Early Distributions of IRAs And 401Ks

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Enjoy it, share it, but most of all, thank you for listening and for choosing the Truth Podcast Network. Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Well. Well, welcome to Finishing Well with certified financial planners, Tom Griffith and Hans Scheil. In today's show, we're talking about early distributions of IRAs and 401ks. And, you know, Tom made an interesting observation, actually, when we were talking about this show, that, you know, a lot of folks, they feel like all that money in their IRA or their 401k is theirs, but actually, you know, some of it still belongs to the government. And he pointed out that a lot of it would be kind of like, you know, Jonah running away, actually, the opposite way of Nineveh, you know, trying to pretend that something didn't happen. And when you think about it, God had invested a lot in Jonah. He'd given him all sorts of skills as an evangelist and a teacher, and yet he was going to keep that stuff invested the way he wanted. And where do we all know Jonah ended up as in the belly of the whale, right?

And so since we're guessing you don't want to end up in the belly of the whale, I would point out that it's a really neat thing. In God's economy, he invested all that in, obviously, Jonah. When Jonah decided to make a distribution of that, he saved an entire city, right?

Once he finally turned loose the controls of the gifts that he'd been given. It's amazing what God does with what you do with your investments. And so with that, you know, you guys explain, this is really a fascinating topic.

Tom and I both and our other associates around here. And so I sat through a presentation a while back where, you know, this guy was showing us, he really made the case that taxes right now, federal income taxes, are maybe they're not the lowest they've ever been, but they're pretty close. And in some brackets, they are the lowest they've been. And he's just presenting this as there's a problem out there with the debt, with the national debt. And it's growing. And the problem is getting worse. And sooner or later, he shows this numerically that we're going to have to raise taxes substantially just to cover our debts and keep our money worth something. So with that being said, I just want to outline the problem a bit, because the national debt is almost $33 trillion, you know, and a trillion is $1,000 billion. I mean, it's just, you know, when I'm sitting here looking at the number right now, 32 comma, and then 920 comma, 878 comma, 645 comma, 869.

That's what it was a few weeks ago when we made the video. Guess this is probably at 33 trillion by now, or it's pretty close. So I mean, it's hard for people to conceive that, but it's a lot of money. And to just put it in perspective, we spend the federal budget in 2022, or the federal spending was $6 trillion, $120 billion. So just a little over $6 trillion. And we took in taxes in 2022, $4.5 trillion.

So we took in enough taxes to pay about 75% of our bills, and the rest of that just went to the debt. So most people understand that this is a problem. And there's people that talk about we need to get rid of the debt, we need to make it zero.

You know, it just, well, that's all fine and good. I'm just showing you that there's a problem. It doesn't, apparently, it doesn't seem to have a solution now, where we're spending more than we take in. And, you know, when you just look at these numbers, what this guy was making the case, and I tend to agree with him, at some point, we're going to have to raise taxes if we're bringing in $4.5 trillion, and we're spending over $6 trillion, and it leaves a trillion and a half dollars just of spent money that we don't have taxes, they're going to have to raise taxes and raise tax rates.

Yeah, and I agree that there's a problem here. I do not think they're going to be able to cut spending enough to solve the problem entirely by targeting the spending, because it's really a math problem, right? You have money coming in and money going out.

And, you can change either side of the equation. In reality, it's probably going to be a mix of both, but they're not going to be able to cut enough spending to make a dent in this without raising the revenue, which would be increasing taxes. So, when we look at this moving forward, they're just going to have to raise taxes. We don't know when that is.

