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Protect Your Retirement Accounts From the Tax Man

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In this episode of Motley Fool Answers, host Alison Southwick and personal finance expert Robert Brokamp are joined by tax expert Ed Slott to talk about his latest book, The New Retirement Savings Time Bomb. Also, can using an app influence your financial behavior for the better? And we’ve got a look at Warren Buffett’s latest letter to shareholders.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on March 9, 2021.

Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick, and I’m joined as always by Robert Bro Daddy-Day-Camp Brokamp, Personal Finance Expert here at The Motley Fool. I would like to thank C-Roy Compounding on Twitter for submitting some new Brokamp names for me to use.

Robert Brokamp: Really?

Southwick: I don’t know if Bro is thankful, but yes, that was one of them and there’s going to be some more coming down the line.

Brokamp: Looking forward to it.

Southwick: In this week’s episode, it’s the Bro Show, as he interviews Ed Slott, Retirement Account Expert on his new book, The New Retirement Savings Time Bomb. Bro’s also going to talk about Buffett’s latest letter and whether apps improve your finances. That’s some foreshadowing there. All that and more, on this week’s episode of Motley Fool Answers.

So, Bro, what’s up?

Brokamp: Allison, I got three things for you, a total of three. No. 1, awash in cash. 2020 was a unique year in a lot of ways, one was that the U.S. personal savings rate hit an all-time high of 33.7% in April. It dropped down to about 13% last fall, but it has since rebounded to a current level of 21%, and that’s still above the all-time high before 2020, which was 17% way back in 1975, so Americans are doing a lot of saving. We can thank subdued spending and government stimulus checks for the skyrocketing savings rate, and there’s more stimulus on the way thanks to the American rescue plan that will soon be signed into law. 

This has resulted in a lot of cash on the sidelines, also known as the money supply in the U.S., this is measured by something known as M1, which is essentially cash and circulation, coins and bills and stuff, as well as in your checking accounts. Then M2, which includes M1, but also has things like savings accounts, CDs, and money market funds. If you were to look at a graph of the M2 money supply, you’d see a line that very gradually and very evenly slopes upward until 2020. In February of last year, right before the pandemic panic, the money supply was $15.5 trillion, now it is $19.4 trillion. That is a 25% increase over the year, it’s the largest year-over-year increase since 1943. You may have heard some folks are worried about higher inflation on the horizon, and this is one of the reasons. It’s obviously true that many Americans are still struggling financially, but as a group, we have a lot of cash that can be put to use if and when Americans open up their wallets again, that could be a lot of demand chasing goods and services, and in some cases the supply is limited. To quote a recent NPR headline, “American factories scrambled to secure critical supplies.” 

When investors fear inflation, they sell their bonds because who wants fixed-income investments that will lose purchasing power? And that’s what we’ve seen so far this year. When many investors sell their bonds, prices go down and the rates go up. Which is why the 10 year treasury is back to 1.6% and the rate on the 30 year mortgage is back above 3%. When rates go up, the prices of existing bonds go down, the Vanguard total bond market ETF is down more than 3% so far this year, which is actually a pretty big decline for bonds when you’re looking at a period of just 10 weeks or so. 

This brings us to item No. 2: Buffett on the bleakness of bonds. On February 27th, Berkshire Hathaway released the latest addition of Warren Buffett’s annual letter to shareholders. I have had the full for more than 20 years and I can’t remember a time when one of his letters received less attention. It’s possibly because the investing world nowadays is focused more on things like GameStop and Bitcoin and the soaring prices of Dr. Seuss books, it likely doesn’t help that Berkshire stock, like many value oriented investments, hasn’t exactly been setting the world on fire. Its annualized return over the last three years is a little under 7% a year compared to more than 14% for the S&P 500, plus, frankly, the letter doesn’t necessarily break new ground, but I think it’s still a worthwhile read, and I’m not to say that because I’m a shareholder, and frankly with Buffett turning 90 last year, I feel like we’ve got a treasure every letter we still get from them. Just some highlights for me from this year’s edition. 

