Wealth from Wisdom

The Dark Side of Your IRA and 401(K) That You Deserve to Know

June 28, 2019
Wealth from Wisdom
The Dark Side of Your IRA and 401(K) That You Deserve to Know
Chapters
Wealth from Wisdom
The Dark Side of Your IRA and 401(K) That You Deserve to Know
Jun 28, 2019
Carson Wealth
Your IRA or 401(K) is one of your biggest retirement assets, but there’s a dark side to these accounts that nobody wants to talk about.
Show Notes Transcript

Your IRA or 401(K) is one of your biggest retirement assets, but there’s a dark side to these accounts that nobody wants to talk about. Don’t miss this episode of Wealth From Wisdom.



Speaker 1:
0:00
Okay, and here's the legal Mumbo jumbo. The opinions voiced in wealth from wisdom with Ron Carson or for general information only and are not intended to provide specific advice or recommendations for any individual to determine what is appropriate for you. Consulted, qualified professional. All indices are unmanaged. I may not be invested into directly. Investing involves risk including possible loss of principal. No strategy assures success or protects from loss. Past performance is no guarantee of future results. Advisory Services offered through Cwm, LLC and SEC registered investment advisor.
Speaker 2:
0:30
The stock market hit another all time. Records as much as $10 billion in social security benefits go unclaimed every single year. Federal Reserve announced that they will raise interest rates by 250 skyrocketing cost of healthcare in retirement could now run 350,000 you've worked hard and save for retirement. That's great, but it's what you do with that money that really matters. Welcome to wealth from wisdom with Carson wealth. Carson wealth is a Barron's hall of fame adviser at recognized by Forbes magazine as one of America's top wealth advisors and they're right here in Omaha. This is where you can count on straightforward and objective advice that could help you make the most out of every dollar you've saved for retirement. Welcome to wealth from wisdom with Carson wealth. Hey, if you asked your seat CPA,
Speaker 3:
1:14
if you should contribute to an IRA or a 401k, they're going to tell you what, it's an absolute no brainer, right? And we're going to show you maybe hundreds of articles that are going to tell you the same thing, but there's another side to this story. You're gonna have to turn the next page that nobody wants to talk about. And that is your IRA and four. Okay? 401K if I could say that word today, uh, are often riddled with trap doors. And what I mean by that is these accounts can be some of your most risky investments and you don't even realize it. Hey, I'm Paul West. Welcome back to wealth from wisdom. I'm very fortunate today. It's been a little while, but my call was today is the one and only Jamie Hopkins. Jamie, welcome back. Thanks for having me on again, Paul. Yeah. Um, our show is only so long.
Speaker 3:
1:58
Otherwise, I would read off all of your credentials here today. Uh, but he is the director of retirement research here at the Carson Group. He is also a professor at Creighton University. Um, and also I just saw a, he's a professor for Heinz, so congratulations to you there. Um, you know, Jamie, we're gonna spend some time talking about IRAs and you're certainly is this word right? A Guru of how these things work and what happens. But also I would say helping people avoid mistakes that go along with it. Cause this is one of the most underestimated things people do. They often do a set it and forget it mentality, is they're putting money into their 401k or contributing their IRAs. And then they don't think about what happens later in life. And so the, there's this avalanche of taxes that can happen. There's these dreaded things called the RMDs that you have to be prepared for, but there's also hidden fees and other expenses.
Speaker 3:
2:52
So coming up on today's show, Jamie and I are gonna share some ideas, some techniques, some strategies, and some stories, uh, that are going to help you and your family understand it better. Because what happens when you read those articles? What do you remember the headlines, the pictures or the article? What do you remember, Jamie? Everything. I mostly remember headlines to be honest. You know, most people do, or a picture if there was a good visual image. A lot of those, a lot of those have pictures of the word, uh, over like an Arrow with a dollar sign or an Arrow pointing up. Yeah. But they don't point down or they don't, you know why I'm surprised they don't put age 70 across there cause it's such a monumental age for your Ira, but they just show all those other things. So today we're gonna talk about some of the most important things you can do.
Speaker 3:
3:41
Number one is not actually just even having a strategy to withdraw your money from Your Ira. Most people I'm going to call it, are blind investors. And that is they set it and forget it and they don't worry about it. And really I'm going to call it the contribution phase to your 401k is easy. It really is. It's, but what you, when you withdraw this money, that's when things get complicated. That's when you have to worry about taxes. That's when you have to worry about fees as when you have to worry about penalties. And the key is you actually have to plan well in advance to actually do this correctly. So if you hate paying taxes now Jamie, do you hate paying taxes? I will. I'm a bad example. And this week, one time you did this in a room I think, and I was the only one that raised their hand and said, I'm okay with paying taxes today.
Speaker 3:
4:25
Well, you're not the only one. There's many people that are okay with paying taxes because if you're paying taxes, it means you're making money. Yeah, you're getting money. So I don't look at it as a bad way, but it's also people want to pay the least amount as possible there. I call them, they're maximizers of the minimization of the tax they pay. Yeah. So we have to help them. And I think as you talk about this, you see us all over the place. People just don't understand all the complications that come with it. Yeah. And you know, when you look at, as you mentioned, the savings, what we want to do is put money aside for the future. And first you got to make money. That's the step one, right? So we're making money, then we start putting money aside and we're deciding whether it's a 401k or an IRA or both.
