transcript

Speaker 1:
[00:00] We're about to have another Q&A episode where this week I'll talk about AI and financial planning, the withhold and replace tax-paying strategy, step down in basis, tip slatters, and much more in this, the 201st episode of the Retirement Planning Education podcast.

Speaker 2:
[00:19] Welcome to the Retirement Planning Education podcast, where you can learn all about IRAs and Roth IRAs, employer retirement plans, taxes, Social Security, Medicare, portfolio withdrawal strategies, annuities, estate planning, and much more. Now, here's your host, Andy Panko.

Speaker 1:
[00:36] Hello, all you fine folks. Welcome back. Thank you, as always, for listening. Today is the 201st episode of the show. Hope you enjoyed last week's 200th episode, where I tried to do something a little special. Again, like I said last week, I don't feel like it was my best work, but who knows? There's been times doing videos or writing things or doing podcasts, where I thought something was awesome. I put a lot of time and energy into it and was like, wow, that's really good. Then who knows? Kind of crickets on the feedback. There's been other times I've put stuff out where it's like, hey, whatever, I got it done. Then the feedback has been like, some of my videos, for example, that I used to do when I was still doing YouTube videos routinely, handful of years ago, I got really good feedback on some stuff. I was like, oh, that just seemed like that was kind of like a throwaway thing I did. But so this content creation thing always surprises me. But anyway, moving on. So today is this month's Q&A episode. As always, thank you to everyone who sent in Q&As. I think after today, I'm all caught up on questions. There's a few other show recommendations people reached out about for show topics, but actual questions to be addressed on this style of episode. I think this clears it up. So if you have other questions you'd like answer on the show at some point, you can e-mail them to me at andy at andypanko.com. That would be super groovy. And apologies in advance, my nose is kind of stuffy. It is pollen galore outside. For those of you who live in areas where there is seasonal pollen, there's just like a blanket of green dust on everything. When like a car drives down the street, there's a green dust cloud kicks up behind it. It's that bad. I don't really have allergies, at least not bad, but I think with like this level of outdoor allergens, I guess it gets to everyone in at least a little bit. And so it's gotten to me. Oh boy, excuse me. So I just want to let you know, I used to work in an orange juice factory, but I got fired because I couldn't concentrate. Yeah. And the big goofy smile, this is going kind of full circle. So this big, man, I'm really having trouble breathing because of my nose. This big goofy smile thing, I got the idea from someone I work with actually, who she had said, this is maybe two years ago, roughly. She was at work, it was like a nice day outside, the window was open at work, and she can hear wafting over from across the field, the high school band was with an earshot and they were practicing, and the sound of high school marching music just made her smile as she was sitting there. I think it was like a Friday afternoon at work type thing. That's really nice. I like that idea, not just like hearing high school band music, but the idea that this was something that brought you a smile, when otherwise people would be like, eh, what is that noise outside? So that got me going, and that's the whole motivation and reason why I do this big goofy smile thing. It's like, hey, let me take a little moment to realize or acknowledge or appreciate something in the world that's seemingly small and trivial, but gave me a little smile and made my day better. So that was my initial big goofy smile moment. So my big goofy smile today comes back to the same person who I work with. Jess recently informed me. She's now relatively recently retired and started doing taxes this year under the AARP Tax Aid thing. I was like, as a volunteer and enjoyed it. Said it was a lot of work and there was a lot of questions and there was some stress involved in learning this and doing this. And there's all sorts of stuff that randomly obviously comes up when you're doing taxes for people. But as a whole, really enjoyed it, learned a lot from it, and got a great sense of, I forget the word, paraphrasing here, like fulfillment and satisfaction from feeling like you did something good and helped people with this service, this free service. And so that just kind of made me smile, A, because I'm a nerd and like taxes, but B, the concept of in retirement, doing something that still keeps you mentally engaged and still kept you physically and like socially engaged and did something that is of service to other people. And you get a good feeling, you know, some sense of satisfaction and fulfillment from doing it. It's like, wow, that checks off a lot of boxes for what many people view as successful things or successful ways to spend at least some of your retirement. So just hearing that feedback, that story made me smile like, yeah, you know, people get it and not to say you have to go do taxes for people, like everyone's version of retirement and what it is that brings you joy, satisfaction, fulfillment, you know, appreciation in your days. That's going to be different for everyone. But I just like hearing things like this, where this checked off a lot of boxes in doing something in retirement. So that was cool. Related. Okay, before I get into the questions, there's two other sort of comments or follow ups from previous episodes I want to share. One of which is actually as a, you know, relates to the last episode and coincidentally relates to taxes. So in last week's episode, the 200th episode, where I shared my thoughts about the industry, the last topic I mentioned was that doing taxes is a hard business. People are overworked, the timeline super condensed in the course of two months. It's hard to find preparers, it's a stressful job, the mistakes are made, et cetera, et cetera. Rightfully, clients get frustrated when preparers take a while to get back to them. And this person's comment is, I will, might as well just read it, because I think there's good context in what this person said here. I'm wondering why you didn't suggest that your listeners attempt to prepare their own taxes using low cost online tax software with the additional option of paying for enhanced tax preparation help through the software website if needed. I understand that some of your listeners may have complicated tax situations that require a professional preparer. Others may lack the skills or the interest to prepare their own returns. However, I would think that a decent portion of your listeners may have simple enough portfolios and may be savvy enough to prepare their own taxes. I wonder if all they need is a little encouragement. The only reason why I say this is that I never prepared a single tax return before joining your Facebook group. People in the group spoke about preparing their own returns and encouraged me to try it. I'm by no means a math whiz, but I'm decently organized and found it simple enough to do. I've prepared our tax returns for three years now, saving us hundreds of dollars in tax prep fees. Of course, I'm just guessing about your listener demographics, but thought I'd offer this suggestion. Yeah, this is a great point. I didn't even think to bring that up. I just want to say, my comment wasn't eluding or insinuating that people should or need to hire tax return preparers. I was just sort of