Episode 65 – Ed Slott, CPA, America’s Top IRA and Retirement Plan Expert

Episode: 65
Originally Aired: April 11, 2014
Topic: Ed Slott, CPA, America’s Top IRA and Retirement Plan Expert

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Ed Slott, America’s Top IRA and Retirement Plan Expert
James Lange, CPA/Attorney
Guest: Ed Slott
Episode 65

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  1. Introduction of Guest – Ed Slott
  2. Find a Competent Advisor
  3. Move Your Money to Tax-Free Territories
  4. Avoiding Mistakes with Inherited IRAs
  5. Estate Planning and Trust Intricacies

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1. Introduction of Special Guest – Ed Slott

Jim Lange:  Hello, and welcome to The Lange Money Hour, Where Smart Money Talks.  This is Jim Lange, and we have a wonderful guest tonight, Ed Slott.  Ed is the most popular IRA and retirement plan expert in America, literally.  As you would expect, Ed is excellent technically and has a wealth of tax reducing substantive information.  My opinion, however, where Ed stands above all of the other IRA experts, including myself, is his ability to communicate the material and weave entertaining stories into his materials to make listening to him, or reading his books, informative, memorable and fun.  Ed has been named the best source for IRA information by The Wall Street Journal and America’s IRA expert by Mutual Fund magazine.  He’s been on just about every financial talk show there is.  The second edition of his classic book, “The Retirement Savings Time Bomb and How to Defuse It,” is coming out in January 2012.  This, by the way, of the entire IRA literature, is probably, in my opinion, THE best book and the only problem is, it’s getting out of date.  So, he is updating that and I’m hoping that we can talk a lot about that tonight.  So, are you with us, Ed?

Ed Slott:  Yes, I’m here listening to all this good stuff.  Thank you!

Jim Lange:  Well, it’s certainly true.  Your book “Retirement Savings Time Bomb,” that is the classic, and when I heard that you were revising it, I was just very excited.  That is coming out in January?

Ed Slott:  Yeah.  It’s already revised.  As you can imagine, you know, it’s a 2012 edition and obviously, you know, whole chapters had to be rewritten based on the estate rates and all the other things going on.  There are so many changes.

Jim Lange:  Well, if it’s okay with you, Ed, what I’d like to do is to kind of go through some of your five steps and obviously feel free to interject any interesting anecdotes or stories as we go along.

Ed Slott:  Alright, sure.

2. Find a Competent Advisor

Jim Lange:  Alright.  So the first step as I understand it is you are getting to the point where you are at or near retirement, and what should you do?

Ed Slott:  Well first, I think it’s essential to have an advisor.  This is not do-it-yourself stuff.  I mean, you know, you’re going to get information on this program and reading books and maybe on the internet, but really, that information should just go towards checking or evaluating a candidate for your financial advisor and making sure they have particular expertise in this whole area of what I call the exit strategy.  Taking the money out of an IRA or a 401(k) is a major event, even bigger than, believe it or not, maybe buying your first house because more money can be involved, and sometimes, you have one shot to get this right.  You know, I’ll give you an example: I was just at a seminar.  I do a lot, as you know, Jim, for public television.  As a matter of fact, in Pittsburgh, we were there and, you know, so I do a lot of follow-up seminars to help raise money, and at a seminar a couple of weeks ago in Boston, or Minneapolis (I forget where I was), anyway, a guy came over to me and here’s a typical horror story.  And, of course, I couldn’t help him.  He came over to me and he said, “You know, I was retiring and I had to make some big decisions.  I had a huge 401(k).”  I don’t know how much it was, but I’m guessing probably more than a million.  And he said, “You know, I saw all the ads on TV, so I called one of those 1-800 numbers because, you know, you see the ads and they all have retirement experts, and they told me to do a rollover into an IRA and I did it.”  And generally, that’s not bad advice, but then, he said he saw my show on TV and he learned about something called net unrealized appreciation and employer securities, which is a huge company stock tax break.  And guess what?  He went back and, sure enough, he had mounds and huge amounts of appreciation in company stock in his plan, and he said he just, you know, roughly roughed it out and he would’ve saved about $200,000, he figures, in taxes if he had gone that route instead of the IRA rollover, and he only learned that after seeing the details of that on one of my programs.  And, you know, he’s hitting himself all over.  He came back and actually showed up at the seminar to see if there was something I could do to help, but with that particular case, once you roll to an IRA, that deal is off.  Now, he would’ve saved a fortune.  Now, do you think the telephone operator at the 1-800 number at the mutual fund or wherever he called would even know to ask about that?  They’re programmed.  They want you to do a rollover.  That’s what you’re going to get no matter what you ask for.  If all they have is vanilla, that’s what you are going to get!  There’s no tutti frutti or rocky road.  That’s what you are going to get.  And so I think the first thing you have to have is an advisor that can give you the options.  Like in his case, for example, as you know, Jim, there would have been six options to go through.  One option is the IRA rollover, which I think we both agree generally is the best option without these other situations.  You can leave it in the plan.  You can bring it to a new company’s plan.  You can convert it to a Roth.  You now can even convert it to a Roth and a plan, or you can take a lump sum distribution or the IRA rollover.  In his case, the lump sum distribution would’ve really paid off.  He would’ve had a huge tax break.  Now, I’m not saying when he did the rollover that he paid any tax.  It’s a tax-free rollover.  So, people listening might say, “So what did he do wrong?  He didn’t pay any tax.  How could he lose money?”  Well, when that money grows in the IRA, it’s growing tax deferred, which means it’s going to come out taxable and anybody that’s read a Jim Lange book knows Jim Lange doesn’t like that!  He likes Roth IRAs like me, right Jim?

Jim Lange:  That’s right.

