Ed Slott In-Studio!
Ed Slott In-Studio Show Notes
If you don’t understand the rules of IRAs, bad things happen. With the wrong portfolio, you may find yourself hearing people tell you what you could’ve, should’ve, and would’ve done–and those little decisions can add up to make some big differences.
If you don’t want to wake up to an unpleasant tax surprise in retirement, today’s episode is for you. Once again, I’m speaking to Ed Slott, America’s IRA Expert. He’s been teaching financial advisors about the ins and outs of IRAs for decades, and he’s returned to the podcast to share lots of great new information on this extremely complex topic.
In this conversation, Ed and I discuss why retirees often get such bad guidance, the new time bombs ticking in the world of retirement (and how best to avoid them), and why now may very well prove to be the best time in your life to pay taxes for years (or decades) to come.
In this podcast interview, you’ll learn:
- Why bad tax planning does the most damage to people with the biggest retirement savings.
- How changes to the tax codes have created a number of new “time bombs” for retirees to worry about.
- Why the SECURE Act took away many of the greatest benefits of holding retirement accounts.
- The one document that’s more important than your trust that so many retirees fail to recognize the value of.
- Why IRAs or 401(k)s can no longer be passed on to your children.
- What makes “defer, defer, defer” such a bad tax strategy right now.
- Why now is the right time to find a great financial advisor.
- “IRAs, 401(k)s, and retirement accounts are lousy assets. They’re no good anymore to pass to the next generation. So, you need to look to alternative solutions. The Roth IRA, even life insurance, anything tax-free is a better solution.” – Ed Slott
- “You can’t look at what you lose now. Short-term planning never pays off.” – Ed Slott
- Ed Slott and Company, LLC
- Ed Slott on Facebook | Twitter | LinkedIn
- Episode 031 – How to Avoid the Biggest Tax Traps Like the SECURE Act with Ed Slott
- Episode 045 – Creating a Tax-Free Retirement with Ed Slott
- The Retirement Savings Time Bomb…and How to Defuse It: A Five-Step Action Plan for Protecting Your IRAs, 401(k)s, and Other RetirementPlans from Near Annihilation by the Taxman Ed Slott
- The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes, and Combat the Latest Threats to Your Retirement Savings by Ed Slott
- Schoolhouse Rock – I’m Just a Bill video
- What Got You Here Won’t Get You There: How Successful People Become Even More Successful by Marshall Goldsmith and Mark Reiter
- Schedule a Complimentary Consultation or 20-Minute “Ask Anything” Session with a CFP® professional
- Learn About Our Industry-Leading Financial Planning Tool
Interview Transcript – Ed Slott In-Studio
[00:00:40] Dean Barber: Welcome to The Guided Retirement Show. I’m Dean Barber, founder and CEO of Modern Wealth Management and your host of The Guided Retirement Show. You are going to love this program. Ed Slott, America’s IRA Expert is joining The Guided Retirement Show for the third time with a lot of new great information. Please enjoy my conversation with Ed Slott.
Ed Slott Stops by Our Studio in Kansas City
[00:01:00] Dean Barber: All right. Ed Slott, America’s IRA expert, live and in-person right here in Kansas City.
[00:01:05] Ed Slott: In person. That’s right. I’m here. I’ve watched it many times online, but I’m really here.
[00:01:10] Dean Barber: So, Ed, we’re in the midst of something that you created almost 20 years ago now. You call it the Elite IRA Advisors Group℠ So, I want to start off by having you tell the story about why you started teaching financial advisors about the pitfalls and all of the kind of bad things that can happen if people don’t understand the IRA rules.
Ed Slott’s Background
[00:01:36] Ed Slott: Right. Well, I started, as you know, as a CPA, a regular tax accountant, I hate to admit it, over 40 years ago. And I realized early on we would have people coming in and that’s when IRAs and 401(k)s are just kind of starting. It actually started in the 70s, in the mid-70s but people hadn’t accumulated that much. But starting in the 80s and even into the early 90s, they started accumulating and they started the demographics.
People get older, taking the money out, and they didn’t know what they were doing. The accountants didn’t know. Even the IRS had trouble writing rules. You know, when they created the IRA and all these retirement accounts, they never really “create it” and that’s still true today. Clear rules on how to get that money out, they encourage people to put in, accumulate, accumulate. So, I was doing tax returns and clients would start coming in with questions about their growing retirement accounts and they would say, “What about this?”
Looking Forward, Not Backward with Your Retirement Accounts
And I found myself being the bearer of bad news all the time because typical like most accountants, a lot of them tax preparers today, I was reporting on things that already happened and it’s true today, too. Most accountants or tax preparers are basically history teachers. They tell you what already happened. That’s what I was doing. So, they’d come in and I’d say, “Oh, if you only did that. Oh, you should have done this. Oh, if you only would have done this.”
