The two gifts of the tax code are the Roth conversion and life insurance.” -Ed Slott, CPA
I first heard Ed Slott speak that quote at an IRA workshop on a May day in Washington, DC. As I boarded my train home, I reflected on how beautiful the cherry blossoms looked but also on how the Roth conversion and life insurance could change lives.
I had been a licensed financial advisor since 1991 and the world of IRAs was a growing part of my practice. I began realizing that more clients were retiring and most did not have a pension. They had a 401k or 403b and an IRA. In fact, clients that had been at other companies either kept the 401k at the old company, moved it into the new company’s plan, or some moved it into an IRA. The main advantage of moving their employer plan to an IRA, clients told me, was for better control of investment options. The tax deferral on all these accounts remained until the individual hit 70 1/2 years of age. I had a bunch of clients that had already hit the number and saw their taxes increase because they had to take this required minimum distribution. In the first year, the RMD (Required Minimum Distribution) is about 4% of the prior year’s December 31st value. As the clients got older that percentage really jumped, plus if the market increased so did the account values and their taxes.
In 20 plus years of tax seasons, I had always noticed this pattern of taxation increasing yet I did not see any proactivity or reaction to help clients address this dilemma (especially from the professional tax advising community.)
I believe every American has an obligation to pay taxes once. Paying taxes twice is your fault.
Everyone with an IRA and 401k, 403b, 457, SEP that has not acted on the Roth conversion option is living a lie.
When people with these plans receive a statement, they see the value go up or down. The growth of these investments is like seeing the value of my residence increase but if I were to sell that, my profit would be eroded by having to pay off an increasing mortgage that is held by Uncle Sam (who is not even your real uncle). These tax-deferred accounts are like having a partner that does nothing. So, if I set aside this pretax money, make wise investment decisions, doubled or triple my original contribution, when I pull any of it out, I will have to give a big chunk of it to this silent partner, the IRS.
“One of the Gifts of the Tax Code” as Slott explained is the Roth IRA conversion because you pay taxes now to allow the same money to grow tax-free. The most common way to get rid of a partner is to pay them off.
I sat in the crowd mesmerized, writing down, as instructed by this CPA, the “knowledge” I learned on the left side of a lined notebook and the “relationships” that could benefit from this newly acquired knowledge across the notebook on the right side. I wrote down “Roth conversion” on the left side of my pad and I wrote down 17 names of clients, prospects and centers of influence with whom I needed to share this information on the right side.
At the top of the list was a 64 year old client from Albany. This semi-retired carpenter had listened to me regarding everything dealing with asset allocation and estate planning so far but this tax planning strategy was really special. Ironically, we had just added life insurance to address the estate tax federally at the time, so we already had one of the two gifts of the tax code.
Albany Al converted a big amount in 2010. He continued to convert his SEP-IRA over the next 4 years until he passed away last year. His two sons inherited the father’s assets including the annual tax liability on the remaining IRA.
The sons also split up a Roth IRA which will also need to be distributed annually but completely tax-free. Each of them also received tax-free checks from the father’s life insurance trust.
In fact, both brothers were going to be millionaires but because of the life insurance they became multi-millionaires.
I know that Ed and I played a part in helping this family make a wise financial decision for the future. I continue to attend Ed’s workshops throughout the country and I remain a current and active member of the Master Elite IRA Advisor Group to keep acquiring “KNOWLEDGE.”
“Without knowledge action is useless and knowledge without action is futile.” -Abu Bakr
WFP Tax Partners, LLC provides a full service tax planning experience. WFP utilizes their exclusive team of CPA's to provide tax planning, preparation, and filing services for their clients. Walter Pardo is an active member of Ed Slott's Master Elite IRA Advisor Group, which is an exclusive organization of financial advisors who are dedicated to being the leaders in the IRA industry.