IRAs are Different

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But most of all, thank you for listening to the Truth Podcast Network. IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees. CardinalGuide.com, Cardinal Advisors, and Hahn-Shile CFP sell insurance. This show does not offer investment products or investment advice.

Welcome to Finishing Well with certified financial planner Hahn-Shile. And today's show is IRAs are different. And, oh, we're going to get into, wow, they're different and what that exactly means. But before we get there, I think it's safe to say, and the psalmist said in Psalms 119, I'm a stranger on the earth. In other words, if you're a Christian, I bet you're different. You just, you know, people think that guy's a little different.

You know, he's, you know, all you have to do, I think, is turn on the TV about five o'clock and watch for about two hours. And if you're comfortable, then, you know, I don't know what to say, but you just feel like I'm a stranger. How does all this stuff go on? What are people thinking out, you know, and you feel like you're a stranger on the earth, which is what, you know, the psalmist was saying in verse 19.

But then he said, hide not your commandments or your mitzvahs from us, which these are the, you know, from the standpoint of the Jewish faith, that this is 613 different commandments, but you can kind of boil it down to the two that we generally think about, which is love your neighbor as yourself and, right, love the Lord your God with all your heart and all your soul and all your strength, with the second being the first, because the first will be last. Sorry, just had to throw that in. Sure. But anyway, you know, what would we do without God's word? I mean, how would we have a map and a navigation system? And it seems like I study, and I'm sure you do listening, that you study this all the time. And wow, we need help to find our way. Well, when it comes to IRAs, I think they're different too.

And so it's helpful today that we're going to provide a bit of a map. So Hans, how are they different? Well, yeah, I mean, the first question, and I asked you this, and we're getting ready for the show, different than what? What are IRAs different than? And you can go ahead and answer that. They're different kind of money.

I mean, you've got this great big—a lot of people. My dad had this great big, huge balance in IRAs, and he felt like, wow, I got this, but it's a different kind of money. Well, it is different, but he didn't necessarily look upon it as different. I mean, he knew that he hadn't paid tax on it yet. But if he's, you know, and your father was up in his 80s, I'm talking about people that are coming to me for retirement planning. They're in their 50s, they're in their 60s, maybe early 70s, and they're planning the afterworking or the retirement, and they're planning their income, and they've got generally two buckets of money. And the largest bucket of money most of the time is this IRA money, and the smaller bucket of money is the other money. Most of them understand that the one money you've already paid tax on, the smaller bucket, and the big bucket, you haven't paid tax on it yet, and they're kind of licking their chops about that.

This is that, yeah, that's been a tax thing, and it's grown and grown and grown. Okay, and that's good. Now, what I want to explain to people, and I want them to grasp, and this is really out of the ed slot training manual. Every manual he puts together, this is about the fourth or the fifth page, this document that says IRAs are different. And what we're doing today is we're just, well, how are they different?

And so we're going to just jump into it and start talking point by point. The first point he's got in here is that IRAs pass by contract, generally not by will. What that means is, is your, let's go to the other money first. Your other money, unless it has a transfer on death on it or something, is going to pass according to your will. You know, if you had $10,000 in the bank and you die, the will or the probate court is just going to distribute that 10,000 ultimately to whoever you named in your will. Doesn't work that way with IRAs. IRAs have a beneficiary. They have to have a beneficiary. Many times they have multiple beneficiaries, or they have a primary beneficiary, which is most of the time when people are married as a spouse. And then they have contingent beneficiaries, which most of the time are the children or the adult children, but not always. And when a person dies, that money goes very quickly to the named beneficiary.

Very different than passing through the will. Yeah. And so it speaks to what we always talk about to make sure your beneficiaries are who you want them to be. Yeah.

And I get many people when I'm pointing this out to them, when I'm asking about, oh, we already took care of that. That's all done in the will. Okay.

That's good. You know, I feel like saying, well, I didn't ask you about the will. Who's your beneficiary? You know, because it's not going to matter what the will said. It's going to be really nice when we have the will completely in alignment with the beneficiaries. But when it comes to the IRA, that money's going to whoever's on the dotted line. Okay.

Yes. So the next point is IRAs have required minimum distributions, which currently they start at 72, or after age 72. So many of you don't need to worry about those for a while. As opposed to other money, they don't have any sort of rules in your other accounts that say by a certain age, you got to start drawing out money, and then a different amount at every age. But IRAs have those.

