Jim Lange's Top Lessons for Planning a Secure Retirement

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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Jim Lange's Top Lessons for Planning a Secure Retirement
Jim Lange, CPA/Attorney
Guest: Ed Slott, CPA, "America's IRA Expert"
Episode 2

Please note: Some of the events referenced in our audio archives have already passed. Please check www.retiresecure.com for an updated event schedule.  

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TOPICS COVERED:

  1. Planning for your Retirement Savings – It’s What You Keep That Counts
  2. Leveraging IRAs into Life Insurance Removes Uncertainty of Future Tax Rates
  3. RMD Suspension for 2009 and Strategies for Roth IRA Conversions
  4. Tips for Finding a Qualified Financial Advisor
  5. Limits on RMD Payback for 2009
  6. ‘The Winning Half of the Game’ & Other Roth IRA Conversion Strategies
  7. Listener Q&A: The Law of the Plan is the Law of the Land

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Welcome to The Lange Money Hour: Where Smart Money Talks, hosted by Beth Bershok, with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

Beth Bershok: We are talking smart money and today, wow, this is going to be an information-packed show. Thank you so much for joining us. I’m Beth Bershok and today we have not one, but two nationally-renowned experts. First of all, of course, is Jim Lange. Jim is a CPA and attorney, and he wrote the bestselling book Retire Secure, Pay Taxes Later and, by the way, the second edition of the book came out last month and a week after it came out, Jim, it was a number one best seller in several categories on Amazon.com. So, congratulations on that one. And we also have with us Ed Slott, America’s IRA expert. You may have seen Ed on PBS because first of all, he had the special, Stay Rich For Ever and Ever, which was the number one fundraising public television show throughout the country. He now has a new one, a new PBS special called Stay Rich For Life. There’s also, of course, a book and a workbook Stay Rich For Life - Growing and Protecting Your Money in Turbulent Times. Thank you so much for taking the time to join us today, Ed.

Ed Slott: I’m glad to be here.

Beth Bershok: I think this is the first time that the two of you--Jim’s niche is Roth IRAs, yours is IRAs-- I think this is the first time that the two of you have ever been together in a forum like this, am I right?

Jim Lange: Yes it is. That’s right.

Ed Slott: It must be like a presidential debate or something.

Jim Lange: I don’t want to say debate, but I’d like to add a couple of words of introduction.

Beth Bershok: A summit, I like it.

Ed Slott: An IRA summit.

Jim Lange: Reading Ed Slott is really essential information. I mean, I’ve read Natalie Choate, Bob Keebler, Seymour Goldberg, Bruce Steinberg, Steve Leimberg, Gary Lesser, others. But Ed is probably more popular than any of them, and he, more than anybody, interweaves great stories, humor and ties it into critical lessons, and I just think it is great. His new package Stay Rich For Life at irahelp.com, which is his website, is a tremendous resource. But Ed, getting back to your stories because I think that’s such a wonderful way to learn, and you do it so well. One story I remember in particular, and this goes back six years when I read The Retirement Savings Time Bomb. Before I’ll ask you to recall this story, I’ll mention that Pittsburgh is a great baseball city. In fact, if we lose more than half our games this season, we will set a new record for the most consecutive losses of any major sports team ever.

Beth Bershok: I’m looking forward to that, actually, I reckon it’s going to happen.

Ed Slott: I have no sympathy for you. I’m a Mets fan, and they can’t have lost as many games because they haven’t been around as long, but the way they lose them is so much better!

Beth Bershok: It’s dramatic.


1. Planning For Your Retirement Savings – It’s What You Keep That Counts

Jim Lange: Well, I think we’re going to get into that in a minute actually. But in Pittsburgh, almost 50 years ago, Bill Mazeroski hit a homerun in the 9th inning to win the World Series from the heavily favored New York Yankees. He will be remembered for that homerun, but what a lot of people don’t remember is that he was only a .260 ball player, and he was really a great fielder. Here’s my question for you, Ed, because this story just sticks in my mind so clearly. Could you tell us about Bill Buckner and the lessons that our listeners can take from Bill Buckner?

Ed Slott: Well, Bill Buckner, for baseball fans, is infamous with, you know, failure at the critical moment. But without going through all his statistics, turns out he was one of the greatest baseball players that has ever played. But, when it counted at the end of the game--and that’s why I use the analogy with planning for your retirement savings--it’s what you keep that counts, the score at the end of the game not the score at half time, not if you’re doing baseball in the 7th inning or the 8th inning – it’s how you complete the game. So, where Bill Mazeroski was nowhere near probably the player Bill Bucker was, Bill Mazeroski is in the Hall of Fame because at the end of the game, he came up with the big hit and as everybody in Pittsburgh knows, but I got to tell you, a lot of people around the country when I use Bill Mazeroski’s story don’t know that he’s the only one that’s ever hit a 7th game World Series winning walk off homerun. When I say that around the country people, the real baseball fans say, “Oh no, that’s not true. Joe Carter did it.” Joe Carter didn’t do it--just a little baseball trivia--he did it in the 6th game. Bill Mazeroski is still the only one to walk off the World Series in the 7th game. So, poor Bill Buckner had a fantastic career, over 2,000 hits. Actually had 500 more hits than Joe DiMaggio. Had more hits than people like Mickey Mantle and Ernie Banks and on and on and won fielding titles, won the National League Batting Title. But when it counted, and that error against the Mets in the ‘86 World Series, you know they practically ran him out of Boston. Actually, last year they brought him back for the first time in over 20 years to throw out the first ball, and I guess they forgave him because they won a World Series since then. Bill Buckner will probably never be in the Hall of Fame even though he had a Hall of Fame career. You look at the stats of the people, he’s got more hits than 70% of the players already in the Hall of Fame.

