Read The Transcript Below:

Steven (00:55):

Hello everyone. Welcome to the next episode of the Retirement Tax Services podcast, financial Professionals Edition. I’m your host, Steven Jarvis, CPA, and with me this week I have an industry legend when it comes to tax planning Ed Slott. Welcome to the show.

Ed (01:07):

Well, it’s great to be here.

Steven (01:09):

Yeah, I’m super excited to have this conversation. I mentioned it before we hit record, but I was just talking to some advisors who just got back from one of your conferences and we’re saying great things about the content and what they learned there. So it’s really exciting for me to have you on and really where I want to start is this comment that you made about you want advisors to understand the rules and then ignore them. So let’s talk about why we ignore the rules.

Ed (01:32):

That’s my message. Well, we spend several days. We have several conferences, pretty intense conferences. We have our two day program and then that’s our basic program. We go through a 400 page manual on that, two days alone, a lot of it with tax, retirement and estate planning, RMDs, all that. And then for advisors who want to up their game, we have what we call our elite IRA advisor group. These are advisors that train with us throughout the year and we do several workshops. They have us as a back office for questions. So that’s the event that happened. The one you are talking about, where we’re going all in. We drill down on all these RMDs and this is our first workshop since the new regs from July over the summer, I mean IRS released almost 300 pages of new regs on July 18th of 260 pages of regs regulations on the original Secure Act. So I’m glad they got that out. Only four and a half years later.

Steven (02:35):

Yeah, just four and a half. That’s record-setting pace for them.

Ed (02:39):

Yeah, if you had a kid when the regs came out, he’d be in kindergarten already.

Steven (02:44):

That’s wild.

Ed (02:44):

Think about that. And then 36 pages of proposed regs. So the secure was the final regs, proposed regs, the secure 2.0. So there’s a lot going on, A lot of things that we thought were coming, but then some surprises. But here’s the bottom line. Advisors do have to know these RMD rules.

(03:03):

And there’s more money in these accounts, and I see tremendous, nothing but tremendous opportunities for informed, educated financial advisors who can explain this to clients. I just saw a study come out a couple of weeks ago from ICI, the Investment Company Institute. They record data. How much money are in these retirement accounts? I don’t know if you saw that. 40 trillion with a T in retirement accounts. Most of that money has not yet been taxed. So the name of the game is tax planning. So you have more money than ever before. Of course, the stock market boosting a lot of that and more people who need the help of a financial advisor on the tax planning. Some of the people are calling it the silver tsunami, but the data, the census data tells us in 2024, more people will turn 65 who have already turned 65 than ever in history before, and that will keep increasing.

(04:04):

Plus you have low tax rates, changing tax laws. I mean, I call this a perfect storm of IRA opportunity and that was our message at the meeting. But back to the RMDs, yes, there’s a lot of complicated rules and advisors generally have to know them, but after I explain all the rules, I tell everybody, now that you know what the minimum is, forget it. Because minimum doesn’t really work well in life anything. Think about it. If you have a credit card bill and it’s $3,000, but it says you only have to pay $41, that’s the minimum. Wow, what a deal. I’ll just pay $41 and in three months you owe a hundred thousand dollars. See, that’s how it works. Minimum isn’t good in many things. Do you want minimum income? You want minimum wage. So the M in RMD stands for acquired minimum distribution, but it does not stand for maximum.

(05:04):

Anybody that’s working with clients should let the tax planning drive the distribution planning, not RMDs, not how little I can take out, that short-term planning, which is not good for tax planning. Knowing every minute, every day that goes by that somebody doesn’t take money out of this IRA for example, is another day. It’s going. The tax accruing in that account is going to compound against them. For example, take the 10 year rule. That’s where a lot of the confusion is or beneficiaries. People who inherited IRAs, most non-spouse beneficiaries will have to empty the account. Their inherited IRAs by the end of the 10th year after death. That was the big game changer from the secure Act. The secure act killed the stretch IRA, which was a pretty good deal. Lifetime deferral for beneficiaries over their lives, extended distribution so they could really pile up and accumulate based on their age, 20, 30, 40, 50 years depending on their age. Well, Congress didn’t like that deal that they said anyway. Really it was just a big revenue grab like every tax bill seems to be. Anyway, so they killed the stretch IRA and replaced it with this 10 year rule. But then IRS came in and created these regs, which they finalized as I said in July. And for people beneficiaries who have the 10 year rule, yes, it still has to come out by the 10th year after death, everything. But during the first nine years, years one through nine of the 10 year term, they have minimum required distributions based on their own age.

