#10 | IRA & 401K accounts are no longer good wealth transfer tools

n the last episode, Bruce Hosler and Jag spoke about the SECURE Act, passed in 2019, and its effects on inherited and stretch IRAs. Today, we dive deeper into why traditional IRAs and 401ks are no longer good wealth transfer tools.

Ideally, you want to minimize both your tax burden and the burden of your heirs. And with these new rules, traditional retirement accounts just won’t cut it.

Bruce talks about the advantages of rolling a traditional IRA into a Roth IRA now, how life insurance can play into a financial plan, and more.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management.

Call the Prescott office at (928) 778-7666 or our Scottsdale office at (480) 994-7342.

To listen to more Protecting & Preserving Wealth podcast episodes, click here.

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Podcast Host

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Bruce Hosler is the founder and principal of Hosler Wealth Management, LLC., which has offices in Prescott and Scottsdale, Arizona. As an Enrolled Agent, CERTIFIED FINANCIAL PLANNER™ professional, and Certified Private Wealth Advisor (CPWA®), Bruce brings a multifaceted approach to advanced financial and tax planning. He is recognized as a prominent financial professional with over 27 years of experience and a seven-time consecutive *Forbes Best-In-State Wealth Advisor in Arizona. Bruce recently authored the book MOVING TO TAX-FREE™ Strategies For Creating Tax-Free Retirement Income And Tax-Free Lifetime Legacy Income For Your Children. www.movingtotaxfree.com.

In the Protecting & Preserving Wealth podcast, Bruce and his guests discuss current financial topics and provide timely answers for our listeners.
If you have a topic of interest, please let us know by emailing info@hoslerwm.com. We welcome your suggestions.

*2018-2024 Forbes Best In State Wealth Advisors, created by SHOOK Research. Presented in April 2024 based on data gathered from June 2022 to June 2023. 23,876 were considered, 8,507 advisors were recognized. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit.

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Jon “Jag” Gay: Welcome back to Protecting and Preserving Wealth. I’m Jon Jag Gay joined as always by Bruce Hosler of Hosler Wealth Management. Bruce good to be back with you.

Bruce Hosler: Thank you, Jon. Great to be with you.

Jon: Last time we talked about the SECURE Act and the provisions that could be taking place here in 2022. And why it’s really a good time to act. Today, we’re going to dig a little bit deeper on that, into why those tax deferred accounts like IRAs and 401ks are no longer good wealth transfer tools due to those new regulations. Tell our listeners just a quick recap about these new regulations and what did the IRS do to make it so that these IRAs and 401ks aren’t good wealth transfer tools anymore.

Bruce: Jon, the new IRS RMD regulations have interpreted this SECURE Act so that inherited IRAs in 401ks for most adult children beneficiaries, will now have to be distributed in just 10 years. And they will also have to collect the taxes or pay the taxes in 10 years.

Jon: In just 10 years. So, our listeners children in a lot of cases will no longer be keep that IRA tax deferred and growing after their parents die, they’re going to have to cash it in or, or close it?

Bruce: That’s right in just 10 short years. The account will be, have to be cashed out and closed. And the embedded taxes will have to be paid and all the tax referral benefits will be killed.

Jon: Okay. So, when does that take effect?

Bruce: It’s in effect right now.

Jon: Oh.

Bruce: Anyone who dies this year and leaves an IRA or a 401k to their children. And that’s assuming that the children are not EDBs – that’s that eligible, designated beneficiary we talked about in our last episode. They will be subject to these new rules and will have to close the account and pay the taxes in 10 years or less.

Jon: That really is a big change from the old stretch IRAs prior to this, where you could leave them to your children, and be paid out over the rest of their lives.

Bruce: Yes, it is. It’s a huge change and one that does not favor our listeners. That is why I’m sounding the alarm and letting everyone know that IRAs and 401ks are no longer ideal wealth transfer vehicles any longer.

Jon: Okay. So, when you say ideal wealth transfer vehicle, what do you mean by that? The kids do get the money. The Wealth is transferred, right?