That was interesting that actually Buffett spends some time talking about one of his mistakes, which was paying too much for Precision Castparts in 2016. He wrote “Far from my first error of that sort, but it’s a big one.” I just think it’s good to know that even one of the most successful investors of all-time doesn’t have a perfect record. We often say here at The Fool that you should expect as much as 40% to 50% of your investments will be disappointments, but the other investments will hopefully do allow enough to make up for them. Buffett also discussed the most valuable businesses among Berkshire’s many holdings, and they are the insurance operations, the BNSF Railroad, Berkshire Hathaway Energy, and its stake in Apple, Berkshire actually owns 5.4% of outstanding Apple stock. Discussing the insurance operations, Buffett highlighted the advantage Berkshire has by being able to invest the float of its insurance operations. Most competitors don’t have that luxury and instead, they have to invest in bonds, and this, according to Buffett, does not bode well for those companies or for investors looking for income. He wrote “Bonds or not the place to be these days. Can you believe that the income recently available from a 10 year Treasury bond has fallen 94% from the 15.8% yield available in September of 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed income investors worldwide, whether pension funds, insurance companies, or retirees faced a bleak future.” 

The solution of course, for Buffett, is that you invest as much you can in the stock market and that may be appropriate for you, dear Answers listener, depending on your risk tolerance and time horizon and all that stuff. But for me, it also means that any money you want to keep out of the stock market and you want to keep it absolutely safe, you might want to favor cash over bonds for a while here. 

Item No. 3. In next week’s episode, we’re going to feature a couple of guest Fools who will talk about our favorite personal finance tools. In preparation, I came across a study that was originally published last year, but it was recently updated, and it’s entitled, Mind the App: Mobile Access to Financial Information and Consumer Behavior from Yaron Levi and Shlomo Benartzi. So what they basically did was they studied the behavior of people who used a personal financial tool on their computer for several months. But then began using the tools phone app when it became available. Essentially, they were wondering whether having financial info on your phone changed behavior, and the answer is yes. They found that discretionary spending declined 11.6% after people downloaded the app. It was most pronounced in spur-of-the-moment categories such as entertainment, restaurants, and clothing. This confirms a 2016 study from the Federal Reserve, which found that 62% of mobile banking users reported checking their account balances on their phones before making a large purchase, and then half of them decided not to buy the item after they looked at their bank balances. 

Some of the tools that we are going to discuss next week are primarily for your PC or Mac, while others do have apps that you can install on your phone. If you’re someone who is inclined to make impulse purchases and could benefit from having your budget and your balances on your phone and with you when you’re out shopping, consider the availability and quality of an app as you choose the tool that’s right for you. And that, Allison, is what’s up. 

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[…] According to the Investment Company Institute, there was $11 trillion in IRAs and $9 trillion in defined contribution plans, such as 401(k)s, as of the end of 2019. You’ll likely have a retirement account or a few yourself. While that account is in your name, you are just the co-owner of that money, because at some point Uncle Sam and Sister State are going to want their share as well. How can you keep more of that money to yourself? Here to provide some suggestions is Ed Slott, widely considered to be America’s No. 1 expert in IRAs and 401(k)s, and is out with a new book entitled The New Retirement Savings Time Bomb. Ed, welcome to Motley Fool Answers.

Ed Slott: Great to be back here again.

Brokamp: It’s good to see you. Love the book. 400 pages of outstanding retirement account goodness. It may sound boring to some people, but Ed keeps it funny. Totally recommended it. I’ve marked up the book just about every page. Let’s jump.

Slott: You know what I’ve marked up? I’ve marked up this book. Now, if you’re not watching on video, I’m showing you one volume of the tax code that just includes section 401-408, everything about IRAs and Roth IRAs. I turned that into this, the book we’re talking about now, so you don’t have to do that.

Brokamp: For people who can’t see that book and who remember phone books, it’s twice the size of a phone book.

Slott: That is just one volume.

Brokamp: That’s crazy. Let’s get into it here. What is The New Retirement Savings Time Bomb?

