Are You Top of the Class in Retirement Planning?
by SGL Financial
Our 2 Cents – Episode #223
Are You Top of the Class in Retirement Planning?
We took a short break, but we’re back with a special Back-to-School pop quiz! In this episode, we tackle an important listener question, share some quick insights on estate planning, and have a little fun along the way. Turn on your listening ears and tune in!
- Back To School Retirement Planning Quiz:
- Put your retirement knowledge to the test—will you score an A+?
- Listener Question:
- “I have approximately $1,400,000 in tax deferred accounts (401k, IRA). I want to get all of that money into a Roth via rollover within the next 2-3 years. Every person I talk with tells me to convert gradually. But, we are all one day closer to our date of passing. Don’t you think I am better off doing a Roth conversion sooner and pay the taxes now rather than later?” — Scott
- Estate Planning Report:
- Do you have an estate plan in place? Discover what this new report reveals about investors and the truths of wealth transfer.
Request Your Free Consultation Today
847.499.3330
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 back everybody, to Our 2 Cents. You’ve got Gabriel Lewit here and you’ve got Steven Lewit here, and we’re back from a one-week quick hiatus for the show last week.
Steve Lewit: Hiatus. Yeah, that would be, we missed last week.
Gabriel Lewit: Well, we tried to do these every week. We missed you guys, so we wanted to come back stronger than ever this week with a great new show.
Steve Lewit: And better than ever.
Gabriel Lewit: And better than ever, of course.
Steve Lewit: Because you’re all better than ever and we have to meet you where you’re at.
Gabriel Lewit: Well, what most of you don’t know is I hurt my back quite badly this last Sunday. Doctors think it may be a herniated disc, I’ve got to get an MRI.
Steve Lewit: He’s in pain.
Gabriel Lewit: The first two days this week I couldn’t walk or stand or sit, but with some medications, I’m back in action here and better than ever. I won’t say good as new yet.
Steve Lewit: Not as good. You are walking slowly and tender.
Gabriel Lewit: A little gingerly, yes.
Steve Lewit: And gingerly, yes.
Gabriel Lewit: But the show must go on.
Steve Lewit: Absolutely.
Gabriel Lewit: As they say.
Steve Lewit: Absolutely.
Gabriel Lewit: So, we’re here and I’ve got my support pillow propped up behind me and I’m ready to go.
Steve Lewit: And that’s not me, folks.
Gabriel Lewit: No.
Steve Lewit: It’s a support pillow.
Gabriel Lewit: All right, well, we hope you’re doing great. We’ve got a good show lined up for you. It’s back to school season for kids, for grandkids-
Steve Lewit: Isn’t that-
Gabriel Lewit: … for some of our listeners here. My-
Steve Lewit: Where did the time go?
Gabriel Lewit: My wife is doing a meet-the-teacher event today for my kids. So, yes, it’s starting right back up here. And in the spirit of back to school, and of course as a side note, it’s back to football. Bears have not yet lost this season.
Steve Lewit: You know what that means?
Gabriel Lewit: What’s that?
Steve Lewit: That means when they start the season, they will not be 4 and 0.
Gabriel Lewit: Well, it’s preseason, right? But they tied, I believe, their first game. So we have not yet lost, which is great.
Steve Lewit: That is great, that’s great.
Gabriel Lewit: Yeah. So back to school, back to football, all good things here. And to kick that off and to I guess celebrate that, if you will, we’re going to do a back to school quiz for retirement planning. Even though you may not be going back to school, if you’re a listener, to our show, we want to quiz you, nevertheless.
Steve Lewit: Probably not.
Gabriel Lewit: I didn’t say… I mean, maybe someone’s going back to graduate school-
Steve Lewit: Graduate school, yeah.
Gabriel Lewit: For a new degree or who knows what.
Steve Lewit: Yeah, it could be, could be.
Gabriel Lewit: But yeah, most people probably aren’t going back to school but we’re going to act like we are with a light and fun retirement quiz. Let’s see how you score.
Steve Lewit: Uh-oh. Okay. I don’t like these let’s see how you score quizzes.
Gabriel Lewit: Well, I like them because I always quiz you and then when you’re wrong I can give you a hard time.
Steve Lewit: Exactly. That’s why I don’t.
Gabriel Lewit: These are terrific.
Steve Lewit: I don’t really like these, but okay, I’m there.
Gabriel Lewit: You could quiz me if you prefer.
Steve Lewit: No, no. I’m always in. No, you run the show here, you’re the leader.
Gabriel Lewit: Ah, well I try to keep us on track. Let’s put it that way.