Ed Slott:  So, you’re going to pay at full retail, the highest price, when that money comes out at ordinary income tax rates, and it turned out if he didn’t do that, he would’ve paid some tax now, but a very small amount, but on the rest, he would’ve paid capital gain rates which right now are twenty points lower, and according to his calculation, he would’ve paid $200,000 less in taxes.  Now, if you are coming up on retirement, I would think that would make a big difference to you.  So, that’s what I mean.  The first step is you got to have the right advisor.  I’m a big proponent of advisors.  I don’t mind people learning themselves, but when you have one chance to get this right, you want to know you have all the information you can.  And a lot of times, the advisor you have may not give you those answers.  Certainly, you’re not going to get it from the 1-800 numbers.  I mean, anybody that really knows this stuff is not sitting on the phone at an 800 number waiting to talk to you.  So I would really caution people about getting a top-notch advisor, and I think you would agree with me, Jim, most of the advisors, and I include my own professions, CPAs, attorneys and financial advisors don’t have the required expertise.  Most of them don’t take the courses they should.  They take courses in how to make you money and that’s fine, but it’s what you keep that counts after taxes.  You have to have an exit strategy, and one of them is looking into a Roth IRA maybe, which Jim and I are both fans of, but you have to have somebody that knows the options and can give you the information.  You want to go to a doctor if you have a particular issue, you need a specialist.  Sometimes you need a specialist.  Your general practitioner, he may be a nice guy but he’s not a specialist.  Sometimes you need a cardiologist or a neurologist.  It’s the same thing here.  Sometimes you need a specialist, and I think that’s probably one of the biggest issues in the financial services industry.  The advisors are generally poorly trained.  Would you agree with that, Jim?

Jim Lange:  I would agree, and I’ve seen a number of mistakes.  And by the way, Ed, you’re talking to the right crowd because Pittsburgh is a working town.  There’re a lot of people here who weren’t born with silver spoons, but they put in thirty or forty years of hard work.  They were prudent and put in regular contributions to their retirement plan that were often matched or had an employer share.  Today, the majority of their assets are in their retirement plan and if they make a mistake, and many advisors and even attorneys are not set up as IRA and retirement plan experts, it can be devastating.

Ed Slott:  Yeah.  As you know, one of the things we do as a company is we train financial advisors, and I’m always amazed at how many advisors don’t take training, and the ones that come to our programs are usually somewhat educated.  You know, that’s what you find.  You know, most advisors don’t really come to a lot of programs.  They spend a lot of their time on sales training.  You know, to me, you don’t want a salesman.  You want somebody who’s a competent professional that has specialized knowledge.  But what I find amazing is that the advisors that do have some knowledge, or at least know enough to go to a program and get educated, realize when they go to the programs how deep this area is and how much there still is that they don’t know, and that’s one of the biggest issues that really enlightens them.  They always say things like I didn’t know how much I didn’t know.  Well, that’s better than the guy, at least, who doesn’t know that he doesn’t know, and that’s probably your advisor if you’re listening to us now.  I would say somewhere around, I don’t know, maybe 99% of advisors don’t have this training.  So, you might say to me, “Ed, are you saying only 1% of advisors know anything about this area?”  No.  It’s much less.  I rounded up.

Jim Lange:  Well, that might be a pretty tough indictment.  But I will tell you, Ed, I’ve had some advanced training from you and some of your tapes, and I don’t know if you know this, but we have a national audience and many of the people listening are financial advisors.

Ed Slott:  Well, get to a program if you want to attract…you know, look, our mission as a company has always been to match consumers with competent financial advisors.  The same thing as if you’re going in for an operation.  You hope the surgeon once read a book about it.  I mean, you know, really, if this is all the money you have, and for most people like you just said, hard working people who work thirty or forty years, you know, they didn’t get it, they didn’t inherit it.  They made it the hard way.  You have one chance to get this right, and this is the time.  You have to demand more from your advisors.  A lot of advisors don’t like when I say things like that, and that’s good because they shouldn’t be advisors if they don’t have the knowledge.  You know, sales gimmicks only take you so far.

Jim Lange:  Well, the other area that I have found advisors really weak, and they often make this mistake, is in the area of after tax dollars inside retirement plans.

Ed Slott:  Well, that’s one of those issues that you wouldn’t know it in a million years, and it’s unlikely your advisor even knows to ask.  You know, somebody’s got to ask you did you make nondeductible contributions?  You have after tax money in your IRA maybe from a 401(k) because if you do, you shouldn’t be paying tax twice on that money.  I know accountants that miss it.  I’m talking about my own profession too.

Jim Lange:  Yeah, and particularly in Pittsburgh, there’re a lot of people, you know, middle level executives and higher, there’re a lot of people at Westinghouse who have after tax dollars in their retirement plan, and if they go to the wrong person, it just kind of gets mixed in.  I remember the coffee and cream analogy in your book.  It just gets mixed in, and it’s not so easy to separate them.

Ed Slott:  Yeah, that’s in my book, yeah.  Well, if financial advisors are listening, here’s what I would tell them.  Go to my website www.irahelp.com.  You want to do a great job for your clients and I think deep down most people do, but you also want to make a lot of money, so I’ll appeal to that end.  You want to know something?  I find the advisors who are the most successful and who have the most clients and attract the clients with the most money are the most educated.  These are the guys you constantly see at programs.  Go to my website www.irahelp.com and register for one of our programs.  We have a foundational program, our two-day program.  It’s loaded with information.  That could change your whole career, and for those of you listening that have a financial advisor, for consumers, see if your advisor has taken any training in this area.  It doesn’t have to be just ours.  Have they read a book about it?  Ask them to show you course manuals.  You want somebody that has hands-on knowledge in this specialized area, and if they tell you something like, “Oh, IRAs?  What’s to know about IRAs?”  Then I would run from that guy, because as you know, Jim, these rivers run deep with the IRA tax rules and they’re always changing, and you mess one up and the mistakes are costly and usually irreversible.  So for advisors that are listening, this is an opportunity to do a great job for your clients.  That’s what we as a company are all about, because like I said, matching consumers with competent advisors, we want advisors to be well trained so they attract consumers and we want consumers to work with advisors that are worthy of their business, just like any business.

