‘Retirement Decisions Guide 2015,’ with Ed Slott, CPA

Episode: 152
Originally Aired: December 10, 2015
Topic: Retirement Decisions Guide 2015 with Ed Slott, CPA

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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  1. Introduction of Author and IRA Expert Ed Slott
  2. Don’t Use Roth IRA for College Unless You’re Secure in Retirement
  3. 529 Plans Considered in Financial Aid Formula, Roth IRAs Are Not
  4. Unused Funds in 529 Are Subject to Tax and a 10% Penalty
  5. Check and Double Check Accuracy of Beneficiary Forms
  6. Congress Didn’t Want IRAs Extending Beyond the Life of the Owners
  7. Life-Insurance Policy Can Provide Tax-Free Income for Your Children
  8. Charitable Trust is a Way to Simulate Stretch-IRA Distributions
  9. Use IRA Funds in Your 60s; Take Social Security After Age 70
  10. Bad Things Happen If Beneficiary Forms Are Out of Date

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

1. Introduction

Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg, along with CPA and attorney Jim Lange, and tonight, we welcome America’s top IRA expert, Ed Slott, back to the program. Ed’s been called the best source for IRA advice by the Wall Street Journal. Ed runs two popular websites: irahelp.com and theslottreport.com. He’s authored many best-selling books, including The Retirement Savings Time Bomb (and How to Defuse It). Ed also writes personal finance columns for several publications, presents continuing professional education IRA seminars around the country, and you might have seen one of his retirement rescue specials on television on PBS. Now tonight, Jim and Ed will be covering a number of topics, including whether the Roth IRA just might be a better vehicle for college savings than a 529 plan. They’ll also talk about Ed’s most recent book, Ed Slott’s Retirement Decisions Guide for 2015: 125 Ways to Stretch Your Wealth. Now, we’d love to hear from you tonight. Give us a call with your questions and comments at 412-333-9385. And now, let’s say good evening to Jim Lange and welcome to Ed Slott.

Jim Lange: Welcome, Ed!

Ed Slott: Hi, Jim! Great to be here.

Jim Lange: It’s always great to have you. And by the way, for our audience, when Dan says that you’re the number one IRA expert in the country, that’s clearly true. It’s hard to measure who the top guru is, but certainly, in number of books sold, speaking fee commanded, and then the number of financial professionals who follow you at your excellent workshops, both the two-day ones and other information products that you offer for both financial professionals and consumers, I think you’re just doing a great job of providing a lot of great information for a lot of people.

Ed Slott: Well, thanks, Jim.

Jim Lange: And then Dan mentioned the most recent book that you’ve done, at least that I know about, which is Retirement Decisions Guide, and if you do get that, again, that’s Ed Slott’s — you can get it at Amazon — Retirement Decisions Guide, make sure to get the 2015 version because it’s the most up-to-date, and I like the way that it’s written. It’s kind of like problem/solution, problem/solution, and then Ed’s take on it. So, congratulations on another great book.

Ed Slott: Thanks. It’s a guide to raise questions and awareness, but it has a little something for everyone, and you can really get through it quickly and probably get your question, whatever it is, on retirement answered quickly.

Jim Lange: Well, recently … and I get your newsletter for professionals, and by the way, I know we have a number o … actually, quite a few financial professionals listening, and it is a no-brainer. You have to get Ed’s newsletter. It comes out monthly. I get the hardcopy one just because I’m old-fashioned and I prefer that, but it’s always a wonderful source, and, to me, it’s kind of a necessity of being a financial advisor, and that is available at www.irahelp.com, which is Ed’s main website. But anyway, so I get it, and the title of the article is “Roth IRAs: The Ultimate College Savings Vehicle.” So here, I think of myself as pretty much of a Roth IRA expert. I’ve written a dedicated book on Roth IRAs. I’ve done many articles on Roth IRAs, and boy, that article just hit me. Wow! This really makes a lot of sense that a Roth IRA, in many, if not most, circumstances, is going to be a more effective method of funding your child’s or grandchild’s education than a 529 plan. I said, “Ed, this is such terrific information. Could I have your permission to reprint it in my newsletter?” Of course, giving credit to Ed. And he said yes. But I thought that that would be a great thing to talk about. So, Ed, can you tell us, or our listeners, why Roth IRAs might be a great alternative that might even be better than a classic 529 plan for funding their children’s or grandchildren’s education?

