When Transitioning to Retirement, Reduce Complexity and Consolidate!

After recently losing her father to a long battle with cancer, and having to sort through his estate, one of our Relaxing Retirement members reminded me to share a very important strategy with you so nobody else has to go through the exhausting and unnecessary experience she went through.   

Sorting out all of her father’s bank and investment paperwork took almost two months because it was coming in from everywhere.

When she finally tallied it up, here’s what she discovered.  In addition to numerous bank accounts in several different banks, he had 14 different custodians for shares of stock that he owned, as well as various stock certificates for his original purchases that were located in his fireproof safe in his basement. 

Most of this came about from the break-up of AT&T years ago into all the “Bell” spinoffs like Lucent, Southwestern Bell, Nynex, Vodaphone, Verizon, etc.

In addition to those, he also had 8 different IRA accounts, including 3 in banks and 5 held directly at different mutual fund companies!

In all, that’s 22 different sets of statements in addition to his individual stock certificates! 

Why Did He Have So Many Accounts?

Right now, you must be asking, “OK, why did he have so many accounts?”

As she explained, her father grew up in a household marred by the Great Depression when banks had their troubles and innocent people couldn’t get access to their money.  So, the reason for the different bank accounts was probably to stay under the FDIC insured amount.

As for all of his stock accounts, both inside and outside of IRAs, there’s really no explanation other than he wasn’t aware that he could consolidate them all onto one statement.

Years ago, I had a gentleman in his 70s tell me that the reason for him holding a dozen different IRA accounts was “diversification.”

When I told him that he could keep all the same investments that he had but consolidate them all onto one easy to read statement, he couldn’t believe it.

Why You Should Consolidate Your Statements and Investment Holdings (including Individual Stock Certificates)

He was so conditioned to believe that multiple accounts equaled diversification.

For starters, you can and should consolidate all “like kind” accounts (same title, i.e. joint, etc.) into one account, especially IRAs i.e. Traditional, Roth, Rollover, etc.  This is also true of your retirement plans at prior companies or institutions.

There are several reasons for this, none of which is to boost performance:

  1. Instead of spending time locating statements each month, you can receive one consolidated statement that lists all of your investments broken down by account title.
  2. When it comes time to reallocate or rebalance your investments, you have one source to contact to make the change.  And, that company also does all the record keeping for you.
  3. IRA Required Minimum Distribution (RMD): Once you reach age 72, and you have to begin taking your RMD, you only have to calculate the amount to withdraw from one account, so record keeping is much simpler.  Instead of receiving notification of the required amount to withdraw from several companies, you will only receive one.
  4. Tracking Non-deductible IRAs: Consolidating your IRAs also makes it easier to keep track of non-deductible IRA contributions, and thus accurate filing of your income taxes when you take your annual distribution.  As a simple example with round numbers, if you have $100,000 in IRAs, and $20,000 of that comes from non-deductible IRA contributions over the years, then only 80% of your withdrawal is subject to tax.
  5. On-line access in one location: in today’s world of on-line account access, you can view all of your investment holdings on one website, including your bank accounts.
  6. Last, but not least, it makes it so much easier on your heirs.  Helping our member pull all of this together after the fact reminded me that I take it for granted that everyone knows that you can do this.  Your heirs will be extremely happy that you consolidated everything into one location.

As a final thought, in addition to taking care of this for your family, if your parents are still with us, you may want to approach them about this as well.  It may save you a few headaches down the road!

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New Landmines to Avoid When Your Kids Inherit Your IRA

A year rarely passes without hearing another horror story in financial circles about families losing half of their parents’ IRA to income taxes due to a careless mistake that was completely avoidable. 

This always reminds me to reinforce how your kids can properly handle inheriting your IRA so your savings don’t mistakenly end up in the hands of the government.

Landmines are everywhere.  If your children are not informed, almost half of your IRA could get lost to taxes in one fell swoop!

