The Smart Take:
Congress has agreed on something! Your retirement accounts are not estate planning vehicles. (Sigh.) Provisions in the SECURE Act are now law as of 2020 and impact all IRA owners.
Listen to Kevin simplify the laws and unpack the 3 key changes. The good news is that if you’re doing proper planning, you are likely less at risk than conventional media headlines and other financial advisors are reporting.
And be sure to pay listen at the end, when Kevin describes what premortem and postmortem strategies could help you and your family keep more of your hard-earned money.
Prefer to read? See below for the transcript of the show.
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The Host:
Kevin Kroskey – About – Contact
Speaker 1: Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to retire smarter.
Walter Storholt: Welcome back to Retire Smarter. Another great podcast on the way today to help you get a little bit sharper, a little bit smarter when it comes to your financial and retirement future. Walter Storholt here alongside Kevin Kroskey, president and wealth advisor at True Wealth Design, serving you throughout Northeast Ohio. Kevin, we’ve got another great show on the docket today. How have you been, sir?
Kevin Kroskey: Walter, I’m great. We’re recording on a Monday morning, and I’ve been up and at it for several hours now, and I feel great. So I’m looking forward to it today.
Walter Storholt: I’m actually on my eighth straight day of a 5:00 AM wake-up call and getting to work nice and early, and it’s becoming a habit. What do they say? You have to do things for, is it three weeks or a full month before it becomes a habit?
Kevin Kroskey: Yeah, 21 days or until the next book that comes out that says 28 or whatever.
Walter Storholt: At least of couple weeks worth. So I’m getting there. I’m getting close to making it a habit. Let me tell you what, the productivity level depending on what time I get to work or start working, but let’s say 6:00 to about 9:30 when everybody else is starting to email and get busy. Those are some very productive hours.
Kevin Kroskey: Yeah. Everybody is different. My sister, who’s very productive in her own right, is more of a nighttime person. In high school, I was on speed dial for my principal for probably a few reasons, but one of them was I just couldn’t get up and get to school on time. And now in 43, it’s entirely flip-flop, so I’ve been up and at it, up since three, at it since four, but that’s normal. So when my kids get older, I go to bed… I put my kids to bed, and I go to bed. But as my kids get older and stay up late, I don’t know what I’m going to do. I’m going to have to fix this.
Kevin Kroskey: My wife was making fun of me this morning. She’s like, “You’re going to have to do something different. As the kids get older, their friends are going to come around and probably ask and say, “Wait, do you have a dad?” “Oh, yeah. He just goes to sleep at 7:00 PM every night.”
Walter Storholt: I had some friends like that growing up. I remember where we might be doing a sleepover or something like that, and one of the parents would disappear at 7:00, and it was like, “Oh, what happened to your mom or your dad?” Like, “Oh, they’re in bed already.” It’s like, “What? That’s really, really early.”
Kevin Kroskey: Yeah, it’s funny how things change.
Walter Storholt: It is. It certainly is. Well speaking of how things change, we have seen some significant changes when it comes to retirement plans and, in particular, IRA owners. If you have an IRA, this will be a very good episode for you to listen to today, especially if you are thinking about the next generation and how that generation will inherit possibly those funds inside of an IRA or even if you are someone who will be inheriting money from an IRA. You’re going to be impacted by some of these changes.
Walter Storholt: To set the background, Kevin, there was this conversation about the SECURE Act. We’ve touched on it on a couple of episodes briefly. It was this thing that had been passed through the house, and we are waiting for it to get approved by the Senate and signed into law. We didn’t really think that would happen until 2020, but right before the end of 2019, boom, it all got signed and went into effect at the beginning of this year. There are lots of changes in this thing called the SECURE Act, but we’re going to cover just some of the key changes, again, particularly for IRA owners on today’s show. What other background do we need to know before we jump into the key changes here?
Kevin Kroskey: I guess when I think about what’s happened over the last couple of years, we’ve had a lot of changes over the last couple of years. So at the end of 2017, we had the Tax Cuts and Jobs Act, which was a tax reform for short, but it was the most significant tax reform bill since the late ’80s. So 30 years and now a little bit more, actually almost exactly two years later passed at the very end of 2019, we had this SECURE Act which was attached to a spending bill and passed. The SECURE Act itself, we talked about this on episode 25 in July 2019 that it was one of the few things that both sides of the aisle agreed on.
Kevin Kroskey: In principle, they did not want retirement planning accounts, IRA accounts 401(k)’s, 403(b)’s 457’s, what have you. You just got to use those synonymously and call them retirement accounts. They did not want those to be estate planning vehicles. And it seemed to be a matter of time. I thought it was going to be part of the tax reform passed in 2017, but it was attached to the spending bill and is now the law of the land as of 2020.
