust. They could still simulate the stretch IRA but on their own terms. In other words, they’ll have a much better plan, more money to the beneficiaries, and more tax-efficient meaning they’ll pay less tax if they do have to pay some tax now, but a small tax now and then never again.
So, what this will do, the SECURE Act will force people, especially the ones with the largest IRAs that have the most to protect to be doing the better planning. They probably should’ve been doing all along but now they’ll be forced to do it. The other provisions in The SECURE Act are not as big. They made a big deal about it. You almost think the Congress parted the Red Sea the way they go on and on about, all right, one of the big items they call it a big item is changing the 70.5 day all the way up to 72. What’s that a year-and-a-half? And they crow about this stuff like over an old 72. All that does is take out, I mean, it’s good but I think they could’ve done better. They probably gone to 80 or scrap RMDs altogether. I don’t really see the need for it. People should be under control in control of their own retirement accounts have taken out when they want to, pay the tax when they want to, but that’s not what we have.
So, that’s one item where they extended it to age 72. They required beginning date from 70.5. The only real good thing about that, all right, so you get a break on the first two distributions but those are the lowest ones anyway that I don’t think I’ve talked about 3.5% so it’s not a big savings. But the big item there is to finally get rid of that half-year. Andrew, do you know how many people are confused, “Am I 70? Am I 71? Where does the half come in? When’s my 70.5? Oops, I made a mistake. Now, I have a 50% penalty. I took it in the wrong year.” All of that half-year confusion will go away. So, that’s one good thing.
Andrew: Yeah. I mean, you and I can have a whole three-hour show just on the RMD, the deadlines, what that first year constitutes. When can I take it? Is it April the following year and then I’m good that year? But these are the things that it is complex, just like the tax code, just like optimizing social security, just like Medicare and that’s we’re sitting down and being educated is key. So, you think about 70.5 to 72. They keep pushing that and some of the other things with regards to hardship, but you’re right, the biggest negative of this that people aren’t really realizing is that it’s taking away the stretch and the power of the stretch is just an invaluable, invaluable way for our clients to continue with the legacy. I think if this comes to fruition beyond some of the planning you talked about with more Roth conversions or life insurance with having that tax-free benefit with now a home healthcare writer attached to it.
But I think you’re also going to see the planning where and this is going to hurt I think the IRS is that we’re going to just say, “Hey, let’s donate this. This is going to go to the charity,” and so it’s going to be a double whammy for them. So, good planners are going to just come up with the ways and say, “Okay, this is going to go to Phoenix Children’s Hospital,” so it’s an interesting way on how we as advisors will evolve with it and we’ll figure out how to help our clients the best way possible.
Ed: Well, it’s like that saying, awaken the giant. They kick the giant these people with large IRAs. Remember, if anybody with a large IRA worked hard to save that money probably in that 401(k), they could represent 30 or 40 years’ work now rolled over to an IRA, they’re going to be incentivized to take action where they were kind of laying low before they’re doing that right, they’ll get the stretch. No stretch? Now, they’re going to do some planning and actually there’s always a way with congress. Whenever they say think they’re going to make money, they shoot themselves in the foot, but this is good for people because it will force them to do better planning where the beneficiaries will actually inherit more and with less tax.
Andrew: The attorneys love changes, right? It just keeps them…
Ed: It’s over the accounts. It’s over the advisors. Because it awakes people to start taking action where they might’ve been lulled into a false sense of security thinking everything was fine. Now, they’re more likely to take action and positive tax planning action that will have them end up with more money and less tax to the government.
Andrew: One thing that we hit on almost every workshop and it’s I think for the listeners it makes sense to go through a little bit of the caveat here with regards to beneficiaries on IRAs of qualified money. So, a lot of times we see somebody put a revocable trust as a backup beneficiary and their trust is not set up to be a lifetime trust. It was just what they did because they thought that’s what they should do. What is the problem, the main problem with that that you see which is the complexity of having a trust listed as a primary or contingent beneficiary? And how can it negatively affect the beneficiaries?
