Addressing YOU: Answering Questions from Our Listeners

[00:02:49] Dean Barber: Okay, so first off, the Roth IRA was introduced back in 1997 by Senator Roth, probably the best piece of legislation ever written. And JoAnn Huber, our lead CPA, as well as Ed Slott and I, we discussed the Roth IRA and RMDs in several other episodes of The Guided Retirement Show, Episode 1, Episode 2, Episode 18, 35, 31, and 45. We’ve had a ton of discussion around this, but first of all, the Congress makes up the rules. And so, the idea behind, I think, the last part of that first.

So, the 401(k) has a required minimum distribution, even if it’s a Roth 401(k), if you’ve reached age 72 and you’re no longer working. Now, if you’re still working and you’re 72 years old, the RMDs do not apply on the 401(k). However, if you take that money out of the 401(k), enroll it to an IRA, if it goes to a traditional IRA, RMDs will apply. If it goes to a Roth IRA, RMDs will not apply. RMD rules are very, very specific and they’re complicated. And the problem is that if you mess up on an RMD, it’s not just an oh, it’s okay type of a thing from the government. It’s a 50% excise tax.

[00:04:16] Chris Rett: Yeah, the government’s not very forgiving.

[00:04:18] Dean Barber: Right. And again, there’s no do-overs. So, make sure that you get these right. This is where it’s critical to have a good financial planner that is familiar with the tax laws as well. And as to the first one where they’re talking about…

[00:04:31] Chris Rett: And they’re getting rid of RMDs.

[00:04:32] Dean Barber: They’re not going to get rid of it.

[00:04:33] Chris Rett: Right.

[00:04:34] Dean Barber: Look, think about it this way. The required minimum distribution is the easiest way for the government to increase revenues without raising taxes. That’s the same thing that they did with the SECURE Act of requiring money to come out of an inherited IRA within a 10-year period. They’re going to increase revenue to the Treasury without increasing taxes by forcing more money to come out of those retirement plans that have never been taxed.

[00:05:01] Chris Rett: Makes sense.

[00:05:03] Dean Barber: Alright, let’s move on.

[00:05:04] Chris Rett: Okay. So, Todd T. in Missouri, “Is it better to have contributions going into regular 401(k)s, Roth 401(k)s, or a combination of both? I have both options in my 401(k). If both, what percentage in each account?” This seems to be a common question, we get time and time again.

[00:05:20] Dean Barber: It’s a really common question, and I think it’s a critical question. So, anybody that’s listened to me on The Guided Retirement Show for any period of time or on America’s Wealth Management Show, which is our radio program, I say that you should never put your money into anything until you know what the rules are going to be when you want to get the money out.

[00:05:40] Chris Rett: Right. Makes sense.

[00:05:41] Dean Barber: What are you going to do with that money? So, Todd, we could answer the question in a couple of different ways. First off, it really depends on your tax situation now and what tax situation you think you’re going to be in in the future. I will tell you that, let me take a person like myself, mid-50s, peak earning years, and I have the ability to put into a tax deferred or the pretax, the regular portion of our 401(k), or I can go into the Roth portion of our 401(k).

So, what I’m going to do is I’m going to look into the future on this, okay, when I retire, will I be in a lower tax bracket then, knowing what I want to spend? Or will I be in the same tax bracket? Or will I be in a higher tax bracket? I will make my decision based on that.

If I believe that I’m going to be in a lower tax bracket in the future when I retire because I projected out where I’m going to get my income from, etc., I’ll use the traditional so I can get the deduction today. And then, in those early years of retirement, I’ll do some Roth conversions. If, in fact, you’re young and you haven’t hit your peak earning years and you got a long time to let that money accumulate…

[00:06:50] Chris Rett: And taxes could be increased in the future.

[00:06:52] Dean Barber: Right. I’m a big fan of the Roth at that point. What do you think, Chris?

[00:06:55] Chris Rett: I like that, yeah. And I think it’s important to understand, too, a lot of people that come to us don’t realize that employer plans that match, the matching is already going to be tax deferred. So, if you’re looking to hedge some peace, some might be considered for the Roth as well.

[00:07:09] Dean Barber: Right. Now, I don’t know if you know this, I think you probably do, but there’s a caveat to that. There is actually legislation before Congress right now that was passed with strong bipartisan support through the House Ways and Means Committee in a new act called the Son of the SECURE Act, where they’re proposing to allow the employer to use a Roth contribution. If you’re contributing to a Roth part of your 401(k), the employer portion of that would also go into a Roth 401(k).

[00:07:37] Chris Rett: That’s fantastic. No, I had not heard that.

[00:07:38] Dean Barber: Okay, what does that do, though? Here’s the question. What does it do? Why would they do that? Okay, it’s after-tax money that the employer is putting in.

[00:07:48] Chris Rett: So, they get the revenue.

[00:07:50] Dean Barber: So, they get the revenue now as opposed to in the future when the money comes out.

[00:07:53] Chris Rett: Makes sense.

[00:07:54] Dean Barber: Okay. So, any time the government does something, you have to ask yourself, what’s the ulterior motive?