Kevin Kroskey: So we’ve had a lot of changes over the last couple of years. There is a lot in the bill, but I’m just going to hone in on who is most impacted, particularly for those that are clients and people that are tuning into the Retire Smart podcast. So we’re not going to go over every single part of the SECURE Act and the new law. Still, we’re just going to talk about those significant changes. Then we are going to spend the majority of the time today and talk about the IRA distribution roles and the fact that the stretch IRA is no more.
Kevin Kroskey: So that was something we talked about last July. I predicted that Congress was going to pass this. Again, it was I think in the house, 417 to three. 417 yays, three nays. It just seemed pretty inevitable, and here is the inevitability of 2020.
Walter Storholt: One of the few bipartisan things to go through these days, right?
Kevin Kroskey: Completely. Well, we just wrapped up the impeachment trial. Some things about that were sort of predictable, but I digress. But yes, predicting Congress is somewhat predictable in some ways today. But anyway, as it pertains to IRAs, we’re going to just talk about really what those changes were and somewhat of the paradoxical implications in the name, SECURE Act, because some people are probably going to be feeling a little less secure. So I’ll just dive right into these; what I see are the fundamental changes.
Kevin Kroskey: So, the IRA contribution age limit has been removed. So what this means is making a traditional IRA contribution, and we have traditional IRAs, and we have Roth IRAs. Those are the two big umbrellas of IRAs if you will. But the traditional IRAs, previously, you couldn’t contribute to them after you reached age 70 and a half. You could, however, contribute to a Roth IRA or if you are still working and was a participant in the 401(k) plan in a company that you didn’t own or only owned a tiny percentage of. You could put money into the 401(k) as well.
Kevin Kroskey: So basically, this law change frankly just treats the traditional IRAs the same way that it treats the 401(k)’s and the Roth IRAs. If you’re still working, if you have some income, if you have some consulting income, if your spouse has sufficient income, then you can go ahead and make a traditional IRA contribution, and there are certain levels where you can deduct it or not.
Kevin Kroskey: So again, I don’t think this is exactly that big of a deal, but we’ve had some cases over the years was it’s made sense if somebody could go ahead and put money into a pretax account, they just go ahead and control their taxes. Maybe there was a Medicare income adjustment threshold that they needed to just be under in if they could put money into like a pretax account to get a deduction for it, then they could avoid a higher Medicare premium.
Kevin Kroskey: So little things like that could come into play. For most people, though, most of our clients, it’s a new issue. So they retire and then and they have some income, but guess what, when you’re in retirement, even if you’re working a little bit and say doing some consulting, you still need some income to go ahead and spend money. So that tends to be the first thing you spend, you spend what you earn. So while this is somewhat of significant change, again, it just equalizes traditional IRAs and treats them the same as Roth IRAs or 401(k) plans. So not a huge deal on that first bullet point.
Walter Storholt: At least nothing negative comes out of that change or that impact for folks. A slight positive bump overall?
Kevin Kroskey: Slight positive, yes. Well-positioned there, Walter. So in a similar vein, item number two is that required minimum distributions or RMD’s for short now started age 72. So prior law was that they began at age 70 and a half, and technically-
Walter Storholt: We got rid of the half. All right.
Kevin Kroskey: We got rid of the half, yes. So we’ve got a year and a half extra there. I’ll talk about some numbers, but I think you can see it. Some of the reasons are people are living longer; people are working longer. As this secure name implies, they want people to be more secure in retirement. So they’re going to say, “Hey, let’s go ahead and push this back another year and a half, and you can get an additional year and a half of tax deferral, and there you go.”
Kevin Kroskey: There’s a cut off date and for anybody that started their RMD’s in 2019. Think about this, if you turn 70 and a half in late 2019, and you say, “Okay, great. So what happens to me because it’s 72 now?” Well, you’re out of luck. You have to continue to take your required distributions. So anybody that is 70 and a half as of 2020 is who the law applies to. If you started your required distributions or have to start them in 2019, you have to keep with that program. If, however you turn 70 and a half in 2020, then you are under the new law and have to start at age 72.
Walter Storholt: In my net positive, that’s another slight bump in the positive direction, I would say if I’m keeping score at home?
Kevin Kroskey: For sure. It’s a slight bump, and we always talk about the years from when you retire up until RMD start as being some of the years where you have maximum tax planning flexibility. We did a few episodes on that in December 2019 and just talked about that. And so we’re going to add to that span of years if you will. Yes, on the surface of it, it does not hurt. It’s a slight positive. However, if you can use those years productively, then it could be even more beneficial.
Kevin Kroskey: So I’ll give you a quick example here. So what does that mean? So suppose he had a $500,000 IRA balance and you’re starting at age 70 and a half, while your first-year RMD would be about 18,000, and if you started a 72, so you’ve had some continued growth, then your account is going to continue to grow. So again, we’re assuming like a 6% growth rate on the IRA. This is purely hypothetical, but your RMD is going to be a little bit larger, so it’s going to be in this example about 22,000’s.