Steve Lewit: Yes, you do, because I go on tangents.
Gabriel Lewit: You are a tangential man.
Steve Lewit: I am, kind of.
Gabriel Lewit: Okay, so let’s test your knowledge here. Okay, a little pop quiz. We like to do these from time to time. Question number one is, what age can you receive full Social Security benefits if you were born after 1960?
Steve Lewit: Oh, so we’re giving them a test?
Gabriel Lewit: We are. We’re quizzing our listeners.
Steve Lewit: Oh, I see. So we’re back. I see.
Gabriel Lewit: I’m not actually going to quiz you. I was going to go easy on you today.
Steve Lewit: We’re back to school giving a test, okay.
Gabriel Lewit: Yes, yes.
Steve Lewit: So, you guys are taking a test. You’re back in school.
Gabriel Lewit: Yeah. So your options, our listeners, are 59 and a half, 62, 65 or 67. And again, the question was, what age can you receive full Social Security benefits if you were born after 1960? Which of those ages? I know you know the answer.
Steve Lewit: It’s 67.
Gabriel Lewit: It is, it is 67. And if you were wondering what the other ages commonly are, 59 and a half is the age where you can typically take money from retirement accounts without penalties. 62 is the earliest you can technically start Social Security, not counting Social Security disability and some other kind of nuances there. But yes, that’s not what’s called your full Social Security benefit age. And 65 is kind of just a misleading number, there’s nothing there. That’s Medicare age, but nothing to do with Social Security.
Steve Lewit: Yes.
Gabriel Lewit: 67 for most people is when you will receive what are considered your full retirement benefits from Social Security, called your full retirement age.
Steve Lewit: And you know what? I bet most people got this answer correct. People seem to know this.
Gabriel Lewit: Maybe you did, maybe you didn’t, but hopefully now you do.
Steve Lewit: Well yeah, but people do seem to know it. All right, but-
Gabriel Lewit: Well, if you were born before 1960, it actually could have been like 66 in 11 months.
Steve Lewit: 66 and a half, right.
Gabriel Lewit: Or 66 in 10 months.
Steve Lewit: Well, yeah-
Gabriel Lewit: It kind of got a little funky there.
Steve Lewit: That could be true, I take it back. I apologize for-
Gabriel Lewit: Questioning the quiz master earlier.
Steve Lewit: … questioning the leader’s, the teacher’s brilliance.
Gabriel Lewit: Oh, no, no, no. Just clarifying for everybody.
Steve Lewit: Yes.
Gabriel Lewit: Okay, well, hopefully that is helpful. Right? Now, you can also wait and delay your Social Security to age 70 and you get additional payment amounts, right? And the goal of today is not to talk about all the ins and outs of Social Security, but keep in mind you don’t have to take it at 67 either if you aren’t yet ready or don’t need it at that time.
Steve Lewit: Yes, yes.
Gabriel Lewit: Okay. Do you want to read question number two, Mr. Steve?
Steve Lewit: I’m so excited. What is the maximum annual contribution limit for Traditional Roth IRA for individuals aged 50?
Gabriel Lewit: Traditional or Roth.
Steve Lewit: Or Roth IRA for individuals ages 50 and older in 2025? What is the maximum annual contribution?
Gabriel Lewit: Limit.
Steve Lewit: Limit, 50 and older? Okay.
Gabriel Lewit: Well, are you going to give our listeners their options?
Steve Lewit: Oh, the options folks are, A, 6,000. B, 7,000. C, 8,000. D, 9,000. Well, do you know the answer?
Gabriel Lewit: Of course, I know the answer.
Steve Lewit: All right, what’s the answer?
Gabriel Lewit: Well, if you guess 6,000, you were wrong.
Steve Lewit: That’s correct. That is correct.
Gabriel Lewit: If you guessed 7,000, you were wrong.
Steve Lewit: That’s correct too.
Gabriel Lewit: And if you guess 9,000, you were wrong. Leaving us with?
Steve Lewit: 8,000 is the answer.
Gabriel Lewit: 8,000, ding, ding, ding.
Steve Lewit: Yeah. So folks, you can maximize the maximum limit for traditional Roth IRA, a regular IRA is 8,000 bucks.
Gabriel Lewit: Yes. If you’re over 50, because that includes a catch-up contribution.
Steve Lewit: Right.