And this happened every year, this whole woulda, coulda, shoulda. And it hit me. I’m not helping these people. I should be looking forward, not backward, and just recording everything that happened. Plus, they had questions about, “Well, I have a 401(k) now. This is a new thing. What do I do? How do I get the money out? Should I roll it over?” And I said, “Well, do you have a financial advisor?” And back then there weren’t as many financial advisors. Most of the ones who call themselves – I don’t even think they called themselves. They were wirehouse guys. They’re brokers.
[00:03:36] Dean Barber: Right. Stockbrokers.
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[00:03:37] Ed Slott: Stockbrokers. Well, I asked my broker, the guy, the brokerage. He doesn’t know, and he said, “See the account.” They asked my lawyer. He said, “See the accounts.” I’m here, seeing the account. So, it hit me that nobody knew anything about this yet. It affected how much of their retirement savings they’re going to have to live on because these things are loaded with taxes.
So, it hit me back, I’d say in the late 80s, early 90s, actually, the 1986 Tax Act came out, which was the first iteration of all these regulations on how to get these moneys out, these IRAs, 401(k), tax-deferred moneys out. And it was so complicated, it hit me then. That’s when I had the epiphany. I said, “This is it. This is going to affect everyone and nobody knows anything about it.” It’s this big black hole. You know, people even with several advisors, they have the estate planning attorney, they have the accountant, they have the financial advisor. But everybody thinks the other guy did it.
The accountant thinks the attorney did it. The attorney thinks the advisor did it. The advisor thinks the cat did it. Nobody took care of any of this stuff. So, you had this black hole in the middle and I knew there would be high value there talking about the proactive planning, looking ahead, tax planning for getting that money out, including back then it was really big, estate tax planning because back then I don’t know if you remember. You probably do.
[00:05:01] Dean Barber: 650,000.
[00:05:03] Ed Slott: It wasn’t even 600 then.
[00:05:05] Dean Barber: Okay.
Talking About the Importance of Tax Planning
[00:05:05] Ed Slott: And if you had a house and a retirement account and the estate tax exemption was not only low but the rate was 55%, and if you lived in a state that had state estate tax, you could lose 70%, 80%. I said, “Well, there’s value there and nobody really knows anything about this. If I could save people tens, hundreds of thousands, even millions of dollars on helping them keep more of their money, that’s an area to get into.” And nobody was really into it. So, I started going out doing monthly seminars on this, and this started, I’d say, in late 80s, early 90s, and nobody else was doing anything like that. First of all, back then, a little historical note, accountants and attorneys weren’t even allowed to do this. They weren’t even allowed to advertise by law.
[00:05:53] Dean Barber: Didn’t you do a radio show as well?
[00:05:56] Ed Slott: I did everything. I did the seminars every month. I had a TV show, which was rare, and it was a weekly TV show. Then I had a weekly radio show on the same day. Every Monday, Monday morning, I was a financial editor for a local news show. And then at night, I had a radio show then I did seminars in between, plus wrote articles for a bunch of local papers every week like clockwork, establishing myself in this area that nobody really knew anything about because it was a beginning genre, a beginning specialty area. It didn’t exist before, which is what I liked about it because I was in my early 30s then and I saw the value in doing estate planning and tax planning.
But the people who are really good at that were all 30 years older than me. They had a lot more experience, hard to compete. So, I saw this new area and said, “These guys don’t know anything about that and they are too old to go back and learn it from the beginning because this is all new.” So, I felt I’d have an opening to learn things that affected everybody saving for retirement. And that’s still true today, as you know, with our group, which you’re a founding member of, by the way.
How Ed Slott’s Elite IRA Advisory Group℠ Came About
[00:07:05] Dean Barber: Right. What was the epiphany to do a formal group to say, “Hey, let’s make this a membership program where these advisors can get together and learn from you and the other experts in your organization? Really, we’re doing it for four full days a month and people think, “Well, gosh, how can there be that much information on IRAs?” But then every single year we learn something new.
[00:07:30] Ed Slott: Well, you did it. People just like you. You had the vision also. So, what was happening? I was doing these local seminars, as I said, just to build my own tax and estate planning business, doing really effective, proactive planning, saving people a lot of money. But what was happening back then, there was no internet or anything. So, how did I advertise to get people there? In the local newspaper. So, I took a half-page every month, which is a lot of money back then.
And I guess financial advisors, local financial advisors took note. They thought, “Oh, this guy must be making a fortune,” which I wasn’t. I remember the ads were about $5,000 a month and I had like $6,000 in the bank account but I knew I was on to something. So, they started showing up at these seminars, figuring, “What is this guy up to? You know, how can he do these three or four seminars every month like clockwork for years?” And I always knew who those guys were at the seminars, the guys who showed up in suits. Everybody else was like retirees.
