Estate Planning

Savvy IRA Planning for Boomers

By Modern Wealth Management

January 11, 2019

Savvy IRA Planning for Baby Boomers

IRA Planning is Complicated, We’re Here to Help

Financial Advisor Drew Jones presents an updated version of our Savvy IRA Planning for Boomers webinar. IRA Planning is a complex process. Factor in recent changes from the SECURE Act, and it gets even further complicated. We’re here to clear up the noise as Drew presents Savvy IRA Planning for Boomers. If you want to attend one of our live webinars or workshop, check out our schedule events on the Events page.

If you have questions and would like to talk to someone about your IRA, we’re here to help. Give us a call at 913-393-1000 or fill out the form below for your complimentary consultation.

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Items Mentioned in this Webinar:

The SECURE Act & Your Retirement

Video Transcript

Thank you for taking the time to join us on Savvy IRA Planning for Baby Boomers. My name is Drew Jones. I’m a CERTIFIED FINANCIAL PLANNER™ here at Modern Wealth Management, and I’m going to be walking you through today’s presentation. 

Common Questions About IRAs

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Many common questions that we get whenever we’re sitting across the table from clients or potential clients are questions like:

  • Can I still contribute to a retirement account, and if so, how much? 
  • What type of retirement account is right for me?
  • When do I need to take withdrawals, and how much do I have to take? 
  • How are my IRA withdrawals taxed? 
  • How does my IRA fit into my overall plan? 
  • And what happens to my IRA when I die? 
  • And probably the most important one is, how can I minimize taxes?

Life’s Become More Complicated

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So if you can’t tell, life’s become a lot more complicated, right? Years ago, retirees kind of had a three-legged stool approach. First, you had your pension that was offered by your company. Then you had Social Security benefits. And the third leg of that stool was kind of what you had managed to save along the way. So today’s picture is entirely different from what it used to be, right? 

Where a lot of the responsibilities to save, how you save, and what assets you use to save, the responsibility now is put on the employee instead of the employer.

How Long Will You Live?

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It’s kind of an interesting statistic here. And so this is the most challenging question to answer whenever you’re planning for your financial future, but in this illustration here, we’re going to look at the probability of living from 65 to some different ages.

If we go across this first age bracket of 80, typically, you have a 60% chance if you’re a male of making it to age 80, but females tend to live longer, right? So you’re looking at a probability of 71%. If you go over to survivor, there is an 88% chance that at least one of you will be surviving, making it to the age of 80. 

So I’m not going to go through each of these brackets. Still, I do want to point out that if we go down to 90, for the example of the male, you’ve got a 20% probability of success; for the female, you have a 31% probability of success, of making it to age 90, but you have a 45% chance of at least one person still being alive. So you almost have a 50, 50 chance at least of one of you making it to the age of 90.

So, this is important to know when you’re building any type of plan. You’re going to have discussions about longevity, family history, stuff like that, but you also want to know what your average life expectancy would be from a planning perspective. 

Finally, a Chance to Save!

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So we get a lot of baby boomers typically that we’re talking and working with. They’re at this stage in life that they’ve never been at before. I say that because they have this ability to start saving, to really put money away.

And if you think about it, your mortgage is almost paid off or probably paid off. Maybe you’re finishing paying for a child’s education, or you’re winding down those everyday living expenses that come with raising a family. And so you start to find yourself with excess cash, excess savings that you can put away for your financial future.

Traditional IRA Basics

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So we’re going to switch gears, and we’re going to talk about some of the traditional IRA basics, right? Kind of the nuts and bolts of IRAs. Contributions to IRAs may be tax-deductible. Savings grow tax-deferred while inside the account. Now there’s a little caveat here, any withdrawals made before 59 and a half would be subject to a 10% early withdrawal penalty. 

Any withdrawals that you take are generally added to your income in the year that those distributions are taken. 

Traditional IRA Contribution Rules

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The maximum contribution for 2020 is $6,000. Now you get a catch-up; you get to add another $1,000 if you’re 50 or older. So instead of doing that 6,000, if you’re 50 or older, you can throw in another 1,000 for a total of 7,000. You need to have compensation, though, generally earned income and contribute to an IRA.

So, if you only earn, let’s say, $3,000 a year, then 3,000 is the limit that you can contribute because that’s typically what you earned for the year. Beginning for the year 2020, this is something new. And what we did is we kind of put a little yellow sticky note there for you guys to see, notifying you that this is new for 2020, but beginning for the years 2020 or later, there’s no age limit for being able to make IRA contributions.