2. Don’t Use Roth IRA for College Unless You’re Secure in Retirement

Ed Slott: Well, let me start with the opposite, why it’s not a good idea, so we can get that off the table. It’s probably not a good idea, if you’re approaching retirement, to use your retirement money for your child or grandchild’s education unless you absolutely feel you won’t need it for retirement, because that’s for your retirement. Remember, when it comes to education, they can get loans for that. You can’t get a loan for your retirement. But that being said, if you’re going to help anyway, and it’s the only money available, it might be better than the classic 529 plan. I mean, the 529 has its advantages, but, in general, it’s not anywhere near as flexible. A Roth IRA, a qualified distribution (I should say) from a Roth IRA can be used for anything. 529 plan distributions must be used for education, or you get hit with a tax and a penalty. So, you’re limited there. Plus, 529s, to be effective and raise a lot of money, you have to really start it early. Some people start it, Jim, as you know, when the child is born. You don’t know if that child’s going to college or is going to have a sibling going to college, or maybe they’ll be a dropout like Bill Gates. So, you don’t know, and you don’t know what college they’re going to go to. Although 529s have come a long way, it used to be, if you remember, Jim, you had to select from maybe just the schools in your particular state. But now it’s more universal. But still, you were limited and you didn’t know, if you started for a newborn, or 2- or 3-year old, where they would end up.

Roth IRAs, if it’s a qualified distribution, and that means the money that can be taken out of a Roth IRA absolutely tax- and penalty-free. If you have that money, it might be better to use that money — again, if you don’t need it for retirement — as opposed to the restrictions of the 529 plan. For example, on Roth IRAs, most people are still not aware, even though this rule’s coming up soon on almost 20 years old … the Roth IRA’s in 1998 started so they’re almost 20 years old. The actual contributions you make to a Roth IRA, not the earnings, the actual contributions you can make each year, that’s $5,500 now or $6,500 if you’re 50 or over, can be withdrawn anytime, for any reason, tax- and penalty-free. The actual contributions, you don’t have to 59½. There’s never a penalty. Most people, I’d say even some financial advisors, don’t know that rule, and I’m floored by it. I mean, you can just take that money out. The contributions, yes, the actual money you contributed. So, let’s say you contributed — just to make it even — $5,000 a year to your own Roth IRA, and you did that for 10 years. Forget about the growth. That means $50,000 of contributions that can be taken out absolutely tax- and penalty-free. No holding period, no age limitations, no penalties, nothing. So, that’s a source of funds.

Plus, those funds don’t count for the FAFSA forms. Many people may be aware of that. These are forms that pretty much anybody that goes to college has to fill those out to see if you qualify for financial aid. Something called the EFC, which is the Expected Family Contribution. In effect, if you’re going to need financial aid, they use a formula to … and it includes 529 plans, strangely enough, but not Roth IRAs … to see how much you’re not entitled to. So, for that reason, a Roth IRA may be a better funding vehicle, again, if you don’t need it for your own retirement. But even after the contributions, if you have conversions, because college is a lot more than $50,000 for some people, and you’re not going to get that unless you’ve been contributing a long time. You’re not going to get that with just annual contributions. So there may be conversions involved, and those could be big dollars.

You could’ve converted a hundred thousand, two hundred thousand, a million. If you converted any money to a Roth IRA and have had that converted funds in the Roth IRA for five years, that money is available tax- and penalty-free. Not the earnings, again. So, you could amass a lot of money in a Roth IRA that can be used for anything, no holds barred, no restrictions, college, you could bet it on a horse if you want to, and there’s no repercussions. So, in that respect, you can do whatever you want. When your child’s 18, you can say, “You know what? Now, I think he’s going to go to college, or not, and maybe I’ll use that money.” Or you still could use a 529, but the 529 has those restrictions. So, those are some of the ways a Roth might be a better funding vehicle, and I’ll say it again, I think for the fourth time already, if you don’t need it for your own retirement. You come first. Your retirement, if you’re the one that put this money away for many years, hopefully, that money is for your retirement.

Jim Lange: I think that’s terrific advice. I want to go back for one thing, though, to make sure that this is clear. You used the example $50,000 in a Roth versus $50,000 in a 529, and you said — and if I understand you right — if you have $50,000 in the 529, the formula that the school uses for financial aid is going to consider that a resource and will potentially reduce the amount of scholarship or loans to your child or grandchild.

Ed Slott: Yeah. It seems counterintuitive, right?

Jim Lange: Yeah, it does.

Ed Slott: Like you’re doing the right thing. So, why is it the wrong thing?

Jim Lange: Right. But if instead of putting that money in a 529 plan, let’s say that you had that money in a Roth, and, like you said, it can come out penalty-free under, you know, the original contribution. If it’s in the Roth, then they’re not going to penalize the …

Ed Slott: Right.

Jim Lange: So, that reason alone might be significant, and then …

3. 529 Plans Considered in Financial Aid Formula, Roth IRAs Are Not

Ed Slott: If you’re relying on the FAFSA form for financial aid, yes, and it seems like, like I said, a non-productive rule, a nonsensical rule, really. You’re almost penalized for doing it with the vehicle set up by the government.

Jim Lange: Yeah. Now, I know that you are a big fan of tax-free …

Ed Slott: Right.