[00:07:59] Chris Rett: Yep, or what’s in it for them?

[00:08:00] Dean Barber: Right.

[00:08:01] Chris Rett: Exactly.

[00:08:02] Dean Barber: Alright. We’ve got Bruce from Kansas. What do we get from Bruce?

[00:08:04] Chris Rett: Bruce wants to know, “What are your thoughts or recommendations on converting tax-deferred 401(k) funds to an index universal life contract? The strategy is being recommended by other financial planners, but seems to be very complex and needs to avoid becoming a modified endowment contract also known as a MAC.”

[00:08:24] Dean Barber: Okay. So, I could go on to a huge, huge tangent here, Bruce. What I will say is this, is that if you think about insurance in its purest form, insurance is supposed to be a transfer of risk, right? So, life insurance in its truest form is meant to insure the life of an individual and protect the people that that individual leaves behind in the event that that person is no longer able to provide for the family. It can also be used to pay for estate taxes and things like that.

I’ve never been a huge fan of looking at life insurance as an investment. So, in other words, overfunding that life insurance policy, taking money out of an IRA, putting it into a life insurance policy with a promise of tax-free income in the future, right, here’s the secret. This is how it works. So, what happens is I’m going to take the word life insurance out of this for just a second, Chris, and I’m going to use car insurance as an example.

[00:09:35] Chris Rett: Sure.

[00:09:36] Dean Barber: Alright. So, let’s say that you are driving your car, and well, just for sake of the podcast here, we’ll say we’re driving a Chevy pickup.

[00:09:44] Chris Rett: Okay.

[00:09:45] Dean Barber: Okay. And it’s costing us $1,200 a year or $100 a month to insure that Chevy pickup.

[00:09:51] Chris Rett: Yep.

[00:09:52] Dean Barber: We’ve got all the regular limits of liability, the collision, all that good deductible or whatever. And the insurance agent comes to you and says, “Hey, Chris, we got a new policy here. We got a new car insurance policy that’s going to have the same limits of liability, that’s going to have the same collision, all the other same deductibles, I said all are going to be the same, but the difference is, instead of you paying $1,200 a year, we’re going to ask you to pay us $10,000 a year.

And then, what we’re going to do, the insurance company, we’re going to take that money and we’re going to put it into these indexed funds over here. And we’re going to make some money on that. We don’t know how much. We’re going to just promise you that you’re never going to lose anything, but you made an average 5% or 6% on that money over time, if you’re lucky. And if you want to use that money in the future, we’ll loan it to you.

[00:10:46] Chris Rett: I’m not following, yeah.

[00:10:48] Dean Barber: But that’s the way life insurance works, Chris, right? You overfund the policy that’s meant to provide a death benefit. The insurance company takes that money. They make money on it. You want to use it, you have to borrow it. The reason the income from those universal life policies is tax free is because it’s a loan. It is a loan of your own money. And by the way, you already paid taxes on the money when it came out of the tax deferred plan. Now, you put it into the tax-free plan. When you’re spending your own money, it’s not taxable. When you borrow money, it’s not taxable. Look, you’ll never, ever, ever, you can’t make the math work on these things. You can’t make the math work. Have you run into this, Chris?

[00:11:31] Chris Rett: I have run into this a lot. And what I always tell clients that come to me as the first rule of thumb is, if it seems to be complex, or you can’t explain it to a five-year-old, you are not to invest in it. That’s my general rule of thumb. The second thing I always look at is we talked about it before the government is how is the person getting paid? A lot of times, the advisors use these commissionable products to pitch the idea of what could happen in the future. And they don’t recognize that they’re getting a big upfront commission. So, they’re not really there to stick around for the long haul if they get an upfront commission.

[00:12:03] Dean Barber: Right. Most of these policies, like this, I’m not going to say all of them, because a lot of them are different, but most of them will pay the insurance agent. I won’t call him a financial planner, I’ll call him an insurance agent or a financial salesperson because that’s really what they’re doing here.

[00:12:20] Chris Rett: Yep, that’s more accurate.

[00:12:23] Dean Barber: They’ll get a commission that’s maybe 100% of the first-year premium. And who’s going to win? Insurance company wins, and the insurance salesman wins, and the individual that loses is the person who does it. Don’t do it. Bruce, I’m going to tell you, don’t do it.

[00:12:37] Chris Rett: Yep. And the other thing that flies under the radar, I think, a lot of these policies is these insurance companies will change the crediting options year 1 or year 2. They’re not obligated.

[00:12:46] Dean Barber: You’re right. They can change the rules anytime they want to.

[00:12:48] Chris Rett: Absolutely.

[00:12:49] Dean Barber: On their anniversary date, guess what? You’re stuck with it. And they know that.

[00:12:52] Chris Rett: So, what sounds like 100% of the S&P 500 quickly gets reduced to cap at 10%, 9%, 8%. We’ve seen it happen all the time.

[00:12:58] Dean Barber: Yeah, I don’t like them. And Bruce, if you need us to walk up against whoever is telling you to do this, and we can analyze it for you, we’re happy to do it.