Kevin Kroskey: So 18 to 22 and you may be saying, “Hey, it’s bigger. That’s more than RMD.” Yeah, but again you have a bigger year-end account balance too. So if I take that example all the way up through age 85, the ending account balances are 562 versus 606,000. So again, it’s a 6% per year of a growth rate in taking up required distributions. Under the old law, it’s 70 and a half, and under the new law, it’s 72.
Kevin Kroskey: So you’re getting a little bit more tax-deferred growth. This example, I think, is in a vacuum, it’s accurate, it’s relevant. In practicality, though, if you need to use and spend your IRA money, it’s inconsequential. If you don’t need the IRA money, because you have enough pension income or social security or other income sources, then the IRA RMD is just going to be extra. Yes, that gives you some more flexibility another year or two of tax planning and then additional tax-deferred growth, which could be a good thing.
Kevin Kroskey: So slightly positive, but I would say even more so than the first one that we started with, particularly if you’re able to be thoughtful, creative, and use the most out of the additional year to year and a half.
Walter Storholt: THat’s a great improvement just for the flexibility. That’s the positive nature of it. It’s not really down to the dollars; it’s just, “Hey, it gives me the flexibility to make better choices and have more time to make such choices.”
Kevin Kroskey: Flexibility is always great. You can’t predict the future and estate planning, we’ll get into that a little bit here with the third and most impactful change of the SECURE Act, but you can’t predict what the tax rates are necessarily going to be in the future or the estate tax, or how much money you’re going to have for that manner. So when you’re doing estate planning, having flexibility is particularly key, but even having more flexibility in the short term certainly helps as well.
Kevin Kroskey: You have some things you’re looking at, probably like a year or two basis, your cash flow creating your retirement income, doing tax planning. You have some things that are a little bit longer term. Hey, your retirement planning. Hey, can I afford to spend this much? Am I going to run out of money? How much risk do I have to take? What return do I need? What is my estate plan looking like? And then in all this stuff goes together in the middle as well. But a very important point in that regard.
Kevin Kroskey: I’ll say this is an aside. What I’m hearing some people talk about the SECURE Act, yes, it’s a significant change. Yes, some people are going to be impacted. Some people are going to be quite negatively impacted, particularly by this third provision. Some people are going be positively impacted as well for some changes that we’re really not going to be talking about today that aren’t so applicable to our clients or people that are tuning into the Retire Smarter podcast.
Kevin Kroskey: However, I’ve heard a lot of people just come out in like, “Hey, the sky is falling. Congress is screwing you, and you got to act now to go ahead and hire me to go ahead and save you or, “You’re starting. I’m starting to see this. We talked about this in July last year when we first spoke about the SECURE Act, but there’s going to be a very legitimate use of life insurance for certain people with certain risks, tax risks that are more magnified under these new laws in the SECURE Act. It’s more like a fear-based tactic, in my opinion, to go ahead and try to make a sale.
Kevin Kroskey: Everybody is different. There are some people that are more negatively impacted. Some people can be more positively impacted. You got to look at this and understand it, and if you don’t, this does get fairly technical. I mean integrating investments, retirement planning, tax planning, and estate. Those are all pretty deep disciplines in their own right, let alone when you’re integrating them together. The complexity increases quite rapidly.
Kevin Kroskey: But you just got to look at it, and you got to go through process and if you don’t have the understanding, then work with the fiduciary advisor to go ahead and walk you through who is competent in those areas or who can bring that interdisciplinary knowledge and assimilate it and to show you like, “Look, here’s the risk or the opportunity that you have, or you don’t. If you do have that risk, you’ll hear some of the preventatives things that we can do to make your situation better.” This is probably a nice segue into the third bullet point that will spend the rest of our time today. Sound good, Walter?
Walter Storholt: Sad violin. We are laying the stretch IRA to rest in point number three, right?
Kevin Kroskey: Yes.
Walter Storholt: Maybe not so sad violin. It’s a celebration of life.
Kevin Kroskey: So it’s not a celebration. The little technical detail is going off the back of my mind, and I’ll see if I can make that point later without confusing people. But to the elimination of the stretch, IRA is now dead. Let me say this first of all. We have some clients that have stretch IRAs, inherited IRAs. Their mom or their dad passed, and they had some IRA money, and now our clients inherited that money and what happens is each year, based on their life expectancy, they have to take a certain amount out of the account, and it increases each year, but they can continue to get that tax deferral for over the life expectancy.
Kevin Kroskey: So it could be several decades. So if you have an inherited IRA currently, it doesn’t go away. And again, it’s only for inherited IRAs in 2020 and thereafter. So that’s the first point. But this prior law, as I explained, it allowed you to take the money over your life expectancy, so now that is gone. If I’m the inheritor and say that I’m in my 40s and mom or dad passed away and leave me IRA money, I start out taking about 2% of the account balance out per year, and it slowly increases over time. But because I’m only 40, there are more than 40 years in my remaining life expectancy, per the IRS tables.