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IRA contributions are deductible when it comes to the taxes; it’s deductible unless you are, or your spouse is an active participant in an employer-sponsored plan, and your income exceeds certain thresholds. So just knowing those two things will help you decide whether, for tax purposes, you can deduct those contributions.

Roth IRA Basics

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So now we’re going to talk about Roth IRA basics. And this is interesting to a lot of people and rightfully so. So once we start going over the nuts and bolts of Roth IRAs, you kind of see the difference, obviously, in the two buckets of money. 

There’s no tax deduction received for the contribution; savings grow tax-deferred while inside the account. Contributions may be withdrawn at any time tax and penalty-free. So this is kind of nice, right? You want to think about this as a savings account. 

This would be the last resort that you would want to plot any contributions. But let’s say I contribute $3,000 for the year, and if something happens and I need access to that cash, well, I can access the $3,000 that I contributed into that Roth IRA. As I said, it would be a last resort, but it is there as a fail-safe for you. Qualified distributions may include earnings and are tax-free as well.

Roth IRA Contribution Rules

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So the maximum contribution for 2020 is $6,000 to your Roth IRA. Again, you do get that catch up though. So if you’re 50 or older, you get an extra $1,000 and the ability to save an additional $1,000 for a total of $7,000 for each year. You need to have compensation. So that’s going to be earned income, even taxable alimony counts. 

There is no age limit. Income cannot exceed certain limits. So what they’re looking at is your modified adjusted gross income. Single filers can make full Roth IRA contributions if their income is below that $124,000 threshold. Now for married couples filing jointly, you can still contribute as long as your income is below $196,000 for the year. Again, that’s going off modified adjusted gross income.

Spousal IRA/Roth IRA Contributions

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One benefit, let’s say, for example, you have one person in the relationship that works, and the other person maybe stays at home. The good thing about this is you can make a spousal IRA or Roth IRA contribution on behalf of your spouse. 

This again allows the working spouse to make traditional Roth IRA contributions for the spouse that isn’t working, maybe staying home. The non-working spouse must meet, though, all the other qualifications to contribute to the IRA.

Can $7,000 Per Year Make a Difference?

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So you might be asking yourself, by the time we look at the $6,000 contribution, and then we add in that $1,000 if you’re 50 years or older, so your total contribution is $7,000 for the year. You’re probably asking yourself, well, you know what good is 7,000? That’s great that I can save 7,000, but it doesn’t make a big difference over the long-term?

This is an excellent illustration showing the impact or the meaningful impact of saving that $7,000 a year. So in this example, we’re looking at somebody who’s aged 55, right? And they’re saving $7,000 a year. And we’re assuming an average rate of 6% return. So you can see by the time we get out to age 30, even though we’ve only made ten years of contributions of $7,000 a year, you can see by the year that we start to get out to kind of year 20, you’re looking at almost $150,000 in account value. You go all the way out, 30 years, you’re knocking on the door of about $300,000 in account value.

So yes, it does make sense, or it does help to save each amount, whatever it might be, because, through the power of compounding interest and saving, it can make a big difference in somebody’s account value.

Take Advantage of Employer-Sponsored Plans

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Now we’re going to switch gears, and we’re going to talk about employer-sponsored retirement plans. If you’re still working, you’re still employed, you might want to check and see what employer-sponsored programs are offered. So there may be a traditional 401(k). 

They may offer a Roth 401(k), right? It’s just good to know your options. The 2020 salary deferral limit for 401(k)s and similar plans is 19,500. Again, if you’re 50 and older, you do get a catch-up. So your full contribution, assuming that you are 50 and older, is 26,000, that you can contribute each year to your employer-sponsored plan.

Six “Rollover” Options for Your Plan Funds

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So now we’re going to look at some of your options. Let’s say that you’re in transition. You’re maybe you’re retiring; perhaps you’re working for another company. So we’re going to look at really the six rollover options you have available for your plan. The first one is you can leave your employer plan assets in your existing company, right? 

So the 401(k) that you had all these years, you do have the ability to leave it there, or that 401(k), you can rollover your plan assets to a new company retirement plan. You may move to a different company; they offer another 401(k) plan, you can roll your 401(k) from your old company into that new company. Or you can rollover your assets to an IRA. You can also take a lump-sum distribution of your plan balance. You can convert your plan assets to a Roth IRA, or you can make an in-plan Roth conversion of your plan assets as well.