That is a prediction of ours. We don't know that to be true, other than the Tax Cut and Jobs Act, sunsetting in 2026. We know in the current law that's happening, but past that, we don't know what the future holds, but our assumption, our prediction is that it will go up even beyond that in some point in the future. Yeah, I mean, it just, and I'm not a fan of raising taxes. In fact, I like to do the opposite, but I'm just looking at these numbers, and then we start talking about, so what are these tax rates right now? Well, the top tax rates, the people that make the big bucks, that make over 700,000 as a single, or make, excuse me, over 579,000 as a single, 700,000 as a couple, they pay 37% taxes on every dollar above. You know, it's hard to feel sorry for these people, but they pretty much know that 37% tax rate, historically, I mean, they're paying less taxes than their parents did, if their parents made a lot of money, and 37% is more than a third, but we just want to put this in some context that I do want to point out with that, not every dollar is taxed at 37%, so a lot of people get this confused with tax brackets, is you still get to pay those lower percentages on the money you earned leading up to that highest tax bracket, so their effective rate is less than 37, but that's their top marginal bracket, so we don't want to get too into the details on that, but I think it's important. Well, yeah, but I mean, what you're saying, Tom, is that those people in those high brackets, on their first $22,000 if they're a married couple, they only paid 10%, and then the next 70,000, they only paid 12%, so they get the benefits of those lower brackets, but when you get the money that's over those amounts, which are pretty high, the tax rate is 37%. Now, the thing, the point I want to make is when the Tax Cuts and Jobs Act sunsets or goes away in 2026, that 37% is guaranteed to go to 39.6%, and these brackets are going to get lowered. They're going to be put back where they were and then inflation adjusted in 2017. That's going to happen, and then the smaller percentages also increase, so like what is the 22% tax bracket now roughly will become the 25, what is the 24 will become the 28, so not only do they shrink, the brackets go down in size, meaning you get to those higher brackets quicker, you're also paying more money on those lower brackets as well.

You know, I love the example that you gave in the pre-show, Hans, about Ronald Reagan. Number one, it illustrates how high taxes can go, but it also really makes it clear how it works, you know, based on what he did with his income from the movies. Yeah, so 1945 was the top tax bracket or top tax rate was 94%. I mean, so if you made $1,000 over the minimum or over the bracket level, $940 was paid in federal tax. I mean, that's just unbelievable. Now, I'm sure people back then had some way to shelter some of their taxes or whatever.

I mean, I just look at that. It's scary, but the level of the bracket was $200,000, so you paid less than 94%, way less on the first $100,000 and then a little more on the next $100,000, and then when you got to $200,000, you made 94%, and Ronald Reagan, he was a movie star then, and he only made two movies a year. He'd take the rest of the year off when he got done with two movies. He made $100,000 a movie, and he just wasn't going to pay 94% taxes on that third and fourth movie, and it's just a story about him, and he's going to come up later, and then you fast forward to like 1964, it was 77% taxes, the top tax rate. 1981, the top tax rate was 70%, and in 1986, it was 50%, and I remember paying 50% federal. I was making some pretty good money back in my late 20s, and I remember paying 50% on my last dollars, and that was pretty much, my dad used to say, I'll take all the 50 cent pieces I can get, but I mean, you just look at that, and now people that are at, a couple that's at $191,000 is paying 22% taxes, and a single that's at 95,000 is paying that same 22%. I mean, rates, so we just want to make the point, we don't want to belabor the point, is rates are low now, and I know it's hard to look at it that way, and these lower rates are producing revenue that is a big shortfall to our spending, and I think that they're going to go up in the future, so what, you know, what does all that mean?

Why does that matter to you, the listener here? And if you've got a bunch of money, or some money in a retirement account that's pre-tax, that's tax deferred, I mean, you feel like you're really getting away with something, that you're not paying taxes on that money yet, and you may be postponing it, the taxation, to later years, and those rates may be much higher, and so we're proponents, and we're going to talk in the second part of the show about some things you can do now to shelter that money from later taxes. Right, and so we want to remind you at this point in time that the show is brought to you by cardinalguide.com, and there at cardinalguide.com you're going to see the Seven Worries tab, and there at the Seven Worries tab you're going to find a tab that says, you know, taxes, and so you'll find this show under that tab, as well as show notes describing the video that was there at Cardinal Advisors, so the show is brought to you by cardinalguide.com, but their YouTube channel is Cardinal Advisors, also at cardinalguide.com you're going to find, you know, the How to Contact Hans, How to Hot Contact Tom, and of course his book, The Complete Cardinal Guide to Planning for and Living in Retirement, so you know, we've heard a lot about what the problem is, the good news is again, the second half of the show we got all kinds of solutions for you, and opportunities that there's an urgency behind, so we'll be right back with a lot more, finishing well. 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 Planners, Tom Griffith and Hans Scheil, and today's show we're talking about early distributions of IRAs and 401ks to kind of get out while the getting's good.

