by Richard F. O'Boyle, Jr., LUTCF, MBA
"The Insider's Guide to Retirement and Insurance Planning"
Thank goodness Ed Slott, author of “The Retirement Savings Time Bomb… and How to Defuse It,” has a good sense of humor, because while he looks harmless, his message is nothing short of apocalyptic. Your hard-saved retirement plan is at risk from something worse than inflation or stock market gyrations – the burdensome taxes you and your loved ones will have to pay once you start living off your savings or try to pass them on to your heirs.
Ed Slott, a nationally recognized tax expert, gives us a startling wake-up call – with careless planning, we can not only miss out on potential tax benefits, but punish ourselves (and heirs) with excessive tax bills. There are literally hundreds of “loopholes” and planning techniques mentioned in the book. It is an exceptional reference volume for the professional planner and the retiree alike. There is just enough information here to be dangerous for the person who thinks they can “do it themselves.” A word of caution: tax rules change frequently so don’t try these techniques without the close cooperation of your advisor and tax planner.
Throughout the book, Mr. Slott exposes us to the bewildering tax maze that applies to our retirement plans. It’s easy to get overwhelmed, but I advise the reader to not be alarmed, because many of the worst pitfalls can be easily avoided. Secondly, some of the complex strategies may never apply to your personal case. Nevertheless, it’s useful to open your eyes to some of these issues, just in case.
This book is like the manual for your DVD player. You probably won’t read it cover-to-cover, but you certainly should have it handy when:
- you open an IRA account
- you change jobs
- your spouse or parent dies
- you are setting a retirement date
Mr. Slott’s “Professional Publications” and “IRA Information Websites I Use” resources are solid gold. The appendices, likewise, are valuable, especially the glossary.
My clients would love to have massive IRAs that they don’t expect to exhaust in their lifetimes. Unfortunately, most people are more concerned with just having enough in this lifetime alone rather than maximizing their kids’ inheritance. Examples of valuable gems in the book include:
- Net Unrealized Appreciation (NUA): If your company retirement plan allows you to buy company stock, you can segregate it when you retire and possibly pay a much lower tax rate on it;
- Stretch IRAs for Beneficiaries: This simple concept is repeatedly emphasized as a way to allow a second generation of IRA beneficiaries drag out the requirement that they pay taxes on their inheritance while letting the account value compound over a longer period of time;
- Life Insurance Strategies: Mr. Slott is a vocal proponent of retirees holding life insurance as a means of leveraging assets and providing more options to both the spouse and children. For large estates, life insurance proceeds are an essential resource to pay estate taxes.
- Non-spouse Beneficiaries: We automatically assume that our legally married spouse is the logical beneficiary to our retirement plan. That’s not always the case, nor is it ever an option for gay and lesbian couples.
- Contingent Beneficiaries: Always name a contingent beneficiary to avoid the possibility that your estate will inherit your IRA, and also to give your spouse the option to disclaim the inheritance.
- Keep copies of your beneficiary designation forms since you can’t assume that your financial institution or bank will have them when your heirs need to prove that they are the rightful beneficiaries.
Mr. Slott was gracious enough to take the time from his busy schedule to speak with me on March 9, 2011:
[Richard O’Boyle] One of your most important points in the book is your emphasis on properly designating beneficiaries. When you name a non-spouse as a beneficiary of a non-IRA retirement plan (either because your spouse predeceases you, or you are not legally married, for example), what are the issues to consider?
[Ed Slott] First of all, if you have a non spouse, they don’t have the same benefits and legal protections as a spouse. Even if you are remiss or sloppy, the proceeds of an account will likely go to the spouse any way. If you want a person to get the plan, make sure that they are properly listed as the beneficiary on the form. Everybody thinks that the banks or financial institution will have a copy of the form when the time comes, but institutions can be very sloppy. If the bank doesn’t find that form, big tax benefits can be lost, and your intended beneficiary may not ultimately get the account. A beneficiary form trumps the will and any other legal documents. When we think of “non spouse beneficiaries” we often think of our children – and I got this point from your blog – very few people think “unmarried partner”… a gay partner is a non spouse beneficiary. Even if they are married under state law, under the federal tax code, they aren’t. The most important point for same sex partners is to make sure they name each other as beneficiaries on the form.
[O’Boyle] Trusts can be inordinately complicated, even for the experts, which is why I suspect many families close their eyes to their value. How can non-married couples preserve their wealth without getting overwhelmed by complex documents and expensive legal fees?
[Slott] Again, using beneficiary forms is the most direct and foolproof was to make sure your wishes are followed. Maybe some other family members don’t approve of your relationship. Trusts are a way to make sure the property goes to your partner. If your main concern is to make sure they get it, it can get done simply through the beneficiary form. Trusts are for other issues, not necessarily tax issues. For example if the intended beneficiary is a minor, disabled or incapacitated, or it is a beneficiary who can’t handle money. If that’s an issue then you go the trust route. If these aren’t issues, then you might not need a trust. The beneficiary form is iron clad and it trumps even what may be stated in a will.
[O’Boyle] There actually still are plenty of people who have pensions provided by their unions or employers. How can gay couples get the same benefits as legally married couples when it comes to survivorship and continuation of pension benefits?
[Slott] The only way is to name them as a beneficiary. Now, I’m not an expert in all these plans and you will have to go plan by plan so see if you can even name a non spouse as a beneficiary. Another way to do it is to take some IRA or pension money out – you will have less pension benefit – but you transfer that money into a life insurance policy and the surviving partner gets a chunk of money through life insurance. That’s a much better way to make sure there is money than trying to go through a complicated pension plan.
[O’Boyle] Nobody knows where tax rates are headed, but the conventional wisdom is that they are headed higher. If rates increase dramatically, where should people shift their future retirement savings?
[Slott] That’s an easy one: a Roth IRA, because a Roth IRA is a hedge against the uncertainty of tax rates going higher. You don’t have to worry if tax rates go to 50 or 60%. You don’t have to worry because you have locked in a tax free asset. Of course you pay the taxes up front now. It really doesn’t matter how high they go. You can set that up right now.
[O’Boyle] I can count the number of “insurance positive” celebrity advisors on one hand. By that I mean the number of financial professionals who get significant air time who are strong proponents of cash value life insurance as a part of a retirement plan. Why does cash value life insurance get such a bum rap?
[Slott] I’m not an insurance guy, nor am I am expert in stocks, bonds or investments. I like life insurance as a tax vehicle. I believe it’s the single best benefit in the tax code because it gives you the ability to take small amounts of money and leverage it tax free. All I care about is the tax benefits and if it pays out at death. The kind of life insurance is up to you and your advisor. Some people just want the most insurance for the least money. But as you get older you probably will be better off with cash value life insurance. The term premiums get astronomical and you have nothing to show for it.
"The Retirement Savings Time Bomb... and How to Defuse It" is available from Amazon.com.
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