Ed: Well, it is a problem, but it is also necessary in certain situations. The problem is, as I said before, on the program that most advisors creating these stress or advising do not have the specialized IRA knowledge. They use these garden-variety I call it or boilerplate trust that they’re same for any assets. If you notice at the beginning of every one of our workshop course manuals that you get twice a year, I have a section called IRAs are different and all the reasons why IRAs don’t play nice with other assets, they have their own tax rules, all distribution rules are and deed rules, trust rules, and really the average trust is not going to work for an IRA. It has to be set up as a specially-qualifying IRA trust that most are not. Now, the reason most people name a trust at least they hopefully this is the reason, first, let me go back the other way of why should people name a trust. And when a client asked me, “Oh, I was just with my attorney and he said name a trust.” I said, “Why do you want a trust?” and the first two reasons don’t count, “Because my attorney said so.” That doesn’t tell me why.
Second reason, to save taxes. That’s not a reason, because in some cases the high trust tax rates I just talked about actually accelerate taxes. So, tell me again, why do you think you need a trust? And the answer comes down to some version of what word? Control? Post-death control and I don’t blame people that have a million-dollar IRA or 2 million or 3 million of large IRAs. They don’t want it squandered by a 25-year-old or even a 40 or 50-year-old beneficiary that can’t handle money or they have marriage problems or lawsuits. So, when do you name a trust? Well, when you have maybe a minor beneficiary, a disabled beneficiary, a non-sophisticated beneficiary, a beneficiary you don’t think is good with money. He might squander it. He might be vulnerable to people preying on that, a spouse who can’t manage money or needs professional help. That’s why you name a trust and trust do work well with large IRAs, but under this new tax rule if it’s enacted, they will not work well at all and they’ll, for the most part, cease to exist I think because that would be replaced with a life insurance trust and better solutions that don’t have the complications and better tax outcomes.
So, those are the problems with the current IRA trust. They’re not even done correctly, and the problem is nobody finds out about this until it’s too late and the damage is done. What do I mean by it’s too late? When the person dies and then they find out, “Oh, the trust doesn’t qualify. Has the wrong provisions. It doesn’t follow the qualifying rules and now we have all kinds of problems and you probably would’ve been better off without the trust.” I’m not saying you shouldn’t have a trust. For certain control reasons, you might need a trust if you have a large IRA but this is where you have to have expert advice and these are the kind of things that our team, Ed Slott’s Elite IRA Advisor Group, is a back office to our members like Andrew and our 400 members around the country. If they have a question, Andrew has a question, you have somebody comes to you, Andrew, with a large IRA, they have a trust. As you know, you have our back office. First of all, you have all the knowledge that we give you, but if there’s a question you know you come to us. We’re your back office to go through this. There’s a lot of money at stake in these IRAs and you want to have an opinion based on expertise.
Andrew: And let’s say you did everything right with the trust qualified and so forth. The one thing too is right now with the way the laws there’s a required minimum distribution on the stretch IRA. If the individual is listed, then it can be based on their life expectancy. So, one of the challenges is if the trust is listed and everything else like Ed said that that goes through and it qualifies and this that and the other, the trust has to use the oldest life expectancy of the beneficiary which we had a situation. The client came to us after everything was said and done and had a 50-year-old as the oldest and like a 15-year-old is the youngest. Well, now each of these shares had to be that the money had to be taken out based on the older person which meant that they had to take out more of that money each year and it really over time negatively affected all of the younger beneficiaries.
Ed: See, now, in that case, you would advise or in that case, we would advise separate trusts for each of those beneficiaries so the 15-year-old could go out maybe 60 years. But that’s not going to happen in the future anyway if this law goes through and you’d be better planning. In fact, all the planning will be inverted. If you remember, I said one of the exceptions to this mandatory 10-year payout is the surviving spouse. You can have a spouse. Now, everything’s inverted. That is 75 years old. That effectively has a longer life expectancy, tax-wise than a 25-year-old as the 25-year-old would have to take it out 10 years where the spouse could roll it over and keep going to age 95 or 100.
Andrew: Yeah. That’s so true, and especially too a second, third marriage is if there’s age differences. So, we talked a little bit about RMDs and most likely whether 70.5 or 72, it’s going to stay. I think that’s pretty, we can be pretty positive on that.
Ed: Well, actually, there’s a Senate bill. Who knows where any of these is going? They have ratchet it up maybe all the way to 75. So, who knows? Something’s going to happen. They all agree that you got to get rid of that half-year because nobody understands it. I’m guessing some congressmen couldn’t understand it and so let’s grab this whole thing, for me.
