How to Avoid the Biggest Tax Traps Like the SECURE Act with Ed Slott
How to Avoid the Biggest Tax Traps Show Notes
Many consumers get caught off guard by massive tax bills they not only don’t understand, but thought someone else had planned for. How does it happen? It’s simple: our tax code is a maze. If you have money and want to emerge on the other side of it relatively unscathed, you need an excellent guide.
Today, America’s IRA expert, Ed Slott, is here to help you make sense of what you really owe – and how to prevent massive tax penalties in retirement. I’ve been studying with Ed for nearly 16 years. I sit on his advisory board, and I can tell you that he knows more about the tax code than just about anyone else.
In this episode, you’ll learn how to navigate the rapidly changing tax landscape we’re all living in. You’ll discover why it’s all but impossible to memorize the tax code and be 100% right in every situation – but how you can get the advice you need to make strategic decisions and plan for the best possible outcome.
In this podcast interview, you’ll learn:
- Why everybody thinks their attorney, accountant, financial advisor, or CPA is planning their taxes – and how this misunderstanding created what Ed calls the black hole of retirement planning.
- The difference between tax preparation and tax planning – and why so many advisors aren’t prepared to help their clients when it’s time to take money out.
- Five pieces from the SECURE Act that are critical to consumer tax planning.
- Why everyone should be making Qualified Charitable Distributions since the passage of the Tax Cuts and Jobs Act – and why no one with earned income should be making tax-deductible IRA contributions after the age of 70.
- How working closely with a good CPA in collaboration with a good financial planner can help prevent you from falling into the biggest traps in retirement – no matter what the tax law looks like in any given year.
- “Here’s a clue, whenever Congress names a law, you can be sure it will always do the opposite. So, when they call it the SECURE Act, you better run. Your money is less secure.” – Ed Slott
[00:00:09] Dean Barber: Welcome to The Guided Retirement Show. I’m your host, Dean Barber. As you all know, after listening to The Guided Retirement Show, hopefully, to all of our episodes, you do need a guide, a guide to take you through all of the aspects of the great journey of retirement. Remember, it’s the longest vacation you will ever take. On today’s episode, we are joined by America’s IRA expert, and that is Ed Slott. I’ve been studying with Ed Slott for nearly 16 years. I sit on Ed’s advisory board.
I know Ed personally and I will tell you that the knowledge that this man has when it comes to the tax code and the way that he has trained me and other advisors around the country through his elite IRA advisor group is second to none. And so, this maze of a tax code requires an excellent guide, especially for those of you that have money. Please enjoy my interview with Ed Slott, America’s IRA expert.
[00:01:10] Dean Barber: You’re listening to The Guided Retirement Show with me, a good friend, and I will say even mentor, Ed Slott, America’s IRA expert. Ed, let’s get the audience familiar with you. I know that in a lot of places, you’re a household name because of all of the things that you’ve done with public television but tell us a little bit about yourself. You’re a CPA. Sometimes you call yourself a recovering CPA but…
[00:01:36] Ed Slott: That’s exactly right. That’s right, yeah, I started as an accountant, a CPA, I’m still an accountant. I don’t do that many tax returns anymore. I’m kind of out of that but I realized doing tax returns, this goes back over 30 years, that when people had retirement accounts, they didn’t know what they were doing. And I would see these returns and I would say, “Look what you did. You took money out. You know it’s all taxable.” “Well, I didn’t know.” So, I realized there was this huge void.
Everybody thought the other guy was taking care of it like the accountant thought the financial advisor was taking care of it. The advisor thought the attorney was care taking care of it. The attorney thought the cat was taking care of it. Nobody was taking care of it. And I saw this black hole of what I call retirement planning. People had just begun building balances in their 401(k)s and eventually to the IRAs for IRA rollovers but nobody knew what to do when the money came out.
And it was a little obvious to me even back 30 years ago, that eventually, these people are saving this money for a reason to spend it in retirement. And back then, most of that money was taxable, tax-deferred, not tax-free. We didn’t have Roths back then. So, it was taxable and they didn’t count on the taxes. They didn’t know how to do rollovers. They didn’t know all the things we talked about In our training, Dean, as you know, you’re a part of our elite IRA advisor group, actually a founding member of our advanced education program.
So, you know about all these things but many consumers were caught off guard on areas they thought either their accountants took care of or it’s something that financial advisor should have explained to them. And they were getting these huge tax bills just because they didn’t know how to get money out of their retirement savings. So, here I was the CPA doing their tax returns, constantly giving the bad information, not bad information, the bad news, the kill the messenger stuff.
[00:03:40] Ed Slott: And they say, “Why didn’t anybody ever tell me this?” And obviously, I can’t fix it. That’s why you said I’m a recovering CPA because most CPAs, tax preparers even today are what I call our history teachers. They tell you what happened in the past and it was always the same thing. You come in via taxes. It will probably happen this year too and the accountant will say, “Oh, you know what you should have done… Oh, if you only did this… Oh, you could have done this.”
So, we go through this whole woulda, coulda, shoulda, and that hit me as this is not the way to go. There’s tax preparation, which is reactive historical planning on what happened, and tax planning, which is proactive, how to change what happens in the future. So, that’s where I got involved and I realized there’s a whole area that’s untapped. And I think you might even agree still today, most advisors are not prepared for when the money is coming out.
Now today, it’s coming. It’s flooding out due to the demographics, the baby boomers taking money out, more people that are retiring, and people having both tax-deferred and tax-free money in a Roth. So, the landscape is changing. Now, we have the new SECURE Act. There were so many things hitting from every direction, you really need competent financial advice in this area, and I think it’s still lacking.
[00:05:04] Dean Barber: And I totally agree. Let’s back up a little bit. You talked about 30 years ago and I remember that there was…
[00:05:12] Ed Slott: That called the 80s.