(06:47):

Under the old stretch, you have this hybrid system. You have the first nine years, the old stretch, and in year 10, 100% RMD, the entire account balance. So many people wanted to know, well, should I just take the minimums years one through nine? No. Why on earth would you do that? So you could have a balloon mortgage at the end of the 10th year. You don’t know how much that will accumulate. You do know and you don’t know what future tax rates are. So to leave it to the 10th year thinking you’re doing the clients a big favor by keeping the clients, in this case being the beneficiaries, keeping their bill low each year. Probably the better item is to look at the tax rates. I keep them on my desk. I have a little short here we create. Yep. And if you look at the brackets for 24 unprecedented low brackets, this is where tax advisors can shine by using up these low brackets, a wasted bracket is wasted for life. You never get credit in a future year. So when people tell me, even CPA colleagues of mine telling me, oh, I had a client so happy I kept him in the 12% bracket. You know what I say? Oh, sorry to hear that.

Steven (08:02):

A waste. Yeah.

Ed (08:03):

Because now if he has an IRA, he’s going to get hammered at some point. So you’ve got to look at these brackets. 22%, 24%, I mean married filing joint in 2024 can go up to 383,900 of taxable income in the 24%, and a lot of that is still at the lower graduated bracket. Why would you waste that? So what am I saying? Get that money out now, even before it’s required; this leads to Roth conversions. And you know why it’s such a big deal? Because you’re not saving anybody any money. Remember the tax, these distributions that create the tax bill, that tax is going to be paid. It’s not if, but when you’re not saving anybody anything by giving them this false sense of security that you save them all this money and then they’re going to have a mega-hit at the end. So you got to let using the rates, the bracket planning, the tax planning drive distributions.

(09:09):

Same thing with IRA owners who are about to take RMD, say at age 73, they should be doing some kind of Roth conversions. I’m not really saying it’s for everybody. The Roth conversion, well, actually I am, but for everybody because the point is to get these balances down, what Congress did actually, if you think about it, they made the IRA the worst possible asset, the worst, the absolute worst possible asset for wealth transfer or estate planning. It’s now the worst possible asset to inherit. They made it a lousy asset because all the benefits are gone. It was complicated to work with before the secure act. You still had a lot of these rules. It was a tax landmine, almost like an obstacle course. Not to step on any problems, but we put up with it because you had the stretch IRA. It’s like in baseball for example, let’s say you’ve got a guy that’s a great home run hitter, but he’s a horrible team player. And I’m not mentioning, I’m just talking anybody on any team. It could be the quarterback in a football game, but I’m using baseball. It’s world series season or by the time this airs World Series would be over. I don’t know who’s going to win, but I’ll make, I don’t want to make a prediction because I’m from New York and I see the Yankees going down. So…

Steven (10:36):

Yeah, it’s not looking good for you.

Ed (10:38):

Let’s say you had a great star, a home run hitter, but he was a pain in the neck on the team because all kinds of problems. He was involved in scandals the worst kind of, but you kept him on the team. He kept hitting home runs. What if that player could no longer hit home runs? He had no more redeeming qualities. You get rid of him. That’s how I feel about an IRA. Once the stretch was gone, that was the only reason we kept it around. It had some redeeming qualities and now that big benefit is gone. So let’s trim down, get rid of these IRAs and take advantage of today’s low tax rates both during life with Roth conversions and at death for beneficiaries to smooth out distributions over a longer period of time. We don’t know how long these low rates will last. We know it’s going to last for at least 24 and 25.

(11:34):

Supposed to go back up in 26. I would even go one step further. So a lot of this is kind of stuff you probably don’t hear on your show IRA’s bad from Mr IRA. I’m telling you, bad, horrible assets to leave to the next generation. Horrible assets to plan with start trimming balances. And the second part that goes along with starting to trim balances, don’t add to them stop contributing to 401Ks and IRAs instead. If the company has a Roth, do a Roth 401k or do a Roth IRA. Now, when I said that, I said that to a group of CPAs just recently, and they said, well, stop contributing to 401Ks. They were picking on when I said no more 401K contributions. What do you think? They yelled out reasons why their clients should continue with funding 401Ks.

Steven (12:28):

Well, most CPAs are focused on how big of a refund can I get right now and their tax bills going to go up if they quit contributing to a 401k.

Ed (12:35):

So the two things they would yell out, one would be, and this is almost a trap I set for them, but I let them do it. One, they would yell out, what about the match, that tells me they’re not up on the tax rules. That’s why I said I baited them on that because the secure app fixed that. The match can go to the Roth side now, so that’s not an issue, but the big issue is the one you mentioned. They’ll say, what about the deduction? And as a tax advisor and you too, I don’t like to even call it a deduction that you get for your 401k people call it that. It’s an exclusion from income. It comes off your W2. I don’t call it a real deduction because it’s not what I call a real deduction. Your home mortgage interest, you get that deduction.