Jim Lange:  Well, I’ll tell you, Ed, you are literally a wealth of information.  You know, even the two-day workshop that deals in depth has a lot of great information, both technical and things that’ll help the advisor to a better service.

Ed Slott:  Oh yeah, and I’m telling you, here’s what happens at that workshop.  It never fails.  First of all, you walk away with a 400-plus page course manual, which is pretty amazing.  We cover that in two days.  And that’s just the tip of the iceberg.  But usually about an hour or two into it, I start to see advisors leaving the room, like not because I have to go to the bathroom, like more emergency than that.  And I always find out in the breaks after why did you leave the room, I just realize I messed up royally.  I had to call something and I was able to save a client from a horrible mistake because of something I did, or the other way, they got an idea and they’re calling your client saying, “Wait a minute.  We could do this.  I didn’t know about this.”  So, there’s a wealth of information.  That’s why I appeal to both advisors to get educated and to consumers to move your money to educated advisors.  I think everybody wins under that model.

Jim Lange:  Well, I think you’re right.  In the two issues that we talked about briefly, NUA and after-tax dollars…

Ed Slott:  Well, that just happened to be what he talked to me about, but you could understand.  You know the issue, I know.  I didn’t want to get too into the details, but you could see where the guy is thinking is there any way to correct this?

Jim Lange:  Yeah, and I’ll take it a step further.  You know, sometimes, the appropriate action isn’t necessarily rolling everything into an IRA.  I’ll give you an example: again, I mentioned Westinghouse, and so I personally have a lot of Westinghouse clients and I have quite a few college professors and TIAA-CREF participants.

Ed Slott:  Right.

Jim Lange:  And the TIAA is actually a pretty decent bond fund, and the Westinghouse actually has a GIC, which is a guaranteed income contract, that actually offers fairly competitive rates for fixed income.  So, what I might do with some of those people is sometimes maybe split the difference and say hey, you might want to consider leaving some of the fixed income portion of your investments where it is, but then maybe rolling some of the stock portion out into an IRA.

Ed Slott:  But do you think somebody at an 800 number is going to  give them that kind of advice or NUA advice?

Jim Lange:  Well, of course not.

Ed Slott:  Of course not.  Right!  But look at the ads.  Look at the money, this always gets me, the money these major companies spend on full-page ads.  You see them every day.  You open the paper today, you’ll see it.  I’m telling you, just call, and our experts will talk to you.  I saw an ad on TV, and the same thing, they run them on TV.  There’s one running right now.  There’s a young blonde woman saying “Talk to an expert like me.”  I’m looking at her.  I said, “An expert like you?  You’re twelve!”  You know the ad I’m talking about?

Jim Lange:  Yeah.

Ed Slott:  I mean, you and I both know what it takes to learn.  We’re still learning every day.  This stuff changes, literally, rulings come down every day, every week, you know, major tax law changes.  You know, if you have saved your money and worked hard for it, you better work with an advisor that works hard for you.  If your advisor isn’t investing in his education, then you shouldn’t be investing your money with that advisor, and as far as the free 800 number, you can’t afford free.  It’s too expensive.

Jim Lange:  Well, I agree with you, and frankly, I think at one point you actually said “Look at the person’s bookshelf,” and they should have books by Ed Slott and Barry Picker and Bob Keebler and Natalie Choate and Hunt Bledsoe.  I’ll throw my own book in there.

Ed Slott:  Well, whatever the name, they should at least know a name, and I do tell the consumers that.  See if your advisor’s even gone to a course and not sales training.  You know, they always say they went to IRA courses, and you know what I mean, right, where they learn how to talk to people or learn special words or gimmicks or what colors to wear to get people to give them the money.  That’s a bunch of nonsense.  Knowledge is what people want.  People want educated advisors, because there are ways using the tax code as you know to end up with you and your family having millions more than you ever had, and all tax-free.

Jim Lange:  Well, you just gave the two examples.  One is the NUA treating the, in effect, capital gain property and missing it and paying ordinary tax on it, or if you miss the after-tax dollars in a retirement plan, then you’re paying tax twice on the same money.

Ed Slott:  Or you know where I see a lot of problems?  Right at that point, even when people get advice, just doing the rollover, as you know, when money is moved, that’s when it’s in its most dangerous state.  Remember, I always say an IRA is like an eggshell.  You break it, it’s over.  This has got to be handles with knowledgeable hands, and you have to be careful.  You know, I hate to keep harping on it, but really, this is not do-it-yourself stuff.  If anything, the do-it-yourself part would be for you to get educated so you raise the bar and expect more from your advisor.  Remember, the more educated you are, the more you can demand from your advisor, and the more you’rsquo;ll be able to know to evaluate.

Jim Lange:  And I’ll tell you the thing I thought you were going to mention is the difference between a rollover and a trustee-to-trustee transfer.

Ed Slott:  Oh yeah, that’s another.  I mean, you could go on and on with these problems, but yeah.  That’s another issue.  People take the money out and they don’t know about the withholding tax, and all of a sudden, they lost 20% of their money, and now they have a tax and possibly a penalty, or they don’t get the money in in sixty days.  You know, there are so many issues, and I call some of these errors fatal errors, which means you lose your retirement savings.  Here’s one that happens a lot because people don’t pay attention.  When I say people, consumers who don’t know any better because they’re not experts, and advisors who claim to be experts and aren’t.  The once per year IRA rollover rule, people do a second rollover, could be…I had a case many years ago and it was $1,000,000.  A guy did twenty rollovers.  He kept moving the money for lower CD rates and nobody told him you could only do that once, and he had to pay tax on $1,000,000.  It was the end of his IRA.