So, they realized, quickly, “Wait a minute.” I’m not a competitor of theirs. They thought I was a competitor doing stocks and bonds, which I’ve never done. I’m just a tax accountant, a CPA, a tax planner. And they realized, “Hey, we want this at our office. Can you do seminars for us?” And that started. I never meant to be in this business of an education company, but that blossomed 30 years later. So, I was doing these seminars all over the country. It really grew and then people like you started seeing me and said, “We want to learn more about it,” because you picked up, you and a few members, the other few members, maybe there were 50 or 60 of you around the country that said, “Ed…”
[00:09:08] Dean Barber: Very small group. Yeah.
Ed Slott’s Elite IRA Advisory Group℠ Convenes in Kansas City
[00:09:10] Ed Slott: “You know, we want to learn more. You’re onto something and we want to be on to that because we see high value in helping clients,” people like you, who became our members that started this group. We’re talking about Ed Slott’s Elite IRA Advisor Group℠ because you asked for it. You came to our two-day program and you realize how much more there is. Now, almost 20 years later, we’re still learning new stuff at every meeting, like we’re here now live at the meeting in Kansas City here.
And we just created, you know the books. You’re going to get those giant manuals of all new stuff and you realize it’s new material all the time. And it affects the people that have saved the most for their retirement, their 401(k)s, their IRAs. They have the most to lose and they’re not getting this advice from advisors who don’t have this specialized knowledge.
America’s IRA Expert Is a Published Author
[00:10:03] Dean Barber: So, I want to turn, Ed, to your first book.
[00:10:07] Ed Slott: Oh, boy.
[00:10:08] Dean Barber: So, for those of you that are watching us on YouTube, he’s got The Retirement Savings Time Bomb … and How to Defuse It. Look at all that hair.
[00:10:14] Ed Slott: Yeah, yeah, yeah.
[00:10:16] Dean Barber: And then your newest book, The New Retirement Savings Time Bomb. So, talk about the first book, The Retirement Savings Time Bomb … and How to Defuse It. A lot of the information in here is outdated because there’s been several tax code updates since then. But when I read this book, I was like, “Wow. There really are a lot of time bombs out there in the retirement arena.” And people that have read this book, even the consumer, which you’ve got a lot of these in the hands of the consumer through your public television programs but this was really, to me, the kick-off of Ed Slott becoming America’s IRA expert. And that came from the whole education piece.
[00:10:59] Ed Slott: Right. That whole book came from an article I wrote Six IRA Mistakes. I think it was, I don’t remember if that’s the exact title, for Mutual Funds Magazine. Somebody picked up on it and I was at a seminar in Albany and I tell the story in the book. A guy said, “You should make a book out of this.” I said, “It’s just an article.” He says, “That’s a book.” And he called somebody and they called somebody and blah, blah, blah or yada, yada, yada, whatever.
All the IRA Material You Can Imagine and More
[00:11:25] Dean Barber: Yeah. Well, it’s amazing. And what I find fascinating is, like you said, we’re at this event here in Kansas City, which we do twice a year. The next is one is going to be in Las Vegas.
[00:11:38] Ed Slott: See how you light up when you say Las Vegas?
[00:11:41] Dean Barber: Absolutely. But you said you got another manual and it’s really thick and I know they all are. It’s all-new material again.
[00:11:50] Ed Slott: It’s always all new. You know, most people don’t realize, even most advisors. That’s why advisors like you and the others that trained with us, especially you, because you’ve been with us the longest from the very beginning, we were just a roughly a small group, now we have hundreds and hundreds of members, but most of the average financial advisors so consumers watching this now probably think their advisors are on top of it. It’s not the case.
I’ve seen the horror stories. The accountants don’t know. The advisors don’t know. The attorneys, they just throw their hands up and they can’t keep up with the rules because they’re constantly changing. Congress changes it, IRS changes it, but a lot of these rules don’t make the big headlines. You know, you don’t see it as a top story on a news channel. A lot of it is under the radar but you have to know it or if you’re a consumer watching this, you have to know or you hope your advisor is up on this because it could cost you a fortune. You could lose chunks of your life savings.
The Education Never Stops
[00:12:49] Dean Barber: It’s so true, Ed. The thing that I think is frustrating and I know it’s frustrating for you, it’s frustrating for guys like me that have been with you for so long is there have been literally hundreds of members that have joined and then left. It’s like they think that they can come to a couple of programs and now all of a sudden they know it. I joined thinking I need to increase my knowledge so that I can make sure that I’m helping people make these decisions.
[00:13:17] Ed Slott: That’s exactly the reason.
[00:13:18] Dean Barber: And the education really never stops.