Gabriel Lewit: Yes. So yes, if you’re thinking about contributing to a Roth IRA, I think that’s a great option if you’re in the right tax bracket. If you’re in a higher tax bracket, you may actually be phased out of the traditional pre-tax IRA contribution limit either way because of your income, your income can reduce that to being non-deductible. But your Roth IRA also has an income limit. So there’s a little bit more nuance to this, folks. But yes, generally speaking, if you’re looking to save outside of your 401k in an IRA, $8,000 if you’re over 50 is going to be the number for you to keep in mind. So they’re giving you little catch-up options right inside your 401k, inside your IRAs. If you feel like you’re behind in your savings, a little bit of catch-up can go a long way.
Steve Lewit: Even on a hamburger. Even on a hamburger.
Gabriel Lewit: I always got a little ketchup goes… I just had a barbecue for my daughter’s soccer team last night, she’s on a new travel team. They had a really nice get-together, hundreds of families and kids and stuff there. And they had hamburgers and hot dogs-
Steve Lewit: And ketchup.
Gabriel Lewit: And I put catch-up on them.
Steve Lewit: Excellent.
Gabriel Lewit: Yeah, so a little ketchup goes along way.
Steve Lewit: A little ketchup goes a long way.
Gabriel Lewit: All right. All right. Now, question number three. Which type of retirement account requires you to take RMD’s, required minimum distributions?
Steve Lewit: And the options are?
Gabriel Lewit: And there’s actually more options than four, but we’re just going to list four for you to try to trick you a little bit here. Brokerage account, option A. Option B, 401k, and I’ll say traditional 401k. Option C, HSA health savings account, or option D, Roth 401k. And again, the question is, which of those accounts requires you to take a required minimum distribution, RMD?
Steve Lewit: Yes. Well, you need a little silence. We’re giving people time to think.
Gabriel Lewit: Time to think, okay.
Steve Lewit: Time to think. And the answer is?
Gabriel Lewit: And the answer is?
Steve Lewit: A 401k.
Gabriel Lewit: Traditional 401k.
Steve Lewit: Brokerage accounts, if they’re not IRAs, do not have a required minimum distribution.
Gabriel Lewit: And really quick, a RMD, required minimum distribution is when you are generally age 73 currently and up, you have to take a required distribution out of a IRA or traditional 401k account after you turn 73. You cannot skip it, it is a required, RMD, required minimum distribution.
Steve Lewit: Yeah. We often get this question folks, are the required minimum distributions required? And the answer is always the same.
Gabriel Lewit: Yes.
Steve Lewit: Yes, it is.
Gabriel Lewit: That’s the R. Yes, an HSA, a health savings account does not require you to take an RMD and neither does a Roth, either a Roth IRA or a Roth 401k, and to this point an IRA, right? A traditional IRA is also subject to RMDs, but many people get their IRAs by starting in 401ks, but both would be subject to the RMD rules.
Steve Lewit: Anything that’s not a Roth.
Gabriel Lewit: Mm-hmm.
Steve Lewit: IRA is subject to an RMD. I think it’s fair to say that.
Gabriel Lewit: And there’s things like 403bs, there’s a lot of different types of-
Steve Lewit: 457s.
Gabriel Lewit: … what are called traditional pre-tax retirement accounts, most are subject to RMDs. And if you’re not familiar with RMDs, if you’re a younger person, it’s probably not on your radar but there’s one of the major elements of retirement income planning and tax planning is navigating these RMDs and why Roth options sometimes starting at a young age can be so attractive.
Steve Lewit: And if you are a younger person, your starting RMD age is probably going to be 75, rather than 73.
Gabriel Lewit: Correct. Yep, yep, and it may even be higher by the time you get there. Who knows?
Steve Lewit: Right.
Gabriel Lewit: Okay. Question number four, Steve, I’m going to let you take point on this one.
Steve Lewit: Well, thank you. What does the 4% rule refer to in retirement planning? The maximum percentage you can contribute to a 401k. Okay, a tax on high income retirees.
Gabriel Lewit: Interesting.
Steve Lewit: Interesting. A suggested annual withdrawal rate from your retirement portfolio. The penalty. Oh, the penalty for early withdrawal from a Roth IRA.
Gabriel Lewit: This is a tough one.
Steve Lewit: Oh, got it, yeah.
Gabriel Lewit: Yes.
Steve Lewit: That’s not an easy one.
Gabriel Lewit: Well, we need some of that… What’s that? Jeopardy music, right?
Steve Lewit: Creating noises.
Gabriel Lewit: While you think. All right.
Steve Lewit: And the answer is, Mr. Gabriel?
Gabriel Lewit: Well, the answer is a suggested annual withdrawal rate from your retirement portfolio is known as the 4% rule.