That doesn’t sound too inviting, so let’s take this opportunity to walk through an example of how your children and grandchildren can make an “informed” decision when they inherit the IRA that you’ve taken your entire lifetime to build. 

And, there’s a new unfortunate twist that was built into The Secure Act of 2020 that changes the landscape that you must actively prepare for.

Len and Loretta’s Sad Story

Len and Loretta have been married for 38 years and have 4 children who are all out of college and in the workforce. 

After Len retired, he rolled over his 401(k) and pension plan to an IRA where he named his wife Loretta as his primary beneficiary and his four children as secondary (or contingent) beneficiaries in equal shares.

Three years after making his retirement transition, Len suffered a massive heart attack and passed away.  (Sorry for the blunt shock value of the story, but it’s necessary to make the point

When Len passed away, as Len’s spouse and beneficiary, Loretta may transfer the money that was in Len’s IRA into her IRA without paying any taxes. 

Key point: ONLY spouses can transfer funds from their deceased spouse’s IRA into their IRA.  Non-Spouse beneficiaries (kids, etc.) may not.

Now, let’s fast forward ahead 3 more years.  After a long and courageous battle with cancer, Loretta passes away. 

At this point, Loretta’s children have some decisions to make as the beneficiaries of their deceased mother’s IRA. 

In far too many situations, here is what happens:

They call the institution where the IRA was held (bank, investment firm, insurance company, etc.) to inform them that their mother has passed away and to find out what their options are. 

Depending on who receives that phone call, here’s the answer that they’re likely to hear:

“We’re very sorry to hear about your loss.  We’re going to send you out an IRA distribution request form.  Please each sign the form and return it to us along with a certified death certificate and we’ll get the checks out to you within 7 to 10 business days.”

Sounds simple enough, right? 


What just happened?

Income Taxes Now Due on the ENTIRE IRA

The children just paid income taxes on the entire balance of the money in the IRA!

Depending on their own personal tax brackets, it’s likely that they gave up 40+% of their share in federal and state income taxes in one fell swoop! 

In the most recent situation we heard about, that amounted to over $1 million that went to pay federal and Massachusetts state taxes.

Imagine that.  You work your entire life.  You diligently save your money.  You select sound investments.  You do everything right and with one phone call to an uninformed company representative, 40+% of your hard-earned savings is gone in one shot! 


What Should They Have Done?

Each of the kids actually had another option with their share of their mother’s IRA.  One option was to just cash it all out, and each of them has the option of doing this if they choose to.  However, as I mentioned, that has enormous tax consequences.

The second option each of your beneficiaries has, which is all too often omitted from the discussion, is to “re-title” their portion to an Inherited IRA, leaving their mother as the deceased owner of the IRA and them as the beneficiary.

The amount of money saved in the short term and the long term is staggering, i.e. in the case I referenced, that’s over $1 million up front!

Prior to the passage of The Secure Act in 2020, your kids would only have to take a small annual taxable distribution from your IRA each year based on their life expectancy.  This allowed them to stretch the tax burden over their lifetime leaving the rest of the funds inside the IRA to grow tax deferred. 

The New Twist of The Secure Act of 2020

The new unfortunate twist that was built into The Secure Act in 2020 was they now only have ten years with which to stretch the tax burden.  In short, they must withdraw all of the balances by the end of the tenth year after your passing. 

The key differential, however, is there is no mandatory annual distribution.  Your children/beneficiaries have the option to withdraw as little or as much as they wish each year.  They simply have to remove all funds by the end of the tenth year.

This requires significant planning on their part.  Is it better to take an equal amount each year, or is better to let funds grow tax deferred and pull more out in later years?

This ideal strategy will depend on their need for the funds, their income tax bracket each year, and their ability to anticipate higher income tax rates that may or may not come with future legislation. 

Given the current climate in Washington, it’s highly likely that we will see higher income tax rates in the future so this has to be taken into consideration. 

