483: The Future of Tax Rates: How to Keep More of Your Money and Pay Less Taxes with Ed Slott

[INTERVIEW]

Casey Weade: Today, we focus in on taxes, the future of tax rates, the impact of a Republican trifecta, Roth conversion strategies, and more with the one and only Ed Slott, CPA, and the nationally renowned IRA and retirement distribution expert. He's the president and founder of Ed Slott and Company, a leading resource for advisory firms like ourselves to level up our tax game. He is also the professor of practice at the American College of Financial Services and has been named the best source for IRA advice by the Wall Street Journal. And I bet if you're listening, you own an IRA. You're going to want to listen to this content. I'm truly excited to bring on one of the biggest experts and biggest names in retirement advice.

He is also the co-host of the Great Retirement Debate podcast with Jeffrey Levine, who we've also had on the show, and he's the author of several different financial books, many financial books over the years. Most recently and the one that will be the focus of our discussion today is The Retirement Savings Time Bomb Ticks Louder: How to Avoid Unnecessary Tax Landmines, Defuse the Latest Threats to Your Retirement Savings, and Ignite Your Financial Freedom. We're also partnering up with Ed to give away his book for free to you.

If you want a free copy of the book, it's super easy. All you have to do is write an honest rating or review of the podcast over on iTunes and then shoot us a text with the keyword 'BOOK' to 888-599-4491 or just check out a link in the show notes. Visit us at HowardBailey.com. We'll verify that iTunes username. We'll send you a free book at no cost. With that, Ed, welcome to the show.

Ed Slott: Well, great to be here. That was some build-up. I hope I live up to it. I think you took away my secret weapon, low expectations.

Casey Weade: Well, Ed, I can see that. Now, I actually have a great question about that, that you say low expectations. I mean, I am truly excited about this. We've been trying to have you on the show here for a few years now. We've been wanting to run an event with you as well. We're going to get all of that done in the next 12 months. I'm committed to that. I'm super excited to have you here on the show. We've had advisors go through your trainings. I've been exposed to you since I was a kid. My dad was a retirement planner as well. And so, I'm really excited to have this conversation but you said you want to set expectations low. Now, you're often referred to...

Ed Slott: I said that because whenever somebody builds it up about taxes, I mean, it's not like the most exciting thing, but I think you'll find it very exciting when you see how much you can save in taxes.

Casey Weade: Well, exactly. As I was laying in bed last night, I was trying to go to sleep, I was thinking about this interview and I thought about what it's like when I'm sitting on a plane and the person next to me says, "What do you do for a living?" And if you say, "Financial advisor," they shut down pretty quickly. And I'm imagining when someone asks you what you do for a living and you say, "I'm an IRA expert," I'm wondering how that conversation goes because I would think most people would go, "An IRA expert? It's not that complicated. You get a tax deduction, you put the money in, you take it out, you pay taxes on it."

Ed Slott: Well, actually, I tell people... It's funny you mention that because I never know what to say when people ask what I do. I say, "It's complicated." I can't even figure it out. Most times I just go, "I'm a tax consultant," if people ask because I was a C... I still am a CPA. I had a CPA practice for 40 years. I don't do that as much anymore. But as you know, we have our educational advisor trainings. We do consumer programs. I write books and course manuals. And so, yeah, I got my hands on a lot of things, but all on the tax planning around retirement accounts. And the reason that's such a... People say it's a niche area. Maybe it is because not that many people are well-versed in it, but it's a giant niche. I mean, there's $40 trillion in these accounts.

This is where most people with retirement money, this is where they have it, and most of them have no plan or no clue on how to get the money out. That's my area. Getting the money in is easy. Like you say, you put the money in, maybe you get a deduction, maybe you don't, and that's it. But most people don't think of, "Well, why was I doing all this to eventually get that money out?" And the last thing you want is to realize when it's time to get the money out, you're not prepared. You don't know what to do. The advisors don't know what to do. Everybody you talk to thinks the other guy took care of it.

The clients, people watching now might say, "Well, I talked to my accountant. He said, 'Well, talk to your financial advisor.'" Financial advisors, "Talk to the attorney." The attorney says, "Talk to the cat." Nobody knows what's going on because it's so involved and it's unfairly complex how these tax laws just took off.

Casey Weade: It is mind-blowing just how much I've learned from you over the years, the little nuances, the strangest little rules that have made their way into the tax code when it comes to IRAs. I was curious. I bet you know the answer to this. Do you know how many rules there are that pertain particularly to IRAs?

Ed Slott: I don't know. A billion? You know what that reminds me of?

Casey Weade: The government debt?

Ed Slott: The old show, Married… with Children?

Casey Weade: Yes.

Ed Slott: You know, with the... I forget the guy's name. Who is the father in there?

Casey Weade: Yeah.

Ed Slott: Anyway, he's like a dumb guy, right?

Casey Weade: Yeah.

Ed Slott: He's got this scam. He goes to court because he got an injury. And the judge says, "How much are you suing for?" And he says, "A gajillion!" So, that's how many rules there are. I don't know if he knows because they keep - it's not even the rules. Remember, there are layers of tax law that have just been piled on like Band-Aids and Band-Aids over 30, 40 years. And then there's IRS rules and regulations where they have their take on what they think Congress meant by these rules because they're so complicated. And then, I mean, even that is overly complex. Remember, our company spent 30 years trying to translate and explain these rules in English to people, including financial advisors.

Casey Weade: Yeah. I often find that when I do bring in a new advisor even when they come in with a decade of experience, this is the most difficult area for them to grasp and really train them on. And you said that it's difficult to know who to talk to. You think Financial Advisor. I think most people think CPA. You mentioned you're a CPA, but you've also said that you're a recovering CPA. What do you mean by a recovering CPA?

Ed Slott: Well, there's a bit long story behind that. But basically, I'm a tax planner and I look forward. Planning should always be looking forward, not looking behind. And I learned this early on in my years as a tax accountant, a CPA with my practice. When I first started doing returns, I would have people come in at this desk. I've been here over 40 years, this very desk, and I found the first couple of years, it only took me a few years, they'd come in and I get all their papers to do their taxes and I say, "Oh, you know what you should have done? Oh, look over here. We could have done that." This whole would have, could have, should have and I said, "What am I doing?" You can't do it anymore. Unless you had a time machine, you can't go back.