And you need to be familiar with them, because they're going to come up all of a sudden. And if you miss a minimum distribution, the penalties are gigantic. The whole idea that the IRA is what's it here for? From the government standpoint, it's here for your retirement. So they've allowed you tax savings and investment growth without paying taxes on it.

And now they're saying by 72, if you're not retired, and you don't need this money yet, we're going to make you take some of it, and take every amount of it or some amount of it every year until you pass away. And that's not enough to empty this thing. It just typically is not. That's why people end up dying with big balances. So and unfortunately, a lot of people use these RMDs as their guide for how much to take out. And I'm a believer on another show of another day, we'll talk about having a strategy to take out more than that, so you're not passing along a tax burden to your children. So let's move along to the next one is that IRAs have very complex distribution rules during life and after death.

So let's just leave it at that. There's very, I mean, if you inherit a bank account, the taxes or some of that other money, the distribution rules are pretty simple. I mean, you know, if you inherited a bank account from your father, it was difficult to get it. But once you got it, it was just drawn out of the bank, it's yours. I mean, there's nothing complex about that. With IRAs, let's just leave it at the fact that they're very complex.

And all those complex rules were changed by the SECURE Act, which was passed a few years ago. IRAs distributions can incur tax penalties. So if you're taking money out and you don't do it in the right fashion, you're going to pay penalties. Or if you don't take any money out, you should have taken more, you can get penalties for that, in addition to the tax. So and many folks are familiar with the before age 59 and a half withdrawal, you got to pay a 10 percent penalty plus the taxes. And that really zinks in people that take early distributions out of their IRA or 401k.

Many times to live, but those tax penalties are there and they need to be paid. IRAs are highly taxed upon death or withdrawal. And we point this out all the time, because when somebody dies, generally the heirs, they want the money. I mean, if you receive an inheritance, you want that, you need it.

Because you're the next generation or the next generation down, you have needs and wants and kids to educate and things to do. And if you take a whole bunch of this money out in one year, it's going to put you in such a gigantic tax bracket that it's going to be devastating to the money. IRAs are double taxed at death.

That means for large IRAs where people are subject to the estate tax, this is kind of a complicated one to get, but if you have a big IRA and it's just part of your assets that create a taxable estate, first you're going to have to pay estate taxes on the whole amount, then you're also going to have to pay income taxes on that IRA balance so it creates an effect of a double tax. Did you ever think about that? Not for one minute. Okay, that's good.

I appreciate your honesty. We're in with these lawyers and CPAs and we go to an ed slot meeting. It doesn't take much to get us thrilled and excited or angered or whatever, but there's really complicated ways to weave in and out of the estate tax and the income tax for large estates. Now this next one where it talks about IRAs have no step up in basis. So, you know, when we talk about step up in basis, what we're talking about is, you know, grandpa owns the farm, grandpa lives on the farm and the farm becomes worth a lot of money during his lifetime and then grandpa dies and the children inherit the farm and of course they perhaps want to sell it after grandpa's passed away, but they're all worried about the income taxes because the farm has increased in value so much and what a lot of people are not aware of, it's just an asset or other money that you own outside of an IRA, which typically real estate would be, this gets a step up in basis. So they really won't owe any tax, income tax, if they sell the farm right after grandpa passes away. That's why we see cows on so many of the lots of the land that's in there close to town near the freeway and you say, what does this guy do in farming?

Well, they're keeping the land busy as a business until that generation passes away. So they get the step up in basis and then they can sell it for millions to build a neighborhood. That's going on all the time. I thought before, you know, I started listening to you, I thought the step up in basis was like, who's on first, what's on second? A different kind of basis is what we're talking about. It's B-A-S-I-S. What was the joke about, go ahead and tell the joke.

Come on, you're going on the radio. I had a joke that, you know, what happens or what do you call it when your dad is on third base and dies and you inherit that base, you don't have to bat again. It's called a step up in basis. Yeah, that's the idea. I knew it was like that. That was real good. Well, this is a really good place for a break. So you're listening to Finishing Well. Today's show is IRAs are different.

I imagine you're saying this is a bit of a different show. Well, it is because we've got a lot of information to cover, but I think it's going to be really, really helpful for you if you have IRAs, things that to be thinking about, at least planning around. And you can find out all about these in Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. It's right available at cardinalguide.com, as well as a video on the subject is at Cardinal Advisors on YouTube.