** The key is to make sure they are aware of this option as you can’t do it for them before you pass away.  Unfortunately, most people are not aware of this. 

After they examine all of their options, some of your beneficiaries may choose to receive your IRA in a lump sum (or partial lump sum) and pay the taxes up front.  That’s fine as long as they’re making an educated decision.

However, once they realize the short and long-term advantages, it’s highly likely that they will choose the Inherited IRA option so they can avoid giving up almost half your life savings in one fell swoop!

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How to Let Your Family Know Exactly What to Do When You’re No Longer Here?

A few years ago, we received a very sad phone call from Susan, a young woman who was calling on behalf of her mom, Jane.   Jane, age 64, was referred to us by her best friend, one of our Relaxing Retirement members.

The reason for the call was Jane’s husband Charlie had recently passed away after suffering a massive heart attack at the young age of 66.

Jane’s daughter Susan shared with me how difficult and overwhelming all of this was for her mom after suddenly losing her husband of 45 years.

In addition to dealing with the emotional trauma, Jane and her three grown children quickly discovered that they now had a host of problems that they had to deal with immediately.

And, they had no idea where to start.

The reason for the urgency was the fact that Charlie was classic “old school” and kept all of his information and plans tight to the vest.  The kids knew absolutely nothing about their parents’ affairs, and unfortunately, Jane wasn’t in the loop on much either.

Our Meeting with Jane and Her Kids

Jane’s son Kevin, and her two daughters, Susan and Laura, brought her to our office.  Jane put up a strong front, but we could all see how devastated she was.

What we learned was that Kevin is married, has 2 children, and lives in Atlanta. Laura is married with three children and lives in Chicago.  And, Susan is married with one daughter and another on the way.  Susan’s lives locally so she organized everything.

As they all explained, Charlie was a real rugged individualist, a do-it-yourselfer, and a pack rat.  Charlie paid all the bills, did all the banking, prepared and filed their income taxes each year, handled all of their investments, created their wills on-line, and purchased their insurances.

Because of this, Jane and her children had no clue where to begin.  They didn’t know:

  • Who to contact:
    • Friends?
    • Professionals?
      • Attorney, financial advisor, insurance agent, or CPA?
    • What funeral arrangements had been made
    • What Charlie wanted in his obituary
    • If they had a will or trust (Jane knew that Charlie had done something, but it was so long ago that she couldn’t remember any details),
    • If Charlie had life insurance (Jane remembered him purchasing insurance, but had no idea if it was still in effect, and with what company)
    • The password to their fireproof safe
    • The keys to their safe deposit box at the bank
    • Passwords to files on Charlie’s computer
    • What bills to pay to stay current and maintain good credit
    • Which insurance bills to pay and which to stop paying
    • What vendors to contact
    • How to handle their income taxes because Charlie prepared them himself each year
    • Where Jane’s income will now come from
      • Veteran’s services (since Charlie was a veteran)
      • Social Security
      • Charlie’s pension:
        • Was there a joint and survivor benefit? How much?
      • What investments they owned:
        • 3 brokerage accounts: Merrill Lynch, Fidelity, and Ameritrade
        • IRAs
          • There were no Inherited IRA instructions
        • Roth IRA
        • Charlie’s 401(k) which was still being held at his former employer
        • Limited partnerships

In short, it was a complete mess because Charlie left no instructions for anything, and hadn’t included Jane in any of his planning.

Jane felt helpless (and, unfortunately, foolish), and Kevin, Laura, and Susan felt terrible because they didn’t know how to help their mom.

They didn’t know where to begin…

A Burning Question For You

After going through this heartbreaking process with Jane and her children, here’s the burning question I have for you:

If something tragically happened to you tonight, and you were no longer here to guide them, would your family be able to answer all of these questions?

If you said “no”, you’re not alone.

It’s a rare circumstance where I meet a new Relaxing Retirement member who has all of this tied together tightly for their family.  (That’s why we created a solution to this horrific problem: The What To Do When I’m No Longer Here Program.)