Kevin Kroskey: So I can really get the benefit over a multitude of decades of tax deferral, tax-deferred growth, spreading out the income tax burden all that good stuff. So that is gone. That part is dead. Subject to the new law is, “Hey, it just has to be out over ten years.” So that’s the new rule, and I should point out what’s very important is this is for what they call non-spouse beneficiaries or non-spouse designated beneficiaries. These little technical terms matter if your spouse, old law, and new law are the same.
Kevin Kroskey: That’s very important. The spousal rollover is very compelling. Basically, so husband passes, and the wife survives him. She can roll his IRA over into her IRA and is treated as her own. So it’s called the spousal rollover. That was under prior law that’s still here today under new law in 2020 and moving forward. But it’s for your children. It’s for these non-spouse beneficiaries, and it has to be designated. And if somebody is not designated, basically if you screw up, and unfortunately this happens, more than what we would like to see, certainly does not happen for our clients but sometimes people reach out to us and have an issue like this, but if I go back to that example, husband-and-wife, they name each other’s primary beneficiary, but they don’t name anybody as contingent.
Kevin Kroskey: So husband passes, the wife goes ahead and rolls over his IRA to hers, but he’s no longer there, so he can’t be the primary beneficiary anymore. She never named the kids. For whatever reason, they didn’t, and now there is nobody named. So there’s nobody that’s designated. So I say designated beneficiary, that’s what I mean. You have to be named on the beneficiary form, and then it just goes to the estate, and there are some different distribution rules there that we’re not going to get it into since it will be more technical.
Kevin Kroskey: So you have mom and dad are both gone, and let’s say, we have an example, and you just have one child. So that child who is in this example going to be a designated beneficiary has under the new law 10 years to distribute the IRA. So rather than, in my example, before taking out like 2% per year, or 3% per year. So if you’re around age 50, now you have to take it out over the tenure period following the year of death. The difference and this part I like personally is you don’t have to take it out equally over the ten years. You have flexibility. You could go ahead and wait all the way until year 10. You could spread it equally. You can do it however you want. The IRS just wants it completely distributed by the end of the tenure period.
Kevin Kroskey: So that’s the big change. So you can’t stretch it out over the life expectancy. At most, you got ten years. At least on the surface, we talked about maybe some planning that you can do where you can get a little bit more than the ten years, but at least that’s how the law is written.
Kevin Kroskey: So let me just put a quick recap on this, the spouses are the same. You still do the spousal rollover. It’s really the children, these designated non-spouse beneficiaries where it’s different. So at most, you have ten years. However, you don’t have to take it out each year following the year of death. It just all has to be distributed by the end of 10 years.
Walter Storholt: So in point number two, where the RMD’s and that age increased to 72 from 70 and a half, we gained some time, we gained some flexibility. With the stretch IRA being limited, it’s going the other direction. We’re now losing time to make decisions and to make those withdrawals. So it’s putting assist on a real crunch of a timeline here.
Kevin Kroskey: Yes. So that begs the question of well, who’s really going to be most impacted by this? It’s probably fairly straightforward to see, but the larger the IRA is, the worse off that your beneficiaries are going to be. So if you use, say, I’m a big fan of round numbers, particularly on a podcast format, but let’s just say it’s $1 million. Under the old rules, let’s say somebody who is 50 was inheriting, well, they would have to take out round numbers about 3% or $30,000 per year.
Kevin Kroskey: So if they just went ahead and said, “Okay, under new laws, I got up to 10 years. If I just did equal distributions each year, that’s…” All right, Walter, I’m going to ask you a question. I got a million bucks. If I’m going to take equal distributions over ten years, ignoring growth, how much am I taking per year?
Walter Storholt: Man, I got this one. 100,000.
Kevin Kroskey: Yes. Let’s give him an applause in the background. Woohoo.
Walter Storholt: I actually already done the math in my head before you even thought of asking the question.
Kevin Kroskey: Walter, I had the complete utter confidence and faith in you. Good job, Walter. I love that we’re doing this on a Monday morning. For both of us. So you could see 30 grand verse hundred grand. Big, big difference, right? Substantial difference. And because of the way that our tax system works-
Walter Storholt: Why is that a big difference? I understand that the pure dollars are 70,000 more dollars in one example, but I can then just put that money into some sort of different savings. I don’t have to go in and spend that money; it’s just moved out of one account to another. So what’s the big tax deal in that difference?
Kevin Kroskey: It’s just because of the way that our tax system works, our income tax system. So it’s progressive. So the higher the income goes, the higher the tax rate goes. So again, if we go back to some of the things we talked about in the fourth quarter last year that go into having a tax-smart distribution plan and understanding how to do tax planning in general. This is the key thing. What is your marginal tax rate? So a lot of times, the example that I’ll give is when you go from taxable income… I’ll just use round numbers. Round numbers of about $80,000. You’re paying a 12% tax rate.