So, I was always giving bad news, this whole woulda, coulda, shoulda, because I was making a mistake of looking in the rearview mirror. Things had already happened and it hit me. Most CPAs that do tax prep or tax preparation, that's still true today, most people who prepare taxes are really just history teachers. They tell you what already happened. You can't do anything about that anymore. And I realize that's not helpful to people. That doesn't provide value to tell me everything I did wrong on this last year. So, it only took me a few years. I changed everything. And this goes into a recovering CPA where I came in, I said, "Let me find something," and this ties in you told me before your mission about providing value, things that I can change.

Instead of looking in the rearview mirror doing reactive planning, things I can't change, why don't I look forward and do proactive planning so the bigger things can change in the future? And I move more into tax planning and estate planning to save people not a few dollars on charitable contributions, but to save them tens of thousands, hundreds of thousands, even millions if you take it over a lifetime and on to their beneficiaries for estate planning. And one of the things that came up many years ago in '98 was the Roth IRA. And I loved the Roth IRA. I still do. I loved it because it's a tax-free vehicle. But many of my colleagues, CPAs, not as much today, but still there are some out there that don't like it at all because they were trained like me as CPAs.

And the first year, I mean, it was ingrained in us. The first year in college, they put it into your head. Never. I mean, it was the golden rule. Never pay a tax before you have to always defer, defer, defer. Put it off. In fact, if when you were a kid and your mother told you to do something and you said, "Not now, ma. I'll do it later," you would have become an accountant because you were trained to put things off. So, that was the mindset. So, many accountants said, "Why on earth?" And there are still some that say now, "Would anybody pay a tax before they have to?" I'm talking about a Roth conversion where you have to pay the tax upfront. So, I picked up on that right away.

And when I talk about the typical CPA, that's when I use the phrase, "But I'm a recovering CPA," because I see the bigger future. And there may be reasons, a lot of reasons to pay some tax now to have a bigger, more valuable benefit for you and your family later.

Casey Weade: Yeah. Well, I have dealt with the same thing every year. My CPA, "Why are you putting so much money in your 401(k) in your Roth side?" I always do the Roth. I've always done the Roth. I just want to get that behind me. That's just been my mindset. That's been what I've been trained on. And yet you say we talked about tax preparation versus tax planning, and that's really what you're alluding to there. But you've made this such a mission of yours, 30 years of working in this, and you're clearly extremely passionate. And I'm wondering where does that passion come from in the way of what do you hope your real legacy is? What's the big impact that you hope that you make over the next 20, 30, 40 years?

Ed Slott: Well, I switched because I enjoy making a difference rather than I said, giving bad news all the time. So, I switched to planning also as a way to build my business and separate myself from other people because I wanted to provide something valuable. But this goes back many years, 30, 40 years. I was in my 20s and the people doing this high-level tax planning were usually like 60 years old, had 30 years experience on me. So, I had to find a way to get into that world. And I'll tell you, the event that happened, it was the 1986 Tax Act. I was 32 then. 1986, it was such a big deal. Now, new tax laws aren't as big a deal because it seem to happen every year.

But back then, if you had a new tax law, that was a big deal. In fact, the '86 tax law was such a big... The Tax Reform Act of '86 was such a big deal that they renamed the Internal Revenue Code, the Internal Revenue Code of 1986. The former name was the Internal Revenue Code of 1954, the year I was born. That's how long before they had major tax reform. And in that Tax Act was all these rules for the first time of getting the money out of an IRA. All these required minimum distribution rules, required beginning date. And that began this avalanche of complexity and confusion on how to get the money out. And that hit me. That was the moment that hit me. I said, "Wait a minute, I'm looking to provide value."

And I made maybe you called it a bold prediction back then. I said, "Wait a minute, you know what? Anybody in 30 years, anybody still alive will be 30 years older." Wow. That was a big deal. It was true. I know. I went out on a limb there. And I realize these people are going to be building accounts. People didn't have much in IRAs. 401(k)s were just getting off the ground. And I realize there's going to be a market for getting this money out because this is where all the money's going to go in. And nobody, it was like a different language, that '86 tax law. It was like Sanskrit or Russian, like a different language. You had to learn. I said, "This is my opportunity here." The old guys I'm worried about, they don't want to learn anything new like me.

Now, with all the computer stuff. I'm not on TikTok. I don't know any of that stuff. But back then I said, "You know what? I'm going to dig in here." The accountants don't know anything about it. The lawyers don't want to learn it. The old-time estate planners, they just want to do what they're doing. They're not going to learn. They're not interested in learning from square one, from Ground Zero, a whole new tax law that affects what clients of theirs that may be clients of 30 years when they'll be dead. But me, I saw it as a lane, a genre that didn't exist before. And so, that was the niche I took and it really took off because people started accumulating and these accounts didn't happen right away.

And so, well, now what do I do? You know, required minimum. Where do you go? There were no specialists. And that gave me the idea to create those specialists by training people like you and advisors that need to know this stuff. But not enough advisors do. As you said, most advisors can help you make money doing investments and so forth. But I don't see a lot of value in that. It's because it's been commoditized and marginalized, just like tax preparation. Tax preparation, I'm glad I moved to tax planning because the market has said that's worthless. Just watch a football game and you'll see the ads. I forget which one. This does into a tax or whatever it is. They'll do everything for free. Well, they ran. A couple of weeks ago, I saw one of the football games.

They started running the commercials on saying, "Whatever you are paying your CPA, we'll do it for less." So, in 15 seconds, that commercial wiped out all the fees, the tax plan or tax prep guys can do. So, you can't make a living at that even if you're doing a good job. Just like with investments, you could be doing a great job but the market is saying all these people can do it for less or for free and you get what you pay for normally for free. So, I went into the area of tax planning where there's real value. I love tax planning and I love when people see the difference. The thing with tax planning, it involves math, it involves certainties, and it's tangible. You could see how much you save. It's quantifiable.