[00:05:13] Dean Barber: Yeah, the 80s. But remember, Ed, I think it was before the Tax Reform Act of 1987, they hadn’t really given any guidance on how to get the money out of these IRAs or the rules weren’t really in place. And people would say, “Well, I got to take my money out of my 401(k) and they didn’t know that they had to roll it over within 60 days into an IRA or they would have to pay taxes on it. At the end of the year, people would say, “Well, that’s it. You got to pay taxes on it. Well, I spent the money.” And so, they came up with this mandatory 20% withholding, and then the perception was, “Well, so I only have to pay 20% tax,” but that wasn’t it, right?
[00:05:57] Ed Slott: No. That was just the withholding amount. As a matter of fact, same thing happened to people last year and there were 18 taxes after the Tax Cuts and Jobs Act. They were promised all these refunds and it turned out the tax tables, the withholding tables are wrong, and a lot of them owed money even though, in effect, their taxes were actually cut but they still owed money because they didn’t withhold enough. The 20%, it was only withholding from plans but back then you could have been at a 40% rate. So, you only have half the tax paid in.
[00:06:31] Dean Barber: Yeah. So, your whole thing, Ed, what you did was you formed this group, the Elite IRA Advisor Group. What was your thought process when you did that and why? Why did you start it?
[00:06:45] Ed Slott: Well, I saw all the problems but with every problem, as you know is an opportunity. And I realize everybody’s going to have these issues. At some point, everybody who saves in a retirement account, which is tens of millions of people is going to have to take the money out and pay the piper one day, and they are not prepared. So, it hit me as actually a business opportunity to start training advisors. I was doing that anyway but then advisors, people like you, then this goes back, oh, you may go back 20 years with me something like that, started saying to me, “Ed, these waters are really deep and I don’t think most advisors know this and I want to know more.”
That’s what people like you told me. So, eventually, I had collected the cards of enough people just like you. Maybe there was 60, 70, I forget how many people, that said, “We want advanced education. We want to know more to help our clients.” Now, you would think every advisor would want to know more but some of them have a real problem. And the problem is they don’t know what they don’t know and that’s pretty dangerous.
[00:07:51] Dean Barber: That’s the scary part.
[00:07:52] Ed Slott: At least you knew these waters are deep because you had taken training. So, people like you, you were one of that first group what we call our charter members that said, “Let’s get an advanced study group so we can educate them ourselves on that, not just in a seminar here and there but with detailed workshops on and on, resources, back office support.” And that’s what we created and that was back in 2005. So, we’re going into our 16th year, believe it or not, Dean. You’ve been in this group, this advanced study group, Ed Slott’s Elite IRA Advisor. I don’t want to make you feel old but we’re starting our 16th year as a founding member, though, to your credit.
[00:08:31] Dean Barber: I look at the pictures of you and I back then and we looked a lot different than we do here today.
[00:08:38] Ed Slott: I don’t have those pictures. I don’t look at those.
[00:08:42] Dean Barber: That’s hanging on my wall in the office. Alright. So, you started this group and the idea was that you could help the consumer by educating the advisor, a broader reach.
[00:08:54] Ed Slott: No. Both. That was the master plan. Remember, I’m more of a consumer advocate. As you know but just to tell the audience, I don’t sell stocks, bonds, funds, insurance, annuities, none of that. I’m a tax advisor and a consumer advocate but I realized and so did advisors like you that consumers were massively being underserved by unqualified advisors or advisors who are ignorant to the rules, not for any bad reason, no malicious intent. They just didn’t know that they didn’t know.
So, my point was let’s create this Ed Slott’s Elite IRA Advisor Group, highly trained advisors, and then match consumers so both people need each other. Consumers need advisors that are highly trained that have specialized knowledge in this area. We’re talking about the taxation of retirement savings when the money comes out. In retirement, that’s critical.
Let’s match consumers with advisors that have this knowledge knowing that most advisors don’t. And now, over many years, many consumers start to realize what I was saying is true. They start to realize I may have had a good advisor, he made me a ton of money but it’s what you keep that counts after taxes. And that’s what determines how much money you’ll have. Taxes are the single biggest factor that separates people from their retirement dreams. There’s no question about it. Most are not getting the advice.
I’m glad you’re doing this program, I’m glad you’re doing what you’re doing, because every time we get the message out there and you know my favorite word, right? Outflow, getting things out there to let people know their retirement savings are at risk, especially now of higher taxes.
[00:10:40] Dean Barber: Let’s toot your horn a little bit here, Ed. You had this idea that you could educate the consumer by putting together a program on public television and that’s been a massive success. And that’s why I say I think a lot of people will say, “Well, I know who Ed Slott is. He’s a household name because he’s been all over PBS all around the country.” Talk to us about why you started that, how you did it, and then how many shows you’ve done and what kind of impact you’ve had for public television and for the consumer?
[00:11:10] Ed Slott: Well, it’s just something that morphed. It’s like I say, I talk to you about outflow but as you and I know, what I mean is getting the message out. So, I was doing seminars, as you know, all over the country, training advisors, educating consumers and somebody caught wind of it and said, “This would be a great TV show.” I said, “TV for what?” So, it turned out this happened over three years but I’ll give you the 20-second version of three years. He knew a guy who knew a guy who knew a guy at PBS.
A PBS producer said no for three years until he finally saw me do a seminar down in Florida. He said, “This would be a great TV show.” So, they put it on and this was 12 years ago. Against all the better advice from the people, I don’t know who, but some people may be at public television said, “How are we going to make it a success and by success, remember it?” I hate to say it but it’s true. They don’t really care what I’m doing. I could be juggling. If that brings in money, that’s considered a success, okay?