[00:13:20] Ed Slott: It never. Not even just the two meetings a year. It never stops. If a tax law comes up, if you look at your email, we usually have that out to you today, sometimes in hours after it passes, or even sometimes if it’s proposed, if it’s a big deal. So, you’re constantly in the loop. Even through the pandemic, we had the webinars, the updates, the alerts, the newsletter you get every month.
What’s the Latest on the SECURE Act?
[00:13:45] Dean Barber: And the latest one in the news today that’s still unfinished is the SECURE Act.
[00:13:49] Ed Slott: Right.
[00:13:50] Dean Barber: You have a great acronym for that. It’s supposed to say Setting Every…
[00:13:54] Ed Slott: I don’t even know what it is. But I can tell you this, after 40 years of studying tax law, one thing that’s always been true, whenever Congress names a tax law, you can almost always bet it will do exactly the opposite of what they name it. Remember the Budget Reconciliation Act? That was a good one. So, when I saw SECURE come out, I said, “Hold on to your wallets.” And sure enough, they took away some of the biggest benefits of holding retirement accounts and most people still aren’t aware of that.
Saying So Long to the Stretch IRA
[00:14:25] Dean Barber: Yeah. So, what they did was they eliminated something called the stretch IRA provision. So, talk a little bit about that for people that may not remember because that was a great tool that families could use to continue to defer taxes on inherited retirement accounts but it’s gone now.
[00:14:42] Ed Slott: Yeah, it’s gone for most people. And again, most people and some advisors know about it but they don’t really know the rules. That’s why you need an advisor that has specialized knowledge. That’s why I created this group. If I had a big master plan, I would hope that everybody with a retirement account, a 401(k), an IRA, spent 20, 30 years saving for retirement, sacrificing, building to have something later on, would have an advisor that knows how to operate when it’s time to take that money out. I always call it the second half of the game. That’s where most advisors just don’t have the knowledge and could really cause a mess because we get a call when we hear the horror stories.
[00:15:22] Dean Barber: I think one of the things, a big mistake that happens a lot and I’d like to get your thoughts on this is that people will go to an estate planning attorney and they’ll tell them, “This is what I want to have happen.” And so, the attorney writes up this trust, puts it in beautiful binder, and then says, “Here are your instructions.” And so, they get an instruction sheet. But what the people don’t realize that just got the trust prepared is that the IRA beneficiary form trumps everything that’s inside that trust. And so, people will pass away, beneficiaries think it’s one thing, and then it winds up being something totally different. And there are so many court cases that go on every single year with people challenging…
How Does This Impact the Next Generation?
[00:16:02] Ed Slott: And you learn about those in each meeting. And people can’t believe that these things are happening. You know, even if you win at court, if it has to go to court, you’ve got a problem. I get lawyers calling me all the time whenever I hear from a lawyer, obviously, nobody can fix the problem. If I’m hearing from them, it’s probably not even fixable at this point. But back to your other question on the stretch IRA, that was a big provision lots of savers relied on for decades where they could have an IRA.
And now this is about the next generation, not the person who earned its lifetime where they wanted to accumulate and accumulate. Maybe they didn’t spend it all. A lot of people have accumulated large sums. And their plan was to leave it over to their beneficiaries, generally their children or sometimes grandchildren. Under existing law, for 30 years or so, they could do what we called a stretch IRA, the ability of the beneficiaries to stretch out, as you said, defer payments over their lifetimes 20, 30, 50, 70 years.
Well, in the SECURE Act, Congress said, “No more of this.” The retirement, Congress believes and this was a big majority of Congress, I believe, I don’t have the number. I think it was 419 to 5 or something as some amazing majority of even the SECURE 2.0 that’s promoted is proposed now. It passed the full house for 414 to 5. I mean, this is totally bipartisan, almost unanimous. Matter of fact, when SECURE 2.0 passed the House, 414 to 5, I said, “Who are the five guys that are anti-retirement?” But anyway, so there’s big support and the Congress felt in the SECURE Act that your retirement account no matter what your plans are, no matter that you relied on tax law, which was your first mistake. CPAs always have a saying, “Tax laws are written in pencil.” All right.
Tax Laws Are Constantly Changing
[00:17:56] Dean Barber: They change all the time.
[00:17:57] Ed Slott: Right. And the Congress felt that your retirement account should be for you and your spouse, basically. And that’s it. Not as a wealth transfer or estate planning vehicle to leave for 50, 60, 70 years to your kids. So, they cut out this stretch IRA, that big deferral benefit. And most beneficiaries, children, and grandchildren except for spouses, spouses are okay, will have to empty that full account within ten years after your death, bunching all of the taxes into that short 10-year window, which means a lot of your planned savings are going to go to Uncle Sam.
[00:18:35] Dean Barber: Yeah, I looked at that. And my theory on why so many of our Congress people voted for that to go into effect was it was a way to increase revenue to the Treasury without raising taxes.