Jim Lange:  That is pretty painful.  Ed, I would love to continue, but we have a whole bunch of other material and I believe it is time for a break.

Ed Slott:  Okay.

Jim Lange:  So, why don’t we take a short break and then we will be back with Ed Slott, America’s IRA expert, and more issues with Ed.


Jim Lange:  We are here with Jim Lange, me, and Ed Slott, America’s IRA expert talking about some of the concepts in Ed’s upcoming second edition of “The Retirement Savings Time Bomb and How to Defuse It.”

Ed Slott:  It’s a mouthful, but it’s worth it.

Jim Lange:  I feel bad because that is my favorite IRA book that has so much wisdom and hopefully some of the listeners today can get some of that wisdom.  Ed, your second step might be a little bit of a…

Ed Slott:  I’m still on the first step about getting the right…I don’t even know if the first step was the right advisor.  I think that’s the step before the first step!  But you know, in the first segment, I was talking about the advisors don’t know, you’re with the wrong advisor, I gave all the problems without giving a solution.  One solution, and it’s not the only solution, is if you want to know if your advisor has the training, I gave you some of the tips: see if they’ve gone to courses, if they have books like you said, do they know the educator’s names, but another thing, you can go to my website.  We have a group called Ed Slott’s Elite IRA Advisor Group.  These are some of the most educated advisors in this area of the country, and you go to my website www.irahelp.com, and believe it or not, out of I don’t even know how many advisors, if you put all the professions together, there are a million advisors.  So you would think, well, wouldn’t all of them want to be educated?  There’s only about 400 at that level, and they’re listed from all over the country.  There’s a few from the Pittsburgh area on our website www.irahelp.com.  You just go to ‘Find an Advisor,’ and it doesn’t mean they know everything.  It means that they’ve been exposed to it.  The best thing a good advisor could tell you is that they know what they don’t know, and the advisors in that program, that’s our advanced education program, have access to us and our technical experts, so all they have to know is somewhat, you know, they’re exposed to the material continually on an ongoing basis.  So they do know quite a bit, but if they come across something they don’t know, at least they know to ask and they have us as their back office.  So, horrible situations like the one I talked to you about wouldn’t happen because I’ve created checklists (we call them modules) in over thirty different areas, so nothing falls through the cracks.  They take you through a whole list of checkpoints, like for example, that horrible NUA story I told you about, where the guy is going to pay $200,000 more in taxes than he should have.  We have a module, a series of checklists for that.  If you’re leaving a plan, any one of our advisors knows to take you through all of those options.  So it would’ve uncovered, you know, the issues would’ve surfaced, and those advisors invest a lot of time and money to be in that education program and, just so you know about me, I don’t sell any stocks, bonds, funds, insurance, annuities, none of that.  I’m a CPA and we’re an education company, and I believe more advisors need to be educated.  So, you could find an educated advisor there.  It doesn’t mean they’re the only ones, but at least these people have been through some tough training and continual training.  It’s not a day or a weekend.  It’s not one of those things where they get some phony designation.  In fact, we don’t even give a designation.  We just want people to know that they’re in a highly advanced program that specializes in this area, the area where you have most of the money that you worked for most of your working life.  So that’s what we’re trying to do, create professionals that have this specialized knowledge and match them to consumers, and that’s why we put their names on our website.

Jim Lange:  And as you said, it actually works out very well for the advisor because they become competent and they get more business.

Ed Slott:  Right, it’s a win-win.  I love models that are win-win.  The consumer wins because he gets a better educated advisor with less chance of making a horrible error and costing them a fortune in taxes, and the advisor wins because he gets the client he deserves.  He’s invested in his education.  He should have a better clientele.  So everybody wins and the real purpose is that people, I believe, are mostly underserved by their financial salesmen, and most of them, that’s what they are.  You know, you can get stocks and bonds anywhere.  In these tough times, it’s really tough to make money in the market anyway, so really, your plan should be to keep more of what you have and leverage and capitalize on the tax code, and there are ways to do it where your family can end up with millions more than you ever had, and that can all be tax-free.

Jim Lange:  Ed, you just said that you don’t sell insurance.  You don’t sell annuities.

Ed Slott:  No.

3. Move Your Money to Tax-Free Territories

Jim Lange:  But on the other hand, you are a big proponent of life insurance in many situations.

Ed Slott:  You bet!  You know why?  Two words: tax-free.  I love tax-free, and I know you do too because you believe in the Roth.  Actually, the tax exemption for life insurance, just from a CPA point of view, a wealth- building point of view, is the single biggest benefit in the tax code.  No question about it.  You have the ability to take a dollar and turn it into ten dollars tax-free.  Who wouldn’t do that all day long?

Jim Lange:  You have a good story about Ann, or you might have other stories of people who have done very well…

Ed Slott:  Oh yeah!

Jim Lange:  …with life insurance, and see, I think…and this might be true of a lot of my clients, that they say, “Well, gee, the way I look at it is I have enough money for me and my wife to live comfortably for the rest of our lives.  They used to have cheap term insurance back when I was working, so if anything happened to me, my wife would be provided for, but now that I have my million or two million or whatever it might be, and based on our spending, that should be enough.  Why do I need life insurance?”

