Wealth For Generations

Tax Time Bombs in Your IRA: We Have a Tool to Defuse Them Before They Explode on Your Heirs

• Todd Whatley

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We introduce our new tax calculator tool that reveals how much of your retirement accounts will go to taxes over your lifetime, helping you understand the true impact of tax obligations on your 401(k), IRA, and other qualified accounts.

• Our simple tax calculator at generationswealthtax.com shows your potential lifetime tax liability in just minutes
• Most clients are shocked to learn how much of their retirement savings will be lost to taxes
• Everyone should pay their "fair share" of taxes, but strategic planning can significantly reduce what's "fair"
• The national debt ($36 trillion and climbing) suggests tax rates are more likely to increase than decrease
• The three possible scenarios for future tax rates: they go up, stay the same, or go down
• Paying some taxes now through Roth conversions or other strategies gives you control rather than leaving it to chance
• Traditional IRAs are among the worst assets to leave to non-spouse heirs due to accelerated taxation
• Heirs often see a million-dollar IRA but only receive $600,000 after taxes
• Life insurance can provide tax-free liquidity to help offset tax burdens for heirs
• Pre-planning always provides more options than reacting to tax situations later

Visit generationswealthtax.com to calculate your potential lifetime tax liability, or call our office to schedule a consultation about your specific situation.


Speaker 1:

Welcome to Wealth for Generations, the podcast where you learn to grow, protect and preserve your wealth for generations. Our hosts on today's show are Todd Whatley, a certified elder law attorney, and Ian Weiner, a certified financial planner. Join us and our expert guests as we uncover the mindsets, tools and strategies to help you maximize your wealth and impact. Let's embark on this journey to secure your legacy. Please note this podcast is for informational purposes only and is not intended as financial or legal advice. Always consult with a professional regarding your specific situation.

Speaker 2:

That's right. This is the Wealth for Generations podcast, and my name is Todd Whatley, and I am here with my co-host, Ian Weiner. Hey man, how are you?

Speaker 3:

Todd doing well.

Speaker 2:

Today we're going to talk about one of your favorite topics, because you're a nerd and you love taxes. You love talking about taxes.

Speaker 3:

Don't turn your dial. Hang on, we've got something really cool for you. We do I think you're going to like we're going to make it practical.

Speaker 2:

Yeah, I mean, taxes are one of those things that everybody knows about, is concerned about, and you're like do I owe it, do I not owe it? How much am I going to pay? We have the perfect solution for that. We have come up with a very quick, easy way to see how much in taxes, theoretically, you're going to pay, particularly on your qualified accounts, right?

Speaker 3:

Yeah, this is think lifetime tax on 401ks, iras, 403bs. This is going to give you an idea of how big of a partner your uncle Sam is in these accounts, and this is something that we've talked about quite a bit on other shows and in other formats. But it's so important that we discuss this because every single week we visit with people and they're like no one's ever talked to us about taxes. We have no idea how this really works or how much we're going to owe, and so we wanted to create a tool that that helped folks go from. You know there's there's kind of stages in your educational or planning sort of journey. You know there's oh yeah, I know taxes are a problem to okay, how much tax do I owe to, are we going to address this and have we solved it? And you know a lot of folks they get stuck at the first part of that because they really don't want to know what they're going to have to owe, because that's like that's like future Ian's problem, that's head in the sand mentality.

Speaker 3:

You know. And so there's like there was a great old Seinfeld bit years ago where Jerry talks about morning Jerry and night Jerry, always, as he says, you know, always screws. Morning Jerry Stays up too late, has an espresso too late, gets in trouble, and then morning Jerry always has to pay for it. To me this is kind of like that Isn't that weird.

Speaker 2:

It's like I hate getting out of bed in the morning, but at night I'm like, hey, let's do this and this and you don't go to bed, but I love. Yeah, that's true, that's very weird. But yes, we don't want to think about taxes, but they're there.

Speaker 3:

It's not fun.

Speaker 2:

Yeah, it's definitely not fun.

Speaker 3:

Especially when we put a six or seven-figure number in front of you. You know, this is something where and you're right, todd we talk about this a lot and this is a topic that I'm passionate about because it's something that we really have a lot of control over. You know, when we're visiting with folks, when we're doing planning with folks we want to focus on, we have limited time to engage with them. You know, let's say, you know we visit with a client four hours a year. You know, a couple of times we visit with them for a couple hours a couple times a year. That's more than traditionally most advisors visit with their clients First of all. Second of all, you know, we we have a limited and we love our clients. We don't work with anyone that we don't really enjoy. However, you know, we have to be very strategic in the way that we spend that time together, and so we need to select the highest leverage, the most valuable things to focus on, and there's really nothing that gets much above this tax planning stuff.

