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Yahoo
10 hours ago
- Business
- Yahoo
Everything retirees need to know about RMDs: Ask Yahoo Finance
A required minimum distribution (RMD) is the minimum amount of money you must withdraw from your retirement plans annually after reaching a certain age, depending on your birth year. Yahoo Finance Senior Columnist Kerry Hannon and Yahoo Finance podcast Decoding Retirement host Robert Powell join Mind Your Money with Brad Smith to answer all of your questions about RMDs. Read more: 401(k) vs. IRA: The differences and how to choose which is right for you To watch more expert insights and analysis on the latest market action, check out more Mind Your Money here. Sign up for Mind Your Money newsletter Well, we're going to help you get retirement ready and talk about required minimum distributions known in the personal finance world as RMDs. And today, you ask the questions and ask finance everything. Ask Yahoo finance anything. We have a whip smart team to answer your RMD questions. And joining me now, we've got Yahoo finance senior columnist, Kerry Hannon. Also with us is host of Yahoo Finances Decoding Retirement video podcast, Bob Powell. Kerry, let's start with you. Just first, from all the folks writing into you, what's the thing that confuses them the most about RMDs? Yep. Uh Brad, I'd have to say, the big one is like, when do I have to take them, right? It's it's confusing for people about, you know, when this specific thing and as as we discussed, it's, you know, April 1st of the year following if you turned 73, this year it'd be next April. Um, but you can take them by December 31st this year. If you turn 73 this year, you can go ahead and take it by December 31st. That's what really trips people up. But here's the beautiful thing is, to tell you the truth, you don't really have to do this on your own, do that calculation. Generally speaking, your financial services company where your um IRA is or your 401k will do this calculation for you. And they will usually let you know by the end of December what you're going to have to pay out that following year. And you can make the decision. Do I want to automate, you know, do I want to automate it? How often do I want to take money out of the accounts? And should they go ahead and withhold the taxes for you? And most people say, yeah, go right ahead and do that. There is an exception to this, um, Brad that I like people to remember that if you are still working, um, at the employer where you're paying into that 401K plan or what have you, you don't have to take your required minimum distributions in general until you do retire. So that's one exception to this. But really that's what trips people up. So again, you know, reach out to your accountant, talk to the plan administrator where your money is and they can help you work through this. Carry, one of your readers wrote to you and asked, the stock market was up last year and so were my retirement accounts. Will my RMDs be the same or more than last year? Sorry, Charlie, they're going to be more. You know, it's the thing is, that's the point is higher returns on your investments translate to higher RMDs because we discussed that calculation. It's how big your account was at the end of December. So that's what you're going to pay for for 2025. You're going to be based on what your uh account was worth at the end of 2024. So, you know, the S&P was up, what was it? Something like 23%. So yes, indeed, they will be a bit higher, but that is translates because you did really well last year. Bob, turning to you. A topic that you're interested in is a new rule regarding RMDs when someone has multiple IRAs and wants to do a roth conversion. So, what is the new rule and how do people navigate it? Yeah. Um, it's a wonder why anyone owns an IRA, Brad, but here's the final regulation. It states that all of your IRAs are now viewed as one giant massive IRA for RMD purposes. Now, historically, you could satisfy the RMD for a specific IRA and then convert any remaining funds in that IRA into a roth, but under the new rule, all of your aggregate RMDs from all of your IRAs must be fully satisfied before any distribution from any IRA can be converted into a roth IRA. And if you convert money from an IRA before you do all that, you could be subject to a 6% excess contribution penalty on the improperly converted amount. Bob, got another one for you here because, you know, it's about the 10-year rule with IRAs. People who inherit an IRA from a parent or other relative have to empty that account within 10 years of their death. But how the money is taken out during those 10 years, it differs around whether that person had started taking RMDs. So, can you please explain these scenarios and tell viewers what they need to do? Yeah, I'll try and simplify it, Brad. So the new final regulations clarify the distribution requirements during the 10 year period. It depend on whether the original IRA owner died before or on or after what's called their required beginning date. So, if the IRA owner died before their RBD, uh the beneficiaries have do not have to take any RMDs during years one through nine, uh following the owner's death. They simply have to empty the entire account by the end of the 10th year. Now, if the IRA owner died on or after their RBD, the uh they have to take a what's called an annual stretch distribution during the years one through nine, and then take out the remaining uh balance by the end of the 10th year. So it's a little complicated uh because we've now added another acronym into the mix here. We've now, in addition to RMD, we've added RBD into the mix. So my advice would be it's best to talk to a professional if you inherit an IRA. Kerry, I got 30 seconds or less. Another one of your readers asks, can I use my RMD to make a charitable donation? What say you? Yes, indeed. If you are charitably inclined, absolutely. You need to make that. It's called a qualified charitable distribution. The money needs to go directly from your IRA or your account to that non-profit, don't come to you, go straight there. Make sure your accountant knows about, so it's not counted as income and that money doesn't get taxed. So, yeehaw, you make a big back, a big uh bang with your buck with that non-profit. And I think it's a wonderful thing. You are some limits. I think it's up to $100,000. You can do that. IRS has a few things around this, but it's really a great option for people. All right. AMAs ran, so AYFAs could sprint here. Ask Yahoo finance anything edition with Carrie and Bob. Thank you both so much answering some of those key burning questions from our viewers and readers. Appreciate it. Thanks, Brad. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
10 hours ago
- Business
- Yahoo
Costly IRA mistakes could crush your retirement