My Recommendation For You

Dedicate an hour this weekend, just one hour, to writing out your answer to these questions for your family.

Now, I fully recognize that you won’t wake up tomorrow morning and say, “Let me see, this weekend I can relax with my family, go to that party, read a book, watch the game, clean the garage, or write out a set of instructions for my heirs when I pass away! Hmmm, what do I want to do first?”

We’re all in the same boat.  I understand.

At the same time, however, your family deserves better.  They don’t deserve to be in the position that Jane and her children were in when Charlie suddenly passed away.

Not when you’re in complete control and can rectify it right now.

Just take a little bit of time to write it all down and share it with them.

As difficult as this may be to do given the scope and underlying purpose of this project, try to put yourself in the shoes of your heirs for a moment.  Try to picture them anxiously attempting to carry out your wishes, but without your presence to guide them.

Assume they don’t know anything that you know.  Because of this, I recommend being as thorough and clear as you can.

If you’d like a copy of The What To Do When I’m No Longer Here Checklist referencing specific pieces of information you’ll provide to your heirs, simply email Info@TheRetirementCoach.com and write “What To Do When I’m No Longer Here Checklist” in the Subject line, and we’d be happy to provide you with a free copy.

However, even without that checklist, you can get started by simply answering the questions posted above.

Do it right now!  Your family will never be able to thank you enough.

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Questions to Ask Before Helping Your Grown Children During Retirement

One of the most difficult challenges I have seen some of our Relaxing Retirement members embroiled in is the anxiety surrounding helping their adult children transition to becoming fully financially independent.

This is a very delicate subject and one that I have spent a lot of time discussing with several members.

If you’ve had to deal with this, you already know that you have to walk a fine line between your desire to help them avoid the struggles you went through when you were younger vs. helping them learn financial self-sufficiency.

It’s a very precarious situation, and as a father of two college-aged kids, I sympathize completely.

Helping them with month-to-month expenses….to paying off school loans, car loans, and credit card debt….to helping them with the down payment for their first home…all the way to bailing them out of challenging financial times if and when the need arises.

Two Important Outcomes Awaiting You

Whether or not you choose to help your grown children financially, and to what extent you choose to do so, will definitely have two extremely important outcomes you can count on:

  • It will affect your long-term relationship with them, and
  • It may very well shape the way they handle all their finances for the rest of their lives.

For starters, after creating your Retirement Blueprint™, and knowing your numbers as well as we all do as a result, we can confidently clarify to what degree you are in a financial position to help your children

However, that’s very different than suggesting that you should help them financially.  Everyone’s situation and background is so unique that no one stock answer will suffice.

However, with that said, if you choose to help, here are some thoughts I recommend considering before you do.

What to Do Before You “Help” Your Kids

To the extent that you can, given that you’re dealing with your children, and potentially your grandchildren, my first recommendation is to de-emotionalize yourself from the situation and try to think as rationally as you can.

I recognize how difficult this is given the circumstances.  After all, we’re talking about your children and your grandchildren!  I know from experience how hard it is to resist going to every length to make things easier for them at every turn.

However, I also recognize that all of our good long-term decisions are based on rational thought, and not on spur of the moment emotions.  So, as difficult as it may seem at the moment, try to make these decisions after careful thought.  (No different than any other significant financial decision.)

Questions To Ask Yourself

Ask yourself a few very important questions:

  • What is my goal in giving this money to them? And, what is the most likely outcome once I do?
  • Do they really need the help, or are there areas in their lives where they could prioritize a little better and free up the necessary money? This is extremely difficult in today’s “I want it right now” world that we live in.  Things that were luxuries years ago, or that didn’t even exist, are now absolute necessities.
  • Does this help them become more independent and self-sufficient, or does it increase the likelihood that they will be back for more later?
  • How will this affect my relationship with my other children?