So, they consider a success they rely on public support because of the educational programs they put on, which are fantastic. And they said, “But how would this bring in money? How are people going to even sit through a show on death and taxes? Nobody wants to hear about that.” Well, as you know, they were wrong. It became one of their top hit shows as far as I’m told, one of the biggest successes in PBS history.
And to show it, I’m starting now my, I believe, 12th year and sixth show on the same topic, which is unprecedented. It shows there’s a hunger for this information for people who have worked, built, saved, sacrificed, and invested to have retirement savings. Now, they have to get the money out and they don’t want to lose it. They want to have more, keep more, and make it last.
[00:13:08] Ed Slott: So, this became a huge hit on public television. And if you’re watching this year, yes, the show has been renewed. We have a new version running right now in 2020 and we have updated all the gift packages for all the 2020 rules for the SECURE Act, maybe the first information out there in a wide-ranging TV show, national TV that covers the SECURE Act. So, it’s something everybody should look to but you should also look to see that your advisor has this knowledge because everything you know about retirement rules has changed beginning in 2020. Now, if you’re watching this, look at the calendar. It’s 2020. These rules are effective now.
[00:13:51] Dean Barber: Ed, I think some people might be shocked that you’re in your 12th year of doing public television and that you’ve done six different shows. But I tell you, I’ve been studying with you now, like you said, for coming on 16 years and there’s not a workshop that I attend where I don’t learn something still. Because the amount of information that is out there in the tax code surrounding retirement accounts is so vast, it’s impossible to memorize it all.
And I know that if I run into a scenario where maybe I don’t know, I think I’ve got a 95% I think I’m right, I’m going to reach out to your office and I’m going to say, “Hey, do I have this right?” And there have been a couple of times like, “No, I had something a little bit wrong but you know what, my clients always got it right because they knew they could ask me, and if I didn’t know it 100% I could reach out to you.” And you know, if there’s a testimony to that of saying, “Hey, 16 years of education and you still don’t know it all? What are you stupid?” No, it’s constantly changing.
[00:15:01] Ed Slott: And you talk about memorizing the tax code. Remember, the tax code is not even written in English. It’s written in some version of Sanskrit that nobody could ever understand. I’ve always considered myself a translator, turning the tax code, which I have right behind me here, if I don’t break. This book is just one of several books. You notice a lot of post-it notes in here. The tax code sections, putting this into English. Now, this particular book runs, I don’t know, a few thousand pages but this is what Congress does. Do you think they know what’s in here? Nobody knows what’s in here.
[00:15:41] Dean Barber: Not a chance.
[00:15:43] Ed Slott: It’s ridiculous. That’s what we do. So, we’ve been studying this for years, as you know, and it changes not only big tax laws like we just had but as you know from going to the programs, a lot of under the radar rulings, cases, and updates that if you’re not with it and up-to-date, you could lose chunks of your retirement savings.
[00:16:05] Dean Barber: You know, the whole visual of that book, just one of the books…
[00:16:09] Ed Slott: Look at the books. And this is just the most current version, right? My favorite section 401(a)(9), all the retirement rules. There they are.
[00:16:17] Dean Barber: Unbelievable. I mean, you can’t absorb it and you’re right, it’s not written in English and there are rules to rules and there are exceptions to rules. And it does, it gets super complicated. And the thing is that when I started studying with you and I started learning these things and I go back and then I started noticing the same mistakes, I didn’t know that people were making those mistakes before. I may have made some of those mistakes before I started studying with you but it’s so vast.
We even went to the extent, Ed, where I don’t even know if you notice now but we’ve got four CPAs in our practice now and the idea is doing what you said. It’s forward-looking tax planning understanding that at some point that money is going to come out, you’re going to either live on it or it’s going to pass down to the next generation. So, let’s talk a little bit about this new SECURE Act. You’re one of the smartest guys out there when it comes to how the retirement accounts work. This SECURE Act is much deeper than what anybody realizes.
So, I’m going to ask you to give me five pieces out of the SECURE Act that are going to be critical to the consumer. And let’s just start with number one. Don’t list them all out. We’ll go through five of them.
[00:17:31] Ed Slott: All right.
[00:17:34] Dean Barber: So, what’s the first thing?
[00:17:34] Ed Slott: Okay. Well, obviously, the biggest one is the loss of the stretch IRA. This is something you’ve probably been using with all your clients, knowing how to set up an inherited IRA so the child or beneficiary or grandchild even could stretch or extend distributions on their inherited account over 40, 50, 70 years, depending on maybe you’re a 10-year-old or a one-year-old. That’s all gone now. But it’s not gone and this is where the confusion is. It’s not gone for certain classes of people.
One class is anybody who inherited in 2019. You remember I said the law takes effect for most people in 2020. So, if you’re already sitting with an inherited IRA, that you’re doing the stretch, you’re fine. But anybody else when somebody dies in 2020, the beneficiary is not going to get that long tax deferral over their lifetime.
Instead, for most beneficiaries, it’s being replaced with what’s called a 10-year rule now, which means the government wants its money. That’s what this is all about. They don’t want to wait for their money because they’re broke. Look at the deficit. So, where do they go? And this is an important thing to know, where do they go?
They always go to raid people’s retirement accounts. That’s where Congress always goes. You know why? Because that’s where the money is. They know all of those trillions and I just saw that latest stat, actually, in today’s Wall Street Journal. It just said about 18 trillion, yeah, there it is. 18 trillion, yeah, today’s Wall Street Journal. So, you see how prepared I am?
[00:19:11] Dean Barber: There you go.
[00:19:12] Ed Slott: 18.3 trillion. The government says, “Ooh, 10%, 20%, 30% of that number, that could fill the budget deficit.
[00:19:24] Dean Barber: Well, here’s what I think this was all about, Ed. You tell me if you agree with me or not but I think this was about a way to increase taxes without actually increasing the tax rate.