[00:13:06] Chris Rett: Yep. So Curtis from Missouri says, “When is the market going to correct and reflect what Biden is doing?”

[00:13:12] Dean Barber: Okay. It never will. Alright. So, here’s the thing. And this just goes back to pure economics. Government spending equates for 15% of our total GDP. Corporate spending equates for another 15% of our total GDP. Consumer spending equates for 70% of our total gross domestic product. So, what we do as a consumer drives 70% of economic activity.

The thing that drives me crazy more than anything else, Chris, is that our politicians want everybody to believe that it is they, the politicians, who are the ones that are making things great. And the reality is that it’s us, it’s us waking up in the morning and brushing our teeth and turning on our electricity and driving our cars and going out to eat and having birthday parties for our kids and doing events, going to concerts, going to sporting events. It’s us living our lives that drives 70% of our economic activity.

Now, can Biden slow economic activity because of penalizing people, raising taxes, putting more regulations on businesses and things like that? Yeah, but the impact is so, so, so small, and it takes a long time for that to take effect. So, what Biden’s doing today is all about what? His party is known to do, which is want to grab more power, grab more power, grab more power, make everybody believe that it’s them that is why America is so great, but the reality is Americans are why America is so great, yeah.

[00:14:47] Chris Rett: American people driving the economy.

[00:14:50] Dean Barber: It is what we do. So, it’s a great question, it’s one we get all the time. So, politics don’t affect the market the way that everybody thinks they do.

[00:15:00] Chris Rett: Yeah, markets don’t favor a political party over the other.

[00:15:03] Dean Barber: That’s right.

[00:15:05] Chris Rett: David R. in Kansas says, “What inflation rate are you currently building into your retirement plans?”

[00:15:10] Dean Barber: Right. This is a complicated question, but it’s critical because we see a lot of people that are building in inflation rates as they’ve seen inflation over the last decade. Maybe it’s 2%, maybe it’s 2.5%. I think that’s suicide, right? So, a core inflation rate is about 4%. That’s what we’re going to put in, but you have to think about inflation in terms of what are you inflating? Let’s take healthcare, for an example. We’re inflating healthcare 6.5%, and that might be too conservative.

[00:15:45] Chris Rett: Absolutely.

[00:15:46] Dean Barber: We may need to reflect inflation higher than that on healthcare costs. If you go into retirement with a mortgage, and let’s say that your mortgage payment is $1,500 a month, and it’s going to be that way for the next 10 years and then it’s paid off, there’s no inflation on that $1,500 a month. And you can look at how often are you going to replace vehicles? Or what’s the inflation on vehicles? How often are you going to– what are you going to do for travel, energy, those types of things? You should break that down in a budget and you should inflate different expenses at different rates if you really want to get accurate about it.

[00:16:19] Chris Rett: But you’re saying, the base that we run in on our plans is 4%.

[00:16:23] Dean Barber: Yeah.

[00:16:24] Chris Rett: Okay.

[00:16:25] Dean Barber: And the amazing thing is, Chris, you know this as a CERTIFIED FINANCIAL PLANNER™, that if you run a plan at 4% and then you run that same plan at 2.5%, you’re going to get totally different outcomes.

[00:16:34] Chris Rett: Yeah, and we always coach our clients to say we want a plan. We want to be overly optimistic when it comes to your retirement, but we want to be pessimists, we want to plan for the worst-case scenario when it comes to planners.

[00:16:45] Dean Barber: That’s what you have to do. That way, we are prepared.

[00:16:49] Chris Rett: Absolutely, yep. So, Robert R. in Missouri has another question on inflation, “So, seeing inflation rising and bad Washington policy, how soon will you reallocate profiles? Also being retired, will you reallocate differently than a 30-year-old who is building his portfolio?”

[00:17:05] Dean Barber: Okay, so first of all, there’s a link in the show notes here, and you’re going to find a lot of different resources there. So, we go back to Bruce, where he was asking about universal life. There’s a video that’ll be out there called Never Be Sold Insurance. There is also a Retirement Plan Checklist that talks about how to put inflation properly into your retirement plan. Also, out there, through that link in the show notes is an article, Lumber, Commodities, and Inflation Fears, where we wrote this article not too long ago. And it basically flies in the face of what mainstream is saying, is this great inflation coming?

Because this inflation that we see is, we believe, temporary. So, we don’t think that inflation is really going to become a factor for probably another two or three years. And there’s a lot of reasons behind that, but the bottom line is we’re not going to make a knee-jerk reaction to adjust a portfolio because of a couple of months of inflationary data. We need more information and we need to be convinced that this is a longer-term issue, and inflation is one of those things that doesn’t sneak up on you. You can see it coming.

[00:18:17] Chris Rett: You can read the tea leaves.