Slott: Well, it’s like that song. I remember the old boss, I forget who is the new boss. What are those words? The new boss, the old boss, whatever it is. Welcome to the new — you know the song, I can’t think of the lyrics now. You know the one I mean?

Brokamp: I don’t know.

Slott: What’s it again? Anyway, it’s the same as the old boss, the new boss. But it’s worse. There are new, and even more severe threats to your retirement savings, and you put it best. I always say Uncle Sam is a partner on your account, but I like co-owner. I think that’s more dramatic, so that the ticking tax time bomb, say that three times best. Ticking tax time bomb is the tax building up to what may be your largest single account, your largest single asset for many people, larger than the value of their homes, your IRA, and 401(k). It’s a big bag of tax, and you won’t find that out. Some people know it and bury their heads. But when do you realize it? At the worst possible time. When you reach in to get yours in retirement and you find out, wait a minute. Who’s this guy Uncle Sam? I thought this was my account, and it’s a big problem, because that’s the worst time to get hit with the tax bill just when the paychecks stopped, and you’re the most vulnerable, and who knows what future tax rates could be. Your retirement savings are at high risk. That’s what I call the ticking tax time bomb. It’s going to go off the minute you need it the most. I propose a bunch of things you can do now. Basically, my five-step plan in the book to move your money from accounts that are what I like to say, forever tax, to never tax, because I love tax-free. That means you keep all your money. No partners, no co-owners.

Brokamp: When you’re talking about tax-free accounts, of course, people think of the Roth. You’re a big fan of Roth, have been for many years. Many people will follow the rule of thumb that says, well, if I’m going to be in a lower tax bracket in retirement, I should stick with the traditional. Is that still a good rule of thumb?

Slott: No. In theory, it is. But in practicality, in reality, almost nobody that has saved any money for retirement is going to be in a lower bracket in retirement. For years I’ve had clients tell me this, “I am doing taxes for over 40 years. I don’t do them anymore.” People used to be amazed. I would have retirees come in and they say, “How can it be? I have more income now than when I was working.” It’s called RMD, Required Minimum Distributions. If you do nothing and you’ve built up a healthy retirement account, guess what? The mandatory distributions from those accounts can exceed what was your income from working. Not only that, I worry about what future tax rates might be, given our level of deficits and debts. Even a low bracket, even if you say, “Well, I’ll be in a lower bracket in retirement.” Who knows what the lower bracket is? 

There’s another more devious item there, and this involves married couples. Married couples might say, “Well, we’ll be in a lower bracket in retirement, neither of us will be working.” Well, with most married couples, I’m going to go out and make a bold prediction. One of them will die first. When that first spouse dies, and most people leave everything to their husband and wife as surviving spouses. Let’s say the husband dies first, the wife inherits everything he had. Now, she has everything they had together. Her income is roughly the same income they had together, other than maybe some adjustments for Social Security. Except now, her rate goes through the roof. Now, she’s in a much higher bracket because she’s filing at single rates. She doesn’t get the married joint rates. That’s what I call the widow’s penalty. Most people don’t look beyond that. You have to look to the end of when this money will actually be taxed. 

Now, here’s the thing I love about the Roth. Let’s say I’m wrong about everything, and you’re right. I’m a big Roth fan because I love tax-free. I like to get rid of the problem. This is why I love root canals. Why? It gets rid of the problem. I take the pain up front, never have to worry about cavities or anything else. Now, I just found out that root canals can go bad, you have to do them again. But maybe a bad example. This is why I love Roth IRAs. Let’s say I’m wrong about everything, and tax rates don’t go up. Maybe they even go down; I doubt. Here’s what I love about the Roth or any financial decision. Before you make any financial decision, or any decision I guess in anything, you always want to look to the worst-case scenario. What if I am wrong about everything? The worst-case scenario, if you convert to a Roth, you’ve locked in a 0% tax rate for the rest of your life, and even after the new secure act eliminates the stretch IRA, you can still go out another 10 years to your children and grandchildren all growing tax-free. You keep every cent. Locking in a 0% rate now guarantee is not a bad consolation prize. You can’t beat a 0% rate. Or you want them to pay you? That’s the worst-case scenario, which is why I love Roth. I never have to worry about what the uncertainty, a future higher taxes can do to a person’s standard of living in retirement. Who wants that hanging over your head when you have the ability now to make your tax rate zero if you want to?