[00:19:34] Ed Slott: Exactly.
[00:19:35] Dean Barber: And the other thing is that you’re taxing dead people who can’t complain.
[00:19:39] Ed Slott: Right. That’s the greatest constituency. Yeah. Dead people don’t write letters to their congressmen. They don’t complain. They don’t vote. Well, most of dead people don’t vote but most people are not going to complain. So, it’s an easy target but lots of people are upset about it. Who’s upset? People that are still alive with retirement accounts, 401(k)s, and IRAs. Why? Because they arranged their lives based on long-standing rules that they thought they could trust, what they could rely on.
And Congress pulled the rug out from under them in the ninth inning of the game and they feel it’s not fair. Now, Congress’s point of view is, well, this money is for retirement. We never told you to leave it overall that money for beneficiaries. But I know lots of people, maybe you do too, that said, “You know what, if they told us that upfront, we might have arranged our affairs differently.” I’ve heard from people say, “We lived less lavishly and we weren’t big spenders because our plan all along was to have a legacy to our children or even grandchildren.”
And now, that’s all going to be accelerated. The taxes accelerated now into 10 years after death. So, for most non-spouse beneficiaries, there’s no more stretch for a death in 2020 or later and it’s replaced with what we call the 10-year rule, which means all the money has to come out within 10 years by the end of the 10th year after death, which means Congress is going to get their money sooner and more of it. And we don’t even know what the rates will be. And remember, many beneficiaries are given average life expectancy.
Let’s say an IRA owner dies say 80 years old. Chances are they have a 50-year-old child that might be in their peak earning years and they will be hit at their top bracket.
[00:21:28] Dean Barber: That’s the part that I think gets me more frustrated than anything else is that is who the beneficiary is going to be. It’s that person in their peak earning years and now you’re going to throw all of this IRA money on top of that bracket that they’re already in, maybe throwing them up into the top tax bracket, and all of a sudden, this money is going to be taxed at a higher rate than it was ever deferred at.
[00:21:53] Ed Slott: Right. And that’s where you lose money and that’s where the government gets money. Now, not everybody is subject to this. It’s not as terrible as it might seem because it doesn’t affect, here’s the good news, most people. Why? Because spouses are exempt. Most people leave their IRAs or 401(k)s to their spouses. So, even this 10-year rule can be delayed until the second spouse dies. Obviously, if you’re single, then yes, it’s a problem.
When you die, the 10-year rule kicks in. There’s also four other exemptions to this stretch rule but these are not cases that are going to happen that often. Minor children are exempt but people misunderstand this one, not grandchildren, your minor children. So, what are the odds? By minor children, we mean somebody hasn’t reached majority, which is 18 in most states, some 21. So, what are the odds of an 85-year-old dying with a 12-year-old child of theirs? Unlikely.
So, that’s not a big group. It’s more likely somebody dies with a 12-year-old child is 40 years old but if they’re only 40, they don’t have as much accumulated at that point. So, it still won’t be a big issue. So, they’re exempt. But even these minor children are only exempt until they reach majority. And then the 10-year rule comes in unless they’re still in school, then they can go to age 26. Then there’s two other categories, which we hope you don’t qualify, disabled and chronically ill.
And then the last category of people exempt so there are five categories of people exempt, spouses, the minor children, disabled, chronically ill, and the strange group of beneficiaries not more than 10 years younger than you, like a brother, a friend, a partner or cousin, somebody around your same age. Congress said who cares about them? They’re as old as you. There won’t be a big stretch thing there anyway.
[00:23:50] Ed Slott: But everybody else most non-spouses will be stuck with the 10-year rule so they won’t get the stretch, the taxes will be accelerated, and they will have to plan for that. And the big hit is going to be the people that save the most. That’s why you’ve heard me say this at 20 years. Our tax system is a penalty on savers. The ones who saved the most, somebody has a $2 million or $3 million IRA, not because they’re some Wall Street executive because they work for the money.
The only way money couldn’t get in a 401(k) originally is to work for it. And then through diligent and disciplined saving and investing and working over 30 years, it built up. They rolled it to an IRA and now the millionaire next door has 3 million in their IRA. Well, these people are likely to leave their IRA to a trust because they don’t want their kids squandering or losing the money right after death to lawsuits, bankruptcy, divorce, mismanagement, people preying on them because they came into all this money.
So, they name a trust. Most of these trusts now will also be subject to the 10-year rule, throwing that system into disarray. And almost all of those plans have to be changed and you’re going to learn about them in our May workshop coming up.
[00:25:12] Dean Barber: I’m looking forward to that but I want to talk about that because this whole idea the trusts out there that are the living trust, the see-through trust, the ones that have the designated beneficiaries but a lot of times people don’t really understand the mechanics of if somebody passes away and the IRA asset goes into the trust. First of all, the trust can’t own the IRA asset, right?
[00:25:40] Ed Slott: Right. Only the RMDs go into the trust but here’s the thing I didn’t mention about this 10-year rule, and this is the trap. It’s actually a good thing in the law but a trap with trust. They’re under this 10-year rule. Let’s go back to the stretch. Under the stretch, as you know, the kid could go out maybe 40, 50 years. He takes 1/40th, 1/39th very small distributions RMDs every year but they get to stretch it or extend it over decades. With the 10-year rule, there are no post-death RMDs each year. You don’t have to take anything out.
The only RMD is at the end of the 10th year after death, then everything has to come out. So, you could do whatever you want within the 10 years, which gives beneficiaries who have good advisors like you guiding them to take it out maybe when they’re in a lower bracket. Let’s say you have a beneficiary who inherits but they’re still working and making a decent income, like we talked, their peak earning years. But let’s say five years from now they plan on retiring, maybe don’t take anything until they retire and their income is lower so you can manage it.