[00:18:48] Ed Slott: Right. Right, exactly.
The Baby Boomers and IRAs
[00:18:50] Dean Barber: Because the baby boomer it was really the first big accumulator in IRAs. And I think the youngest or the oldest baby boomer is in their early 70s now.
[00:19:02] Ed Slott: ‘46 was the first baby boomers.
[00:19:05] Dean Barber: Yeah. So, those people are now getting to an age where they’re passing and then sending money down to the next generation. But I think the thing that a lot of people don’t understand is that the vast majority of people who inherit IRAs are in their 50s.
[00:19:21] Ed Slott: I know. They’re in their highest earnings.
[00:19:23] Dean Barber: They’re in their peak earning years. And so, now we got to empty out this huge IRA and all that income is going to come in as ordinary income to the individual.
[00:19:31] Ed Slott: In a short window.
[00:19:32] Dean Barber: In a very short window while they’re in their peak earning years. So, it’s likely going to be taxed at a higher rate than it was ever deferred at.
[00:19:39] Ed Slott: Well, I’m more like decimated, not taxed. I mean, they’re going to lose. And we’re in low rates today. They could raise the rates by that time. So, you’re going to have a larger balance, probably at a higher rate. And if it’s pushed into those 10 years, even if the rates stay the same, it will jack up the beneficiaries’ own brackets.
Relishing the Benefits of the Roth
[00:19:59] Dean Barber: Yeah. I think the one way to get around that is using the Roth IRA or the Roth 401(k). So, we got to go all the way back to Senator Roth, who wrote that legislation. And I think it’s one of the best pieces of tax code that exists today.
[00:20:14] Ed Slott: One of my favorite accounts ever. And the big message here, if you’re watching your IRA and your plan is to leave your IRA to children or grandchildren, that plan is off the table. IRAs, I mean, the SECURE Act was the beginning of the end but now IRS has added new regulations that just came out this year other than the people who study in our group probably don’t even know about it yet. I think that was the final nail in the coffin. So, I’m here to tell you IRAs and 401(k)s, retirement accounts are lousy assets. They’re no good anymore to pass to the next generation. So, you need to look to alternative solutions. The Roth IRA, even life insurance, anything tax-free is a better solution.
[00:20:58] Dean Barber: So, the Roth IRA, I think that people get confused about their ability to get money into a Roth IRA. They think, “Well, there’s earning limits.” I can’t get money in there. But in the 401(k) world, there’s no earnings limits. Anybody that has Roth 401(k) available can put money into a Roth 401(k) and anybody can convert from a traditional IRA to a Roth IRA and it’s not an all-or-none type of a conversation.
It can be done methodically over time so that you can get money into that Roth IRA, so that then that becomes your largest asset as opposed to the traditional IRA or traditional 401(k). But I think what I see happening is a lot of people, they just want to use an Excel spreadsheet and say, “If I take this and I convert it over here and I got to pay this much tax and I’m losing time value of money.” And so, they’re trying to look at a value at the end of the day and that’s way too simplistic. It doesn’t work.
Looking at Future Tax Rates
[00:21:55] Ed Slott: I did a seminar, one of my seminars, years ago and had an accountant in there, and I talked about the Roth conversion. He said, “What about the opportunity cost, the time value of money?” And I had to show him the math that that is not an issue. The whole thing with the Roth is a bet on future tax rates. If you believe your rates are going up or for your beneficiaries to go beyond, then the Roth is a good bet. And that’s a pretty good bet. Well, put it another way. Do you think your tax rates will ever go down? We’re in the lowest tax rate you might ever see in your lifetime.
[00:22:30] Dean Barber: Right. And with the SECURE Act and that money being forced out to beneficiaries in their highest income years, yeah, the Roth IRA makes a ton of sense, but it has to be worked into an overall financial plan. And this is where I think it’s critical that CERTIFIED FINANCIAL PLANNER™ Professionals work hand-in-hand with CPAs that understand how to do these very complex, forward-looking tax projections so that you can actually see and understand the benefit of Roth IRA and Roth conversions.
[00:22:59] Ed Slott: Right. Roth conversions, as you said, I think that’s where all the money is but most people don’t get it. Nobody likes to pay tax upfront but the secret is to pay taxes when the rates are the lowest, which is right now. And many of my colleagues for years, some of them are coming around now. The CPA has never liked that because we were trained as CPAs from day one in college, “Never pay a tax before you have to always defer. Defer. Put it off.” But that doesn’t work anymore.
The Impact of the Tax Cuts and Jobs Act
Deferred to what? When you’ll be in a higher tax bracket? So, that doesn’t work anymore. But what you said about the projection is key because if you’re doing Roth conversions, you better know what it’s going to cost because another tax act, that’s why you have to stay up on this stuff, the Tax Cuts and Jobs Act, you may remember, made Roth conversions permanent. No going back anymore. So, once you convert, you will owe the tax, even if your financial situation changes later on.
