IRMAA Mia! Not Another Bill!
by SGL Financial
Our 2 Cents – Episode #269
IRMAA Mia! Not Another Bill!
A new episode of Our 2 Cents is here, and this one is packed with plenty to talk about! Today, Steve and Gabriel are diving into quick financial hits, October’s financial planning must-knows, the Medicare surcharge that could catch you by surprise, and end with a great listener question. Press play and get in the know. Your next financial insight starts here.
- Gabriel’s Quick Hits:
- Social Security benefits are set to increase by 3.6% in 2027 thanks to the annual cost-of-living adjustment (COLA). What does this boost mean for your finances?
- Candy prices are getting scarier, but Halloween shoppers aren’t backing down. Let’s unwrap what the data shows.
- Feeling pressured to tip? You’re not alone. Discover how tip fatigue is shaping consumer behavior.
- October Financial Planning Calendar:
- Education and goal funding take center stage this month. Here’s what to keep on your radar.
- IRMAA: The Gift That Keeps on Taking:
- Medicare has a costly little secret, and it could be hiding in your income! Could you be paying more than expected? Find out what triggers Income-Related Monthly Adjustment Amount (IRMAA) and how to plan ahead.
- Listener Question:
- “What are some best ways to reduce assets that have reached Illinois Death Tax level?” – Grace
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Podcast Transcript
Announcer: You’re listening to Our 2 Cents with the team from SGL Financial, building wealth for life. Steve Lewit is the President of SGL Financial, and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Well, welcome everybody to Our 2 Cents. You’ve got Gabriel here and Steve here. Welcome back. We are here to talk about all sorts of financial topics and news and interesting items that we think you’ll find valuable and helpful. So without further ado, I’ll say hello to Steve.
Steve Lewit: Hello to Gabe.
Gabriel Lewit: Back to you.
Steve Lewit: And hello to everybody.
Gabriel Lewit: And we are wishing you a wonderful start or end to your week whenever you may be listening to our show here this morning.
Steve Lewit: And a wonderful end to the summer and the beginning of fall.
Gabriel Lewit: Yes, exactamundo. Believe it or not, almost Halloween. We’ve got pumpkins decorating the street. I’ve got a little candy update for you. The cost of candy is going up. We’re going to talk about that here, just a little tidbit here in just a moment. But today we’re going to focus on our October financial planning topic, which might not impact many of you out there, but it’s still interesting nevertheless. So we’re going to talk about that. We’re going to talk a little bit about Social Security and the official COLA increase that you’ll receive for 2027 coming up.
Steve Lewit: Yeah. Yay.
Gabriel Lewit: We’re going to circle back and dive a little deeper into some tax planning items here for the rest of the year as it is full-fledged tax planning season at the moment. And lots of ideas here to save you money on taxes. And then of course, if we have time, which I think we will today, we will talk a little bit about some listener questions. So that’s our lineup here for you today. We hope to keep you engaged and entertained for the next 25, 30 minutes.
Steve Lewit: Well, you’ve got me working very hard today. I was just here. I thought we were going to just take it easy today.
Gabriel Lewit: I get that sense.
Steve Lewit: Right.
Gabriel Lewit: Yes.
Steve Lewit: Now we’ve got topics and we’ve got plans.
Gabriel Lewit: We do, right? Lots of things here that we need to talk through here this morning. Our listeners demand it.
Steve Lewit: You are such a good director, leader of this conversation.
Gabriel Lewit: Well, thank you. Okay. So let’s dive right in here. Some of the items I mentioned that are just generally just quicker updates, news to use, if you will. We’ve got Social Security cost of living adjustment called the COLA is going to increase your payments by 3.6% in 2027, which happens to be the highest COLA in the last four years.
Steve Lewit: Yeah.
Gabriel Lewit: So, this will start in January 2027.
Steve Lewit: And at the rate inflation is increasing, I think next year’s COLA might be bigger.
Gabriel Lewit: Well, we’ll see. At the moment, this means the average Social Security recipient benefit will increase by a grand total of $75 per month. Okay. That’s as producer John here said he had to buy some gas for his car recently and regular gas was $4.99.
Steve Lewit: Regular gas.
Gabriel Lewit: That’s a deal by the way. It’s not $5. It’s $4.99.