Andrew: Exactly. So, a lot of times we sit with a new client and we’ll start looking at statements and digging in discovery meeting and let’s say they’re over 70.5 and, I mean, too many times as you know, Ed, just because of the advice that’s out there we’ll ask there’s 73 and we’ll ask them, “Hey, did you take out…” I don’t see any distributions from the last few. You can take out your RMD and they look at me like they just saw a ghost. They’re like, “What are you talking about? Nobody told me I had to take it out.” So, there are ways to help remedy that. If we made a mistake and we forgot to take out our RMD, what can we do to help fix the problem if we obviously start getting the right advice by a firm or CPA that really knows what they’re doing?
Ed: Well, it’s not terrible. There’s no RMD prison yet but there is a 50%, that’s 5-0, prison might be cheaper. A 50% penalty on the amount you should’ve taken out but didn’t. So, if your RMD was 10,000, if you didn’t take it, you have $5,000 penalty. The good news is that the penalty is rarely assessed if you take action. What should you do? As soon as you discover you missed one or several years, you immediately take the back-year distributions. So, now you can’t go to the back years. Well, you can’t go back in time unless you have a time machine but other than that, you would have to take them now. So, let’s say, just for example, we’re in 2019, you missed the last two years, ‘17 and ‘18, for whatever reason. You might have had a medical issue. You weren’t sure. You got bad advice. It doesn’t even matter the reason although you have some reason other than you just didn’t care because that won’t work, but whatever reason. So, what you would do now in 2019, you would take the makeup distributions for ‘17 and ‘18 plus you have your ‘19 distribution so you would have a heavy amount of distributions this year because you have your makeup distributions plus your current.
And then you go back and file what’s called form, and this is something you might do with your accountant, Form 5329. It’s a special tax form where you ask the IRS to waive the penalty but the first thing you have to do to qualify for the waiver is write a little statement. It doesn’t have to be an autobiography. It could be a couple of sentences. People get too carried away. You just work – but the things that IRS wants to know is that, number one, you’ve made up the missed distribution so you say, “Due to a financial error, an oversight, a misunderstanding the rules, I just wasn’t aware of it, a death in the family, a medical,” whatever it was, anything pretty much. “So, due to that reason, I was confused by the rules, wasn’t aware of it, but I took immediate corrective action and made up the past distributions and going forward, I’m on schedule taking current distributions.” That’s it. And they will waive the 50% penalty so you’re off the hook except you will have a bigger tax bill in the year you took the makeup distributions because those are added to the current years.
Andrew: And we’ve over the years, I think you’ve done a handful of times of help somebody who didn’t student take it out, didn’t have the proper advice, and we’ve always had it again, nothing’s guaranteed, but it’s been always where the IRS has been cool with it and they didn’t get any additional penalties and so forth. So, it’s owning up to the problem and then just following the guidelines and you guys have been instrumental in making sure when that happens for our clients that we follow it to a T. And these are things like, I mean, you would think a CPA would know how to do it but we’re having to guide the CPA in what they need to supply and so these are the type of relationships that you should be having with your advisory firm. We’re obviously not giving tax advice but we’re helping and working and partnering with the CPAs and the tax preparers and just providing them the overview and the step-by-step to help ensure that you, as the client, are going to be handled and well taken care of.
Ed: Well, here’s one thing you cannot do, and some CPAs get this wrong. I’m glad you brought that up. They’re not as well versed in the problems here. Sometimes CPAs especially the old-timers that remember the days before computers, they’ll say, “Ah, you missed a few years. Let’s just correct it going forward. Let sleeping dogs lie. Forget the past.” Well, you know what, IRS has computers now and you can’t forget the past. They will know if you missed an RMD, a required minimum distribution and you have to file that 5329. That’s the tax law, the 5329, because if you don’t file it, you are never off the hook. Now, you might hear your CPA say, “Well, there’s so many years ago. There’s a three-year statute of limitations.” Not for this because under tax court rulings, the court is ruled several times that Form 5329 because it has its own signature line. Under the law, it will be treated as a separate tax return. If you don’t file it, the statute of limitations never begins to run. So, you will have that 50% penalty hanging over your head forever.
