Year End Review with Ed Slott, CPA
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|The Lange Money Hour: Where Smart Money Talks
|Click to hear MP3 of this show|
- Guest Introduction: Ed Slott
- Starting to Save Early
- Where to Go for Good Advice
- First Step for Smart Investing: Time It Smartly
- Second Step for Smart Investing: Insure It
- Third Step for Smart Investing: Stretch It
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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m David Bear, here in the KQV studios with Jim Lange, CPA/Attorney and author of two best-selling books, Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again. Today, we welcome Ed Slott back to the show. Named the best source for IRA advice by the Wall Street Journal, Ed hosts two popular websites, www.irahelp.com and www.theslottreport.com. He has authored several best-selling books, including in 2012, both The Retirement Savings Time Bomb…and How to Defuse It and an updated edition of his classic Retirement Decisions Guide: Ways to Save & Stretch Your Wealth. Ed also writes personal finance columns for numerous financial publications and presents continuing professional education IRA seminars across the country. Stay tuned for an interesting and informative hour, and listeners, since our show is live, Jim and Ed are available to answer your questions. To join the conversation, call the KQV studios at (412) 333-9385. And with that, I’ll say hello, Jim and welcome, Ed!
Ed Slott: Hi!
Jim Lange: Welcome, Ed.
Ed Slott: Hi Jim.
Jim Lange: Everyone in the IRA and retirement planning world knows Ed Slott. He’s the most popular IRA writer, speaker, seminar guru in the country, and it is always…it’s Bob Dickey’s favorite show of the year, and I love when Ed’s on. I really do. Ed came out with another book this year…well, multiple books, but one of the books that was a little bit different than his normal, because it has a different target audience, is a book called Fund Your Future: A Tax-Smart Savings Plan in Your 20s and 30s. Ed, this is a little bit of a different twist for you because usually, your target audience is a little bit older than twenties and thirties. In fact, it’s probably closer to sixties and up.
Ed Slott: You’re right about that. First, thank you for having me back on the show. But I realize a lot of the benefits are compounded if you start early. I mean, this is no magic formula, but the greatest single moneymaking asset any individual can possess is time, and young people have more of it than anyone else, and, of course, they waste more of it, like all of us, than anyone else! And I thought if I could get the message across to people in the biggest transition of their lives, you know, we’re always talking about transitions of people retiring, starting Social Security, taking retirement withdrawals, but if you think about it, somebody in their twenties to thirties, the transition of maybe getting out of college, for example, getting a first job, getting married, having children, buying a home, taking on debt, all of these things happen in a very short amount of time. Maybe within ten years, all of the things I mention are happening, and with all that happening, maybe the biggest thing that will give them financial security for the future, saving, gets put on the back burner.
So, I created this very easy to go through guide, it will maybe take you an hour to read the whole thing, maybe a little longer, and hopefully, some of the lessons are tried and true, like for example: pay yourself first. Everybody knows that, but most people don’t do it because of all the other parts of life that kind of get in the way, and I understand that. I remember when I first started working in my first accounting firm, IRAs had just come out then in the mid 70s, and my boss told me, “You should put away money in an IRA.” And here I am, I guess around 22 years old, something like that, just out of college, and I said to him, “Why on earth would I do that? You can’t touch it ‘til you’re 59 ½. I’ll be dead by then! That’s so old!” Well, I’m going to hit 59 next year. But he was right. He knew what I’m telling you now, but I didn’t process it because it really wasn’t a top priority for me. My priority was, you know, having a job, making money, having fun. So, I think you could have fun, but also put away for a time…I also didn’t have what young people have now, and that’s the Roth IRA. I didn’t have a way…you know, it was true what I said to my boss back then, “You can’t touch it until you’re 59 ½.” But that’s not necessarily true with a Roth IRA, and there was no vehicle where you could put money in and have it come out in retirement tax-free. You got a tax deduction. That was the big hook on IRAs, still is. But as you believe, which I know from your books, Jim, you know, the whole Roth scenario, and I’m a big Roth fan as you know, too. I believe, just like your book says, pay taxes once and never again, and young people have such power in the time. The power of the Roth IRA is in the compounding, tax-free, over time. The Roth IRA, there’s no question, is the best asset you can own. It will grow the fastest because it will never be eroded by future taxes. And young people have the opportunity of a lifetime. So, that’s the reason for this book. It’s a great gift if you’re listening and you have children or grandchildren just coming out of school in their twenties and thirties, and you know they should start saving, but there are other priorities. Maybe a gift of this nice little book, very easy, I lay out the case, and by the time you finish reading it, if you’re in that age group, you might say, “You know, if I try this, the numbers really do add up,” and the compounding over time and tax-free compounding, just with a Roth IRA, the average twenty-year old could retire a tax-free millionaire without even Social Security, or even if they didn’t put one dime into a 401(k). The numbers, as you know, Jim, are staggering.