Jim Lange: … so ideally, if somebody has maxed out their Roth contribution, and let’s say that they’ve either maxed out, or it is no longer appropriate to do a Roth IRA conversion, and let’s say that there was still money left over, you wouldn’t have a problem with doing Roth and a 529 plan, would you?

Ed Slott: No. But again, the 529, you’re taking somewhat of a risk because, again, I don’t know how you see it, but I see most clients want to do it as soon as somebody’s born, and you don’t know what’s going to be in 17, 18 years.

Jim Lange: Yeah. Now, maybe if you have a bunch of children or grandchildren, it’s not as bad because you could shift it back and forth.

Ed Slott: Right.

Jim Lange: But I think that your …

4. Unused Funds in 529 Are Subject to Tax and a 10% Penalty

Ed Slott: The problem is, if you don’t use it, then you get penalized, because then you have the money in there. You’re not using it for education. You get a tax and a 10 percent penalty, you know.

Jim Lange: Yeah. Anyway, I just thought that that was such a great insight, and I guess I’ve even had clients ask me that through the years, and then your article is just so clear. It’s “Hey dummy, if you only can afford to contribute to one of them, and you want to maintain the most flexibility,” and the other thing is, let’s say that you put in that $50,000, and maybe you get laid off or you’re not in as great a position as you thought you were and you say, “Hey, I just need it for me,” you can do that. If in the 529 plan, if you take it out for anything other than education, tax and penalty.

Ed Slott: That’s right, and there’s another situation. You know, I talked about younger parents, but it’s common now … well, I don’t know how common, but I’ve seen it, where people over 59½ are now paying for college because they’ve had kids later in life, or for whatever reason. If you have a Roth five years and you’re over fifty-nine-and-a-half, then not only the contributions, not only the conversions, but even the earnings can be withdrawn tax and penalty-free from a Roth after fifty-nine-and-a-half if you’ve held the account for five years. So, for people listening, say, in their sixties still paying college, or have the bill hanging over their head, it can be used for that.

Jim Lange: Yeah, I actually think that that’s great information. So, what I’d like to do now is to talk about an actual case of mine that came in the door the other day, and to get your take on it, if it’s OK?

Ed Slott: Yeah.

Jim Lange: So, the client that came in …

Ed Slott: The clock’s ticking! The meter’s running. You’re looking for a consultation? We could do this on the air.

Jim Lange: OK, I’ll make sure to charge the client!

Ed Slott: All right.

Jim Lange: And your rate, I would imagine, is pretty darn high!

Ed Slott: Yeah, double what I charged you last year!

Jim Lange: OK! But anyway, his dad had died, owning a significant IRA, and the dad was 95 years old and left it to, let’s say, kids equally, and the kids both had grandkids, one was in a position to disclaim to grandkids and the other needed the money, but Dad never filled out a beneficiary form, and the question is … and I think that one of the reasons why I ask you is because I sometimes get so excited with some of the more subtle things, and then you sometimes just say, “Hey dummy, you have to fill out the beneficiary form!” So, I thought that this might be a good example of the tax treatment that the children can expect if it wasn’t done right, like this time, when you have no beneficiary form versus had the father filled it out properly, which is, let’s say, naming each child equally with the right to disclaim into a well-drafted trust for grandchildren.

Ed Slott: Well, you said the father was 95?

Jim Lange: Yeah, the father was 95.

Ed Slott: And so, the beneficiary, in effect, did it default to the estate?

Jim Lange: Well, that’s actually an issue. In this case, both the intestate law of Pennsylvania would be children equally, and that is also the bank’s position that it would go to the children equally, and the will says children equally. So, who’s going to get it I don’t think is in question. The question is at what rate they’re going to have to make withdrawals?

Ed Slott: Well, it depends. If they put in as the default beneficiary, then it’s treated as if they were named. What’d you say? There were two primaries, 50/50 each, or …?

Jim Lange: Well, yeah, but remember, Dad never filled out a beneficiary form.

Ed Slott: Right, but what does the law say? That the kids split equally the default of the statute?

Jim Lange: Yeah, that’s what the statute says.

Ed Slott: Right. So it’s treated. If that’s how they get it through the statute, like as a default provision rather than it goes to their estate, then they’re treated like they were named on the beneficiary form like he had done it right, 50/50 each. So, they would each get 50/50. The problem is, if they disclaim, they may not … one wanted to disclaim, refuse the inheritance to have it go to the grandchild. That’s probably not going to happen because there’s no contingent beneficiary named anywhere.

Jim Lange: Yeah, that’s right, and if you don’t have the statute, then it would end up going to the estate, and then they would have a very rapid distribution.

Ed Slott: Well, I looked it up while you were talking. It’s 4.1 life expectancy. It’s worse than if he died before 70½, where at least he would have gotten five years!

Jim Lange: Yeah.