This 10-year rule also applies to the trust, which means by the end of the 10th year after death, all of that IRA money has to go into the trust and it will all be taxed if it’s a traditional IRA at one shot or it could be taxed within the 10 years. Everything that comes into the trust is taxed and if it’s retained in the trust not given out to beneficiaries because they want to make sure the beneficiaries don’t blow it, then it’s taxed generally at trust tax rates, which are the highest rates in the land. So, you’ve got a real tax problem and you don’t have the protection you thought you might have had without a prohibitive tax cost.
[00:27:29] Dean Barber: Thanks for listening to The Guided Retirement Show. I’m Dean Barber, Managing Director at Modern Wealth Management. We’ll be back after this short break.
[00:27:37] Female: At some point in everyone’s life, you have to go to school because let’s face it, a good education is important and just because you’re nearing retirement age or you’re already there, it doesn’t mean the learning stops. One of the easiest ways to learn about retirement is at Modern Wealth Management’s Education Center. There, you’ll find things to read, to watch, and to listen to about important retirement topics. So, go to BarberFinancialGroup.com. Click on the menu dropdown. It’s in the upper right-hand corner and select Education Center.
There you can download and read our Social Security checklist, watch Dean Barber’s latest video on the current state of the markets, or listen to an audio recording about tax reduction strategies and so much more. There’s no cost. Just sign up for access at BarberFinancialGroup.com. It’s as simple as that. Besides, there’s no tests, no textbooks, and I promise, not to move your seat even if you talk too much. There’s so much to learn about retirement. Just go to BarberFinancialGroup.com. Click on the menu drop down and select Education Center.
[00:28:51] Dean Barber: Here’s what I think this was all about, Ed. You tell me if you agree with me or not but I think this was about a way to increase taxes without actually increasing the tax rate.
[00:29:00] Ed Slott: Exactly.
[00:29:00] Dean Barber: And the other thing is that you’re taxing dead people who can’t complain.
[00:29:03] Ed Slott: Right. That’s the greatest constituency. Yeah. Dead people don’t write letters to their congressmen. They don’t complain. They don’t vote. Well, most dead people don’t vote but most people are not going to complain.
[00:29:35] Dean Barber: Welcome back to our program. I’m Dean Barber. So, are you crystal clear on everything that’s going to happen with the trust yet? I’ve talked to some of the CPAs in here and they’re saying, “Dean, I’m afraid to give somebody advice on exactly how to change it?” And of course, now we’re recording this in mid-February of 2020 so we’re shortly after the SECURE Act has come out and so some of the people are saying, “Well, maybe we should just get the trust off of the beneficiary form right now and just put the kids on especially if they’re adult kids.”
[00:30:07] Ed Slott: Well, yeah. You got a tough choice there because every person has to make their own decision. Like I said, if somebody has a $3 million IRA or something, and they have a child that has maybe addiction problems or financial problems, that’s the last thing they want for that money to go right out to them because they know it may be lost. So, they may have to keep the trust but probably revise it immediately with an attorney that has the right language. Now, here’s the problem. It’s also spawned, believe it or not.
Like you said, we’re only say two months in, not even into the SECURE Act and attorneys all selling, you may have seen it online, all different versions. They make up their own trust and call it names and things like I saw one of them like they have all these names. And some of them are just gimmicks and they don’t work. So, you have to be very careful that the trust is done correctly. So, you may need it to be revised if you’re worried about that.
Or if that’s not a big concern, get the trust’s beneficiary off. And if you have a good attorney, that trust, the original trust may be able to be reformed or change. Obviously, you could change the trust law you’re alive. So, maybe you should look into that.
[00:31:21] Dean Barber: So, just this one piece of the SECURE Act, Ed, where which is all losing the stretch and the trust and all that. I’m sitting back looking at this and I see three winners, the IRS, attorneys, and insurance companies. Those are the three winners.
[00:31:40] Ed Slott: Yeah, definitely. Because insurance I don’t sell life insurance. I think I said it earlier today but that has replaced the IRA, in my opinion. Some people loudly disagree with me. To me, an IRA, which was never a great asset to leave to a trust or leave to a beneficiary because it was tax-deferred, it had all the rules, had all the landmines. Even with the trust in the past that was supposed to work, a lot of them, as you know, were done improperly and they blew up and didn’t work as planned.
IRAs were never a great asset to leave over. Now, they are worse than ever because of the new rules forcing that money out. I think you’re better off having if you have a large IRA, that’s meant to have the lion’s share, go to the beneficiary. You might be better off with what I call a life insurance replacement plan where you take some of that money down now, pay the tax. Yes, I said pay the tax upfront at today’s incredibly low rates.
Look at the brackets. You can be in the 20%, 24%, and earn hundreds of thousands of dollars. Take it out at low rates and reinvest it in a cash value life insurance policy so you could have access to a tax-free during your life if you need it. But after death, it pays to the beneficiary. Now, if you’re still worried about the beneficiary blowing the money, first of all, the life insurance that pays off will be tax-free but you could leave that life insurance instead of the IRA to a trust where it’s a lot more flexible.
You have more planning flexibility because you don’t have to worry about the IRA rules. There are no RMDs. There are no taxes. It doesn’t matter who the beneficiaries are. You create your own plan. It’s like you can design your customized estate plan. You can simulate the stretch, say my beneficiary can get this insurance money over 20 or 50 years. You can allow for invasions distributions if they need money, maybe for education or maintenance of support or things like that. And you give your trustee those powers.