Ed Slott:  Well, it depends on what your plan is.  Do you want to leave your kids a big tax bill or do you want to leave them tax-free money?  That’s really what it comes down to.  Plus, in today’s shaky times, you know, the market’s pretty shaky these days, up two hundred, down five hundred.  You know, it’s not bad to have money stuffed in a life insurance policy.  It may be one of the safest places to invest.  Remember, you can get to life insurance money.  It’s not as easy as getting money out of a Roth, but it can be accessed from a life insurance policy and it pays off at death and it’s all tax-free.  Plus, the money you take now reduces the money that you would have been exposed to future taxes.  I’m not saying to go broke over any of this thing, even with the Roth conversion.  If you don’t have the money, don’t do it.  With life insurance, if you don’t have the money, don’t do it, but if you have money just sitting there rotting away as a sitting duck waiting for future tax increases to decrease your buying power and erode your money, that money should be leveraged.  That’s why I say with IRA money, use it and leverage it into tax-free territory or lose it to future taxes, and I believe future taxes are going go through the roof.  Look what’s going on in the government.  You know, you’ve got to start putting money away into tax-free territory.  My big master plan for everyone is what I like to say, moving your money from accounts that are forever taxed to accounts that are never taxed, and the two best ways to do that are with Roth IRAs and life insurance.  They both require some money to be paid now, but it’s going to be money you will pay later anyway.  So, you may as well pay it now at low tax rates and set up tax-free vehicles both for during your life like a Roth IRA, and for your beneficiaries in the way of life insurance after death.  That’s why, when I say on TV, people say, “How is it possible when you say on TV that you can create a plan for anybody where they can end up with more than they ever had?”  I already said it twice on this show.  You know, you take somebody with a net worth of a million dollars, it’s easy.  Anybody can arrange a plan for their beneficiaries to end up with two million and it’ll all be tax-free, and that could only be done with life insurance.  That’s why I say it’s the single best benefit in the tax code.  It’s a great wealth-building tool, so that’s why I would use it.  You don’t have to, but you might say with that typical couple you asked me about, they have enough money but they’re taking down taxable money, higher tax rates are going to erode that, and at some point, they’re going to wish they didn’t have to keep paying the government, and I’m sure that when they die, a lot of that money is going to be taxed at the beneficiary level, and that doesn’t have to be either.  So it depends on what you want.  If you’re happy with everything you have, then great.

Jim Lange:  Well, I like life insurance, particularly.  I’ll tell you my types of policies that I like, particularly for well-to-do people.  I really like the second-to-die life insurance policies, and it’s kind of a variation of a gift, and I always say well, don’t make the premiums so high that you can’t afford to just give your kids some money, you know, if your kids need it or if your grandkids need education, you don’t want to make the premiums so high that you can’t help your grandkids with their education.  But there is a happy balance and a medium where you can hopefully get the best of both.

Ed Slott:  Yeah, it’s not an all-or-nothing.  You do what you can do.  Just be careful.  I always give a caveat with a second-to-die that I always like to have a little policy at the first death pay off so that the survivor has money to keep paying the policy.

Jim Lange:  And that’s a very good point.

Ed Slott:  So, I always put a little policy of something at the first death.  And again, I don’t sell insurance, but it’s the greatest wealth-building tool available to ordinary people through the tax code.

Jim Lange:  Well, I think the fact that you don’t sell insurance makes you even that much more credible.

Ed Slott:  Yeah, I mean, really, what I’m telling you, I did myself, both things.  I loaded up with life insurance and also, I have Roth IRAs.  As a matter of fact, the first day I could, January 4, 2010, when the floodgates opened up, and there’s still people, believe it or not, who think they don’t qualify.  That law was repealed permanently.  I converted everything to a Roth IRA.  So, it’s not like I’m just telling you to do this.  I did these things myself because I believe in creating a tax-free estate as a hedge against what future tax rates might be.  I don’t want uncertainty, and the Roth IRA, to me, removes the uncertainty of what future tax rates could do to my retirement savings.

Jim Lange:  Well, as a matter of fact, as you well know, I’m a big fan of Roth IRAs.

Ed Slott:  Me too, yeah.

Jim Lange:  In fact, we’re actually having a workshop this coming Saturday at South Hills Village on Roth IRAs and Roth IRA conversions, and you’re absolutely right.  There’re still a lot of people out there who have maybe thought about it a little bit, but they never got the full information and never acted and never made conversions, and some people think that they have to do what you just did, which is convert everything.

Ed Slott:  No.  Do what you can, you know?  You can do partial conversions, but I do get that question at every seminar too.  You know, I can’t afford to convert everything.  Then do little pieces.  Over time, you’ll build up a huge tax-free nest egg, and I got to tell you, when rates are getting up to 40 or 50% as I predict they will, tax-free is going to be looking pretty good.

Jim Lange:  Well, that’s what I think, and I’m a big believer in taking a look at the different tax brackets.  So, after I do some analysis for somebody, we often do a series of Roth IRA conversions every year for a number of years to take advantage of some of the lower, maybe, 15 or 25 or 28% brackets.

Ed Slott:  Yeah.  Who knows how long we’ll even see a 15% rate anymore?

Jim Lange:  Well, I hope you’re wrong, but I fear you’re right.  I think that we have some big problems in the country and somebody’s going to have to pay for it.

Ed Slott:  Well, I got to tell you, you know, not only do we have problems in the country, but the easiest people to hit to solve them are people with money in their retirement account because they are sitting ducks.  Why?  Because that was the deal they made.  They got tax deductions when they put the money in and they agreed that when they pulled the money out, they were going to pay tax at ordinary rates, top rates, and the money is stuck in there.  They are sitting ducks, and don’t you think that that is such an easy target for the government to go after?  And there’s trillions in those accounts.

Jim Lange:  Well, Ed, how would you answer somebody who said, “Hey, you know, I can make some Roth IRA conversions, but then I end up having to pay the tax so my kids don’t,” and let’s say that somebody is a little bit more interested in being able to spend and have purchasing power for themselves.  Would you still say a Roth IRA is good for them?