Beth Bershok: Actually, this is the first time I’ve ever heard of Bill Buckner – right here on this show.

Ed Slott: The point is that he had a great career and the analogy to retirement savings. You could have a great career saving, building and investing and having more and more. But if you strike out or drop the ball like Bill Buckner did at the end of the game, the distribution strategies, the planning, your family will remember the same thing about you that they remember about Bill Buckner – that you dropped the ball, you blew it when it counted, even though for 30 years you did everything right, and that’s the big problem with retirement planning. People only plan for, what I call, the first half of the game accumulating money, and you know you really don’t have much control over that half the game. You might think you do with investing but there’s bigger, as we found out, bigger forces at work that you can’t control like Wall Street and all that. But the only thing you can control is putting the money in and hoping for the best. Even with a great investment advisor, you’re finding out that you don’t really have much control over how much it grows, but you can put it in and you can control the backend of the game, which is to me, the winning half of the game. That’s what I call the winning half of the game in my new book Stay Rich for Life. You can control that because it’s all about the taxes, and that’s what people have to focus on now, what you can control. You can’t control the stock market, the greed, the fraud and all of that. But you can control mining the tax code and doing great tax planning for the end of the game when it counts--like when Bill Mazeroski hit that home run.

Beth Bershok: Well, I think a lot of people are worried about that now. I have to jump in here with this because I saw on your last newsletter, Ed, that you have a catchphrase for today’s economy which I love. You call it the Yo-Yo Economy.

Ed Slott: Yeah, we’re in a Yo-Yo Economy I call it. A Y.O-Y.O. stands for You’re on Your Own. Never before have people felt so helpless even with financial advisors who now they find out were really just salesmen, brokers selling them stocks and bonds. I think Warren Buffet said it best. He had a saying, “When the tide goes out, you quickly find out who’s wearing a bathing suit.” And that’s what’s happening now, we’re finding the curtain’s coming off. A lot of these people that call themselves financial wizards or gurus, these brokers and bankers, and a lot of them really didn’t know what they were doing. They just sold what their company told them to sell. You lost your money, they got bonuses, so that’s got to stop. That’s one of the things that I talk about in my book. How to find competent, true financial advisors that actually do the tax planning, the distribution planning where the score matters at the end of the game. Things you can control.

Beth Bershok: You know, knowing you were going to be on today Ed, we had some listeners who sent us questions, and we’re going to be getting to those in just a minute, but I know there was something Jim wanted to ask you first.

Jim Lange: Well, I was actually attending a professional seminar, and I met a guy named Bill Nelson who sang your praises.

Ed Slott: Oh yeah, Bill.


2. Leveraging IRAs into Life Insurance Removes Uncertainty of Future Tax Rates

Jim Lange: And he told me that the secret to one of the most important things about IRA planning was in The Retirement Savings Timebomb, and he gave me the page. It’s the old edition--which I still have the old edition because it’s all marked up--and I have the new edition too. But I use the old edition because again it’s highlighted and marked up, etc. If you remember, there was the case study of Ralph and Sadie who had $1,000,000 in an IRA, and they had a 40-year old daughter named Ruby, and you had made some recommendations to Ralph and Sadie. I was wondering if you could tell our listeners what you would recommend to Ralph and Sadie who have $1,000,000 in an IRA and a 40-year old daughter named Ruby.

Ed Slott: Actually it’s funny you mention that because I brought that story back and updated it for my new public television special Stay Rich For Life – same name as the book, and I understand from what you’ve both told me that it’s been running in Pittsburgh.

Beth Bershok: Yes, WQED.

Ed Slott: So, in the second act of that show I tell that story. I may have changed the names. I don’t think I used names. But the point I was trying to make again, managing the taxes, doing planning, taking advantage of what I call those golden nuggets in the tax code, which most people don’t. Most people are going to lose their retirement savings. When I say retirement savings, I mean your 401 (k), your 403 (b), your company plan, your IRA because that money has not yet been taxed. So now you have to do something about it to do pro-active planning ahead of time before, what I believe, are huge tax increases coming along. Look at the economy, bailout after bailout. Who’s going to bail out America? It’s going to be the very people who did everything right – put money in 401 (k)s and IRAs -- but it behooves everybody to do this kind of planning like you just referred to, and I call it using the biggest benefits in the tax code. Just so you know, I do not sell insurance, stocks, bonds, funds, annuities, but I believe in leveraging the tax code – I’m a tax advisor. The reason I said that is because the single biggest benefit by far is the life insurance, the tax exemption for life insurance. The reason I said that is because as soon as I say life insurance, people must think I must be selling it or something, I’m not! I’m telling you to use that to leverage your money when you can use the tax code to turn $1 of taxable money into $10 tax-free. That’s a good deal. I would do it all day long.