Head to Nineveh, not the wrong way, so Tom you wanted to talk about that a minute. Yeah, I mean I think a lot of people, they view their 401ks or the IRA as their money. They got their name on that account, they see that balance growing, they feel good about it. What they fail to, or what they miss, they fail to see is that the IRS essentially has a lien on this account. You owe the IRS money out of the account whenever you make a distribution. So that's not to scare you, but all of that money is not going to be your money. Some of that is going to have to go to pay taxes, and what we're wanting to do, and what we'll get to here in a second, is talk about planning strategies of how to get the IRS out of that account at the lowest amount possible, right? They're a partnership, we want to get them out, be as small of a partner as they can in that account. I heard someone once call an IRA, an IOU to the IRS, which is a little bit sort of a silly thing, but there's some truth to it, is that at some point that money is getting taxed, so let's just do this the most efficient way, pay the least amount of taxes as possible so you can enjoy more of your money.

Okay, so just without assuming that what we talked about in the first part of the show, that taxes need to go way up to pay off the debt, let's just assume they don't go way up. This still made sense before we really started talking about this, to take some of the money, pay the taxes now, and either enjoy it, or convert it to a Roth, or buy some life insurance with it. I mean, so we're going to explain this now, what are some of the strategies that we recommend to our clients who buy into that? I want to take advantage of these lower tax rates.

Well, let's just give an example. I'm going to kind of make this example as I go, is the first strategy is distribute some of the IRA 401k money and live on it. I mean, we run into people, and there's example after example of people who live much below their means, and that's admirable, especially if they're very giving about their money, but when they get to these retirement accounts, and we kind of get in to take a look at things, people are living off of way less than they need to early in retirement. And you know, that's admirable, and that's really the way they want to do it, go for it. What we're going to recommend is that you start pulling some of this money onto your tax return now, as opposed to just postponing it as long as you possibly can. And the first strategy is distribute some of the IRA 401k money to yourself, pay the taxes, and then enjoy it, the difference. And we have examples of this where we just encourage people because of the size of their savings and their spending rates, that this money is there to be enjoyed, or give it to the church, or do something where you're going to get a tax deduction for it.

So that's the first strategy that we're going to have right out of the box. We don't just need to convert everything. And you know, as an example, is a married couple who up to $90,000 of income, they're paying 12% taxes. So if you have somebody living on $70,000, and they've got a pretty big IRA relative to their income, and you know, it's there for later, we're going to encourage them to pay up and maybe get into the hundred, the 22% bracket, just because, you know, if you took $20,000, $30,000, $40,000 of your IRA and converted it to a Roth, you're just going to pay 12% taxes, maybe some 22%, which we're going to say is a bargain. And if you just convert it to a Roth, then, you know, you pay that taxes out of it, now you have a tax free account.

And to be never taxed, even by your heirs. So I do want to make the point with the spending strategy is it needs to be controlled, right? You don't need to go overboard with that. Some people might hear that and go spend all of their money out of their IRA.

We're not recommending that. But assuming you have enough to cover your expenses, and there's really not a scenario where you're going to run out of that, enjoy some of it. I mean, you worked hard, you saved it, be generous with it.

Maybe you can bless family members or friends or people in need or the church, whatever it might be. But again, we talked about this earlier. Money is a tool, right? It's not the end all be all of everything. Let's use it. Let's use it for the benefits and God has blessed us with it. Let's, you know, use it for his purposes. Pre-tax IRA is a lousy savings account.

Yeah. Because when you save for things and then you pull out a hunk of it, you have to give so much of it to the government. I'm just for a planned strategy of doing Roth conversions, depending on where you are on the tax bracket and how much money you have. You know, so I'm not just blanketly recommending these, but just getting an accumulated balance over on the tax-free side is wonderful. And to be able to live your golden years and have an account you can pull on where you don't pay any taxes is wonderful. And I will say for maybe the younger listeners in the audience, someone maybe closer to my age, or maybe your children are closer to my age, is they can start saving in a Roth. So they don't necessarily need to convert traditional IRA money or 401k. If they're still working and saving, they can save directly into the Roth. And then they have that many years of compounded growth that's going to be tax-free in the future.

So that's personally what I'm doing. Every, all of my retirement savings are going into Roth accounts as much as I can get into them. Because again, I think tax rates are going up. I want to take advantage of these lower tax brackets now and have those years of compounding growth be tax-free. Yeah.