Steve Lewit: Yeah. And folks-
Gabriel Lewit: Okay, it’s-
Steve Lewit: … I want you to know Johnny shops for the cheapest gas prices. So $4.99 is rock bottom.
Gabriel Lewit: Yeah. Well, there goes your COLA. Okay.
Steve Lewit: Your COLA went up to gas COLA, right?
Gabriel Lewit: Yeah. Yeah. So anyways, that’s the news to use on the Social Security COLA. Everybody was on Social Security typically was eagerly anticipating what their COLA raise would be, but now you know it’ll be about 3.6%.
Steve Lewit: We’ll take it.
Gabriel Lewit: Well, hey, it’s better as I often say than a kick in the pants.
Steve Lewit: Let me see. Well, I think I’ve never said that.
Gabriel Lewit: You’ve never said that’s better than a kick in the pants?
Steve Lewit: No.
Gabriel Lewit: You’ve never heard this?
Steve Lewit: I think I’ve heard it.
Gabriel Lewit: Producer Gabby, it’s an old phrase. I’m an old soul.
Steve Lewit: How do you know this phrase? This is like from the 1890s. Where did you get that from?
Gabriel Lewit: No, I’m not the only one that has heard that phrase. I’m just going to put that out there.
Steve Lewit: Oh, my gosh. Digging into memory lane.
Gabriel Lewit: Yes. All right. Well, the other thing that will not stretch your Social Security COLA very far is the fact that candy prices are already surging nearly 8% higher than last year. And candy is not cheap as it is. So if you go out to fund these big buckets or baskets of candy for all the Halloween trick or treaters, it may chew up your COLA for next year.
Steve Lewit: Oh, my gosh. I go for Halloween, I go, where do I go? I go somewhere that’s just buy bags of candy. So I’m not aware of candy prices, but 8% is huge.
Gabriel Lewit: Yep.
Steve Lewit: Imagine you’re getting an allowance of $5 a week and you go to your parents and say, “Mom and dad, I can’t buy anything for $5 a week anymore.”
Gabriel Lewit: Yeah, there you go. I mean, if your seven-year-old is talking to you about inflation, maybe you’ve got your future financial mind at work there.
Steve Lewit: Yeah. A little advisor.
Gabriel Lewit: Yeah. Well, that’s the news on COLAs and inflation on candy. So hopefully that was helpful for you. The other thing, this was just a tidbit here. There was an article that came out that said, how much do various people tip in various states? And actually the reason I was thinking about this was that producer John, when he said he was filling up for his $4.99 gas, he said he went inside to pay his gas payment, prepay it, and it asked him to tip for the prepayment of his gasoline that he was self-pumping himself.
Steve Lewit: Yeah. I just-
Gabriel Lewit: So, the whole tip thing is getting, as we’ve talked about before, a little bit out of control still. People still like to complain about these, I think.
Steve Lewit: Well, I still like the-
Gabriel Lewit: Nobody likes them.
Steve Lewit: I still like the jar where you put the dollar in. I don’t like it in my face. I go to Starbucks and they say, “Oh, there’s another question you have to answer.” No, there’s no other question I have to answer.
Gabriel Lewit: Well, you know what it is and you know why that little plastic over the no button is really worn out on all these things like no.
Steve Lewit: Yeah, right.
Gabriel Lewit: No. People hitting it like six times. No.
Steve Lewit: I mean, it’s crazy. Look, I feel for people. I tip well in a restaurant. I’m not a cheapo, but I don’t want to be pushed too.
Gabriel Lewit: Yeah.
Steve Lewit: I mean, you go to Chipotle and you want to leave a tip. Everybody wants a tip now.
Gabriel Lewit: Yeah, sure do.
Steve Lewit: Even the person that does nothing behind the counter at BP wants a tip for sitting there.
Gabriel Lewit: While you pump your own gas.
Steve Lewit: While you pump your own gas. I mean, it’s crazy.
Gabriel Lewit: Yeah. I really don’t really get me going on this topic here, but yeah, there’s places that should request tips and places that shouldn’t. There’s just no more distinction between them anymore.
Steve Lewit: Yeah, but that’s not what this article was about.
Gabriel Lewit: Well, yeah, the article was saying us Illinoisians here are amongst the least tipping-
Steve Lewit: We’re not good tippers.
Gabriel Lewit: … of any state, short of California. We’re like the second worst behind California and Seattle.