[00:18:18] Dean Barber: You really can, but the other part of Robert’s question is that we will reallocate the portfolios based on two different scenarios. Number 1, if they get out of balance where they need to be, and number 2, if the objective of your overall plan changes, that requires a change to that allocation. And obviously, the thing that we’re looking to do is try to be as conservative as we possibly can to still maintain those goals. And we will always reallocate differently for somebody that’s in retirement versus somebody that’s 30 years old trying to grow their money.

[00:18:52] Chris Rett: Absolutely, yep. So, Howard K. in Missouri, “Traditionally, is it suggested that it is best to hold off taking Social Security until age 70 if you don’t need it now? Lately, I’ve been hearing discussions around taking it now.” He’s currently 66 and a half and investing it, suggesting one may earn more in the investment market than you would gain by waiting. Your thoughts on this approach?

[00:19:14] Dean Barber: Alright. So, first of all, I’m going to direct Howard out to a couple of other episodes of The Guided Retirement Show, Episode 34 and 49, Marc Kiner, Jim Blair, Social Security decisions, guide, all out there through that link in the show notes. To answer the question here, when you should claim your Social Security is a really personal thing. And it’s going to depend on your own personal situation.

[00:19:38] Chris Rett: It’s a unique scenario.

[00:19:39] Dean Barber: There is an 8% increase in the benefit per year for every year past age 66. And so, in some cases, I don’t know anything about whether Howard’s married, whether he’s not married, if he’s single, yeah, you probably can take it and maybe you can invest it, it depends on how long you’re going to live. The longer you live, the longer you wait, it helps, right?

[00:20:05] Chris Rett: Absolutely.

[00:20:06] Dean Barber: If you’ve got health issues and you think you’re not going to make it to 75 in Howard’s case, take it now. This is not a decision that is, one, that you can say here’s a rule of thumb. I would do this or I would do that. What I would say is, Howard, let us put your personal situation into our guided retirement system and let’s see what makes the most sense because we can actually show taking Social Security now versus taking it at 70, investing it, and then see, what does that do to the overall plan? What does that do to your ability to spend what you want to spend throughout your retirement? That’s really the answer, I think, that most people want. What’s my goal? Am I trying to accumulate assets? Or am I trying to just increase my income?

[00:20:49] Chris Rett: No. And for other listeners out there that are considering taking early to beat the market, 8% guaranteed year over year is tough to beat.

[00:20:56] Dean Barber: It is, it is. And so, again, it depends on if you’re married, right? Who’s the older? Who is the main breadwinner? Which one do you want to maximize?

[00:21:05] Chris Rett: Yeah. Health concerns, longevity.

[00:21:07] Dean Barber: Yeah, I mean, look, when I wrote the book Social Security Essentials all the way back, I think, in 2009, where we talked about the hundreds of different ways that people could claim their Social Security, and of all the people that have come into our office, and we’ve run the planning and we’ve looked at their Social Security claiming strategies, it’s very rare that you find two people that it’s exactly the same thing.

[00:21:32] Chris Rett: Rarely is anywhere.

[00:21:34] Dean Barber: Yeah.

[00:21:35] Chris Rett: So, no, that makes complete sense. So, Paul A. in Kansas, “In retirement, with the exception of an upfront fee, why are annuities bad, at least for part of a person’s portfolio? In retirement, I need to know what my income stream will be. I may miss out on some of the upsides of the market from time to time, but I don’t stress about any market correction during that time. I would be curious to know your thoughts.”

[00:21:56] Dean Barber: Alright, so we did a video, Paul, and that again is in a link in the show notes called Are Annuities a Good Investment? So, just about all these questions that we’ve gotten, Chris, we’ve done extensive research. We’ve done either podcasts on them. We’ve got videos out there on them. So, the annuity in and of itself is not a bad investment. And I don’t think anybody can say annuities are bad.

[00:22:21] Chris Rett: You’re like saying all cars are bad.

[00:22:23] Dean Barber: Right. Okay, what’s happened is that the annuities, they’ve gotten sold by financial salespeople, goes back to the whole thing with the guy with the life insurance question.

[00:22:38] Chris Rett: Yeah, well, the first.

[00:22:39] Dean Barber: Okay. What am I trying to accomplish here? What does the annuity actually give me? And what am I giving up in return?

[00:22:48] Chris Rett: There’s always a tradeoff.

[00:22:49] Dean Barber: 100% of the time, there’s a tradeoff. If there were such a thing, Chris, as an annuity that never had any surrender charges, it never had any upfront charges, it had the ability to give me tax-deferred growth, it had the ability to give me a guaranteed income without any tradeoffs, and I can change my mind and I can do things different with it in the future, I’m all about it.

[00:23:16] Chris Rett: We would sign up for it.

[00:23:17] Dean Barber: Right. Those don’t exist. What happens is, again, you’re talking about an insurance company that is going to guarantee you a stream of income for life. You’re going to give up something for that guaranteed stream of income for life. And as many different types of annuities are out there, and then the number of different insurance companies that are issuing those annuities, you’re going to find different rules within all of these different annuities.

