IRA 401K Equals Lousy Estate Planning Strategy

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Well, I'm so glad you tuned in today to Finishing Well. I think you're going to be so glad you did, as today's topic may sound negative at first, but when you think about it, sometimes it's really helpful to know what not to do in order to know what to do. And so the topic for today's show is IRA 401k equals lousy estate planning strategy. And so, you know, I was thinking about this lousy estate planning strategy, and, you know, recently I've been around a lot of relatives, and I was talking to them about their very long-term estate planning strategy, like, how are you going to make sure that you're in heaven? And even though that I knew at one time these particular individuals that I've spoken to knew the correct answer to a estate planning strategy is Jesus's blood, but what these people are telling me, lots of them, is that their estate planning strategy is their merit. And so I wonder, you know, people that you may think you know that you know, because I would have told you that both these people that I'm talking about right here would have told me that their estate planning strategy was that Jesus died for their sins, and that when they got there, you know, like, He did this so that I could, you know, be righteous, that I'm going to get there on His righteousness, not on mine. But, you know, as you're hearing me, just check in with some people that you may not be so sure, or maybe it fits your situation. Like, do you think that you're possibly going to get to heaven on your own merit? Well, thank you for playing. That's not going to happen, right? You get there not on what you did, but what on He done, right? He died for us that we may have that really great long-term estate plan of living eternally, but on top of that, there's some estate planning we got to talk about here, Hans.

Yeah. This is of this world, and it is the money that is sitting in your 401k or in your IRA and money you haven't paid taxes on. And so I'm going to give you some statistics here, is there in retirement plans, IRAs and 401ks, as of just a little while ago, 34 trillion, 900 billion dollars is how much money in balances in all of those things exist right now today.

And that's really outstanding. It's almost like, you know, all those people that did good things, it's really good that they did that meritorious behavior because, you know, that helped their relationship with God, but they didn't put it in there as an estate plan. They put it in their right to have the savings for their retirement. Well, and the government didn't give them the tax break that they got when they put the money in there so that they could pass it onto their kids. They gave them the tax break, which doesn't work out to be that great of a break, uh, in your retirement, but the government put it there because you saved for your retirement.

And a lot of my clients are like close to retirement or they're retiring or retired. And now's the time to enjoy that money, to use that money. And if you don't feel like you need it, then the government's going to let you hoard it until you're 73.

Then they're going to make you take out certain amounts and required minimum distributions. And then how whatever's left is going to go to your beneficiary. And if that's your estate planning strategy, if that's where most of your money is and you just don't, you know what, this was, this was just a quote ed slot when I was just at his two and a half day meeting that I go to twice a year, I just wrote it down.

I said, I'm going to do a show on that. IRA and 401k is a lousy estate planning strategy. Or even your friend that said that it was like a roach motel infested with taxes.

Well, that's what, that's even, he goes on further. He said it's because of the stench of the tax is what makes it lousy. I mean, if it didn't have the stench of the tax, it'd be a great estate planning strategy. You just leave the money there, postpone the taxes. And then when you die, it goes to your kids. And then if they didn't have this thing just full and infested with taxes, it'd be a great estate planning strategy. And the one friend of mine who's who's a character, he said, it's infested with taxes.

That's what the problem is, is, is that it is there's too much tax in the thing. And so we're going to talk later after we've finished making our point about this, cause I don't want to run these things down as for retirement. There's a reason we got $35 trillion there it's for retirement. So let's get a plan to use it during retirement or to convert it into a good replay estate. I mean, if you're real plan, you say, I don't need to spend it on my retirement.

I'm just fine on what I got. Okay. Well then let's just not by default, try to make it more lousy of a state planning strategy. Then let's, let's look out over a number of years to turn the thing into a good wholesome estate planning strategy. Even great, right?

Yeah. So what happened with the secure act, which passed in 2020, or it started in 2020, it passed in 2019 and then secure act 2.0 that passed in the very end of 2022. And they had to fly the bill down to the president on vacation somewhere in one of the islands. It's literally somebody got on a commercial flight with the bill 800 pages and flew it down there on the eve of the year, end of the year, um, to have the president sign it, to make it law. But that was included in that long bill was secure act 2.0, which doesn't mean a lot to our listeners, big deal, secure act.