If we do these three things, you and your family will save $1.238 million in lifetime taxes. You can show it to them. So, there's a lot of value. And if we can save that kind of money, they can see the value. It's hard to see the value in market timing or investment planning because it's too touch and go. There's not a lot of certainty. And what I learned over this time is it's an old saying. I don't know if you ever heard it. Money is a coward. You ever hear that saying?

Casey Weade: I thought you were going with death and taxes.

Ed Slott: No. Money is... It's scared. It's a coward. It flows away from risk, uncertainty, and worry. But it flows towards safety and certainty and guarantees and outcomes that can be counted on. Money always flows that way. And if you have a plan, you can see the end of that in line. And what I loved about the planning is as I got older and had clients, what we did this planning for, I'm not saying this is the good part, but when they died, the beneficiaries saw what we did and they saw the value. You know, I used to joke when I would teach estate planners, attorneys, and accountants, and I used to say, "Estate planning is a great business. Why? Because you don't need to know what you're doing. Who cares if you mess it all up? The client will be dead. They'll never know."

So, it's a great business until the client dies and the beneficiary see what happened. And I always say they'll know. They'll know whether you did the job right. So, it's very nice. Again, not the wrong way. When the client passes, it's not that it's nice when they pass, but when you work with the beneficiaries and they see the results because they are, as the word says, the beneficiaries, they're the ones who get the life insurance, they're the ones who get the inherited IRAs. And when they see it all work out and the taxes minimize, they're the ones that get the Roth IRAs and they inherit.

Many cases for most of the planning I've done my life using these very vehicles that you use, Casey, if it's done right, the family, even after taxes, ends up with a higher net worth, a larger inheritance than the parents ever had. I used to get comments from the beneficiaries, "How is this possible? How do we end up with 5 million? My parents were only worth like 3 million or 2 million when they died." Well, we use these vehicles. We did tax planning. We leveraged a lot of that.

Casey Weade: What you said there is really important, and that's the reason that I love tax planning. I can tell a client, "Hey, we're going to get you 1% to 2% more than what you're getting today but that's completely market-dependent. We don't know what the market's going to do next year or over the next ten years or 20 years. But if we can save you some money on taxes, then we are creating more certainty," which is what we really want as we're stepping into retirement or really any element of our financial lives. And I love you said, you know, ironically, I was born in 1986, and so I was born right when you created this passion, right, when this tax timebomb started to tick.

And this new book that you have, it's the sequel to your 2021 release, The New Retirement Savings Tax Bomb. Now, you say the tax time bomb ticks louder. And I'm curious. I knew we had a lot of questions from our subscribers about this. Is the tax bomb still ticking louder? Does this still hold true with the Republican trifecta as we enter 2025?

Ed Slott: Even more so, except there's going to be more of a calm before the storm. That's the only change and you should take advantage of that. My feeling and a lot of people agree I don't have any inside information, but it's a good bet that these tax cuts will be extended. But what does that do? It just kicks the can down the road. Right now, I don't even know what the debt level is. Maybe it's $36 trillion, $37 trillion. All I know is if they have to round up to the nearest trillion, that's bad. That's not a good sign. So, at some point, the chickens are going to come home to roost or whatever that saying is. The whole country is living on a credit card.

So, yes, we'll get this calm because we'll have low taxes and people may ease into it and it will lull themselves into a false narrative thinking that everything's going to be great. We'll never have higher taxes later. But again, it comes down to math. They hold themselves into a false sense of security because we may have a few years before that happens. But the whole country is living on a credit card. So, imagine if you had a credit card bill and now you had maybe the company, whatever, a Visa or whatever said, "We're going to give you five more years to pay it off. Don't worry about it." Oh, that's great. No problem for five years. But what happens then? That $3,000 you owed them in five years will be $300,000.

If you see how, what do they get? Like 28%, 30% on credit cards? I think the same thing is going to happen here. The debt is going to pile up because you can't have it both ways unless they cut back, but they never cut back. Even in the new administration, they're going to cut this and cut that. But if you look at where all the money is being spent, 80%, 85% of that budget is accounted for between the military, Social Security, and Medicare. There's not a lot of cutting you can do. They talk about cutting government waste, fraud, and abuse, and maybe you'll get something, but nowhere near what's needed to address the debt.

So, I'm afraid of the debt deficit levels but the good news is now we have more years to do something about it by moving to tax-free vehicles like Roth IRAs, like life insurance as a hedge against the uncertainty. Protect yourself on what the uncertainty of future taxes could do to your standard of living in retirement if they have to jack up rates.

Casey Weade: So, it sounds like if you were to pull out your crystal ball right now, TCJA, the Tax Cuts and Jobs Act that's set to expire at the end of next year, you're expecting an extension. Are you expecting an extension or are you expecting any major changes?

Ed Slott: Well, they're going to have to play politics. Even though, say, the Republicans are in charge, I already see stories of them not agreeing with each other. They want to do things, but they want to pay for it at the same time because they're still staunch conservatives there. They want to balance the budget and all of that. So, they want to have low taxes, but things are going to have to get cut elsewhere. And the big things nobody really wants to cut. Nobody wants to cut Social Security or Medicare. They might say they can. In fact, one of the proposals was not to tax Social Security. I don't think that's going to happen. You're talking about blowing a hole in the budget.

So, they're going to have to come up with some plan to keep the tax cuts but make the math work. And I don't think they're going to be able to do it. So, I think they're just going to kick the can down the road and build up bigger debt like I said, that growing, building, accumulating, snowballing credit card bill. At some point, it's got to come home. And that's when I think tax rates will have to go up. Most people don't realize this but now is the optimum time. So, what you talk about the new administration is going to give you more years to take advantage of the planning while rates are low. You don't realize how good you have it. These are the good old days.