What are the biggest mistakes people make when managing their retirement accounts? This week on Decoding Retirement, Robert "Bob" Powell dives into the complex world of IRAs with "the IRA Whisperer" Denise Appleby, CEO of Appleby Retirement Consulting. Denise discusses what to do if you miss your required minimum distribution, the best way to do a 401(k) rollover, and the IRS forms you need to stay on top of your retirement. To hear expert insight on a key component of retirement planning, check out this episode of Decoding Retirement. Yahoo Finance's Decoding Retirement is hosted by Robert Powell. Find more episodes of Decoding Retirement at If you made a rollover contribution, is it in the right box? Right? Look at your 10 and 9Rs too. If you took a distribution, is it coming from the right type of account? Is it reported as a direct rollover when it should be? Things like that gives you an opportunity to audit your IRA, which you must doevery year. When I think about IRAs, individual retirement arrangements, I think it's a wonder why anyone would ever own one. You have to think about beneficiary designations. You have to think about RMDs. You have to think about various forms like 5498 or 1099R or 1099Q. Well, that's what we're going to talk about today with Denise Appleby. She's the CEO and founder of Applebee Retirement Consulting. Denise, welcome. So glad to be here and I'm so glad you're talking about this because people need to know. They, they do need to know, and, and that's part of our goal, Denise here is that at Decoding Retirement, we want this to be people's first and last stop in their search for not just retirement information, but also knowledge and wisdom, and you're here to help us accomplish that goal today. So thank you for being here. Yeah, I, I love the name Decoding because as you know, IRAs are governed by the tax code, and for you and I, it's about translating that to English or decoding. I love that. Yeah, well, it's a tall order and uh you among many, or maybe just a few, quite the best at what you do here. So let's start here with the most recent news, which is Form 5498. Uh, to me, whenever I get this form, I have no idea what to do with it. I know that there's a place on the, uh, 1040 where I have to list something or other to having to do with 5498, but, but help us learn what's going on with what's new about this. Yeah, so the, the, the, the challenge rate form 5498 is that using last year's example, it's not issued until May 31st of this year. So you have already done your tax return. You get this form and you're thinking, ah, I'll just file it away cause my accountant doesn't but you need it, and maybe you should share it with your accountant. I'll give you a real life example. The IRS just issued a private letter ruling. A private letter ruling is where, you know, if you have a problem and your custodian tell you they can't fix it, then you go to the IRS and say, Can you help me?So in this case this person set up an account that they thought was a a Roth Iray. At first everything was fine. Then she got married, changed her name, had the custodian change the account. They still kept it as a Roth account, but they took off the wrath of the title. So every time she looked at the account, she she's thinking, oh, this is a traditional so she makes contributions to the account thinking traditional literary contribution. She rolls over her 401k account to that account, thinking, oh, non-tax will will roll over, only to find out years later, about two years ago. Now this happened in like 2012. Wow. So then she found out about two years ago that the account was actually a Roth and what that meant is, let's say she rolled over.a million dollars from her traditional 401k thinking that it was non-taxable turned out that it was taxable because she processed a conversion without knowing it, so she went back to the IRS after she got a denial from a custodian and the IRS allowed her.A late recharacterization. Remember those? Yeah, they're not allowed anymore. Yeah. After paying a professional to help her fix it and go to the IRS and paying the IRS's huge fee, the IRS says it will allow you to do this recharacterization. Now the problem that the recharacterization can be done, that's good. The question is, what do you do when you get your Form 5498? There's a box on the form going to be checked to see if it's a regular IRA, SEP IRA, simple IRA, or raw IRA. Had she checked that, she would have seen that it was a raw IRA despite what the title said. So when you get your Form 5498 this year, which was just sent out in May, look atThat. And that's only one of the many things that you need to look for, Bob. For instance, if you made a rollover contribution, is it in the right box? Right? Look at your 10 and 9Rs too. If you took a distribution, is it coming from the right type of account? Is it reported as a direct rollover when it should be?Things like that gives you an opportunity to audit your IRA, which you must do every year. Yeah, now, am I correct to say that the information on the 5498, which captures the gross amount in your IRAs, there's a place in the 1040 to actually list that number, is there not? Not the gross amount, but let's glad you asked that question. Let's say you took a distribution from your IRA and you rolled it took it from your traditional IRA. You roll it to a traditional IRA. That's a non-taxable transaction. The distribution side is going to be reported on the 1099R, and that's what the IRS looks at to say, Oh, Bob, you took out a million dollars, or 10, owe me income tax on 100,000 because the IRA custodian is going to report it as being taxable, but they also check a box that says taxable amount not determined, meaning as far as we know it is, but we're not swearing that it when you roll it over, it's going to be reported on your form 5498, and that's where that taxable amount box not determined comes in because it leaves room for your tax preparer to say, Bob, let me see the form 5498 because I want to make sure you rolled it over, right? Or it would have been on your year end statement by then, but the Form 5498 is what is sent to the IRS as proof that you rolled it over. So your your accountant used that information and you're right, that's the information they're going to use to report on your tax return, your 1040 to say Bob took out 100,000 and it's non-taxable, so we report it on line 4A distribution. We exclude it from line and rewrite roll over beside it so the IRS knows what to look for when they get that Form So I was right to say at the beginning that it's a wonder why anyone would want to own an IRA given all the landmines that await people, whether it's Form 5498 or one of my favorites, right, is at some point in one's life, if you own a traditional have to take required minimum distributions and then you'll have to think about things like required beginning date and so forth and so on. Um, and, and a lot of people miss their RMDs. What, how do you handle that? The, what are the what