(13:22):

You keep it, charitable contributions if itemized, you keep it. But this deduction, if you call it that, you don’t keep, you know what? When people say, but I get a deduction for contributing to a 401k. No, you don’t. Yeah, you get one upfront, but you know what it really is a 401k deduction is really just a loan you are taking from the government to be paid back at the absolute worst time in retirement. And then they’ll say just like you said, but then they’re going to pay more tax. Yeah, now, but at low rates, if they don’t pay it now, they’ll pay it later. You can’t bury your head in the sand on this stuff and make believe the problem’s going to go away. It’s like that old quote I use sometime in my seminars from Henny Youngman. He said, when I read about the evils of drinking, I gave up reading.

(14:17):

You can’t make believe like this is not going to happen. This is happening. If you have a client with a growing building IRA, I’m telling you, those people are looking for good tax planning. What I’m hearing in our training sessions is that the advisors that have the training that can explain this kind of planning, which I think is kind of simple. They’re picking up large IRA accounts or new clients both for tax planning and investment management. Investments are not my end, but the tax planning. And they’re picking up these accounts from either accountants who don’t do this planning or from advisors who don’t do this planning and advisors that they’ve had for like 20 years in some cases because what we’re seeing the clients with the largest IRAs, and there’s more of them than any time before in history. In fact, FIdelity just released a report more 401k millionaires than ever before.

(15:11):

And these clients have reached what I’ve coined the term crossover point. What I mean by that where they realize they have a tax problem and they also realize they crossed over. They realize if you looked at a graph, they crossed over. That’s where I got the idea from. They realized they know more about this than their current advisor because it’s their money. They’re looking at it now they’re realizing they have a tax problem and the advisor is not addressing this. So the best advice I can give anybody watching or listening to this program is to start getting serious about proactive tax planning. Don’t be shortsighted and show them how much money, like you said Steve, they could save them today if they’re going to pay it back and then some tomorrow. So that’s what I mean by rethinking retirement planning. Think maximum, not minimum.

Commercial (16:06):

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Steven (16:27):

Ed, I love that so much because there’s so many things in there that you’re saying that I try to reinforce advisors all the time and especially this idea around, yes, the rules are there, but throw ’em out, do right by your clients. When secure Act 2.0 first came out and I was seeing all these advisors celebrate when the IRS was punting on enforcing the rules, they’re like, ah, now I don’t have to worry about it for another year. And I’m like, no, no, no, no, stop. You’re doing a disservice to your clients. To your point, that’s the minimum requirement. But on really just about any tax rule, if we just let the default happen to us, we’re going to get killed on taxes. We have to be proactive and intentional or that tax bill just balloons and balloons and balloons, just doing really basic math on a 10 year timeline of an inherited IRA. If we take a million-dollar IRA and do it all in year one or all in year 10, the tax difference can be six figures that compared to being strategic and doing it evenly throughout those 10 years. And so these aren’t small dollars. We’re not talking about saving somebody a thousand dollars in taxes. This can be hundreds of thousands of millions of dollars of taxes, depending on the size of the assets involved.

Ed (17:32):

And huge tax savings. Just take a simple example. Let’s say we have a full 10 years. Your point is well taken there, and that’s exactly what happened for the 10-year people who inherited, say right after the Secure Act in 2020. It was so complicated that for 21, the IRS waived that RMD for 22, 3 and 4, they did the same thing. So as you said, oh, they said, good, I got a break. No, I can wait now only have six years. You have a shorter window. When that income has to come out in a shorter window, it has like a fire hose effect of taxation. So that’s a big problem for lots of people and beneficiaries. Let’s take a typical client that has an IRA leaving it to say a beneficiary is a traditional IRA that’s subject to the 10 year rule. And if they wait till the 10th year, as you say, it all comes out at one shot. But imagine if there were three beneficiaries, three children, let’s say beneficiaries. So it was subject to the 10 year rule. If they each took just simple, forget about calculations or even tax one 10th a year for 10 years, they would get the opportunity. Remember, if they did it in year 10 that have one shot at the low tax brackets.

(18:46):

Three beneficiaries could use the low tax brackets 30 times in that 10 year period, use the 12 ,22, 24% bracket 30 times as opposed to once. It’s bizarre how much can be saved when you start thinking like that.