Beth Bershok: You know actually, let us get back to this in one second. We have to take a quick break, it’s The Lange Money Hour: Where Smart Money Talks. Jim Lange and our very special guest today, Ed Slott. The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: The Lange Money Hour: Where Smart Money Talks. I’m Beth Bershok, and we have a great guest today, Ed Slott, who is America’s IRA expert, and Jim Lange of course. We were just in the middle of an insurance story that Ed was talking about, and Jim, if you want to continue on with Ed’s idea there.

Jim Lange: Well, we were talking about Ralph and Sadie who have $1,000,000 in an IRA and a 40-year old daughter named Ruby, and Ed was mentioning a little bit about some of the benefits of the tax code, because he’s very concerned with future taxation and was talking about life insurance.

Ed Slott: I’m excessively concerned about future taxation! I think we’re all going to hit much higher taxes, so we have to do something to move our money now to tax-free accounts, and the point to the story was, a spouse is usually better off getting free and clear money – totally tax-free money. Which is, nothing better than life insurance. There are no required distributions, and children and grandchildren are generally better off with the IRAs because they can stretch or extend distributions over their lifetime. So, that was the point to the story. Instead of what most people would think, “Well, I want my wife or husband to have the IRA,” you’re better off having life insurance which will never be taxed – the state or income tax, and getting the IRAs out to your kids, estate-tax free, which you can do now even more so since the exemption for estate tax has been increased to $3,500,000. That opens it up for a lot more money if you have that much. You know the less you have the more important it is to protect what you have. Even if you have a lot more you can give up to $3,500,000 or leave should I say, $3,500,000 of IRA to kids and grandkids now estate tax-free.

Jim Lange: Ed, let me ask you this. So, basically you are saying if the husband is the one with $1,000,000 in the IRA, you’re saying to consider a life insurance for the husband.

Ed Slott: Well, in the example I said the husband had a $1,000,000 IRA, and normally when somebody comes in--probably the same thing with your clients if somebody came in with that scenario--the wife would be the beneficiary because that’s what everybody is told on the IRA. I’m saying to change that, to make the daughter the beneficiary, but then the wife is going to say “Well, what am I going to live on?” and that’s where the life insurance comes in. But generally what I end up doing is changing the IRA beneficiary back to the wife anyway, but adding the daughter as contingent beneficiary. So this way the wife is in complete control. What the wife really wants, not so much the IRA, she wants financial security. She looks at the IRA as financial security, but that’s not really a secure future when you don’t know how much of that is going to be taxed when you’ll need it most. When she reaches her hand in there when she’s the most vulnerable and needs it the most, taxes could eat up 50% to 60% of it, depending on future tax rates and estate tax rates. You’re better off with the life insurance, which is a sure thing – you have it free and clear, and she can also get the IRA if she wants, but by naming the daughter contingent, she has the ability to refuse that inheritance, another benefit in the tax code, called a Disclaimer, where it could go right back to the daughter after death anyway. I know that was a mouthful.

Ed Slott: That’s why I’m trying to get this story down. But the point is to look at the life insurance, leverage taxable money now. It even pays to take money out of your IRA now, pay tax at low rates – we’re at very low rates now, and leverage it into life insurance.

Jim Lange: Ed, by the way, you and I are very much on the same wavelength on a lot of areas. I’m a big fan of disclaimers, as you know. Lange’s Cascading Beneficiary Plan is basically an estate plan set up with disclaimers, so I’m a little more comfortable naming the surviving spouse first and letting the decision of who gets what…

Ed Slott: Right, that’s what I was getting at, that she can have it both ways. She’s better off with the life insurance as opposed to an IRA. She doesn’t have the life expectancy to get as much out of the IRA, and the life insurance removes the uncertainty of what future tax rates may be.

Beth Bershok: Basically, the whole idea behind this is to save taxes, to save the taxes at the end.

Ed Slott: To me financial security is having free and clear money. The last thing you need in retirement is you reach in your hand when you need it most and the government takes 70% of it. That’s the time you need to keep 100% of it.

Beth Bershok: Our guest is Ed Slott, and are you guys ready for a question we had tossed out from a listener?

Ed Slott: I’m ready.

Beth Bershok: Oh, Jim says here’s one more question. We’ll let Jim do his question first, then we’ll get to some other questions.