Jim Lange: Well, they are, and that’s one of the reasons I was so happy to see it, and I like your idea of listeners making a gift of the book to their kids or grandkids because I’m not sure how many in their twenties and thirties are actually going to buy it. I don’t know what your stats are, and even if you had stats, I guess you don’t know who’s buying your book, but I like the idea of parents and grandparents gifting it. And, of course parents, you know, no matter what they tell their kid, their kid isn’t going to listen, but if they say, “Here, this book was written by the top IRA expert in the country. See what he has to say,” I think that that might hold some weight, and maybe actually get some action.
Ed Slott: Well, you could put it this way: the book is very inexpensive as far as buying it as a gift, but when you present it, you give it to your kids or grandkids and say, “You see this I just got you? This could be worth a million dollars to you tax-free, if you follow the advice.” So, it’s a pretty good return on investment.
Jim Lange: Well, I think it is. Now, the other thing is they could be hard guys, and they could do what somebody did with one of my books, and they gave out a copy…and I really think this would be a good thing, particularly for somebody who just needs to get a little encouragement to save money, and say “Here’s the deal, kids: if you want to inherit any of my money, you have to read Ed Slott’s book, A Tax-Smart Savings Plan in Your 20s and 30s, which I highly recommend.”
Ed Slott: I haven’t seen that provision in many wills, but it’s a good idea!
Jim Lange: Well, I don’t know if I was going to put it in the will, but knowing this guy, the guy that said it, he might say, “Okay, it’s Christmas morning. Time for your quiz! All right, what does Ed Slott say about Roth IRAs?”Ed Slott: Well, actually, the advice, like I said, is very simple. The key is to capitalize on youth, which most people don’t at that age, as you know.
Jim Lange: Right. Well, as much as I enjoyed the book, and as much as I think that there’s an important place for it, and I know that you have a whole bunch of books out there, but in my mind, I have a favorite. And frankly, this was a big influence on me, your classic book, which I originally believe came out in 2003…
Ed Slott: Yes!
Jim Lange: The Retirement Savings Time Bomb, and then, I think…
Ed Slott: And How to Defuse It.
Jim Lange: Right, And How to Defuse It. And I think you’ve actually had several editions of this, and you actually updated that in 2012?
Ed Slott: Right. For one year, the tax law changes were so significant for that one year, I thought it was worth it. I had never done that before, write a book just for one year, and we don’t even know what next year’s going to be. So, as of right now, this book is as current as any book on the market on this topic.
Jim Lange: Right, and I do want to talk about some of the concepts in it, but just so if listeners…well, I don’t see how they could not enjoy the conversation, but if people wanted to get the book, again, it’s The Retirement Savings Time Bomb, don’t get the 2007 edition because I know that’s on Amazon too. I would get the 2012 edition.
Ed Slott: Well, that’s the only one, and unfortunately, like you say, sometimes when you go online, you can’t stop the old…people sell the old books like, you know, I don’t know how they do it. They read it and they sell the old book for $2.00. Get the new book, and you can get it either on Amazon or at bookstores, but probably the easiest way to find it the fastest is on my website where you can see all the books, like Fund Your Future for the young people. It’s at www.IRAhelp.com, and you’ll see all the books that Jim and I are talking about. The Retirement Savings Time Bomb, which is the classic, and that has all the meat in it, and Fund Your Future, which is maybe 1/10th the size. It’s a nice easy read, but it has a big message for young people.
Jim Lange: And I like your other books, too. The other advantage, by the way, of going to your website is I would encourage people to sign up for the newsletter. I guess you have a couple levels. You have a free level and a paid level, and I would encourage certainly everybody to sign up for the free newsletter, and I know we have quite a few financial advisors listening…
Ed Slott: Oh, there’s a lot of great free stuff. TheSlottReport.com too, you want great information, breaking news all the time? I mean, there’s so much free reliable and accurate information up there that if you just went to that each day, either TheSlottReport.com or IRAHelp.com, and just checked in, that would be beneficial. And if you’re a financial advisor, like you were just talking about, Jim, we have a discussion forum on the website, and the questions are usually excellent, and the answers are even better. So, if you’re a financial advisor and you want to see what consumers, generally with large IRAs, that’s generally who comes to our website, are interested in and the kind of things they’re asking, go on the discussion forum and check it out. We have thousands of questions asked and answered up there, and if you see one, and this is for your own advice, if you see many questions asked over and over again, well then you should take note of that because if many people are asking those questions, chances are your clients are going to be asking them and you want to know the right answer.
Jim Lange: Yeah, and I actually think it’s a great resource, and the other thing that I thought was interesting is that it’s not always you who’s answering the questions. You have other experts.
Ed Slott: No, it’s almost never me answering them. So, the next question is (I love this question I get from advisors) how do we know if the answer’s right? We have some of the top people. I don’t know if you’ve jumped in there and answered questions, but we have some of the top experts in the country answering these questions, but my answer to advisors when they say, “Well, how can you rely on it, if just anybody can jump in and answer a question?” That’s true. So, here’s what I would say to you: go in and answer a question and see what happens if you’re wrong. We have this, I don’t know, this cult following that can’t wait to pounce on somebody that says something wrong.