Speaker 2:

Yeah, so what is this tool? Well, wait first something you said we fully agree that everybody should pay their fair share, but your fair share is variable.

Speaker 3:

And I say this and I love that you chuckle about this and sometimes people chuckle, but it's really true and I've probably said this before on this podcast, so if you've heard this, forgive me, but I think it's important. In my house, there's a four-letter F word that my kids are not allowed to say and it might be a different one than you're thinking. They're not supposed to say that either, but fair. Fair is a word that is not allowed in our house. That's no fair. This is not fair. They've done studies on this. Actually, neuroscientists and behavioral psychologists do studies.

Speaker 3:

Fair is one of the most um, I think this is a reasonable word to say, manipulative words to use. Yeah, and I'll you know, there's times that I use it very thoughtfully in language patterns when I'm talking to people. Um, because everyone wants you know, 99 of people want to be fair. They want to be seen as fair, they want to act. They've been conditioned to be and do things that are fair their entire life, sure, and so when our friends in Washington say, hey, everyone needs to pay their fair share, you're like, oh, that seems reasonable, Like that seems like the right thing to do, that seems honorable. Well, is it fair?

Speaker 2:

Yeah, Well, depending on your mindset on that, we can make it as fair as you want to. If you want to pay all the taxes in the world that you can absolutely yeah, that's fair. The taxpayers appreciate that. If you would like to pay less in taxes and still follow the rules and follow the law, we can help you do that, and this tax calculator will let you know what that number is if we don't do something to adjust that right.

Speaker 3:

Yeah, and what's great about this calculator, Todd? So I'll tell you where you find it. You can go to generationswealthtaxcom generationswealthtaxcom, and we'll figure out how to put the link in the show notes here. But what this does? You fill out two or three questions it's very simple and it'll spit out a report for you. You put in your name, your email, because we have to send the report to you, and if you want us to communicate with you about it, we can. You'll put in your age and then the value of all of your qualified accounts, your IRAs, your 401ks. Then you get to pick an assumed growth rate up to 10%, and then you get to pick what you think your tax liability is going to be. So what's great about this is you can run a couple different scenarios and see, based on where things are, what that's going to look like over your lifetime.

Speaker 2:

So before people sit down with this, they need to go get their 401k, 403b, ira statements, add all those up together and then plug that number into the calculator.

Speaker 3:

I think that would be a great thing for folks to do, because people have a ballpark number. But one of the big first steps that we do when we work with people is we put together a balance sheet. First steps that we do when we work with people is we put together a balance sheet, and you would be shocked at the number of multimillionaires that we work with that don't have or maintain a balance sheet, and so this is a good exercise is to figure out what you have and where it is.

Speaker 2:

Do you have some suggestions for those variable numbers they can put in Tax bracket, I think, and growth rate?

Speaker 3:

Yes. So what's interesting about this is and it's kind of fun that we can do this and show how these things work those variables have. They do different things to the number right. So if we're assuming that the tax rates are going to go down over your lifetime, well, we would. I'm sure they will, because definitely we don't have any tax or spending problems.

Speaker 2:

Yeah, congress is flush with money, so I'm sure taxes will go down Everything's been.

Speaker 3:

It's totally solved, right. We're only at let me look it up right now, at the time of this recording. What is that website? National Debt Clock. What is that website, national Debt Clock? You can go to nationaldebtclockcom and see how much it. Well, okay, the number might be lower, right, but if you also assume a higher rate of return, what's happening? Well, not only is the account growing, but so is the tax liability. Now, let's say you don't want to make very much money. There's different ways to view that, right, you can assume a lower rate of return. There are different ways to view that, right, you can assume a lower rate of return. A lot of the folks that we see before they become clients, for whatever reason, it seems like they didn't want to make very much money. But then if we increase the amount of money you make, so does the tax bill. Now, it would always be better to make more money, pretty much. So I just want to say that.

Speaker 2:

Right now, it's $36 trillion. $36.6 trillion. As of right now this is St Patrick's Day of 2025, march 17th it is $36 trillion.

Speaker 3:

It's only $107,000 per person, per citizen, per taxpayers $323,448.

Speaker 2:

So I mean Pretty soon that's going to be some real money there.