So, the one thing you cannot do is ignore it, but I’ve heard that advice before so I’m glad you brought that up, Andrew, because you can’t ignore it. You have to address it. File the 5329 and ask for the waiver with the simple explanation I gave you. An IRS will waive it and that will be the end of it. You’ll be back on track without a penalty.
Andrew: Love it and we got a lot of questions from clients. They’re still working and they’re like, “I don’t need the income. I don’t want to take my RMD out.” So, walk the listener through maybe this is a little-known tidbit that a lot of advisors don’t know but if somebody is still working, has a 401(k), what is the benefit there in regards to RMDs and how is the system currently set up to protect them?
Ed: Well, there’s a couple of benefits. You mentioned the plan. If you’re still working so you’re 75, most company plans allow you to put off or defer you taking your RMDs so you don’t have to take them while you’re still working. As long as it’s not your own company, if you own more than 5% of the company, basically, it’s your company self-employed, it doesn’t apply to you. But if you’re in a big company, they have what’s called a skilled working exception, which means you don’t even have to take RMDs until you retire. But let’s say your monies all – so that’s good to know. That will help keep your tax bill low while you still earning so you don’t have to take wages and required minimum distributions the same year but that only applies to the company plan of the company you’re still working for. People get confused. If you have an IRA, there is no still working exception.
So, even if you’re still working for your company, if you also have an IRA, you still must continue the RMDs from there but if you’re over 70.5 taking RMDs from your IRA and you’re charitably inclined, you should be using something called QCDs, qualified charitable distributions. They’re more popular and tax-efficient than ever before, especially under the new tax law. What the QCD allows you to do is to stop making out checks. We saw this last year at tax season. People are not getting the memo. There was a big change in the tax law. People saw it for the first time on their 2018 returns. How did they find out? They went to their accountant’s office. Remember what I told you upfront, Andrew, the history teacher? He tells them, “Oh, here’s what you should’ve done.” Why?
They come in with their checks to charity and now the accountant this year had to say, “Can’t use these anymore. They’re not deductible because you have a new higher standard deduction.” Most people found that they were taking the new larger standard deductions and not itemizing, which means they got no benefit for their charitable contributions. They took the standard deduction instead. So, what you can do if you’re an IRA owner is do your charitable planning through the IRA, through a qualified charitable distribution. The way it works is you take a direct transfer from your IRA to your favorite charity or your alma mater, a hospital or whatever your cause is, and you have the funds transferred directly from your IRA as a QCD to the charity. What that does, it excludes that income from your tax return.
So, when the dust clears, you not only get the new higher standard deduction but essentially, you get the deduction of the charity you didn’t get before. Actually, you get in and out of deduction. You get an exclusion from income that can offset your RMD income. Remember, I said there’s no still working exception so you still have to take RMDs from your IRA but if you get to charity anyway, do it this way and you can offset the income from your IRA at least to the extent of the amount you give to charity and that’s the way to give charity to get the new higher standard deduction, plus the exclusion from income on top of that, that lowers your income for things like Social Security tax, Medicare surcharges, medical expenses, anything tied to your income. So, that’s the best way to give to charities. So, if you’re giving to charity, do it for your IRA.
But not everybody qualifies. The only people that qualify are IRA owners, not 401(k)s, IRA owners who are 70.5 years old or older or IRA beneficiaries who also have to be 70.5 or older, so you must have an IRA and you must be 70.5 or older, but that’s a big group. If you’re in that group taking RMDs, why pay tax on them? Give that money to charity. If you’re going to give to charity anyway, do it this way. I’m not saying give more to charity below your tax bill. I’m saying do the same, giving what you’re doing before, but just do it a different way and you’ll save money on your taxes. I’ll give you an example. If somebody’s in the 24% tax bracket, a new low tax bracket, and they give away $10,000 and let’s say there are RMD, the required minimum distribution from their IRA happens to also be 10,000 but they give 10,000 to charity through a QCD, that RMD won’t be taxable. That person will save $2,400 on taxes by giving the same gift on the same amount of the gift.
They’ll save $2,400 in taxes in the 24% bracket. So, this is a huge tax saver and it can offset the income from your RMD. So, that’s another way to put more money in your pocket. Remember, IRAs are the best money to give to charity because they’re loaded with taxes. You’re better off doing that and saving your other money for your beneficiaries.