So, now, there are some annuities today that are what we would call a fee-only annuity, which means that they are for fiduciaries, they’re for IRAs that they don’t have any upfront costs, they don’t have any surrender charges, you can take your money, do whatever you want with it anytime you want to. You get the tax deferral. And there are some reasonable benefits that some of those have. I tend to favor the flexibility, but if you’ve got limited resources and you know that you have to have X amount of dollars, that money has to be guaranteed, and it can’t waiver because all you’ve got is X amount of dollars plus Social Security, then maybe an annuity makes sense, but don’t just go think I’m going to go buy an annuity. Do the research and understand what your options are.

[00:24:41] Chris Rett: Well, and I think it’s always a good practice, too, just with anything, whether it’s stocks, whether it’s bonds as I think there’s an upper limit on how much you should take in your portfolio. I think the listener mentioned portion, and like what you’re saying, too, is never, ever, under any circumstances, invest the whole far amount on an annuity.

[00:24:57] Dean Barber: Well, that would be like saying, let’s just go put my retirement plan in Bitcoin.

[00:25:03] Chris Rett: Seems reasonable.

[00:25:04] Dean Barber: I know, but again, see what your money needs to do, measure your resources what you want to do, go through, use our guided retirement system to create the plan and say, “Okay, if I put an annuity here, does it improve my probability of success? Or does it detract from my probability of success?” That gives us the answer in real math as opposed to again, oh, man, I got this great annuity. And again, most annuities, these people don’t go out and seek to buy them, they get sold by salespeople.

[00:25:32] Chris Rett: Absolutely. Yep. So, it’s just important to never overinvest in them and understand how they work.

[00:25:36] Dean Barber: Absolutely.

[00:25:37] Chris Rett: So, Gregory in Missouri, “I would like to preserve the gains made in my IRA portfolio, majority of it,” which he claims is in VFIAX. “I’m retired at 65, having $700,000 invested and a million dollars in the mutual fund. I’m considering a strategy that’s called reverse dollar-cost averaging. Each month, I sell a fixed dollar amount and move it into cash. This protects a monthly growing portion of the gains and reduces the risk of loss should the market correct, yet allows for a portion to grow should the market fall.” I’m sorry. This is a really…

[00:26:15] Dean Barber: Well, what he’s basically saying here, Chris, is should I sell this S&P 500 index fund, which is what the VFIAX is. All at once, should I preserve those gains? Should I take it out a little bit over time? And Gregory, you’re asking a very legitimate question here on what you should do. Here’s the way that I would look at this. I would say, sit down with whoever your CFP is here at Barber, and let’s plug this entire scenario into your financial plan and let’s look at what’s really important to you, let’s look at what you want to spend, and let’s measure the resources.

And I would say that with where we are with the markets today, with the elevated market values, even though they can stay overvalued for a period of time, let’s look at what’s the portfolio that’s necessary to allow you to accomplish all of your objectives with the highest probability of success and the least amount of risk, and then let’s pare down the risk now. Okay, let’s wait for the next 19 or 18, 24, 36 months, there’s something coming. You and I know it.

[00:27:35] Chris Rett: There always is.

[00:27:36] Dean Barber: Right. We don’t know when it is, but we know when markets get this elevated that there is a possibility of a pullback. We also know that in order to get price to earnings ratios back to where they need to be, that we need three and a half years of zero return in the market to get the price to earnings ratios back down below 20. And so, we’re either going to see markets pull back or we’re going to see almost nothing for a period of time. So, just owning an index and that much of a portfolio, I would say it’s time to address it more than just doing a little bit at a time, find out what the portfolio needs to be with the least amount of risk that will get you what you want and make that decision and do it now.

[00:28:22] Chris Rett: No, I completely agree. And I think it comes back to, Dean, we can’t say it enough is having a plan and executing the plan.

[00:28:28] Dean Barber: Absolutely. You have to do that. Greg had a second question.

[00:28:30] Chris Rett: Yep, follow-up question, “I know I can’t use IRA funds to pay the taxes when I do a Roth conversion, but next year, couldn’t I withdraw some of that converted money from the Roth and pay the taxes on the second year Roth conversion, then use this as a rolling strategy until my traditional IRA funds are all completely converted?”

[00:28:50] Dean Barber: Okay, so let’s clear up some misconceptions here. You can use the IRA money to pay the tax on the conversion. That’s very simple, right? The question is, does that make sense? So, Greg, again, what you want to do here is you want to run the scenario out, not just in a math problem and taking that IRA and putting it under a microscope and doing a Roth conversion analysis there, you want to do that Roth conversion analysis and figure out the tax consequences of that in the context of the overall plan. And that’s the only way you’re going to actually get the right answer, correct?

First of all, if I’m going to convert to a Roth, I’m not going to take money out of that Roth next year just to pay the taxes on a conversion I’m doing the following year. That to me, doesn’t make any sense.

[00:29:40] Chris Rett: To rob Peter to pay Paul.

[00:29:42] Dean Barber: Because you can actually take the money out of the IRA as you’re doing the conversion.

[00:29:45] Chris Rett: Correct. Now, is it true that before for our listeners under the age of 59 and a half that is there any type of prepayment penalty?