Jim Lange: I think that’s true!
David Bear: The power of the internet!
Jim Lange: Right! On the other hand, Ed, I mean, very frankly, you have really all of, what I would consider, the top IRA experts. Natalie Choate loves your work, and Barry Picker, and Bob Keebler, and Sy Goldberg, and me, and I think we all feel very good about your work and the reliability of the content of your books and your websites.
Ed Slott: Well, the information is up there. I mean, you know, as an advisor and as a consumer, this is where all the money in America is and is going, and as you know, Jim, these are the most complex rules in the tax code, and the rules are different from this asset as opposed to tax rules for a house or a stock. Everything’s different with IRAs because they’re tax-deferred accounts. The IRS wants to keep tabs on them, make sure you take the right distributions, make sure they get the tax money, and the penalties for making a mistake are severe and permanent. Most of them are irreversible.
Jim Lange: Well, that might be one of the reasons why…and I actually don’t have statistics on this. Maybe you do. But I was guessing that The Retirement Savings Time Bomb is the most popular IRA book ever written. I don’t know if that’s true or not…
Ed Slott: Well, I don’t know about that, but it’s got everything in there. You know, and people ask, “Well, what does that cover?” Like Natalie Choate’s book, it has everything in there. I call it like that tomato sauce, Prego? It’s in there! Remember that commercial?
Jim Lange: I do, and by the way, Natalie’s book is wonderful, but Natalie’s book, with all due respect to Natalie, and frankly, I buy every single edition religiously…
Ed Slott: Me too.
Jim Lange: …and she has been on the show every year, and she’s just a wonderful lady and a wealth of knowledge, but her book is not really for the lay public. And your book, it seems to me, kind of crosses over between lay public and financial advisor.
Ed Slott: Yeah, I try to. That’s right, yeah. I try to. You know, I use Natalie’s book when I want a citation. You know, you’re right. It’s more for advanced serious people, and I tried to make it for both audiences, which is tough. You know, I write for consumers, but financial advisors use it, as well. I try and make it understandable with examples, too.
Jim Lange: Well, the other thing that I love about it is that you have stories that kind of cement the concept and makes it much more memorable.
Ed Slott: Well, those are stories…you know, I’m also a practitioner. Not as much now, but I’ve had many clients, you know, for the last thirty years, so I’ve been in the trenches. This is not pie-in-the-sky stuff. This is real life stuff that I have all these stories. A lot of them are horror stories about clients that made terrible mistakes, and I put them in there so you can learn from them. You know that saying that says ‘learn from your mistakes’? Well, that’s kind of a dumb saying. I’d rather learn from other people’s mistakes, not my own!
Jim Lange: Well, you certainly have enough stories. What I was hoping that we could do today is to go over…you kind of break it down into five easy steps, and I thought maybe if we could talk a little bit about each one…
Ed Slott: Sure!
Jim Lange: …that that would give listeners a good clue about, not only what the book is about, but what their retirement plan should be about. The first step that you said is ‘Time it smartly.’
Ed Slott: ‘Time it smartly.’ Yeah, well, everything with IRAs and retirement accounts…and when I say IRAs, I mean 401(k)s, 403(b)s, all these tax-deferred accounts, and everything’s about timing because that was the deal. It’s almost like when we started with IRAs, we made this deal with the IRS devil and we got a tax break upfront, but as with any deal with the devil, there’s a day of reckoning, and they have a name for that date. It’s called your required beginning date. That’s the date after 70 ½ that you have to start taking money out, or what I like to say, it’s the date when the government decides they’re sick and tired of waiting for you to drop dead and they want their money back! And the penalties, as I said before, are severe. The penalty for missing a required minimum distribution is fifty, 5-0, percent of the amount you should have taken but didn’t. Now, that would put a big dent in a retirement savings.
Now, most people don’t pay these penalties because the IRS has been kind of lenient recently, but that’s not going to be the case. A lot of that is changing. The IRS, actually, the overseer of the IRS, the treasury inspector general, just completed a study and it showed that a lot of people were missing required minimum distributions and they’re going to tighten up on that, and it’s reported all over the place. So, you better make sure if you’re subject to a required distribution, you take it and you take the right amount. And this is where you might need an advisor to guide you through, but not just any advisor will do. This is a specialized area. So, the average financial advisor might help you make money, but it’s what you keep after taxes that counts, taking it out, and most advisors don’t have the specialized knowledge in this area. And that’s true with my own profession, CPAs. They might know taxes, estate taxes, and help you on your tax return, but very few of them know these rules. In fact, I had a CPA come into my office a couple of hours ago (I’m in a building with lots of CPAs) and he had a question on ten-year averaging and didn’t understand how it worked. That doesn’t apply to everybody so I’m not going to get into that, but it just proves the point that even a CPA who’s supposed to know taxes may not know about this. This is a very specialized area, and timing counts. You have to do the right things at the right time and there are penalties if you mess up, and a lot of these penalties are irreversible, especially if you’re a beneficiary too.