are Denise's rules for handling missed RMD? Not a minefield. So, but I do believe everyone should have an IRA, but you're right, you want to protect certain things and that includes taking a required minimum distribution. Bob, I've come across cases where people didn't take required minimum distributions for 18 years, right, especially when it comes on to inherited accounts. So you got to remember take required minimum distributions from your account. You have to, if you're at least 873 this year, you have to take an R&D for this year. If this is your first R&D year, you just reached 873, you have one due for this year, but you can take it as late as April 1 of next year. Every other R&D must be December 31st of the year for which they're due. So if you wait until next year, you're going to have two to take, and that's a conversation you must have with your CPA. Should I take both of them next year or spread it out between two years because that could affect the amount of income tax. So let's say hear Bob and I talking, you're like, Oh my God, I didn't take my required minimum distribution. And not only that, I inherited an IRA from my uncle 5 years ago, and he was already taking his required minimum distribution, which means I have to take annual required minimum do I do? Because when you don't take a required minimum distribution, Bob, you owe the IRS a 25% excise tax on the amount that you didn't take. It used to be 50% as of 2023, it has been reduced to 25%.Now people usually ask me, they would say, Denise, don't tell the IRS I asked you, but what if I just pretend I don't know and don't take it? Well, you know, here's a reason why you should take it as soon as you find out. First of all, there's a new provision where if you miss your RMB and you take it during what is known as a correction window, the 25% excise tax is automatically reduced to 10%.Right, so that's a bonus right there. The second thing is, if you miss the deadline due to reasonable error and you ask for a waiver, the IRS, I'm gonna go on a limb and say will. I, you know, I prefer to say will likely, but based on my experience, they've never denied a request when the, the reason for missing the deadline is reasonable. Let me give you a reasonable had a 403B account. They also had a traditional IRA. They had to take required minimum distributions from both accounts. Now the law says if you have a 403B and you have an IRA, each of those accounts must satisfy the required minimum distributions there are some rules that allow you to aggregate RMBs. Say you have multiple traditional set and simple IRAs. You can aggregate those, meaning you can combine RMBs for those accounts and take it from one if you want to. Same if you have multiple 4 or what you can't do is take the R&D for 403B from the IRA. This taxpayer didn't know, and they were actually working with a CPA who told them that they could do all along, they calculated the R&D for the 403D, they calculated the R&D for the IRA. They totaled it and they took it from the now they have a new CPA who says, no, you can't do that. In a case like that, here's what you CPR or tax preparer must file IRS Form 5329. There's a space on it where you report your required minimum distribution in that same space. You tell the IRS how much you took, how much you didn't take, and you follow the instructions and ask for a waiver. You attach a nice letter explaining how come you missed your R& you ask nicely for a waiver of of the excise tax and you put everything together and send it in. And no, don't worry if it has been multiple years. I have worked on cases where they have been multiple years, 1015, 18 years and we get a letter back from the IRS saying, yeah, your request has been approved, so don't give up you find out that you owe the excise tax, because there's provision under the tax code that the IRS uses to waive the excise tax if the deadline was missed due to reasonablecause, right? And if the IRS rejects your request, you you've mentioned that it's typically because you filled out the form incorrectly. Is that fair to say? Yes, yes, yes, I've, I've had cases where come to me and say, Denise, I've listened to your seminars, and based on what you tell me, the IRS wouldn't reject a request if there's reasonable cause. But here I get a rejection letter and I say, Give me that letter, let me see it. Then give me that form that you filled out. Turned out they filled out the form incorrectly because if you follow the instructions as they're written, it can right? And so many brilliant people have been tricked by those instructions. You got to read them carefully and make sure in the spot where it says how much do you owe, you put 0, because if you put any other amount, the IRS is going to take that as your acknowledgement that you owe them and you're willing to pay them, so they're gonna come after you for thatmoney. All right, Denise, we have to take a short break and when we come back, we'll talk about maybe Form 1099Q and RMDs, again, if you don't mind, we'll be right back. Welcome back to Decoding Retirement. I'm talking to Denise Appleby. She's the CEO and founder of Applebee Retirement Consulting. Denise, when we left off, we were talking about RMD's and I promised we were going to come back and tackle even more about RMDs andI think one of the biggest things that people need to tackle when they think about this is how do I actually calculate what my required minimum distribution is? Uh, it's fairly simple, but maybe not for some. Maybe not, maybe not it comes to an employer plan like a 401k, the good news is that the plan administrator will likely calculate it for you. Smaller employers sometimes farm it out to, say, an IRA custodian, but you want to know how to calculate the RMB. If you have an IRA, your IRA custodian must send you an RMD notice by January 31, so we're in, say, 2025, you should have gotten it by December 31, 2025. But here's why you want to know how to calculate they make a mistake, you're responsible. Now there are 3 life expectancy tables. The first thing you want to think about the single life expectancy table, which is used for beneficiary accounts, the uniform lifetime table, which assumes that your beneficiary is 10 years younger than you are, and the joint life expectancy table, if you're married to someone much younger, more than 10 years younger, and the and they're your sole primary beneficiary, then you can use that table. So if you're doing your calculation for get the fair market value for December 30, 2024. Then you look at the life expectancy table and based on your age, there's going to be a factor beside it. You get, you grab that factor and you divide it into the fair market value. Voila, you have your R&D. Sounds too easy, right? Here's something that can trip you up. Using the wrong life expectancy table, I just explained when you should use either of the if you have an outstanding transaction, Bob, say in