And they always give it these names. It's like your retirement is now more secure. I'm telling you, what's more secure is the taxes they're going to reap from your beneficiaries, um, is more secure for them because they just tightened up the options that your heirs can use to get the money out of there and use it.

Yeah. And that was clearly the case, you know, and when my dad, you know, we've wished now that, you know, he had had a chance to talk to you because clearly what he did was, you know, he went to be with the Lord, with all this money and IRA. And as my siblings all got these, you know, then clearly they were faced with, you know, how am I going to pay the taxes?

And some cases they used wise, you know, back when, before the secure act, they used the stretch and all that kind of thing. But in some cases they had to get the money. And so when they got the money, you know, what they thought was going to be, you know, a hundred thousand dollars or whatever quickly found out was more like 60 and oh, here was this big tax liability. Well, and the reason the tax liability, when you pull it all out is so big is that goes, all that shows up as income in that one year on top of your other income. So you can be marching along in a pretty low tax bracket, paying your taxes, and then you get this inheritance and for a hundred thousand dollars, and then you cash it in, you know, if your income was 70,000 before the, before the inheritance in that one year, it's going to be 170,000. Go look at the taxes you pay on 170 grand.

That's, that's the problem with it is, is when beneficiaries and heirs receive the right to withdraw the money, they generally want to know how quick and how soon and how much, and the tax is the furthest thing from their mind and a lifetime of savings and work goes out the window and tax that that's what. Ed slot is talking about. And that's what I'm talking about. When I use the word lousy, I didn't take that lightly.

I mean, I'm quoting him, but I looked it up in the dictionary just to make sure I wasn't, um, swearing or saying something, but it passed muster in the terms of what I can use. And this whole point with that is it has a tax. It's like an IOU to the IRS. And so there are other ways there's things you can do now to improve or to create a great estate planning strategy. Yeah. Cause again, it's a great thing that you have those assets and boy, can you create an estate planning strategy and long-term care strategies and all sorts of strategies? Cause you have the resources to do it.

Well, sure. And so one of those is the Roth conversion. Now, if you wait till 73, or you wait till minimum distributions to start doing Roth conversions, you can't convert the minimum distribution or the RMD. So if you wait that long, or you get on a long-term conversion strategy, when you get to 73, you're going to have to take the minimum distribution from the pretax IRA, but you can then convert amounts above that.

And what's interesting. There is no annual limit on the amount you can convert. So you could have a million dollars in an IRA or a 401k that you've never paid taxes on.

And you could convert all million of it in one year. I don't think that would be very smart, but what we would typically do with somebody with that much money is we'd look at a hundred thousand, if they were a couple, perhaps 200,000 a year for five years. So we'd have a multi-year strategy or we'd perhaps we would think about leaving some of it in the IRA, because we can get rid of RMDs through QCDs or a qualified charitable distribution. The question that just, I guess comes right to my mind, is that if the idea of the IRA is to have an estate plan, right? Like, and it was for my father, that was, I have this because this is what I'm going to do with my, you know, because he knew he didn't need the money. I mean, he had other resources that he would never touch that money. So it was clearly his estate plan. Why wouldn't it be smarter just out of curiosity to buy life insurance? Well, yeah, that was number two on the list here is, is that would have been hard for him to do about the first time I met him because he was 87 years old.

Oh, okay. Still not impossible, but you know, it would have been more appropriate, you know, 10, 15, 20 years earlier for him, if he could look forward and see, even if it was part of the IRA that he didn't need, because I mean, most people when they're 65 or 70 is an age that I'm talking about. They have a hard time looking forward and saying, you know, I really don't need this IRA money. I mean, most people at that age, I don't care how much it is and how much they have at the side or how much they have coming in.

They're thinking more, I might need this. So I need to hang on to it. Well, with a Roth conversion strategy or a life insurance policy, building up cash value, which have a lot of similarities, either one, you haven't given that money away. You've just simply paid the taxes on it so that it can now accumulate tax free.

So it can accumulate that way. And if you leave it there as an estate planning strategy, and then it passes to your, they don't have to pay your kids, they don't have to pay any taxes. So I mean, that's now, now, now we're talking about a great estate planning strategy and to specifically talk about life insurance. I mean, we can set up, we can take a Roth conversion strategy, like the one I talked about earlier of putting a hundred thousand a year in there for 10 years. And we could also take the hundred thousand dollars that we convert. We were able to pay the taxes on the conversion, but we could take that same amount of net money or gross money, depending if you have tax money on the sidelines and put it into a overfunded cash value, a life insurance policy that it's now going to accumulate tax-free it's accessible tax-free.