Taxation of a Retirement Account

Non-Roth Withdrawals

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So whenever you’re taking these withdrawals, look at the taxation of those retirement accounts. And so withdrawals from retirement accounts are generally taxed as ordinary income whenever those distributions take place. So the withdrawals are added to your income and taxed at whatever bracket you’re in. 

So if we look at the illustration on the right, we’re going to look at the married filing jointly segment. But you can see that up to $19,750, that portion will be taxed at your 10% rate. Now, whenever you go from $19,751 up to $80,250, that next portion of the money will be taxed at the 12% tax bracket.

So people will always say, “Hey, I’m in the 12%, or I’m in the 22% tax bracket,” but you still kind of want to look at what your effective rate is, too, right? Because you’re paying a portion of that money at 10%, 12%, maybe another portion at 22%. So that’s why they always give you what tax bracket the top tax bracket is, but they also give you what your effective tax rate is. 

Top Income Tax Rates Throughout History

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Excellent illustration here, just looking at tax rates through history.

It might feel a little different for some people, but right now, we are in some of the lowest tax rates that we’ve seen historically. If you go back through 1913 and going into the early ’40s and going through that period, we’ve seen some high tax rates. 

It’s just not until recently where we’ve started to see, through the ’70s and ’80s, ’90s, 2000s, where we did have pretty low rates as far as taxes. Changes to the tax rates could increase, or they could decrease, right? That’s the one thing that nobody has known. Many people believe, though, that tax rates are likely to rise in the future.

And that’s probably not too far out of the realm. Likely, something will have to take place just with the deficit and the amount of money that we’ve taken on as far as the country that it would be hard to see tax rates being consistently low from here on out.

Potential “Side Effects” of IRA Distributions

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So some of the potential side effects though of any IRA distributions. It’s always useful to look at the pros and cons of anything, right? It could increase your exposure to the 3.8% surtax on net investment income. It could phase out itemized deductions or personal exemptions and tax credits and can increase your Medicare Part B premiums. 

So those monthly premiums that you pay for Part B could increase. Increase the amount of Social Security benefits that are taxable. It can reduce or eliminate financial aid for a child’s education. It can also reduce or eliminate Roth IRA contribution eligibility and much more. So it’s essential you know anytime you’re taking an IRA distribution always to understand what the ramifications or what the possible effects of those distributions are going to do.

Required Minimum Distributions

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Required minimum distributions. This is a segment that I think is really important. And we usually get a lot of questions that are geared towards this. So avoiding IRA withdrawals, kind of the positive or the pros of this is, it allows your account to grow tax-deferred as long as possible, right? If you do not have to take distributions, you’re just letting that money build upon itself. 

Again, it keeps income off of your tax return, but the bad thing is you can’t avoid withdrawals forever. Required minimum distributions begin for IRAs once you turn 72. So again, there’s that sticker, new for 2020. This was something that has changed, right? It used to be 70 and a half, the required minimum distribution. Now with the SECURE Act, they’ve changed that to 72.

Required minimum distributions begin for most plans, again, once you turn 72. One of the big things to take away is any failure to take your required minimum distribution results in a 50% penalty. So it’s one of those things that you want to be mindful of. 

One thing to know, though too, is any individuals who reached 70 and a half in 2019 still need to take their RMDs. That is different for this year because you get to pass on taking your required minimum distribution for 2020. So typically, what we see is, in times of volatility, like we kind of experienced in the first quarter of 2020, they will sometimes say, “Hey, you don’t have to worry about taking your RMD now,” they’ll always pick up the next year. But I just kind of want to get that out there. 

Calculating Your Required Minimum Distributions

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So a lot of people have questions about calculating their required minimum distributions. The way you want to do this, or how it needs to be done, is you need to obtain your prior year-end balance. Whatever the balance is of the IRAs as of 12/31 of that previous year. 

Then you’re going to take that balance and look up your life expectancy factor on the IRA’s timetable. What you’ll do is take that year-end balance, divided by the life expectancy factor. So, for example, we’re looking at somebody who is 72. The life expectancy is 25.6. So, taking the balance divided by 25.6 would give you what your required minimum distribution is.