Ed Slott: So, it would all have to come out within about four years after death, if it goes that way. But from what you’re saying, it looks like they are designated beneficiaries. The problem is if one wants to disclaim … the one that doesn’t want to disclaim is fine. He’ll be able to take it and stretch it over his life expectancy if he wishes. The one who wants to disclaim, it’s kind of strange because the one who doesn’t want to disclaim, who needs it, probably won’t do the stretch because he needs the money! And the one who wants to disclaim, if he disclaims, it’ll probably go back to the estate because there’s no contingent beneficiary, which means it could go to his kids, but they’ll have a rapid payout.

Jim Lange: Umm-hmm.

Ed Slott: And we don’t even know if it’ll go to his kids. It depends on what the guy’s will says now.

Jim Lange: Right. Basically, the guy’s will said, “Children equally per stirpes.”

Ed Slott: Oh, OK. So, it would go to his children, but what would happen, for that one second in time, it would actually go through the estate to his children, which means there’s no designated beneficiary if he disclaims, and those kids would have to take it out over about three or four years.

Jim Lange: Which means there isn’t much benefit to disclaiming.

Ed Slott: Right.

Jim Lange: Now, why don’t we contrast that with had it been done right?

5. Check and Doublecheck Accuracy of Beneficiary Forms

Ed Slott: Had it been done right, the right way, this goes for anybody, and I see this a lot. I mean, it’s so strange that you bring this up — not strange, actually, common — but I mentioned checking beneficiary forms. As you probably know, in every seminar, in every program, every TV show, every radio show, every seminar, and everybody on my staff is sick of hearing me talk about it, yet it’s still the single biggest issue that comes up. People not checking beneficiary forms. So, if you’re listening to this, these horrors happen every day. You save the money for 20, 30, 40 years. This 95-year-old may have saved it for 50 years. Who knows? And if you’re putting that much effort in a lifetime of saving, go the next step and check beneficiary forms. Make sure you have them, Number 1, for each IRA you own. Make sure they’re current, up-to-date. They change as life changes.

Jim Lange: Yeah, and in our law firm, we don’t even let clients fill them out. We fill them out ourselves because that way we’re sure that they get done right.

Ed Slott: Right, and they have to be updated for what I call “life events.” You have a birth, a death, a marriage, a divorce, a beneficiary dies, a change in the tax law, a beneficiary’s born, you had a new grandchild. You know, these events that happen in everyone’s life, and they have to be taken into account. So you have to make sure it’s current, but then go a step further. As Jim just said, if the advisor does it for you, make sure you have both primary and contingent in case you want to disclaim, or a beneficiary wanted to disclaim, you’ll have a path for the contingent beneficiary to get it to the next generation. Now, that’s probably not going to happen in this case Jim mentioned because they didn’t do that planning, a simple thing by naming a beneficiary and a second, or what we call, “contingent beneficiary.”

Jim Lange: And Ed is a wealth of information in a number of sources, and I’m going to mention a couple of them. The most recent is a book called Retirement Decisions Guide, and if you get it, make sure to get the 2015 update, which actually is different. In fact, one of the questions that’s coming up is going to be on one of the updated issues. My favorite book of Ed Slott is The Retirement Savings Time Bomb, and that, to me, is just classic Ed Slott. He’s done multiple editions, and I would give the most recent edition, which, I believe, is 2012, of The Retirement Savings Time Bomb. The other resource, and I would say that this would be appropriate for both financial professionals and for consumers, is Ed’s website, www.irahelp.com. And for the financial professionals listening here, I think it’s really just essential to get Ed’s newsletter. In fact, we just spent probably 20 minutes talking about one of the articles on why Roth IRAs are better than 529 plans in many situations. So, again, Ed just has an incredible wealth of information available, either free or not much.
Ed, one of the things that we have talked about in the past, and I thought maybe you could give us an update, and something that scares the bejeevers out of me, is some potential legislation that might be coming down the road that would limit the ability of the non-spousal beneficiary — that is, the children and the grandchildren, in most cases — to stretch the IRA. Do you know what the status, or do you think?

Ed Slott: No, same as last time, but I’ll tell you this. The provision is out there. It’s already worded, and you know, they have the right section to put in the code. It’s already a done deal. They just have to insert it in a bill that becomes law, and they’ve tried the last few times. I’m surprised it didn’t get in the trade bill, to be honest with you, because they slipped another retirement provision into the recent trade bill that was just signed on the 10 percent penalty exception for public safety employees. I’m surprised that one didn’t get thrown in. So that one’s with a group of provisions hanging out on the sidelines, and at some point, it’s going to get thrown in when it can be done, I guess, politically or legislatively, and I think that’s a done deal. It’s just a matter of when.