[00:29:52] Dean Barber: Yeah, you can’t do that under 59 and a half, and listen, he says he’s 65 years old and retired. So, we don’t have that 59-and-a-half rule here.

[00:29:59] Chris Rett: Gotcha. So, Vincent C. in Missouri, can you do a multiyear forward-looking tax plan along with retirement income plan and distribution strategy while still working and not retired?

[00:30:11] Dean Barber: 100%. And that’s what you should be doing. And if you think about it, let’s say that you’re going to retire at 65, and you’re 55 today. Alright, you can start to put that strategy together because what we want to understand is what are the resources you have today? What’s the net income that you’re going to need to have in the future? And when are we going to claim Social Security? Is there going to be inheritance in the future? We factor all that into the plan. Then, what we want to do is, alright, in order to get the net amount after tax that you want to spend in retirement, where should we be saving today? That’s the beginning part of creating that forward-looking distribution strategy.

So, the forward-looking distribution strategy, we have to step into the future and then reverse engineer all the way back to today. Rhe question that we have to answer now and take action on is where do we put our money now, so that we can get that forward-looking strategy in the future? And we have to also understand that we have a bunch of sickos in Washington that want to change the tax code on us, it seems like every other year or two. So, we have to be flexible and we have to know that a plan that we put together today may need to be changed in 18 to 24 months.

[00:31:20] Chris Rett: Yeah, no, I completely agree. And a scarier follow-up question to that, Dean, could you imagine planning it any other way?

[00:31:26] Dean Barber: No, but the thing is, you can do it. You can put it together and you should.

[00:31:31] Chris Rett: Absolutely, yep. So, Judy R. in Kansas, “I funded my trust. I made the trust, the beneficiary, my bank account and my IRA account and my Roth account. Is this correct?”

[00:31:47] Dean Barber: Okay, so, on trust, you have to understand that it depends on what you’re trying to accomplish. As many different ways as you can think about, there can be a trust that can be made. So, first of all, your trust should probably own the bank account, not be the beneficiary of the bank account. If you want the trust to be the beneficiary of your IRA and your Roth accounts, what that means is, is that the trust has to be a conduit trust.

In other words, it has to see through, it has to be designated beneficiaries of the trust. And then the money basically flows through the trust to the designated beneficiaries. It can’t stay in the trust. Well, it can, but if it does, the trust has no life expectancy, right? So if the money just flows into the trust and it’s not a conduit trust where it flows out to other individuals, then what winds up happening is…

[00:32:40] Chris Rett: It might be defeating the purpose.

[00:32:43] Dean Barber: Yeah, because the trust has no life expectancy and because all IRA and Roth IRA rules are based on life expectancy, all of a sudden now, that trust has to distribute 100% of the money, and it’s all become taxable in the same year. So, there’s a lot of different ways and a lot of different methodologies, it really depends, Judy, on what you’re trying to accomplish.

If you’re trying to control the distribution of wealth from those IRAs and those Roth IRAs, you probably need to look at an IRA trust. If it’s simply just you want to make sure that the money is getting to the right beneficiaries and you don’t want stipulations on how quickly they can take it out, just naming the designated beneficiaries, the individuals there instead of the trust, maybe cleaner.

[00:33:23] Chris Rett: Okay. Carrie L. in Missouri, “I was diagnosed with invasive breast cancer almost five years ago. I am 61, my husband is 62. I’m retiring next year. I’ll start drawing my Social Security early while my husband will continue to work till I turn 65. We are debt-free with a house and everything else. We have $600,000 in a 401(k). House is worth $425,000. I’m thinking, it makes sense for me to withdraw early and for him to take his late.” Is she on the right track?

[00:33:53] Dean Barber: Okay, 100%. First off, let’s say to Carrie, we’re sorry to hear about your breast cancer. Well, let’s hope that they’ve got everything, and you live a long, happy, healthy life.

[00:34:02] Chris Rett: Absolutely.

[00:34:03] Dean Barber: But yes, you’re on the right track here. So, here’s what I would say to this is that, you taking at 62, absolutely. Your husband works till 65. You got $600,000 in a 401(k) plan. What I would want to see, and whether or not your husband should take at 65 would be this. What is the net income need that the two of you need? And what’s the benefit of your husband waiting until age 70? Because remember, after age 66, you get a guaranteed 8% per year growth on that Social Security check.

So, in the event that Carrie’s husband would pass on before her, it would be critical that she gets as much Social Security as possible. So, the way the Social Security works here, Carrie, is that the first spouse to pass, the surviving spouse keeps the larger check. I would be in favor of your husband, if it’s feasible within the overall plan, of your husband delaying Social Security to 70, because if he passes on, you’re going to need a bigger Social Security check. We’re going to get one of those checks as large as we possibly can if the plan works that way. Go to the link in the show notes, request a complimentary consultation, and we can actually give a definitive answer there so that you’re making the exact right decision.

[00:35:30] Chris Rett: But to sum up, when somebody has a health concern, you are in favor of taking it early.

[00:35:35] Dean Barber: Especially for that person who’s sick.