Ed Slott:  Well, then, that’s the first question I ask: who are you doing it for?  You or the next generation?  I’m doing it for a combination of both because I’m in my fifties, late fifties, so I still think there’s time, but if you say exactly what you said, to heck with my kids.  Let them make their own money, and let them pay tax.  And I would say if you’re seventy or over, then maybe don’t do it.  The cost of paying tax up front isn’t worth the benefit given your shorter life expectancy.  So, there comes a time when you say maybe it won’t pay for you.  If the intent is for you to use it during your lifetime, then it may not pay for you to do a Roth conversion and eat up that tax money now because you won’t have as many years to get it back.  The power of the Roth IRA is in long-term compounding over the life of a child or a grandchild, which combined with the new estate tax laws, I mean, it is incredible the amount of tax-free wealth you can transfer now, let’s say, to a grandchild.  You know, you can transfer now, let’s say you died now and you had, you know, I don’t know anybody who does, but there could be some…actually, I do have one client who does.  You can transfer up to $5,000,000 in a Roth IRA to a grandchild that will now be income tax-free, estate tax-free and free of generation skipping transfer taxes.  A complete, tax-free transfer of wealth.  This is incredible.  I’ve never seen anything like this.

Jim Lange:  Well, this is about the most generous time that we’ve had, except for 2009, but I think that that was a one-year window when there was a…

Ed Slott:  2010, you mean, when there was no estate tax?

Jim Lange:  Yeah.  Oh, that’s right, I’m sorry.  2010.  You got it.  You got me!  I’m sorry about that.

Ed Slott:  Yeah.  You know why it’s confusing?  Because then they went back and did people, you know, they passed the law so late in the year that people didn’t know what the heck to do, so they said you could either have no estate tax or take a $5,000,000 exemption.

Jim Lange:  Right, and so George Steinbrenner…

Ed Slott:  Yeah, he wins again!

Jim Lange:  …died with a $1.5 billion interest in the New York Yankees…

Ed Slott:  Freebee!  He wins again.  He wins at everything!

Jim Lange:  I guess he does, except in 1960 when the Pirates did him in.

Ed Slott:  Yeah, I remember that.  I remember that.  I was a New York Yankee fan then, and I was young.  I was six years old, but I remember seeing the picture…back then, they had encyclopedias.  I don’t even know if they have them anymore, but my parents got me Collier’s encyclopedias.  It was these big red books, and they used to put out a year-end issue like an almanac, and it had that picture of Bill Mazeroski rounding third and going to home, that famous picture.

Jim Lange:  Well, everybody in Pittsburgh knows that one.  In fact, there’s even a statue of it right in front of PNC Park.

Ed Slott:  You know that’s the only time to date that that’s ever been done.  I said that in a seminar once.  I don’t know how it came up.  Maybe I was in Pittsburgh, so I was talking about Bill Mazeroski, and sure enough, a guy said, “You’re wrong.  Joe Carter did it.”  I said, “No, that was Game 6.  To date, Bill Mazeroski has the only seventh game World Series walk-off home run.”

Jim Lange:  Yeah, that was quite an event, and I forget the number of how many people Forbes Field had, but about roughly double that many claim and promise that they were there that day.

Ed Slott:  Oh, from what I hear there were twelve billion people there that day.

Jim Lange:  I think something like that.

Ed Slott:  How did we get on Bill Mazeroski?

Jim Lange:  I think we were talking about estate tax-free in 2010.

Ed Slott:  Oh yeah!  We went from George Steinbrenner.

Jim Lange:  Right.

Ed Slott:  I was trying to think, how did we circle back there?

4. Avoiding Mistakes with Inherited IRAs

Jim Lange:  Well, I’ll tell you what we could circle back to, because you started to mention something about leaving IRA money and Roth IRA money to children and grandchildren, and that I think is one of the…

Ed Slott:  That’s where the power is because the power of the Roth, of anything that’s going tax-free, the power is time.  You know, the exponential growth factor, you know, I always say the greatest money-making asset any individual can possess is time, and if you add time to tax-free, that’s like e=MC2 for tax-free.

Jim Lange:  Well, I have seen people blow what we would call the stretch IRA, and I know that here is an important section in your book of stretching it, so maybe you could tell our listeners a little bit about what happens when somebody dies with an IRA, both a spouse and eventually a non-spouse, presumably children or grandchildren, and the opportunities to mess that up.

Ed Slott:  Oh, there are so many.  In fact, I just wrote an article about it.  Another thing we have for professionals, if you’re an advisor listening, I put out a monthly newsletter called “Ed Slott’s IRA Advisor,” and it comes out every month and I just finished off the December issue today actually with an article on all the mistakes people make on inherited IRAs.  So even if you do everything right, let’s talk about the best situation first.  The tax law allows, all you have to do to name a beneficiary on the IRA beneficiary form, and the tax law allows whoever you name, say, a child or a grandchild to stretch it out over their lives.  There’s a term called stretch IRA which really doesn’t exist anywhere in the tax code.  It’s kind of a made up word, but it’s the ability for the child to take only minimum distributions over their expected life, so for an example, a 40-year old has a 43.6 year life expectancy, while a 1-year old has a 81.6 year life expectancy.  So very little has to come out each year, while the real 90% of it in most cases is just expanding and growing exponentially in the cocoon, if you’ll call it that, of the inherited IRA, and if that’s an inherited Roth IRA, that is growing tremendously.  Not that it grows faster, but all the growth stays in the family because there’s no taxes.  Tax-free money grows more because you keep more of the money.  Not that it grows more, but whatever it grows to, you keep all of it as opposed to some of it.  So that’s a big exponential benefit that’s come to be known as the stretch IRA, and they call it that because beneficiaries can stretch, or extend distributions over their lifetime, and they have a lifetime of income.  Can you imagine if somebody ever did that for you, that you had a check coming in every month tax-free for the rest of your life?  Enough to pay, maybe, a car bill or your rent?  But that’s what people can set up now for their kids just by naming a beneficiary on the IRA beneficiary form.  So that’s the first mistake people make.  They don’t name anybody on the beneficiary form.  So what happens?  They paid all that money for a Roth IRA, or save money in a traditional IRA, and it has to get paid out very quickly or much more quickly after death.  Most people don’t know if they even have an IRA beneficiary form.  That’s probably the number one mistake, I would say.  When I ask people, “Who’s going get your IRA when you die?” they don’t know what the heck to say.  A lot of them say something like, “Well, isn’t that in my Will?” and when I hear that, even if it is in their Will, I say to them, “Well, if it is, then you’ve just taken one of the biggest benefits in the tax code away from your kids, the stretch IRA.”