Speaker 3:
5:07
Um, you know, the leading question you go ask somebody, what should I do? Well, for a lot of people, both as the answer, um, and then realizing as you said, what happens when we pulled the money out, which is much more complex than putting the money in. It impacts a lot of different areas when we take money out of this to spend it, when we want to, you know, move into retirement and finally use our 401k and IRA. Generally speaking, general rules, we're going to be subject to ordinary income tax on what we call the taxable distribution, right? Whatever the tax pieces that's taxable is coming out, we're going to pay ordinary income taxes on it. Now, why? Why are we paying taxes on it? Because we got a deduction typically when we put the money in. So the government gave us a tax benefit upfront to let us safe to let us grow our money hopefully.
Speaker 3:
5:52
And then eventually you've got to pay some taxes. I mean, that's a general rule. Most people are aware of. The government likes its money. It wants to tax you at some point. Yeah. And it's not going to go on forever. I mean, and uh, the big point and we're going to get into this later in the show is RMDs is the way to ensure the government gets their money at some point during your lifetime. Again, assuming you live to age 70, but those are the things that happen. And you know, one of the things we're going to talk about is if you don't plan well for it, you could be making a major mistake. So, so what's the highest tax bracket right now you can be paying as an individual JB? Ah, so, well it actually depends a little bit, but where I think we're at 35 right now, is that right?
Speaker 3:
6:33
35 but we also then investment income tax. We have a higher medicare tax you could tack on, you could tack on your social security taxes. So if you actually add all of that together, you can actually see people where they're paying over 50% in taxes at the federal level. Tack on states, you could get pretty close to probably 60 ish percent today. All in on taxes. So everybody who's listening right now, I shouldn't say everybody, most people think you're wrong. Yeah, right? But you're right. Yep. So there are scenarios where this can happen between just regular ordinary income, like you said, social security benefits. What if you're doing an RMD, you have net investment. I mean, there's all of these complications, but what if you just tweak that slightly and you are able to make that way better. But the problem is you can't do it when it happens because it's already too late and you have to figure those things out.
Speaker 3:
7:24
And maybe this is, you know, it drives me crazy. So I'm going to give you an example. I know you have a recent newborn at home, right? So you're probably not planning a big summer vacation now. We're two months after ours has been for us. So the, the, the big vacation with the two month old isn't as exciting as otherwise. But uh, yeah, it's been pretty fantastic. I mean, I, you know, as a parent, I love that. And it also, it does change the way I think it, you know, not every day about taxes, but about saving, about investing for the future, about taking care of yourself, all of that. So powerful. So anyways, right. Yet you're asking me about a vacation. No big vacation plans. So we'll continue down this path, right? Yeah. But so think about your last vacation you took. All right. You got it in your brain.
Speaker 3:
8:08
Yes it did. Right? Where'd you go? We actually went to Napa and San Francisco. Okay, excellent. And who play on the trip. Um, say my spouse and I split the planning on it, 50 50, then probably not say that it could be a 90 10 also, somebody says it's a set, let's say, you know, assuming she's watching, we'll go closer to 50. Okay. All right. Well she could be watching or listening. And so as we're 50, 50, then you think about like how much time did you actually spend planning your trip between buying the airfare and thinking about where you're gonna stay. So due to nap, I'm gonna assume you went to some wineries. Yeah. That on that side though, I outsourced that page. Right. So sourced it. Yeah. Right. What I did is I outsourced that. I don't, I don't know Napa wineries well, and it's, it would take me a tremendous amount of time actually to figure that out, which to should I go to?
Speaker 3:
8:56
So what did I do? I hired a service out there that would drive your round. They scheduled the winery tours and it was an excellent use of money. I actually just talked to somebody yesterday at the college world series. Uh, one of the games or you know, nearby there about this. And I said it was great. It was worth every penny, uh, that we spent to outsource that because I have no background in that. Yeah. And I think so you're a delegator, so you've made it as a, you're a vacation delegator there. Um, and for a lot of people, you need to become a financial delegator. So when you're a financial delegator, you let other people help figure these things out for you. And then the way I bring this up is most people are not vacation delegators jail. They're not. So they're going to go to Napa, they're going to spend two hours trying to find the best flight possible.
Speaker 3:
9:43
They're gonna spend another two hours trying to pick their hotel, and then probably another four hours trying to determine their itinerary for the day. All right. All the ghosts, spend money and have a good time. You said, hey, I'm going to go spend 14 minutes and find someone to do all of that for me. So you, you bought back some time, you paid more money, but you just saved yourself. Let's call it seven hours of your time. That sounds like a good plan. All right, so it sounds uproar, but I'm thinking about this. Most people, no matter what age, if they loved to plan for their vacation, but they're going to expend on average eight hours planning, then go ask them how long they spent spend actually planning for their taxes. What do you think the answer is? It's pretty low number, right? Maybe close to zero, you know?