RMDs as a Percentage of Your Account Balance

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When we look at it from a percentage of your total account value for year 72, we’re not going to go through all of these, but it shows that at age 72, your RMD as a percentage of your account balance is going to be 3.91%. And then again, you see that it grows year by year, that percentage, or you’re going to be taking as part of your IRA balance. 

And so, again, the whole goal of forcing you to take these required minimum distributions is going off of this life expectancy timetable. Still, they want to be getting close to zero, and now those counts reduce the value of those accounts.

Three RMD Mistakes

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So we’re going to talk about some of the big three RMD mistakes that we see sometimes. 

Aggregating RMDs Between Different Types of Retirement Accounts

So the first one is aggregating RMDs between different types of retirement accounts. For example, I would give you somebody who has a 401(k), and they’ve got an IRA, right? Maybe the IRA is doing better than the 401(k). 

So somebody would add up the balance of the 401(k), the IRA, and say, “Well, you know what, I’ll take the money that I needed to take for my RMD out of the 401(k) and the IRA. And I’ll just take all that money out of the 401(k).” That’s not how it works, right? So for a 401(k), you need to take your RMD out of that balance. 

As far as your IRA, you need to take the RMD out of that IRA balance as well. Now, IRAs are a completely different situation. You get multiple IRAs, and you can add up your RMD for each IRA and take it out of one IRA. It’s just whenever you get that 401(k) kind of mixed into the picture is where you don’t want to aggregate those.

Aggregating RMDs Between Spouses

Aggregating RMDs between spouses. So each spouse might have an IRA. And so for an example, somebody might say, “Well, you know what? My spouse’s RMD is this; mine is this. I’ll take it out of my account balance.” Well, that’s not the way again it works. Each spouse needs to take their RMD out of their IRA accounts.

Forgetting to Take an RMD and Doing Nothing About It

Forgetting to take an RMD and doing nothing about it is probably one of the worst things you can do. If you forgot to take it or you haven’t taken it, you need to realize the mistake. You need to let the IRS know, tax preparer know, and so you can start getting the process going and just not sticking your head in the sand and forgetting about it.

Savvy IRA Planning Strategy #1

Hold Off on Taking IRA Distributions

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Let’s talk about some of the different strategies. After all, this is Savvy IRA Planning. So we’re going to talk about some of the savvy strategies that you can do. In the first one, some of these strategies may work for some people, may not work for others, but we at least want to get these different options out there. So holding off on taking IRA distributions. Possible benefits include; allowing the IRA funds to grow tax-deferred, keeping IRA income off of your tax return for as long as possible, and avoiding all those side effects of IRA distributions, again, for as long as possible.

Potential Drawbacks to Savvy IRA Planning Strategy #1

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Some of the potential drawbacks and limitations, though, as your IRA grows, so does Uncle Sam’s share, right? So that balance is growing in upon itself, hopefully, year in and year out over time. At 72, RMDs need to start taking place or need to start happening. IRA distributions in the future may be higher, which may push you into a higher income tax bracket. 

Possible side effects in future years may not currently be an issue. Things like increasing the amount of Social Security benefits that are taxable increased Medicare Part B premiums. An increase in future tax rates could result, though, in an increased taxation bottom line.

Savvy IRA Planning Strategy #2

Roth IRA Conversions

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Savvy IRA planning strategy, number two, Roth conversions. A special transaction where you take money from your IRA or other pre-tax retirement funds and move that over into your Roth IRA, the taxable amount converted is added to your income for that year. So, for example, Jill converts 100,000 from her IRA to her Roth IRA. Jill will have to add the $100,000 to her income, and the conversion amount will be taxed at Jill’s tax bracket. So again, this is something that you want to consult with your tax professional. You want to know where you’re at and what you might have to expect to pay if you do that conversion.

Tax-Free Roth IRA Distributions

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Tax-free Roth IRA distributions. So all the distributions from a Roth IRA are tax and penalty-free. If you’ve had the Roth IRA for more than five years, or you’re at least 59 and a half. If you’re older than 59 and a half, the amount you convert can be distributed at any time. 

Who Can Do a Roth Conversion?

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Another question that we get a lot is who can do a Roth conversion. So really, anyone can convert their IRA over to a Roth IRA. There’s no age limit, there’s no income limits or restrictions, and there’s also no requirement to be working. As long as you’re willing to pay the tax on that conversion, you can do a conversion from an IRA over to a Roth IRA.