Brokamp: Just to drive home a point you were alluded to previously, one of the other benefits of the Roth is you don’t have the required minimum distribution. If you don’t need the money, you can just let it grow and grow and grow.

Slott: Tax-free money grows the fastest, because it’s never eroded by current or future taxes. So you will accumulate more. Imagine if in the last few years people had these big stock gains, and if it’s in your IRA, as you said, you have a co-owner, you have a joint owner. If it grows in your Roth, you’re the only owner, you keep 100%. That’s what real accumulation is.

Brokamp: I would ask you a question. I know it’s one of the most common questions you get asked, but I know everyone is curious about it. What about the people who say yes, that’s the current rule for the Roth —

Slott: I love that question.

Brokamp: What if the government changes its mind down the future and decides to apply tax to it?

Slott: You know what? That is the No. 1 question I get in seminars. Back in the day, I used to go out and do seminars. I would get on something called an airplane, go to an airport, and go into these big buildings called hotels. They were all over the country and people went there. It was back in the golden age. Now we’re doing this virtual thing. Every time I did one of these programs, and I would talk excitedly about the Roth, and tax rate, and keeping more of your money, somebody would always get up and ask the question you asked, but not as nice as you asked it. They would say, “Yes, but can you trust the government?” I’m making it nicer than they said it; ” Can you trust the government to keep its word that Roth IRAs will always be tax-free, that they won’t change the laws?” My answer is, and I say it in my book, of course not. You can’t trust these guys as far as you can throw them. There’s an old CPA tax advisor saying, “Tax laws are written in pencil. They can always change them.” That’s why you want to take advantage of today’s rock bottom bargain basement low rates now. These are the lowest rates you will ever see in your lifetime. Take advantage, it’s here now, could congress change the rules? They could, but highly unlikely. Anyway, they would probably grandfather anybody that already paid the tax. 

Here’s why my theory is they won’t touch the Roth IRA, because the people in Congress are the worst financial planners on earth. Look at our national deficits. If any financial planner did that, they’d be thrown from a building. But here’s why they are such poor planners, they only look short term. See that’s the secret for Roth. Don’t look at the short term, yes, there’s money to do now, look at the long term big picture. For example, let’s say I was the accountant for the congress. You remember that movie years ago, Dave, where he became the president, he was like a look-alike for the president?

Brokamp: Yes, I remember that.

Slott: He brought his accountant in to talk to the president, and he […] the sheet of paper, and he fixed the whole budget deficit. Remember that scene?

Brokamp: Yeah.

Slott: If I was that guy coming in, I would tell the Congress, and the president sitting around, I said, “You’ve got to get rid of this.” If I was advocating for the government for bringing in revenue, I would tell “You got to get rid of this whole Roth IRA.” Sure, people pay tax upfront, but if everybody did this, you would have a whole country of tax-free millionaires. But what? They’d never paid taxes again. You know what they would say to me? “Well, we don’t care about them, we only care about the first two-year budget cycle. The way we look at it, the Roth IRA is bringing money upfront, that’s all we care about.” Luckily, they’re such short term thinkers and horrible planners. They use the Roth IRA to fill budget gaps. If you look at the last few tax laws, and if you go in the back, after the first thousand pages, they have to say how they are paying for everything. That’s why you always see the Roth provisions where they expand, because they want more people to do the Roth because it gives them money upfront. In fact, in the last few administrations, I haven’t heard it in the latest round. Do you remember Congress? The budget agenda is coming out with the term “Rothification,” you remember seeing that the last five years?

Brokamp: Yeah.

Slott: You know what that was? They wanted everyone to go Roth, because they wanted the money upfront, not realizing they would get nothing later. That’s a horrible deal for the government, but a great deal for us because they are such lousy planners. I don’t think they’re going to kill the golden goose that brings them all that money upfront.