Jim Lange: Well, assuming that’s true, and I happen to agree with you, why don’t we talk about what the implications of that are, how that would work, and what, if anything, somebody can do about it? So, let’s just say, for discussion’s sake, that our listener is sitting there with a $500,000 or a million dollar or a smaller number, bigger number, it doesn’t matter, but let’s assume that it is possible, even likely, that they will not die before they spend all that money. So they are going to leave some of their IRA or Roth IRA money to their children, and let’s assume that their children get the best advice. What would be the difference of the treatment of that money for the children under, let’s say, existing law and under this law that you say is already worded, it’s already ready to go, all they have to do is insert it, and you said you were surprised it’s not even law already.

Ed Slott: Right. They just didn’t have a place to insert it. So, what would be the effect? Well, going back to what we talked about in the last segment, not checking beneficiary forms? If you’re not checking beneficiary forms, it has no effect on you because you won’t get that stretch IRA anyway, which is most people. So, you know, most people are their own worst enemy with that, or maybe they don’t have a financial advisor that does do this kind of work and check, like you just said you do with your clients. So, that’s the first step. You won’t get it without naming individuals, people, as a beneficiary, but let’s say you do everything right and they change the law. Well, the payout could be only five years. That’s the proposal — not could be, it would be. That’s what’s written. It’s limited to five years, and that’s that.
That means if you have a million dollars or even 10 million, whatever you have has to come out to the beneficiaries in five years. So you might want to change your planning, knowing that the tax is going to hit in a condensed period of time, a compressed period of time. It’s going to raise the taxes on the beneficiaries. So you might consider other options: taking the money out, and if you really want to take care … if you’re saying, “Well, that’s money I want to leave for my beneficiaries and I don’t need that money,” it might be more tax efficient to turn it into life insurance. Take it out, pay the tax, buy a life insurance policy. Your kids will get a life-insurance policy instead of an inherited IRA, and they’ll have more money, and more of it tax-free, no required distribution rules, no tax rules because it’s tax-free, and, as I just said, it’s tax-free. So the government, I feel, might shoot themselves in the foot because it’ll force people to do the planning they probably should have been doing all along anyway.

Jim Lange: Well, I have …

Ed Slott: Another option … yeah, go ahead, Jim.

Jim Lange: I agree with you for a lot of people, but let’s go back to the initial premise, just so people can understand how miserable this will be. And let’s use a million dollars because it’s a nice, even amount.

Ed Slott: Or even a hundred thousand, but the less it is, the less the impact, if it’s over five years.

Jim Lange: OK.

Ed Slott: So, if you have a smaller amount and you have several beneficiaries, let’s say you have a $200,000 IRA that you want to leave over. You figure that’s the amount that will be left. Everything else, you’ll spend. And you have, let’s say, four kids. Well, if they have to take it out over five years, and the five-year rule doesn’t mean you have to take out an even amount every year. It just has to be emptied within five years after death. But let’s say they did it every year, and they took out $40,000 a year split by four kids. Split by four children, that’s not that much. It’s $10,000 each. It’s not going to have a big impact.
But when you get into the big numbers as you’re talking about, Jim, a million dollars with maybe one beneficiary, that million dollars has to come out in five years and will push them into top brackets, and that starts a pinball machine of activity, if you know what I mean. In a pinball machine, all the bells and whistles start going off. All the lights and the flashing. What happens is, anything good on a tax return starts to get phased out because you’ve raised income over certain levels. You can start losing your medical deductions, or your Social Security can be taxed. You’ll start losing some of your itemized deductions. You might get even hit with the 3.8-percent tax on net investment income. You’ll lose your personal exemptions, tax credits, almost everything that’s pegged to your income for the year will start to kick in. That’s what I call like a “pinball-machine effect.” All the bells and lights and whistles start happening, and they’re all bad because you loaded up so much income in a short period of time.

Jim Lange: And what’s so ironic is this is likely to happen to people who have worked hard and saved all their lives …

Ed Slott: Right.

Jim Lange: … and they wanted to leave some money to their children, and I have feared this provision for a number of years. The way you’re talking now, you just think it’s a matter of time.


6. Congress Didn’t Want IRAs Extending Beyond the Life of the Owners

Ed Slott: Well, the reason I tell you this, if you look at the legislative history … not even legislative history, the congressional history on this. Congress never intended for an IRA to go beyond the IRA owner’s lifetime. It was created in a terrible time in our history, back in the late ’60, early ’70s, actually created in 1974 finally. But it was talked about for 10 years before that because big companies were folding. The big example was the Studebaker Packard company, that the people worked and had pensions for years, and they just got nothing. Forty years of work down the drain, and somebody said, “You know, these people need their pensions protected. If there was only a way they could take that money and put it into their own individual-type retirement accounts so it can be protected for them,” and that’s how the IRA was born, and it was meant as a vehicle to ensure people had retirement money to last them for the rest of their lives. The growth we have today, it was never meant to go on beyond their lives as an estate-planning vehicle. That is not what Congress intended. So they have no problem nixing this whole post-death benefit.