Steve Lewit: Really?
Gabriel Lewit: Yeah.
Steve Lewit: I missed that, that California was a low tipping.
Gabriel Lewit: Yeah. California, 17.1% is the average tip. And in Illinois, we’re at 18.8.
Steve Lewit: That’s not bad.
Gabriel Lewit: Yeah.
Steve Lewit: It’s close to 20%.
Gabriel Lewit: Well, all of our surrounding Midwest neighbors are all 20% plus. So us Illinoisians, we’re cheaping out.
Steve Lewit: We’re good money managers. Maybe. I don’t know if we look at it. Maybe it’s not cheaping it out. Maybe it’s just being rational and good money managers.
Gabriel Lewit: Correct. Maybe we are more rational than other states.
Steve Lewit: Yeah. Yeah.
Gabriel Lewit: Exactly.
Steve Lewit: Exactly.
Gabriel Lewit: Well, hey, now you know. All right.
Steve Lewit: That’s called justification.
Gabriel Lewit: So those are our quick hits here for today. I’ll give you a little something to talk about here when you’re out and about, but let’s jump into our main planning conversation. It’s our financial October topic here. And as you recall, if you listen to our show regularly, every month of the year, we’ve been talking about different topics in the attempt to help you make these bite size changes and decisions each year. And so this month is actually going to be even easier for some of you because it may not apply to everybody out there listening to the show. The topic this month is education and goal funding. Okay. Education and goal funding. And let me explain what that is. I think the education part is pretty clear.
Steve Lewit: Well, it’s obvious. Yeah.
Gabriel Lewit: Okay. You’re saving up for something like college, right? Or sometimes even private schools.
Steve Lewit: Starting a business.
Gabriel Lewit: Well, education funding would be-
Steve Lewit: Oh, I’m sorry. Education. Right.
Gabriel Lewit: Yes.
Steve Lewit: I was thinking of education of learning how to start a business.
Gabriel Lewit: The other part, goal funding-
Steve Lewit: Yeah.
Gabriel Lewit: … would be for whatever other bigger financial goal that you may have for yourself. One of those might be-
Steve Lewit: starting a-
Gabriel Lewit: … starting a business, right?
Steve Lewit: Yeah.
Gabriel Lewit: It could be saving up for the car you want to buy in cash. It could be the roof replacement you need in three years. It could be whatever those things are that come to mind. Right? But the idea here is identifying things specifically that you know you’re going to need to spend money on in the near future, and then coming up with a game plan for how you’re going to save and pay for those. So again, education and goal funding.
Now, some of you out there, depends on how you pay for things, might often say, “Well, we don’t have any short-term things that we have on the horizon.” So I often go through this exercise with clients where we try to inventory these, because believe it or not, they actually are fairly predictable. For example, if you own a home, you can just start going through all the big ticket items in your home and you can inventory these and you can get a quick sense of whether or not there’s going to be something in the near term horizon that you might need to pay for. Right? So I do this exercise with clients, say, “How’s your roof?” “Oh, the roof just got replaced five years ago.” Okay, great. That’s probably not going to be a cost for many, many more years.
Steve Lewit: Yeah, but if the roof hasn’t been replaced-
Gabriel Lewit: Yeah, it’s original.
Steve Lewit: … for 16 Years or 20 years ago.
Gabriel Lewit: From 1970s.
Steve Lewit: Hey, maybe we should put a budget in for that.
Gabriel Lewit: Yeah. We’re likely playing with fire there and it’s going to be something that’s going to cost you in the very near future. Right? Same with your car. How are the cars holding up? Oh, this one’s on its last legs. It’s very different than, yep, we’re one year into a five-year brand new car payment. So you want to inventory these bigger expenses. You’ve got water heaters, you’ve got air conditioners.
Steve Lewit: You had one of those recently, didn’t you? What did you replace?
Gabriel Lewit: Lots of things. You’ve got washer dryers, you’ve got furnaces, right?
Steve Lewit: Yep.
Gabriel Lewit: The furnace is what I generally have to replace all the time because I think I have a lemon. That’s not the brand.
Steve Lewit: Is that the brand?
Gabriel Lewit: No.
Steve Lewit: I wouldn’t buy that brand.
Gabriel Lewit: Yes, the brand. Top-notch brand. High reliability.
Steve Lewit: Call Lemon today.
