IRA Guru Ed Slott On Taxes, Retirement & Roth IRAs – Forbes

Posted: December 16, 2020 at 12:56 am


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IRA guru Ed Slott doesnt trust politicians with his taxesand doesnt think you should, either.

A well-known retirement expert (and a recovering certified public accountant), Slott leads seminars for financial planners, advises regular folks on how to retire securely and recently updated his 2003 classic, The New Retirement Savings Time Bomb, to address Congress latest indiscretions.

He recently spoke with Forbes Advisors Taylor Tepper about how savers should do whatever they can to avoid taxes in their golden years, even if it means paying taxes upfront. This interview has been lightly edited for clarity and length.

What is the retirement savings time bomb?

The time bomb is the tax liability building up in your individual retirement account (IRA). Most people dont think about it, but some of your IRA already belongs to the government. The question is how much.

Most retirement accounts are tax-deferred, not tax-free. You can have someone with a million dollars in their IRA, but its not all theirs.

When they take out the money, theyll have to pay taxes. You dont know exactly how much youll be able to keep unless you take action to lock it down now.

How can people defuse the tax bomb in their IRAs?

You cant rely on Congress to keep their word, so you must be proactive and take steps to keep more of your money. To pay as little tax as possible along the way you need to turn taxable accounts into tax-free accountsmove your money from accounts that I call forever tax to ones that are never tax.

So youre talking about converting to Roth IRAs, right? Youre a big fan Roths.

Not a big fan, a huge fan.

But many people have already built up their savings in an traditional IRA, or other tax-advantaged accounts, which means theyd have to use a backdoor Roth IRA conversion. Who would benefit from this?

Just about anybody who doesnt want to worry about the uncertainty of what higher future tax rates can do to their standard of living in retirement.

Lets say the top tax rates go up to 50%, just as an example. Youd have half the money you thought you had. So as rates go up, the value of your retirement savings effectively goes down.

The thing I like about the conversion is that it gives people certainty. People dont like the uncertainty of What is Congress going to do? We already know from their broken promises that we cant trust them.

But you dont think a Roth IRA conversion is the best move for everyone, right?

No, and I have a section in the book that describes who shouldnt do a Roth IRA conversion.

(Editors note: In his book, Slott advises against doing a Roth conversion if

OK, lets say I go ahead and do a backdoor Roth IRA conversion. What if youre wrong? What if Congress doesnt end up hiking tax rates substantially, a thing they have not done in years?

I do a lot of speaking engagements. I was doing a virtual program recently and someone told me, Ed, I went to your big two-day IRA training program 10 years ago and you said the same thing then. You said taxes were going to go up, and you know what? They didnt. In fact, they went down. You were wrong. What do you have to say about that?

I said, Well, if you had listened to me and converted to a Roth IRA 10 years ago, all of those gains from a booming stock market would have grown tax-free in your Roth IRA. Thats what I have to say about that.

So a Roth IRA conversion is a way to cover yourself, just in case?

I call Roth IRA conversions tax insurance. Thats why you get insurance: In case something bad happens. It doesnt matter how much they raise tax rates; your tax rate will be zero.

Any financial decision has benefits and drawbacks. You have to look at both sides to see whats best for you. With the Roth IRA, I look at the worst case scenario. Whats the worst thing that can happen? Lets say I was wrong and tax rates didnt go up. Youve still locked in a 0% tax rate on your gains for life.

Why dont more people do Roth IRA conversions?

The downside is that you pay taxes up front. But those are taxes youd have to pay anyway. Not if, but when. The only way to get money out of a traditional IRA, even if you just want to spend it, is to pay taxes.

Maybe some people really dont believe that Congress will raise their taxes?

You cant believe these guys. With the SECURE Act, they showed their hand again. The minute they need money the first thing they turn to is retirement savings. Why? Because that money is a big juicy steak to Congress because they know that money hasnt been taxed yet. Its low-hanging fruit.

As part of the SECURE Act, Congress made many IRA beneficiaries take withdrawals over 10 years instead of stretching them over a much longer time period. Why is that so bad?

The whole fact that Congress pulled the rug out from everybody when most people were relying on promises made by politiciansI know thats almost ridiculous to say. But they promised!? A congressman, a politician, can you believe that?

Many people made plans to stretch IRA savings a long way after they died.

This is why I begin my book with a chapter titled The Broken Promise. The theme is you cant rely on these guys, youll need to make your own plan, as best as you can.

But were mainly talking about adult child beneficiaries, right? Minor child beneficiaries, spouses and others are exempt. Basically Congress is scaling back the estate planning benefits of an IRA. Is that really so bad?

When youre planning for retirement, whats important is not what youre going to do tomorrow. Its a long-term plan, a 20- to 30-year plan. So you need to be able to rely on the rules. And the rules were the same for over 20 years, and then all of a sudden they changed them.

A lot of people I hear from are not super wealthy people. They simply arranged their life a certain way because thats what they wanted. Maybe they lived more frugally because they wanted to leave their kids and grandkids a legacy for years to come. So they adjusted their lives based on these rules.

What can someone do if they dont want to do a Roth conversion or if they still want to leave their adult children a financial legacy?

I have to tell you as a tax advisor, who doesnt sell life insurance or any financial product, the tax exemption for life insurance benefits is one of the single biggest pluses in the tax code and most people dont take advantage of it.

When I talk about life insurance Im talking about permanent cash value policies, and its very similar to Roth IRAs in the sense that you can leave someone tax free money.

But why should someone pay the premiums for a policy just to use it as an estate planning tool?

People want to know, Whats in it for me?

What most people dont know is that many policies, like my owneverything Im telling you Ive done myselfhave long-term care riders. You can tap into that life insurance money, in effect taking an advance, if you need it to pay these huge health bills later in retirement.

Thats one way to turn the tables on Congress. You just cant trust themyou have to trust yourself and do what you can to control your own tax rate.

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IRA Guru Ed Slott On Taxes, Retirement & Roth IRAs - Forbes

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December 16th, 2020 at 12:56 am

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