[00:35:37] Chris Rett: Yep.

[00:35:38] Dean Barber: Yeah, we’ve got to have some time to enjoy life.

[00:35:39] Chris Rett: Absolutely. While we’re healthy.

[00:35:41] Dean Barber: Absolutely.

[00:35:43] Chris Rett: Kevin G. in Kansas, “What specific areas of a retirement plan will be impacted by potential inflation? And what approaches are best to hedge against these inflation impacts?”

[00:35:54] Dean Barber: Okay. So, we talked about inflation here just a little bit ago, Chris. And essentially, you want to look at all the different places where you’re spending money and inflate those at different rates and based on what those are inflating it. And you want to make sure that you’re doing that as you’re updating that plan throughout the years. Potential inflation hedges are stocks. Stocks are inflation hedge. Real estate is an inflation hedge.

Commodities are sometimes an inflation hedge. Land, those types of things, it depends on where the inflation is flowing, but the best thing to do here in this instance, Kevin, is to build these higher inflation rates into your plan, and then we can look at what asset allocation from a historical perspective has been able to provide the best protection against that and be able to give you that increased income in the future.

[00:36:40] Chris Rett: That makes sense. Honey H. in Missouri, “Supposedly, the government may mess with our IRA and 401(k) accounts.” What can we or she do to protect that?

[00:36:52] Dean Barber: Alright. Let’s pair that up with Billie M. in Missouri. He says, “What’s all the noise we’re hearing about 401(k) being in jeopardy from the Biden administration?” And the reality is this. So, there’s a lot of talk out there. The only thing it’s actually been signed into law is the SECURE Act. And the SECURE Act basically says when you pass on, and the money passes down to the next generation, that the beneficiaries, your children, have to get all the money out of that IRA within a 10-year period or the 401(k) within a 10-year period. There’s no other legislation that’s been passed at this point in time. So, anything else that people are hearing, that is simply noise, right? And so, until we have legislation, there’s really no way to plan for it.

There is talk about limiting the size of IRAs. So, there’s talk about limiting the size of an IRA to $5 million. If you get more than $5 million in an IRA or Roth IRA, you’re capped out. You can’t get any bigger than that. So, you have to start taking money out. That’ll never pass, by the way, because that’s just ludicrous that they would even think that they would have authority to control something like that, but many times, when you get some questions like this, I’m like turn off the news because the people are telling you things that are trying to scare you. In a lot of cases here, they may be trying to scare you to sell your financial products so really be careful.

[00:38:11] Chris Rett: Well, not only that, you and I joked offline before this and we talked about the same conversations we had when Roth IRAs were started. We know the benefits of Roth IRA. So, it’s important that we put down the pitchforks just now until we see how this can possibly benefit us before we start getting angry.

[00:38:27] Dean Barber: Yeah, it’s interesting because back in ‘97 when Senator Roth introduced the Roth IRA, which I said at the beginning of the program today was one of the best pieces of legislation ever written. I had clients, and I’m like, okay, this is the best thing ever. Convert it all.

[00:38:41] Chris Rett: Yeah. Eighth wonder of the world.

[00:38:42] Dean Barber: Do it because you can spread the taxes out over a four-year period. And I have people going, oh, no, no, no, no, no, no, no. I would never do that because why? I don’t trust the government. And what’s to say they won’t change that law again in the future? The people that did it, Chris, have been laughing.

[00:38:58] Chris Rett: Laughing all the way to the bank.

[00:39:00] Dean Barber: Tax-free income for the rest of their lives doesn’t cause their Social Security to become taxable. It’s been amazing. So, I don’t know what you guys…

[00:39:08] Chris Rett: Change that channel. Yeah, change the channel.

[00:39:10] Dean Barber: I don’t know what you’re hearing, but I would say let’s not worry about those changes until they actually become law.

[00:39:16] Chris Rett: Well, and further see how it can benefit you first before we…

[00:39:20] Dean Barber: Yeah. But here’s the key, have a plan in place, a comprehensive financial plan. Use our guided retirement system, okay. And if you do that, and that plans in place, then you go, “Oh, there’s a tweak to the law. Let’s apply that to the plan.” You can say, “Oh, here’s how to fix it.” And if it doesn’t affect it in a meaningful way, then you don’t make any changes. If it affects how it’s going to pass to your beneficiaries, you make that change. If it affects your ability of how much you’re going to get an income and be able to spend, then you address it at that point in time.

[00:39:48] Chris Rett: Oh, that’s a great point, Dean, is that I know that we here have conversations all the time about what ifs and what coulds and things like that only in the context that we show that we can pivot with our plans. It’s not a matter of we’re nervous about it, but I think it’s important that all the listeners out there sit and think about is, hey, do I have a plan that can pivot in the event of something that could happen? Not that we’re worried about it, but can I pivot?

[00:40:11] Dean Barber: Yep, you have to have it.

[00:40:13] Chris Rett: John A. in Missouri says, “We have an 80-acre farm, and what would be the best way to leave that to my son, either sell the farm now and leave him with the money or leave him with the farm and let him sell it?”