And it also, if you don't touch it, which a lot of people never touch it, and then it's going to go as a death benefit that is received tax-free by your kids. So your father, if he could have done that many years earlier, that would have been terrific. Oh yeah, absolutely. Well, we've got to go to a break, but we want to remind you that this show is brought to you by cardinalguide.com. And as you might guess today's show is on the estate planning tab, the worries tab, seven worries tabs at cardinalguide.com. So if you go there, you'll see show notes, et cetera, on all that we're talking about today on the video that you did as well, which was, you know, IRA 401k is a lousy estate planning strategy video. So when we come back, of course, we always want to remind you that your contact information for Hans is all there at cardinalguide.com.

So we come back, we've got so much more on what you shouldn't do so that you'll know what you can do as far as a great estate planning strategy. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.

Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with certified financial planner, Hans Schiel, which again, we want to remind you is brought to you by cardinalguide.com. And today's show, we're talking about IRAs, 401ks equal a lousy estate planning strategy. So we're hoping in saying that up front that we're going to help you if the idea of those funds is an estate plan, we got some great ideas for you. So the beneficiary designation on an IRA, on your IRA is not there to create an estate plan.

It's really more there. It's your retirement plan. The money's there for your retirement.

You saved it. And then if you die before you use it, the custodian needs to know where to send the money. I mean, so it's there by default. So it's really not a strategy.

It's just, it just is. And so what I talked about in my video is really three alternatives. And there's more than this to turn this into a good estate plan. One is to do a Roth conversion and to have a multi-year Roth conversion strategy. And so I pointed out earlier, there is no annual limit.

Nobody's telling you that you, you can convert only so much of your IRA in any given year. So if you've not paid the taxes, you can now pay the taxes on a certain amount of it. I don't want to advise you bite off too large of a chunk that you're, we're going to take a look at the tax brackets. You come to me, we're going to look at the tax brackets.

We're going to project them into the future years. More about that in a second. The second one of those is a life insurance and overfunded life insurance policy. And so life insurance is a great estate planning strategy because life insurance benefits are received by your heirs tax-free, right?

I mean, it's just that simple. They get a check and we can even set up beneficiaries so that you can control the payout of that money. If you think that one or some of your children will be spends riffs and you're afraid of it being gone by the time your grandchildren maybe need it for something. And one of the things I always love about the life insurance is, you know, say you are 65 when you buy it and you, you know, you're going to devote $200,000 of your IRA to buying this life insurance policy for that, that child or whatever, that at some point in time might be worth 300,000 or whatever in life insurance. Then if you happen to pass away, you know, when you're 72 or whatever, then guess what? They get the full death benefit and still what the premiums that you haven't paid or are still in the IRA or whatever.

I mean, it's a, you know, it's a very sound strategy. There's also a plus over the Roth account because once you pull money out of the Roth account and use it for something, you can't put it back. And with the life insurance policy, you're effectively borrowing from yourself in your cash value at 0% interest.

It's a net cost zero. And I did this when I opened my business and you can borrow it. And then if you never pay it back, it's never due. It's just when you die, it'll be deducted from the death benefit, but I paid it back. And so you can do that the same. You could pull out some money and then pay it back.

And it has the same tax character to it. So, and then the third strategy that I talk about that maybe for some of you should be first is I have a lot of clients that are just not pulling anything. They're under 73.

They're not at RMDs yet. And I'm talking to them about all these strategies cause they've kind of woken up to it. This account builds, they're going to have a big tax debt that's going to start when they're 73. And you know, by the time they get to be 80 and I start mapping that out, people all of a sudden people all of a sudden start listening to me. How about we do number three? How about you just take some of this money, pay the taxes and go enjoy it instead of converting it or buying life insurance, which is just another account.

It all makes sense. I don't sound much like a life insurance salesman or investment sales person here, but how about just cashing in some amount of this money every year, paying the taxes and going and enjoying it. And if you don't have anything you want to spend it on, give it to your kids and grandkids.