December 2024, you took out a million dollars as a distribution and you rolled it over in January, when your custodian does your calculation, they won't have that million dollars records and so they'll do the R&B calculation minus the million dollars. That means your RMB is going to be short. So you got to look for things like that to make sure that your RMB is right because it's you who's going to be responsible, not your IRA custodian. Yeah, so in many cases, there is some uniformity between IRAs and employer plans with respect to RMDs, but that's not always the case, is that correct? Yeah, that's not always the case. The the the calculation formula is generally the same, right? And if you're still working for an employer that provides your 401k, the terms of the plan couldSay, oh, you're 73, you don't need to start yet because you're still working. Wait until you retire. Don't always assume that that's an option. Check with them first to make sure. Also, if you run your own business, that option is not available to you because you're referred to as what they call a 5% owner. But one of the primary differences, Bob, is if you have a 401k 401k stands on its own when it comes to R&Ds. If you have two jobs like I used to, you still cannot combine those 2 401k accounts. But if you have multiple traditional SEP IRAs, you calculate them you may say, you know, Bob, you're my beneficiary on IRA #1, and I like you better than the beneficiary that's on IRA #2. So I will take from the IRA that you're the beneficiary, but I'll take everything from the IRA where I have beneficiary # that gives you some flexibility. Do not forget your inherited accounts. When we talk about required minimum distributions, there's a tendency to think that it applies only to account owners. But for individuals who have accounts that they inherited, required minimum distributions apply to those two. In some cases, not every year. For instance, if the account owner died before they were supposed to start R& 10 year rule applies to you, then you don't have to do anything. It becomes a tax question as to whether you should during the 1st 9 years you got an MTA account body in year 10. But if they died on or after the date they were supposed to start taking R&Ds, you have to take R&Ds every year, and the life expectancy factor helps to determine how much you should take. Yeah. So we're going to send folks to your website toLearn more about that and and other things that we're not going to talk about today like designated beneficiaries and non-eligible beneficiaries, etc. We'll, we'll send them to your website. But I, I do want to ask, we now live in a world where many folks are gig workers and maybe setting up solo 401ks where, in effect, they are 5% owner, so they would be subject to the RMD rules even if they reach a required beginning date. Is that correct? Absolutely, if you, if you run your solar 401k, you're at least 873 this year, you have to take your RMD. Now, if you work for a huge corporation, then they could have said, you know, wait, you don't have to, and I'm saying cool, you gotta check with them, but you're absolutely right, for gig workers, there are 5% owners and they don't have the option to wait past 873. right, another form that where there's been some updates is something called the IRS form 1099Q. and uh I don't know what stands for. Maybe we're running out of alphabets here. What the folks need to know about that qualified tuition programs like uh you know, 529 plans. So one of the most popular feature that came out of Secure Act 2.0 was this new provision where if you have excess amount in your 529 can move it to your raw IRA as a regular raw IRA contribution. You're subject to the annual IRA contribution limit each year, and you have a lifetime limit of $35,000. Now you can do this only if you have had the 529 plan for at least 15 years. And so there were certain questions aboutIs this going to be reported, because if you move $5000 from the 529 plan to the Roth, it's going to include a prorated amount of basis and earnings, and we weren't sure how that was going to be communicated to the 529 owner. Now the IRS have updated the form if you go to that form now, you'll see where there's an option for the the 529 plan holder or custodian to indicate to the IRS that yes, you have moved X amount from your 529 plan to your BI rate has been done as a direct transfer so it meets all the requirements that it should meet. So when someone might be moving from one employer to another, oftentimes they're told to do 401k rollover trustee to trustee transfer to their new employer if they're able, or if not, to roll it into directly to an IRA. Is there a big mistake that people need to avoid when they're doing this by chance from your perspective? Yes, I'm so glad you mentioned that. So you avoid the 60 day deadline by doing a direct rollover, say from a 401k or to your IRA or you use a trustee to trustee transfer if you're moving from IRA to IRA. Here's a number one mistake that I see happening. You set up the account, it's a Roth tell, say your custodian of the 401k plan, do a direct rollover to my IRA. The number is 1234567. This is a traditional IRA. The funds hit the account. It turns out that it's a Roth IRA, and so here you have an unintentional Roth make sure it's done as a direct rollover. Verify the type of account first to make sure if you want it to go to a traditional liar, it goes to a traditional liar. And here's a tip, Bob. Check your 401k account statement. Do you have after-tax amounts in it? Make sure that goes IRA, that's a tax-free conversion. Do you have employer securities? Stop and call your CPA or your financial advisor because there are special tax benefits that could apply to those employers securities. And if you do anything, it might mess up that opportunity. I'm afraid we've run out of time. We never got to backdoor Roths or mega backdoor Roth, so maybe you'll come back on in a few months and we can talk more about that. In the meanwhile though, I want to thank you for sharing your knowledge and wisdom with us and our listeners and our viewers. It's so greatly appreciated. Thank you. Thanks for having me, and you're doing a good thing here. I appreciatethat. Thank you so much, Denise. So that wraps up this episode of Decoding Retirement. We hope we provided you with some actionable advice to help you better plan for or live in retirement. And remember you can listen to Decoding Retirement on all your favorite podcast platforms. And if you've got questions about money, about retirement, email me at YF podcast@yahoo and we'll do our best to answer your questions in a future episode. This content was not intended to be financial advice and should not be used as a substitute for professional financial services. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
6 days ago
- Business
- Yahoo
Should you use AI for your retirement plan? Expert weighs in.