Roth Conversions Help Reduce the Risk of Rising Tax Rates

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Roth conversions may provide that hedge against any increase in future tax rates. That’s the big unknown, right? Is what future tax rates are going to hold for all of us. Taxes are a major concern for a lot of retirees. Roth conversions allow you to pay that tax at what you know the rate is today, right? 

And if you believe that future tax rates will be higher, maybe you should entertain doing Roth conversions and how that may benefit you down the road for higher tax rates. It can help manage those other costs tied to your income. So again, that’s the Social Security benefits. And also that Medicare Part B premium as well can be affected.

Roth IRAs Have No Required Minimum Distributions

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Roth IRAs have no required minimum distributions. So no required minimum distribution, no RMDs during your lifetime, right? So you decide when you want to take those distributions, it allows your account to grow uninterrupted or tax-free for life. And then it can also provide a tax-free inheritance to your children.

The Tax Cuts and Jobs Act’s Big Change

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The Tax Cuts and Jobs Act, though, had some significant changes, and one of them eliminated the recharacterization; a do-over, decided you didn’t want to do a Roth conversion.

And that happened in 2018. If you did do that Roth conversion, and all of a sudden you realized that tax bill is higher than you thought, you accidentally faze yourself out of a credit, maybe the investments dropped in value right after you did the conversion, or you just changed your mind and said, “Hey, this is something that I thought I wanted to do, but now I don’t.” 

The bottom line is it’s too bad; you don’t get that do-over. That was taken away with the Tax Cuts and Jobs Act. So if it’s something that you’re going to do, it’s something you want to be pretty solid on your conviction to do that.

Three Key Questions Before Converting

So three questions before converting, and these are three questions that you want to know the answer to. 

  1. Do you have a rough idea of the conversion’s impact on your tax bill? Super important to understand and realize that. 
  2. Do you have a plan to pay for the resulting taxes? Right? So obviously, you’re going to owe a little bit more in taxes. Well, how are you going to pay for that? 
  3. Do you have a reasonable expectation that the benefits of prepaying your taxes like this make sense long-term for your overall plan? 

You’re going to want to be able to answer yes, to all of these and know the reasons and why you’re doing this and be able to answer yes to all three of these questions, knowing that what you’re doing is making good financial sense long-term.

Filling Up the Bracket

Roth IRA Conversion Strategy

So you might hear us talk about “filling up the bracket.” For this example, we have a before conversion, right? So we have these little buckets that are full of water. Some of them are full of water. Some of them are almost there, right? So if you think of that analogy as filling up a bucket of water. 

And, before this conversion, we have our 10% bucket already filled up. Our 12% tax bracket bucket is full. And we’ve got a little bit in our 22% tax bucket. You’ve got some room in that 22% bucket. So if you’ve got some space and already in that 22% tax bucket, it might make sense for you to do a conversion and fill that 22% tax bracket up. 

So this is just if you’re a visual person. This helps illustrate the concept. The idea in that delicate dance of figuring out how much you’re going to do. And you don’t want to do too much because then you’ll start spilling over into the other tax bracket as well.

Hunt for Low Income Years

So you’re always going to want to look for opportunity, right? If you’re thinking about doing a Roth conversion, you want to kind of hunt for some of those lower-income years. So bigger Roth IRA conversions in years where you’re usually at a lower-income level. Common examples of low-income years might be a business owner who had unusually low sales, right? Or maybe it’s a business owner that has unusually high expenses. 

And perhaps it’s a period where you had high non-reoccurring medical bills. So after retirement, but before receiving Social Security benefits and IRA distribution. You want to look at that window may be where you’ve retired, and you haven’t turned on Social Security, and you don’t need to take any distributions from your IRA. Again, that might be an opportunity time period wise to do some Roth conversions.

Potential Risks and Limitations

Some potential limitations and risks of Roth IRA conversions and the Roth IRA conversion strategies that we just walked through or presented. There is no guarantee that a Roth IRA conversion will achieve the intended results. 

There is no guarantee that Roth IRA distribution rules won’t be changed in the future. The amount converted is generally added to your income.

A Roth IRA conversion may also trigger the same side effects associated with regular distributions from our traditional IRA that we looked at earlier. There is no guarantee that investments will appreciate in the Roth account after a conversion. 