speaking on this assumption and to say that when you make assumptions. Yes, there are people out there that do their own returns. Awesome. Great for them. But for those who choose or need to use tax return preparers, that was just sort of my comment about what it is, what it means to be a tax return preparer. But I fully agree. If you are willing and able and interested, I highly encourage all of you to take a crack at doing your own taxes, or at least if you do have them done by someone else, follow along. Try to start to learn the basics of taxes, especially if you have a simple situation. Like you just have a bank account, a brokerage account that doesn't invest in anything fancy, and an IRA and Social Security. That's almost as simple as it gets for an average sort of typical retiree. Try to do your return in your head or at least what you think your return is going to look like, and then after you have it done, compare it and can you understand and follow all the numbers in there, why they're there, and whatever. If you can, awesome, maybe give it a shot. Yeah, there are commercial tax prep, retail-focused tax prep software you can buy for cheap or if not even free, in some cases. So yeah, I think that that's a great idea for those who have the interest, willingness, and ability for those who don't. Yeah, obviously having them done by someone else is the main, if not the only option if you don't want to self-prepare. So yeah, great, great comment and thank you for bringing that up. I'd be curious to know how many people, I'm not actually asking you all listening, I'm just talking out loud. Nationally, of the however many, there's what, 400 million people in the country, those over 18 or at least those that have income and file a return is probably well over 200 million. I really don't know. I'm sure the stats are out there. But I'm curious how many of those are self-prepared versus done by someone else. My guess is it might, I'm just wild guess, but maybe roughly half of returns, if not even more, are self-prepared. It is my guess. I can be way off. That's just if you put a gun to my head and told me to pick a number. Anyway, so yeah, thank you for that comment, listener. Next, this is a correction. Someone brought some information, commented on something that I said a handful of episodes back that was actually wrong. So thank you for pointing this out. This is in reference to episode 193, that Q&A where I talked about if you get, if you delay Social Security beyond 70, let's say, and you turn 70 late in the calendar year, I'm sorry, you turn, what am I trying to say? Yeah, you turn 70 late in the calendar year. You can delay, you can retroactively file to start your benefits up to six months back. So you can wait till like 70 and a half technically to start your benefits. So let's assume you wait and you start a handful of payments after you turn 70, and that happens to be the next calendar year. So you're going to get a lump sum then for however many months it's been since you've been 70 of these retroactive payments. And I said, all that income is taxable to you when you get it in that second year, not in the year, not for the year in which the payments were for. And I was like, tough luck, the income is in that second year, you got to deal with it. Well, that's not actually right. So thank you for the person who pointed this out. If you look at IRS Publication 915, which is about Social Security and taxation of, there's something called the lump sum election, which addresses exactly this. In a super high level, that's the right word, whatever nutshell. Yeah, so let's assume you turn 70 at the end of 2025. Let's assume, let's say August, September 2025. But you waited till early 2026 to start your Social Security, and you retroactively backdated until September, you know, to September 2025. So you're going to get whatever it is, a handful of months of payments, paid as lump sum in 2026. Those payments were attributable to 2025, and I previously said, that's 2026 income, tough luck, deal with it. By default it is, but if you make this lump sum election, you can actually say, let me go back and see what these payments or how they would have been taxed had I received them in 2024, I'm sorry, 2025, and I can compare that versus what they're getting taxed at now in 2026. And if it's lower, you can in effect on your 2026 return, have these payments have this lump sum taxed at what the payments would have been taxed at in 2025. So you're not undoing, you're not amending your 2026 return, that's done and dusted at this point. But on your 2026 return, you can get the benefit of having those payments taxed as if they would have been taxed in 2025, if that makes sense. So yeah, it is possible you can actually get a little tax break if you would have been in a smaller tax situation in 2025 than you are now in 2026. So again, that's called the lump sum election. So thank you for, I won't name names here, but thank you for the person for pointing that out. Okay, let's now get into the questions. This, let me take a little drink first, hold on a second. Cool. All right, this first one goes a little something like this. AI is disrupting many industries. Please give me your take on how it may change the practice of financial planning. Yeah, that's a good one. I have no idea. It is so quickly emerging, and so quickly ingraining itself throughout all sorts of areas of life and software, and well, whatever. I don't know what else to say with that. I only have two things, I guess, life and software. But I've been reluctant to take on, to just start using or at least start knowingly using AI tools. There's plenty out there in the financial advisory world. The big one that's been around, the big use case of AI that's been around in financial planning for a couple of years, it's really gained traction last year or so, are note takers, where you can have an AI agent or a bot basically, like join Zooms as an attendee, for example, and it records the whole thing, transcribes the whole thing, takes notes. And I've seen some of these, that it's really good at structuring notes and summarizing who said what, what the takeaways are. You can sort of, program is not the right word, but you can train these things to produce notes in a style and like length and stuff that you want. And it could save a tremendous amount of time. I know lots of advisor friends who've used AI note takers and absolutely love them and say it is truly one of the game-changing technologies of efficiency improvements. Now, they're not perfect. You still have to review the notes. They're often small or even sometimes big inaccuracies and things like that, but, you know, AI apparently is getting better and it trains or teaches itself. And the more time and the more things it goes through and things it analyzes, it gets better and refines its stuff. So AI far from perfect, but definitely making tremendous leaps and bounds and improvements in accuracy. So outside of note takers, there's also things like tax analysis software. This is huge. This is note takers. I want to say that's disruptive. I think that's a huge efficiency and complement to what we do, but that's not disrupting or taking advisor jobs or anything like that. There's stuff now like tax analysis, tax planning, tax recommendation software where you can upload a tax return to it. It can, this AI bot, I don't even know what you call it, this AI thing scrapes it, analyzes it and can summarize really pretty reports about all sorts of things, income thresholds and planning opportunities. And hey, there's a little more room here. You can still do a Roth IRA contribution, stuff