Gabriel Lewit: Okay. Well, yeah. So I’ve got a furnace that the motor keeps going out, so there’s that, right? What else do you have in your… If you have fridge, fridges can be expensive.
Steve Lewit: Oh, gosh. Yeah.
Gabriel Lewit: It’s your big appliances. What else? I don’t know. Yeah.
Steve Lewit: Well, driveways aren’t a big deal. But, yeah.
Gabriel Lewit: Sometimes driveways need to be replaced.
Steve Lewit: Yeah.
Gabriel Lewit: So, point being though, you can inventory all these very, very typical big expenses. And then the question is there anything on the horizon that you need to have a plan to pay for?
Steve Lewit: The idea is not to be surprised by it because we have people come in and say, “Oh, I need a new car.” And it’s like, “Well, you probably knew you needed a new car two years ago and just didn’t plan for it.”
Gabriel Lewit: Yeah, no. So that’s exactly the goal. I mean, the goal of planning as a whole is to have a predictable picture of where you are and where you’re headed.
Steve Lewit: And where the money’s coming from.
Gabriel Lewit: Where the money is, where it’s at-
Steve Lewit: Yeah.
Gabriel Lewit: … where it’s going to be in the future. And I like to say that you don’t generally have to have surprises, right? It shouldn’t be a surprise at 64 years old that you haven’t saved up enough for retirement. Okay?
Steve Lewit: I thought you were going to say something else. No, that should not be a surprise.
Gabriel Lewit: I mean, the whole point of planning is I have a 22-year-old client that’s planning their retirement. We know exactly as of today how much money they would need to have saved based on a current budget.
Steve Lewit: Right.
Gabriel Lewit: So, these things are designed, these exercises, what we’re talking about here for your financial planning homework here for October is to think through these bigger financial goals, these bigger ticket items as I like to call them.
Steve Lewit: Yeah. Let’s say you want to take a trip with your kids to Alaska, the whole family, and you’re taking 13 people on the trip. Where does that money come from and when are you going to take the trip?
Gabriel Lewit: Yeah. As one of these topics obviously is education funding. I had a client just the other day say, “I want to fund some college savings for my grandkids.”
Steve Lewit: Grandkids, yep.
Gabriel Lewit: Right. It’s very, very common. So this now became a savings goal, and we have topics here like savings for 529s. I had another client that just said, “I just want to save for a future house down payment for my kids when they’re 21 or 22, help them out. How do I do that? What’s the best way?” And we start getting into these conversations about, “Well, how much do you want to save? Do you want a full ride for college? Do you want to have a $100,000 down payment?”
Oftentimes people just think about a monthly amount that they can afford. So you can reverse that and say, “Well, I can afford $250 a month. Gabe, what would that grow to after 18 years of saving for college?” We can calculate that very easily, give you a sense of approximately how much that would be. But that’s the idea. The final piece here is how do you invest the dollars for these various goals? And it really does depend on the time horizon when you need this money, short-term versus medium term versus long-term, and then we can help determine the optimal investment mix for each of these specific goals that you might have.
Steve Lewit: Yeah. It’s like having your bucket list for financial projects. Instead of you retire, you say, “I want to go to Mount Everest. I want to take a trip around the US. I want to buy a sailboat,” whatever floats your boat, no pun intended. Financially, what is your bucket list financially? And lay it out and then plan it out.
Gabriel Lewit: Yeah.
Steve Lewit: And that way you get peace of mind, and you’re not surprised not only where you get the money from, but the tax implications of getting that money, which is going to tie into the IRMAA conversation.
Gabriel Lewit: Yeah. We’ll talk about that here momentarily. But before we switch gears, so folks, your homework, your assignment for your financial planning topic here for October is simply that, list out inventory, if you will, any upcoming goals or big ticket expenses that you can think of. If you have these already listed out, terrific. Give yourself a pat on the back or a gold star, whatever you have on hand. If you haven’t thought about these yet, start to write them down. Okay. It could be an Excel document. It could be on a piece of paper. It could be on an email you send to your financial advisor here at SGL Financial.
Write these down, let us know what you’re thinking about, what you’re trying to save for, and then we can better quantify this and make sure that even though these are smaller goals other than big picture goal like retirement, we can help ensure that you’re feeling on track for these as well month in, month out.
Steve Lewit: Well said.