We're in the lowest tax rate historically most people have ever seen in their lifetime. In fact, when you get my book, let's see, you go to page 28. Just to make this point, I did the full history of taxes on page 28 to show people how good you have it now. And I highlight the years. People like me, the baby boomers who were born 1946 through 1964, just as a frame of reference to show you how good you have it now. The top federal tax rate in each of those years, 1946 through 1964 exceeded 90. No. I said 90 with a 9. 90%, every one of those years except the last year, 1964, when for some reason it got dropped way down to only 77%. And I'm told I was only ten years old then but I'm told when the rate went down to 77%, the whole country did a happy dance.

Only 77% taxes. What a deal! That's more than double today's top rate. So, what I'm saying is take advantage of these rates while they're here. I don't think they'll ever get lower. The cuts may be extended, but I don't think the math works to actually lower income taxes.

Casey Weade: Yeah. Well, it sounds like the thing that retirees need to pay, pre-retirees need to pay the closest attention to is going to be those tax rates, their tax brackets, and making sure that they're taking advantage of it. The Trump administration has now, during the on-the-campaign trail, now twice they have told us we're going to get a simplification of the tax code. It's pretty clear we're not getting a simplification of the tax code. So, we need to make sure we're taking advantage of the low tax rate environment we find ourselves in. And in your book, you talk about understanding your risk IQ. This is a little quiz that you offer up that help people identify how much of our savings could go to the U.S. Treasury. Can you talk us a little bit about... Talk to us about that calculation, its meaning, and maybe even offer some people some ideas on how they can get an idea of just what their IQ might be right now.

Ed Slott: Well, people again, I said they got lulled into a false sense of security and it's been made worse by the rising stock market because as these balances grow, people's fidelity just came out recently said they have a record amount of 401(k) millionaires and other companies have said that people see their IRAs growing in leaps and bounds, but you never know. It could come down. That's the market, like you said before. But they see that and they feel a sense of security. But what they don't realize, a lot of that money is owed right back to Uncle Sam. If you have it in a tax-deferred, not tax-free, tax-deferred IRA or 401(k), yes, it's good to have more money, but it's what you keep that counts after taxes that you can spend. You can't spend what's going to taxes.

I used to have clients that used to come in to me. I remember this one guy years ago. He was so happy. His IRA first broke $1 million and he came in. He showed me a statement. I'm looking at the statement and I said, "What are you showing me here? This is not your money. It's just temporarily on your letterhead. You're not keeping any of this." And I said, "Give me that statement." Let's say his name is John Smith. I said, "All right, so it says John Smith IRA. But you didn't put the joint owner. It's John Smith and Uncle Sam. This is a joint account you have, just like you have a joint account with your wife." Except it's not that kind of joint account with the government. Uncle Sam is a special kind of joint owner.

Most married couples understand what a joint account is. We own things 50/50. Uncle Sam may want more than 50%. Uncle Sam can choose how much his share is based on how much money the government needs just when you reach in to get your money. So, think of your IRA as a joint account. Every time you add a dollar and same thing for a 401(k), that's why you said, Casey, "Why would people start adding/putting more fuel on the fire, adding to a 401(k), adding to an IRA?" And the reason? They are told you get a tax deduction. That may be the worst reason on earth. That's what I mean by short-term shortsighted planning. Yes, you'll save money this year and then you'll pay for it for the rest of your life and beyond to your beneficiaries under these latest tax rules that have to pull all this accumulation out by the end of the 10th year after death.

They'll get walloped in taxes. A lot of this money will go right back to Uncle Sam and it doesn't have to. And I don't know if you know this, if you're listening here, Uncle Sam is not even your real uncle. So, there's no obligation to overpay your taxes, which most people do because they go for short-term gains. So, why do I say, "Don't take a tax deduction"? Because it's not a real deduction. I don't even know why people call it that because it's on the tax return maybe. A real deduction to me is you take a deduction if you itemize for mortgage interest or contributions. You get that and you keep that. You never give that back. That's a deduction. A deduction for a 401(k) contribution or an IRA is only temporary.

You know what it really is? It's a loan you're taking from the government to be paid back at the worst possible time, in retirement, based on how much money the government feels it needs at that time, total area of uncertainty. It's like an abyss. You don't know where it's going to be. So, just when you need to get your money, you'll probably have a higher balance at a higher rate, keeping less when you need it most in retirement. Better option, use the Roth 401(k), use the Roth IRA, and I even talk to advisors about this. And when I say, "Don't keep adding to the 401(k)," and they say, "What about the deduction?" And I tell them what I just told you. Not a real deduction. But then they come back and say, "But what about the match?"

And that tells me they haven't kept up with their tax knowledge because that has been changed by Secure 2.0. The company match can also go to the Roth 401(k) side. And even the government likes that. And, Casey, this goes back to your last question about the new administration. You said, "How are they going to pay for all these tax cuts and benefits they want to give us?" One idea that's been floated, I don't know if they'll do it, but they're looking again and this came up maybe five, ten years ago, maybe ten years ago I think during the Obama administration, you remember the ideas floated about they were calling it Rothification? You remember that came up? Wanted everyone to go Roth and that's been floated as a way to pay for this.

And I think that's great. People say or let me just explain to the listeners what they mean by Rothification. No more deductions for your 401(k). You can't use the 401(k) and get a deduction. Got to go with the Roth. Good. Hurt me more. I want to be in the Roth. The fact that they... And the reason the government likes the Roth is because... Let me tell you about the government. You probably know this already as far as finances. Lucky for us, our Congress are the worst financial planners on earth because they're short-sighted thinkers. They're like I just told you. Don't be like that. They like the Roth because it brings in money upfront.

That's all they see is the revenue, not realizing that people will never be paying taxes in the future if everybody's in the Roth, but they love it. And I think that's one of the things if I had to predict, they're going to try and expand to find money to pay for other things.

Casey Weade: Well, let’s get down to brass tax. We know we have a tax problem. Now, we want to fix it. And if we want to fix it, you offer up five tips to protect savings from the taxman. And let’s jump into step one, time it smartly. And I’m going to kind of frame a lot of these through the lens of our listeners. If you’re a Weekend Reading subscriber, we reached out to you about a week ago and asked you to submit questions to help co-architect this interview. I’ve already asked some of those questions and I’m going to dive a little bit deeper into some of those questions.