like that, all without any human interaction. It can produce this just within minutes of uploading a thing to it. Now, again, like all AI, it's not perfect. It's learning, there will be errors. So it still currently takes a living, breathing human being who actually knows what they're doing to review this stuff and ensure accuracy and tweak where necessary. But that, I'm not the most tech-forward person. I'm definitely far from staying on top of AI. But just seeing software like that is like, man, that's going to be a monster. It's already becoming a monster, I guess in a good way. But stuff like that and what it can do, I can't even begin to imagine how many other areas of financial planning. Does AI completely replace traditional financial planning software? The advisory injury, the three biggies are e-money, Money Guide Pro, and Right Capital, that virtually all financial planners use, unless you're in an in-house captive place, one of the big national brokerages who have their own software maybe. But at this pace, I can easily see AI in effect replacing those things, or having one AI tool that does everything. Currently, there's financial planning software, which is separate from tax prep software, which is separate from CRM, which is a client relationship management stuff. Easily, I can see within a couple of years how a single AI tool can replace all this stuff, and make it super fast to interact with, and coordinate, and make it all comprehensive. So I don't know. I still think, I'm sure I'm naive, but I think like many technologies, AI is ultimately going to be a big compliment to the industry. Yes, it'll change a lot of the way things are done. It'll definitely get rid of a lot of the manual work. We're already seeing that happen. So does that mean jobs are directly at risk? Maybe, I would assume so. But to what extent? I don't know. I still feel this is where my naivete could be coming in. There's not in our lifetimes at least, there's not going to be a software or a Borg or a bot that completely replaces a good human advisor and that personal, not just for relationship reasons, people want to, especially when it comes to money, millions of dollars you're overseeing for someone, they're going to want to know and talk to and see that there's a living breathing human behind the relationship. But even, like I said before, I don't think we can ever just blindly rely this analysis and recommendations that software is doing is all going to be accurate. So if nothing else, you need someone who knows what they're doing to review it, fact check it, make sure it passes a sniff test and what have you. But again, I can be wrong. I am really not that tech-forward and maybe AI does truly take over like Terminator, Terminator 2, and eventually these self-learning bots are taking over the world and we're all just nothing like just a bunch. I don't know if you ever saw The Matrix. We're just basically a bunch of living, breathing batteries that this machine is siphoning energy off of to feed itself. That was a really cool movie, by the way, The Matrix. So that's my thoughts on that. Again, I, in my business, I've chosen to not use any of these AI tools. I still have concerns about compliance and data security. For example, anything that takes transcriptions of conversations or Zooms or calls, all those transcriptions become formerly part of the advisory firm's books and records, meaning they're discoverable in court, they're searchable, they're archived, they need to be held for whatever seven years, I think it is. Now, that can come up all the ways, that can be good and that can be bad. For example, if a client and advisor agree to do XYZ and the advisor does it, and it ends up like just dumb luck, that security goes down a lot, and the client tries to sue the advisor and be like, you never got my permission to do that. They're like, yeah, we can, let's pull the tapes, here you go. Or vice versa, the advisor says something mistakenly, or they say something that's not completely, entirely clear, and the client misinterprets it. That's not the client's fault necessarily. That now is all record and discoverable in court, and maybe that ends up backfiring on the advisor. And so, I don't know, again, that could be good and bad. I'm not saying, I don't know what I'm saying. My outside compliance folks, for what it's worth, they're not on board with this yet. They have concerned about it. Again, I have nothing else to data in cybersecurity aspect of it, but even just like the fact that all these things that are recorded are now officially books and records of the firm and need to be kept and are discoverable and stuff like that. But they also concede that, yeah, this is a train that's gaining speed and you can't stop it. Eventually, the whole industry is going to have to cave to using AI in some form or fashion. I'm just definitely not there yet. Good question. Next, what do we got here? I just cleaned my nose. Sorry for doing that on a microphone. Okay. I have a question for your upcoming podcast. On your number 186 Hot Topics podcast with Cody Garrett on January 8th, you both discussed your preference to use withholdings for paying federal taxes. I recently came across an interesting technique for paying federal taxes by withholding federal taxes from a traditional IRA to Roth conversion, and then returning the withheld amount to the IRA using cash as a 60-day rollover contribution. After researching it, I found the same technique discussed on several sites as a legitimate way to replace estimated payments with withholdings for federal taxes in a traditional IRA to Roth IRA conversion. I included some additional information below. I'd like to hear your thoughts and discussion about using this technique for paying federal taxes throughout withholding. So, this is a multifaceted topic. Just to sum up at a super high level, there's in effect two ways to pay taxes. One is you manually make estimated payments every quarter, where by manually I mean like you log on to the IRS site and make a payment, or there's a site called EFTPS, electronic filing something something, where you can set up quarterly payments in advance. Or more recently, you can create, if you haven't already, an online taxpayer account with the IRS. It's a more user-friendly way. It does a lot of things, but amongst other things, you can pre-schedule future estimated payments that way. Or you can do withholdings, withholdings where, like if you have income from wages, your employer withholds some of your wages as tax, and they send that tax straight away to the IRS or Department of Treasury, technically. If you have Social Security, you have pension, you can have taxes with help from that. IRA distributions, annuities, I think gambling winnings maybe, and there's one or two other things you can have withholdings from. I prefer to do withholdings because it's easier for a few reasons. One is not to get too technical, but the IRS tax system is the pay as you go system. You're supposed to be paying tax relatively close to when you earn it or receive taxable income, and that's on a quarterly basis in the IRS eyes. That's why there's quarterly estimated payments. But that can be hard because what if your income for the year is uneven and you're supposed to pay the year's total tax obligation in four equal quarterly installments? Sounds great, but if you don't know what your income is going to be throughout the year, then it gets messy and now there's ways around it, but it's a little more work. But point is, if you don't make enough estimated payments throughout the year when you're supposed to, you can be charged