Bruce: You’re right. The leftover funds are transferred to the kids. But only after the taxman takes his share. Ah, but it is the manner and the taxation and the timing and the total benefits that children receive that determine if this is an ideal wealth transfer tool or not.

Jon: So, I’m going to go out a limb here, Bruce, and guess that you are suggesting there are better ways to leave the money to our families than just naming them on that old IRA beneficiary form.

Bruce: You’ve got it, Jon. Let’s apply some financial planning, some tax planning and advanced wealth transfer strategies and potentially leave more money to the children and pay less taxes overall. Both between our clients’ generation and their children, less use some financial planning techniques that have a high likelihood of leaving the IRA owner and the next generation in a better place.

Jon: Leaving less taxes to be paid by both generations. I like the sound of that. What are some techniques our listeners could consider implementing for a plan like this, Bruce?

Bruce: So, depending on your facts and circumstances, folks, I want you to consider several approaches.

First off, let’s stipulate or let’s agree that there is a very high likelihood that we will have much higher tax rates in the United States in coming years.

Jon: Mm-hmm.

Bruce: These higher taxes will need to be paid so we can fund Medicare and Medicaid and social security benefits because these programs right now are underfunded to provide all the future benefits that the government has promised to those participants.

Jon: That’s back to the point we talked about in just our first couple episodes. There are also other reasons why we’ll face higher tax rates going forward too, right?

Bruce: Yes, absolutely. The national debt is larger than it’s ever been right now, Jon, and it continues to grow out of control. With the high rates of inflation, which have forced us to have higher interest rates as the fed raises these rates.

Jon: Mm-hmm.

Bruce: It’s highly likely that the government’s going to require more and more taxes to service the national debt. As the new higher interest rates require us to pay more interest as a country.

Jon: Okay, that part makes sense. But what do the higher taxes have to do with the crux of today’s episode being wealth transfer?

Bruce: Most clients I talk to do not want to leave a huge tax bill for their children.

Jon: Mm-hmm.

Bruce: And they don’t want to pay the taxes when the parents die. So, the opportunity is for you to switch right now from a traditional IRA to a Roth IRA. In other words, convert your IRA to a Roth IRA.

Jon: Right. We talked about Roth IRAs before. The Roth IRA owners, they don’t have to take those required minimum distributions, those RMDs, right?

Bruce: Oh, that is the part that all my clients love. Roth IRAs do not have RMDs. They hate to pay those taxes and they hate to have to draw the money out. So, the new regulations do require if they’re to be left to a normal non EDB adult child, the account will have to terminate and be paid out by the end of the 10th year, but there’s no taxes due.

Jon: Okay. So, I want to understand this. If the inherited Roth IRA account still has to be distributed by the 10th year, how is that better than the traditional IRA?

Bruce: So, the beneficiary gets to use the rule of 72 and allow the account. So let me just talk about the rule of 72 for a second. It’s a mathematical formula that if you divide your interest rate into 72, it will tell you the number of years to double your money.

And assuming that the account earns 7%. With the rule of 72, that IRA account could double over 10 years without taking any distributions. And so, toward the end of the very last year of the 10th year, if they withdraw the entire Roth IRA, potentially that account has doubled and it’s 100% tax free, no federal income tax. No state income tax.

Jon: So, I just want to make sure I have that right. For 10 years, you’re not pulling those RMDs out because the Roth is not subject to the RMDs. And then that rule of 72, if you get the return that you’re talking about, that money, you’re not pulling any of it out. And the whole thing could double before you have to take it out. And that’s the advantage over traditional IRA.

Bruce: Absolutely. And the big test though, Jon, is can we get those beneficiaries to not touch that money for those 10 years. That’s the real tests.

Jon: Once you’re gone, you have no control over that. You can’t try to persuade


Bruce: That’s right. But if the kids are smart, this Roth money is the most sacred money that they have. To let it grow and not touch it.

Jon: Very important point. What else can our listeners do to create an improved transfer of their IRAs to those children or their beneficiaries?

Bruce: So, if you think about it, the goal that most people have is to leave as much tax- free wealth as possible to their children and their loved ones. So, without giving up the access and the tax advantage growth and the income of their IRAs.

Jon: So how can they do that? How can they leave more tax-free money to their heirs from the IRA accounts?