The first question here is from Scott, and I think this probably could just all encompass this step one, time it smartly, about conversions and distributions. How do we time these things? Scott says, “Is it smart to try to convert larger sums of money now and pay the tax? The market seems to be doing well, but I’m concerned about the extra taxes on accumulated possible gains for the future.” What I hear him saying is how do I time these conversions? Do I look at the market? The market’s high. Do I wait on the market to go down lower? What kind of timing do I have year in and year out when I’m doing these conversions? Do I do a barbell strategy? Do I do it at the beginning of the year and at the end of the year? Do I do it once a month? How do you think about timing?

Ed Slott: All right. Here’s an easy answer. You can’t time the market for Roth conversions or anything else for that matter. I’ll give you a simple example. I had a client years ago, I think it was at the end of ‘18. She was a doctor, still a doctor, had a large IRA, didn’t need the money at all. She was making all kinds of money, was well off on her own, wanted to do it, the conversion for what I think is all the right reasons for her kids to get them. And at that time, that was a stretch IRA no more, but the Roth is still a good deal.

So, this began in January of that year, and she kept calling me and said, “Is this the time to convert? I’m watching the market. Is this the time?” And this went on and on. I said, “Just convert. Do it already.” “I want to convert $1 million out. It has to be at the right time.” I said, “Look, now, it’s December already.” This is still going on, like these monthly conversations, almost monthly. Finally, she says, “All right, I’m going to do it because I want to get it in before the year ends. And I’m converting.” And she converted the million dollars.

I get an email, I think, the next day or the day after, like the world is ending. Oh, my. Oh, what happened? This is the worst thing that ever happened to me. What was your problem? That day that she converted, right before she converted, the market had its biggest one day uptick. It went up a thousand points, one day. She said, “I converted at the worst possible time. Oh, I’ve been trying to do this right. Now, I converted, the market is up a thousand points.” I said, “Calm down. Take a chill pill. Calm down.” She’s writing all these emails. Not mad at me because she’s mad at herself, like, “How could I not see this? How can I convert at the worst possible time? Market went up a thousand. I paid a premium.” I said, “Let’s take a step back. When we talked about this, who are we doing the conversion for?” “My kids.” All right, they’re not going to get it for many years. Forget about it. It doesn’t matter what it cost because they’re going to get it tax free.

Couple of years after that, she wanted to convert another one. And I said, “We’re not going to go through this again,” but let me tell you what happens. I said, “I looked back, and when you were screaming and yelling that the market went up, it was around 20,000. What is it today?” And I forget what it was. It was 35,000. I said, “So that was a pretty good deal, right?” “Oh, yeah, yeah, I just got caught up.” So, you can’t really time it.

And now, the market, at least last I looked, is over 40,000. So, it went up double from the time she went crazy because she thought she converted at the wrong time. So, it’s very hard to do market timing, plus often, let’s go the other way. She got hit, and I hope people understand. You understand what I’m saying that she converted and that she converted, the market went up right before she got paid top dollar in her mind. But people are worried about the other thing, too, not worried about, they want to take advantage when the market goes down and there’s a dip and they want to convert on that. The market tanks, it dips, whatever you want to call it.

And you can’t do that. I’ve had clients that tried to do that. The market crash, it went down 500 points. I’m converting. Then I get a call the next day. The market went up 500 points the next day and by the time the order was in, I was right back where I was. So, you’ve got to get the order in. A lot of times when you have a big dip, it usually bounces right back in two days. So, the best thing to do, if you really want to time the market, which I don’t think you can do, is do a series of smaller annual conversions or even monthly conversions. I think that’s a bit much.

But if you stay, you’re in your 50s or 60s, let’s say, do a bunch of conversions over time each year using up, don’t look at the market, look at the tax rates, look at your marginal brackets, see how much of that. That’s why I say do it annually in December when you know you have a better projection of what bracket you’ll be in. And that’s what you should use as your guideline. How much can I convert to fill up the 24% bracket or the 22% bracket? Don’t look at the stock market. Look at how much can I convert to fill up that bracket because that’s the key to good tax planning, to always pay taxes when the rates are the lowest and take advantage of low brackets.

Every year, you don’t use up that 22% or 24% bracket. That’s a wasted opportunity. So, each year, I would say, in mid-December, when the mutual fund companies release their capital gain distributions, when bonuses and other income are in, and you have a real good projection of where you’re going to end up, tax bracket, marginal tax rate wise, that’s the time to pull the plug and do a Roth conversion based on how much you can get into the Roth at the lowest rates.

Casey Weade: You talk about doing it annually in your 50s and 60s. Ron asked this question, “Considering the tax consequences both now and for in the future, is it usually better to convert most or all of my investments from traditional IRA to Roth prior to age 73 when RMDs will take place?” And we often get this question. “Well, now, I’m already on RMDs. Do I need to get all of this work done before I get to that RMD age?”

Ed Slott: The answer is you don’t need to, but you should. You should have a time horizon. Right now, the RMD age is 73. It’s supposed to go up to 75 many years in the future, not that many years, but they did that 10-year thing. So, right now, it’s age 73. And that’s what I mean. You’re in your 50s or 60s. Start converting each year. Every year you do that, you’ll be taking advantage of these low brackets and piling it up into tax-free accumulation. That’s when you have the tax rules working for you rather than accruing against you.

If you keep it in an IRA, as you said, Casey, the whole Roth thing is a bet on future tax rates compared to where we are today. And I believe, given the math, that rates will probably be higher, and they’re almost definitely going to be higher if you do nothing because if you do nothing, your IRA doesn’t stop. It keeps growing. So, doing nothing is not an option. Every time your IRA grows, so does the tax in there. It’s eroding in front of your eyes. It’s like the sign in my dentist’s office. She has a sign, “Ignore your teeth and they’ll go away.” You can ignore this problem. It doesn’t go away. So, it’s really, you’re betting on future tax rates. It’s like buy low and sell high. I didn’t make that one up, but write that down. That’s a good one too.