Speaker 3:
10:26
Yeah, maybe eight minutes. When you get towards tax prep season, it changes a little bit. Yeah. Not really planning. Yeah. Well here's what happens is, so for those of you listening, and especially for those of you do it, your software, so you go get on your TurboTax or other self preparation software, you start putting things in. You're like, you know what I need to do? Adjust that for next year. [inaudible] and then what happens? Yep. Life Life. You know my least favorite be word of busy. So you let life happen and they don't happen. But yet when you want to plan a life experience or life moment, you will spend eight hours of your time. You want to save a lot of money in taxes, you spend eight minutes of your time and it seems a little bit backwards to me because what if I spent that eight hours or I was a financial delegator and I outsource this to someone?
Speaker 3:
11:18
I'd be pretty confident, I can't use the word guarantee. I'd be pretty confident though that by spending that eight hours you'd be able to take multiple trips because of the tax savings you find and actually doing the planning. Yeah, I mean, and that's what we just talked about. Rate tax rates can be tremendously high and there's a lot of avenues to, you know, as you said before, it's not avoid taxes. It's pay the least amount of taxes that you're legally required to pay and that often means like you can actually give yourself money, right? Essentially put money aside for your future and that can help reduce your burden this year. And if you're doing planning ahead of time, there's a lot of great strategies, even new ones under the tax cutting job act that actually kind of opened up new ways to reduce your tax liability.
Speaker 3:
12:03
Yeah, well people read the headlines, but like we said earlier, they don't actually dive in to figure out how they happen and worse yet actually make them happen. Jamie, we were talking about this the other day that you know how often when people set a goal, do they actually attempt it? How many times do they actually attempt it when they set a goal? Did you hear this stat? No. So you would think most people try it two or three times. Okay. You know what the average is 0.8 0.8 so even though they say they're going to do it, don't even try at one time as normal. So one of the things I want you to know is when you're thinking about your taxes, it's personalized. People need help. Hey, if you want help from us, here's our number. (888) 419-8513 it's (888) 419-8513 hey, you're listening to wealth from wisdom and we'll be back in a moment.
Speaker 2:
12:48
Do you own an annuity? Inflated fees and commissions could be costing you an arm and a leg. Get straightforward and objective advice from Carson wealth by calling. (888) 419-8513 are you caring for an aging parent? Are you concerned about the skyrocketed cost of health care and longterm care? Or do you have questions about how to best manage an inheritance? We can help call Carson wealth today at (888) 419-8513 and now back to wealth from wisdom with Carson wealth. Okay.
Speaker 3:
13:21
According to Forbes magazine, over a lifetime, these can consume nearly one third of your investment returns. Can you believe that? Wow. Hey, welcome back to wealth of wisdom. I'm Paul West and today we're revealing the dark side of your Ira's and your 401k accounts that you really need and deserve to know. My goal is today is our director of retirement research, Jamie Hopkins. Welcome back. Yeah, thanks for having me. Glad to have you. Dark side. You know, that makes me think of two things. Music and to our side of the moon for sure. And movies. Uh, well I guess we go star wars. There's, we gotta go star wars, the dark side and for a lot of people. And when we think about what's going on in the world, you know, I like to use the term dark side and I often talk about this and so I'm gonna move into a topic, uh, that I would say is a little bit controversial in our profession.
Speaker 3:
14:10
And that is this usage of the word fiduciary. And if people are fiduciaries or not, and again, reminding you for the public what a fiduciary is. If somebody who's got a legal, legal, and I would say also ethical is what I put in here. Yes. Interest to always give you advice that's best for you, not for them to be said simply somebody that cannot tell you something to stir you, to make a buying decision that positively impacts them. So I say, you know what then comes your brain salesperson. A salesperson wants to sell you something because why? They get paid, they get paid, they then get to put food on their table, they get to take their family on vacation, they get to do all of those things. We're a fiduciary. If they're going to you advice that also gives them compensation. If it's not 100% in your best interest, then they can't give you that advice or they'll lose that designation and get in trouble.
Speaker 3:
15:04
So for those of us that have that title are able to say we're a fiduciary. Jamie, there's been some, uh, legislation recently. I want to be careful how I go down this pathway here with you cause I feel the, uh, you can just unleash me or hardens might come out. But walk us through a moment just in a way that everybody can understand. Cause not everybody understands this here, but when there's very few of us that are firms like Carson that can behave that way versus many Wall Street firms cannot behave that way. Uh, what's going on in the marketplace today? Cause I think our investors deserve to know. That's why we have this wealth from wisdom show. You may have saw the news line or the article on what the sec just did, but you read the news line and you, you didn't really understand what has transpired over the last month.
Speaker 3:
15:51
Absolutely. And you know, as you said, try to make it simple here and it's a nuanced area of the world, right? And it's, it's one of those areas that the headline doesn't make. You might not even remember that one in this world. And the SCC finally passed with say, new regulations, right? June 5th, 2019, brand new, um, this was actually part of Dodd-Frank going back almost a decade now. We'll go where it's crazy. A decade ago. Financial crisis. Right? And you know, the government at that time said, look, we need to have a higher standard of care for investors than we have because of some of the things that occurred during the financial crisis. Um, now these aren't all the same things that you know, led to the financial crisis, but it was a part of the conversation protecting consumers and protecting consumers in the sense of, right. Having disclosures that consumers are making informed decisions.