Jim Lange: Alright, Ed, I have also been an advocate of the combination of life insurance and IRAs and retirement plans and have been so for more than 20 years now. One of the things that I do in my practice--which is maybe a little bit different and I thought I would ask you comment on this--what I often do is Second-To-Die Policies. I’ve actually run numbers, and your way works out better, and I’m the first one to admit that. When you run numbers, it works out better for people in terms of total wealth to the family to do what you are suggesting, which is to insure the husband’s life, have that basically go to the wife and then have the IRA going to children and grand-children. What I have been doing, and maybe I guess it’s conservative--yours is more conservative, mine might be a little different in that it might be a reduced premium-- is I often use Second-To-Die or Survivorship Life Insurance and that will pay not at the first death but at the second death, and I tend to use guaranteed policies so that there’s no question if it’s not a whole life situation where it depends on investment results etc. I was wondering if you could comment on that. I know it’s not quite the way you do it.

Ed Slott: I do all different ways actually; it depends on what’s best for the client. It depends on how much money might be needed at the first death. The problem with my scenario is sometimes you never know who’s going to die first, too. At the second death obviously if you don’t need the money, if they have enough other assets to live on without the life insurance, then of course the Second To Die because you’re spreading the risk over two lives so it depends upon each case. But when there’s a case where a spouse is worried about financial security if the one with the IRA owner, you know that has a large IRA, and she has nothing let’s say, then I want her to definitely get some money that is tax-free as much as possible at the first death.

Jim Lange: I think that sounds good. So, if we are concerned with both spouses, we might consider a traditional policy on the IRA owner, and if there is more than enough for both to do the Second To Die. I sometimes say, well, there is a certain gifting budget and you want to allow some money for children, just plain old regular gifts, some money for 529 plans and then also some money for life insurance also.

Ed Slott: If they both have enough to live on, then it’s probably more of a benefit to do a Second-To-Die policy. If neither spouse is worried if there’ll be money when the first one dies.

Beth Bershok: Ed Slott, our guest today, America’s IRA expert and Jim Lange on The Lange Money Hour: Where Smart Money Talks We do have some questions from listeners, and we will be back with that in just a minute. The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking more smart money, The Lange Money Hour: Where Smart Money Talks. Jim Lange and we have a great guest today, America’s IRA expert, Ed Slott, the author, and a PBS television special called Stay Rich for Life. If you want to check all of his information out, it’s irahelp.com. That’s Ed’s website, irahelp.com, and thank you so much again, Ed, for joining us today.

Ed Slott: No problem, glad to be here.

3. RMD Suspension for 2009 and Strategies for Roth IRA Conversions

Beth Bershok: We have so many questions from listeners who emailed us knowing you were going to be on the show, and I discovered a theme in these emails. Everybody seems to be completely confused about the RMD suspension for 2009, and I assume, Ed, that you are also using this as a strategy. I know Jim has been using it as a strategy to convert to Roth IRAs. But here’s the question, and this comes from a retired dentist in Indiana. His question is: He’s skipping the 2009 distribution, but he wants to convert his IRA to a Roth IRA, and he wants to know if he skips the distribution, is he still allowed to do that?

Ed Slott: Yes, well providing he qualifies. In 2009 your income cannot exceed $100,000, that’s the only restriction. But a better strategy that I’ve been using for some clients who are willing to do it, even though they don’t have to—these are clients over 70 ½ that normally would have required distributions. Now they don’t have to take them. Now on the surface, that looks like a good thing, but I’m telling them that you’re better off getting the money out while you know what today’s tax rates are, which are very, very low – almost the lowest they’ve been in most people’s lifetime. So, it’s best to take the money out anyway, and if your income doesn’t exceed $100,000, let’s say you can convert to a Roth--you qualify to convert to a Roth--then you should convert. Normally, they wouldn’t have the opportunity to convert to a Roth, because when they take required distributions, those distributions are not eligible to be converted to a Roth, but now this year only, since those distributions are actually voluntary and not required, they can be converted to a Roth. So, it’s a real window of opportunity to convert it to a Roth now.

Beth Bershok: Actually, Jim, do you want to chime in on that, because Jim has been using this as a strategy.

Jim Lange: Well, I agree with you 100%, and the reason why I am such a big fan of making Roth IRA conversions in 2009 for people who qualify is because that will be the lowest tax year and the lowest tax bracket they will likely ever be in. So, let’s say you’rer 70 or older, you have money in an IRA and normally, let’s say you have social security, pension, interest, dividends – whatever you have. Normally, the minimum required distribution from an IRA is going to push you into a higher tax bracket. So, if you were to make a Roth IRA conversion, you would have to pay taxes at the higher rate. Now that you don’t have to take a minimum required distribution, your Roth IRA can be converted for cheaper than it will ever be. I used to say, “Do the Roth IRA conversion after you retire but before minimum required distribution when you’ll be in a low tax bracket.” 2009 is now a very special year because we can convert at the lowest tax rate that we’ll likely ever be in.

Ed Slott: Right, I agree with that. I don’t think people realize--you know there’s a lot of complaining about taxes all the time, but most people don’t realize how good they actually have it now. On my book, Stay Rich for Life, which if you’re interested you can get on my website irahelp.com. It’s my website, you can even ask questions, you can type in questions if you’re listening now, you can type in questions right on the front page of the website, and they’ll be answered by true experts. And if you scroll down you’ll see a picture of Stay Rich for Life – the book we’re talking about, and if you click there is just goes right to Amazon.com, and it’s probably the best price to get it. But whatever price you get it at, it’s going to be well worth it if you read it. Page 7 in that book, I give you a history of tax rates.

