Ep. 23 - Estate Planning Roadmap for Retirement Accounts

EP 23

Ledly Jennings: [: 00:00:00

So recapping, we started out with IRAs and talked about what the SECURE Act, uh, did. The SECURE Act was a new act, um, I believe 2019 when it was enacted and it's been revised since then, but it changed the way we inherit retirement accounts. So if you'll remember. That inheriting an IRA is typically a bad thing for anyone that is not a spouse because it is subject to a 10 year stretch.

ning they will take a pretty [: 00:01:00

Um, that's what I always say when planning for my tax, uh, situation, you know, while I'm living, but it also applies to your beneficiaries. Um, and then we talked about how you can still leave IRAs to trust and why you would do that. And then we talked about the best account there is to inherit, which is a Roth IRA.

So now that we've kind of laid out all that information, I wanted to Summarize it in a roadmap for your family about where you should start thinking about planning. So we'll start with, let's say, you're my situation where you, um, you know, 35 years old, have a young family, um, good job right now, so we're making money.

t I'm doing is to a Roth IRA [: 00:02:00

So I'm contributing to a Roth IRA. because I like the benefit and the sovereignty of being in a 0 percent tax bracket. That's how you fully protect yourself and can ensure that you're putting yourself in the best situation because you're not relying on the government or income or other things. to dictate, you know, what your take home is.

beneficiaries. But then our [: 00:03:00

If something happened to us today, I don't want to hand my 18 year old son, uh, you know, a ton of money that he can blow. So it goes to him in a protected manner managed by other people. And a Roth is okay to leave to a trust because it is income tax free. So it's not subject to the high trust tax rate.

So young families that has Typically what I'm advising is primary beneficiary spouse, secondary beneficiary, um, your trust. Now that changes if you have blended families, um, you know, different situations, then you may want to leave your primary beneficiary a trust, but for most families, um, same kids happily married, you want to make your spouse, the primary beneficiary.

t with us because we need to [: 00:04:00

Um, so sometimes the relationship happens that way. Sometimes the parents come to me first, but let's just say there's a 60 year old couple. Um, they've saved money, have a good bit of money in, say, an IRA. They're getting ready to retire. They're trying to plan for how they leave things. So if their money's sitting in an IRA right now for their beneficiary plan, the only time I really advise keeping it in an IRA is for a few instances.

One is if they want to leave things to charity, so, um, you can take a QCD, qualified charitable, um, distribution from an IRA, meaning you can leave your IRA to a charity and it's tax free, charities don't pay taxes, so an IRA makes sense to do that because you got the tax benefit up front and you're still getting it on the way out.

ituation. The other reason I [: 00:05:00

For me, since I'm contributing to a Roth, my HSA is a source for my long-term care. But if you have it already in an IRA. Then that should be the source to pay for your, um, long term care, assuming you don't have insurance or different things like that. The reason is because when you can then take a deduction for your medical expenses, um, when you use your IRA for long term care.

h to pay the taxes up front. [: 00:06:00

Or if your time frame is little. So, if you're 60 and in good health, you have a long time frame. You have at least, you know, 20 years, you know, until you're 80. So, the time frame makes sense to convert to a Roth, but say you're in very poor health, or, um, you come to me and you're 75, then it usually doesn't make sense to convert to a Roth.

So, if you don't have the cash and no time frame, then we won't convert. But if you do have the cash and you have a long time horizon, then usually we talk about converting to a Roth, but let's say that you had neither one of those and you have an IRA and that's what we're sticking with, then how do you name your beneficiaries?

e the spouse gets a lifetime [: 00:07:00

And if that's the case, that's when you, we really need to sit down and make sure your trust that's existing is drafted a certain way. Um, because if you leave your IRA to a trust, it has to meet certain standards that we talked about in a previous episode. Go back and listen to that. All my trust will meet that standard if we are planning for it.

Um, and the reasons to refresh your memory that you want to leave an IRA to a trust is if your kids are bad with money, um, you have, um, divorce concerns, um, if they're disabled, you know, anything like that, you don't want them managing the money, then it needs to be left to a trust that can be managed by someone else.

Um, especially if [: 00:08:00

So IRA beneficiaries, primary, your spouse, secondary, kids, or trust typically. Um, and again, we can leave it to your spouse if there's second marriage or blended family concerns. Um, and you want to make sure your IRA is protected and ultimately goes to your kids. Then we can leave it to your spouse in a trust as well, but those trusts do need to meet certain standards and they lose some of the benefits as versus leaving it to them outright.

ve to keep an IRA, let's say [: 00:09:00

So really under 70, I would even do it because typically you have a good time horizon there. Um, so under 70, then, and you have the cash to pay the taxes and you have that long time horizon, then I would consider converting to a Roth IRA. The thought being is you have a, enough cash that there's probably going to be an inheritance left for your kids.

So you want to do it in a responsible manner. You don't want to hurt them from a tax perspective and you don't want to see your estate dwindled away. You know, 30 percent just because of a bad choice you made. And this, cause I always say your kids are going to pay the tax or you're going to pay the tax.

ld be worse for them because [: 00:10:00

Um, so. Typically we convert to a Roth IRA because it goes to your kids in a income tax free manner, 0 percent tax rate, and you can leave it to a trust. Um, so if you leave your Roth IRA, or really if you leave any account to a trust, typically It's taxed at a trust rate, but because Roth IRAs are income tax free, it can skirt around that and you can still get the protections if your trust is drafted appropriately.

your actual income you were [: 00:11:00

Well, let me let me take a step back there. It usually makes sense to convert your IRA to a Roth if you're going to leave an inheritance for your kids. That was the point I wanted to make and when you decide how to make your beneficiaries of the Roth Um, typically the same as an IRA, we make, you know, the surviving spouse, the primary beneficiary and, you know, a trust, the secondary beneficiary or kids outright as secondary beneficiaries.

ut asset protection, or your [: 00:12:00

It actually matters about who your beneficiaries are. Um, I wanted to make sure that we know. With the kind of a horror story that I've had recently is you have to name a beneficiary. So, if you have any of these retirement accounts, get with your advisor and make sure you name a beneficiary. Because if you do not name a beneficiary, then instead of that 10 year stretch period, this applies to IRA and Roth, 5 years.

t didn't have a beneficiary. [: 00:13:00

In this case, it was just a will. So we probate the will and the will says I want my IRA to go to these three kids. Um, but not a fourth kid. So if the wheel says that, then we follow what the wheel says and the IRA goes to the three kids. Um, let's just say there's only four kids, no surviving spouse by law, everything would go four ways between each of the four kids.

eby saying that our IRAs are [: 00:14:00

So in that case, this man's IRA would go to his four kids because of that private contract that they had when he clearly had a will that said he wanted it to go to his three kids, not the four kids, but the private contract is overriding that. Um, so it's important that you pay attention to your beneficiaries or something like this can happen because any private contract overrides a will.

and a trust. So if you have a beneficiary designation, it doesn't matter what your will or trust says. That account goes via your beneficiary designation. But if you don't have one, if you don't have one listed, we need to verify with your company. Do they have one listed for you, even if you do not. Um, but the real takeaway here is make sure you list a beneficiary because you want your accounts to go to who you want it to go to.

And I usually [: 00:15:00

That's how you typically get the most benefits, especially with an IRA. Um, with a Roth, you can have a little more flexibility, but just make sure you have two levels of a beneficiary listed. on all of your retirement accounts. And this has been the good steward law and wealth podcast where we believe that everything we have is a gift and it is our job to manage that gift to the best of our abilities.

Thank you for listening.