Andrew: Yeah. The QCD, which it’s always been an important component. I know back in the day, we have to wait to like December 27 to see if congress would initiate. It’s “locked-in” forever, but it’s the biggest no-brainer out there and it’s just so few people. I think whenever I ask a client or prospective client, nobody’s ever heard of it.
Ed: I just had a situation, Andrew, where a client I just think you know how I do a lot of these advisor programs around the country. I did one last week and I gave this idea and the advisory mailed me back who said, “You know, one of my clients is a big giver to a cancer charity,”
because my advice was go to the charities. He says, “I called the charity and this is a major cancer charity. They said they never heard of it. Imagine the donations they would get if they would do it this way.”
Andrew: You know, I think you just brought up a great idea there, getting the messaging out there to local charities here. if we go and educate them that, hey, we can do a little workshop on this and just help make sure that their donors are aware of it whether they become clients or not. They can go back to their CPA, their advisors and say, “How come we didn’t know this?” I mean, think about, listeners, if you got to take out $20,000 and even if you’re going to gift and donate $1,000, who cares? Why not have a go from the custodian? The one thing that you have to know though is we use TD Ameritrade as a custodian, but the 1099 at the end of the day is not going to necessarily break it down for your tax preparer. So, it’s important that if you did a QCD that you keep your CPA on board so that they know, out of that $20,000 distribution, if you did 5,000 of it as, Ed, as you said directly to the charity so that’s important part has to go from the custodian, they have a form but they’ll send it out directly but we got to make sure that your CPA knows that you actually did it, or you may not get the full benefit.
Ed: You’re right. The 1099-R which is the form you get exactly your situation. Let’s say I think your example was 20,000 and 5,000 went to charity. You should only be paying tax on 15 but the form will show 20,000 as taxable. You have to tell the CPA. There is no coding of the 1099s usually.
Andrew: Very, very important. That’s just the whole point is have a team and make sure everybody’s working for you. So, listeners, you can hear the passion that both Ed and I have. I mean, you and I, Ed, we could sit here for five hours and discuss. But that’s one of the reasons that we’re going to have you. I’m so excited about this. We’ve been wanting to do this for a long, long time.
Ed: Yeah. I forgot about that.
Andrew: October 22, listeners, and again, obviously, local Arizona, Phoenix, Scottsdale but we got Ed and his team. They’re going to be coming out here specifically for a night and we’re going to go through all of what we discussed today and even dig deeper in how to go from having your hard-earned money tax, all the different strategies that we learned that Ed has over his career help other advisors and other consumers put more money back in your pocket. That’s going to be October 22 at McCormick Scottsdale. In the show notes, we’re also going to have the details on that. We’ll be getting that out to you, listeners, both clients and nonclient. You love doing that, don’t you?
Ed: Oh, yeah, and these are fun events. I know I hate to say it’s about saving taxes, but we make this fun and people start to understand the strategies and I love when the light goes on and they say, “Wow.” And the wheel start turning and things happen. People tend to take action and it’s really to protect your hard-earned money. We give lots of solutions, talk to them about Roth conversions, all the things that you’ve heard us talk about and how to put the plan into action. And if there’s one thing to have more, keep more, and make it last. Move your money from accounts that are forever taxed to never tax. I love tax-free. At the end of that program, you will say, “I love tax-free too because I get to keep all my hard-earned money.” That’s the big plan. That’s what we’ll be talking about October 22nd, so I hope to see you all there.
Andrew: Yeah. We’re going to bring the sexy back into the tax plan and that’s it.
Ed: The sizzle. Let’s call it the sizzle.
Andrew: Love it. So, as we end today, I know you’ve been a big component with regards to getting your messaging in public TV, PBS, let’s just talk about your new show and where the listeners how they can find it and really just your passion for educating but also helping public television with donations and everything that you’ve been doing all these years. So, the program is called Retire Safe and Secure. It’s your newest version so walk us through what that looks like.
Ed: Right. All of today for 2019 and it’s all over the country. So, you actually have to find your local station and most of the stations I’ve been out there to do them live like in Arizona I was actually out at ASU. I think that’s where we did the show with public television is in your area. The contact, I don’t know if that’s the name of the station. Do you know your…
Andrew: Yeah. It’s just the PBS basically, PBS Arizona.