And establishing multiple Roth IRA accounts could result in an increased fee. For example, maybe there’s a custodial fee or something associated with having a few different accounts. Those are just some things that you want to be mindful of and have in the back of your mind.

Savvy IRA Strategy #3

Move Retirement Money Directly

So now we’re going to look at Savvy IRA strategy number three. And this is looking directly at that the movement of money in retirement. There are two ways to move retirement money. You can do what we call an indirect rollover, also known as a 60-day rollover. 

You can also do a direct rollover, and this is also known as a trustee-to-trustee transfer or a direct rollover. 

Indirect Rollovers

In an indirect rollover, the distribution is made payable to you. There’s a 60-day time limit that begins when you get your hand on that check. 

There’s a 20% mandatory withholding from the employer-sponsored retirement plan. The big key here, though, is there are once-per-year IRA rollover rules. So if you’re going to do an indirect rollover, you can only do one every year. So if you do more than once a year, there could be a tax part of that, right? You always want to be mindful of these rollovers and how you’re going to do them.

Direct Rollovers/Trustee-to-Trustee Transfers

The direct rollover, that’s the safer way. It’s a trustee to trustee transfer. The money leaves your 401(k) and goes directly to the custodian. The funds are sent right from the old retirement accounts to the custodian. They bypassed you completely. There is no 60-day rule, and there’s no 20% mandatory withholding. 

And again, something that’s key is there’s no once-per-year rollover. You can do as many of these as you want in a year. 

Here’s an illustration of what a typical direct rollover check will look like. It will have the company name, and it’ll have the custodian. It will also always say FBO, which stands for, For Benefit Of. So company X, the custodian name, for benefit of John Smith IRA. And you always have the account balance or the amount that the check is written out to.

Savvy IRA Planning Strategy #4

Coordinating Your IRA Planning

So Savvy IRA strategy number four, coordinating your IRA planning. So again, this is huge whenever you think of it from an overall perspective. IRA Planning should be coordinated with other aspects of your planning, such as your comprehensive retirement plan, your estate plan, tax planning, and education planning. Regardless if it’s for you, your spouse or kids, or grandkids.

It’s Not Just What You Own, but Where You Own It

We’re going to look at what assets and maybe what might make sense to what you want to hold asset level-wise in those accounts. So, allocate certain investments in your retirement accounts and other non-retirement accounts and how that may lower your tax bill. 

Here are just some of the assumptions that we’re going to be going through in this example. So we’re going to say that you have $100,000 in an IRA. You’ve got $100,000 in a non-IRA investment account. 

Strategic Allocation Example – Assumptions

We’re going to say that you’re in the 24% tax bracket. You want to own $100,000 of investments paying a hypothetical 4% interest rate. You want to own $100,000 of stocks paying a hypothetical qualified dividend of 4%.

Strategic Allocation Example – Scenario #1

So in scenario one, that $100,000 in an IRA that owns stocks paying 4% qualified dividends, 4% of that $100,000 will be $4,000 of income generated within the IRA. That’s going to be taxed at ordinary income tax rates when you withdraw that from your IRA. So $4,000 IRA withdrawal at a 24% tax rate will create a $960 tax bill on that portion of the money.

Don’t forget, though; we have that other pocket of money, $100,000 of a non-retirement account. So this could be an individual account or a joint account, and we’re going to say that you own bonds, and the bonds are paying a 4% interest rate as well. So the interest is taxed again at ordinary income tax rates. That $4,000 generated from that 4% interest rate will be taxed at the 24% tax rate. So again, that creates another $960 tax bill. So 960 plus 960, that gives us $1,920 in total tax owed for the year.

Strategic Allocation Example – Scenario #2

Now, in scenario two, we’re going to mix it up a little bit, and we’re going to say, okay, well, what if we switched the assets and what type of investment vehicle they’re invested in? The $100,000 IRA owned bonds paying 4% interest again. So $4,000 of income is generated within that IRA. Again, that’s taxed at ordinary income tax rates when withdrawn from the IRA. Again, $4,000 at 24% tax rate gives us that bill of $960, but that $100,000 that’s invested in that non-retirement account. The individual, the joint account, what we’re doing is we own stocks with a 4% qualified dividend payout. So qualified dividends are taxed at long-term capital gains rates.