Speaker 3:
16:44
And so what the SEC finally did here is say the broker world and that's the non fiduciary. What you mostly described as sales role has to essentially increase their standard of care. They've got to move up a little bit, enter in the future. Um, if the role stays in effect, um, it'll kick in next summer, June 30th, 2020 after that, brokers will then say we're best interest when we give you a recommendation. Now here's where it gets very nuanced, right? That's their land. In other words, for nuance, confusing, confusing, but they'll act in best interest when they make a recommendation. However, the sec was very clear that the broker has no ongoing responsibility to look at your situation, to look at your investments. If they do those things and they manage your ongoing situation, then they actually move over to the fiduciary role and they have to become registered with the sec as a fiduciary.
Speaker 3:
17:40
And we typically call those Ria firms registered investment advisory firms like Carson is one of them, right? Um, and there's a lot of them out there and firms can be in both too. You can have what we call dually registered now. They still need to act as fiduciaries, right? If you're an Ria, you are a fiduciary by federal law period, right? And stop, whatever that means. Um, if anthropods about it, um, when you're acting as a registered investment or you're a fiduciary. Now the other area there that I want to expand on, so that's what happened, right? Um, it's going to be harder to differentiate in the future between a broker who is not a fiduciary and a fiduciary because the language that the sec wants to require everyone to use his best interest on your form. The reason why it's gonna make it harder is because you're going to walk into two people that do not have the same standard of care and all you're going to hear is headline best interest.
Speaker 3:
18:35
It's going to be very, very difficult. And that burdens really being shifted onto the consumer, which I find unfortunate. You know, it didn't lower the fiduciary standard of care. It's there. So the quality firms that are following that will still be following it, but it's really going to be up to the consumer to ask the right questions. Are you a fiduciary? And here are the answer back. Yes, we're a fiduciary, not the sidestep answer that says, oh yeah, best interest. And so Jamie, I mean here, I've talked about this a little on the show. Obviously this is recent information that's just come out. Um, and I know we're certainly disappointed in it on behalf of the Carson Group and I know you personally are very disappointed in it. Uh, as I've seen a lot of your media stories, I know, I know you've written articles and been very well publicized talking about this because help our listeners today, Jamie, I mean, because what you described as is here's what's going to happen if they go to a non fiduciary.
Speaker 3:
19:26
So, whether it's Merrill Lynch, Wells Fargo, Edward Jones, whoever else, whoever their the specific person they're working with and they say, Oh, I'm going to do what's in your best interest if I'm sitting on the other side of the table from them, okay, that sounds darn good, but they're going to have no clue that the difference between them and them sitting across the table from someone like me, Carson, who has a fiduciary responsibility. Absolutely. And what I'm, you know, what I've been telling people, and I will continue to tell people here is that you want to ask for that, right? You want to see somewhere in writing, in writing, for sure. It says fiduciary. I don't want them to dance around. You want to see it in writing. If it's not in writing, it's not there. Um, and then the second piece of it is, you know, something that, you know, from transparency purposes, both you and I are CFPs, right?
Speaker 3:
20:12
Certified Financial Planning Professionals and uh, you know, that has an education requirement, ongoing ethics CE requirement and CFPs are required by our kind of charter that we hold. And you know, the rules governing it, um, to be fiduciaries. And so that's a nother thing to look for. Right? I often say, I wouldn't hire an attorney that didn't go to law school to represent me in court. I wouldn't hire a doctor perform surgery on me that didn't go to medical school. I wouldn't hire a financial advisor that doesn't have education either. Yeah. Well, and there's a lot of them will tell you it will, hey, I've lived through the school of hard knocks. I've, I've been on the street, I've been doing this for over 25 years. Why would I need to go get the CFP? I've learned enough. I'm not disagreeing that they may not be a good advisor, but what does it tell me that they haven't invested back what I would call to be a great advisor?
Speaker 3:
21:05
What they may have on the school of hard knocks is a set amount of specific instances or situation, but they may not know about a modern technique. They may be missing out on something. And by the way, I love the accountability as a certified financial planner, as do you, that we're held to this standard of care that not everyone is held to. And if I'm sitting across as the consumer public and, and, and I, and I joke and I please don't take this the wrong way if you're a listener, but, but if, but if you go to an urgent care facility versus a hospital, you have a mental block that you think if somebody is working in urgent care facility, are they as good as somebody working in a hospital? Let's just be realistic. You're all of our listeners. I don't, I'm not saying that's good or bad, it's just the reality and I don't, I don't look at this as any different here is at the end of the day, if you see somebody who's going to CFP and somebody who doesn't and they're both fiduciaries, you probably don't look at the other.