So you can check that out. When we come back, we'll have more on IRAs are different. Hans and I would love to take our show on the road to your church, Sunday school, Christian or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, Social Security, Medicare and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner, Hans Scheil, brought to you, of course, by Cardinal Guide. And today's show, IRAs are different. And if you've been listening thus far, you would say, man, I had no idea.

We'll continue on Hans. Yeah, well, and just so we were talking about a step up in basis, which people receive when they inherit an estate, you know, or in other words, when a person passes away, their capital assets get marked to whatever their value was when the person died. So it basically eliminates taxes on the gain on property, which is same thing's true for stock. If your grandfather or your father bought stock at $20 and it's now sold for $200, you'd think there'd be a $180 gain if he sold it during his lifetime. But if you sell it after he passes away, when you've inherited it, there's no step, there's no basis or no income tax on the thing.

It's just the basis is $200. And so the point being with IRAs, there is no such thing as a step up in basis because you're going to owe ordinary tax on any distribution. It doesn't matter when the stuff was bought and sold. Investment gains are taxed as ordinary income. There's no capital gains tax rates inside of IRAs. Investment gains are not subject to the 3.8% investment income surtax. So there's a surtax of 3.8% that we help some of our more well-to-do clients avoid or by smoothing out their income, because you've got to pay an additional almost 4% on investment income. And IRAs, you don't have to pay that on IRA distributions.

IRAs cannot be gifted or transferred during lifetime. This is one that people just don't get. As they say, you know, this is in my wife's and my name. It's in both of us. Okay. I always just say, okay.

You know, because I'm, you know, it gets old arguing with people, but they're not. I mean, it's either in your name or your wife's name. It can't be in both. And you can't give it to somebody. You can't put it in a trust. An IRA or a 401k or anything of the like needs to stay in your name for your whole lifetime.

Kind of simple. Yeah. Is that with Roth IRAs as well as regular IRAs? True.

Both of them. So, so a person opens a Roth and so now they got two kinds of IRAs or the two types, but they got two accounts and both of those accounts are going to stay in their name for their whole life. And then as soon as they pass, that money is going to go to the name beneficiary on both accounts.

It's just that simple. And then the name beneficiary has some decisions to make as far as when they want to withdraw and how they want to withdraw. And you got a whole other set of rules for them, but we're not going to get into those today. Okay.

Okay. Now there's, there is an exception to that, that you can give a direct gift to a charity under a qualified charitable distribution or a QCD. You need to be 70 and a half or older to do it. And there's also another exception that it can be transferred as part of a divorce agreement from one spouse's name to another spouse's name.

But those are the only two exceptions. Other than that, it's got to stay in your name for the whole life. IRAs cannot be transferred to trusts during lifetime or after death. We can use trusts in regard to the beneficiaries. So we can set up trusts that are going to control these things after you die, but we can't actually transfer the asset into the trust. IRAs cannot change ownership during lifetime. This sounds a little bit like we're going over the same thing, but if you do change the ownership, it triggers an immediate and complete distribution and ends the tax shelter. IRAs cannot be owned jointly. Like other property, we already went over that. IRA equity cannot be tapped the same way home equity can be tapped without triggering tax and potential IRS penalties.

I was even naive on this when I was a young person. I just thought, well, that IRA is over there in a balance. That's kind of like my money. So when I go buy a house, I can just tap that or no, or I can put that up as collateral. No, you do any of that stuff, it's going to be considered a distribution. The choice of IRA beneficiaries determines the potential value to the beneficiaries. So who you choose as your beneficiaries, I mean, I don't recommend you use the tax consequences to pick your beneficiaries. I would think you're going to want to pick your beneficiaries as to who you want to get the money after you pass away. But if you were interested in using the tax consequences, well then different beneficiaries, depending upon their age, whether they have a disability or they're a spouse, I mean, there's different tax consequences to beneficiaries of receiving inherited IRA money. Really?

Oh yeah. So like if your spouse receives, so your spouse has a whole bunch of options, which is good. I mean, because presumably they were either living off of or could have lived off the income of the IRA or the distributions, and now the principal is deceased, and then the money comes to them. They can keep it in the deceased person's name and treat it as a spousal IRA.