Gabriel Lewit: Amen.
Steve Lewit: Amen.
Gabriel Lewit: All right. If you have any questions, of course, you can call us here, (847) 499-3330 or go to our website, sglfinancial.com. Of course, if you’d like to schedule a complimentary phone call or meeting with us to talk through any questions that might be on your mind, please reach out anytime. We’d love to talk with you. Okay, so let’s switch gears here. We wanted to circle back here. Actually, I think a couple episodes ago we planned to talk about this. Started to talk about it, ran out of time. We might be late, but we won’t forget.
Steve Lewit: Yeah.
Gabriel Lewit: Okay?
Steve Lewit: Yeah. We’ve been delaying this topic.
Gabriel Lewit: We had started talking a little bit, I think, about Roth conversions and we wanted to talk about a specific topic of Roth conversions called IRMAA, income related monthly adjustment amount. And what we want to focus on is this topic of, is it sometimes a good idea to pay an IRMAA surcharge when doing Roth conversions where sometimes people think that they should avoid paying these surcharges at all costs, but that might in fact be faulty thinking.
Steve Lewit: All right. So let’s back up a little bit here. IRMAA is the price increase for your Part B and Part D on your Medicare.
Gabriel Lewit: If your income is above a certain threshold.
Steve Lewit: That is correct. So what they do is they go back two years, they look at your marginal adjusted gross income for two years ago. Based on that, there’s a chart that I happen to have in front of me that says at certain income levels, you will pay an additional charge or additional increase for your Part B and your Part D. And it can get pretty considerable, Gabriel.
Gabriel Lewit: Yes, it can. So keep in mind your Part B, if you’re on Medicare, you have to pay for every month. It typically comes out of your Social Security. Your Part D prescription drug plan will depend on what plan you picked. But if your income, your modified AGI, is over $218,000 if you’re married filing jointly, you will be subject to a surcharge right around $81 for your Part B and $14 or $15, depending how you round for your Part D. So just call it roughly $100 more a month per person.
Steve Lewit: Per person.
Gabriel Lewit: Per month.
Steve Lewit: Per month.
Gabriel Lewit: For one full year.
Steve Lewit: For one full year.
Gabriel Lewit: Based on your income from two years prior.
Steve Lewit: Do you feel like you have an echo here?
Gabriel Lewit: A little bit, but that’s okay.
Steve Lewit: Okay. Yeah. So the idea in a Roth conversion is that, “Oh, I’m doing a Roth conversion, that comes out as additional income.”
Gabriel Lewit: And raises your modified AGI.
Steve Lewit: Raises your modified AGI. And then you got, “Oh, my IRMAA increase might be as much as $300.” What is the top? I don’t have it in front of me.
Gabriel Lewit: Well, the top IRMAA, no, I’ve yet to have a client ever hit, is if they earned married filing jointly, $750,000 a year or more in modified AGI is $487 a month more for your Part B and $91 a month more for your Part D.
Steve Lewit: Yeah. So it’s almost $12,000 a year, give or take. And that’s like an additional tax on doing the Roth conversion.
Gabriel Lewit: Well, essentially, yeah. So if you bump over, let’s just go back to the first IRMAA threshold or first tier, and it costs you another $100 a month for you and $100 a month for your spouse, that’s $200 a month times 12 months. It’s $2,400 more in costs per year because you bumped over that threshold.
Steve Lewit: Well, for that one year.
Gabriel Lewit: For that one year.
Steve Lewit: Yeah.
Gabriel Lewit: And so, if you do a Roth conversion and it bumps you over that threshold, it is essentially a fair way to think of it almost as an additional tax on that conversion.
Steve Lewit: Right. And the question always is, look, folks, IRMAA’s the most unloved woman in the world.
Gabriel Lewit: She is very disliked.
Steve Lewit: She’s very disliked.
Gabriel Lewit: Yes.
Steve Lewit: So, nobody wants to pay IRMAA, but how do you balance that, Gabriel? I want to do a Roth conversion. I want to get my money into the tax-free bucket because I think taxes are going to go up in the future, and when I die, I want my kids to inherit tax-free money. Is it worth paying the IRMAA? What do I do?
Gabriel Lewit: I was just going to say, by the way, I think IRMAA may be right up there with Uncle Sam.
Steve Lewit: Definitely.
Gabriel Lewit: Nobody likes these two. Okay.