with underpayment penalties and interest for having not paid enough tax during the year when you're supposed to. Conversely, when you pay taxes through withholdings, there is no timing element. If your total tax obligation for years is $100,000, let's say, and you just do a single $100,000 tax withholding at the end of December, you're good. It doesn't matter that you didn't pay or withhold anything throughout the whole year and you wait until December 20th to do it, that's fine. The IRS treats withholdings as if those taxes were in effect paid evenly throughout the year. So, for those reasons, withholdings are preferential. You don't have to worry about the timing thing. And as an advisor, it's easier for us. We can more directly control withholdings for clients. We can't make estimated payments for clients, but we can do with holdings because we can control when IRA distributions are made, how much is withheld, etc. So it just makes the process a lot more efficient, in my opinion. So for those reasons, whenever possible and feasible, pay taxes through withholdings as opposed to messing around with making estimated payments. However, there's this trick and there's different names. You may hear this referred to depending what places you follow and read and watch. But the gist is you can take advantage of the benefit of paying taxes via withholdings and get the benefit of that being treated as if it was paid throughout the year, yet still use like money from your bank account, for example. To actually ultimately pay the tax. And so here, I feel like I'm already stumbling through this. But let's assume, I mean, another thing I should say, that from an optimization perspective, if you're doing Roth conversions, it is mathematically such that the optimized way to pay taxes is ideally, if you're converting $100,000 from your IRA to your Roth, you would ideally want $100,000 to go from your IRA to your Roth, which means separately, you're going to have to kick in money out of your bank account or checking account or brokerage account to pay the taxes on that, let's assume it's 20 grand. So you're going to have to kick in 20 grand of cash out of your bank account to make estimated payments in this case, to do this full $100,000 conversion where all 100,000 leaves your IRA goes to your Roth. Versus, and the reason why it's more optimized is simply because the assumption, and there's assumptions in all this stuff we talk about like I mentioned last episode, is that the cash that you're using to pay estimated taxes is otherwise sitting there pretty idle. It's not earning a lot, it's getting 0.1 percent if it's in a checking account, it's getting maybe 3.5 percent if it's in a savings account, versus the money you're converting into your Roth. In theory, you're investing it more aggressively, it's going to grow at whatever you want to assume, 6, 7, 8 percent over time. Therefore, you're going to ultimately end up with more net of tax usable money years down the road by paying taxes out of your bank account as opposed to paying taxes from your IRA withholding and therefore having less going to your Roth. I'm throwing a lot at you here, just trying to share my thoughts as cleanly as possible here. Now, I always say whether or not you do conversions, it's an optimization technique. Like I mentioned last episode, it's not going to make or break your plan. A good plan is not going to break because you don't do conversions. A bad plan isn't going to become good because you do conversions. So whether or not you do conversions, don't sweat it too much, it's an optimization technique. Take it a step further, how you pay tax on the conversions, whether you do it from paying out of your bank account or you do it from just withholding money from your IRA as a distribution, that's a second order of optimization. So how you pay taxes on a conversion is an optimization technique of something that's already an optimization technique. So my view is don't sweat it. If you're the type of person who wants to optimize to the nth degree and you're not satisfied unless you do, then yeah, sweat it. But for the vast majority of people, don't overthink this. Do what seems easiest, the least amount of hassle, etc. You're ultimately going to be fine or at least whether you do this stuff or don't do this stuff, you're not going to notice it between now and wherever you pass. Okay, moving on. That's a not so quick background about estimated parents versus withholdings. This little trick here is, let's go back to the example of you're doing a $100,000 Roth conversion but oops, I forgot to pay estimated taxes throughout the year, darn. It's December, you do $100,000 conversion. Let's say you withhold 20 grand of that from your IRA as a tax withholding. What ultimately happens is you're technically only converting 80 in that case, the other 20, you're doing an outright IRA distribution and you're having 100% of that 20 withheld and paid to the Department of Treasury's taxes. So that's good, that pays your $20,000 tax bill for the year. Because of the holding, it doesn't matter that you did it late in the year. The downside is, oh man, only 80 grand of this $100,000 that left your IRA actually went into your Roth IRA. But now, let's say you have 20 grand of cash sitting around your bank account, you're like, I wish I could have used that 20 grand to pay taxes. Well, you can. You use what's called an indirect 60-day rollover, not to get too involved here, but if you take a distribution from your IRA, you have within 60 days to get that money back into the IRA, or another qualified retirement plan. That distribution would be like it didn't happen. Now, depending where you put it, if you put the money back into an IRA, the distribution would be like it never happened. But that's not what you want to do here. Your ultimate goal is to get all $100,000 into your Roth IRA. Again, 80 got converted to your Roth, 20 got peeled off and sent as taxes to the Department of Treasury. You have 20 grand of cash now in your bank account. You can put that into your Roth IRA within 60 days of when this $20,000 distribution slash withholding happened. You put this 20 grand cash back into your Roth IRA. Now, ultimately, all 100 that left your IRA got back into a qualified retirement plan, meaning Roth IRA, 80 that was originally converted, and this other 20 now that you've since converted after the fact. And so, what ultimately happened was, yes, the 20 grand that was sent to pay taxes through withholdings, that still went to pay taxes, so you're good there. The 20 grand cash you had in your bank account, you now put into your Roth IRA. So, the net result of all this is that you used to have 20 grand in your bank account, you no longer do. That's gone, right? But, you have $100,000 now that went into your Roth IRA ultimately via a conversion process. 