Steven (19:03):

Well, and the other thing that’s interesting to me, I think this is just from a behavior standpoint, our advisors and taxpayers are so hesitant to take action that it requires them to pay more taxes now because that feels very real to them because they have this delusion that because they don’t know exactly what’s going to happen in the future. I think I even heard it from you that the tax codes written in pencil…

Ed (19:23):

Right?

Steven (19:23):

We know the tax code can change and it will change. And so they have this hesitancy of I’m not going to take any action. But I think that’s very narrow minded, very shortsighted because the tax code can change in lots of directions. And if you’re waiting for the tax code to be crystal clear, you’re never going to take action. And to your point earlier, most tax law changes. They’re about votes or they’re about short-term objectives of Congress. So that was the whole people think that Roth was this noble thing from Congress to all of us, but it was just a way for them to get money from us sooner. Yes, we have the opportunity to be strategic and intentional and use that to our advantage, but we’ve got to set aside this idea that there is a single tax rule that is for the taxpayers benefit by default.

Ed (20:04):

Right? Of course, exactly what you said we should be taking advantage of. In my seminars, I always say the big benefit taxpayers have lucky for us as advisors, Congress are the worst financial planners on proof. They are so shortsighted. Why do you think they love the Roth? Because exactly like you said, it brings in money upfront. We should take advantage of that. And when you do a Roth conversion, by the way, for the beneficiaries, it’s the better asset to inherit. When I said IRAs are lousy asset to inherit, I meant traditional IRAs not Roth. Roth are the best because if the parents, let’s say the IRA owner does a Roth conversion in their lifetime, they get double benefits first. Yes, they pay their tax upfront, but that tax would’ve been paid by them or their family at some point anyway. There was no savings on there.

(20:54):

It’s not if, but when. So they pay the tax. Now they have a Roth IRA. They never have RMDs for the rest of their lives and 10 years beyond for the beneficiaries because anybody who inherits a Roth IRA, they’re still subject to the 10-year-old. The inherited Roth funds have to come out by the end of the 10th year after death, but there are never any RMDs for years one through nine of the 10 year term. And in that case, you do want to spread it out as long as possible or avoid it because the inherited Roth money is growing and compounding and accumulating absolutely income tax free for these beneficiaries who when they inherit might be in their own highest earnings years. So that’s good planning for a parent or IRA on it to do a Roth conversion, a double benefit, no RMDs during their lifetime.

(21:48):

And if they need the money, they can take it tax free. But if they don’t, they can keep their income low. Doing Roth to me is tax insurance. It’s insurance against the uncertainty of what future higher taxes could do to your standard of living in retirement. So I think it’s something that every true tax planner a conversation at a minimum that you should have with your clients about getting involved in a series of conversions hopefully before RMDs kick in. See, that’s the difference. Once RMDs kick in, it’s out of your control. The beauty of Roth conversions during your life is that you can control the tax rates. You can control what you pay. Once you hit RMDs, you’re out of control and so are the beneficiaries. Because a beneficiary cannot, and I get questions on this, many people think, well, we’ll let the beneficiaries convert. No.

(22:44):

Inherited IRAs cannot be converted to inherited Roth IRAs. Beneficiaries cannot convert unless they inherit from a 401k for some odd reason. If you inherit a 401k, that can be converted to an inherited IRA, but for some reason IRAs cannot be, so the beneficiary can’t do it generally. So it’s up to the IRA owner to set the table for their beneficiaries where they’ll both benefit yes, tax, some tax will be paid upfront, but this is money that will be well spent because you get something for your money, you get absolute tax freedom for the rest of your life and at least for 10 years after death to your beneficiaries who can accumulate that money for the full 10 years all tax free.

Steven (23:34):

So many great points in there, ed. And I want to circle back to how we started this episode, which was I really want to make sure that we’re reinforcing, you do need to know what these rules are before you ignore them because there are these situations where we’ve got to make sure that we’re not missing some of this nuance. But the bigger picture here is that if you want to not get killed on taxes, it takes a proactive approach. It takes doing more than just what the IRS tells you by default. The other thing I want to circle back to because I think language is really important, and you and I nerd up out about this kind of stuff all the time, so we just fly through it, but the piece in there that you talked about, that 401k contribution or an IRA contribution is not a deduction. I love that framing. And so to take that and to start explaining it to clients for advisors listening to make sure that they understand that distinction as well, to use that comparison that you gave Ed, because there’s a big difference between a 401k contribution where you took this loan from the IRS as opposed to a charitable gift or your home mortgage deduction where that’s a permanent deduction. The IRS has never come back and say, wait, never mind, now I want my piece.

Ed (24:33):

Right?