Speaker 3:
21:59
But if they're not both fiduciaries, then there's a huge difference to me. Yeah. And I actually think that what you just described with kind of urgent care, um, or you know, the, some of the 24 hour places you can run in and you know, if you're getting strep throat or something, you might go there as opposed to the hospital. And I think that's important because that's illustrative of the financial service profession is that you don't, we're not here saying that the brokerage world is bad and not needed no. Right. Like it absolutely is just like all the other healthcare providers that are different than er, right now when I have something serious, I go a different route than when I have a cough and go to cvs or a local pharmacy and that kind of relationship and cake taking care of your whole being is a different relationship and you really want the top level care as it is when I just need to buy something.
Speaker 3:
22:56
Yeah. Right. I use a broker, right. In the sense of a life insurance agent myself. Right. That's an example. That's how I buy my life. Insurance is a great relationship. I believe I have good, we have great insurance. I'm very happy with it and you know, I've went that route because I need that now when I need planning and when I need that comprehensive. Right? And as the SEC said, right, that ongoing monitoring and relationship, that's the difference, right? That you are hiring a relationship that watches out comprehensively, not transactionally. Yeah. I give an example of, and I love the insurance one is that's just purely transactional. It's a one and done. It is truly and you keep explaining this way. Um, but I give an example for those of you that are business owners, you know there's a very common phrase you use called an RFP.
Speaker 3:
23:46
So our request for proposal. So here's what happens with the request for proposal. If you are receiving it from someone, all the value you provide in your services doesn't matter. Whenever you get a request from proposal from someone, it's only about one thing and one thing only cost. So I share that with, so when it's good to go to a broker, if it's purely about cost and not about value in your examples, perfect. Jamie, you need life insurance. You need because pay, you've got another newborn at home, you have risk for your family that if you're not here, they need money for your family's life and goals, then you need insurance. So for you, is it for you? If you need $1 million worth of life insurance or for you maybe 20 million, whatever the number is you need, but it doesn't, it just does that matter to you, broker versus fiduciary because they ended day.
Speaker 3:
24:36
You're picking costs at that moment versus comprehensive value and tax and IRAs and RMDs and all of those things that go with it. So here's what I want our listeners to do, and it's one of our most downloaded pieces is we call it 10 questions to ask your adviser and get it back in writing. If you'd like a copy two ways, you can email us info. I nfo@carsonwealth.com or if you want, give us a call, we'll email it to you. (888) 419-8513 that's (888) 419-8513 10 questions you can ask your advisor like get them in writing. Hey, you're listening to [inaudible]
Speaker 2:
25:15
from wisdom. Any major decision in life is worth getting a second opinion and financial planning is no exception. Let's talk about how you could make your money go further and retirement than you ever thought possible. Call Carson wealth. Just schedule your free initial analysis now at (888) 419-8513 do you have a lot of assets but are short on cash? Learn how you could leverage your assets to free up cash with Carson wealth by calling (888) 419-8513 and now back to wealth from wisdom with Carson wealth. Hey, welcome back. Well, first of all, Paul West,
Speaker 3:
25:52
it was today's Jamie Hopkins. Jamie's our director of retirement research. Welcome back. Hey, we keep talking about the dark side of things that we see out there in the environment. We spent a little bit of time talking about not thinking through the second half of your IRA contributions or your four one k contributions that ultimately become distributions. We spend a little bit of time talking about the sec and the fiduciary rule, but also what I want to talk about here on wealth and wisdom is topics that maybe the consumer public doesn't fully understand or they make rapid judgements without knowing all the details. And Jimmy, I'd love to talk with you for a moment. It really is hitting home for me right now. I got two kids in high school and got one to be in high school and another year. Uh, so we've been saving in five 29 plans.
Speaker 3:
26:39
I mean, essentially since they've been born, uh, helping gear up pay for, and now there's a lot of noise going on in the marketplace about potential student loan forgiveness. I'd love to hear just what your thoughts are currently on that. Yeah. So the very first thing to lay out there is that this is, I guess a passionate topic like Americans, right? We have people. Is that what you're taking off your jacket right now? You're getting ready, you're getting ready to rumble. Right. Uh, and you know, we have people that really love it and we have people that are really, really opposed to it. I don't think we have a lot of middle, I think people actually fundamentally have a position on this. And so we'll try to be this, uh, you know, non as possible here. But you know, passion comes through. Uh, you know, so the purpose, you know, there's proposals out there for gifts, certain types of student loan debt and the argument behind it is essentially that people have been straddled with debt.
Speaker 3:
27:31
They can't move forward with their lives. They're not being as entrepreneurial as they could. You know, it's limiting their growth and it's slowing down the economy so that they're, there's a strong argument saying, Hey, you get rid of that. It spurs on the economy. People can be entrepreneurial, they can go do things they otherwise wouldn't have been able to do. There is the pro argument con arguing very expensive. And it also, you know, one of the things I worry about is I always think about behavioral things. Like what does this create? Now you can, you could talk about entitlement. I think that's thrown out a lot that, you know, people just want it then and we feel entitled to free stuff and nothing's free. We know that love free stuff. Yeah. Just go to any fair festival who's got a vendor handing out free pens or Sunscreen, what happens?