Buy low, sell high. You’re betting on the tax rate. Like a stock, you want to get it low and sell it high. It’s like the old comedian, Henny Youngman, used to say, “I’m putting all my money into taxes, the only thing sure to go up.” He was right. That was a joke in the 50s. But it’s true now. You’re betting, you buy/sell, you’re betting on future tax rates.

But here’s the thing I love about the Roth, even if I’m wrong and tax rates don’t go up in the future, first of all, I don’t see how that’s possible given math, but let’s say they don’t go up and they even go down, which I think is less likely. I always look when I talk about financial transactions, a big one, like a Roth conversion, what’s the worst-case scenario if we’re wrong? And here’s what I love about the Roth. If you’re wrong and it turns out tax rates didn’t go up, maybe they even went down, what’s the worst-case scenario? You’ve locked in a 0% tax rate on that Roth for the rest of your life and no RMDs for the rest of your life, and 10 years beyond, absolutely income tax-free growth for the rest of your life and 10 years beyond by locking in today’s rates. That’s not a bad consolation prize. You can’t beat a 0% tax rate. So, I don’t see a lot of downside risk here.

Casey Weade: Yeah. So, tip number one, time it. Step number two, secure it.

Ed Slott: Wait a minute. Let’s go into timing. I didn’t answer the rest of that question. Your question was, should we do it? Do you have to do it before RMDs kick in? And I said, “No, no, law says that, but you want to do it.” So, the perfect plan might be at age 72, just before you turn 73. If that’s your age at that time for RMDs, you don’t have any IRAs, you don’t have any RMDs. Now, you’re sitting pretty in retirement, virtually low tax rates guaranteed for the rest of your life, and all that growth, income tax free, and you control the taxes. But if you’re already listening, you say, “Well, what about me? I’m already 75. I’m stuck with RMDs,” that’s okay.

Here’s the rub. You can still do Roth conversions, but it will cost a bit more. Why? Because you’re still required to take that RMD, that required minimum distribution, and that amount can’t be converted under the law. So, you first have to satisfy your RMD, pay tax on that, and it can’t be converted. But once that amount is satisfied, then the rest of any part or all of your remaining IRA balance for that year can be converted, but it costs more because you have to pay tax on some money that you couldn’t convert.

Casey Weade: That’s great. Step number two, being secure it, it leads in perfectly to what you’re talking about here that you often call as the sweet spot, that point between the time you turn, say, 59 and a half to the time that you get to RMD age. And the SECURE Act, it pushed out that RMD age. That was the big celebration across a lot of retirees. Oh, no, I don’t have to take till 72 or 73 or 74. And most, what I found, said, “Well great, I just don’t have to take it.” But what that really did is I think it created a larger sweet spot at the end of the day. So, that’s the good part about the SECURE Act. But in general, I don’t know if this SECURE Act had anything to do with actually creating more security for retirees.

Ed Slott: No, absolutely not. One thing I learned after studying tax law for 40 years that whenever Congress names a tax law, you can almost always bet that whatever they name it, it will do exactly the opposite. That’s a guarantee. How’s that Deficit Reduction Act doing from years ago? That never happened. So, they come up with these names. And what it did is make people less secure if they had large retirement savings because now, that stretch IRA for beneficiary has been cut to 10 years, so we have an end date when all of this tax is going to, I call it a ticking tax time bomb, get louder, explode at the worst possible time, maybe in your lifetime or for the beneficiaries.

But they did raise the age to 73 and then years later, 75. And most people love that. And I love it too. But most people liked it for the wrong reasons. The wrong reason is good. There’s two more years. It was 70 and a half and 72 and 73. So, it went from 72 to 73 in the last round. And people saying, “Good, I have another year before I don’t have to do anything.” No, that’s the wrong reason. You have another year to get money out, like we were just talking about Roth conversions before RMDs kick in. Take advantage of those extra years, just like at the beginning, the outset of our program here, Casey. We were talking about what if this Tax Cuts for more years, take advantage of them. Don’t lay back and say now, I don’t have to do anything.

Casey Weade: Yeah, I hear you’re saying step number one, time it, sooner, the better. Step number two, secure it. Take advantage of that sweet spot in the way of step number three, which is Roth it. And Ed asked a common question. He says, “What framework of questions and answers do you use to determine how much of your IRA to convert into Roths? What’s this process look like? Is there a simple process that people can follow to know how much they could be converting and when?”

Ed Slott: There is a simple process, and I just gave it to you. Don’t look at any factor, except your tax bracket because that will tell you how much it will cost. Any time you can get money out at these low rates, I mean, some people, I’m looking at the rates now, you could have 10, 12. Most people don’t have 10% to 12% rate, 22%, 24%. I mean, you could go up hundreds of thousands of dollars in income and operate that 24% bracket. People in the past paid 60%, 70% in taxes. This is the deal of the century. That’s what should guide your distribution planning. The mistake people make with like RMD planning, they take the minimum. No. Max it out. So, if there’s one, and I gave it to you already, but I’ll say it again, foundational principle, it’s so simple of always saving the most in taxes. So, this is always true and it’s so simple. And I’ve said it before, but I’ll say it again.

In fact, when I do programs, like I’m going to come to you in Fort Wayne, Indiana, and do a program there for your people there, and I’m going to tell them the same thing. And here’s my always rule, always pay taxes at the lowest rates. You’ll always save the most in taxes. And we have that right now. Now is the time to take advantage of that. So, that’s the rule.

And some people might say, and you probably get this, Casey, but I’m already at a 37% rate, would it be good for me to convert? I get this from a lot of advisors for their clients, and I say, absolutely, because future rates could be 50%, because the alternative, if I say don’t do it, the alternative is do nothing and that IRA continues to grow and then it’s out of your control. See, the key with Roth conversions before age 73 when RMDs kick in, you control how much tax you pay. That’s another key to tax planning. You control how much you pay.