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. Can artificial intelligence help you build a retirement plan and figure out how much to save or invest? The short answer is no, not yet, said Nick Holeman, director of financial planning at digital advisory company Betterment. "I would be cautious about using it for personalized financial advice right now," Holeman said in a recent episode of Decoding Retirement. "We're seeing a lot of traction with general financial education. In that case, it's a brilliant tool. It's really powerful. It can be really incredible. But using it for personalized financial advice, I don't think it's quite there yet." Holeman's caution is notable given that Betterment helped pioneer robo-advising. Founded in 2008 and launched in 2010, Betterment helped define the direct-to-consumer automated investing model that many firms later adopted. "We don't use AI for our financial advice currently," he said. "We're looking into it. We've seen a lot of promise, but it can act a little bit odd when you start to get into some really technical details." Read more: Retirement planning: A step-by-step guide AI "hallucinations" — confidently stated inaccuracies — are improving, he said, but they remain a concern. "Large language models weren't really built to do math," Holeman said. "We're seeing that get a little bit better as well, but still a little bit of concern there. So it's moving incredibly fast. I think we're not far away from it, but we're just not seeing that widespread adoption quite yet." Still, Holeman acknowledged that AI can be helpful for users who understand financial terms and prompt design. In other words, it can be empowering if you know the right questions to ask. "Prompt engineering is important, and it's worth exploring because many investors don't even know what to ask," he said. "Once you're dealing with terms like adjusted gross income or anything involving the IRS, it can get pretty complex." But he added that even savvy AI users and financial advisers would be wise to proceed with caution, especially given the potential tax changes on the horizon and the rapidly evolving political environment. In recent months, Holeman noted that Betterment advisers have witnessed increased client conversations about political uncertainty affecting investment decisions. "We are seeing an uptick in investors being nervous," Holeman said. "Our investors have been very well behaved with their retirement portfolio that we're not seeing mass panic or sellouts of their existing nest egg, but we are seeing them hold on to cash for a lot longer than usual." No matter how you proceed — with or without AI — Holeman encouraged people to "think like an engineer" when approaching financial decisions. Instead of defaulting to vague answers like "it depends," he urged people to identify clear inputs, calculations, and expected outcomes — an approach he said helps demystify and improve the consistency of financial advice. Got questions about retirement? Email Robert Powell at yfpodcast@ and we'll do our best to answer it in a future episode of Decoding Retirement. Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service. Sign up for the Mind Your Money newsletter
Yahoo
17-06-2025
- Business
- Yahoo
The number 1 mistake retirees make with money
Planning for what happens to your finances when you're gone can be a tough but necessary conversation. On this episode of Decoding Retirement, Robert "Bob" Powell speaks with Jeffrey Levine, chief planning officer of Focus Partners Wealth, about balancing a happy retirement with a sizable nest egg for your family to inherit. Jeffrey discusses how to maximize tax efficiency, how aggressive your portfolio should be, and how to ensure your expenses don't exceed your income. Yahoo Finance's Decoding Retirement is hosted by Robert Powell. Find more episodes of Decoding Retirement at Some people think that estate planning is only for the wealthy, but it's not. And here to talk with me about that is Jeffrey Levine. He's the chief planning officer at Focus Financial and also, I think the chief planning nerd at Jeffrey, welcome. Yeah, lotsof different titles, really just a big, you know, big nerd is really what I am for All right, so two nerds talking to each other for, uh, 22 minutes or so. All right. So I, I, I, I, a lot of times people planning, that's not for me, you know, spousal limited access trusts, charitable remainder trust, charitable giving, that's for the wealthy, uh, but it's not. Tell us about that. Yeah, well, I think thefirst thing we need to do is make the distinction between estate planning and estate tax planning, right? Estate tax planning is one component of estate if you're not super wealthy, maybe you don't have to worry about estate tax planning, but there are still a lot of other elements of estate planning. For instance, there's a lot of income tax planning that can go around estate planning that could be how you leave your retirement accounts, for instance, to various beneficiaries. Do you name them on the beneficiary form versus leaving it to them through a will? Uh, who is your beneficiary? You know, with retirement accounts there different rules for let's say a spouse versus a uh a child that's healthy versus leaving it to a charity. They all have different post death distribution rules. Uh, if you leave a taxable account, like let's say money you just invested in your own name that you had bought, you know, something years ago for $1000 and now it's worth $10,000 there's a what's called a step up in basis there's some tax advantages there, but if we go all away from taxes, just thinking about, you know, if we ignore taxes, there's still, who do you want to get your money and how do you get there as efficiently as possible, and then what happens about all the other non-financial issues? What about who is going to make decisions on your behalf if you are incapacitated or otherwise not able to make those decisions that might decisions, but it might also be medical decisions. Uh, beyond that, thinking about if you have children or other individuals that you take care of maybe even adult individuals with special needs, maybe even a an elderly parent if something happens to you who becomes the guardian who will take over care for these individuals, these are all things that should be addressed within an estate plan and have absolutely nothing to do with having a lot of wealth. All right, that's fair. So one of the things that I wanted to do in today's podcast, uh, Jeffrey, is to talk a lot about some of the mistakes that people make either pre-retirement or in retirement and what they can do to avoid them. Uh, one thing that, uh, I just wrote about and I'm curious to hear what you have to say is this notion of relocating based on your sources of income so that maybe you can create the most tax efficient, uh, place to live based on maybe whether you have earned income or investment income partnership income or uh or Social Security or pension income or IRA withdrawals. Uh, do you have thoughts about that? Absolutely. I,I guess the first thing I would say is, you know, taxes should be a part of the consideration because they're cost, right? And when we're looking at retirement, it's a matter of balancing how much you have versus what your expenses are, and expenses can be the things you want to spend money on like gifts for your grandchildren and vacations and uh, you know, a nice residence to live in, etc. but they're also the cost that maybe we don't love, but we have to pay anyway, right? Things like income taxes, maybe property and so