[00:33:40] Ed Slott: Plus, when the money comes in, it’s all tax-free. So, you have no RMDs, no tax complications, and no rules, and no tax. I think what Congress has done has awakened the giant and they’ve incentivized people to do probably the better planning they should have been doing all along because it doesn’t matter what vehicle gets you there. The IRA was the vehicle, the stretch IRA, but it ran out of gas. At death, the engine seizes up. Now, you have to switch vehicles and you may be better off in a different vehicle.
All you want if you’re listening to this and you’ve saved a lot in an IRA a 401(k), generally, what I’ve heard from people for 30 years is the same thing. You want three things. You want post-death control because you don’t want those kids blowing your hard-earned money and you want less taxes or tax-free, post-death control, and tax minimization. How you get there as long as you get there to me doesn’t matter. So, I think life insurance is a much better vehicle for this kind of estate planning than your current IRA plan. For those who disagree with me as you know may have seen…
[00:34:50] Dean Barber: You know what, but I agree with you that it doesn’t matter how you get there, as long as it’s effective. Here’s one of the things that I was thinking of.
[00:34:56] Dean Barber: If your old car breaks down, you get a new one.
[00:34:59] Dean Barber: Here’s one thing I was thinking of, Ed. What if you have two spouses? Let’s say that they both have a million dollars in their IRA.
[00:35:07] Ed Slott: So, one guy has two spouses?
[00:35:11] Dean Barber: No. Husband and wife, right?
[00:35:13] Ed Slott: Okay. Because I don’t know where you’re broadcasting from.
[00:35:17] Dean Barber: We’re the Midwest. We don’t go that way here. So, you have husband and wife each with a million dollars in their IRA. When the first spouse dies, what happens? Well, the surviving spouse can inherit that IRA, right? Then they still have the ability to inherit that IRA. There’s no tenure rule. Nothing like that, right?
[00:35:34] Ed Slott: They’re unchanged. Right.
[00:35:36] Dean Barber: What if we just had enough life insurance for that surviving spouse to use the death benefit to pay the taxes to convert that IRA over to a Roth IRA? Now, we’ve got tax-free assets that can pass down to the beneficiaries. Yes, that tax-free money, the Roth still has to come out in 10 years but it doesn’t kill them with taxes.
So, now all of the sudden, you’re paying all the taxes with an insurance policy at the death of the first spouse and now you got tax-free income for the surviving spouse, that helps us with that whole idea that whenever you’re a single taxpayer, you’re hitting those higher rates and lower-income thresholds. So, it could be a win-win for two generations there.
[00:36:18] Ed Slott: Yeah. And we didn’t mention it but Roth IRAs are another strategy to solve the trust problem. If you convert to a Roth IRA, which you hit on, and you still wanted a trust, the Roth IRA will work better in the trust because there’s no trust taxes because those distributions into the trust after death will generally be tax-free. You could even do a Roth conversion. Let’s say you have two spouses, like you said, married to each other, wife and a husband. I had to clarify that because the way you said it, it didn’t sound right. That’s like that commercial.
That’s not right. You know that commercial where they say, “That’s not right.” Say the husband converts his IRA to a Roth and he uses up the low brackets which may be a good move, and he leaves the Roth IRA to his wife. But instead of a life insurance policy on the wife, maybe they get a second-to-die policy because they might not need a payout. Because the wife as she inherits the Roth IRA, there are no RMDs. If she ever needs that money, it’s all tax-free. She never has to take it out.
But when she dies, then the 10-year rule kicks in but then you could have the life insurance, and even if the 10-year rule kicks in with a Roth, it’s still tax-free. So, you can combine the strategies however you want but those are the two better strategies than inheriting an IRA.
[00:37:37] Dean Barber: Alright. So, let’s move on to number two in the SECURE Act. What’s the second big piece? I know that the end of the stretch is probably in you and I’s mind, one of the biggest. But what else is out there? There’s something on…
[00:37:48] Ed Slott: Everything else is trimming around the edges. This was the big piece. Congress was crowing about these provisions, the one I’m going to tell you about now the RMD age being raised to age 72. Congress is patting themselves on the back, you saw it, crowing about it’s like they think they won American Idol just changing the RMD age. This is what they thought was phenomenal, from 70 ½, which everybody knows all the way up to 72.
[00:38:20] Dean Barber: Yeah, big deal.
[00:38:22] Ed Slott: Yeah, big deal. But here’s what I tell you I like about this provision. So, what I like about that provision is they finally got rid of the 70 ½. That to me, to most people, not to me as much because I understand it but that was the most confusing part of the law for over 20 years. People didn’t know. Am I 70? Am I 71? When am I 70 ½? Which table do I use? What age do I use age 70? Do I use age 71? That confounded so many people. So, good riddance, we don’t have the 70 ½ year calculation anymore. That’s the single biggest benefit to this provision.
[00:39:02] Dean Barber: But we still do have 70 ½ because that’s still the age what you can do at QCD.
[00:39:08] Ed Slott: Right. Yeah. They forgot to change that part. So, they changed it to 72 but there’s even a trap with that. So, what happened is because they did everything rush, rush, like almost sneaky under the cover of night, I’m talking about Congress, you know when they did this December 20. People woke up January 1, it’s effective and then they heard, oh, 72.
So, I can wait until 72. Not if you were already 70 ½ in 2019. The old rules still apply to you. You don’t get a year off. So, the 72 only applies to people who turned 70 ½ in 2020 or later. How do you know? All right, I’m going to give you an easy rule. If your birthday is July 1, 1949 or later, you get age 72. So, that might be an easier way to remember it because most people know when their birthday is. So, that means you can delay it until 72 if you know when your birthday is.
[00:40:08] Dean Barber: Alright. So, to me, that was…
[00:40:10] Ed Slott: If that helps. That’s a big nothing.
[00:40:12] Dean Barber: It’s a big nothing. Exactly right. It’s like ho-hum. And you know, the crazy thing is that when they were trying to sell the benefits of this SECURE Act because remember this thing sat in the Senate for probably what? Seven, eight months.