Jim Lange: That page that I’m on right now.

Beth Bershok: He is--he literally is on there.

Ed Slott: It’s really an eye-opening thing when you see rates in the 70s, 80s and 90s. If you said that to people now, people now think tax rates are high! Back in the years, I just want to isolate the years of the baby-boomers which were 1946 to 1964. The top federal tax rate, that’s the marginal top rate paid by the wealthiest, exceeded 90%, 9 0 in case you’re banging your radio now. Did he say 90? How can that be? What’s left for me? Nothing! Exceeding 90% each of those years of the baby-boomers except the last year ’64 where it was only a paltry 77%. Now the point I’m making is that those years are the years the baby-boomers were born. They didn’t need much from people. Now they’re on the other side of the fence collecting. The first baby-boomer just started collecting social security last year in 2008. They’re going to be on top of all our other fiscal and economic problems and bailouts. The baby-boomers, 80 million strong, are going to need more from government of some form or another. There’s going to be some kind of dependent which will push pressure on tax rates to go up even further. So, that’s my point, tax rates are going to go up, and now is the time to act. Now is the time to do these Roth IRAs, take money out even if you don’t need to. Leverage it into life insurance and get money away from the taxman now. I call it “Buying Taxes on Sale” because that’s what they are now.

Beth Bershok: I think we should mention the 2010 tax law change, too, while we’re talking about these Roths.

Ed Slott: Yeah, well anybody can have a Roth conversion in 2010 – everybody qualifies.

Jim Lange: I think that’s going to be a phenomenal opportunity for tax payers who now have incomes of more than $100,000, and one of the things I like to do in my practice is, we call it running the numbers. Where we actually try to come up with a long term Roth IRA conversion plan, usually multiple years, and I think 2009 is great because we will be in a low tax bracket for the people who are 70 and older. 2010 is going to be phenomenal for millions of people who previously did not qualify for a Roth IRA conversion.

Beth Bershok: And there seems to be some confusion about that, too. I have fielded some questions even at the office. Is 2010 the only year you’re going to be able to do that? Right, at this moment it’s endless, it’s 2010, 2011.

Ed Slott: The provision is repealed forever, but the big deal about doing it now as opposed to waiting until 2010, now you know what the tax rates are. Now what I’m saying, if people aren’t getting it, is to pay taxes now. If it goes against the grain, I’m a CPA of every accountant who has ever been born. Every accountant has been hard-wired to always pay taxes later, but I got to tell you that I’m worried about what our future tax rates might be. So, I guess now that makes me a recovering accountant, because I think it’s better to pay taxes now and get the government off your back forever.

Beth Bershok: With the Roth?

Ed Slott: Yeah.

Jim Lange: With the Roth and Life Insurance.

Ed Slott: It’s not only taxes are on sale, it’s a double sale on Roth IRAs.

Beth Bershok: Is like a BOGO right now--buy one get one.

Ed Slott: Yeah, it’s better than that. It’s a double sale, rates are low and values are low. They are depressed because of the stock market – take advantage of it!


4. Tips for Finding a Qualified Financial Advisor

Beth Bershok: We should mention, too, that when we give all of this information, there are some people that will attempt to do all of this without speaking to a financial professional.

Ed Slott: No, no, no….

Beth Bershok: You really should have a financial professional look this information over first.

Ed Slott: That’s one of the key themes of my book Stay Rich for Life. The point is to educate people. I want people to be educated, to be empowered, to know how much more there is to know, and to demand more from their financial advisors, but not to do it yourself. You want to know that your advisors know, and there’s enough in this book, and other resources, and that’s what you should do. You have to educate yourself to demand more, make better choices – people who are better educated always keep more of their money.

Beth Bershok: You said that you mentioned in your book picking an advisor is extremely important, but honestly how do you pick a good one?

Ed Slott: Well, I give you guidelines there. To me, the first test I want to see an advisor, if I’m a consumer, I want to know that an advisor has invested in his education, and a lot of advisors say they know all about this. Actually, when I run lots of programs, probably the same with Jim when he runs programs, I have advisors that come to the programs, and many of them think they know it all already, but they come anyway. Usually on my longer programs--the multi-day programs, two-, three-, four-day programs--within two hours of the first day I have advisors coming to me telling me, “I didn’t know how much I didn’t know.” The problem with most advisors, they don’t take a lot of education in helping you to protect your money – in the tax planning, the thing that is essential that I’m talking about because they don’t know that they don’t know. And if you ask your broker or your banker “Do you know this?”, “Oh yeah, we know everything.” You know, anybody says that, you run because nobody can know everything. I study this full-time, I’m sure Jim does too, and I have questions almost every day that come up. You want an advisor that has gone to courses. Matter of fact, in the companion workbook to Stay Rich for Life Book, I actually give you questions to ask financial advisors to see if they know this stuff. You might say “Well, what can you ask an advisor? How would you know if he’s giving you the right answer?”--because that would be the natural thing. It’s like asking a doctor about a medical procedure--he could tell you anything he wants, you wouldn’t know the answer. So, I created questions here that you would know if your advisor knows. For example, I’ll give you a simple one, “When was the last time you went to a seminar on IRA or retirement distribution planning?”