Jim Lange: Well, I know one of your favorite sayings that I’ve heard a lot is “You can’t afford a free advisor.”
Ed Slott: No, what I say is…
Jim Lange: Do I have the exact words on that right?
Ed Slott: Yeah, something like that. You can’t afford free. It’s too expensive.
Jim Lange: Okay. All right.
Ed Slott: When people get free advice here and there…but this is right after I just said get free stuff on my website, but my website’s accurate! But I mean there are some nutty things on the internet that are actually old, even.
Jim Lange: Well, the other thing in that section, and mine’s pretty well marked up and highlighted and things like that, you also include a discussion of what to do after somebody dies.
Ed Slott: Right.
Jim Lange: And one of the things that I have a great big star and yellow highlighter is correct titling after death. And maybe you could tell people a little bit about that because…
Ed Slott: Well, if you inherit an IRA, now, you might be inheriting or in line to inherit, or you may be someone with an IRA that you’re leaving it to your kids or grandkids, and there’s huge benefit to leaving it to a younger person. They get to what’s called ‘stretch,’ or extend distributions, over their life expectancy, but they have to know how to handle it. And this goes just as well, even more so, for an inherited Roth IRA because that’s growing tax-free so you really hate to mess that up. The first thing you have to do…and these are technical rules. That’s why you really need an advisor with specialized knowledge. In fact, on my website, that same website, IRAHelp.com, I actually list a few hundred advisors from all over the country that have actually taken substantial, significant training in this specialized area. They’re not the only ones, but at least I know they’ve been exposed to this kind of training, and you could find them in Pittsburgh or anywhere else around the country that have expertise in this area. So, an average advisor might not know what to do. You inherit an IRA, and they might say, “Well, you inherited the IRA. I guess it’s yours!” So put it in your name. You do that, the whole thing is taxable, end of story. Your dad, who you inherited from, might have spent fifty years building that account up and had it maybe in a 401(k), and now he rolled it into an IRA after retiring, and now it’s $500,000 through a lifetime of disciplined saving and investing. The minute he dies, the whole thing becomes taxable and it’s gone because you made one wrong move putting it in your own name. Now, this is a technical rule, but when you inherit an IRA, it has to be properly titled as an inherited IRA, which means the name of the deceased IRA owner, if you inherit it from your dad, for example, must remain in the account title. And I give you examples in the book The Retirement Savings Time Bomb…and How to Defuse It, and there’s no official language on this, but the basic thing is that the basic requirement is that the name of the deceased IRA owner must remain in the account title. So, if Jim Smith dies with an IRA, the titling might read ‘Jim Smith, IRA, deceased, date of death, for the benefit of (or FBO) Jim Smith, Jr., the son.’ And that’s how it stays for the entire rest of Jim Smith, Jr.’s life. But if Jim Smith, Jr. jumps the gun or puts it in his own name, the whole thing is taxable, and that mistake can’t be fixed.
David Bear: Let’s take a quick break at this point, and when we return, Jim and Ed will continue the conversation. If you have a question or comment, call the KQV studios at (412) 333-9385.
David Bear: And welcome back to The Lange Money Hour. I’m David Bear here with Jim Lange and Ed Slott. Listeners, you can join the conversation if you call the KQV studios at (412) 333-9385.
Jim Lange: Ed, we were talking about what happens to your IRA after you die, and one of the things that we were talking about is the correct titling, because I had that starred in my notes of your book The Retirement Savings Time Bomb, which I’m highly recommending to our listeners, and I’m recommending that they get the 2012 edition, either at www.amazon.com or at www.irahelp.com. But the other thing that I have talks about the transfer of an inherited IRA to a beneficiary. So, let’s say that you have your money at the ABC Bank, and you die, and you leave the money to, let’s say, your son, and let’s say your son doesn’t use the ABC Bank and has no particular desire to. He uses the DEF Bank, or he uses a financial advisor who is different than your own. Have you had any trouble in that transfer between one institution and another for IRAs after death?
Ed Slott: Well, first, let’s go to the rule. Obviously, if he doesn’t want to use ABC Bank, that’s too bad because he’s going to have to title the account as an inherited IRA. And then, he has to hope that ABC Bank will let him do a transfer to an institution of his choice, and then that transfer better be done as a direct transfer from one bank to another to wherever he wants, also properly titled. And if you do everything right, usually, I see it work. The only time I’ve seen a problem, actually, is when the beneficiary wasn’t properly advised, or the advisor made a mistake. Where the beneficiary just wanted to get their hands on the money, I had a case years ago similar to what I talked about earlier on the program. I had a guy who had $600,000-plus in his IRA. His son inherited it. And this guy spent years building it up, and when his son came in, actually I was called into this case when it was too late. This is what I mean. So, this guy spent his whole life saving and built it up to $600,000, on a modest salary, too. So that’s good investing, and he was very conservative. Well, when the son inherited, the son said, “Look, that conservative stuff is good for my father,” and this was back in the late ‘90s when everybody was a day trader and everybody could, you know, make 25% a day, remember those days?