Brokamp: You’ve mentioned previously about passing along the wealth as well. There have been some developments over the last couple of years, particularly the SECURE Act. You’re not a big fan. Tell us a little bit about the SECURE Act and what that changed for leaving wealth to your heirs via IRAs and 401(k)s?

Slott: Because again, Congress needed money and whenever they need money, the first thing they do is raid your retirement savings. Why do they do that? For the same reason Willie Sutton robbed the bank. Do you remember that reason?

Brokamp: That’s where the money is.

Slott: That’s where the money is. You just mentioned, I think you said $20 trillion. Now with trillion with a t, not billion with a b, like Bill Gates, that’s nothing. We’re into trillions now. $20 trillion in tax-deferred money, most of it is tax-deferred, which means that’s like a big juicy steak to Congress. They know this money has not yet been taxed, and they want to get at that as soon as possible. What they did in the SECURE Act, and here’s another just piece of advice. In 40 years of studying tax law, I’ve always noticed that whenever Congress names attacks that, you can almost always bet that whatever name they gave it, it does exactly the opposite. Like, here’s a good one, the budget Deficit Reduction Act, that was a great one. 

The SECURE Act, when you hear a word called the SECURE Act, hold onto your wallet. That’s exactly what happens. They killed or eliminated something called the Stretch IRA. They downgraded IRAs as a vehicle to transfer or leave wealth for the next generation for estate planning. They’ve felt that IRAs and other retirement savings were met for retirement, not as a wealth transfer, or a state planning vehicle. They killed one of the biggest benefits by eliminating something called the Stretch IRA. Now, I remember when that came out, and people didn’t exactly know what it was. I had a client call me one day. This is like 20 years ago. He said, “Ed, I’m at the bank. You said get a Stretch IRA. They don’t have them. I should go to Bed Bath & Beyond. They have everything. I guess it would be in the beyond section.” The stretch IRA is not a product — and if you’ve got a Bed Bath & Beyond, don’t be a sucker. I don’t know anybody who doesn’t get a 20% coupon. It’s in the mail for everybody in America everyday. You can do with the Roth, 20% off today’s taxes. Anyway, the Stretch IRA was just the ability if you named a beneficiary, say a younger beneficiary on your beneficiary form, say a child or even better, a grandchild because they’re younger, they have a longer life expectancy, they could stretch or extend distributions over their lifetime, building, compounding that tax referral over their lives, over 40, 50, 60, 70 years even, depending if they were young. Congress said, “That’s the end of that,” and they killed it effective 2020. This is in effect now, appending people’s long planned retirement plans. People relied on this for 20-30 years and Congress pulled the rug out from under them in the ninth inning of the game. By the way, that statement I just gave you, I put that line in the book. They pulled the rug out from under us in the 9th inning of the game. The editor from Random House came back with this big exclamation. Do you know what she wrote? What was the comment?

Brokamp: I’m going to say it was a mixed metaphor.

Slott: That’s right.

Brokamp: Is that what they said? I’m a former English teacher, so I know these things. [laughs]

Slott: She said, this is a mixed metaphor, you can’t have that in a book, get rid of that, so I got rid of that. But I could say it to you. So they pulled the rug out from under us at the end of the game when we were counting on it. Now, they replaced it with just the 10-year rule, because again, they want to get to that money faster, accelerating the tax into 10-years after debt. What this does is exactly what Congress intended, it downgrades IRAs for estate planning purposes, it makes them a lousy asset to leave to heirs. It was always a problem, because it’s loaded with tax, but at least you have the stretch to stretch it out; now, it’s a bigger problem. The Roth is a better solution, even something like life insurance, and I don’t even sell life insurance, I’m a tax advisor, I don’t sell stocks, bonds, funds, insurance, annuities, none of that, that’s why you can depend on the advice I give you as independent, objective, unbiased. 