forth. Well, obviously that becomes a factor, but where I have seen in my experience, people really, uh, go make unfortunate decisions is to base their decision solely or too heavily on where they're going to have the lowest income tax bill. At the end of the day, when you get to retirement, you've done all the hard work to get there, right? You've worked for the last 2030, 40 years in many cases even longer than that, and you've putIn your, you know, your blood, sweat, and tears, in some cases, quite literally, to be able to build up your savings. The last thing you want is to go somewhere, purely because it's gonna save you a little bit in the way of taxes, but you're just not happy there. It's not, you're not close to your friends, you're not close to your family. And if we look at, you know, satisfaction of individuals in retirement, and not only just satisfaction, but individuals' health during retirement, both mental and physical, a greatdeal of that has to deal with community, who you have around you, and that could be, you know, family, friends, etc. So you want to try to balance these things moving close to individuals, or even if it's a new place, a place where you could develop a community around you so that you can enjoy your retirement, and not just from a, hey, what do I enjoy doing, but also to be healthy mentally and physically in retirement to be able for it to be as long as possible,right? So, so one thing that happens in retirement, uh, in terms of enjoyment is, uh, people sometimes don't spend what they could spend, especially early in the go go years, for instance, and, uh, you have some thoughts about that too, I'm sure. Yeah, I do. I, it's actually one of the biggest mistakes I think a lot of, um, fortunate retirees make, right? There are certainly some individuals who have not been fortunate enough to save enough during their careers. They're gonna be tight during retirement and they have to be very careful about that. But there are an awful lot of people who've worked really hard and also benefited from some good fortune where they have enough. In fact, they more than enough. And when we think about classic rules of thumb for taking money out of retirement accounts or just distributing dollars in general during retirement, they tend to be pretty conservative and for obvious reasons, right? Like you don't want to have to be 80 and go back to work if you haven't worked already in the last 20 years. But let's there's a really popular one like Bob, you are very familiar, I know with the rule of like the quote unquote.4% rule, right? The, the 4% rule effectively says you're based on some research that was done a number of years ago, if you take 4% out of your portfolio when you start your retirement, you can go 30 years and you won't run out of money. Again, that's based on historical returns and so forth, doesn't mean it's always going to be that case going forward. Um, but here's the end result of 4% quote unquote rule was based on the research and saying what is the uh the most amount of money that could be taken out of portfolio in order for during the 30 year period that they looked at for it never to run out of money. So that was like the worst case scenario and the worst scenario they looked at 4% still meant that you could make it through 30 years. But that means in every other but the worst case, you could have taken more. So someone who just says, Well, I'm gonna take 4%. Well, you might end up with a lot more money than you actually thought. And in some cases, that's fine. But in other cases, it's not. And here's the way I make the determination, Bob. On one hand, you have some individuals who say, I've worked really hard and I want to, uh, make sure that not only do I have a wonderful retirement, but I want to provide a legacy for leave them, you know, maybe as much as possible after I spend what I want. That's one set of individuals. There's another set that says either, whatever's left over for my kids or grandkids, they'll get and they'll be happy with it because it's left over, you know, it's bonus for them. Or maybe even, uh, a little bit of a variation of that where someone says, Hey, um, I want to leave behind a million dollars for them. And you already have it. But then there's all this other money that you were to have accumulated. If you don't spend through it and you die with like $10 million you, you, you've not followed your plan, right? Like, it's, it's a failure of your plan. It's now, it's a failure to the upside, which is certainly a lot better than running out of money. But if your goal is, I want to leave my kids a million dollars, and then everything else I want for my spouse and my enjoyment during retirement, then you've got to periodically re-evaluate how things have what your initial set of expectations are, and in many cases you can spend more than you originally planned, because when you start retirement, you're often conservative in case you happen to retire in a bad market scenario. Yeah. So you mentioned the word conservative. A lot of times people at the end of their working life, they really only have maybe their uh retirement account to to to depend on for income, maybe they have a social security, maybe they have a but in many ways, uh, people have to think hard around how conservative or aggressive that portfolio needs to be, and sometimes they lean too heavily toward conservative when they might need to think about how do I manage and mitigate the risk of inflation for a 30 year time horizon. Yeah, I think you just hit on a really important point, right? You, you mentioned inflation and then also the value of the portfolio and you know, when, when people say risk, for whatever reason we have become conditioned to risk is when I look at my account statement, is it, you know, has it gone up or down? And that is how we assess risk, right? Like the account balance, the risk that when you put money into something, when you look next month or next year or 2 years or 5 years or whatever it is down the road, that the amount of money you the account has gone down. And that's what a lot of people call the risk in my portfolio. But the reality is, market risk, which is that is my investment up or down, is just one type of risk that people should be aware of. Uh, we already talked a little bit about tax risk in retirement, but there's tax risk, there's, uh, uh, a inflation risk which you just mentioned, which over a long period of time, I mean, even if inflation is just 2 or 2.5%, when you over a 2030, or potentially even 40 year retirement in some cases, that really eats away at the value that you have, your ability to spend and, you know, I, I used to use eggs as the example before eggs became such a, you know, a, a, uh, hot button issue here. But, you know, you want to be able to go to the grocery store and buy a dozen eggs this year and go next year and buy another 1 dozen eggs. You don't want to be stuck saying, well, I have the same $10 but it only buys 11 eggs next year and the that it only buys $10. Like yes you still have your $10 but if it buys less, who cares? So there's inflation risk. there's interest rate risk as interest rates change, the ability for you to take money that is perhaps matured in a previous investment and reinvest it might be lower or higher than it was before and obviously as interest rates rise and fall, so too does the value of certain investments like bonds or your ability to refinance a take a home equity loan in retirement if you need. So there are any number of risks. Market risk is certainly one of them and probably the