Yeah, I made that suggestion to all my kids, right? You know, if you can put it in a Roth now, it's a way smarter strategy because you do realize that that's going to happen. So this is not only applicable, obviously, to those folks going into retirement, but really for all folks to realize that this is an opportunity to, you know, in both Roths and life insurance, right Hans?

Well, it is. And so another strategy is to use cash value life insurance. And, you know, we have policies we can design which are very heavily weighted on the cash value accumulation. In other words, they're designed to, instead of the minimum premium or get the least expensive one, their design is you can stuff the most amount of money.

And so we'll, you know, it's pretty simple. We put into the computer that we want to save $100 a month or $500 a month. And it's going to tell us how much life insurance at a minimum we need to buy on top of that savings and that cash value to justify and call it life insurance. And then it accumulates what some would call tax-deferred because if you just pulled it all out at once, you would have to pay taxes on the growth. But you can do a loan strategy where you can actually borrow it at either low cost or no cost, where you're borrowing your own money, and then you can put it back.

So, you know, it's a little too complicated to explain over the air, but we have people that make withdrawals. Again, these are people 60 and over that make withdrawals from their IRA or their 401k, and they pay the taxes and they take the remainder and they stuff it into a life insurance policy. And that accumulates very well, and it has some advantages over the Roth for certain people. So, you know, those three strategies, one is just pull it out, pay the taxes in a calculated amount and enjoy it. Another one is convert it, and a third one is buy cash value life insurance with it that the cash is available to you during your lifetime.

One other strategy that's a little bit different than these, but it's still useful if you have a large IRA balance, and we've talked about this on the show many times, is using a QCD. These are qualified charitable distributions. You have to be over 70 and a half, so that's somewhat limiting, but what it allows you to do is give directly to a charity like your church or some other 403. Oh, Robbie, you could read off the tax code. 501c. There we go.

Yeah. 501c charity, you're able to give directly to the IRA or out of your IRA and not have to pay taxes on that money. So, it went in, you got a tax deduction when you put it in, it grew tax deferred, so you didn't have to pay taxes on the growth, and it comes out tax-free to the charity.

It's a wonderful way to do your giving that way. Yeah, very tax-efficient. This national debt problem is people like to sweep it under the rug and just not think about it, and there's a website with the national debt clock, and I think Tom can read it off too. Yeah, usdebtclock.org, it has like a live balance, running balance of these numbers, so the numbers we quoted in the show will likely be different by the time this airs, just based off of, it always is increasing.

Oh, they definitely are different. They're moving, when you go to that usdebtclock.org, I'd suggest you do that, and you know, and you go back there and you check in every time you want to forget about this thing, or you have been forgetting about it, and it just shows you all kinds of different numbers, but the main number is, this is a problem that I'd like to think we could solve this through cutting spending and pay off some of this debt, or at least stop it from growing so quickly, but it's growing at a significant rate. I mean, you just go in there and look at it, and I just think that 10 to 20 years from now, these tax rates in the 12%, 22%, 24%, 33%, 39.6% to the highest levels, I just, I think that we're going to look back in 10, 15 years and say, you know, I really wish I had taken advantage of that while it was there, even though I looked upon it as bad, paying taxes, which people tend to do, it's a smart thing that you can do. I will also warn you, if you're going to go the Roth conversion route, that first year you do the Roth conversion is not going to be a lot of fun.

It's going to be somewhat painful knowing that you paid a lot more in taxes than you otherwise would have to, so you have to take the long approach and the long view on this, approach it from that standpoint. Once you see the benefit of it, it's very valuable. Oh, I understand.

Yeah, absolutely. Well, again, we've run out of time before we've run out of show, so I want to remind you to go to cardinalguide.com. That's cardinalguide.com, and there you're going to see the Seven Worries tab, and this one will be under taxes, and so you'll see the show notes, and again, a video along these same lines, all sorts of resources there at cardinalguide.com, as well as Hans' book, The Complete Cardinal Guide, The Planning for and Living in Retirement, and of course, most importantly, how to contact Hans or Tom.

It's right there under contact us at cardinalguide.com. So great show, guys. Thanks so much. Thank you. Thank you.

God bless. 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.