Steve Lewit: Actually, called the safe money withdrawal rate.
Gabriel Lewit: Yes.
Steve Lewit: Why it’s safe? I don’t know, but it is a withdrawal rate.
Gabriel Lewit: Well, I’ll tell you why. Okay? It’s basically when you get to retirement, you need income, hypothetically, let’s say. You’ve got to pull money from your nest egg. And people often ask this question, “Do I have enough to retire?” And there’s all these rules of thumb, but really at the end of the day, the question is, if you model out your retirement income using a couple different income strategies, you’ll see whether or not you have enough to retire. One of those income strategies is known as the 4% systematic withdrawal rule or safe withdrawal rate. What it means is if you generally take no more than 4% out of a diversified stock bond portfolio.
Steve Lewit: 60-40.
Gabriel Lewit: 60-40 or 70-30, 70% stocks, 30% bonds, there’s a good chance, not guaranteed, a good chance your money will not run out in retirement if you stick to that 4% or less value.
Steve Lewit: And I must add, there’s a lot of research now that debunks that rule, but it’s still a very prevalent rule.
Gabriel Lewit: Well it’s actually, it’s a good starting point-
Steve Lewit: It is, it is.
Gabriel Lewit: … for determining if you’re taking… Let’s say you have a million dollars, okay, and you need $80,000 per year. You are taking out 8%. It is well above, double what’s considered generally a safe withdrawal rate. So it’s a good little mini quick benchmark.
Steve Lewit: Actually, that’s a yes, absolutely.
Gabriel Lewit: It’s not the end-all, be-all. There’s far better income planning strategies that we would get into when we talk about this. But if you’re like, hey, I need 100 grand in retirement and you’ve got a million dollars saved up right there you know, okay, we’ve got a problem. You’re pulling out 10% of your portfolio every year, that’s two and a half times the safe withdrawal rate. That’s going to be a big problem.
Steve Lewit: And there’s some research now that’s saying that really the safe money, it’s really interesting. There’s some research that says the safe money withdrawal rate is 3.75, and then I read some that said it’s 4.75.
Gabriel Lewit: Well, the guy that originally came out with it is supposedly re-clarifying that his rule is now 4.75%, but I would really highly caution that, actually.
Steve Lewit: That’s a heavy withdrawal rate.
Gabriel Lewit: He had all these contingencies around it if you read the article. Well, if you stop doing this and you do this, it was very, I think that’s a dangerous thing to put out there. I actually think the 4% rule again is a very good starting point benchmark, right? If you’re substantially higher than that, we got to talk about how to optimize your plan. It’s possible to have a five or 6% withdrawal rate, but you may not want to use a market-based approach, it may be too risky.
Steve Lewit: And that’s true, because there’s a lot of history on 4%. So, it is a good benchmark.
Gabriel Lewit: Yep, yep. Okay. But yes, it is not a penalty from an early withdrawal from a Roth IRA, that’s actually 10%, okay? And well, there is a maximum dollar amount you can contribute to a 401k, but not a percentage.
Steve Lewit: That is correct.
Gabriel Lewit: Okay, last question. What is a financial risk that many retirees face? A, outliving their money. B, paying too much in taxes. C, miscalculating healthcare costs, or D, being overexposed to risk in the market, or E, all of the above.
Steve Lewit: Come on, this is a give me question.
Gabriel Lewit: We ended with a give me the last one was hard, this one’s a give me.
Steve Lewit: This is an easy one.
Gabriel Lewit: Yes. Do you know the answer, Mr. Steve?
Steve Lewit: Well, I’d say all of them for sure.
Gabriel Lewit: You are correct.
Steve Lewit: Thank you.
Gabriel Lewit: Yes.
Steve Lewit: I feel better.
Gabriel Lewit: Yes. So when you work with a planner or you research retirement planning, retirement planning in many ways is a strategy to mitigate risk. Okay? And there are many different types of risk. Outliving your money is one of those, right? You live a really long time, your money has to last longer. If you pay too much in taxes, that’s going to stress the value of your portfolio. If you don’t plan for healthcare costs, that could really come out to bite you. And if you take too much risk in the market and things backfire, that could actually come back to haunt you as well. So these are all risks. There’s others as well, things like interest rate risk, which is a little less known. We talked about that back with bonds a couple episodes ago. There’s other types of risks too, sequence of return risk.
Steve Lewit: There’s a CPA analysis that I read; this must have been a number of years ago. That actually lists the 22 different retirement risks.
Gabriel Lewit: There are many, right?