Kevin Kroskey: But you go over that $80 thousand by $1, then the additional dollar or your marginal dollar is at a 22% tax rate. So we go from 12, all the way to 22. It’s a pretty big increase. So think about it. Say if you’re 50 and if I go back under prior law, I inherited a million-dollar IRA from mom and dad, thank you very much. Much appreciated. I have to take out 30,000 per year. While I’m in my 50s, I’m probably at my peak earning years and so that $30,000 is going to sit on top of the income that’s already hitting my tax return.
Kevin Kroskey: If I’m a one-income family, I have one income going through the tax return. If I’m a two-income family, husband, and wife both working, then I have two incomes going through the tax return and then the RMD sitting on top of that income. Very quickly, you can see how those income thresholds can get higher and higher, and the tax rates higher and higher, too if it’s rather than 30,000, new law 100,000. Again assuming that we’re spreading it equally over ten years in the example. Well, you’re more likely, and I’m going to be pushed up into higher brackets.
Kevin Kroskey: So the larger the IRA and the fewer the beneficiaries, the more is likely to go to Uncle Sam than to your kids, and that’s the long and short of it right there. I will say this as a quick aside, and we talked about this in the past too, but tax reform in 2017 so that is applying to tax years 2018 through 2025. That’s current law. And then for some technical reasons, the laws go back to what they were in 2017. So when we look at tax rates from now through 2025, one of the interesting things is that there you’re only paying 22 or 24% rate up to about, I think it’s $324,000 of taxable income.
Kevin Kroskey: So you can have a lot of income and still pay a fairly low, at least compared to historical standards, a fairly low-income tax rate 22 or 24. If we go back to 2017, you are hitting a 25% tax rate at about $75,000 of taxable income. So not only are the rates a little bit lower, but the brackets, particularly that range that I just talked about, are incredibly wider.
Kevin Kroskey: So when I’m hearing some of these fear mongers out there talking about what this is going to mean, frankly for somebody that may pass away over the next few years, it might not be so bad. Again, I mean you got lower rates, you got wider brackets, so it doesn’t look too bad. However, we get to 2026, and it looks a lot worse. And so the rates are going progressively get higher more quickly, and the rates are higher on an absolute basis as well. So, Walter, we don’t have… I don’t know. What’s the psychic hotline, we can call and find out exactly when so-and-so is going to pass away, and how much exactly was inherited?
Walter Storholt: Ms. Chloe? Was that the…
Kevin Kroskey: Ms. Chloe, yes. Something like that. But it gets back to the idea of flexibility, and we just don’t know these things. And so there certain things we can do. There’s a certain period of time where there’s more flexibility that we can do some more planning, both before as well as after death, which we’ll talk about. But it’s not an immediate concern. I’ll say this if somebody was unfortunately on their deathbed and they had an IRA, and then it was going to be inherited, I don’t think there’s any immediate planning that somebody may need to do generally speaking, again, because the rates are to be lower for the next several years now barring some sort of change to the current law.
Kevin Kroskey: But we don’t know when we’re going to inherit money. We don’t know exactly how much is going to be, and more likely than not, the rates are going to be higher-income 2026. And potentially, they’re going to be even higher than what they’re scheduled to revert to. This is always a moving target if you will. So it depends is, unfortunately, the right answer if you’re going to be better or worse off in that example that we gave.
Kevin Kroskey: But one of the things that’s for sure because there are these lower tax rates for the next several years, it does create some planning flexibility, particularly what we call premortem and then postmortem planning. These are the two buckets if you will, where we get down to some strategies about what we should do. So Walter, everything I say so far are clear as much? Should we recap anything, or should we get into some of the, here’s what you need to do pre as well as postmortem?
Walter Storholt: No, I think it’s clear, and I think that the helpful thing to know here is that, like you said, in the news, Ii seems like this very urgent thing that needs to be planned for and solve for immediately. But you’ve shown that the ground has already been laid to actually help those who are going to be passing money down essentially immediately or over the immediate future of one to two years. You’re already in lower tax brackets than we’ve been in decades. And so that’s a good thing. So it’s not that bad that you’re then going to be forced to take the money out over these lower tax brackets at times. But the big deal is five, six, seven years from now if that’s when the transfer of money happens and tax rates have gone back up, therein lies the big problem and the lost opportunity maybe for folks. Is my tracking okay?
Kevin Kroskey: You got it. It could be a problem, for sure. And again, the two variables here. The larger your IRA and then the fewer beneficiaries. I mean, if you have a million-dollar IRA, but you have ten kids, and each of them gets ten years, that’s not big of a deal.
Walter Storholt: It’s going to get diffused a little bit quickly, right?
Kevin Kroskey: Right. If you have a $3 million IRA and have one beneficiary, much, much bigger problem. The biggest IRA personally I’ve ever seen, and this is a complete unicorn, this is not indicative of a rare client, but I may have mentioned in passing, but that the guy is $30 million in his IRA and he worked for company, really a shrewd just common investment prudence and practicality and only owned his company stocks with his 401(k) plan.