Jim Lange:  I would love to continue, but it is time for a break, but please stay tuned.  We will be back in about a minute, and you’re here with Jim Lange and Ed Slott on The Lange Money Hour, Where Smart Money Talks.


Jim Lange:  Welcome back.  This is Jim Lange.  I’m here with Ed Slott, America’s IRA expert and bestseller of four books on retirement planning.  Ed, before I forget, I wanted to, and I mean this sincerely, for every advisor, it’s an absolute no-brainer, but even for people who own IRAs and retirement plans, I’m going to recommend that they get the “Retirement Savings Time Bomb and How to Defuse it” when it comes out in January.

Ed Slott:  It’s the 2012 edition.  Don’t get it now.

Jim Lange:  Right, right, and that’s important.  What I was going to ask you is are they better off going to your website, or going to Amazon?

Ed Slott:  Yeah, it’ll be on my website when it’s available, like on Amazon.  Yeah, you can go to the website, or just go to Amazon, but it’s not there as of right now.  It should be there in a few weeks.  We’re saying January.

Jim Lange:  Okay.  So, if everybody’s getting that, “The Retirement Savings Time Bomb and How to Defuse It” by Ed Slott, and you can either get it at, it’s www.irahelp.com, correct?

Ed Slott:  Right.

Jim Lange:  Which is Ed’s website that has a lot of great information, you know, regardless of the book, or go to www.Amazon.com and get it directly there.

Ed Slott:  Yeah. There’s a lot of free information and good information on IRAs and retirement accounts, and like I say, I want everybody to be educated.  I think consumers need to be better educated so they can demand more from their financial advisors and everybody wins.

Jim Lange:  Well, I think it’s a good resource, www.irahelp.com.  Ed, we were talking about stretching IRAs and I know, and this is a true story where a father and son both shared the same advisor, and the father died with roughly $1,000,000 in his IRA and left it to the son, and since the advisor was handling the work for both the father and the son, he took the $1,000,000 that was in the IRA and he transferred it into the name of the son.

Ed Slott:  I knew you were going say that!  I knew it was coming!

Jim Lange:  Well, you can finish the rest of the story!

Ed Slott:  Yeah, and then he has a tax on $1,000,000, plus an excess contribution.

Jim Lange:  Yeah, so it was truly a disaster.  So, in addition to having the appropriate plan while you are alive, it is also imperative that your beneficiary gets the right advice after your death.

Ed Slott:  Exactly.

Jim Lange:  That was going to be my point there because unfortunately, way too often, people don’t get the right advice, particularly in the IRA area, and I hate to point the finger at attorneys, but sometimes attorneys aren’t right on top of this issue either.

Ed Slott:  It goes across all disciplines.  That’s why I said CPAs, attorneys, financial advisors, look, you know, if you wanted to pick on attorneys, look at the IRA trust out there.  You know, that’s a specialized area too.  If an attorney writes a trust to be an IRA beneficiary, they better have the specialized knowledge in that area too.  The regular boilerplate, or garden variety trust, won’t work.

Jim Lange:  Well, that’s right, and the other thing is, I mean, I’m a big fan of meeting those five conditions in order to get the stretch IRA because if you miss one of them and you cause a massive income tax acceleration, it’s literally an enormous difference in the lifestyle of your children or grandchildren.

Ed Slott:  Right.  Well, people have to know…that’s why my first, and the most important thing is they know they have to be working with a competent advisor.  You do a great job in that.  You do a fantastic job.  People in Pittsburgh are lucky to have you.

Jim Lange:  I appreciate that, Ed, and I’ve always enjoyed hearing you, both in person and in your tapes and your material and you books, and I don’t know if it’s your favorite book, but “The Retirement Savings Time Bomb” is my favorite book, and if you were here right now, you’d see it dog-eared with all kinds of notes and stars, etc.

Ed Slott:  Well, that’s good.  You’ll see the new one coming up, and I can tell…as a matter of fact, in the beginning of the new one, I listed all the tax laws that were changed.  I couldn’t believe how many there were from the last edition.  It’s unbelievable.

5. Estate Planning and Trust Intricacies

Jim Lange:  Well, that’s actually, one of my questions is…I don’t think we’re going to have time for, because the other thing that I did want to cover is talking about what happens in the event that, and it’s very possible, although we don’t know what’s going to happen with the tax law, but in the event that the estate tax comes back for smaller or medium-sized estates, of what happens when somebody has an IRA that might be potentially subject to estate tax?

Ed Slott:  Well, obviously, you’re going to have to again review estate plans.  I’m telling that to everybody right now.  Just the increase to the $5,000,000, every estate plan…I mean, if you’ve got anything saved, chances are every estate plan has to be reviewed at a minimum, and possibly revised, and that might happen again after 2012.  You might want to change beneficiaries, or change property ownership and go back to the way it was.  You know, I hate to make predictions, but I don’t think that they’re going to do away with the portability function because that seems to be good for people.

Jim Lange:  Do you think it’s still going to be at the $5,000,000 level?

Ed Slott:  I don’t know if it’s going to be at the $5,000,000, but the whole idea of portability that you don’t lose your exemption just because you didn’t set up a separate trust to separate your property, you don’t need, you know, to do extra estate planning to secure an estate exemption.  I think that’s good for most people.  So I’m hoping that stays.