Steve Lewit: Yeah. IRMAA is visceral. When I say to some clients, “If we do this conversion, you’re going to bump up one bracket on IRMAA.” “Oh, I don’t want to do that. No, I’m not paying IRMAA.” Well, then we have to do less of a Roth conversion, so which is the lesser evil, so to speak?
Gabriel Lewit: How you position that is exactly what happens. So you can attempt to do Roth conversions and stay under the first IRMAA bracket. And depending on your total income, let’s say you’re close to the IRMAA bracket, maybe you’re $30,000 away and you don’t want to bump over it. So you have to give yourself a little wiggle room typically on a Roth conversion in case your income projections are off. So let’s say you give yourself $10,000 of wiggle room in your projections. So you decide to do a $20,000 Roth conversion.
Well, that’s not bad, and you might be paying no IRMAA and you have a fairly low tax bracket, maybe 22%. It’s a good conversion spot. However, what’s the downside? If you had $2 million in IRAs, you did not convert very much of it. Right?
Steve Lewit: Yeah.
Gabriel Lewit: $20,000 out of two million is not going to move the needle very much as far as reducing your tax impact from your overgrown balance and pre-tax bucket of $2 million in pre-tax IRAs. So the question is is when you get to RMD age and you’ve only done these really tiny Roth conversions, you still have millions and millions of dollars in your pre-tax IRAs, you’re going to have to take RMDs, which will then bump you sizably into IRMAA thresholds regardless.
Steve Lewit: Now RMDs are required.
Gabriel Lewit: Minimum distributions.
Steve Lewit: Minimum distributions.
Gabriel Lewit: Yes.
Steve Lewit: And please do not write in and ask if required. Minimum distributions are actually required. They really are.
Gabriel Lewit: It’s amazing actually how many times we get the questions, “Hey, are RMDs required?”
Steve Lewit: Yeah, I get it all the time.
Gabriel Lewit: We’re like, “Well, let’s unpack this.”
Steve Lewit: Yeah, right. Let’s look at this more closely.
Gabriel Lewit: Yes. R for required.
Steve Lewit: Riff.
Gabriel Lewit: Okay. So yeah, you’ve got RMDs where if you don’t do Roth conversions, you’re forced to take money out called an RMD, and that will inevitably bump you into these IRMAA brackets anyways. At that point, however, you have no control to avoid or reduce them.
Steve Lewit: And double trouble if taxes go up in the future.
Gabriel Lewit: Yeah.
Steve Lewit: So right now, you might be in a marginal bracket of 22, taxes go up in the future and you’re in the marginal bracket at 28. Now you have to take that money out and you have to take it out at a higher tax rate and your kids get it at a higher tax rate and they got to take it out over 10 years.
Gabriel Lewit: So, let’s unpack this, folks. If you were in the 22% tax bracket and then you triggered IRMAA and you had to pay an extra $2,400 a year, let’s say that came out and gave you almost an effective rate of 24% on the conversion. This is a rough example. Okay? The fundamental question on a Roth conversion is still this: Am I going to, even with that IRMAA surcharge, pay less today than somebody, either my future self or my future ex-spouse or divorce, sorry, if you pass away, your widowed spouse or my kids who inherit my money, will they pay more than that 24%? Even though I paid IRMAA, will they pay more than that because tax rates have increased or they’re higher income brackets or all the other reasons that it might occur? If the answer is yes, then bumping into that IRMAA bracket can still be incredibly worthwhile when you do a Roth conversion.
Steve Lewit: Yeah, but Gabriel, people, including me and you, I mean, we get emotional about it, not logical about it. It’s like when we talk to folks and we say, “Why don’t we consider Roth conversion and they say, I don’t want to pay the tax.” You say, “Well, taxes are at the lowest rate in history right now. Why not pay them now instead of 15 or 20 years from now when they might be double?” And they say, “Well, I’ll have less money,” which is not true because if you have a million dollars or $500,000 in your IRA account, you really have 80% of that. That’s not all your money. You have a partner in there.
Gabriel Lewit: Yeah. No, it’s a very important point is if you’re here thinking, “Should I do a Roth conversion?” The general answer is usually they’re a good idea for most people, but not everybody. We got to run the numbers. We’ve got to see where your tax brackets are and what might make sense. But for a lot of people, they make a lot of sense. And as long as you can understand that your pre-tax IRA money is not all yours, so if you convert it it’s really worth its true after tax value and you’re just taking advantage of low tax brackets today to do it, you can start to see the light bulbs go off in their eyes and in their heads when you start to discuss this topic of Roth conversions.