80 of that went directly the first go-around and the other 20 that you just put in now. And so, you still got the benefit of the $20,000 tax withholding, and then you have to mess around with estimated payments. But you still had the $20,000 leave your bank account, and you still got $100,000 into your Roth IRA ultimately. So, I know I bungled and jumbled that. Sorry, but I probably should have made this its own topic, or at least do it in a newsletter where I can write this out and spell this out more. But that's the gist of it. Does it work? Yes, it can work. There are risks involved, there are things you got to watch out for, a few things. If you're not at least 59.5, doing the distribution from your IRA will count as the ordinary distribution and will be subject to 10% penalty, so not cool. So, if you're under 59.5, probably don't consider this. The 60-day rollover thing, you do have to get the money back within 60 days full stop. If you don't, like you can't, that $20,000 IRA distribution you did, I'm just trying to think about it. Yeah, the $20,000 IRA distribution will be on the books as a distribution and you can't go back and undo that. So, yeah, trying to think anything else come to mind here. You can only do a 60-day distribution, this indirect 60-day rollover thing, once every 365 days, not once per calendar year, once every 365 days. Now, I say that out loud, though. I don't think conversions apply. I think if you're indirectly converting the money, meaning it's leaving a traditional IRA, ultimately getting into a rough IRA, I believe that's not subject to the once per 365-day thing. I could be wrong, but I think that's one of the exceptions. So anyway, so yeah, this does work. It is legit. There's no like loophole, no focus, poke is black magic. This is a legit thing. It just takes some planning and processing. Little more steps to do this. Is it ultimately worth it? I don't know. Again, if you're one of the people that want to optimize the integrity, sure. If you're not, it just let the money be withheld. You know, if conversions make sense for you, they make sense for you. I think doing a conversion and having the money withheld from an IRA isn't going to all of a sudden make that conversion not make sense, right? So you got to weigh the pros and the cons and the hassle factor and the work involved. And then again, the risk of if you don't get it back in 60 days for whatever reason, like you can't, that ship of sale type thing. Okay, good question. Thank you for that. Next question. Subject line, inherited stock being sold at a loss. A person goes on to say, the deceased bought stocks on Impulse, so his account has several that have lost bigly, and he actually wrote bigly, I like that, and seem likely to go to zero. Wow. He also picked a trustee who has taken years to distribute anything, and never sold any of the losers because his dad picked them and they might rise from the dead and he is confused and lazy. Nice. If we could use dad's tax basis or even values of day to death, we'd have huge losses to harvest, enough to wipe out taxable gains on all the winners. So I have a couple of questions. Is there a way to do that? That is to realize the losses from either before death or at least before distribution. Next, do we adjust basis to day to death or distribution from the trust? Any better ideas? So, and I actually replied back through email to this person because I didn't want, I thought this is worth getting across sooner rather than later, but I'll address it here as well. So you all probably heard of step up in basis, which is for non-qualified assets, meaning not Roth assets, not IRA assets, not 401k assets, just like regular brokerage assets or real estate even that you own outright. Those are non-qualified assets. There's a step up in basis, meaning when someone dies, whoever inherits it receives it as if they bought it at the value that was on the day the person died. So for example, let's say your father, your mother owns the house that she's lived in her whole life, bought it for $50,000. Now it's worth $500,000. If your mother sells it, there's a $450,000 unrealized gain. Now there's an exclusion, but a bad example. Let's use stock instead. Your mother bought shares of Microsoft decades ago for $50,000. They're now worth half a million dollars. If your mother sells those stocks, she'd have a $450,000 gain that she'd realize she has to pay tax on. Let's assume your mother's single, she owns them in a brokerage account, and then your mother dies and you are the sole heir, the sole beneficiary to her stuff. So they're worth $500,000. She paid $50,000 for them. When she dies, you inherit them, and the basis, meaning the cost in your hands, gets stepped up and gets stepped up to what those shares are worth on the day your mother died. So in this case, it's $500,000. So you now inherit $500,000 worth of Microsoft shares, and this isn't a recommendation to buy or sell Microsoft, I'm just using that as an example. You inherit them as if you paid $500,000 for them. You turn around and sell them tomorrow for $501,000, let's say. You only have a $1,000 gain, just a gain from the date of the value on your mother's death to when you sell them, that's your gain. So all the $450,000 of unrealized gain in the hands of your mother magically goes away due to the step up in basis. Now, this is a double edged sword, cuts both ways. There's also step down in basis, which people don't use that term, but it works just the same. Let's assume your mother bought stock decades ago for $500,000, and they tanked, it was some high flying tech stocks or something that never came to fruition. Now, they're worth $50,000. If your mother were to sell them, she'd have $450,000 of loss that she would realize. Now, not to get too in the weeds here, but if she's not selling other things that gains in that same year, she's only able to realize three grand of that loss on her current year tax return, and then the rest will keep carrying over for future years. When your mom dies, that whatever unused loss that she had from prior years that she hasn't yet been able to deduct in her return, that just goes away, like that unused loss doesn't carry forward to heirs, unfortunately. But let's assume your mom didn't sell them before she died. So she bought them for $500,000, they're worth $50,000, she dies. You inherit them, that $50,000 worth of stock, you inherit it as if you paid $50,000 for it, okay? So you, unfortunately, don't get the benefit from any of that unrealized loss your mom had. Just like unrealized gain is wiped away due to step up in basis, unrealized loss is wiped away due to step down in basis. So that was one of your questions. Now, here's where it gets a little more involved. You said like they went to a trust after your mom died, or this person died. We'll stick with mom in our example. Depends what kind of trust it is and how it's structured and what have you. If the trust is there just to distribute the deceased assets, then the assets pass through and are taxed to you, the beneficiary, not taxed to the trust. So if the trust held on to them for a few months, so let's assume you got these stocks, let's run through our same example. Your mom bought them for 500 grand, they were 50 grand the day she died. They were dumped into a trust that was created, a testamentary trust that was created upon her passing. But the trust goal is just, the trust job is just there to pass stuff out to you there. And let's assume by the time the trustee gets her act together and whatever, administers all this stuff, it's a few months later, these stocks are now worth only $10,000. The question is now, hey, they're 50 when my mom died, they sat in the trust for a while, I finally get possession of them, they're only worth $10,000. What happens? Well, you still, your basis is still at $50,000. The fact that the trust held on to it, while they're waiting to give them out to you, doesn't change things. So if these shares are now worth $10,000 you sell, you do have a $40,000 realized loss, because then your basis in them would be the $50,000 data death valuation of your mom. And vice versa, if the shares went from 50 to 80, let's say, before the trust passed them through to you, then you'd have a $30,000 gain on this, right? Because they're 50 when you inherited them, they went up to 80, you sell them, that's a $30,000 gain you'd realize. Even though the trust held it, it doesn't