Jim Lange: I remember those days when people thought that!
Ed Slott: Yeah, right! So, he was one of those guys. So, he took his father’s inherited IRA and he said, “You know, my father was a little too conservative, but I’m a big time day trader. I know what I’m doing. So, I’m not going to leave it where he wants it. I’m going to take it to one of these do-it-yourself trading accounts.” And he did. The problem was, he jumped the gun and he took the money out to put it in his day trading account. Well, once you do that, the whole $600,000 was taxable and at his bracket, he lost over $200,000 immediately of his father’s hard-earned money. So, maybe his father was conservative, but this guy just didn’t know the rules and he blew it. He took the money out. You can’t do that with an inherited IRA. Once you take it out, it’s out. You can’t put the toothpaste back in the tube. And it’s taxable, and there’s no recourse for it. There’s no relief. It’s just over. So, that inherited IRA, which could have lasted this guy another fifty years, just died that day.
Jim Lange: And it should have been titled something like ‘inherited IRA of Joe Schmoe for the benefit of Joe Schmoe, Jr. under will dated,’ or something like that.
Ed Slott: Right, right. Right, but he didn’t do it. You know, the kid wanted to move quickly, and by the time I was called in, I said “I can’t help you. But you can day trade what’s left.”
David Bear: It takes a lot of trading to make $200,000!
Ed Slott: Yeah!
Jim Lange: The second step that you always recommend is ‘insure it.’
Ed Slott: I’m a big believer in life insurance. I don’t sell life insurance. People should know that. I’m a CPA. I’m a tax advisor. I don’t sell stocks, bonds, funds, insurance annuities, I’m just a tax advisor, but I have to tell you, similar to the Roth IRA, the tax exemption for life insurance, to me, is the single biggest tax benefit in the tax code. The ability to take relatively small amounts of money, have them grow tax-free, tax-sheltered in the shelter of an insurance policy, and there were even some policies, without getting into the details, where you could have access to it during your life, it’s called permanent insurance, and after death, it blows up as a tax-free windfall for your beneficiaries. So, if you have money that you’re not going to use, it’s just going to sit and die on the vine, especially with some of the new tax increases coming, whatever they’re going to be, if you have money sitting in accounts, it’s a low-hanging fruit for the government to hit that with some of these big tax increases. You’re better off having it sheltered in a tax-free account. The same idea as the Roth IRA, and the two things the Roth IRA and life insurance have in common is they’re both tax-free vehicles, and I’m a big believer in tax-free. Tax-free is always better. It means you keep more of your hard-earned money, and with tax-free, you don’t have to worry about the uncertainty of what future tax rates might do to your retirement dreams. But the other thing that both Roth IRAs and life insurance have in common is that to get those benefits, and those are huge benefits, you have to pay for them upfront. But most of those benefits that you pay for, you pay for at discounted dollars, very small amounts upfront.
Jim Lange: Well, I’m also a big fan. I also like the permanent policies. I like the permanent policies with a secondary guarantee, the type of policy where you pay an annual premium every year, a relatively low premium, and then I actually prefer the policies that have a very big death benefit, and I like the ones that are guaranteed, and as you probably know, Ed, those types of policies, the ones that are guaranteed, so even if the economy does badly, even if there’s inflation, no matter what happens, the death benefit is guaranteed. The price of those policies, the premiums on those policies, is going up somewhere between 8% and 15% by the vast majority of the companies, actually as of December 31st when the new requirements for the insurance companies take effect, having to reinsure and having to have better capitalization. So, one of the things I’m doing with my practice is I am telling people who need permanent insurance to get the application in before year-end. I don’t know if you have a similar thinking on that or not?
Ed Slott: I agree with all that, and the big picture is, you know, what I always say is the key to keeping more of the money you make is having a consistent plan, whether you do it this year, and like you said, next year it could cost more, to move your money from what I call accounts that are forever taxed to accounts that are never taxed. You have to be consistently moving money out of the tax system, and it costs money to do that upfront, but this is a good investment. This is money well spent, whether it’s spent to shelter money in a Roth IRA or in life insurance, because if you look at the long-term big picture, it pays off big time tax-free just when you need it the most, or when your family might need it the most.
Jim Lange: Well, Ed, one of the things that I really liked about your book is that you hammer some of these points home with a story, and your favorite story of mine is the Bill Buckner story.