Jim Lange:  Well, I would agree with you, but it also points out that the old traditional AD Wills are often not only not helpful, because you don’t necessarily need that with the portability, but actually act as a restriction for the surviving spouse.

Ed Slott:  Oh yeah, it could actually disinherit a spouse.  That’s why I say every estate plan has to be revised, especially when the estate exemption goes up.  While that may be a good thing, if you still have one of those old Wills with the family trust, or what ever you call it, the credit shelter trust, the A/B Trust, it could be a spouse may get disinherited.

Jim Lange:  Yes, or if not outright disinherited, the spouse…

Ed Slott:  Yeah, they could have access but they won’t get the kind of money they thought they were going to get outright.

Jim Lange:  No, and that actually brings up another, let’s say, what I consider a bad combination, which is these B trusts, or family trusts, or exemption credit shelter trusts, or whatever you want to call them, and IRAs.  So, I sometimes see a trust reference as the beneficiary of an IRA, whether it’s a B trust or a Q-Tip trust, and it just kind of makes me ill because I think of all the income taxes that are accelerated when you name that type of trust as the beneficiary of an IRA.

Ed Slott:  Well, that’s why it has to be looked at.  I would look at everyone, and if you really think you need a trust, there’s a reason to do a Roth IRA because it removes some of the trust tax problems too.

Jim Lange:  Yeah, that’s right.  What Ed’s talking about is trusts are typically taxed at the highest rates.  So let’s say you have either a minor or…and frankly, Ed, we’re running into more and more adult children that are not capable of managing the money or maybe it would be inappropriate.  They’re spendthrifts.  Sometimes they have drug and alcohol problems, and you don’t want to have that money taxed at the highest trust rate.

Ed Slott:  Right.

Jim Lange:  So what you’re saying is a Roth IRA is a great asset to have in that situation?

Ed Slott:  Yeah.  If you want to restrict access to the kids based on being spendthrifts or not handling money or they can’t be trusted with money, at least if it goes to the trust, the distributions that come from the inherited IRA to the trust are not taxable.

Jim Lange:  Yeah.  Now, sometimes, we try to get around that by, if it’s in a normal situation or if it’s already done, if it’s a regular IRA, we will distribute some money from the trust to the beneficiary and…

Ed Slott:  So they pay at their own rate?

Jim Lange:  Right.

Ed Slott:  Yeah.  But if you don’t do that, if you want to restrict it because of those reasons you said and it gets stuck in the trust, then you have high trust rates, but that’s the kind of thing that’s probably beyond most people listening, but it’s another factor to look at when you’re considering hiring a professional.  You’d better have somebody that really knows these intricacies, and I’m telling you again, most people don’t, and that’s why we created the group I told you about earlier, Ed Slott’s Elite IRA Advisor Group, and if you want to see if your advisor has that kind of education, you can check our website.  There are only about 400 members around the country that have that level of training, but whoever you use, they should have a high level of education in this specialized area.

Jim Lange:  Well, Ed, what do you think is the…and I know we only have a couple of minutes left, but what do you think are some of the biggest changes between the law as it is today than when you wrote the first edition of “The Retirement Savings Time Bomb?”

Ed Slott:  Well, probably one of the biggest ones is the increased exemption and the availability of Roth IRAs for everyone, to convert for everyone.  That’s huge.  That’s creating large amounts of Roth conversions that can be sent to beneficiaries, not only income tax-free but estate tax-free too.  Those are probably the two biggest changes, and if you combine them, you have a tax-free wealth-building machine that can span generations.

Jim Lange:  Well, and as you know, that’s why I’ve been a fan, and that’s why the commercials were actually for the workshop that I have this coming Saturday.

Ed Slott:  Well, I say people should attend.  Do advisors come to your programs too?

Jim Lange:  I do get a couple ringers in there.  They sometimes don’t necessarily announce themselves.

Ed Slott:  They’re the ones wearing a suit.

Jim Lange:  They are the ones wearing the suits.  Sometimes, they actually bring their clients and they sometimes go in the back and whisper a little bit.

Ed Slott:  Yeah.

Jim Lange:  But I usually prefer to have consumers.

Ed Slott:  Well, I hope that they’re listening to you.  We scared the bejesus out of you and they come to your program and they get a top-notch advisor.

Jim Lange:  Well, I appreciate it.  The book is “The Retirement Savings Time Bomb and How to Defuse It” by Ed Slott.  It is not available at the moment, so write this down and probably some time in January when it’ll become available, either go to Amazon.com…Ed, let me ask you this.  If they go to your website now, www.irahelp.com, and sign up…

Ed Slott:  I don’t believe it’s on there yet.  I’m checking as we speak, but I don’t believe it’s on there because there’s no link to it yet because the book’s not available.

Jim Lange:  Right, right, but is there a mechanism that you would give them a reminder?

Ed Slott:  You know, that’s a good idea.  I don’t know if there is, but I’ll make a suggestion.

Jim Lange:  Alright.  Let’s assume it’s not there.

Ed Slott:  Yeah, I see it up there but it’s the older book, and I don’t want people buying that, but that’s a good idea.  Maybe we’ll put a link in to send them a reminder when it’s out.  Good idea, Jim, thanks.

Jim Lange:  Okay, but again, “Retirement Savings Time Bomb and How to Defuse It” by Ed Slott, Amazon.com or irahelp.com.  This is Jim Lange.  You’ve been here with Ed Slott.  This program will air again on Sunday at 9:00.  Ed, you’ve been a wonderful guest.  Thank you so much.

Ed Slott:  Well, I’m happy to be here, Jim, and you’re doing a great job.  Thank you for having me as a guest.

Jim Lange:  Thank you.

Ed Slott:  Okay.


jim_photo_smJames 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.