matter, it's still your income. Where the analysis is different, depending on the trust. If it's a trust, I'm forgetting the technical name, I'm drawing a blank here, but the trust wasn't designed just to pass stuff through to you and it actually held on to these shares, and the trust was structured and worded such that any income within the trust is taxable to the trust type thing, then that could be a different story. If the trust held on to these for three years because the trust was set up to protect you from yourself and not just give you the money because your mom's concerned you're a spendthrift or you have addiction issues or something like that, and the trust sold these things in the few years it held on to it, then the gain or loss will be gain or loss of the trust in that case. So trust can be tricky with taxation and stuff like that, depending how the trust was structured, worded, what its purpose is. The trust in many cases is ultimately nothing more than just a quick pass-through to get stuff to you there. In other cases, the trust is its own taxable entity that is the recipient of the income on this stuff. Anything else I missed here? I guess not. I think that addresses that question. Now, one other potential wrinkle. I mentioned that the value that these basis gets stepped up or stepped down to is the date of death value, the date of the decedent's death. There's this alternative method where if the executor or executrix of the estate chooses, and if it's beneficial for the estate and the heirs, they can do the alternate valuation, which is the stuff will be valued at the date that's six months after the date of death. So why would you want to do this? Well, if it's an estate of someone with a lot of money, if it so happens that six months after they die, the value of all this stuff has gone down substantially, then they may want to use this alternate valuation date because it can result in the estate value being lower and therefore, no or less estate tax that may have otherwise been there had they used data death valuation. Now, you can't cherry pick stuff. You can't say like, let me alternate value just these shares at six months lower, six months later, and keep the rest of the estate at the date of death valuation. You can't do that. It's all or none. So rarely does this make sense for people, but in theory, it can for potentially different reasons. Okay, that's that one. Next question, well, there's a few more here. Okay, where are we at? Okay. Just looking at the time. Actually, I have to take my kid to dance soon. I didn't realize this episode was going to run that long. Okay, fine. Sorry, moving on. I am a state government employee with a non-covered pension. I married age 54, about six years from full pension eligibility, and expect I will retire at the same time. As some of my peers have retired recently, they have been encouraged to get underwritten for life insurance. Obtaining life insurance allows them to collect a single life payment option, which is hired monthly, with no remaining pension benefit to their spouse. The life insurance is intended to provide a replacement to their spouse for that stream of pension income. I believe this is called pension maximization. Are you familiar with this method? If so, what factors should be considered? What type of life insurance is used? If this is a smart course, would it be good to obtain the life insurance policy at a younger age to get lower premiums? Yeah, this is a big one. So as you probably know, for those of you who do have a pension available to you, there's going to be different options. One is called single life, which means it's the largest payment option and it lasts as long as you do. Once you die, the payment stops. There's nothing that lives on for your spouse. There's no residual cash value type thing, anything like that. For those who are married, you often have other options, a joint and survivor, meaning if you predecease your spouse, the payment will live on for your spouse's life until they die. Now, you can often select payments where 100 percent of the payment lives on, half the payment lives on, 75 percent of the payment lives on, 25 percent lives on, and there's a trade-off, right? The more payment that lives on for your spouse, the lower the payment is going to be when you start it logically, because there's more risk to the pension payer of having to pay out longer time. So an option, a thing some people do is instead of selecting a payment to live on for my spouse, if I predeceased them, what if I take the highest possible pension payment, which is a single life, again, once I die, it stops, but I don't want to put my spouse at risk. If I die early, that's not good for my spouse. So what I can do is, let's assume my single life payment is going to be, you know, making these numbers up, $1,000 a month, or if I take a full survivor payment from my spouse, it's only going to be $600 a month, right? So what I'm going to do is instead of taking the full spousal survivor payment of $600, I'm going to take the single life of $1,000 a month, and I'm going to take that $400 differential that I'm in effect saving, or more than I'm getting than I would if I took the spousal option, I'm going to take that $400 a month and put it towards buying a life insurance policy. And so I'm going to fund this life insurance policy so that if and when I do die, especially if it's early or premature, then this life insurance will pay out to my spouse because they're not going to be getting any pension payments when I die, remember, but they'll get this life insurance payment instead. That's the gist of it. Does that make sense? It could. This is one of those that you really got to analyze this, you know, six ways to Sunday or whatever that saying is. How much pension money you're giving up, how much is going to cost in life insurance, how much life insurance benefit you actually get for it, and do all sorts of like pros, cons, break even type stuff. What if I die in five years, 10 years, 30 years? When does this make it worth it? When does it not? That's it at a super high level. Now to your other question, could it work? Sure. But your other questions, and this is hard, you got to just shop around. What type of insurance is used? Term, whole, variable, universal? Depends. I mean, if you can get a term, it's probably only going to be 20 years, 30 years tops. Now depends on your plans. If you live at least 20, 30 years, you may be good. Your spouse may not need additional money if you die then. Or if you only get a 10-year term, what happens if you die on the 11th year? Your insurance is gone. What if you die then? Your spouse gets nothing. Now maybe you're not insurable in 11 years, so you can't get a new policy at the end of that thing. This ties into one of your other questions. Is it a smart course of action to get the policy earlier in life? It depends, right? If you do get insurance earlier rather than later, you can get policies that are guaranteed renewable. So even if you become sick later in life, it doesn't matter because you're already guaranteed to get this policy where you're able to renew it so long as you continue paying, obviously. Versus you go the term route, one term, you get a 10-year term or 20-year term before it expires, you say, okay, I'll just get a new policy. You'll have to go through underwriting at the time if that term isn't guaranteed renewable. You have to go through underwriting at the time. And what if some bad medical condition arises such that you're no longer insurable and you can't get a new policy anymore? So once this term is over, it's done. So this is much