one we focus on the most, but in order to build a sustainable retirement portfolio that's really built to withstand threats in a multitude of areas, you have to have the right mix and again that's different for every individual based on a, you know, a multitude of factors, but going to conservative quote protecting against market risk probably leaves you more exposed to inflation risk. Worrying about solely inflation risk probably leaves you more exposed to market risk. So it's having investments oftentimes in different areas that can each help deal or mitigate certain risks, but leave youexposed to others. Yeah, I, I'm often fond of telling people to go to the Society of Actuaries website where on their uh page about retirement and retirement a booklet that outlines the 15+ risks that you'll face in retirement and then also outlines the ways to manage and mitigate these risks. And if you read this chart, you'll think, I won't have any money left over for essential expense of this, so I have to manage and mitigate all these risks that I'm going to face in retirement. Jeffrey, we have to take a short break and when we come back, we're going to talk about, I think one of your favorite topics, which is, uh, tax bracket management. So don't go back to Decoding Retirement. I'm talking to Jeffrey Levine. He's the chief planning officer at Focus Financial. And, uh, before the break, I mentioned that we're going to talk about one of Jeffrey's favorite topics. He's a CPA by background and also an IRA expert, right, Jeffrey? And then there's a host of other designations after your name that I can't recall all of them. Yeah, abunch of letters, but I, like I said, to start, Bob, I'm just a big nerd. That's really, it's the those are the four letters that you need to know. N E R D, big nerd. Uh, I have a lot of favorite four letter words too. One of them is all right, so let's talk about tax, managing your tax brackets effectively either pre or during retirement, as well as the opportunities that maybe it creates for Roth conversions, especially now that maybe we're going to have a tax bill that extends, uh, the tax bracket, uh, the tax cuts of the uh of the tax cuts and Jobs Act. Yeah, it certainly seems like it at this point. And, you know, I guess if we really continue with sort of the theme of what we've been discussing, we've been talking a lot about mistakes that people make in retirement. And, and we can sort of put this bracket management in, in context of one of those mistakes. Another common mistake I see individuals make is focusing too much on their annual taxes and their annual tax bill and not what I call their lifetime tax bill, you know, when it comes to good tax planning, it's not about giving anybody the lowest tax bill in any one year. It's looking at their lifetime and trying to figure out how to pay taxes over that extended period of time, such that the total of those taxes over your life is as low as possible. And where does that come in with brackett management? Well, there are a lot of times when, when you've might be, let's say in what are known as the so-called gap years, the uh the years between when you were working and had income coming in from work and the years when you start getting income from Social Security and maybe when you start taking required minimum distributions from your IRA's 401ks, etc. and during those years, oftentimes individuals have very low in some cases no taxable income you know, on, on the surface, that might feel great, like, hey, I paid no taxes this year. That was awesome. But if you look, if you have very modest income and modest savings, that's just gonna be what it is. But for those who have been fortunate enough to accumulate significant savings, having a low or no income tax is actually a really bad thing. A low income year is a terrible thing to waste as a tax planner because you could be pulling money down at 2 days or at that time, you know, the low income tax rate you have in that year. And it's better to pay taxes oftentimes a little bit sooner, but at a much lower to wait until the future when you already have all of this income, or to do it earlier while you're working and have all of that income and be paying taxes at those higher rates. So you want to look for those gaps in income years, or even years where you make abnormally large uh contributions to charity or other things that would result in a deduction, and look to pull down more income in those years. Now, the challenge with that, Bob, isIf you could have more income simply by saying more income please, like, wouldn't you have it, right? Like that would be but we, we can't generally do that, but there is sort of a magic wand of creating income for those who have saved money in an IRA or a 401k or a similar type of plan, and that is the Roth conversion. It is the tax equivalent of waiving your wand and creating income in exactly the year when you want to pay that income. So it is a veryVery powerful approach to look and to say, when will my rate on this income be the lowest? And one other thought here Bob before I kind of take a breath and come up for air and that's when we're thinking about rate, people oftentimes focus only on their tax bracket, but there are a lot of other costs potentially associated with income as well. may be on your tax return like surtaxes, etc. like the 3.8% surtax, but even things that may not be on your tax return. For instance, if you do a Roth conversion before 63, you don't have to worry about impacting the cost of your Medicare Part B or Part D premiums. But if you do a Roth conversion at 63 or older, that can potentially bump you up higher Medicare Part B and or Part D premiums and now even though it's not a quote unquote tax, it's a cost that needs to be factored in to when you should take your income and when you should avoid taking income. Yeah. So oftentimes, Jeffrey, the traditional advice is for people to delay Social Security to age 70, let's say, so they get the maximum that to bridge the gap that they might take money from their IRA, uh, that would have been coming from Social Security, and that does two things. One is, right, it brings money forward that's maybe at a lower tax bracket, and it allows you to sort of maybe avoid higher taxes when you reach RMD age, and then it allows you to create the highest possible benefit with your Social Security benefit, uh, at age 70. Any thoughts about that as a strategy?Yeah, I, I thinkthat's oftentimes the advice that is kind of put out there as a, a general statement of more people should do this, right? Like everyone's situation is different. What I could say with certainty is far too far too few people wait until 70 or closer to 70 to take their income, right? Like if you look at the statistics that Social Security puts out, it's pretty clear that a lot of people that are not in their best interest. It's impossible to look at any one individual and say you shouldn't have claimed that 62, for instance, unless you know everything about them, uh, but it is on, on based on the large numbers, it's clear that there are so many people who claim either as early as possible or not waiting until their full retirement age or even if they're their own full retirement age, until perhaps as late as 70 as you mentioned, to take advantage of those quote unquote delayed credits where your unreduced retirement benefit at your full retirement age for Social Security can then be increased by as much as 8% per calendar year for the amount you wait which can have a really material impact. Uh, one thing I would share is, you know, a