Bruce: They can use what we call the tax bracket strategy to look at their effective tax rate strategically and start IRA distributions each year to fund a life insurance retirement plan and a life insurance retirement plan will provide them with access to future tax-free income, tax-free death benefits for their loved ones. Whether it’s a spouse or their children.

Jon: Wouldn’t that cause them to have to pay the tax on the IRA distributions?

Bruce: Absolutely it does, but not the whole IRA account in any one year. So, we want to strategically use the IRA funds to make the investment into the life insurance plan over a number of years, and depending on your age and your situation as a IRA owner, this strategy can potentially be very attractive and beneficial as a wealth transfer strategy for many of you.

Jon: Okay. So, we’ve talked about insurance. We talked about converting to a Roth IRA, and we’ve said this before every individual situation is different. Are there circumstances where it would not make sense to convert your IRA money into a Roth?

Bruce: Absolutely. If your other income and that is low enough where you may not be in a higher tax bracket, then that may be the case. But it is very rare that we find someone that cannot benefit long-term, from converting that IRA to a Roth IRA.

Jon: So, when you convert the money to the Roth, you’ve got to pay the taxes the time of conversion. So, that’s why you’d want to consider where your income and tax brackets are at the time of the conversion. Do I have that right?

Bruce: And your other income. So, if you’ve sold a property or you have a capital gain that year, you may want to convert less.

Whereas if your income is lower that year, you may want to convert more. So, that annual tax bracket strategy, that annual tax plan becomes very, very important on this conversion to a Roth IRA idea.

Jon: I remember, uh, several years ago I was unemployed for a large part of the year, and it was probably the lowest, my lowest earning year since I was an adult, and I’m wish I could go back in time, and I wish I could have converted that money when my tax bracket was so low.

Bruce: That is an example that is perfect Jon. Because when you have a low-income year, you want to be aggressive on those Roth conversions and moving those over. The other idea is when the market is down, then that money can convert over while the market is down and then grow back again in the Roth, uh, as the market recovers.

So, a timing of a dip in the market is also a big thing that we look at.

Jon: That’s when you talk about taxes being on sale or stocks being on sale, if the market is low, you’re going to pay taxes on the value when you convert it. Not what it’s going to be when it comes back, but what it is right now.

Bruce: That’s right. So, the moment that you convert, that’s what you have to recognize as taxable income. And let me just clarify one other thing. Just because it’s taxable as income that you have to recognize, it doesn’t mean that that’s how much you have to pay. Let me give you an example.

Jon: Mm-hmm.

Bruce: If you have a business and you’re starting up and you have a big loss that first year, you may have a loss that offsets what you could be doing as a Roth conversion that year.

So, there may be other losses. Capital losses or other losses that you can use to offset your income a little bit. Business losses. That can be also a good opportunity to convert some money to a Roth IRA.

Jon: Bruce, you really know your stuff. I know the same is true for your whole team at Hosler Wealth Management, talking about all kinds of individual situations being different and what circumstances are right for the Roth conversion, the life insurance you talked about earlier.

If our listeners want to come talk to you and the team, phone numbers and website, best way to reach you?

Bruce: So, phone numbers and Scottsdale (480) 994-7342 in Prescott (928) 778-7666. And of course, our website Hosler https://hoslerwm.com. You can sign up for an appointment right on the website.

Jon: Great info as always today, Bruce, look forward to talking again soon.

Bruce: Thanks Jon.

Jon: Securities and advisory services offered through Commonwealth Financial Network® member FINRA/SIPC, a registered investment advisor. Forward looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast does not monitor for comments and any comments should be given directly to the office at the contact information specified.

Any tax advice contained in this communication, including any attachments is not intended or written to be used and cannot be used for the purpose of 1) avoiding federal or state tax penalties or 2) promoting marketing, or recommending to another party, any transaction or matter address herein. The accuracy, completeness, and timeliness of the information contained in this podcast cannot be guaranteed. Accordingly, Hosler Wealth Management, LLC does not warranty guarantee or make any representations or assume any liability with regard to financial results based on the use of the information in this podcast.

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