I'm sure that they've got something they can find very worthy or buy something for them. I mean, it just, this is your retirement account. So we really talked about three things that we can incorporate it so that when this is paid out after your death, it doesn't have a tax connected to it. We also could structure the beneficiaries on either the life insurance, well, just the life insurance in such a way that they don't give it to them all at once, tax free, that they're going to pay it out to them over a number of years so they don't go blow it all in a year or two. And then there was the kingdom building estate.

Oh yeah. Well, I missed that part is that's the part we don't convert. I mean, I've saved back some of my IRA so that when I get to be 70, I've saved it back in pre-tax money because I'm going to do my tithing through a QCD, through a qualified charitable distribution. Once you're 70 and a half and every year after that, you and your spouse can give substantial money.

It counts as the RMD required minimum distribution and it never shows up where you got to pay taxes on it. So when you do get to this required minimum distribution place, that's the fourth one is that if we don't change the estate planning, we're going to give it to God right now. Right. And that's the right treasure in heaven plan.

Yeah. And you can lame the church or missions or something as the beneficiary as well as if you set up this other tax free estate planning strategy to go to your kids and your heirs, the amount that's in the IRA that's taxable. If you leave that to the church or to any qualified charity, you're, they're not going to pay tax on it. Neither are you and neither is your estate. So it's a, there's still a place to just pass on that piece of the money to, to, to the kingdom.

To the kingdom. So what's the maximum amount of that per year? It's a hundred thousand dollars per year per person that can be put into a QCD. And starting in 2024, that a hundred thousand is going to be indexed for inflation. So people that are very well, and a lot of people who has that kind of money, let me tell you, I have clients and some that I'm working with this week that, um, yeah, I mean, we're planning things out because this, this gentleman has a almost $5 million 401k and he just doesn't need to spend it. And so his wife's a little older than him.

She has like 400,000 in her IRA. And so we're, we're planning QCDs out of that and whatever they raise the max, he's good. They're both going to give the max out for the foreseeable future. Let's just put it that way. And then we're also converting parts of this. So we got a lot of strategies are for the kids, the grandkids, the education, but charitable giving is a very big piece to these people.

And so, um, that's in there as well. The point I'm trying to get is you have a period of retirement from whenever you get retired till the end of both of your lives, if you're married and we need to plan for that first to make sure that you're well taken care of. But we also need to, um, plan for the estate plan of this thing. And we need to get rid of the taxes is what, what I like to do. Now I want to get in a couple more points before we're done here is that 2023, 2024 and 2025 are the only three years left that we have to use these low tax rates to begin to pull money out of the IRA because in 2026 taxes are reverting back to what they were before. Um, they lowered them in 2018.

So, um, just a note to self is you got three years starting with this year to, to really load up on these things and take advantage of some low tax rates and 2026 and beyond. I mean, we don't know that they're not going to extend these tax cuts. We also don't know that they're, uh, whether they're going to raise them before then.

I mean, we, but pretty much, I don't think so. I mean, 23, it takes so much to pass a tax law and to get everybody to agree on it that I think what's going to happen is we're going to have these low rates for three more years and then they're going up and it's probably still going to make sense to convert after they go up, but it makes even more sense now. So the general theme of this whole show, it's opening with a somewhat of a negative statement that an IRA and a 401k is a lousy estate planning strategy. And so we did that for a little, that just kind of hit me with a shock.

And so I don't want really want to go off of negative, but that was to get your attention a little bit and say, if that's what you're using, it's time to do something. We talked about four strategies that you can use at one of them being Roth conversion, and there's no limit to it. And for the next three years, you could pick an amount above what you already earn and just choose your tax and get it over to Roth. And then it's going to be a tax free account for the rest of your life. And it's going to pass tax free to your kids.

You could do a very similar thing, cashflow wise with an overstuffed overfunded life insurance policy that will pay out tax free to your kids. It'll also be available for you to withdraw from if you need the money during your lifetime. All right, well, we want to remind you that today's show is brought to you by cardinalguide.com at cardinalguide.com. There you can find out critical information like how to get up with Hans. It's all that contact information there, cardinalguide.com.

Of course, today's show all about IRAs and 401ks is all there at the IRA worry tab on cardinalguide.com as well as Hans' book, The Complete Cardinal Guide to Planning for and Living Retirement. Again, great show, Hans. Thanks.

Thank you and God bless you. The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such.

Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.

Finishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and cardinal advisors are independent of each other.

Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. We hope you enjoyed Finishing Whale 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 Whale radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.