beyond the scope of this podcast. These are just my initial thoughts. Could it work? Yes. Is it guaranteed to be better? Maybe, maybe not. I think a lot of things are retirement planning. Tell me when exactly you're going to die, what your expenses are going to be, how the markets are going to return, whatever. And I can tell you, in hindsight, which option would have been the best for you. But I think you just got to do the homework, shop around, talk to a knowledgeable, trustworthy insurance agent who's able to sell these different policies. There's places out there, like I kind of have to name names here, like Primarica, they are fundamentally opposed to anything other than term. They flat out do not offer any sort of permanent life policy. It's term only. So I would not talk to someone at Primarica about this analysis because it very well might make sense to get a permanent life policy for this strategy, in which case you definitely want to talk to someone who's able to underwrite and analyze and sell you not just term but also one of the flavors of permanent, which could be whole life or it could be something universal. I'm not knocking Primarica, but they're the only firm that comes to mind where I know for certain they absolutely do not offer anything but term. There could be other agencies out there who are similar. I don't know all of them. Primarica is pretty big, so I thought that was worth mentioning at least. Okay, that's my thoughts on that. Okay, next question. Tips ladder. Love the show. Hope you never get tired of my questions. My husband and I, basic dignity floor, recovered by our Social Security of about $20,000. If we both wait till age 70 to collect. Of course, there are taxes, which I did not put into my musings. He is five years younger than I am. We met with the financial advisor. It was suggested he take his benefit early and meet at 70. My husband's benefit is basically 500 more than mine at his age 70. We will meet again before we retire to confirm and we are following what he suggested. However, what would be the downside to a tips ladder to cover until Social Security kicks in at 70 for both of us? I think this would cost about one third of our nest egg. It seems like less worry in management. Will the surviving spouse be screwed in the end? With our age differences, we are both healthy and active, but you never know. Thanks for all you do. Interesting. Whether it's tips or not, the idea of a ladder is that, and tips is Treasury inflation protects the securities. The idea of a ladder is simply that, let's say you're 65 now and your Social Security is not starting until 70, keeping the math easy, and you need income for the next five years, where is it going to come from? And you're risk averse and you want your income to be known. You don't want there to be any market variability or volatility that can impact where you get your money from or where your money is coming from. So let's assume you need $50,000 a year for each of the next five years. Well, you can ladder something. It could be CDs, for example. You can buy one CD where you're going to get $50,000 maturing in one year. You can buy another CD where you're going to get $50,000 maturing in two years. You can buy a third CD where you get $50,000 maturing the next year, etc. You can do it with MAGAs, multi-year guaranteed annuities. You buy one that matures in two years, three years, four years, five years. You can do that with just regular treasury bonds. You can buy $50,000 worth of treasury bonds that mature in one year, $50,000 that mature in two years, etc. You can do that with TIPS, Treasury Inflation Protective Securities. Now, the difference there is the notional, the face amount of the bonds increase over time with inflation. So, you'd buy, I don't know, let's $49,000 today that you expect is going to mature at $50,000 in a year because of inflation. Then you put in, let's say, $47,000 today into a two-year TIPS that's going to mature at hopefully roughly 50 grand in two years time. So, you have these known amounts of money maturing at these certain times. So, you have to put in a lot of money along the way, depending what you're using, whether it's CDs or myGas or Treasuries or whatever. There may or may not be interest thrown off along the way, but that interest presumably isn't going to be enough to float your full income needs every year because if it was, you'd have to put a lot of money into these things, a lot of notional value. So, what I'm interested is you say you think this would cost about one-third of your nest egg to do this TIPS ladder thing. When you say cost with TIPS or any bond, like you put 100 in, you get 100 back. Well, in TIPS, you get a little more back because of inflation. But you put something in, you basically get that back at the end of one year, two year, three year, four year, five year, whatever it is, and potentially interest along the way. So it's not really costing your nest egg. It's tying up your nest egg along the way. But if it's meeting a purpose, if it's solving some future cash flow need you have, then I wouldn't call it cost. So I don't want to get hung up on semantics. We just want to make sure when you buy TIPS, you're not actually like irrevocably giving away a third of your portfolio. You're just in effect kind of tying it up temporarily until the bond that you're buying matures. Could it work? Sure. Like anything with laddering, it's good because you know exactly where you're going to get and when. I guess TIPS actually you don't know. With non-inflation adjusted stuff, you know what you're going to get, right? If you buy $50,000 of bonds that mature in a year, like you know you're getting exactly $50,000 in a year, barring default of the issuer. With TIPS, I guess you don't know exactly where you're going to get because it depends where inflation is going to be. You know it's not going to be less than some certain amount, like you know that now, but the ultimate amount you get, you're not entirely sure what it's going to be. So my comment is less about TIPS and more about laddering in general. Yeah, it's good. If you're conservative, if you want zero or minimal volatility to where your money is coming from, how much you're going to get and when, laddering stuff can make sense. The downside is opportunity cost. In theory, you could do better if your money was in not specific maturity things. That can cut both ways though. You can end up worse obviously, and that's why you would do a ladder because you want to avoid the ending up worse stuff. You rather take a known amount of interest or return you can get as opposed to an unknown and hope it's a little better. So I don't know. I'm not really sure how to address that. Laddering could work. It's not something that I firmly believe in. I mean, for folks who are very conservative and have really low risk tolerance, like, yeah, it makes sense. Otherwise, I still think just like a well-invested, obviously have some cash for emergencies. And some people want multiple years of cash just because they help them sleep well. But I think a well-invested portfolio that's not necessarily laddered and precisely bucketed to certain years is going to wash out the same over time. So I don't know. That's my view. Okay, next. Looks like we have one, maybe two more here. Not looking for nor asking for per... Okay, so this was a question. I thought he was asking for specific advice. I wrote back like, sorry, I can't give specific advice. He's like, no, this is more of a general question. So I felt like an idiot. I'm 55 doing maximum 401k contribution of 1.4 million in the 401k. Should I take the $8,000 