Steve Lewit: There are lots of them. I have a-
Gabriel Lewit: And the idea is working with a planner like SGL can help you navigate these because if you’re doing it for the first time, you’re just not going to really be able to spot these as well as I’d say we can, certainly having done this for thousands of clients over many, many years.
Steve Lewit: Yeah. I’ve got a new set of questions.
Gabriel Lewit: Yeah, do you?
Steve Lewit: Regarding to the same set of questions. All right, so recent research and for the life of me, I can’t remember who it was. What is the number one concern, risk that retirees say they worried about of these? Outliving money, paying too much in taxes, miscalculating healthcare costs, being overexposed to risk in the market, which is the number one question on most retirees’ minds?
Gabriel Lewit: I would say outliving their money.
Steve Lewit: Outliving their money.
Gabriel Lewit: Yeah. I mean-
Steve Lewit: This is the number one question.
Gabriel Lewit: At least 50% of the time when I’m talking with a new potential client, I say, “Hey, how can we help you?” And one of the questions is, “Well, I’m worried if I’m going to have enough to retire or am I going to outlive my money?” Right? And we focus a lot on that.
Steve Lewit: Absolutely.
Gabriel Lewit: Really key to have a plan to help you navigate that.
Steve Lewit: Well, if you don’t have income in retirement or you’re worried about your expenses and you go out for dinner and say, “Can I afford this?” Or you can’t afford to do the house, let’s put that vacation off. All of that reflects worrying about income, money to live your life. What is number two, Gabriel?
Gabriel Lewit: Well, number two would be losing money in the market, I would assume.
Steve Lewit: It’s actually close, paying too much in taxes.
Gabriel Lewit: This wasn’t on my sheet.
Steve Lewit: No, it’s not on your sheet. This is in my head from research that I read that I cannot quote this.
Gabriel Lewit: Well, the research I read said it’s losing money in the market. Well, taxes is probably up there. I mean, those are the top three things.
Steve Lewit: Yeah.
Gabriel Lewit: Income, taxes.
Steve Lewit: This is risk.
Gabriel Lewit: My risk in the portfolio. Those are kind of the trifecta there, the big concerns.
Steve Lewit: Yeah, and it’s interesting, for people that have had parents that have gone through a lot of healthcare costs, they worry about healthcare costs. Whereas people that have parents that have not done that, they don’t worry as much.
Gabriel Lewit: Well, if we have time, we’re going to talk about healthcare today. If not, we’ll talk about it next time. But how did you score, Mr. and Mrs. Listener? Right? We hope you did Well. We hope you got a five out of five or six out of six with Steve’s bonus questions.
Steve Lewit: Yes.
Gabriel Lewit: And hopefully, if you didn’t, you learned a little bit here today about some of these really key planning elements. But there’s more, right? And we’re going to talk a little bit more about other things that impact retirement here, talking a little bit about some listener questions here today. So stay tuned, because we’re going to hop right back here after my little interlude here, of course.
Steve Lewit: Are we singing?
Gabriel Lewit: Well, you can sing if you’d like.
Steve Lewit: Are we interluding?
Gabriel Lewit: You want to interlude?
Steve Lewit: No, no, I don’t.
Gabriel Lewit: It’s been a while since you’ve done it.
Steve Lewit: I can do it, but not today.
Gabriel Lewit: Well, if you have questions on this, give us a call, (847) 499-3330. You can schedule a complimentary review, second opinion, or just a Q&A session if you have questions for us. You can also email us info@sglfinancial.com. And go to our website, sglfinancial.com, click contact us, and we are here to help answer and navigate any questions you may have along anything we’ve talked about here on the show or otherwise.
Steve Lewit: You know what’s really interesting, Gabriel? You sound great, nobody would know you’re sitting here and you can’t move.
Gabriel Lewit: Well, I’m shifting around a lot because if I shift just like one inch the wrong way, I get these pains up my back and my leg.
Steve Lewit: Right, I can see the wince in your face.
Gabriel Lewit: I’m trying, so.
Steve Lewit: You’re doing great.
Gabriel Lewit: Thank you.
Steve Lewit: You sound fantastic.
Gabriel Lewit: It’s the two extra egg bites I ate right before the show.
Steve Lewit: Yeah, it’s probably the tranquilizer they shot him.
Gabriel Lewit: Giving me my energy.
Steve Lewit: They shot into you earlier this morning.
Gabriel Lewit: Oh, man. I am really trying my best, so.