Kevin Kroskey: Coincidentally, and very luckily for him, it happened to be one of the best-performing stocks over the last 20 or 30 years. It just shot the moon. We have several clients that have multimillion-dollar IRAs. There are limits what you can put into these plans every year. This year, if you are under age 50, It’s $19.5 thousand. You can do another $6,500 if you’re 50 or better. Your employer puts in some contributions in these amounts increase slowly over time with inflation. But there’s a limit really to what you can have in here. Actually, I take that back.
Kevin Kroskey: I remember when Mitt Romney was running for president, and this was really unique, but part of the process… I think this is interesting, but I’m a finance guy, so I’ll throw that caution out in the wind. He had at the time $26 million in his IRA, and so what he did, he worked for Bain Capital, and because he was a partner, he elected to have his stock in the company in his 401(k) plan. There was something unique that he was able to do at the time. And frankly, it was strictly the wrong thing to do because the required distribution on his account balance is just going to be astronomically, would have been much better owning his company stock outside, but he owned it, I believe what’s called an ESOP plan.
Kevin Kroskey: There’s a lot of negative press like, “Oh, can you believe it. He’s got all this money.” And I saw that I was like, “Wow, he’s got me paying a lot in taxes.” Or he’s going to be having lots of charity, and he’s probably going to be doing both. But I digress. If you have $500,000 in your IRA and you’re going to be living on this money in retirement, and it may be going to getting drawn down over time, and you have a couple of kids that are going to inherit what’s ever left when you’re gone. Again, probably not a big risk.
Kevin Kroskey: But we have a client currently who’s unfortunately not in great health. His IRA balance is north of $2 million, and he has two kids that are going to beneficiaries. Rest assured, we are going to be doing some planning for them that we’re going to be taking a really hard look about what changes do we need to make in light of the SECURE Act not being here anymore? But some of the things, I think thankfully, I mean, if you’ve been tuning into the podcast, if you’re a client, a lot of the things that we were doing just as good planning for years already made sense and alleviated some of the risks of the stretch IRA being removed.
Kevin Kroskey: So again, into the pre-mortem or before death category, certainly, you need to start… As with anything, you kindly need to look at your plan. You need that longer-term plan. You’ll take a look, make the projections. Here’s how much I currently have in my IRAs. Here’s how much I have in my Roth. Here’s how much I have in my trust account. Here’s my spending. Here’s my income sources. Here are some assumed rates of return for the investments, and when I get further out down the road, looking at life expectancy, again, we’re getting into estate planning here, but really how much risk am I going to have. How much am I likely to have in my IRA account?
Kevin Kroskey: If it’s going to continue to whittle down through the required distributions that I’m going to have to take and maybe him spending at a fairly healthy clip relative to how much in assets that I have, then again, the tax risk is going to be mitigated over time naturally. Now, again, we don’t know exactly when we are going to pass. But when you have two spouses, then you don’t have to worry about everything necessarily when the first death occurs.
Kevin Kroskey: So you need to start with that plan first and foremost. You really need to come take a look at this. I had a call just last week with the client. The return they relocated to outside of Ohio and retired in Arizona, and they had a good proactive attorney from what I can tell and said, “Hey, there’s been these law changes. We should take a re-look at your beneficiaries and your estate plan.” And the client calls me, I said, “Hey, Bob. I completely agree with that. That’s great that the attorney did this. However, because I know the details of your plan, we have been doing a few things already in your plan that have mitigated some of the risk.”
Kevin Kroskey: They had money and IRAs is pretty sizable balance, low seven-figure balance, but they had a good chunk in the Roth IRAs too. The way they had gotten that is each year, we’re doing small conversions, partial Roth IRA conversions looking at the current tax rate that we can convert out and as long as it’s likely to be less than what the tax rates are going to be in the future, we’ll that’s a good trade. If we can pay lower taxes today, then let’s go ahead and pay the tax now, get it over into the Roth IRA and let it be tax-free forever.
Kevin Kroskey: So we’ve been doing that for them for many, many years now. They’ve got a good chunk in the Roth IRAs. They’re going to continue to take out the required distributions, and their IRAs are going to continue to cut a window down over time. The other thing I said, “Hey Bob, when you look at your investment account too, and we have a client vault. Clients can login any time that they want.” They always get to see, “Hey, what do I own? How has it been doing? What’s my financial plan? How’s that look like?” Basically, it’s updated on demand every single day, which is I think is pretty nice.
Kevin Kroskey: But I said, “Hey, log in here; take a look.” And for Bob and his wife, they had a little less than 60% in stocks. I said, “When you look at the stocks,” I said, “all those stocks are already placed into your Roth account as well as into your trust account. There are some tax reasons for that, but what we call that is asset location or asset placement.” So first we figure out what we want to own and then we figure out well, tax-wise, where does it make sense to own it?