My only bias in the book is against taxes, to pay less taxes so you keep more of your money. That’s the whole theme of the book and how to do it and how to do it now, before they jack the rates up again. With life insurance, it’s similar to a Roth IRA. I say the same thing, take down that heavily taxed IRA now at rock bottom rates. Remember, the taxes are on sale, unlike sales in stores where people rush to, you don’t actually have to buy that thing in the store, sorry to say; with taxes, you do. It’s not if, but when. So as long as you know you’re going to have to pay it, get rid of it now, before the value goes up and before taxes go up. You take it down now, we mentioned the Roth conversion, but you could also put it into a permanent life insurance policy that also grows a cash value tax-free. It can be drawn on during your life, not for everybody, but you should always speak to your professional advisors on this. But if you need the money during your life, you can pull it out tax-free, you never have to worry about future taxes and if you don’t need it, like most people don’t, you leave it to your children or grandchildren. It can simulate the Stretch way better than the Stretch because it’s tax-free and you don’t have any RMD rules and you don’t have these complicated beneficiary rules, and you don’t have these complicated IRA trust rules, you don’t have any of that. You can get larger inheritances, more control at less tax. That’s what I named the insurance chapter in my book, I call it, the Power of Life Insurance. As a tax planning vehicle, everything in the book is geared to, at the end of the game, you having more of your hard earned money, being able to enjoy more, less tax, and more to pass onto your loved ones, also tax-free.

Brokamp: Let’s go back a little bit to this Stretch IRA. I think the confusing thing about the SECURE Act was that it didn’t apply to everyone. If you inherited your IRA in 2019 or earlier, you could be basically grandfathered in. But even now, there are still some people who can stretch it. Who are the select few who still can stretch an IRA even if they inherited in 2020 or later?

Slott: This is a group that Congress named, and leave it to them to come up with these names, I did not make this up, “eligible designated beneficiaries,” that we in the tax jargon world now call EDB. […] is that person in EDB? Not me, I wasn’t an EDB. No, you want to be any EDB. Now, they created more complication, they created different tiers of beneficiaries but they are all still on the same Titanic ship loaded with taxes. Let’s use Titanic as an example. The eligible designated beneficiaries, which is mainly your spouse and some others, get the elite status, they’re on the top deck, they’re getting the lifeboats, no question about it, they’ll have no problem. Almost everybody else is in the middle, like children or grandchildren, you name, they get the 10-year rule. If you forget to name a beneficiary, which is the Cardinal sin, you go down and steer, you’re a dead man at the bottom of that Titanic, no chance for you and your IRA. 

They have these three tiers of beneficiaries. There are five exceptions to the elimination of a Stretch, but the big one is the surviving spouse. One thing I have to say about the tax code, it always protects a surviving spouse, in almost every case. So, if you’re surviving spouse, you don’t have to worry about any of these things, except as I said earlier, at some point one spouse is going to die, and then you’ll be right back in the same boat with your only beneficiaries being children and grandchildren. There are other exceptions for the Stretch like minor beneficiaries is one. You might say, but Ed, you just said a 10-year old can’t go out 70 years. They can if they’re your beneficiary, not grandchildren. But what are the odds of somebody dying with an IRA, say at age 80, having a 12 year old child? The only one I can think of is Tony Randall, and he’s dead. Whenever I mention that somebody says, “Oh, what about Mick Jagger?” Mick Jagger doesn’t have an IRA. He has something much better, it’s called royalties, and the ability to perform ’till 150 years old. 

The minor exception doesn’t really apply to that many people, it’s the minor beneficiary of the deceased owner. Maybe it’s more likely to happen if somebody dies in their 40s and they have a 15 year old child, but chances are if they’re in their 40s, they probably haven’t accumulated that much and it’s not as big of an issue. Plus, even the minor exception ends when they hit the majority, which is age 18 in most states. They can go to age 26 if they’re still in school, but after that, back to the 10-year rule. Then there’s two other categories which Congress actually did a nice job of carving out benefits, for disabled and chronically ill individuals. They can continue the Stretch, they even created a special process for them in the SECURE Act because they know they’re going to need help. Then the last exception, the 5th one, was this funny group called “beneficiaries who are not more than 10 years younger than you.” This would be, and these are non-spouse beneficiaries, so it would be a brother, a friend, a partner, around the same age as you. I guess Congress figured they’re around your same age, how long are they going to live anyway? So, give them the stretch. Those are the five exceptions, the big one is the surviving spouse. But even that, like I’ve said, is temporary when the first spouse dies.