Gabriel Lewit: Okay, okay. So I want to actually talk about a listener question here, which I think was a great question and we love to bring these up when we get them. The question is from Scott, and Scott said, “Gabe, Steve, I have approximately 1.4 million in tax-deferred accounts, 401k IRAs. I want to get all of that money into a Roth within the next two to three years. Everybody I talk to tells me to convert gradually. However, we are all one day closer to our date of passing. And do you think I’m better off doing a Roth conversion sooner and paying the taxes now, rather than later?”
Steve Lewit: You were so nice on the date of passing.
Gabriel Lewit: Date of death, I guess.
Steve Lewit: Well, that was the question.
Gabriel Lewit: Date of passing sounds-
Steve Lewit: That’s what he wrote.
Gabriel Lewit: … softer to me.
Steve Lewit: Softer, yeah.
Gabriel Lewit: Yes. Well, that’s a great question, Scott, and it’s actually an interesting tie-in to what we were just talking about in the quiz about IRAs and 401ks having RMDs. Okay, but they also because of their pre-tax nature, the other thing folks, this as a little context, is if you don’t convert those, you’re going to be subject to RMDs and you’re also going to be subject to a 10-year when you pass away, your beneficiaries of that IRA have 10 years to withdraw it out in. Otherwise, they’re going to get, if they take it all out in year 10 or the bulk of it in year 10, they’re going to be taking a huge tax hit. Right?
So the question that you’re asking, Scott, conceptually is number one, are Roth conversions a good idea, which we think they are. And we’ve talked a lot about those on the show before and we’ll just give tiny bits of what a Roth conversion here is in a second. But then the second question is if you like the concept of a Roth IRA conversion, how quickly or how aggressively should you do it, I think is really the core of this question right here, if I were to paraphrase.
Steve Lewit: Absolutely, absolutely. He’s saying, look, I’ve got 1,400,000, what if I die tomorrow and my kids are going to inherit this, they’re probably in their peak earning years, and now I’m going to drive them into a higher tax bracket because they have to take this out over a 10-year period.
Gabriel Lewit: Well, what’s really, Roth conversions are number one, just as a tiny bit of back context here. You take a pre-tax IRA, let’s just say you had 100,000 in a pre-tax IRA, you converted that to a Roth, and you’re in the 22% tax bracket. You will have if, you withhold on the conversion, $78,000 in your Roth IRA, versus 100,000 in your pre-tax IRA.
Steve Lewit: Now, most people think they lost money when they do that.
Gabriel Lewit: Yes, but you did not.
Steve Lewit: You did not lose money.
Gabriel Lewit: Because the 100,000 is not a real figure. You have to give away some piece of that to taxes.
Steve Lewit: Yeah.
Gabriel Lewit: Anytime it’s ever withdrawn you, your spouse, your kids.
Steve Lewit: The government is your partner in your account.
Gabriel Lewit: Yes. So even though the Roth IRA may look lower, especially if you think tax rates are going to go up in the future or your beneficiaries would be taxed at a higher rate, you are saving either you or your future beneficiaries money by converting it to a Roth IRA.
Steve Lewit: And the other misnomer… Is that right? Is misnomer?
Gabriel Lewit: Misnomer. Yes, that’s correct.
Steve Lewit: Is that you lose all the growth on the interest by giving the government their money. And here I can’t give you the math, but the math is very simple. If taxes stay the same, it doesn’t matter whether you pay the taxes now or 20 years later, you’re in exactly the same place. So this idea that you lose all the growth on the interest is not true.
Gabriel Lewit: Yeah, correct. You actually, generally, if you think Roth conversions are a good idea, you believe taxes are probably going to go up in the future.
Steve Lewit: Go up, yep.
Gabriel Lewit: Or your beneficiaries will pay a higher rate, or the other thing that I’ve been talking a lot about lately is if you’re married and you pass away and you have a younger spouse, they inherit your full IRA balance as their own. They have the same RMDs. Most income does not get cut in half but your tax brackets essentially get cut in half.
Steve Lewit: Yes.
Gabriel Lewit: So more of that RMD.
Steve Lewit: Now, why do your tax brackets get cut in half?
Gabriel Lewit: Because you’re single instead of married filing jointly.
Steve Lewit: You’re filing single instead of jointly.
Gabriel Lewit: So, if you have five or six years of this IRA left for RMDs after your spouse passes away, you might be paying substantially higher tax rates than had you converted more of this while you were both still alive with your married filing jointly practice.
Steve Lewit: Yeah. So what we’re saying, Scott, is we’re with you on conversions.