Kevin Kroskey: So for Bob, and his wife would put all the bonds, all the interest-bearing tax, and efficient assets in his IRAs. We knew we didn’t want to take more risk than what we are already taking. We are comfortable with the level of risk we’re taking. The financial plan was going to work. There are going to be able to sleep at night. And then so that was good. So we check the box with the allocation and what works for them. And then we got into the location aspect; he said, “Well, hey, let’s put all his bonds in the IRA. We want the slower growth, more tax-inefficient assets there. We’ll put the higher growth, the highest growth assets in the Roth, because hey, that’s tax-free. That’s long-term money.
Kevin Kroskey: It’s probably going to leave money for our kids. Let’s put what we think is going to do the best over the next 10, 20, 30 years there to maximize those favorable attributes and then in the trust account for them, typically you want own very tax-efficient US equities first, and then there’s a hierarchy that you go through. But when you look to just those two things that we’re doing for them, both the partial Roth conversions as well as the asset location, that really mitigates some of the tax risk long-term in their plan.
Kevin Kroskey: Set another way, it helps them maximize their wealth on an after-tax basis. So this is something that we’ve been doing for a decade for them. I said, “Bob, your attorney is exactly right here, but when you look at this, with everything that we’ve already done over last 10 years and “Hey, we’re going to keep doing this,” and when I look at your quick projections like long-term, you got two kids. There is husband and wife or some other postmortem planning that we’ll be able to do, and we’ll talk about here in a moment, but I just don’t really see the risk being that significant right now to you guys.
Kevin Kroskey: So just let the attorney know, say thank you. Hey, I’m going to go ahead and hold off, but I’ll come in and see maybe later this year, but we’re going to basically update their numbers and just walk them through that a little bit more than just talking to them on the phone and connecting the dots for them. So those are, I guess, two of the primary things. It’s just good planning while you’re living, but it also helps mitigate the risk of a larger IRA owners and having this accelerated distribution and not being able to stretch out the IRAs any longer.
Walter Storholt: It definitely gets more complex. The more you walk through all of those different little moving parts, but I guess that’s why once you get to the detail of, “Okay, this does impact me. That’s the good news is, “Okay. It gets complicated from there. But at least it’s relatively simple to see whether okay, I’m going to be having major impacts by this or not, but depending on my situation.”
Walter Storholt: And then it gets more intuitive or maybe less intuitive and more detailed from there. And that’s where we work with you and figure out the best moving parts for our situation, and also you mentioned the flexibility, because things could change five or six years down the line or when the new tax rates come into effect, and after the current ones run out, maybe they don’t pop up as much as we thought, or somehow in some way go down. I don’t think anybody’s predicting that to be the case, but you never know. That’s the whole point of this. There’s some flexibility that we need to maintain throughout the process.
Kevin Kroskey: Completely. And again, I mean, this is what we do every day, I’ve been doing this for quite some time, and I’m very comfortable with all this. I’m fully cognizant that I can rattle this off and it may feel like somebody is drinking from a fire hose right now and that’s certainly not my intent. It’s almost like if you ever try to read your trust or the trust is usually even worse than just reading your will, but all this legalese, I mean it just gets incredibly confusing quite quickly, but here again, we’re looking at… We have to understand taxes. We have to have a very robust retirement plan that reflects our lifestyle as well as projecting it forward.
Kevin Kroskey: At some reasonable rate of return and how our assets are going to grow into the future, and then understanding the estate and distribution aspects of it and integrating all the stuff together. Ten years ago, I probably would not sound nearly as informed as I do now because we’ve been doing this for so long. I get it that it can get complex pretty quickly, but at the same time, that’s why I try to really distill this down to, “Hey, here’s the key provisions of the act. Here’s who’s most impacted and again, the larger the IRA the fewer the beneficiaries, the more risk that you have.
Kevin Kroskey: But again, I think quite importantly, I mention this somewhat earlier, but because tax rates are lower right now. If you’re not already doing these partial Roth conversions, if you’re not already doing this asset location, particularly the partial Roth conversions over the next several years, taxes are in sale right now and by and large, they’re lower, the current law is that they’re going to go higher. So whether or not, you’ve already started doing this sort of planning, frankly the time to act is now.
Kevin Kroskey: So this fear-mongering that I mentioned earlier, I’m not trying to be in a similar vein, but you look at it, hey, taxes are lower now. One of the key strategies that can go ahead and help maximize your wealth while you’re living on an after-tax basis are these partial Roth conversions. And oh by the way, it also helps mitigate the tax risk for the estate planning now that you can’t stretch the IRA out any longer. If you’re not doing it, no time like the present to start doing it and then what were you to be doing for clients throughout this year is just re-looking at this and say, “Well hey, in light of the change, do we need to be more aggressive?” And for some clients, like the gentleman that I mentioned who’s not doing all that well healthwise has a pretty significant IRA balance, likely going to pass.