Now, that shouldn’t be a reason to not convert to deter you from converting. But as you said, more of a reason to plan out. Probably a better strategy is over time to a series of smaller Roth conversions over time annual conversions taking down that big taxable IRA balance and bringing up your balance in your tax-free Roth account. And one of the big benefits besides Roth being tax-free, which can’t be bad, is that there are no Required Minimum Distributions during your lifetime. So, you have the freedom. And that’s why my new show, that’s why I called it Ed Slott’s Retirement Freedom. You have the freedom to use your money as you wish. You’re off the government plan. How many times have you heard me say on TV you want your plan, not the government plan?
The Roth As It Relates to Medicare and Social Security
[00:24:47] Dean Barber: Right. Well, I think there are two other big benefits to the Roth IRA that a lot of advisors don’t consider. One of those is that income from the Roth IRA while you’re in retirement doesn’t affect the Medicare IRMAA tax, right? So, the higher Medicare premiums. It also doesn’t affect how much of your Social Security is being taxed. So, distributions from a Roth IRA, besides being tax-free, can play very favorable into somebody’s distribution strategy in retirement by keeping those things.
[00:25:14] Ed Slott: You have to have a long-term big-picture strategy because most people don’t get that. And if you’re watching this, I’ll tell you a story. I was doing a consumer seminar, do lots of them around the country. I was talking about the Roth and one lady said, “Yeah. But if I do a Roth conversion, my IRMAA, my Parts B and D premium surcharges are going to go through the roof and if that happened that would make me angry.”
I said, “Well, if that makes you angry, convert anyway because I’d rather have you be angry for one year than be angry for the rest of your life. Because if you don’t do it, the problem doesn’t go away.” Once you hit RMD age, age 72, when you’re forced to take it out, you’re going to be angry every year because that’s going to happen every year with forced distributions that are out of your control. So, you have to look at the long-term big picture. It may pay to pay some tax now to get a bigger benefit later on for the rest of your life.
Defer, Defer, Defer
[00:26:10] Dean Barber: You know, you’re industry taught, “Defer, defer, defer.” They taught the same thing in my industry, defer, defer, defer. Never have a client pay a tax where they have to. But I think there’s also a selfish part of it from the financial advisor standpoint because if they tell somebody to convert and then they’ve got to pay taxes on that, well, that’s less money that they get to manage. And so, now all of a sudden they’re not growing their fees as fast as what they could have before.
But I think that we have to stop looking at what is right for the financial advisor, what is right for the CPA. And we have to focus on what is the right answer for the individual. And unfortunately, even in your books and you write about so many different examples, it’s not a one-size-fits-all solution. There’s not one solution for every individual. Every person is like their own puzzle. And you’ve got to figure out what’s the best way to put it together.
[00:27:01] Ed Slott: Everything is customized. But financial advisors who think like that are not the advisors that trained with us for two reasons. You know, in every meeting I always say, “Do what’s best for the client.” But besides that, everybody can win. It’s a win-win because you have to have a long-term planning mindset. And if you have a long-term planning mindset, if you’re a smart financial advisor, you will be managing more assets later on because they’ll accumulate more because they won’t be eroded by future higher taxes.
Some Tax Planning Perspective from Another Member of Ed Slott’s Elite IRA Advisory Group℠
[00:27:34] Dean Barber: Exactly, right. But it’s a long-term picture. So, I was having a conversation with one of the other members of the Ed Slott Elite IRA advisors, Marty James. You know Marty very, very well.
[00:27:44] Ed Slott: Oh, yeah. Big tax guy. Indiana.
[00:27:46] Dean Barber: Yeah. And so, I was talking with Marty and we were talking about Roth conversions and he said, “Dean,” he said, “I have found several situations over the last couple of years where even though people don’t have the money to pay the tax on the Roth conversion in a separate account where it’s actually made sense to pay the tax out of the converted amount.” So, you and I have not talked at all about that but have you seen that?
[00:28:11] Ed Slott: It could only make sense if you’re over 59½. To me, if you’re under 59½ and you have to pay a 10% penalty, that’s a deal-breaker. I would never. To me, getting a 10% penalty for taking money out that doesn’t get converted before 59½ and throwing it in the garbage is just not worth it.
[00:28:30] Dean Barber: But after 59½, you think it can make sense?
[00:28:32] Ed Slott: It can make sense long-term. You’re just not getting the full value of what you’re paying for. It’s sort of like buying a stock. Let’s say you’re buying a stock for $100,000 and the minute you put it in the account, it’s worth $70,000 because you’re paying tax on the full amount.