Jim Lange: And as I understand it, President Obama wants to nix it, the Republican Congress wants to nix it, and the only reason why it wasn’t nixed when it was voted on is because, at the time, there was a Democratic Senate that stopped it. It was something like 51 to 48.

Ed Slott: Right, yeah.

Jim Lange: So, if somebody does insert it, I do fear that it’s coming, and if you think about that, let’s take the worst example where it’s a million dollars and one beneficiary, that beneficiary, within five years of their parents’ death, is going to have to pay tax on a million dollars, and no matter how much tax planning you do, there’s just no great alternatives if somebody dies with a million dollars.

Ed Slott: Unless he’s lucky enough to start a business and lose a million dollars and taking an operating loss.

Jim Lange: There you go. Let’s go back to your proposed solution because what you had just mentioned over the air briefly, I don’t know if you remember this, but in our private correspondence, you more or less said the same thing, that the government might be shooting themselves in the foot …

Ed Slott: Oh yeah!

Jim Lange: … because it might force people to do what they should have been doing otherwise.

Ed Slott: Right!

Jim Lange: So, let’s say that you’re in this position that you have a substantial estate, you hate paying taxes, you don’t want your kids to pay a lot of taxes at your death, and let’s say that you could afford some money to alleviate this problem, and let’s say that you’re in reasonable health.

7. Life-Insurance Policy Can Provide Tax-Free Income for Your Children

Ed Slott: Well, I would pull down that million dollars of IRA, and it’s outrageous. You’d say, all the tax … we’re in the lowest tax rates you may ever see in your lifetime because, at some point, taxes have to go up. So even if you just lost half of it to taxes, $500,000, it still leaves you with $500,000, assuming you wanted that to go to your kids. You wanted the million to go. You weren’t going to touch that, but I have a better plan. You take the $500,000, you put it in a life-insurance policy, that might get you $5 million of life insurance. So, when the smoke clears, your kids don’t get a million taxable IRA, they get $5 million tax-free! Life insurance. It’s a no-brainer!

Jim Lange: Well, you know, I actually analyzed that in the third edition of the book that I actually just sent you today, and the one that we are saying that readers can get for free if they go to jameslange.com and they put in KQV in the offer code. But anyway, I actually analyzed the numbers, and I think in one of the situations, the kids were literally more than a million dollars better off if Mom and Dad bought life insurance, and nowhere near the amount that you were talking about. We were only talking about one million dollars of insurance, not five million. So the evidence was the quantitative proof that the life insurance is a much better plan, assuming, again, that you can afford to make that kind of gift.

Ed Slott: Well, the only reason I said you could afford to make it, because if you were saying, “I don’t want to touch that. I want that million dollar IRA to go to the kids.” That means you aren’t counting on that. There wasn’t a need for it for yourself. We’re only talking about the money you won’t need in your lifetime that you wanted to pass on.

Jim Lange: And Ed is the acknowledged top expert on IRAs and retirement plans in the country. His most recent book is Retirement Decisions Guide. It is very easy to understand. It is a wealth of great information. I would recommend that everybody get that and to be sure to get the 2015 update, which does have differences, two of which I’m going to talk about. Again, that’s Retirement Decisions Guide, by Ed Slott. Make sure to get the 2015 update. The classic Ed Slott book, which is my favorite, is The Retirement Savings Time Bomb, and I believe the most recent edition is 2012. Again, still very appropriate, and maybe, if not the best IRA book out there, certainly one of them. Ed’s website, www.irahelp.com, has just a wealth of information that I would recommend both financial professionals and consumers to utilize. For financial professionals, getting Ed’s newsletter, it’s a no-brainer. Here I am, you know, I think of myself as an IRA and Roth IRA expert, and then I get this article that just opened my eyes and made me look at Roth IRAs and 529 plans differently. So, anyway, Ed is a wealth of information, and I would encourage our readers and listeners to take advantage of that by Retirement Decisions Guide 2015 update, Retirement Savings Time Bomb, and Ed’s website, www.irahelp.com, and to get Ed’s newsletter.

So, Ed, if we go to your …

Ed Slott: Well, before we go there, I wanted to continue on that stretch-IRA thing, if they eliminate it.

Jim Lange: OK.