Speaker 3:
28:12
Right. And remember somebody paid for that. Yes. There's no free things now, uh, you know, waving debts and things like that. We have, we do have models of that. I mean, we have bankruptcy proceedings. In fact, we do that in the u s um, you know, we understand that there's some benefits at some point. People get so far behind. So maybe revamping, um, some of those procedures could be good. But the part that I really worry about from just a behavioral thing is, let's say that, you know, we somehow do move forward with some type of student loan forgiveness. Well do you, what do you do for all those people that paid it off? What do you do for those people who sign up to the military, OCC, et Cetera, to pay it off? What do you do for those people who come in the future who are still taking out loans?
Speaker 3:
28:55
That's a big thing. We're going to forgive those again too. Um, that's a big challenge and it starts to get in your mind and then you start thinking, Hey, well, student loans were forgiven. I don't need to repay mine. Well, why would I repay it and then why would I save for College? Why am I going to save for my kid's college, take out loans and somebody will forgive it? And we could create here with this a very bad behavioral and mindset issue outside of the entitlement. Right? Outside of all those other issues, but an expectation and any lack of planning. Yeah. I'm greatly worried about this because if we're providing advice that is really solid advice. Now are you just, are you gambling at the moment on whether or not you decide to say, you know what, I'm going to stop investing in a five 29 plan.
Speaker 3:
29:40
I'm not going to start it because I think down the road, this thing a will actually happen in student loan, you know, interest on debt will be forgiven. Uh, I think you're making a mistake. You have no idea what's going to happen. It's certainly, I mean, what's your thing on duration here? I mean, is it a one year thing, a two year thing or no clue. I mean, I, I'm not trying to figure out where any of this is going to end up. I mean, uh, you know, the, the whole government and congress nowadays is anyone's guess on what's going to happen next and you know, but the one thing I would say is, you know, first even though there's a lot of resentment towards this, um, kind of student loan forgiveness and there's a lot of good arguments not for it, there is some momentum behind it, right?
Speaker 3:
30:23
It's not in the, like no chance at all bucket of occurring. Um, maybe it's in the not likely bucket, but it's not in the no chance at all. Like there are proposals that squarely fall into the no chance at all bucket. This isn't on a cocktail napkin right now. Yeah. I mean you have multiple politicians supporting this, right? Like you, it's not one. And often we see when one person gets out there and they talk about something, you get that there's no support through forward. There are soapboxing you could argue some of this is soapboxing, but there's some support for it. Then there's a lot of young constituents in certain states that have a lot of student debt and would like nothing more than to be given a, you know, some relief for that. So, you know, as I said, there's some appetite for it, but what's the downside?
Speaker 3:
31:08
What's the harm that we create by it? Yeah. And I would say this is definitely charged. No Man, no on your side here. And I think again that there's, there's most people are either a republican or Democrat, but there's some independence. There's, there's very few in the middle on this. Most are on one side of this or the other? Yeah. I think why, I think even in the, in Congress rate now in a, we don't have a, I mean I think Bernie Sanders is seat only is a truly listed as independent and then he caucuses with the Democrats for the most part and ran as a Democratic candidates. So as you said, most people right now, there was actually an article that said in the most, uh, if it, maybe it was New York Times or something that said in the most diverse, um, you know, uh, House and Senate ever, um, it's the least diverse from independence.
Speaker 3:
31:56
Yeah. I, speaking of all this, I mean, talk about noise. How about earlier this week when you have the democratic debates and you have that many people up on stage? It's a little bit, uh, I call it like coaching a soccer team. You know, for youth soccer, it's whoever's loudest wins often, or it's the, I call it, or you're in a board room. Sometimes the loudest voice wins. And sometimes that's what happens. And now you know, the interesting part about today's world is what happened in the past, everything was about, hey, what you saw and what you watched on TV and what you heard there was actually, there's a lot of power. I'm going to go back and talk about Tom Brokaw. He's a very legendary bro. Think of the power he had, what he said in the presidential world and debates and elections really influenced a ton of people.
Speaker 3:
32:44
If you really go back and look at the power the media had, but that power is shifting right now. So here we are in 2019 the power shifting. What was the debates about earlier this week? It was more about what they said, but then got promoted socially because so few people actually watched it live. What they do, they watched video clips, they saw the individual speaking Spanish, they saw all of those things that were little pockets of information. We're in the past, people would have sat down and said, you know, I'll consume this information for an hour now. Basically they consumed whatever popped up on their media feeds. So it's become a completely different, I'm gonna call it game. I mean, I don't know the better way to say it, Jamie. Then a game of how you consume information about the election. Yeah. I mean that's not something that everyone knows. I did work in political consulting, that's feels like a lifetime ago now. Um, and worked on what, 26 so yeah, it hasn't, it's on 26 now.
Speaker 3:
33:42
26 plus and uh, yeah, you just keep saying plus and it's always accurate. It just keeps running and stuck. The keyboard stuck right now like you had in pluses and uh, you know, even the temperature then when I worked in DC is much different than it is today. And uh, you know, we don't really need to go into, I think people are just aware of that too. And as you said, like we didn't have to deal with Twitter then. Right? Like we didn't deal with Facebook then that, that, you know, we dealt with mass media. You only had a handful of people he had to deal with. And you know, now the voices, the ways to send messages to ways to interact have changed tremendously. I mean, it changes for our profession to, for advisors, for companies and anyone running their own business knows that.