Gabriel Lewit: Now the problem, Scott, is if you have 1.4 million, let’s say you did that in one year, please don’t do that, right off the gate. If you did though, you are going to be way up in the 37% tax bracket.
Steve Lewit: That’s right.
Gabriel Lewit: Okay? So that’s why the traditional advice is, well, don’t do that because chances are whoever’s going to inherit this in the future, even if they stretch it out over 10 years, probably won’t be paying 37% unless they’re extremely high income earners. Okay.
Steve Lewit: Or unless taxes go up.
Gabriel Lewit: Or yep. You’d have to kind of presume or expect that taxes are going to increase above that level to then say that’s a good idea today.
Steve Lewit: That is correct.
Gabriel Lewit: Okay, but that’s not a given, right? That’s kind of a gray area. Now, you could split that, if you did 500,000 per year for three years plus interest on your 1.4 million, just as an example. You’re not going to be paying 37% in taxes, but you’re still going to be up there in the 32, 35% brackets. Right? So there’s risk there as well, right? If the people that are ultimately going to withdraw this in the future would be paying less than those rates, again, the Roth conversion may not be the best idea.
Now, you can get around this, right? So that’s where the partial conversions over time up to say, a 22 or 24% bracket often are recommended. There are ways of accelerating that, especially if you have a charitable interest of any kind, number one. You can then plan around your charitable giving to give you a current year tax deduction, which allows you to do larger and larger Roth conversions. The most common strategy here is you do a charitable remainder trust. Okay, you give a large donation to a charitable remainder trust in the same year that you take or do a Roth conversion, and we got to look at all your assets to be able to do this. The charitable remainder trust gives you a big tax deduction that offsets the cost of your larger Roth conversion. And then the charitable remainder trust sends you income every year.
Steve Lewit: It does.
Gabriel Lewit: And if you do this the right way, typically we’re going to buy with that income from the CRT, a life insurance policy-
Steve Lewit: That insures-
Gabriel Lewit: … with a very high death benefit.
Steve Lewit: Which gets you all the money back.
Gabriel Lewit: Which gets you all the money back.
Steve Lewit: that you donated to charity.
Gabriel Lewit: That you donated to charity.
Steve Lewit: If not more.
Gabriel Lewit: And allowed you to do the Roth conversion at either little or no tax costs and at a very accelerated schedule. Now, if that seems like a lot to follow, it can be, but there are ways of doing them in an accelerated way, we really don’t recommend doing that on your own. It’s fairly calculated on a tax angle, financial angle, it’s complex, you’ve got to have trust created. There’s a lot of different parts of that, but it is something that we could help you do.
Steve Lewit: Yeah, absolutely. What we don’t know here, Scott, is how old you are.
Gabriel Lewit: Correct.
Steve Lewit: We don’t know your wealth, your other wealth, if there is other wealth.
Gabriel Lewit: Yep.
Steve Lewit: We don’t know if you’re paying on Medicare because there are IRMAA considerations in all of this, but it’s a great question.
Gabriel Lewit: Yeah. So, a lot there to unpack, but if we can help you with that, please give us a call. But great, great question and yes, there are ways to accelerate that faster if desired.
Steve Lewit: Yeah, and folks, just to punctuate what Gabriel said, there are lots of ways of using charitable donations to accomplish two things, to get money to a charity, but to give you tax savings that often outweigh what you give away to the charity. So, it’s a win-win for everybody.
Gabriel Lewit: It is, it really can be. And you could do the life insurance option even without the charitable component, but the two often go very well hand-in-hand together, yeah.
Okay. So with just a couple minutes to go here, I just wanted to, a little snippet. Right? This is almost like a continuation of our quiz. I just think there was a piece of that quiz that we didn’t talk about, which was estate planning. There was no questions on our quiz about estate planning. A new report from Escalent, which is a company that does data-driven analytics and research reports.
Steve Lewit: Research company, yeah.
Gabriel Lewit: Yeah, has said that there is 95% of affluent investors need to create or update their estate plans. 95% is what their study said.
Steve Lewit: This is kind of mind-boggling, actually.
Gabriel Lewit: So, if the quiz had asked a question, should I update or review my estate plan? Yes, no? Maybe people would’ve wrote no, but probably 95% of you need to, is what this study is saying.
Steve Lewit: Yeah. It is extraordinary, folks, and this is not only here at SGL but across through the industry, how many wealthier people have not prepared properly for their transfer of wealth when they pass away. See, I didn’t say death, I said pass away.
Gabriel Lewit: That was good.
Steve Lewit: I learned from you how to temper things.
Gabriel Lewit: I softened that a little bit, yes.