8. Charitable Trust Is a Way to Simulate Stretch-IRA Distributions

Ed Slott: There’s one other angle that may not appeal to everybody, but you were talking some big numbers and you said some people might not even need that money and want to pass it on to beneficiaries. Another angle is leaving it to a charitable trust. That is a way to simulate the stretch IRA even if they eliminate it. If you’re charitably inclined … actually, even if you’re not, the kids may end up with more, and you can actually combine the charitable trust strategy with the life insurance, but if you just wanted to do that, you leave it to a charitable trust. It accomplishes a few things. First, it protects it for your beneficiaries. The stretch IRA on its own does not protect it for your beneficiary, unless it’s done through a trust. If you don’t want to do that, and let’s say there is no stretch IRA, a trust won’t help you stretch it anyway. It’ll just protect it. But with a charitable trust, you leave the money to the charitable trust, and the charity pays out your beneficiaries the same as a stretch IRA would — similar — and they would get income for life. The only downside is, that’s all they would get. They would get the checks. If they needed a lump sum, they couldn’t get that, but they would get checks for the rest of their lives, and that’s a nice thing if you want to help the charity, but you also want to make sure your kids get taken care of for the rest of their lives. So, let’s say you have some kids that you worry might blow the money, might not be good with money, might not be careful. Even if they blow it one year, they’ll always get another check next year. So that’s an opportunity also where even if there’s no stretch IRA, leaving it to a charitable trust could accomplish the same thing and more.

Jim Lange: I agree with you completely, Ed, and actually, if you take a look at the book that I just sent you, I actually have a whole chapter on that, and somebody might be saying, “Well, gee, if the charity’s going to get the principle at the end, how could the kids end up with more money?”

Ed Slott: Well, they can, and probably, if you’re going to tell me your example shows that, it probably will.

Jim Lange: Well, that’s exactly what it shows, and here’s the reason. Just think of that million dollars. Let’s say that the tax on the million dollars, over the first five years, is $400,000. Now the kids only have $600,000 left to invest, and let’s say they get interest and dividends, et cetera, on that, but then they have to pay tax on that. Compare that to the million dollars staying in the tax-deferred environment, other than the distributions, which, like you said, are not all that different than the minimum required distributions anyway.

Ed Slott: Right.

Jim Lange: So, it works out. The example that I ran for the book, it worked out that not only were the children better off by hundreds of thousands of dollars, but as a bonus, the charity got $180,000 at the end. So that’s a great solution. Now, on the other hand, to be fair, is the, let’s call it, the conservative attorney, I don’t think I would draft that until they passed that law. In other words, right now, if you’re not charitable, the existing strategy works better than the charitable trust. But if you’re not going to do life insurance, or maybe, like you said, you combine the techniques, after they pass that, then … and very frankly, I’m anticipating an onslaught, because if they pass that, and Ed, we’ve done about two thousand wills, almost all of which have beneficiaries of IRAs and retirement plans, and many of them, frankly, should be redone, and I feel a fiduciary duty to anybody who I’ve done a will for to keep them up to date, and that might be a huge amount of work, but it could potentially save a lot of money.

Ed Slott: And again, with both of those strategies I mentioned — this is why I say the government’s going to end up shooting themselves in the foot — with life insurance or charity, the big loser is the government in both scenarios.

Jim Lange: Yeah, and I think that, you know, most all our listeners, whether you’re on the left side of the fence or the right side, I think all of you would prefer money going to either your family or the charity of your choice than the government.

9. Converting to Roth IRA After Age 70 Doesn’t Make Tax Sense
Ed Slott: And the government’s going to lose money a third way I didn’t even mention. You know, one way is with the life-insurance strategy, the second way is with the charitable strategy, but the third way is in people that I would encourage not to do Roth conversions, say, after age 70, because it wouldn’t be worth it if the money had to come out in five years after death. You know, the cost versus benefit wouldn’t be worth it to pay a big tax on a Roth conversion if you’re really doing it for the beneficiaries and they have to take it all out in five years. So, the government would lose again on all the money they would have got from people doing Roth conversions.

Jim Lange: Yeah, and that’s something that we … in our firm, by the way, we always run the numbers. So, we say, “OK, what if you do a Roth? No Roth? What if you convert all of it? What if you convert part of it?” And then the other added thing that we have to do now is to consider what would happen if they do change that law.

Ed Slott: Right. So if they changed it, I would tell people, if I had to put an age on it, somewhere around age 70, depending on the person’s health, I would still encourage Roth conversions because, like you, I’m a big Roth fan for younger people. But as you’re getting older, it won’t be worth it if you’re doing the conversion, say, for a grandchild or a child. It won’t be worth it.

Jim Lange: Right. The possible exception is, to me, my favorite years to do a Roth, which is after you retire, so you don’t have your income from your wages or your job or your self-employed business, but before 70, so you don’t have your minimum required distribution.

Ed Slott: Right.