Speaker 3:
34:27
Right? The way to get out your message has changed. Some businesses still do things the traditional way and you know, knock on doors and word of mouth and referrals and you know, just running a solid business. But it, it, the, the landscape is shifting. Yeah. Well I think about how many people just consume it in the, in an article called the winners and losers of last night's debate. Right? And then they'd go make a decision. And as we continue to go on the next segment, because I believe you're a big believer in the behavioral element of the world. And so I know behavioral finance and you know, especially as we think about our world, but I mean the behavioral element of politics has changed immensely in terms of how people will make those decisions. And I give the example, you know, I was at home the other night and what happens once it was over, my phone started getting messages about stories.
Speaker 3:
35:16
And so I think about if somebody didn't see it, that's how they consumed it. And no differently than investing. What do they see? Quick article market crash today. Well down 1.2% is in a crash. That's not. So what we want to teach people is how to ignore the noise, how to be a good financial delegator. And I'm gonna share with you if you want to talk to us about how to be a better delegator and figuring out the right noise to listen to what's important rather than interesting. We're at (888) 419-8513 that's (888) 419-8513 we'll be back in a moment on wealth
Speaker 2:
35:52
from wisdom. Have you ever wondered how do other people get away with paying fewer taxes than everyone else? Learn how you could save thousands of dollars in taxes by calling Carson wealth at (888) 419-8513 social security risk, taxes. And healthcare. This is where you can count on straight forward and objective advice on the biggest challenges with investing for retirement. And now back to wealth from wisdom with Carson wealth.
Speaker 3:
36:26
Welcome back to wealth wisdom on Paul West Coast. Today's Jamie Hopkins. Hey, we've been sharing our insights earlier today about IRAs and 401k's. We spent some time talking about the fiduciary rule. We're also dived into a, let's just call it the controversial opinions related to uh, forgiveness of student loan debt. Uh, but Jamie, one of the things I like to spend some time on in our last segment today is probably one of the most important financial elements of your entire life. I know you're not going to believe me, but it is, and it's called the RMD required minimum distribution. And I want to tell you is one of those items that when I work with families and Jamie, you do, and you speak across the country, it's one of those things that once people get it, it, they've heard it their whole life, but they're like, oh yeah, I know what an RMD is.
Speaker 3:
37:17
But then if you ask them to the next layer of detail, they don't know what an RMD is and they're afraid to admit it. It's kind of like when you're in a big room of people and somebody asks us a question and they're afraid to because they think they're not smart. I was gonna use the word dump, but we can use lots of words there. And all of a sudden they look around the room and the majority of people were thinking the same question and didn't ask it. That's how I feel about continuously trying to explain RMDs to people cause they hear it but they don't digest it. So let's dive into that for a moment. So what are some of the simple facts? When do RMD start? What age? Yeah, so RMDs are essentially when the government says you need to spend all this tax deferred retirement savings, right?
Speaker 3:
37:56
And pull it out of these accounts starting in the year in which you hit age 70 and a half. So they made it nice and simples, you know, 70 and six months. Now that first year, you know, little bit of a wrinkle, you might be able to push it to April 1st of the next year, but the number we want stuck in our head is 70 and a half. That year is important. Yeah. So every year for the rest of your life, you're going to have to take out a certain percentage. So I like to just use examples here to illustrate. So let's just say I've got $1 million in an IRA. How much approximately am I going to have to take out and an RMD that first year? Yeah, so you're looking, I think that first year is about three to 4% in there. Um, 4%, um, was at 3.9 is 0.9.
Speaker 3:
38:40
Yeah, 3.9 something trailing off there that first year. And so essentially it's doing it by your projected life remaining life expectancy. It's actually a very smart way to do this. So it's gonna say, we'll spend down this account based on how long we expect you to live. So it's a very good thing. And you know, actually as you move, right, that it, the percent gets a little bit higher every year, the dollar amount might stay close to the same, but the percent that you're spending down will increase. Yeah. And so here's something I want to caution all of you about because this happens all the time. We see it. So you're getting that 40,000 so I'm reaching across the table and I'm giving you the 40,000 Jamie. But guess what? I'm going to take 10,000 of it back. Why taxes if you're in the 25 you know, approximate range.
Speaker 3:
39:27
So a lot of people think, oh, I'm getting it. No, no, no, no. You're, that's the total. So think of it. That's like getting, that's a $40,000 salary. Yep. You're getting, you still have to pay taxes on it. And by the way, since many people retire in their mid sixties they don't have a lot of income coming in anymore, maybe except for social security. So they're trying to keep social security at a low level to maybe not pay as much taxes to now what happens if you get your RMD? Andrew ever social security. Now potentially both are taxable and very few people really. So I call it, ah, the brilliance here of the government is they're going to force you to take some because they want to start earning their money off of what you've deferred your whole life, but then it often creates a taxable income from your social security.