[00:40:23] Ed Slott: Yeah, it was in May it came out. It sat in the Senate. The house voted it out I think in May of 2019 and it sat around growing dust and then they had to fill the budget gaps at the end. They said, “What is this thing laying around? Put that in there. Sign it up. What is that? I don’t know. But sign it up. It’s Christmas. We want to go home.” That’s how it became law.
[00:40:43] Dean Barber: Right. And it was all part of the budget deal. Right?
[00:40:46] Ed Slott: Right.
[00:40:47] Dean Barber: They just tucked it in there and…
[00:40:48] Ed Slott: Yeah. Put it in the back. Yeah, throw this thing in the back. What thing? Don’t even ask. We want to go home for Christmas.
[00:40:54] Dean Barber: It was ridiculous. All right. So, you get the 72 as opposed to 70 ½.
[00:41:00] Ed Slott: The other thing is the thing you mentioned.
[00:41:02] Dean Barber: The QCD.
[00:41:03] Ed Slott: The 70 ½ is still the age for QCDs. QCDs are qualified charitable distributions. This is one of the best provisions in the tax code. It didn’t come from this act but this act and the Tax Cuts and Jobs Act actually a couple of years before making QCDs much more valuable. These are contributions you can make directly from your IRA. The only negative is it doesn’t apply to as enough people. It only applies to IRA owners who are 70 ½ and as you correctly stated that age is still 70 ½ even under the SECURE Act, even though the RMD age went up to 72.
It only applies to IRA owners who are 70 ½ years old or older, and you have to actually be 70 ½, not the year you turn. So, if you turned 70 ½ tomorrow, you can’t use it today. So, for that group of people, it doesn’t apply to plans like 401(k)s, just IRA owners or beneficiaries who are 70 ½ years old or older, they can transfer directly from their IRA to a charity.
Now, I’m not saying just give your whole IRA to a charity. I’m talking about, I mean, under that theory, yeah, if you give all your money to charity, you’ll have less tax. I’m saying don’t give more to charity. Do the giving you’re already doing but give this way and you’ll save a lot on taxes. Why? Because most people found out last year the first time, they’re not getting deductions for the charitable gifts they made because most of them got hit with taking the larger standard deduction. Doing the giving this way, you get the larger standard deduction but you’ll also get the benefit of giving to charity.
Actually, you get better than the old charitable deduction because this is an exclusion from income. It comes right off the top. So, it’s a good way to whittle down your IRA at no tax at all and the amount you use like QCD satisfies can go towards satisfying your RMD.
[00:43:05] Ed Slott: You could even do more than the RMD. You can do up to 100,000 a year. So, that’s the way to give and save taxes at the same time. Since you’re not getting a deduction for your gifts anyway, here you’re getting better than a deduction and exclusion from income.
[00:43:20] Dean Barber: Totally agree. Since the Tax Cuts and Jobs Act, we’ve used QCDs more than any other time in my 32 years in this business.
[00:43:26] Ed Slott: Yeah. Everybody should be using it but most people don’t.
[00:43:29] Dean Barber: But there’s another piece in the SECURE Act that is going to cause complications and that is that if you still have earned income after the age of 70, you can still make a deductible contribution to your IRA, right?
[00:43:46] Ed Slott: Right. Don’t do it. It’s a trap. It’s a trap. From that, you know, I was going to show at the meeting the Born To Run video, because there’s a line in there, “It’s a deathtrap. It’s a suicide rap. Better get out while you’re young. It’s a trap.” You know, it’s just amazing. Congress gave billions. Most of these tax bills, these budget bills that went in at the, like I said, under the cover of night at the end of the year last year, were written by lobbyists, giving billions of biggest tax breaks to the biggest companies. But here’s what really irked Congress.
They were afraid people like you and I and everybody with a retirement account might give too much money to charity. Ooh. So, they lowered the hammer on this in one of the most ridiculous tax provisions I’ve ever seen. And you mentioned it, you hit it right on the head. So, now, they eliminated the restriction, the age restriction.
Before the SECURE Act, if you wanted to contribute to a traditional IRA, you couldn’t do it after 70 ½. Now, you can. But if you do a deductible contribution, which you shouldn’t do, but if you do it and you want to do a QCD, somebody, some staffer, I wonder who that person is that thought he was the hero of the country that stuff that in because no congressman could ever have figured this out. So, if you give 7,000, if you take a tax-deductible IRA, assuming you have the earnings after 70 ½ and you deduct it but you also give the 7,000 to charity.
They say that’s double-dipping. Ahh, the horror. We’re going to make your QCD taxable. So, here’s the answer. Don’t do that. Nobody should be doing a deductible IRA after 70 ½ anyway. Your tax rate is probably low. You’re probably in lower-income. Do a Roth IRA. There were never any age restrictions for that. So, you can do a Roth IRA and still do the QCD from your other IRA money if you have it. So, avoid that problem altogether.
[00:45:54] Dean Barber: Ed, I’m afraid that what’s going to happen here is because of what you said at the very beginning of this podcast is that most CPAs are reactive. What could I do to reduce my tax bill? They’re going to tell people, “Hey, you can make a…”
[00:46:07] Ed Slott: Oh yeah, do a deductible and the QCD. Don’t do it.
[00:46:10] Dean Barber: No.
[00:46:10] Ed Slott: You heard it here on the Dean Modern Wealth Management radio network. Don’t do it.
[00:46:15] Dean Barber: Here’s the deal. Because there’s another component.
[00:46:17] Ed Slott: It’s a trap. It’s a cookbook like they said on that Twilight Zone. It’s a cookbook.