Steve Lewit: Yeah, I softened that.
Gabriel Lewit: Well, it says more than three in 10 affluent investors don’t have a will or trust at all. And of those that do, nearly two-thirds are young enough that they’ll likely need to update their plans well before their life expectancy. In other words, if you’re 60 and oh, I created my will and trust, by the time you’re 80 and you have your average life expectancy and you pass away, 80, 82, 85, chances are that trust is going to be completely out of date. Why? Because tax laws change, rules change, your beneficiaries may change, people might’ve died. So many things could have changed inside of that trust and will that already it’s out of date substantially. Your net worth might’ve climbed beyond state tax levels, either state or federal. So many things may need to be adjusted or improved there. But a lot of people just say, “Oh, I already have one in place. I’m good.” Okay? So it’s a pretty staggering statistic.
Steve Lewit: Yeah, and what does it mean not to not have a estate planning? I mean, what’s the impact on that?
Gabriel Lewit: Well, some people have, it’s happened way more than once where I’ve gone through someone’s 401k and I’m like, “Oh, by the way, who’s your beneficiary on that?” And they’re looking at, “Oh, wow, I don’t have one listed.”
Steve Lewit: I don’t have one.
Gabriel Lewit: They just never even realized they didn’t even have a beneficiary listed because they set it up like 30 years ago and never listed to somebody.
Steve Lewit: So, if there’s no beneficiary, what happens?
Gabriel Lewit: It goes to your estate.
Steve Lewit: And then happens?
Gabriel Lewit: Which needs to be probated.
Steve Lewit: And what does that cost?
Gabriel Lewit: A lot.
Steve Lewit: Five to 8%?
Gabriel Lewit: Yeah, a good amount of money you don’t have to pay otherwise if you have a good plan. It takes time, right? It’s frustrating for your executor of your estate or administrator of your estate. So, number one, just having beneficiaries on your accounts, confirming those. Number two, you could have a trust, will, powers of attorney or a combination of all of those preferably in place that’s a part of your estate plan. Three, you want to update those frequently, every two, three years, double check, make sure they’re still good. Number four, you want to visualize those and make sure that people understand their responsibilities that are a party to those agreements.
Steve Lewit: Yeah. You don’t want to get a trustee in there that knows nothing about finances and doesn’t want the job.
Gabriel Lewit: And is all of a sudden shocked and surprised and can’t find any of your information. You want to make it easy for this to pass. And of course, you want to pass your assets tax efficiently.
Steve Lewit: Yes. Well, I was just getting there. So there are two parts to an estate plan. One is the actual transfer of the assets that they get to where you want them to go and make sure they get there. And the other part is tax efficiency. And especially in Illinois, folks, where the Illinois estate tax, a very onerous tax, and it’s not portable like the federal tax. So in the federal tax, if you’re married, each one of you have the 15 million now, exemption on federal estate taxes. So your estate would have to be over 30 million, which most people are not. But in Illinois, the estate tax exemption is four million but if you go $1 over the four million, there is no, you pay on the entire four million, and it’s not portable. If you’re married, you don’t get two of them unless you have a properly constructed trust.
Gabriel Lewit: Yeah, there’s a lot to go into estate planning, but the idea here is just, think about that, right?
Steve Lewit: We should do an estate planning thing.
Gabriel Lewit: Well, yeah, we certainly can in a little bit more detail. But yes, this is something that if it’s on your radar, it’s something that we give you guidance on, right? As holistic planners here at SGL, we want to make sure it’s not forgotten about. Obviously, we can’t give full-fledged legal advice, but we can talk about all these things conceptually and ask you if you have them and give you guidance on what you should or shouldn’t potentially do with that. So, call us if we can help you here. I know we covered a lot of ground today. (847) 499-3330, or go to Sglfinancial.com, click contact us.
Steve Lewit: I do feel smarter, though.
Gabriel Lewit: We would love to talk to you. Hopefully yeah, you’ve gotten some back to school-
Steve Lewit: I feel brilliant.
Gabriel Lewit: … insights here.
Steve Lewit: I mean, I feel like I’m going to have a great day.
Gabriel Lewit: We hope you passed the quizzes and tests.
Steve Lewit: Because of the wisdom inside myself.
Gabriel Lewit: You are genius.
Steve Lewit: I’m yeah, it’s hard, it’s hard.
Gabriel Lewit: And we hope you have a wonderful rest of your week and weekend. So, stay well. We will talk to you on the next show.
Steve Lewit: Be well, everybody. Bye now.
Gabriel 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.
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