catch up that has to be after tax into Roth or buy long-term care insurance instead? My plan is to retire at 65 when I qualify for Medicare. So new rule for 2026, maybe even last year, if you are a high earner, I think that's defined as $150,000 inflation adjusted, maybe of earnings or wage income. And you do a catch up contribution, that catch up has to go into Roth and Roth only. You can't put the catch up into your pre-tax side of your employer retirement account. So the question here is like, if I'm doing a catch up contribution of currently $8,000, should I go ahead and put that into the Roth 401k? Or should I skip doing the catch up and use some or all that $8,000 by long-term care policy? This is a much bigger question. It's not specific. My view is it's not specific to catch up or not. The question is, I have X amount of dollars I could invest. Should I invest it or should I use it to buy some sort of insurance protection, in this case, specifically long-term care? That's a hard one. Whether or not to buy long-term care insurance, there's a lot that goes into that. Are you in a position where you think you'll be able to self-fund if and when the time comes? Do you have a significant other who can be a long-term caregiver at least to some extent? Do you have really strong legacy desires to ensure you leave behind at least X million dollars to someone as opposed to your money getting burnt up having to spend it on long-term care expenses? Are you willing and able to buy a traditional long-term care policy? Do you have health issues that will prevent you from getting approved? In which case, that's off the table. Well, let's assume not. Let's assume you can get a regular traditional long-term care policy. Those are used or lose it. If you don't end up having a long-term care event and you die, it's like homeowners' autos insurance. You keep paying every year, but if you never use it, it's just gone. Now, that's not a bad thing. No one buys homeowners' insurance hoping their home blows up. With long-term care, people feel like that's the case. It's like, I want to get something out of this, otherwise I got skunked. I don't know if that's the right way to view it. But are you okay with the concept of you could be paying thousands of dollars a year for this premium if you never use it. There's nothing for it. Now, there's hybrid life insurance policies that are permanent life insurance at their core with a long-term care rider tacked onto it, so that if you do need long-term care, you can tap the death benefit early to pay for long-term care, or if you don't have long-term care and you end up dying, then you get paid out the death benefit. But those are substantially more expensive and premium than long-term care because they're going to pay out regardless, whereas long-term care only pays out if you have a long-term care event. I don't know whether or not you or anyone in general should consider long-term care insurance as a much bigger analysis than just, hey, I have $8,000, I could potentially catch up, contribute to a Roth, should I do that or put it in a long-term care policy? It doesn't matter. It doesn't matter in that, whether it's a 401k catch up or just $8,000, you got in free money that you can put in a brokerage account. The bigger question is, do I invest or do I buy long-term care insurance? That I can't answer. Again, it comes down to those things I mentioned. Willingness and ability to sell fund, willingness and ability for a significant other to step in and do a lot of the duties, desire for legacy goals, risk tolerance, comfort with the idea of paying for insurance you might never use, and potentially spend tens of thousands of dollars and a hundred plus thousand dollars over your lifetime in premiums, depending how long you live type thing. That's my thoughts on that. And finally, what do we got here? I'll paraphrase here, but the question is, at some point, at a certain level of wealth, does the basic, bobblehead, simple sort of ETF portfolio not work and need to evolve and get more complex? I don't know. I think about this a lot. I mean, if you have hundreds of millions of dollars, a large part of me feels like, yeah, I mean, you probably should be doing something different than just investing in index funds and cash accounts like that. But then, I think from an investment perspective, not necessarily, I think from a tax planning and a state planning, a state size perspective, 100 percent. You got $200 million, you are very, very different financial planning profile and someone with $5 million. Not because of what you are invested in, but just because of the tax implications of you are looking at tens of thousands of dollars of, no, hundreds of thousands of dollars, no, millions of dollars actually. If you got 200 million of estate size, you are looking at millions of dollars of estate tax when you die. You can make some really meaningful impacts in reducing that through creative uses of insurance and other sort of some trust structures, some charitable structured things. But those aren't investment specific. I don't know. Let's keep it more simple. Let's assume you got $5 million versus $20 million. Do your investment profile need to change from just a handful of ETFs or whatever and some bonds? I don't think it does. At some level, if you're talking truly generational wealth and you have a really long horizon to it, meaning you can deal with the potentially significant illiquidity of some private investments, and you have a 40-year horizon on this, if not multiple decades beyond that, then maybe alternative investments, private equity, hedge funds, direct investments in these things might matter. But the good ones have really large buy-ins generally. You got a million dollars to put into private equity, like you're not getting the good stuff. You're getting the leftover scraps that are meant for retail people. If you're a pension fund, if you're an endowment fund, if you have hundreds of millions of dollars to put in, you'll get access to the good stuff. So my answer is sort of yes and no. I think for most people, even up to 20 million, I'm just picking a number, but 20, maybe 30 million of net worth, I don't think investing needs to be more complicated than the typical sort of vanguardian stuff that most of us talk about and read about and whatever. At some level, though, yeah, sure. That's called hundreds of millions of dollars and beyond. It makes sense to diversify for tax reasons, for maybe it's more real estate, maybe it's commercial stuff, maybe it's partnerships, maybe it's hedge funds, private equity funds. Then there's more of a case to be made. Five million dollars, 10 million dollars, I don't see in good faith a case for someone to need to consider alternatives and other funky stuff beyond just the basic simple things. So that's my thoughts there. All right. That's all I got. I am all caught up on questions. Again, thank you for everyone who sent them to me. If you have ones you'd like me to address or try to address, send them to andy at andypanko.com and I will do my darndest. If you haven't already, I would really love if you'd leave a review or click some five stars on Apple Podcast for this show, and check out the retirementplanningeducation.com website. Lots of good stuff there. That is it. Thank you as always for listening and I'll see you next time.

Speaker 2:
[57:50] The information discussed in this podcast is only general explanations and education. It is not specific tax, legal or investment advice. Before considering acting on anything you heard here, first consult with your tax, legal or investment advisor. Thank you.