That $4,000 of the $100,000 is generating a $4,000 qualified dividend income for the year. Now you’ll notice, though, that long-term capital gains rates are tax at a 15% tax rate. So 15% of that $4,000 is a $600 tax bill, which equates to about $1,560 in total taxes. You can see that the $1,560 in total tax owed is less than the previous scenario. Just knowing what type of assets and what account you’re going to hold those in can help with tax savings at the end of every year.

Potential Risks and Limitations

Some potential limitations and risks of this strategy include no guarantee that the investments will perform as expected; not all dividends qualify for taxation at long-term capital gains rates. There’s no guarantee that the special tax rate for long-term capital gains won’t be eliminated in the future.

Coordinating IRA Planning With Social Security

So now we’re going to talk by coordinating IRA planning with Social Security. When we’re just looking at things high level, many retirees do not adequately evaluate when to apply for Social Security benefits. When you should claim benefits is a personal decision that depends on many factors, right? 

It depends on your current situation, how much you’ve saved, and where you save that money. It also has a lot to do with health, right? Longevity, family history; all those things go into a personal decision on when you should claim Social Security.

Social Security is guaranteed for life and has cost-of-living adjustments. Delaying Social Security can increase your monthly benefits. So every year you delay taking Social Security after age 66 or 67, whatever your full retirement age might be, you do get that 8% increase up until age 70. Well, we do see many retirees claim Social Security potentially earlier than they really should.

Withdraw from an IRA to Delay Social Security?

Withdraw from an IRA to delay Social Security, right? It doesn’t make sense to front-load my retirement by taking those distributions out of my IRA instead of turning on Social Security. There have been some reports, and Boston College did this one, but they’ve looked at and show Social Security is often the cheapest annuity you can buy.

And you could say, “Well, Social Security, I didn’t really buy it, right?” Well, you paid into it. And the price you are paying by delaying taking Social Security is using those other assets to fill that income need, right? So that, in a sense, is a price you’ve paid. 

The annuity bought, though, is the difference in the monthly benefits by delaying Social Security. So again, by delaying taking it, you are getting that higher monthly benefit. Social Security benefits are generally more tax-efficient than IRA withdrawal. So at least 15% of the Social Security benefits that you receive will be tax-free.

Savvy IRA Planning Strategy #5

Coordinating Your IRA Planning with Your Estate Planning

Savvy IRA strategy number five is coordinating your IRA planning with your estate planning. So IRAs and other retirement accounts generally pass via the beneficiary form. Your will does not generally control who gets your IRA. So that’s one of the big misnomers that we hear from people, one of the misconceptions out there. 

Many people fail to appropriately update their beneficiary forms, leading to problems. Obviously, life changes, right? Things happen, circumstances change. There’s a lot of things that can happen, and it’s every time those things happen, you always need to go back to those accounts and make sure that the beneficiaries reflect who you want to receive that money should anything happen to you.

Different Types of IRA Beneficiaries

So this is pretty busy. A lot is going on here, but this was a significant change. Again, there’s that new sticker for 2020. So what it did is it took the beneficiaries and divided them into three categories. You still have your eligible-designated beneficiary. So that’s going to be the minor children of a descendant. That’s going to be considered a disabled person, a chronically ill person, not more than ten years younger, certain trust and spouses. So all of these fall into what they consider eligible-designated beneficiaries.

Then you have the middle column, this orange box, which is considered a designated beneficiary. And so this would be certain trust, right? Or non-spouses. And then you have on the very far right in red, non-designated beneficiaries, and who was created in this? It’s your estate; it’s charities, it’s certain trust.

Designated Beneficiaries

So designated beneficiaries, generally living people, some trust can qualify sometimes. But here’s the important thing, the account must generally be distributed by the end of the 10th year after the year of death, right? So that was a huge change, and we’re going to go into why that was a huge change. 

But if you’re leaving IRA money to kids, non-spouses, that bucket of money has got to be taken out. It can be taken out periodically through those ten years; it can sit there until year ten and then be taken out. But the fact is, is that it needs to be taken out within that 10-year timeframe.

Eligible Designated Beneficiaries

Eligible designated beneficiary. So this is a specified group of designated beneficiaries who can still stretch those distributions, right? They don’t have that 10-year window. It’s spouses, disabled persons, chronically ill people, individuals within the ten years of the descendant’s age, and the IRA owner’s minor children. But again, only until they reached the age of maturity. And then certain trusts for the benefit of the person that is above may qualify.