[00:40:23] Dean Barber: It depends on Biden. Okay. Well, here’s what I say to that. So, right now, his son, John’s son, would have what’s called a step-up in basis. So, I have no idea what John paid for the 80 acres, have no idea what it’s worth today, but if John dies and…

[00:40:41] Chris Rett: For the sake, we’re assuming there’s been some gain.

[00:40:43] Dean Barber: There’s some gain. If John dies and leaves his son the 80 acres, then the cost of the 80 acres when John’s son sells it is deemed to be the value of the date that he inherited it. Okay, so if you did it that way, there’s no taxes due on the sale of the farm.

[00:40:59] Chris Rett: Because essentially, they’re showing no gains.

[00:41:01] Dean Barber: Right. If John sells the farm before he passes and then gives his son the money, there’s pros and cons. You sell the farm and you get the money, but you have to pay the taxes at capital gains rates, but then again, you get a chance to see your son enjoy the proceeds of that farm. So, I mean, from a tax perspective, let him inherit the farm, right? If it’s more important for you to be able to see him enjoy that, or there are some things the two of you want to do together, and that’s more important than not paying taxes on the sale of farm, then go that route.

[00:41:31] Chris Rett: Yeah, that makes sense. So, Don from YouTube, “I have a stock that I got for zero dollars that’s worth over $5,000 this year. Can I sell the stock and realize zero percent capital gains paying only estate tax? Or can I convert that $5,000 of IRA money at 12%, plus the estate tax? Which option makes more sense here?”

[00:41:50] Dean Barber: Okay, the question really doesn’t make any sense because if it’s $5,000 worth of stock and you’re in the 12% or 10% bracket, you can sell it, and there’s no capital gains, but if it’s already in an IRA, then the capital gains rates don’t apply. So, if it’s an IRA and it’s $5,000 of IRA, and that’s your only $5,000, then yes, you can convert it, that’s a 12% tax rate, but if you have other IRA money, then the pro-rata rule applies. It’s a more complex question than just that. I would encourage Don to get out to the link in the show notes, get a conversation going with one of our CERTIFIED FINANCIAL PLANNER™ Professionals.

[00:42:30] Chris Rett: Okay. Diane B. also from YouTube, at 67 and still working, she owns her own company. How much should she be putting in into a Roth at a time?

[00:42:41] Dean Barber: Maximum $7,000 a year.

[00:42:43] Chris Rett: Okay.

[00:42:44] Dean Barber: $6,000 plus the $1,000 catch-up.

[00:42:46] Chris Rett: Any back door?

[00:42:47] Dean Barber: At that age, probably not, unless everything is in a solo (k), but again, that’s a complex question, but a simple answer to a question, how much can she put into a Roth IRA? $7,000.

[00:43:00] Chris Rett: Richard C. from YouTube, “What are capital gains rates in a trust? Our long-term rate is 15%.”

[00:43:06] Dean Barber: Okay, if a trust is the owner of the account, you are going to hit the top marginal tax bracket on any earnings from that trust after about $13,600. I don’t have the exact number right in front of me, but trusts pay tax at a totally different rate. It’s their own deal, right? So, if you’ve got money in a trust or it’s an estate, then it’s going to pay the top marginal tax brackets after– it’s under $14,000 of earnings, Chris, I don’t know if you know the exact number off the top of your head.

[00:43:38] Chris Rett: I don’t have it, yeah.

[00:43:39] Dean Barber: I think $13,600 is the number. Bottom line is you need to distribute that out to the individual. Okay.

[00:43:49] Chris Rett: It’s $13,150.

[00:43:51] Dean Barber: Okay, so I knew I was really close, $13,150. I know that you want to get that money out of the trust and distribute it to the individual so that it is taxed at their tax rate. Otherwise, if it stays in the trust, and that’s where those tax rates come in, it stays in the trust and is not distributed. If it’s distributed to the ultimate beneficiary of the trust, then it’s taxed at whatever rate that beneficiary is in.

[00:44:11] Chris Rett: No, that makes sense.

[00:44:13] Dean Barber: Okay, so listen, all of our listeners out there, all of our viewers on YouTube, we had a blast doing this. And Chris, you did a great job in joining us…

[00:44:21] Chris Rett: Thank you. Thank you for having me.

[00:44:22] Dean Barber: …here on The Guided Retirement Show for the first time. Again, we know you’ve got questions. We know that those questions are critical, they’re specific to you. So, get to the link in the show notes. There’s a ton of resources there. All the things that we talked about today, all the different episodes, all of the different white papers and videos and things, you’ll find that out there. And through that same link, you can request that complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We can do it by phone. We can do it through a virtual meeting or we happen to meet with you in person.

A special thank you to all of you who submitted your questions for our 50th episode of The Guided Retirement Show. You have made today a blast and you’re making The Guided Retirement Show an absolute success with thousands and thousands of listeners and viewers all across the country. Thanks for joining us on The Guided Retirement Show. As always, you subscribe and make sure and share this podcast with all your friends and all your relatives.

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