Beth Bershok: This is a question to ask your advisor?

Ed Slott: Yeah.

Beth Bershok: Right.

Ed Slott: They might say, “Oh, we go all the time,” and I have in there what I call BS detectors.

Ed Slott: Very innocently you say, “Oh, that’s interesting. Could you show me the course manual from the program?”

Ed Slott: You know right there if you see a deer in the headlights look, you know you got a guy, and they tell you they take education, you have to be very careful. When I say education, I don’t mean education on how to sell your products – sales training. That’s something completely different. I’m talking about education on the tax planning. Or a good question to ask “Do you have any books on this topic?” and they might say “Oh yeah, I have a book. I have Jim Lange’s book Retire Secure”. Then on my BS detector would be, “Oh, that’s nice.” Ask them to open it. If the book cracks when it’s opened, you know that’s the first time that book’s been opened – I would run! So, there are certain questions you can ask to get that sixth sense, that feeling like, “Is this guy really at the top of his game or is he really just a salesman, a stock-jockey?” Those are the guys you got to get away from. A lot of the banks and brokers don’t know anything about this, I’m sure Jim would concur with me. And it’s not only the banks and brokers, other CPAs like myself, and attorneys, you know they might know. It’s more dangerous even with the CPAs because you figure if you go to a CPA they must know all about taxes because those guys are tax guys. But this is a specialized area, the tax planning for retirement distributions. Most CPAs are not up on these things and make a lot of mistakes. So, you have to have an advisor who has training in the second half of the game so we can hit that homerun like Mazeroski for you. You’re not going to hit that homerun, you’re going to need an advisor to do it for you.

Beth Bershok: And this is in the workbook.

Ed Slott: It’s in the workbook. Even on our website you can find trained advisors all over the country. There are about 500 or 600 advisors that have taken extensive training with our firm. But that’s not the be all and end all. If you’re not comfortable with your bank or broker, a lot of these brokers are not even around any more.

Beth Bershok: Jim and Ed, we’ll take a quick break. We will be right back with Ed Slott, America’s IRA expert, and Jim Lange. It’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking more smart money The Lange Money Hour: Where Smart Money Talks. I’m Beth Bershok with Jim Lange and our very special guest today – America’s IRA expert, Ed Slott. Just a moment ago we left off with something I think is on everybody’s mind. The economy has been so turbulent, and you’re wondering to yourself, “Does my advisor know what he’s doing?” In Ed’s book Stay Rich for Life, it comes with a workbook where you give some questions that you can ask advisors just to feel them out, to see if they really know what they’re talking about, and we were just talking about that a moment ago. How do you know? So, in Ed’s workbook, and I’m sure Jim you think the same thing, there are people out there who are giving advice right now that are probably not at the top of their game.

Jim Lange: Well, one thing that I’ve noticed--and I give a lot of talks to financial advisors that get continuing educational credits-- is I’m kind of amazed at the level, and I don’t mean the high level, but at the lack of knowledge about IRAs and retirement plans for a lot of these advisors. I sometimes worry about some of their clients because I wonder if they’re really getting the best advice. Sometimes I find that my own seminars that I give for consumers to educate consumers are really not all that different than the ones I give for advisors--at least in the two-hour talks--and sometimes I get as good or better questions from the consumers.

Beth Bershok: And, actually I want to jump in here because you have one coming up this Saturday. It’s Two New Tax Laws That Create Shocking Opportunities for Wealth Preservation. We are running out of time to RSVP, but you can still do it, so let me give the phone number. It’s 1-800-748-1571. It’s going on at Pittsburgh Golf Club in Squirrel Hill, and there are two: 9:30 to 11:30 and 1 to 3. So, you should also tell us which one of those you want to go to. 1-800-748-1571, and you can also check out the website which is retiresecure.com. Ed, any other tips you want to add in the meantime to what you should look for in an advisor?

Ed Slott: Well again, I agree with everything Jim said, but even more so I train advisors and consumers. What you have to know is, it’s not a slam on these people who sell stocks and bonds – that’s part one of the game-- helping you accumulate money. What I’m saying is that you need an advisor, like a doctor you go to a specialist for different things, maybe that’s a better analogy. When you know you’re coming up on retirement, and you’re accumulating this money. You have to move to an advisor that has a specialized knowledge on how to get that money out in the most tax-efficient manner that can do the tax planning. The problem with most people who call themselves financial advisors is that they don’t really know or even address any of that. They think that if they make you a lot of money, that’s fine and that is great. But keeping it, it’s the score at the end of the game. Bill Buckner, back to the Bill Buckner story, had great statistics. He accumulated tons of great statistics, but at the end of the game he lost it all because he blew it. He blew it by not being able to perform in that key moment. You need an advisor that can perform in the second half of the game – the distribution phase. The things you can control – the tax planning. Most don’t. It’s so bad I would say that about 99% of advisors don’t have that knowledge.