The Stretch IRA

So the stretch IRA, we alluded to it that, “Hey, this group is still able to stretch those distributions out.” Only the eligible-designated beneficiaries can stretch the IRAs over their life expectancy. It preserves the tax deferral for as long as possible, right? And it helps to minimize the impact of taxes on those withdrawals since they are stretching out those distributions over their life.

Trust IRA Beneficiaries

So whenever you look at a trust as an IRA beneficiary, there’s been a lot of changes in this area. One of the things when you’re looking at it, you’re going to want to look at the control aspect of how you want those assets to go, what parameters maybe you want set on those distributions. Still, it would be best to look at the complexity and complexity of the tax law change. You want to look at it in comparison with the cost as well. And just really have those conversations and figure out the best way to potentially have the trust as a beneficiary.

Options for Spousal Beneficiaries

Options for spousal IRA beneficiaries, we’ve got three areas, and we’re going to cover each of these. But you can do a spousal rollover, you can elect to treat the account as your own, or you can just remain as the beneficiary. 

Spousal Rollovers

So in a spousal rollover, we’re going to look at Mr. Smith’s IRA again, and let’s say, Mrs. Smith has an IRA. So we’re going to say something happened to Mr. Smith. What it will do is it’ll move Mr. Smith’s IRA into his surviving spouse’s, his wife’s IRA. The funds are treated as though they were always in the spouse’s IRA. 

It will always be looked at as it’s just her IRA. Future distributions may be subject to the 10% withdrawal penalty if the surviving spouse is not 59 and a half or older. So if they haven’t met that criteria and try to take a distribution, they will be looking at at least that 10% early withdrawal penalty.

Remain as a Beneficiary

They can remain as the beneficiary. So inherited IRA assets are kept in an appropriately titled inherited IRA. Distributions are not subject to the 10% early withdrawal penalty. And then, the spousal rollover can always be made once the spouse beneficiary turns 59 and a half. 

This is some of the key planning that can take place in a time where you hope you’re not going to be facing those things, right? But sometimes they do happen. And so, if the spouse is not 59 and a half, it would make sense for them to stay as the beneficiary potentially. And then once they’ve turned 59 and a half, then for them to assume, or just do the spousal rollover at that time.

Bonus: Savvy IRA Planning Strategy #6

Watch Out for Scams!

So bonus strategy, number six, watch out for scams. Scammers know that there is a lot of money in IRA’s. There are trillions and trillions of dollars in IRA’s. Scams have gotten so bad, so pervasive that the IRS has actually started putting out documents. This is an example of one of the documents that some scammers will claim the IRS agrees with or promotes a particular IRA. 

And so the IRS has put out this publication saying the IRS does not approve IRA investments. It talks about some of the things that people need to be mindful of. Again, you always want to do your homework before making any financial decision, but just know that scammers are out there, to be aware of that, and to watch out.

IRA Planning is Complicated

So, as we wrap up, we have covered a lot today. We’ve thrown a lot your way. So the bottom line is whenever you’re looking at an integrated plan and how everything works together and making sure that it works well together, you can soon find out that it gets pretty complicated. 

So many retirees are unaware of how critical IRA planning is to their plan. Or you want to remember that IRA planning intersects a lot of different areas, right? And we just covered a high-level view of the most impacted aspects, but there’s a lot more to it, a lot more moving parts. So it’s essential to have all of that incorporated into a plan.


I also want to mention that we have another workshop where we look at the SECURE Act, and all the changes and the stretch IRA changes implemented. We go into a lot more detail on this workshop because there is a lot of detail. You can find that webinar here

Complimentary Consultations

So at the end of the day, we know it’s complicated, right? We just covered a high-level view of all the things that you need to think about.

So that’s why we offer the complimentary consultation, right? So if you have any questions on planning and tax-efficient withdrawal strategy, evaluating your current plan employer, and establishing an IRA or Roth IRA, what makes sense, creating an efficient Roth IRA conversion plan, so that’s huge for a lot of people—moving retirement account money if it’s the right move for you. Decide if you should use IRA money to avoid taking your Social Security and ensure that retirement accounts pass to the proper beneficiaries as efficiently as possible.

Schedule a complimentary consultation right here if that’s what you’d like. Let us know if you enjoyed the presentation or have any feedback. If you have any questions at all, please let us know. 

 So thank you for joining us today. Hopefully, you found the information useful. And just let us know if you have any questions so that we can be of help to you. 

Drew Jones


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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.