Jim Lange: And that brings us to the next thing I wanted to talk about, because I don’t think of you as a Social Security expert, but in your book, you say, “OK, you can’t talk about IRAs and retirement planning without talking about Social Security,” and you talk about the, in effect, integration of the best Social Security strategies and IRA strategies, something that I’ve been talking about and that I include in virtually all my workshops. So, can you tell us a little bit about, let’s say, the interaction or why it’s not …

9. Use IRA Funds in Your 60s; Take Social Security After Age 70

Ed Slott: Right. Well, my advice is to do the opposite of what everybody tells you! In a nutshell, just to make it simple, you’re better off using your IRA in your 60s and delaying Social Security. Now, I just had a call from a client today. You know, they say, “But I qualify! Why wouldn’t I take it?” Because every year you delay, you’re going to get more and more by somewhere between 8 and 11 percent, depending on the cost-of-living inflation adjustment. So if you wait the optimum time, if you can, not everybody can, is don’t touch Social Security until 70. If you do that, you’ll get the optimum amount. Plus, if you need money in your 60s, use your taxable IRAs. Yes, you’ll pay tax, but you’ll be eliminating the tax you might pay on required distributions by withdrawing it in your 60s, and then you shift over to Social Security, you’ll get a lot more at age 70 and over, and it’ll be less affected by your IRA. Now, of course, that’s a general rule. There are exceptions all over the place, like this person I was speaking to today said, “Well, what if I’m sick and I don’t think I’m going to live that long?” Well then, take the Social Security. You know, it’s a bet, how long you’re going to live, but if you think you have a long life expectancy, and sometimes you never know, if you wait until 70, because this woman said to me, “But I don’t want to wait until 70. I qualify now!” I said, “That may be true, but if you live a long time, you might regret getting those smaller checks for 20 and 30 years as opposed to the bigger checks.

Jim Lange: And the other thing is, there’s often some very interesting strategies for spousal IRAs.

Ed Slott: Right.

Jim Lange: So, for example, if she was a widow, or if she was divorced, she could actually take a benefit on her, either deceased or ex- …

Ed Slott: Right, without hurting her own. Right.

Jim Lange: Right. So, she would continue to get those 8 percent plus cost-of-living raises.

Ed Slott: Right, on her own.

Jim Lange: On her own, and even forgetting divorced or widowed, let’s just say that there’s a married couple and they’re both the same age, and let’s use the old sexist paradigm where the husband was the primary earner. At 66, I would agree with you, it wouldn’t make sense for him to start collecting, but if he does something called “apply and suspend,” then she can get a spousal benefit, which is half of his, and that would continue between 66 … so, let’s say, he was entitled to $30,000. She would get $15,000 a year between 66 and 70, and that wouldn’t hurt his at all. He still gets his 8 percent raises. And here’s the kicker: She still gets the 8 percent raises on her own record.

Ed Slott: Right, right. So, there are ways to coordinate with the IRA, but I see no problem taking the IRA in your 60s before you have to. The reason I say the 60s, not before 60s, because before 60, you have a 10 percent penalty. After your 60s, there’s the required distributions, which you must take. But in the 60s, that’s really the sweet spot for taking down that IRA money and delaying the Social Security if you can.

Jim Lange: Yeah. I actually was really pleased to see that in the book because very few advisors talk about Social Security, and it really is an important thing, and you had mentioned earlier, well, it might not be so good if you’re in bad health and you’re going to die early. On the other hand, let’s say that you’re married and just one of you is in bad health. It’s really important that the survivor have a good Social Security base, and the way you do that is by holding off or using that apply and suspend technique.

Ed Slott: Right, and that’s something else, you know, that may go away. But it’s here now.

Jim Lange: And everybody that I’ve talked to said if it does go away, that they will, in effect, protect the people who have relied on it to some extent.

Ed Slott: Right.

Jim Lange: Larry Kotlikoff has been on the show a number of times, and he is very articulate, and he actually wrote a book on Social Security that, I think, was actually a bestseller.

Ed Slott: Yeah, yeah. I’ve seen it, yeah.

Jim Lange: All right. So, we only have about two more minutes, but one more thing if … actually, I’ll give you a choice to either talk about the after-tax dollars in the 401(k), or anything else that you want to talk about.


10. Bad Things Happen If Beneficiary Forms Are Out of Date

Ed Slott: Oh, I’d rather spend the last minute begging people to check their beneficiary forms. I don’t know what else to say, but let me tell you some of the bad things that happen if your beneficiary forms are not updated. It won’t happen to you because you’ll be dead, but here’s what’ll happen to your family. Somebody in your family will get disinherited. One child may get more than the other. Your money could go to an ex-spouse, or go to somebody you don’t even know. All these bad things can be avoided if you check your beneficiary forms on every IRA, every Roth IRA, every 401(k), and annuities and life insurance, too. Anything with a beneficiary form should be checked and updated. Have a primary beneficiary or two or three, whatever you want, and secondary contingent beneficiaries, and make sure your beneficiaries know where to find them after you die, because if they can’t find them, it’s the same thing as if you didn’t do anything.

Jim Lange: OK. Again, this has been just a great source of information. Ed Slott, who is the author of Retirement Decisions Guide, and I would get the 2015 update. He also wrote the classic book, Retirement Savings Time Bomb. His website is www.irahelp.com, which I would recommend everybody go to. Financial professionals, this is a no-brainer. You should be subscribing to Ed’s newsletter, and you can get access to that at www.irahelp.com.