There's a way to word that. I don't want you to try this at home, but and just continue on distributions according to their age. But if the spouse is younger, they can retitle the IRA under their name after the death, and then they can still spread out the distributions and wait till 72. I mean, they get all the same benefits, you know, like they were the initial IRA owner. And the same thing for disabled beneficiaries, children or special needs children, different things that they can, they've got a better way to pull the money out and spread the taxes out than a regular beneficiary.

No separate account rules for trusts named as IRA beneficiaries. So if a trust is the named beneficiary, a trust is not a person. So the trust will need to distribute the money over 10 years.

And it could possibly be five years in some situations. So naming a trust as your beneficiary is not a good idea. Of course, you can do all of these things with other money that I'm talking about here. And then IRAs have no principal and income concept. They have none whatsoever that, you know, where they have the money that you put in over here, and then the money that you've earned over here, and they keep those separate. They're all mixed together like one, because the taxation is going to be the same on as the money is coming out of there. It doesn't really matter.

Yeah, that was significant. So, you know, from the IRS standpoint, doesn't matter that you put in, you know, $5,000, if the investment value went up to $25,000, you're still paying tax on the $25,000. Makes no difference. Right.

Because you never paid tax on any of the money. That's all they know. And they're going to get it. So what all this calls for is having a plan for distributions at retirement. That's what we talk about all the time. Having a really, it's kind of tough to make a plan to pay the taxes. That's what we're doing.

And we just got to hold people's hand through this. You know, in some cases it may make sense to pay taxes sooner than later. And their whole life they've been taught, no, no, paying taxes later is always better than sooner. And that's not true in the case of IRAs. And IRAs require their own estate plan. So with this IRA money, we need to have our own, you need to have your own estate plan with your IRA. And then that needs to be integrated in the overall estate plan.

Yeah. And one of the things that I think would be helpful for our listeners, Hans, is at the beginning, you mentioned Ed Slott. And so, you know, I think it's really helpful if you've listened to all this, you're like, man, I need some help with this.

Where do I get qualified help? And part of the training that you've received from Ed Slott is really huge. And so can you tell our listeners who he is and how he fits into the picture? He's America's IRA, actually. He's a CPA that practiced for many years. And then he decided to do estate planning with IRAs because he just saw so many mistakes of people and just where the clients would die.

And he just saw all these mistakes. He decided he was going to make that his business. And then he started training other professionals to do like he does CPAs, lawyers, estate planning attorneys, financial advisors, CFPs like me. And he started running these clinics and teaching people. And then out of those clinics, people are saying we want more. And then that created his elite advisor group, of which I've been part of since 2012.

And we go two times a year. This is just the tip of the iceberg, this 20-point document. I mean, we study this stuff a lot. And I really had some concerns in the beginning. Is this guy going to keep me interested for two and a half days, twice a year, talking about IRAs when I already know a lot of this stuff?

And I couldn't have been more wrong. I mean, when I go into Ed Slott, that's the most engaged meeting that I'm in. It repeats itself twice a year. We're on webinars. We get emails. We get these big, thick books every year. And then we also have those people at our disposal because a lot of situations that come up are just not covered in the book. I mean, they're judgmental things with money moving out of retirement plans and special situations. People have special estate tax consequences, estate. There's divorces.

There's just all kinds of stuff. And we have their technical experts. And even Ed Slott himself, if I need to get him on the phone, I can, to look through a situation and give advice to people. So help do Ed Slott.

Yeah, I hate we're out of time. There's a whole lot here, as you can tell. And of course, we want to make sure that everybody knows how easy it is to get up with Hans and get this kind of planning. It's cardinaladvisors.com, where you've got his book, The Complete Cardinal Guide to Planning for and Living in Retirement, as well as... It's actually cardinalguide.com. Yeah, I said advisors, didn't I?

I get confused. That's right. That's the YouTube channel, Cardinal Advisors.

Right. It's cardinalguide.com, where you can get up with Hans and his staff, Tom and Tara and all these people. So we heard from today for the first time in the show.

So I hate we're out of time. But thank you, Hans. Great show. Thank you. Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Scheil CFP sell insurance.

This show does not offer investment products or investment advice. We hope you enjoyed Finishing Well, brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long-term care, life insurance, investments and taxes, as well as Hans' best-selling book, The Complete Cardinal Guide to Planning for and Living in Retirement, and the workbook. Once again, for dozens of free resources, past shows, or to get Hans' book, go to cardinalguide.com. If you have a question, comment, or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com, cardinalguide.com. This is the Truth Network.