Beth Bershok: 99%, is that what you just said?

Ed Slott: Yeah, you might be thinking, “Well, Eddy, are you saying that only 1% of advisors know anything about this?”

Beth Bershok: That is what we’re saying.

Ed Slott: No, it’s much less.

Jim Lange: You’re pretty tough, Ed.

Beth Bershok: Wow!

Ed Slott: I can tell from the advisors that take my programs and training and go to Jim’s training.

Jim Lange: Ed’s programs by the way are wonderful--his two-day programs and all of them.

Ed Slott: I admire those advisors, and those are the best of the best because at least they are investing in their education for their client’s benefit. In these days, where there is such a lack of trust, you need to do two things. Expect more from your advisor. You need to make sure they’re educated, that they have this specialized knowledge and that they put your interest first.

Beth Bershok: I think the workbook that you have with that exercise is excellent. You can check it out at irahelp.com, and when you click on that website, it’ll guide you to where you can buy it. Can I toss out another RMD question to you guys?

Ed Slott: Yeah.


5. Limits on RMD Payback for 2009

Beth Bershok: Because this one I got and find this really interesting. This came from a guy named Bob in Pittsburgh. He’s a retired engineer, but here’s his question and it really is probably happening to a lot of people with the RMD suspension for 2009. Some people were unaware that that had happened at the end of the year that you could suspend your RMD for 2009, and so they had it taken out in say January. Then when they caught on that they didn’t have to take the distribution, they stopped, but Bob’s question is, can they go back and give the money back for January?

Ed Slott: Only if it’s within 60 days.

Bershok: Oh, 60 days, that is the limit?

Ed Slott: Yep, that’s the only way they can put the money back in, and that’s only if they haven’t done a previous rollover from that IRA within the past 12 months.

Beth Bershok: Any other strategies you guys would like to hit for these particular economic times. This is a time it’s hitting everybody, really.



6. ‘The Winning Half of the Game’ and Other Roth IRA Conversion Strategies

Ed Slott: Well, in my book, my theme is to take control of your money, of the things you can control, and you can control your tax liability, and the planning for what I consider the most important part of the game, which I call in my book Stay Rich for Life, ‘The Winning Half of The Game’. That’s the one that Bill Mazeroski played in and those are things you can control, and it’s time to take control. Don’t just leave everything to advisors. You’re going to have to step in and get educated so you can demand more from your financial advisors and get your plan. If you don’t do anything, doing nothing now is not an option. If you don’t do anything, you’ll get a plan, but it’ll be the government plan which is, let’s face it, our tax system is a penalty on savers. The government plan will wipe you out so you either make a plan now by taking action or you get a plan. The plan will be done by you, or to you, and it’s your choice. I’m saying to act now, take action in small consistent steps.

Beth Bershok: Jim, any other strategies you would like to add?

Jim Lange: Well, I’ve been a Roth IRA conversion advocate for a lot of years, but I would say that 2009 and 2010 are going to be the best years ever because A.) If you are 70 or older, you don’t have a required minimum distribution for 2009 which is going to put you in a lower tax bracket. So, I think that’s going to be a good year to take a look at a Roth IRA conversion. In 2010, when anyone, regardless of income, will be able to make a Roth IRA conversion, I think that’s going to be a great entrée, and the other thing is, I would say that those two factors alone would be good to have Roth IRA conversions. We have two more factors, though, that make it even more compelling. Number 1 is, I agree with Ed, I do believe we are in a low-tax environment even though it might not feel like it, and if you look historically we certainly are, and if you look at what’s going on in the economy, I can’t see how we could not have higher taxes later, and if you could create literally a tax-free dynasty for yourself, children, grandchildren. So, I like doing Roth IRA conversions. The other reason why I like it is, if you do believe in the long-run that the market will come back, and you can pay taxes at a low rate and on a low amount, then that’s even better, and you should, to me again, Ed’s point about having a really good advisor. Last year, we did a lot of Roth IRA conversions. For every single client that we did a Roth IRA conversion for, we called them and said “Hey, if your Roth IRA went down,” which frankly most of them did, “we want to re-characterize that Roth IRA. So, I think you have that additional protection in case you’re afraid that you’re going to make a Roth IRA conversion, and it’s going to go down even further. “

Beth Bershok: We’ll be back in just a minute here. It’s The Lange Money Hour: Where Smart Money Talks with Jim Lange and special guest, Ed Slott, who is the author of Stay Rich for Life. The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking smart money. The Lange Money Hour: Where Smart Money Talks. Our special guest today is America’s IRA expert, Ed Slott, who is also the author of Stay Rich for Life which is a PBS special as well. The hour has gone by so fast! Ed, Jim, we’re down to our last few minutes! I think we could have made this show 10 hours, and we still wouldn’t be out of material!