Ed Slott: Yeah, I feel bad for the guy already. You know, if you’re not a baseball fan, then you don’t know the story, but here’s a guy who had a phenomenal career. I’m not going to go through all his statistics, but one of the statistics is he had 500 more hits than Joe DiMaggio, just to put it in perspective. I mean, this guy was tops, you know. Anyway, the only thing they’ll ever remember about this guy is the one error he made, and that’s it. In the famous game six, the Boston Red Sox versus the Mets, and I’m a Mets fan here in New York, so I’ll never forget that game, but most people won’t because of the Buckner error. So, the reason I use that is because the guy did so many things right in his career, and the only thing they’ll ever remember about him is how he closed the deal, you know? That one horrible error. So, it’s the same thing with your retirement plan. You can do everything right. Like I was saying before, you could work for thirty-forty years, invest well, do everything right, but one mistake at the end, it can topple your retirement savings and cost you huge taxes that are irreversible, permanent, you know, they’re etched in stone. Some things you just can’t fix, like Bill Buckner’s error and your retirement account.
Jim Lange: Well, it’s funny. I read that story and I remember hearing you talk about it, and I was watching a show on TV. It was a special, and it was called “The Last Concert at Shea Stadium.”
Ed Slott: Oh yeah, yeah.
Jim Lange: It was a Billy Joel concert, which by the way, I’d recommend to everybody, if you can get it. It’s a Billy Joel concert, but it has mixed in some of the history of Billy Joel and the New York Mets.
Ed Slott: Right.
Jim Lange: And they had footage of that play.
Ed Slott: A couple of years ago, they brought him back to open for opening day, and he got a huge ovation at Fenway Park.
David Bear: There were also several episodes of “Seinfeld” where they had Bill Buckner as a guest.
Ed Slott: No, it was the other guy, Larry David had him on.
David Bear: That’s right, right, right.
Ed Slott: That was so funny! Yeah, but it’s the same thing with taxes and your retirement. One mistake can topple a lifetime of saving, investing and doing everything right, and one of the big mistakes is not leveraging the money you have in your IRA. If it’s a sitting duck for taxes, what have you done? You built a savings account for the government. My point in the book, and when I do seminars, I say, “I don’t care if you have an advisor that makes you 30% a year, it doesn’t matter if you lose it all on the way out.”
Jim Lange: Well, as a matter of fact, Ed, your book has inspired me. I just applied for a million dollars of life insurance, and actually, I’m going ahead. Tomorrow, we’re signing, and my wife is also getting a million dollars, and we’re, frankly, saving a lot more for ourselves and our family and a lot less for the government.
Ed Slott: That’s exactly right, and you’re doing something else. You’re avoiding the volatility, at least I feel, of the stock market. You know, lately, it’s been overly volatile. You know, you can’t peg your retirement, or hope that you’re going to retire, to the stock market. And what if we have another 2008, which is very likely? But it comes at the wrong time for you, just when you retire and you need the money the most. That’s a horror. So, having something in life insurance like you’re doing is not only building tax-free, but it gives you something you could never get in the stock market, and that’s a guarantee.
Jim Lange: Well, yeah.
Ed Slott: And I think guarantees are worth their weight in gold right now.
Jim Lange: Well, that’s one of the reasons why the price is going up because the insurance company isn’t making it with the current guarantees.
Ed Slott: That’s true.
Jim Lange: But the numbers I’m running, which are dependent on how long you live, but if you live within, say, a normal life expectancy, it’s kind of like buying, at least, an 8% or 9% guarantee.
Ed Slott: That’s right! It’s incredible!
Jim Lange: Now, where are you going to get an 8% or 9% guarantee? You might be lucky to get 2% or 3% today.
Ed Slott: 8% or 9% tax-free.
Jim Lange: Right, right.
Ed Slott: So, it could be worth 15% or 16%.
Jim Lange: Pretty incredible.
Ed Slott: It is, and it’s available to really just about anyone, and that’s why I put a whole chapter. Even though I’m not an insurance guy, the tax leverage is so worth it. Now, you don’t want to go broke doing it. You know, some people go off the deep end with this strategy. But if you have money just sitting in a bank account or a stock account that’s just, like I said before, dying on the vine and not really doing anything for you and you don’t think you’re going to need it during your lifetime, get it into a life insurance policy, shelter it, have it grow tax-free, and it’s not exposed to the gyrations and volatility of the stock market.
David Bear: Well, let’s take one more break, and when we return, you can continue the conversation, and listeners, if you have a question, call KQV studios at (412) 333-9385.
David Bear: And welcome back to The Lange Money Hour with Jim Lange and Ed Slott.
Jim Lange: And we’re talking about some of the advice in Ed’s book The Retirement Savings Time Bomb…and How to Defuse It, which originally came out in 2003, and luckily for us, Ed updated that in his 2012 edition, all of which is actually current and accurate, and I’m going to recommend that people buy that book, again, it’s called The Retirement Savings Time Bomb…and How to Defuse It, and you can either get that at Ed’s website at www.irahelp.com, or through Amazon.com. And Ed, one of the…actually, step number three in your five-step program is to stretch it. What do you mean by ‘stretch it?’