Steve Lewit: And you get beyond the emotional reaction of writing a check for taxes.
Gabriel Lewit: Yes, exactly.
Steve Lewit: Which nobody likes to write.
Gabriel Lewit: They sure don’t.
Steve Lewit: No.
Gabriel Lewit: No, sir.
Steve Lewit: Yep.
Gabriel Lewit: All right. Well, we hope that made sense. Thank you for your patience for those of you that were waiting for us to talk about that from two episodes ago. We finally did.
Steve Lewit: I hope you didn’t lose sleep over that or have a nervous breakdown.
Gabriel Lewit: No, probably not. I would hope not.
Steve Lewit: I hope not.
Gabriel Lewit: Yeah. So there are other tax planning topics here, but I don’t want to get into them today because I want to ensure we can focus on them. So we’ll circle back to those next time. Truly, we’ll talk more tax planning for our listeners. What I want to focus on for the rest of our show here today are a couple of listener questions. Okay? So we’ve got a few of these that have trickled in. Thank you so much for, of course, thinking of us and writing in your questions. So we have one here from Grace. This is, I think, a very key question for many people out there. What are some of the best ways to reduce assets that have reached Illinois death tax level? Okay. What are some of the best ways to reduce assets that have reached Illinois death tax level? Specifically for Grace, she says, “I am also age 90.” Okay.
So Grace, there are definitely concerns with the Illinois, as you call, death tax or Illinois state tax. And there are definitely strategies that you can use to reduce that. However, there are some limitations to some of the ones that you can’t really do if you’re 90 years old, such as life insurance based strategies, but there are still others and we can try to review some of those here briefly today. But for our listeners out there, the Illinois state estate tax, or death tax as some like to call it, is generally triggered over $4 million in assets for an individual. And if you’re over $8 million as a couple, you’re definitely in that territory, especially if you haven’t set up your estate plan properly to account for what we call lack of portability in estate tax exemptions.
Steve Lewit: Yeah.
Gabriel Lewit: Yeah.
Steve Lewit: So, to get $8 million as a couple, you need to have a properly written trust.
Gabriel Lewit: Correct.
Steve Lewit: And if you don’t, the couple will actually only get one exemption-
Gabriel Lewit: Correct.
Steve Lewit: … $4 million.
Gabriel Lewit: Yes. So very important. So the defining asset level is all your assets, not just your investments. Net worth is greater than $4 million, and this needs to be on your radar. Even if you’re 70 years old with $3 million or 60 years old with $2.5 million, you will probably be over these levels in your lifetime, and thus these should also be on your radar because the sooner you understand how to avoid some of these things with the estate tax, the better. Now this is again a state estate tax. There is no federal estate tax limit that’s $4 million. The limit for federal is $15 million per person, much, much higher.
Steve Lewit: Subject to change in the future.
Gabriel Lewit: Correct. Yes. Okay. So this won’t be an extensive review of this just given time, but Grace, some of the most popular options are gifting, annual gifting to as many people as you can think of. So you have an annual gift limit and it won’t use your estate exemption. Now, if you’re 90 and your life expectancy may be shorter, you could start to use up some of your federal estate exemption and gift even more, and that could be one option.
Steve Lewit: So, can you unpack that a little bit?
Gabriel Lewit: Well, gifting is getting money out of your estate and gifting it to somebody else. And if you are over the estate tax limit, your goal is to try to move closer to that limit because you’ll pay less in tax the lesser over the limit you are.
Steve Lewit: Right.
Gabriel Lewit: Okay.
Steve Lewit: So, the annual gift exemption right now, what is it? 2019, 20…
Gabriel Lewit: Oh, it’s gosh, you’re-
Steve Lewit: Is it on our-
Gabriel Lewit: … putting me on the spot. I think it was $19,000, I think.
Steve Lewit: Yeah, I think so. Well, whatever, 19, 20. So if you go over that, a lot of people say, “Well, I can’t go over that.” Well, you can go over that. Anything you gift over the annual exemption goes against your lifetime gift exemption, which is the same as your federal exemption, which right now is $15-
Gabriel Lewit: $15 Million.