[00:28:49] Dean Barber: Right. I think he was speaking at it almost purely because of the SECURE Act and because of the 10-year empty-out rule. So, more of an estate planning type of a scenario?
Never Put All Your Eggs in One Basket (or Stock)
[00:29:02] Ed Slott: It is a great estate planning vehicle. And the other thing from, again, I’m not a financial guy, investment guy but, as you know, any good investment person professional will tell you, never put all your eggs in one stock, in one basket, right? Well, most people do that in a different way with their IRAs and 401(k)s. They have almost all of their retirement money in a big bag of taxable funds, all-in taxable. So, Roth conversions give you some diversification into tax-free territory as a hedge against what would happen if tax rates go up.
[00:29:38] Dean Barber: Let’s go to one piece of legislation that’s out there. And I’m not 100% certain whether this has come to pass or not, but allowing companies to give a company match in the Roth portion of the 401(k), is that law yet?
Too Much, Too Fast with the SECURE Act
[00:29:53] Ed Slott: No. That’s proposed. And you said something before when we were talking about why did they have this law at Congress, why they cracked down for revenue. That’s why they’re doing this. They’re not doing it. It’s a proposal. Remember, if you want to know when a bill becomes a law, go back to the Schoolhouse Rock video, “This is a bill. It’s not a law.” You know, advisors are confused about it because so much is happening. You have the SECURE Act, the SECURE Act regs, the SECURE Act 2.0. Nobody knows what’s happening anymore. It’s just too much too fast.
[00:30:23] Dean Barber: Yeah. So, just so our audience knows what I’m talking about there, when you make a contribution to a Roth 401(k), if you have a company match, that company match goes into the traditional portion of your 401(k) and the proposal is that the company match be able to go into the Roth portion as well. What that would do is that would make that contribution a non-tax deductible for the company, therefore, the company or the business would have to pay taxes on that.
[00:30:50] Ed Slott: You know, people of say in seminars to me and even professionals because I always talk up the benefits of the Roth because I love anything that keeps people away from potential future higher taxes so they can keep more of their hard-earned money. And Roth’s beautiful because it just grows and accumulates tax-free for the rest of your life and even ten years beyond. But most people don’t realize that when you do that, you pay the tax upfront.
Congress Loves Roth IRAs
But that money, the deduction with Congress what I’m getting at, you talked about Congress, Congress wants to eliminate deductions. So, people when I talk about Roths in seminars, they’re always cynical. I don’t blame them. You know, Congress changes the laws all the time. And people sometimes say to me, “Yeah. That Roth you’re always talking about, what if they change it?” I’m telling you another secret. Secretly, Congress loves Roth IRAs. It’s their golden goose.
Why? Because it brings in tax revenue upfront. And people like it. That’s why this is in the proposal. They want to push as much to Roth as possible. And if you remember back maybe five, six years ago, maybe even longer, there was this push toward they called it full Rothification. Remember that?
[00:32:11] Dean Barber: Yes.
[00:32:13] Ed Slott: Nobody knew what that meant. But what it meant is they didn’t even want, Congress this is, didn’t want people doing 401(k)s anymore. They wanted all Roth. So, you might say, “Yeah, but that’s giving his store away. Everything’s going to grow tax-free.” No. Congress, lucky for us, they’re the worst financial planners on earth because they’re so shortsighted. They just look at what they get upfront. So, they say, “Oh, wow, if people start not taking deductions for their 401(k) contributions, we’re going to get all this tax revenue now,” but they don’t see the big picture. So, I say take advantage of that.
[00:32:44] Dean Barber: So, what was it, the 1997 when the Roth was originally introduced and they had a very generous offer? You could convert as long as your income wasn’t above a certain level and you could spread the tax out over a five-year period?
[00:32:57] Ed Slott: Yeah. Four or five years, yeah.
“Take This As a Gift and Do It”
[00:32:58] Dean Barber: Yeah. And I remember back then as a financial advisor telling people, “Take this as a gift and do it.” And so many people did exactly what the person in your seminar did. They said, “Well, what if they go back and change the laws again, now that we’ve paid all these taxes?” Fortunately, I had a lot of people actually do it and then they got decades of growth on that IRA and they’ve had tax-free retirements. It’s been amazing.
[00:33:23] Ed Slott: You know, back then when the Roth first started and now this is old history. This is not the law now. Now, anybody can convert. But if you remember when it started, if your income exceeded 100,000, you couldn’t convert. Then they opened up the floodgates in 2010, another signal that Congress loves Roth IRAs. They saw the boatload of money coming in from more wealthy converters. And I did it myself. I converted everything then and I told everybody – I told you at the meeting, “Take that deal.”
That was the deal of the century. You could convert any amount you want, no matter what your income in 2010, and didn’t even have to pay tax in 2010. You could pay half in ’11, half in ‘12. In other words, Congress gave you an interest-free loan to build a tax-free savings account. It was a deal of the century, and that’s what I call it in my book.