Speaker 3:
40:13
Yup. Yeah. Sometimes we even call that the social security tax torpedo and it's a, you know, it's just forced RMD can actually raise up your, essentially your income base. So social security is both subject to more taxes and more of yourself. Social Security is subject to taxes, so it kind of actually has a double impact on social security potentially for your RMDs. Yeah. So I'm going to give you a technique here. Uh, and I've talked about on the show before, but I want to share it because I still feel like very few people take advantage of it. Um, and I would say most people are charitably inclined, Jamie, you know, they may not be able to obviously give major gifts some days more than others. Yeah. Depends how they're feeling. But most people contribute to their church. They do some form of tithing. Uh, they may give money to where their kids went to school.
Speaker 3:
41:02
Uh, they may give money to where their alma mater was. They may give money to a charity where they have a friend on a board or an interest, or maybe they have a family member who is affected by heart disease, your leukemia or whatever the thing is. But when you're 70 and a half and you have to take this RMD, very few people realize that you can actually take the money out, give it directly to charity. And guess what? Ding, Ding, Ding. You don't have to pay taxes on that. Yep. And how many people would love that? Your charity benefits? You're gonna make the contribution anyways, so why don't people take advantage of it? Is it they don't know about it? Are they lazy? What's the reason? The lazy ones, not the one here for finally, that's finally a good answer, but maybe not all the time.
Speaker 3:
41:46
But, so this was actually, it's a, you know, a QC, D's are qualified. Charitable distribution is the technical term for it. And you're listening to things you don't want to hear technical evidence, but that's what it's called and want to hear. I can make more money and pay lots of taxes. And so the reason why you didn't hear about this a lot for many years, it's what I would call as a temporary law and it kept getting renewed in December. Well the problem with something that gets renewed in December is for that year is you already took your RMDs for that year. Most likely. Now some people push it to December, but a lot of people need the money throughout the course of the year. They've already taken it. Therefore they can't use this strategy. Well about three years ago now, it became permanent laws in a sense as anything is permanent, but it doesn't get renewed every year.
Speaker 3:
42:31
It's just there. So we can plan for it. And again, as you said, if we send it directly from the IRA to the charity, it does not show up as taxable income at all. That's even better than taking income and then gifting it to a charity and taking a tax deduction for it. Why is it better? Well, tax cutting job back to increased standard deduction. Big Benefit for a lot of people. But what that means is you have to itemize to do a charitable deduction. Well, only about 5% of the country itemized last year. Yeah, a small amount. And at the reality is is it's just, it's better for the such that high majority of people that they forget about or they don't do it. So let me go back to my example again earlier. I like to put things in real terms for people. Jamie, I've got $1 million.
Speaker 3:
43:16
I'm going to get approximately a $40,000 distribution I have to make. But let's say I give $500 a month to my church. All right, so that's 6,000 a year. So instead of 40,000 but I'm paying $10,000 in taxes. Now I take 40,000 which I have to, but instead of 40,000 I pay $6,000 directly from my Ira to my church and then only have to take out 34,000 and I only pay taxes on 34 yep. Such a simple way to do it, but most people avoid this. And I don't get why and I get the permanency effect, but I think they're like, oh, it's one more form. Well that's just one form that $6,000 and again, if you're at 25% that one form saved you $1,500. Yup. Yeah. And that's a big thing. Especially as, especially today, most people won't be able to itemize and actually realize the charitable deduction side on income tax.
Speaker 3:
44:13
So for most retirees, this is the only way you're really going to get that tax benefit by giving to charities. Yeah, and I think one of the things is is if you're working with a broker or someone is in your best interest, this is part of the ongoing. And if they're not a fiduciary and don't have an ongoing obligation, guess what? Are they going to bring this up to you? Yes. No, that's not, not certainly their best interest to sell you something, but this is something that is critical for all of you. You know, as we've been on the show today, I hope you're getting some ideas. And the insights that help you out, whether it's thinking about contributions versus distributions versus truly understanding what to ask your advisor and what to ask them in writing. Uh, and then figuring out these RMDs and preparing for them. You got to start years ahead of time. You can't say, Oh, I just turned 70 I better work on it now because at that point it's too late. If you want help thinking through the sequencing of all of these items, (888) 419-8513 or if you want us to help walk through that qualified charitable distribution. If you're above 70, give us a call. (888) 419-8513 hey Jamie, you want to thank you for being a guest in our today show and look forward to hosting you again next time on well, from wisdom
Speaker 2:
45:28
risks, social security, income taxes, estate planning. Every week we talk about how to make your money go further in retirement right here on wealth from wisdom with Barron's hall of Fame Advisor Ron Carson.
Speaker 1:
45:41
Okay, and here's the legal Mumbo jumbo. The opinions voiced in wealth from wisdom with Ron Carson or for general information only, and are not intended to provide specific advice or recommendations for any individual to determine what is appropriate for you. Consulted, qualified professional. All indices are unmanaged. I may not be invested into directly. Investing involves risk, including possible loss of principle. No strategy assures success or protects from loss. Past performance is no guarantee of future results. Advisory services offered through CW m L L C an SEC registered investment advisor.
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