Steve Lewit: … million. So you could give away $15 million without a problem.
Gabriel Lewit: Well, it will depend if it’s IRA money or not IRA money-
Steve Lewit: Right. Right.
Gabriel Lewit: … some of those types of distinctions here. This gets pretty complicated, so we do recommend talking to your advisor about these various strategies. But yes, gifting is probably one of the most common at this stage.
Steve Lewit: At this age, absolutely. So Grace, if you’re not sure who you want the money to go to, you could set up what’s called an irrevocable trust and gift that money to the trust. And when you pass, that trust, will distribute money to wherever it goes.
Gabriel Lewit: And there are some concerns with basis and step up if you do that, which is beyond the scope of this, but just keep that in mind. Again, complex and definitely recommend working with an advisor on these. You can also start to spend more money. I’ve said this before, spending money will lower your-
Steve Lewit: Yeah, just spend it, Grace.
Gabriel Lewit: Just start spending it. Go on some worldwide cruise for $200,000.
Steve Lewit: Absolutely.
Gabriel Lewit: It’ll actually cost you-
Steve Lewit: Go have fun.
Gabriel Lewit: It’ll cost you much less than that because of the savings on the Illinois state estate tax.
Steve Lewit: Illinois state tax, yeah.
Gabriel Lewit: If you feel like spending, it’s a great way. Buying yourself more property doesn’t help-
Steve Lewit: Nope.
Gabriel Lewit: … because it just is part of your state in a different way.
Steve Lewit: Yeah.
Gabriel Lewit: The other things you can start to do would be generally charitable based strategies.
Steve Lewit: Definitely. Definitely.
Gabriel Lewit: So, if you are charitably inclined, you could start to donate money to charities, use the resulting tax offsets there to do maybe more Roth conversions. All of these things can help to lower your Illinois net worth and potentially move you closer to that level or even below the level. And then of course what you said, Steve, was critical. If your estate planning documents are not set up properly, you need to get those updated and reviewed ASAP. That’s I think kind of goal number one right there from that perspective.
Steve Lewit: Exactly. Exactly.
Gabriel Lewit: There are again, other strategies here, quite a few of them, but a bit beyond the scope of our call here today. So hopefully Grace, this helps, gives you a starting point. If there’s more questions that you have or any of our listeners out there on this topic, please let us know. It’s one that we can absolutely talk further about.
Steve Lewit: Yep.
Gabriel Lewit: Yeah.
Steve Lewit: Yep. It’s a great question. And I think the other point you made, Gabriel, that I was thinking about is that how many people come to us at 65 and like you said, they have $2.5 Million and say, “Well, I don’t have to worry about the Illinois state tax.” And then we’ll project out their estate and now it’s $6 or $7 or $8 million 25 years from now.
Gabriel Lewit: And if you wait until then, some of the strategies that include things like more aggressive Roth conversions or life insurance or other things that can help reduce the future Illinois state estate tax, those are no longer on the table.
Steve Lewit: Yeah. The reason Gabriel brought up life insurance is that life insurance is a very tax efficient vehicle. We don’t buy it for the life insurance. We actually buy it for the tax efficiency within the life insurance.
Gabriel Lewit: Yeah, exactly.
Steve Lewit: Yeah.
Gabriel Lewit: Well, Grace, hopefully that helped answer some of your questions. For all of the rest of our listeners, please send us your questions anytime. You can email us info@sglfinancial.com. And of course, if you’d like to set up a time to talk about your financial planning, your retirement, any goals that you have, anything we can do to help you get better peace of mind with your money and finances, please give us a call. Our number here is (847) 499-3330, or you can go to sglfinancial.com, click contact us, and we would love to speak with you anytime.
Steve Lewit: Anytime. Love to talk to you.
Gabriel Lewit: Indeed. So have a wonderful rest of your week or weekend, and we will talk to you on the next show.
Steve Lewit: You stay well, everybody. Enjoy.
Gabriel Lewit: Bye-bye.
Steve Lewit: Bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at (847) 499-3330 or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode.
Disclosure: Investment Advisory services are offered through SGL Financial, LLC, an SEC Registered Investment Adviser. Registration with the SEC does not imply a certain level of skill or expertise. Insurance and other financial products are offered separately through individually licensed and appointed agents.