Looking at Your Financial Plan from a Tax Perspective
[00:34:12] Dean Barber: These things that you talk about now, there are always new rules being proposed and then new rules being enacted into law. And what I think happens and I’ll speak to people that are coming into our organization here at Modern Wealth Management, and we meet him for the first time. We begin the financial planning process then we do a full-on tax review. And so, we look at that financial plan with one of our CPAs from a tax perspective.
And I would say over 90% of people that are coming in for the first time are overpaying their taxes but it’s not because their tax return was prepared improperly. It was because they were missing opportunities. And that, I think, is really what you’re talking about is don’t report on history. Understand that as long as you live in the United States and have money or make money, that taxes are going to be a fact of your life. So, let’s figure out how to pay as little tax as possible, not in one year but over a lifetime.
It’s All About Long-Term Planning
[00:35:06] Ed Slott: Right. That’s the key, the long-term planning. You can’t look at what you lose now. Short-term planning never pays off. You know, if you look at anything good in life, you get taxes. There are some pain upfront. Look at people in gyms. No pain, no gain, no long-term benefit.
[00:35:22] Dean Barber: So, Ed, what are you doing now? We’ll wrap this up here, but what are you doing now on public television? I know that you’ve been one of the biggest fundraisers for public television in the programs that you’ve done, and it’s all surrounding people’s IRAs. What’s the next step there?
[00:35:37] Ed Slott: Well, our programs have resonated, and it’s pretty amazing. You know, I get these numbers from our producer and I’m shocked, millions and millions of people seeing it, thousands of hours, tens of thousands of air plays. I don’t even know what the number is but it’s off the charts. And that tells me people are worried about this stuff. You know, remember, people have saved and worked and sacrificed for 30, 40 years.
And now they have these large accounts and they realize their advisors don’t have the specialized knowledge to take it for the rest of the ride. You know those books, What Got You Here Won’t Get You There? It’s a good shot. The advisor that helped you make the money. And that’s okay. You have to have money to be able to protect it. But in taxes, when you’re building a retirement account, you have to have somebody that knows how to help you keep what you’ve retained. And that’s really the mission to help people keep more of their hard-earned money.
Don’t Put Off Consulting a Financial Professional
[00:36:32] Dean Barber: And I think one of the mistakes that the public makes is they wait too long to find that advisor. They wait until they’re a year or two out from retirement. They go, “Here’s what I’ve got.” And if they’d have been working with somebody, the type of knowledge that the people that are part of your Elite IRA Advisory Group℠ have, they would have changed the scope of where they actually saved that money and how they saved that money.
And they would have built true tax diversification, not just worried about asset allocation and diversification with my investments. Tax diversification, in my opinion, is as critical, if not more critical than the asset allocation. Yet people don’t turn to advisors 10, 15 years out from retirement saying, “How should I be doing this?” Let’s make sure that I got my tax structure set up. They just blindly save money.
[00:37:17] Ed Slott: No. The earlier they started moving, for example, to a Roth IRA, the more they’ll have the accumulation and the more they’ll be protected from what I believe is future higher tax rates. And they should go and look for an advisor that has this training. I believe we’re the only organization. And if you want to see advisors like Dean Barber on there, you go to our website, IRAHelp.com and you go find an advisor. For example, you go to your area here in Kansas.
Dean Is a Charter Member of Ed Slott’s Elite IRA Advisory Group℠
You’ll see Dean Barber there. And you’re one of our longest member because you’re what we call a charter member, helped us create this group because you had the vision. You also, like me, had the epiphany to say, “There’s something where people could really be helped here and they’re not getting that help.” And that was almost 20 years ago. And it’s still the case now but it’s worse now. The risk is worse now because people have more at risk. They’ve accumulated more. And I believe tax rates will take a lot of that away.
Even with the stock market, yeah, it goes up and down but people have made some money in the market. But I have to tell you, whatever the market gives you, the taxman can take away.
Be on the Lookout for More Financial Education from Ed
[00:38:25] Dean Barber: Absolutely. Ed, it’s been fascinating to have you right here in the studio and looking forward to the workshop that we’re putting on in Kansas City.
[00:38:34] Ed Slott: Your head will be spinning for a few days.
[00:38:36] Dean Barber: I’m sure it will. Well, thank you very much, Ed.
[00:38:38] Ed Slott: Thanks, Dean.
[00:38:39] Dean Barber: Hope you all enjoyed my conversation with Ed Slott as much as I did. Look for special promotions in the show notes. There will be a couple of links to other episodes that Ed joined us here. And also, there’s a link to schedule a complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals right here at Modern Wealth Management. Make sure and subscribe and share this with your friends.
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.