[00:46:22] Dean Barber: And there’s a clawback provision too, right? A clawback provision so that if you weren’t doing a QCD in the same year, let’s say you did 10 years’ worth of those $7,000 contribution.
[00:46:31] Ed Slott: It never goes away.
[00:46:32] Dean Barber: Yeah. Now, you want to do a QCD? Well, the first $70,000 that you do in a QCD is going to be taxable.
[00:46:39] Ed Slott: Now, let me put other things in perspective too. Remember, if you’re doing a deductible IRA into your 70s, and you do the QCDs, you had that problem and at the same time, money’s coming out the other way because you’re subject to required minimum distributions. You got money coming from every street. It’s like standing in the middle of an intersection with cars coming every which way and no traffic light. How is anybody going to track this on a tax return? So, just avoid it.
[00:47:06] Dean Barber: So, how does this impact the self-employed individual who’s contributing to a SEP?
[00:47:11] Ed Slott: It doesn’t. See, that’s what’s crazy. SEP, they could do that. The problem Congress had with this, they felt, “Oh, wait a minute. They’re giving money that was they got a deduction for,” but if you think about it, all the money that goes into QCDs was money you got a deduction for. It was just earlier, not later. I don’t know what the problem Congress had with this but they felt they had to put it in. Think about it. All the money by law, actually, the only money you can use for a QCD is a pretax money.
So, all of the money going into any QCD was money you once got a deduction for so I don’t understand it. It’s the dumbest thing I’ve ever seen in a tax law but somebody got a gold ribbon somewhere, some staffer in Washington probably walking around with a little trophy, “Look what I did?”
[00:48:04] Dean Barber: Yeah. I think that the SECURE Act was the biggest money grab that I’ve ever seen out of Congress.
[00:48:10] Ed Slott: Yeah. Oh, yeah. So, that’s a new provision but a trap and that’s why you’re listening to programs like this because the accountants won’t see the trap until this year, this time next year when they’re doing the returns, and then they have to figure out. Accountants are going to have to go to seminars just how to calculate the amount of a taxable QCD. That’s what Congress created, something I’m now calling the taxable QCD. How do you have a tax on money you give to charity?
[00:48:42] Dean Barber: Ed, but think about this. Think about the number of people who either do a tax return in a box, they go to one of the big national chains, and they’ve got either a computer or they’ve got somebody who I would say the epitome of reactive from a tax perspective, people are going to make so many mistakes. I think the mistakes that we’re going to be seeing made because of the SECURE Act is going to go back to what you are witnessing 30 years ago before they ever talked about the rules on how to get the money out of these accounts. And I think the whole thing is a trap. And it’s going to flood.
[00:49:21] Ed Slott: Are you a Twilight Zone fan?
[00:49:24] Dean Barber: Well, back in the day.
[00:49:25] Ed Slott: You know what I’m referring to? That episode where they say, “It’s a cookbook.”
[00:49:29] Dean Barber: It’s a trap.
[00:49:30] Ed Slott: And it was called To Serve Man. Your viewer that understand Twilight Zone they’ll know what it means. It’s like a Trojan horse. So, it was meant to sound good. And you know what I tell you in every program, here’s a clue, whenever Congress names a law, you can be sure it will always do the opposite. So, when they call it the SECURE Act, you better run. Your money is less secure. And this started back in the 80s when I had the laugh of my life over tax law when they called that tax law the Deficit Reduction Act. Look how that worked out?
[00:50:05] Dean Barber: Oh, well. Look at the deficits we have today. Obviously, it worked out great. I mean, but the thing is I think that if I could just get people to get a good relationship with a good financial planner that’s working closely with a good CPA that’s not reactive, that’s proactive and forward-looking, we can help people avoid a lot of these traps. And that’s what your entire education program is built to do.
[00:50:31] Ed Slott: Well, that’s what our Elite IRA Advisor Group is all about, proactive planning. The best way to describe it is planning before it hits the fan.
[00:50:42] Dean Barber: Yes. And again, you said it earlier that the taxes are the biggest wealth eroding factor facing people in retirement. But the truth is that if you’re doing forward-looking planning, you have more control especially during those retirement years than you ever had during your working life.
[00:51:00] Ed Slott: That is the key. You can control your tax rate. Most people don’t realize that. They do nothing. That’s why I say in all my TV shows and all my consumer programs, you either get your plan or the government plan. Most people get the government plan because they do nothing. They don’t have advisors that have the level of knowledge you have in our elite advisory group so they get the default plan, which is the government plan, which is never a good plan.
[00:51:24] Dean Barber: Totally agree. Ed, listen, you’ve been so kind with all of your time here and I’m really looking forward to seeing you here in about a month-and-a-half and learning more. So, I guess with that, I’m going to just say thank you for the education over the last 16 years. Thank you for taking part in The Guided Retirement Show and all the appearances that you’ve had on America’s Wealth Management show. Please enjoy the rest of your day.
[00:51:45] Ed Slott: Well, I’m proud to be with you, Dean. You’re one of the top people who as a founding member of Ed Slott’s Elite IRA Advisory Group. You’ve always valued education and that empowers people to make better decisions but you have to have somebody guiding you that’s up-to-date that stays up-to-date, proactive planning before it hits the fan, your plan, not the government plan.
[00:52:09] Dean Barber: Well, I hope you enjoyed that conversation with Ed Slott. As you know, and you can tell, he’s not the typical CPA. As he said, he’s a recovering CPA. That guy has more information pent up in him. We’re going to be sure to invite Ed back on here and get another episode or two with him because the tax code continues to change. The complexities are out there. Every single person is in a different situation. And it’s important that you have a great guide for your retirement. We appreciate you joining us here on The Guided Retirement Show and hopefully, we get a chance to meet you in person someday.
Investment advisory service is offered through Modern Wealth Management, an SEC-registered investment advisor.
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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.