Ed: Yeah, but I believe – I’m sure I was at the university. That’s what we did it, ASU.
Andrew: Oh, yeah. ASU is right here, yeah, so Arizona State right there Tempe.
Ed: Right. So, each contact the, we’ll look them up online because they showed at all erratic times so, it’s 200 stations around the country and they all showed at different times, but I know they showed that one a lot because I was out there to do it. As a matter of fact, the first thing I did, I copied that. They like to show me the sites and they showed me the big boulevard with the front part of the Psycho movie where they’re in that tower or something. Do you know what I’m talking about?
Andrew: Down in Tempe?
Ed: Yeah. Wherever there’s a street, there’s a landmark building they show me which has like a radio signal on the top and that’s the opening scene of the original Psycho movie and they said that hasn’t been touched since that movie was – it’s a landmark now.
Andrew: Yeah. I do know that.
Ed: So, that’s the thing I’m most proud of. We’re part of the Psycho movie.
Andrew: Yeah. So, just the messaging, getting it out there, the passion for what you do and, listeners, also you can go to as Ed you mentioned earlier, IRAHelp, It’s not just for the elite advisors but, listeners, it’s where you can find wherever you are in the country who can you talk to that’s part of Ed’s group. And also, you’ll be able to sign up for the different monthly IRA updates. You guys are continually putting out just fantastic information not just for the members but for those that sign up for the regular consumers.
Ed: Yeah. One thing I want to mention in case people don’t know what I do, I’m a CPA, a tax advisor, a retirement expert. I do not sell products. I don’t sell stocks, bonds, bonds, insurance, annuities, none of that stuff. I’m a tax advisor and my mission ever since for 30 years has been the same to match consumers with competent financial advisors who have specialized knowledge in this area because I think it’s critical going into retirement to be with the right financial advisors. Most don’t have the specialized knowledge. So, that’s why I’m on this program with Andrew. That’s why we have Ed Slott’s Elite IRA Advisor Group so consumers can have a place to find advisors with expertise when your life savings are on the line going into retirement. You may have one chance to get this right. Your IRA, these tax rules. It’s like an eggshell. You break it. There’s one chance to get it right. The average advisor is not up to the task, and that’s why for 30 years I’ve been training the very few advisors that invested their education and my message to you is if your advisor does not invest in this education, then you shouldn’t be investing with them.
Andrew: Yeah. I mean, think about it. You spent 40+ years working. You may have 40 years of retirement. You can’t make a mistake. You owe it to yourself. You owe it to your family to make sure you’ve got all the pieces of the retirement puzzle put together because I wish it was easy. We don’t know how long we’re going to live. You mentioned earlier that’s the biggest fear, healthcare costs. So, by saving on taxes and being smart and efficient, and knowing the rules and you can’t do it on your own so that’s where, Ed, your passion for getting it out there, helping us. I really just appreciate what you guys do. I’m looking forward to seeing you on September 18th, 19th, 20th. We’ll be holed up at the Westin.
Ed: Yeah. That’s our own training session in Dallas but I’m more excited now about seeing everybody there. October 22nd because your crew can come to that.
Andrew: That’s right. We’re going to have some fun. We’re going to learn. There’ll be some giveaway and then there’ll be a chance for each of you to sit down and just ask us questions and see if you’re on track. So, Ed, I know your time is valuable. You’ve said it all. I know we could say a lot more, but thanks for all you’re doing.
Ed: What? We’re done already. Are you kidding me?
Andrew: All right. Let me take you for another hour, listeners.
Ed: Oh boy, that flew by. I mean, we’re having a good time but a lot of great information. Andrew, you’re doing a great job getting this information out to people who desperately need it so I’m proud to be on this show.
Andrew: Awesome. And, guys, this is just tip of the iceberg of what we do. All of your situations, everyone’s different, everyone’s got their own story. So, whether you work with us or another fiduciary firm, make sure that you have the best team out there because you deserve it. And that team should be continually learning and putting you in the best position to have success at retirement and beyond. So, Ed, thanks again. We appreciate it. Listeners, tune in later this month for another episode of Your Wealth & Beyond. Happy planning, everybody.