Once the RMD’s kick in, you’re constrained. It’s out of control. Now you’re on the government plan. I say that in every seminar for consumers. I say, “Do you want your plan or the government plan?” And believe it or not, some people ask me in the seminars, they say, “Ed, tell me, what is the government plan? Maybe I’m interested.” No, you’re not interested in that plan. That’s not a good plan. That’s when you’re forced to take it on the government’s schedule. That’s what RMDs are. You want your plan where you can control tax rates. You can look at the brackets and decide exactly how much you want to pay each year to move your money to Roth IRAs and maybe avoid RMDs altogether going forward and guarantee a low tax bill in retirement, a low income in retirement.

Now, what I’m saying doesn’t work for everyone. Everybody should look, especially if you have a large IRA, work with your own financial advisor, financial tax advisors. There may be situations maybe where you shouldn’t convert everything. Maybe you have somebody in college and if you have a spike in income, you could lose financial aid. There are things, you have to look at a bunch of factors. In fact, I have all of them in my book in the Roth chapter.

But some of the factors are, maybe you’re charitably inclined. Well, then I wouldn’t convert everything. If you give to charity anyway, the best assets to give are your IRAs. So, hold back some of those conversions because once you’re 70 and a half, you can do something called QCDs, qualified charitable distributions, where you can get money out of your IRA and it could satisfy your RMD at zero tax cost giving to charity. And I’m not saying give to charity for the tax break, I’m talking about people that make gifts anyway. Just do it differently and you’ll save a boatload on taxes. That may be a reason maybe not to convert everything because you want to keep some of that for your charitable giving.

Casey Weade: So, time it, secure it, Roth it. Step number four, insure it. What does insurance have to do with tax planning?

Ed Slott: Okay, just so you know, and I have to say this in every program, I’m a CPA, a tax advisor. I do not sell any products. I never have. I don’t sell stocks, bonds, insurance, annuities, none of that. But as a tax advisor, the tax exemption, the income tax exemption for life insurance is the single biggest benefit in the tax code and not used nearly enough by most people. And I’m talking about permanent cash value life insurance.

That’s why if you look in my book, do you see what I titled the insurance chapter? I call it the power of life insurance. I found after working with clients that have built up significant IRAs and 401(k)s, we did estate planning over the years. And I would always start by asking, why are you doing this? Always get to the why. What do you want to accomplish? Before we do a plan, we want to know what you want to end up. And they would always say a bunch of things, but in all my years, it always came down, they didn’t say it exactly these words, but it always came down to three things that almost everybody wanted when they were doing their estate planning, larger inheritances for their beneficiaries, more control because they don’t trust their beneficiaries, and less tax. And that’s what I call the chapter on life insurance. If you look at the subtitle on the life insurance chapter, let me get that here, I think I say that right there on power. That’s what it says, the power of life insurance, larger inheritances, more control, and less tax.

And the reason life insurance fits that bill, well, thanks to Congress. In fact, I said they really messed up with the SECURE Act, they made us less secure. But if you really look at what they did, they made IRAs the worst possible asset to use for tax or estate planning. They’re a horror show. Don’t add to IRAs. Like we said, don’t add to 401(k)s. You’re just putting gasoline on the fire. They made them because of the complexity of the rules. And it all has to come out 10 years after death at who knows what tax rate. They made IRAs the worst possible assets to use for wealth transfer or estate planning.

So, they downgraded IRAs, but indirectly, what did Congress do? In my opinion, they incentivized us all to do the better planning we probably should have been doing all along. Roth IRAs is one way to move to tax-free vehicles, but life insurance is a powerful way to take down the IRA, same idea as with a Roth conversion at low rates and pile it into cash value life insurance. I did this myself. Don’t do this, what I’m telling you, the life insurance thing before 59 and a half because a Roth conversion is different. You can do that at any time, you won’t get hit with a 50% penalty.

But if you are 55 and you’re listening, so that’s a good idea, don’t do it until 59 and a half because if you take money out of an IRA, you can’t just convert it to a life insurance. You have to take it out, pay the tax, and there could be a 10% penalty. But once you are 59 and a half, in that sweet spot we talked about from 59 and a half to 73 is a free for all. There’s no rules. You can’t even get a penalty if you want to. Sometimes people ask me, “Ed, I want to get a penalty.” Nope, you can’t get a penalty, 59 and a half to 73 is a free for all the sweet spot. That’s the time to start looking at this building IRA, get it out, same theory I said before at low rates, and put it into a life insurance. That’s where the larger inheritances come from. That’s one beneficiary say, how is it possible, I inherited more than what my parents even had? It’s the leverage. So, you could use Roth IRAs. All this I’ve done myself. I have the Roth IRAs, I have the cash value life insurance. And even in my life insurance, I have a long-term care. I love the product I have. That’s why I can talk about it so passionately. I don’t sell it.

But there’s a way to get everything you want, plus their life insurance when it passes to beneficiaries, remember, the clients want larger inheritances. You can get that with the life insurance, more control. Now you can get that with an IRA, but it’s almost impossible anymore because the only way you can control beneficiaries’ behavior because parents are always worried leaving their kids large sums of money. They’re going to squander it, divorce, bankruptcy, lawsuits. Every client has always said, “I want my kids to get the money, but I don’t want them blowing it.”

And a common theme for, like I said, over 30 years was it’s not my kids I worry about. It’s the ones they marry. They are so worried about leaving large sums to a child, then they get divorced, and maybe even the money goes to somebody they never met in their lifetime. So, IRAs are harmed because of the SECURE Act and the other tax rules, are terrible assets to leave to a trust. That’s how you control it. You name a trust. And people always ask me, when do I name a trust? Is my IRA beneficiary? And that’s easy. When you don’t trust, because if you trust them, you wouldn’t need a trust. They should have called it, don’t trust.