Kevin Kroskey: In the not too distant future and a lot of money going to his two kids, then yes, I fully expect in that case, we’re going to be doing something different, probably a lot more aggressive with some of the Roth conversions and some other things that we’ll want to consider. So everybody is different, but if this does feel like, “Hey, I’m taking a drink from a fire hose right now, re-listen to it, give us a call. If you’re working with an advisor, talk to them. Make sure that they are well-versed in those areas though. Again, income tax, estate planning, as well as investing couldn’t really pull it all together, connect the dots for you.
Kevin Kroskey: I don’t know how to make it any simpler than that, unfortunately, but that’s what you have to do. Walter, before we wrap up, let me lease briefly mention some of the postmortem planning. So everything that we talked about now for those people that are impacted and really how to evaluate the risk that you have as well as some the opportunities has been more on the premortem planning or before death. However, post-death, there’s definitely some planning you can do too.
Kevin Kroskey: So let me give you a quick example. So assume a husband and wife, a husband passes. Again, so we mentioned that the spousal rollover is still there. However, let’s say that the wife is 90 years old or let’s say 85 years old and you look at it and we know what she’s spending. We know that, “Hey, there’s going to be a fair amount of money that’s left on for the kids.” So maybe we don’t need to roll all of this over into her IRA into. That’s a full spousal rollover.
Kevin Kroskey: So one of the things that we could do is look to potentially disclaim some of the IRA assets, and how those go down to the kids. So if we just think of a round number example. Let’s say, we have a husband passed away, wife 85 and now we have a daughter who is, say, 60. So we look at mom’s plan. We say, “Hey, you really don’t need all million dollars rollover from dad’s IRA. Let’s just go ahead and rollover half of it.” Certainly we would’ve done some calculations and updating of the financial plan to bear this out, but just for discussion purposes, we’ll disclaim the other half and so the other half, again, provided that the daughter is the contingent beneficiary on the IRA, the other half goes to her.
Kevin Kroskey: So she gets the 500,000. She gets this spread out over 10 years. Say mom lives another 10 years, age 95 and let’s just again round numbers. Let’s say that she’s had to take this required distributions out but she’s had some growth and her IRA is magically still $500,000. So in that case, mom passes at age 95, the daughter then inherits the remaining IRA and can go ahead and distribute that over 10 years.
Kevin Kroskey: So even though there are 10 years to go ahead and take out the IRA now, since the SECURE Act is now the law of the land, doing that planning with the disclaiming is in effect allowed her to have 20 years to go ahead and spread the tax burden. So that’s one example but you could have multiple kids where some kids need the money more quickly. Maybe they’re in a lower tax bracket. Maybe they want to blow it, whatever. Some are in a higher tax bracket. One of the examples that I have coming up here for our one client that is ill and one of the kids is probably going to be retired in 10 years.
Kevin Kroskey: And so when we look at their planning, we may say like, “Hey, let’s not take any out until you retire. You’re going to be in a lower bracket. He’s successful, has his own business, is in high tax bracket now. But that’s some of the postmortem planning you could do. So again, disclaiming is one example. But there could be several others as well. So premortem, postmortem, both important. It all starts with the plan. You got to start there and you just got to have that clarity and then you can go ahead and figure out where to go from there.
Walter Storholt: Yeah. If you have a large IRA balance, and someone says, “Well, you don’t really need to worry too much about the whole SECURE Act and stretch IRA thing,” that should be a red flag because it is something to be concerned with, and to plan for as we’ve discussed over the last half hour plus. And it’s a great take away I think from today’s show to boil it down into its simplest form. But at the same time all parents will get this. This is not a 911 text, right? This is not a, “Call me right now, 911 emergency.” It’s not necessarily to that level for most folks but it is a, “Hey, let’s talk about this. We need to sit down to carve out some time to discuss here soon,” and go ahead and set that time up to meet if this is something that is on your radar now after having talked about it.
Walter Storholt: If you want to schedule a 15-minute call with an experienced financial advisor on the true wealth team, you can certainly do that by going to truewealthdesign.com and click on the “are we right for you” button. Again, go to truewealthdesign.com and click on the “are we right for you” button and schedule your 15-minute call with the team or you can dial the 800 number, 855-TWD-PLAN. That’s 855-893-7526. Speaking of planning, that’s going to be a little bit of what we’ll discuss on the next addition of the Retire Smarter podcast.
Walter Storholt: We’re going to talk about the retirement smarter solution, the planning process, what it really looks like. We’re going to take a deep dive into that on the next episode of the show. Until then, Kevin, great chatting with you. Have a good couple weeks and we’ll talk to you again soon.
Kevin Kroskey: All right, Walter. Thank you.
Walter Storholt: We appreciate it. That’s Kevin Kroskey, I’m Walter Storholt. We’ll talk to you next time right back here on Retire Smarter.
Speaker 4: Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