Brokamp: You’ve made a very important point that I want to make sure everyone knows, is that you should always name a specific beneficiary of your retirement accounts, contingent beneficiaries and you should keep copies of that. I first interviewed you way back in 2005 and you’ve made this point, how important it was and to check to make sure that your financial services firms have the correct information. I got this email from one of our readers. It said, “I just read your interview with Ed Slott and decided to simply to make sure that my husband’s IRA beneficiary form was in order. To my horror, I discovered that my brokerage firm had mixed up our paperwork and listed our youngest daughter as the primary beneficiary.” This stuff actually is surprisingly common and the solution is to have the copy in your record so that they don’t mess it up.

Slott: Remember. the beneficiary form, unbeknownst to most people, overrides your will. You can have everything correct in your will. People think, oh, I have a will, I have my plan. No, you don’t have a plan. The IRA beneficiary form overrides, and if it ends up going through your will, because you don’t have a beneficiary form, then you were in worse shape, then you go through probate, might go to an unintended beneficiary. Probably the worst situation of not updating a beneficiary form, especially after a life event — what do I mean by life event? A birth, a debt, a marriage, a divorce, a remarriage you had, a new grandchild, change in the tax law. This thing has to be updated. The worst situation is divorced. This is where we see the biggest horrors. Somebody gets divorced, they’re going through all this paperwork, they have accountants, financial advisors, attorneys filling out all kinds of paper. The one paper that is never filled out after the divorce has finally resolved after years, is updating IRA beneficiary forms. Then somebody dies, it goes to the ex-spouse, because she was never removed, and then the family is in shock and it overrides the will. So, if you’ve had one of these life events, make sure you update your beneficiary form, as you said, primary beneficiary, contingent beneficiary, and in light of the new tax law, you may want to see maybe that you named the trust as a beneficiary. It may not work after the SECURE Act.

Brokamp: The last part of your book deals a lot with avoiding estate taxes. Someone might say, well, this year the exemption is $11.7 million, twice that for a married couple. I don’t have anywhere near that amount of money. Why should I worry about estate taxes?

Slott: Because that’s the one tax that is probably the easiest for them to increase, either by increasing the rate or decreasing the exemption. If you do nothing, the exemption is slated by law to go back to half after 2025. They won’t get a lot of pushback. One thing Congress knows, is the best people to tax our rich people. But there’s only one group better to tax than rich people, rich dead people. They don’t vote, they don’t complain, they don’t write letters to their congressmen. It’s a very easy thing to do. They’re talking about it already. I’ve gone for years, and you have too, where we saw the exemption at two, three. I remember, this might be over 30 years ago, it went way up to $600,000 and still lots of people were subject to estate tax, their house was worth more than that. The rates for estate tax have been as high as 55%-60%, even higher percent. We could see that come way down. 

Plus, many people live in states that have estate taxes that have much lower levels. For example, my state in New York has about a $6 million exemption, and it’s a very heavy tax when you’re over there. There’s this gap between say $6 million and almost $12 million for the federal. Right now the federal exemption is $11,700,000. But you can’t count on that. If they need money, that’s an easy tax to jack up. You have to do something about it. A Roth conversion can help there. The life insurance strategy can help there. Gifting, you can get so much money out of your estate now, tax-free, most people don’t take advantage of it. There are three tiers of tax-exempt gifting. No. 1, most people I think do know about it, the annual exclusion gift, where you can get $15,000 a year tax-free, invisible, you don’t even have to tell anybody. I found over the years clients love anything that’s invisible on a tax return. You don’t have to tell anybody about it. You can give $15,000 a year once a year to anybody. Some people say, I think it’s only family members. You can give it to anybody, even people you like, it doesn’t have to just be family. That’s one tier. Then this other tier, which I think is the biggest loophole in the tax code, because most people don’t use it enough. The first tier I said it was limited to $15,000 to an unlimited number of people, once a year. This next tax-free estate exclusion and gift, remember, you can use this exclusion during life, and the $15,000 doesn’t cut into your $11 million exemption. The second one doesn’t either, these are direct gifts you make for the benefit of people, for tuition or medical expenses. 