lot of times people are looking at this and they're planning as a there, you can often separate the Social Security decision for the higher earner and the lower earner. The higher earner should really be focused not on their own death, but when the second death you know, sometimes people say, well, I've, I'm in poor health, I'm gonna die at 72. Well, sometimes I look at somebody like that and I say, do you love your spouse? They say, yes, I say, well then don't worry about dying at 72. It's still the right decision to delay because your higher check will live on with your spouse who might live another 20 or 30 years. And if that's the case, even though you didn' see the benefit during your lifetime before you die, it was a meaningful impact for your surviving spouse. Now, on the other hand, a lower earning spouse doesn't need to worry about when the second death occurs, they should think about when the first death will occur because that lower check will go away regardless of who dies first, and the higher check lives on with the oftentimes when I'm asked that question by couples and they say, what should we do, you know, again, it's got to be looked at on an individualized basis. But many times, the higher earner will end up claiming at 70 or closer to 70, and the lower earner might start claiming a little bit younger so that they get at least some income in the interim, right? Uh, hey, we want to take more or things like that. OK, great. So here's a little bit, a little taste of Social Security income for you now, but then later on it'll be much higher because the higher earner has madethe decision to wait. So Jeffrey, uh, 23 minutes goes by in the blink of an eye. I'm afraid we've run out of time, but I, as always, I want to thank you for sharing your knowledge and wisdom with our listeners and our viewers. It's so greatly appreciated and hopefully you come back on, uh, future episodes to talk more nerdy. I'd love to. Yeah, thank you and thank Yahoo for the opportunity to be with you guystoday. Great, so that wraps up this episode of Decoding Retirement. We hope we provided you with some actionable advice to plan for or live in retirement. If you've got questions about retirement, you can email me at YF podcast@yahoo and we'll do our best to answer your questions in a future episode. And don't forget you can listen to Decoding Retirement on all your favorite podcast platforms. This content was not intended to be financial advice and should not be used as a substitute for professional financial services.
Yahoo
14-06-2025
- Business
- Yahoo
Your 401(k) and private market investments: What to know
Financial services firm Empower is adding private market investments like real estate and credit to some 401(k) accounts later this year. Robert Powell, editor and publisher of Retirement Daily, joins Wealth to break down the risks and potential returns of adding these alternatives to your retirement portfolio. To watch more expert insights and analysis on the latest market action, check out more Wealth here. Financial services company Empower, which oversees $1.8 trillion in 401k type plans for 19 million people, is offering something new for your retirement accounts: private markets investments. The firm announcing assets like private credit and real estate will be available in some of the accounts it administers later this year. So what does this mean for the larger 401k landscape, and do you want alternative assets in your retirement account? Here to react is Bob Powell, editor and publisher of Retirement Daily, and host of Yahoo Finance's Decoding Retirement video podcast. So Bob, this has been described as a big opportunity to get private investments into the hands of individual investors. So to start, can you break down what exactly we mean by private investments and how do they differ from more traditional public market options? Yeah, so it's really simple, Ali. Think of private equity investing in companies that are not listed on the public stock exchanges, like the New York Stock Exchange, or in the case of private credit, you, as an investor, are loaning money directly to a company, as opposed to a bank loaning that company money. And and there's a couple reasons why this trend is going on, Ali, that is worth mentioning. Uh, one is the number of publicly traded companies on the New York Stock Exchange, for instance, is declining, but the number of private companies is on the rise. And it's also, it's part of a larger trend that's been going on for decades in the financial services industry, which is, we're looking at the democratization of investing. And so heretofore, individual investors were not able really to invest in private assets, private equity, private credit, private real estate. But over time, now we're seeing the democratization of these investments such that they're now being made available to average investors, whereas in the past they were only available to pension plans and endowment funds. And it's interesting, Bob, because there are various types of thinking here, and let's start with the potential upside. What's the advantage of holding private assets within your 401k? Sure, Ali, there's three things that you need to think about. One would be that there's a higher return potential. In the case of private equity, you might see returns in excess of, say, 16%, where the long-term average for publicly traded companies might be 10 to 12%. Uh, investing in these investments also gives you the opportunity for greater diversification. These investments tend not to move in lockstep with publicly traded stocks or publicly traded bonds. And then, you know, faster growth. There's an opportunity for your retirement account to grow that much faster, for you to accumulate that much larger of a nest egg for retirement. But there are downsides. Well, let's let's talk about those downsides. Why is it a risk? Well, these investments are complex and they tend to be illiquid. So unlike mutual funds or ETFs where you have the ability to trade daily or on the minute or on the second, uh, your investment is largely locked up, and oftentimes you can't access the money in a private equity or private credit fund, or private real estate fund only on the quarter, typically. And then there's the issue of higher fees. These have higher fees than your typical mutual fund or ETF. And there's less transparency. With a publicly traded company, you're getting reports that they have to submit to the SEC, 10Qs, 10Ks, etcetera. Um, these private companies are not subject to the same disclosure rules that publicly traded companies are. So given these risks and rewards, how should investors think about whether and how much to allocate to these alternative assets within a 401k or retirement portfolio? Yeah, so I think the big question for me is always, what is the risk that you're taking in order to get the return? What's the risk-adjusted performance? So think carefully about that, and think carefully about, like, how these investments fit in with your overall goals and whether the costs and the risks that are associated with it justify the investment. Now, if you're investing in a target date fund, it's likely that the percent allocated to these investments would be maybe minor, 5%. But in the case of Empower, they're going to be offered through what are called managed accounts. And there, you may have the opportunity to invest from, say, 5 to upwards of, say, 20%. And so you just really need to understand what risk are you taking in order to get the return that you desire. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