VII. Listener Q&A: The Law of the Plan is the Law of the Land

Beth Bershok: I have a question that I wanted to toss out to you. This one comes from a listener named Fred, and this is Fred’s question. He just retired at the end of 2008, and his question is subject to limitations – can all the after-tax money in a 401 (k) plan be converted to a Roth IRA while all the pre-tax 401 (k) money is converted to a traditional IRA?

Ed Slott: The answer’s yes if you do it the right way. It depends on the 401 (k) plan if they’re willing to separate the check. You’d have to first get rid of the taxable money and roll that to an IRA, and then all you’d have left is the after-tax money. Or if they give you two checks, that’s the best way. You put the taxable money in the IRA and the after-tax money goes right to a Roth tax-free.

Beth Bershok: That was the second part of his question. He said, if I can actually do this, does that imply no taxes are due on the conversion?

Ed Slott: That’s right, but on the other hand, if they give you one check and you put it in your IRA, then you have to do a pro rata allocation, and not all of the after-tax money can come out tax-free. So, the way to do it is first get the taxable money out of the 401 (k) into the IRA – that’s a tax-free roll over. Then, the after-tax money, you go right from the 401 (k), and when I say right from, they might give you two checks if they’re willing to do that. Then it can go to the IRA, to the Roth IRA, I mean, tax-free from the 401 (k).

Beth Bershok: So, it also depends on what your plan is willing to do?

Ed Slott: Yeah well, they could mess you up. Remember, this is one of those areas of the tax law where the IRS rules, believe it or not, are much more liberal and flexible than the plan’s own rules. The problem is, the law of the plan is the law of the land.

Jim Lange: I think that that’s a great analysis, Ed. I’ll chime in for two things. When somebody is retiring, it is really critical they take stock, see what all their options are. They have to check for NUA which we haven’t even talked about today – Net Unrealized Appreciation -- which might qualify for capital gains treatment, which is even more favorable.

Ed Slott: I didn’t want to use the word appreciation on this show.

Jim Lange: That’s a good point.

Ed Slott: People think I’m out of touch!

Jim Lange: By the way, the numbers on that, let’s just say that there’s $50,000 in effect. By the way, after-tax dollars in a 401 (k) is essentially conceptually the same as a non-deductible IRA, and a lot of our listeners have non-deductible IRAs. If they can make the conversion of that and isolate it and just make that conversion, just as an example, if they do that for $50,000, 40 years from now their family will be $500,000 better off.

Beth Bershok: We actually have graphs to show that, as a matter of a fact.

Jim Lange: Yes, so that’s one of my favorite topics. If that situation already occurs, that is, there are already after-tax dollars and pre-tax dollars, let’s say inside an IRA, there’s some very interesting techniques, and I can see you waving your hands. I’m not going to have time to completely explain that you can isolate that, particularly if you have some kind of retirement work.

Beth Bershok: Well, I think what it boils down to because both of you were talking about just this second, it sounds complex. It sounds like again we have to get back to you need a competent advisor. There is no way you could attempt to do that yourself or you should attempt to do that yourself.

Ed Slott: Remember, even the savviest advisors have to work hard to keep up with that knowledge, but that’s their business – you’re not in that business. What you need to do is get educated so you can learn as much to find out if you have the right advisor guiding you.

Beth Bershok: I really hate to wrap this up; this is just too bad it’s been great. Ed Slott, Jim Lange together really for the first time, and I want to give your website again. It’s irahelp.com, the book is Stay Rich for Life, but it comes with a workbook which I think could be very, very helpful for people. Can you buy that separately?

Ed Slott: Yeah, but it goes along with the theory of the book. But yeah, if you get it separately, the point of the workbook is to put your ideas and knowledge into action. It’s all about taking action.

Beth Bershok: And it’s also a PBS special, Stay Rich for Life, your website irahelp.com. Jim’s website is retiresecure.com, and I want you to check this out. For one reason, we’re going to have the audio to this show posted, too. So if you want to review any of the ideas that Jim and Ed have been talking about, it will be on retiresecure.com and Jim, you have a Roth seminar coming up this weekend. It’s 9:30 to 11:30 or 1:00 to 3:00 at the Pittsburgh Golf Club in Squirrel Hill. 1-800-748-1571 if you would like to RSVP to that. We really do have limited space on that one, and you can go to retiresecure.com or irahelp.com. Ed, thank you so, so much for joining us. We really appreciate it.

Ed Slott: I think it was great. I was glad to be on with Jim.

Beth Bershok: It has been great information, too. Thank you two for sharing that. It’s The Lange Money Hour: Where Smart Money Talks. Real quickly I do want to say, our next show, which is going to be one week from tax deadline, is April 8th. One week from the deadline, so we are going to be talking taxes on the next show. The Lange Money Hour: Where Smart Money Talks.

 

 

James Lange, CPA/Attorney

Jim is a nationally-recognized tax, retirement and estate planning attorney with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, will and trust preparation and intricate beneficiary designations for IRAs and other retirement plans.  Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.

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