Ed Slott: Well, that’s for beneficiaries. That’s one of the big benefits of an IRA in the tax law. If you inherit, you can extend distributions. You’re still required to take a certain amount out each year, but it’s a very small amount based on your life expectancy, and there are tables to look at. But just to give you an idea, a 40-year old has about a 40-year life expectancy. A one-year old grandchild can extend distributions, or stretch them out, over 80 years, and the longer you keep your money away from the government, the more it builds for you and your family. And it’s even better with a Roth because if you inherit a Roth IRA, you still have required distributions, but they’re all tax-free. But to get the stretch, you’ve gotta do one thing correctly, and unfortunately, it’s the one thing most people mess up, and it comes down to the IRA owner. Not the beneficiary as much, we talked about that before, titling it correctly, but it comes down to the person with the IRA, the IRA owner. If that’s you, if you want your beneficiaries to get that benefit, then you have to name them as a designated beneficiary on the IRA beneficiary form. Now, that sounds easy. That’s really all you have to do, but most people don’t do it. They ignore it. They don’t realize the importance of the IRA beneficiary form. It’s actually more important than the will. I have people that tell me, “Well, I have a will.” Yeah, but your will probably covers almost nothing. It shouldn’t cover the IRA. If your IRA passes through the will, that stretch, that big extended benefit for beneficiaries, is gone. You don’t get it if you inherit through a will. So, you must inherit through a beneficiary form on an IRA to get the benefit of the stretch, and you can take minimum distributions. You can always take more as a beneficiary, but it provides you the opportunity to take the lowest possible amount so it can build for the rest of your life. It’s really like an annuity for the rest of your life, and if it’s an inherited Roth IRA, it’s a tax-free annuity, and in fact, you could even have an annuity in your Roth IRA to get guaranteed income for life and guaranteed tax-free income. But that’s a little beyond. But the point of the stretch is to keep it growing so you end up with more of the money protected from taxes.
David Bear: If you do designate someone as a beneficiary of your IRA, are you able to change it?
Ed Slott: Yeah, that’s a great question. I get that all the time. You know, there were rules many years ago that were a lot more strict.
Jim Lange: I remember those!
Ed Slott: Yeah, and we don’t have to know those anymore, but all you need to know is you can change the beneficiary anytime you want. When I talk to older people about that, because they’re thinking, you know, they’re seventy or eighty and they’re thinking, “Who’s going to get it?,” and they look at me and they say, “Wait a minute. I can change the beneficiary on my IRA anytime I want?” And I say, “Yeah.” And they say, one guy in particular years ago said to me, “I call this my IRA leverage.” And I said, “What are you talking about?” He said, “Well, I just turned eighty years old last week. We had a big party. Two kids didn’t show. They’re out!” IRA leverage! So, a lot of people like it like that. You can change it any time you want. So, that gives you ultimate flexibility, but here’s the thing: you have to know where that beneficiary form is, you have to make sure it’s current, and most important, you have to make sure whoever the beneficiaries are can find the correct current copy after you die. If they can’t find it, it’s the same as if you don’t have one. So, you have to make sure it’s current, and by current, I mean it has to be adjusted. Sure, you can make changes anytime you want, like if somebody doesn’t show up to your birthday party, but there are other things that happen. I call it life, life events. You have a birth, a death, a marriage, a divorce, a new tax law, for example, a remarriage, whatever reason. Any of those life events probably require a change in the beneficiary form. There was just a big case that came out where a guy had his wife as the beneficiary, and she died and he didn’t update his beneficiary form, and he also made the mistake of not having a contingent, a secondary beneficiary. Well, then, he died with no beneficiary and it ended up a big court battle, a big mess, and the two children that were supposed to get it actually ended up being disinherited.
Jim Lange: Well, that’s a pretty bad thing. The other thing that you mentioned is you said, “Well, let’s say you name a one-year old.” Now, obviously, you could have a one-year old either as the primary beneficiary or, more likely in my case, the contingent beneficiary, for which typically a child could disclaim to a grandchild, but you’re never going to leave that money, or at least I would highly recommend that you don’t leave that money, to a grandchild who could then have a big party when they’re twenty-one or eighteen, depending on what state they’re in. I would recommend a trust as a beneficiary as I would for other situations like spendthrifts, and one of our more recent popular models, the “I don’t want my no good son-in-law to inherit one red cent of my money” trust.
Ed Slott: Yeah, I totally agree, and that’s when you name a trust. But again, this is an area where you need somebody who specializes. You know, you say it as second nature, Jim, because this is what you do, but for the average attorney, CPA, financial advisor, this is foreign territory to them. Even estate attorneys have problems with IRA trusts, and I’ve even seen situations where estate attorneys set up trusts just for those reasons, those control reasons, because there are reasons to name a trust, like you just said, if you have a minor as a beneficiary, disabled beneficiary, incompetent beneficiary, unsophisticated beneficiary, or a spendthrift, like you said. Actually, they should have called it…instead of a trust, they should have called it a ‘don’t trust,’ because that’s when you name a trust, when you don’t trust! If you trusted them, you wouldn’t need a trust! Anyway, you have to make sure that it’s not only done right, set up right, but after death, it has to be implemented with the same care as any other inherited IRA, and that’s where we see a lot of mistakes.