But the IRAs are a lousy asset to go to a trust. Better option, take the IRA down. Like we said, use up the low brackets and put that money after tax into an insurance policy and leave the insurance policy to a trust. Well, you don’t have any of these complicated RMD rules, tax rules, beneficiary rules. You can actually get your own customized estate planning. And one more thing, no income tax, no trust taxes. That’s the big problem with leaving an IRA to a trust. The trust taxes are off the chart. After about 50,000 of income, you’re at the top rate for a trust. An individual wouldn’t hit that rate till almost 700,000 of income. So, a Roth IRA could go well to a trust or a life insurance, but not an IRA. So, that’s a great plan. That’s the way to get the larger inheritances, more control if you need it, and less tax.

Casey Weade: So, if someone’s listening and they’re saying, “Okay, I like both of these concepts, the Roth conversion, the conversion to life insurance.”

Ed Slott: It’s not a conversion to life insurance. You take the money out. I don’t think that’ll allow, you take it out, you could bet it on a horse. Instead, I’m saying, put it into a life insurance plan.

Casey Weade: Sure. Well, and if they’re trying to determine between those two things, do you recommend a diversification across Roth and life insurance? Do you recommend 100% of one or the other? How do they determine that?

Ed Slott: A lot of times, I look at how much of an estate they have. They might have a big estate tax problem. I might even do the life insurance and get it outside the estate within a revocable trust or something. I have one of those myself. But I also have inside. So, again, these are generalizations for this program, Casey, but the takeaway from this program is see your financial planner, your tax advisor. Not everything I’m saying works for everyone. I’ve done these things myself, but it may not be right for everybody. Look at how... I love the Roth. I hate the idea of having any IRAs personally, unless you have those reasons I said before, charitable planning or to use for medical expenses, there are some reasons. That’s where you have to customize what I’m saying.

What I’m saying is more like a big block of clay and you have to mold it to your particular facts and circumstances and family situation. Some people might need a trust. They want to leave it to maybe grandchildren who are too young to handle money. Life insurance is a perfect vehicle for that, much better than, for example, a Roth IRA. The Roth IRA may work better for adult children who inherit in their 50s, their 60s. They get the 10 years of absolutely income tax-free growth, or they may not want it in their estate and have it go to the grandchildren. So, these are the puzzle pieces you have to put together. But the big picture planning is start taking down IRAs and 401(k)s, take advantage of low rates, put it into tax-free vehicles where you have more certainty of the tax savings of Roth IRAs and permanent life insurance.

Casey Weade: Well, we’re going to be running short on time, so people are going to get your book in order to get to step number five. We can’t give away everything here today. And this is a big book.

Ed Slott: I’m happy to give it away because I love the stories that come back to me, especially like from beneficiaries that say, this really worked out. It’s really amazing. People like making money in the market, and that’s nice, but it’s a crapshoot. Let’s face it. You never know. This is certainty. And what do I say about money? Money flows towards safety, certainty, and guarantees. You can actually put a plan together where they’re going to get a certain amount and a lot of it, in my case, almost all of it, I think, or virtually all of it, my Roth and life insurance at least, will all be income tax free for life.

Casey Weade: I love it. And we’re going to be giving away the book for free. So, don’t worry about those stories coming back here. They’re going to come back. They’re going to come back in droves. In one of your recent podcasts on The Great Retirement Debate, you talked about if people should be changing financial advisors or not, you talked about the importance of them having this tax planning knowledge, this insurance planning knowledge. But you also mention the importance of an advisor having that emotional knowledge, that emotional IQ, if you will, and that they need to understand both the emotional and non-emotional side of retirement. So, I’m going to end it with this question. You’re on the Retire With Purpose podcast. What does retire with purpose mean to you?

Ed Slott: It means to you to get what you want. I always, just like I said before and I did this all the time, when I sat down with new clients, “What do you want? Tell me what your dream scenario is.” Well, I want to take care of these kids. Not these kids, but these kids. Or maybe I have a disabled child. I want to provide for that. I want there to be provided for under my door. A lot of them... I don’t know if there’s a good way to say it, but a lot of them are control freaks. The more money they have, the more they want to control it because I understand it now as a parent and grandparent, you don’t want these kids squandering away. I worry about my own kids or grandkids. They don’t know. They didn’t earn it.

I always found one thing. You talk about emotional, and this is so true. The ones who earn the money are always more careful with it than the ones who inherit it. And that’s probably the biggest item that people have on their mind. How can I instill this prudence and carefulness with money that I had my whole life, which is the reason I have it? How can I instill that? It’s not just giving a money, giving them money with instructions.

Casey Weade: Ed, you don’t seem to be slowing down. Do you consider yourself retired as it stands? Do you plan a retirement date in the future to have a traditional retirement?

Ed Slott: Why? I’m having too much fun. I feel like, I mean, it’s just not only that, look at the people. I mean, there are more people turning age 65 this year than ever before, and they’re coming through behind the baby boomers. People in their 50s and 60s, they’re going to have these issues with their parents and themselves. And the earlier you start to address it, you can’t just accumulate money, you have to have a plan, and that goes back to your purpose. You have to plan why you’re doing it, who you’re doing it for. When I give my kids money, they ask for certain things, “Oh, can you help me with this?” So, I said, “Sure. Doesn’t affect me. This is coming out of your inheritance. Take whatever you want. That’s less later.”

Casey Weade: Well, in my opinion, you’re already retired because you’re living that life of purpose, meaning your job optional. So, that’s beautiful. I want to get this book into as many hands as I possibly can. So, we’re going to give it away right now. If you want to get a free copy of Ed Slott’s new book that we’ve been talking about here, The Retirement Savings Time Bomb Ticks Louder, trust me, there is a lot more in this book that’s going to be able to help you. All you have to do is text us the word Book to 888-599-4491. Check out the link in the bio. Check out the link in the description. Visit us at HowardBailey.com. You text us that, we’ll send you a link and we also want you to write an iTunes reviews. So, write a review for us, we’ll send you a link, we’ll verify your username, and we’ll send you that free book at no cost obligation. Ed, it’s been a true pleasure. I’m glad we got to do this and I can’t wait to see you in person soon.

Ed Slott: I will. I’ll be there. And I hope we met the expectations you set with that big introduction.

Casey Weade: You blew them away, Ed. Thank you.

Ed Slott: Thanks, Casey. Great to be on your program.

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