Speaker 3:

What's a couple hundred thousand between friends? Right, and so I like the way that you phrase that, though, Todd is what are the variables? What are the variables Now? If you're like most folks, you assume that the tax rates are going to go up and we're talking about the national debt clock, because you know Congress can really do one of two things. You know, when you have a budget deficit, like we do, you can either reduce your spending or increase your revenue. The way that the federal government increases their revenue is by increasing taxes, and so these are the options. You decide whether you think that cutting spending is realistic in the long run.

Speaker 2:

I could see people probably need to do a best-case scenario and a worst-case scenario. So is that part of the report? Once you get the report, will you respond back to them and say, hey, you ran it at this number, but it could be this or this or yeah?

Speaker 3:

Let's see what's realistic. Okay, and we can absolutely do that.

Speaker 2:

So basically, just put in whatever number that you want to put in, and that will give you a general idea, and then we'll kind of help you refine that once we send you the report, right?

Speaker 3:

Yes, okay, and you know we have. This is just a starting point. You know we talked earlier about kind of the progression, right Is? You know we want to get folks thinking about this and taking a look at the situation. You know it's like putting off going to the doctor for a long time. You got to. You got to, you got sore or something you know. Or your arm hurts and you're like, well, okay, I finally get around to it. The thing's grown, I can't move anymore. You know you got to. That's me. I got to be bleeding out before I go Sure.

Speaker 2:

But we tell people all the time, pre-planning always gives us more options. The earlier you jump on this, the better that it's going to turn out.

Speaker 3:

There's really no downside to being informed. Sure, and I think that's really the point is, we want, we want you to be informed about a. What is this? What's the situation that you're in? And a lot of folks find that it's actually not as bad as they thought. Or, if we make a couple of simple moves, we can, we can get through it and they can retire on their terms faster than they thought they could. That's been a pretty consistent theme in the last few months, and so you know, just get clarity about it. There really is no downside to having clarity, and if it's not what you wanted to see, okay, let's make a plan to address it.

Speaker 2:

Yeah, that's what I was about to say. What if people run these numbers and they're like dang? This is terrible. There is something we can do.

Speaker 3:

There is something we can do, and every situation is different, and so I don't want to give specific advice here. But generally, what we look at is can we pay some of this tax now, even if you're retired, even if you're drawing down some of these dollars? There are some strategies that we can use to either offset this tax, depending on your other goals, or to make a plan to pay it over a few years so that it's done at a manageable rate. You know, there's really we talk about this in meetings, and there's really three things that can happen the taxes, your effective tax rate can go up, it can go down or it can stay the same. And so what the combination there is? What is the marginal bracket? What are the tax rules at the time? Now, at the time of this recording, at the end of this year, we're going to sunset back to what the tax rules were in 2017, unless Congress acts, which we expect they probably will.

Speaker 2:

Yeah, they should, they should. They should, since Trump did this back in 17? 17,. Yeah, since he did it back in 17,. I'm pretty sure he's going to put some pressure on and since both houses are controlled by Republicans, it should go through.

Speaker 3:

This is a big expectation and a big thing that the administration wants to get done, and so I expect that it will. Now, exactly what that looks like, we don't know. So, unless they get it done, tax rates will go up. The effective rate will go up for most people. But we have to look at this not just this year, but over the long run. The other thing they could do is they could stay the same. That's probably for a lot of folks. If they get this legislation passed, what will happen? They'll stay the same or they could go down.

Speaker 3:

I would imagine most folks believe that in the long run, them going down is fairly unlikely and if you're betting, that's not really what you want to bet on, in my opinion, because realistically this is, we're making assumptions based on all of the available data.

Speaker 3:

But let's say we decide to pay the taxes today some of those taxes, not all of them, but some of them. Well, in two of those scenarios we win because we're doing it on our terms and we have control over that. If taxes go up or if they stay the same, we pay those taxes, convert to Roth or use some kind of Roth alternative, and we pay the taxes, and then that money can grow tax-free. Well, even if the tax rates go down, at least we did it on our terms, yeah, and I think that's a huge thing that people miss. They're like, okay, great, now what do we do? Well, we pay the tax and then we let it grow in the Roth account tax-free, and as long as we play by the rules, we can access it tax-free, no matter what they change the rates to.

Speaker 2:

Well, here's the thing that I think people don't realize If you do nothing and let's say that you have a million dollar IRA, you pass away, the kids are going through stuff and they pull this bank account and they see a million dollars. Dad had a million dollars. Your kids aren't getting a million dollars.

Speaker 1:

They're only going to get about 600,000 of that.