You can give unlimited amounts to unlimited categories of people, anyone in any amount, the only catch is, the checks, the gifts must be paid directly to the providers of these services. To the hospitals, the colleges, the doctors, the medical practitioners. This is an unbelievable loophole. Again, this one doesn’t have to be reported anywhere, it’s invisible and it doesn’t cut into your $11 million exemption. Let’s say you had the money and you gave away $20 million to schools and hospitals, you still have your $11 million exemption, and that’s the third tier of tax-exempt gifting. You can use that $11 million during your life. IRS has already ruled a couple of years ago that let’s say you use that $11 million now in gifts, you don’t get it again in estate, you can use it during life, then it’s gone. But let’s say you use the $11 million now and then it comes down to five, the IRS said there will be no clawback. Even the IRS is saying use it or lose it. There are so many ways you can make the tax code work for you rather than against you. That’s the theme of the book. I know you talk about investments a lot, and I’ll make a bold statement. This book may be the single best financial investment you will ever make in terms of the return on your investment. Imagine buying a relatively inexpensive book and saving tens, if not hundreds of thousands in taxes. Other than GameStop, where can you get that kind of return? [laughs]

Brokamp: Very good point. Final question here. We’ve been talking about retirement accounts. You are of an age that some people would be considering retiring. What does retirement look like for Ed Slott?

Slott: You’re looking at it. I have more energy now than I ever did, especially, I love, I get all excited, as you can tell, when a new book comes out. I’m always working on new projects. We train financial advisors, as you know, all over the country, all doing it virtual now. I would like to get back on the road soon. This March 10th, I guess that’s next week, depending on when you’re hearing that, well, depending whenever you hear about now, March 10th will be March 10th I guess, will be one year since I’ve been on a plane. That’s from somebody that’s been on a plane almost every day for the past 20 years. I want to get back out there, but this is what I love doing. I love seeing the reaction. We train a lot of financial advisors, and I get those letters like you get. They send me things that they’ve done for their clients. The reach is unbelievable. The amount of money we’re putting back into families’ hands just by doing great tax planning. 

This is where you make all the money, in taxes, in the market. Yeah. You make money, it goes up, it goes down, you lose money. But if it comes back up, you get it back. If you lose money to taxes, you’re never getting that money back, that’s a one-way street. I also advise you or warn you about a lot of the land mines and tax traps in the code. Because this area of taxes is not only complex, I make it easy and fun, as you know, by looking through the book. Just like this, you’ll have fun reading it, believe me. Then you’re saying, but Ed, you’re talking about death and taxes. That’s fun. If it puts more money in your bank account, that’s fun. If it leaves more to your family, it’s fun. But you can have fun with this process and you’ll love talking about it with friends when you say, “Look what I did,” or ask them, “Did you update your beneficiary form?” The beneficiary form could determine solely how much you keep and how much of your money goes to the government. That’s one key point I make in every program, as you’ve been hearing me say for over 20 years; the bottom line is, you can have more, keep more and make it last if you create a plan. Everybody complains about taxes, but it always comes down to this: either you can complain about it or do something about it. The more you plan, the more you keep it. Always comes down that way. I made it so easy for anyone to go through this and see tax savings like they’ve never seen before. That means more money to enjoy for your retirement, more for your loved ones, and more of it tax-free, my favorite.

Brokamp: Outstanding. Well, our guest has been Ed Slott, who the Wall Street Journal calls “the best source of IRA advice.” You can learn more from Ed’s website, IRAhelp.com, or pick up a copy of his new book, The New Retirement Savings Time Bomb. Ed, thanks so much for joining us on Motley Fool Answers.

Slott: We have to do it again. I love being on here.

Southwick: Well, that’s the show. It’s edited speedily by Rick Agdal. Our email is answers@fool.com. For Robert Brokamp, I’m Alison Southwick, stay Foolish everybody!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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