Steven (24:33):

But those are the kinds of things that help the client take action. It is a challenge at times to help clients who’ve never done this before embrace this idea of, yes, I’m going to willingly write a check to the IRS today because of how much it’s going to help me in the future.

Ed (24:47):

And now, there are reasons to keep some traditional IRAs. I can think of two off the top of my head for clients that are charitably inclined and want to give to charity IRAs because they’re such horrible assets are the best assets to give to charity, and you can do that through qualified charitable distributions. qds, the only downside with that is it’s not available to enough people. It’s only available to IRA owners who are 70 and a half years old or older. But once you hit 70 and a half, if that’s where you want to do your giving, if you’re giving anyway, that’s why I say charitably inclined. I never tell people to give to charity for tax reasons

(25:31):

Because when they’re not really charitably inclined, the days eventually going to COB with all the shenanigans and structures you could set up, yes, you get a tax break, but there’s going to come a day where you have to actually give it away and then they get upset. So if you know in advance that you were going to give anyway, then do it through QCDs if you qualify because it can also offset an RMD. So that would be a reason to keep some traditional IRAs to use them for your charitable planning. The other reason might be if, and you never know this one, medical expenses, you really never know what future medical expenses might be for a client. But if you have an idea that they’re going to be very high, and it’s not uncommon the last few years, I don’t do much client work anymore, but when I did, it was not unlikely. And this is just in the last 10 years to see clients claim over a hundred thousand dollars of medical expenses.

(26:28):

Between nursing homes, aides, I had this with my mother, ambulance doctor visits, medical home improvements, widening hallways and doorways, installing ramps and railings and chair lifts and stair lifts and kitchen and bathroom modifications. These are big-ticket items that will go way beyond the seven and a half a GI limitation. So if you think you have a client that’s heading for that, I might keep some of that money in IRAs, so you take it down and use that to pay the medical bills, even after the seven and a half percent haircut there, you still may do well getting an offsetting deduction. So those are a couple of reasons maybe to keep some IRAs or if you truly believe your client will be in a lower bracket in retirement, which I don’t believe, but some people actually believe that’s true. I’ve never really seen it happen, especially with large IRAs because those RMDs get very, very large.

Steven (27:26):

Yeah, no, you’re absolutely right. And it goes back to something you said earlier, which is some I echoed advisors all the time, which is this has to be a conversation with every client. Every year. There are going to be a handful of situations where it might not make sense in the current year, Roth isn’t the perfect fit every single time, but the vast majority of the time, it is one of the most commonly available tax planning strategies available to taxpayers that can make a difference over their lifetime. So I’m a huge advocate of having these conversations, of understanding these nuances, of making sure we’re doing right by our clients, by being proactive on these topics.

Ed (27:55):

I’ll tell you one situation where we’ll almost always pay, and this is a great tip for all the listeners on this program. Every advisor listening here probably has a married couple client where in 2024, where one spouse has already died or will die before year end. If you have that situation, the minute there’s a death, and you might already can think of as we’re talking, you might say, oh, that was Mr. And Mrs. Smith. He died earlier in the year.

(28:25):

You do everything you can. If there’s a large IRA involved to convert it, yes, you’ll pay a ton of tax, convert it all to a Roth IRA. Why? Because this is the last year in most cases, to take advantage on the final joint return for joint return rates. Because if you don’t that next year, the spouse who inherits, and then generally in most married couples, the spouses leave everything to each other. So say the wife is the survivor, other than the differential on social security, the income she has is going to be the same as the income they both had when they were together on a joint return. But now she’ll file single. I call that the widow’s penalty. So I would do everything in that case. It’s a great tax move. A lot of money goes out when there’s a death with the estate. Don’t worry about that.

(29:16):

Here’s why this is a huge benefit all around. Number one, you’ll save the spouse, the surviving spouse, the widow’s penalty, but once you have a Roth and she inherits a Roth, her income will be lower for the rest of her life because she won’t have RMDs. Anything she takes from the Roth will be tax free for the rest of her life and 10 years beyond to her beneficiaries. So there’s that benefit. Plus imagine if you didn’t do it and she inherited a million-dollar IRA, paying at top rates at single rates, having huge RMDs every year, high tax bills every year, and an unhappy client.

Steven (29:56):

Yeah, such a great recommendation as we close out the calendar year. Well, Ed, really appreciate you coming on the show and sharing so much great information. For listeners, if you’re not already familiar with Ed Slot, which I’m sure most of you are, you can go to irahelp.com or check out his newest book on Amazon. The retirement Savings Time bomb ticks louder. So check out the great stuff that Ed is doing, and until next time, good luck out there. And remember to tip your server, not the IRS.