Speaker 2:

That's going to be so depressing, because I'm sure they're like ching ching, we've hit the honeypot here a million bucks, we're going to get a million bucks. And once they start doing it, they're like nope, your partner gets some of this, uncle Sam. And so by converting this to a Roth or paying the tax, now what your kids see on that statement is what they're going to get.

Speaker 3:

I mean, and they can even keep it in that account for 10 years and let it grow without paying tax on it. That's huge.

Speaker 2:

That's huge, but they don't get that surprise that wait, where did that million dollars go? Someone stole $400,000 of my money. Yeah, they did.

Speaker 3:

You know, what's interesting is I was thinking about this the other day. Maybe we'll do an episode on this you know there's a. You can think through the different things to inherit and you know this is this is, I guess, a champagne problem right, and some folks are listening to this going you know, I don't care if my kids get a nickel, that's hang with me, that's fine. You know, that's great. But if it is important to you that what you pass on is done in as tax efficient a way as possible, the worst. I can't think of something worse Maybe you can Todd.

Speaker 3:

The worst thing to inherit is an IRA, an inherited IRA from a non-spouse, because you have no options really with that, unless your parents came to us and did planning and put it into a charitable remainder trust. You really have no options. That is the least tax efficient, the least flexible account there is and they're really like, yeah, better than nothing. But in that account they have 10 years to take the money out period and that means that every single year essentially one-tenth of that plus growth is added on to the kids or whoever your heirs' taxable income for that year and now they're not taking that out. Maybe you weren't needing all of that income. They're not taking it out in a lower tax bracket, they're taking it out at their highest marginal bracket. It's a very clever system. So the thing that you do not want your heirs to inherit if you care that they inherit anything at all is an inherited IRA. That's the last thing you want to send to them, which is really interesting and yet that's what we see all the time is because people don't want to pay the tax.

Speaker 3:

And so what can we do about it? Well, we can create a way to pay the tax. Some people this is a use for life insurance, if you have life insurance and maintain it through your latter years. We do more life insurance for older retired people than we do for younger people, which is kind of interesting, and the purpose of life insurance in that situation is to bring liquidity into the estate to be able to pay that tax. Sure, and that even works for a surviving spouse too. That can be a good strategy. Or we can pay the tax now, convert it to a Roth and leave it to them tax-free. In either one of those situations, you're going to be better off by being proactive. Sure, it's pretty rare that you wouldn't be better off by being proactive.

Speaker 2:

Absolutely so. This tool will help you see what the current number is based on some you know assumptions and we can help you put in very real numbers. If you're not sure of that, but yeah, just go in, fill it out. We'll get that information. We'll send you a report and if you want us to talk about it with you, we would love to. And if your financial person has not talked to you about this, that's a big red flag. It's a big opportunity. Let us help you through that. Okay, let us help you.

Speaker 3:

Again. These are high leverage maneuvers and opportunities. If we can spend two hours a year and save a million dollars. This is just an estimate, I'm just I'm making numbers up that happen to coincide with what we consistently see projections. That's a pretty good use of your time.

Speaker 3:

It is, we can save a million dollars over your lifetime. Based on reasonable assumptions, we can increase your let's say, your effective rate of return goes up by 2%. Okay, it's going to take quite a while for that to have the same impact, and so that's why we focus on solving these tax issues. So the report is at generationswealthtaxcom. It's very simple. It takes two minutes to fill out. You'll get the report right there. But from there what we can look at is are there areas of opportunity? Figure out how much you would owe under those assumptions, and we'll help you to figure out how much you could save. If we do just a little bit of planning proactively, I think you'll be shocked at the results.

Speaker 2:

Yeah, so do that. And if you just want to schedule an appointment with us, please call the office. We would love to meet with you, sit down and just discuss things that maybe your financial person has not talked about Long-term care have they talked about long-term care lately? Oh, another show. But yes, we bring up all the things that you should talk about and make sure that you can leave our office knowing things are much better taken care of. We do estate planning, we do financial planning and we can help you pay as low of a fair share as you want to pay. All right, yes, all right. Thank you very much and we will see you all next time. See you next time.

Speaker 1:

Thank you for joining us on Wealth for Generations. We hope today's insights inspire and guide you in your financial journey. Remember, the path to wealth and legacy is unique for each of us and we're here to help illuminate your way. Before we part, a quick reminder this podcast does not provide financial or legal advice. The content discussed is for informational purposes only. Please consult a financial planner or legal advisor for advice specific to your situation to financial planner or legal advisor for advice specific to your situation. Visit us at wwwwealth4generationscom for more resources and don't forget to subscribe to Wealth for Generations. Until next time, keep building your legacy, one decision at a time.