Jim Lange: Well, I’m going to do something that’s going to break my heart, Ed. I’m going to skip the Roth section because you know that that’s one of my favorites…
Ed Slott: Mine too. Everybody knows it!
Jim Lange: Right, but we’re going to run out of time. Maybe if we have time at the end, but very frankly, I love what you say, “Avoid the death tax trap,” and you say that “What every large IRA owner wants is: #1, the estate tax exemption, #2, the stretch IRA options, and #3, control.” But you say, “You can’t get them all.”
Ed Slott: Well, actually, now you CAN get them all because the exemption is so large! I mean, right now, through the end of this year, if you die right now, it’s like an infomercial for death! If you want to die right now, we’ll give you a $5,000,000 exemption, but you’ve gotta do it in the next few days!
David Bear: Die before Sunday!
Ed Slott: Yeah! I mean, so, for some people, you can have it all, really, because the estate exemption is $5,000,000 per person, actually $10,000,000 a couple. I don’t know what’s going to happen for the new year, and there’s portability, something that’s relatively new, but I think that’s something that’s probably going to stay, since it’s so popular, the ability to not lose the exemption at the first death. Years ago, if you didn’t use your big exemption, it was lost. But now, if you leave it to a spouse, a spouse can use what you didn’t use. So, that can really add up, given today’s numbers of $10,000,000 of protection for an IRA, and even if you leave to a grandchild, there’s another tax called a generation skipping transfer tax that is protected up to $5,000,000, actually $5,120,000 now. So really, you can get almost all of it, but there are ways to make it the perfect plan for you. Nothing’s perfect in life, but right now, with the tax law being so generous, it really is kind of a perfect scenario.
Jim Lange: Yeah. All right, well, maybe…I see people waving at me, but frankly, I know that you love Roth IRAs and you know that that’s my big thing…
Ed Slott: I’m a big Roth fan, and I am so happy that on January 4th, 2010, the first day I could do a Roth, I converted everything. I took the two-year deal like I told everybody, and luckily, you know, the stock market’s been good. And I haven’t even finished paying for it yet!
Jim Lange: Yeah, so I am also, as you know, a huge fan of Roth IRAs. Now, in our office, we actually call it ‘running the numbers…’
Ed Slott: You know, in our office, we don’t run the numbers so much because here’s what I say to people: “You can’t beat a 0% tax rate.”
Jim Lange: Well, I would agree with that. The only thing that we’re a little bit careful about is you might be dealing with people that are all on the top tax brackets, in which case you don’t really have to run the numbers as much. It usually makes sense. Sometimes, in the middle tax brackets, coming up with the perfect amount to convert is a little bit of an art and a little bit of a science and we do that. But I know that you are a big Roth IRA fan, and frankly have been ever since 1998 when it first came out.
Ed Slott: But in 2010, the floodgates opened when they repealed the income limitation. Now, it’s available to everybody, pretty much to everybody, the Roth conversion. So, I think you should look at it. Right now, I would tell everybody before year-end 2012, convert everything you have because we don’t know what the tax law’s going to be, and the Roth comes…like I said, I was talking about an infomercial before? It comes with a guarantee, a do-over, if you want. If you converted everything, you have until October 15th of next year to undo it for any reason at all. It’s like getting to bet on a horse after the race is over. There’s really no downside.
Jim Lange: And the other thing that you like to recommend, which I agree with 100%, is to do it with separate accounts so you can re-characterize some.
Ed Slott: Yes, yes, definitely!
Jim Lange: You know something? We’re starting to run out, and David’s going to say his last two words, but I will say, I’ll just remind listeners that I would highly recommend you get The Retirement Savings Time Bomb by Ed Slott, and you can get that either at www.irahelp.com or through Amazon.com, and I also recommend getting the 2012 edition.
David Bear: Thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks, and thanks to Ed Slott for his IRA industry insights. He can be reached directly at his website, irahelp.com, and thanks to our program coordinator, Amanda Cassidy-Schweinsberg and Dan Weinberg, our in-studio producer. As always, you can hear an encore of this show at 9:05 this Sunday morning here on KQV, and you can always access an archive of past shows, including written transcripts, especially Jim’s recent conversation with John Bogle, the founder of the Vanguard Group, at the Lange Financial Group website at www.paytaxeslater.com. Please join us for the next edition of The Lange Money Hour in two weeks on Wednesday, January 2nd, when our guest will be Pittsburgh city controller, Michael Lamb. In the meantime, have a safe and happy holiday. I’m David Bear.END
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James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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