The most important factors are clear communication and expectation.  It’s never easy to engage your children in financial conversations.  However, the more explicit you are from the beginning, the more likely you are to get the outcome you’re looking for.

You want them to understand your reasons for assisting them, your limitations in doing so, and any parameters you may have for giving them money, i.e. expectations for the use of the money, limits on how they use it, reporting results back to you, and terms of repayment if so desired, etc.

Put it in the form of a letter if discussing it is difficult.  They will appreciate your honesty, and the fact that you took the time to give it so much thought.

In situations in which they come to you for help, I also recommend that they provide full disclosure.  By that, I mean laying out for you where their income comes from and precisely where it is spent.

Chances are extremely high that they’ve never done this before.  Putting it all down on paper in black and white is amazingly curative all by itself.

What it also forces them to do, which they need to learn to do at some point anyway, is face the reality of the results of the choices they make.

For example, even though their buddy drives a new BMW, that doesn’t mean they’re entitled to drive one as well, thus leading them to a $680 per month car payment when they only make $500 per week!  Likely an extreme example, but you get the point.

Again, in many cases, what used to be a luxury is now interpreted as a necessity.  Putting that down on paper in black and white usually brings the point home very clearly.

Bottom Line

The bottom line is that you have to take the time to think about your goals in giving.  And, then what you believe the outcome will be from doing so.

Are the likely outcomes in line with your goals?  If not, one of them has to be adjusted or you’re in for a potentially tumultuous long future with your family.

And, that’s no fun.

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Two Revocable Living Trust Warnings You Must Know

Two Roadblocks to Gifting After You Retire

There are two roadblocks I’ve seen some Relaxing Retirement members confront before they became comfortable and confident providing financial assistance to their grown children and grandchildren.

The first roadblock is developing the unflappable confidence that you have enough built up in your Retirement Bucket™ of investments to make gifts to your children and grandchildren without jeopardizing your long-term financial security. 

Your custom designed Retirement Blueprint™ answers that question for you by spelling out precisely how dependent you are on your Retirement Bucket™, and how much more you can afford to spend (or give) and still maintain your desired lifestyle for the rest of your life. 

Once you become comfortable with your Retirement Resource Forecasters™, the next roadblock I see and hear a lot is the haziness surrounding gift tax laws. 

A lot of this has changed in the last few years in this area, and I continue to receive a lot of questions, so I thought I’d take the opportunity to clarify some of the questions I’ve received surrounding the issue of “gifting”.

What is considered a “gift?”

This may sound like a ridiculously simplistic question, but from a federal estate and gift tax perspective, the definition is very clear.

A gift occurs when you’ve given something of value to another person or entity with no retention of ownership rights to the gifted item itself.

In other words, a gift is only considered a gift when you no longer have any ownership rights after the gift is given. 

You may receive benefits from it during your lifetime, such as income, but you no longer own or have any control over the asset itself.

How are gifts taxed?

Just as the federal government has instituted an estate (death) tax on your ability to pass on all of your accumulated assets at your death, they have also imposed a tax on your ability to give it away during your lifetime so that you don’t give it all away right before you pass.

And, this tax rate mirrors the estate tax rate, i.e. as high as 40%!

There is a large “but,” however.

Are all gifts taxed?

During your lifetime, you may now give away $11.7 million ($23.4 million per couple) without being subject to gift taxes.  This is what is known as your lifetime exclusion.

This, however, eats into your estate tax exemption. If you’ve given away $1 million during your lifetime, for example, that reduces your $11.7 million estate tax exemption at death dollar for dollar, so you could then pass on $10.7 million at your death without estate taxes.

The key distinction is that, in addition to this, you may also give away $15,000 each year to anyone or any entity you wish without being subject to gift taxes.  A couple could give away $30,000 ($15,000 each).

What if I give away more than $15,000 in one year?

If you give away more than $15,000 to any person in any given year, you are not necessarily subject to gift taxes.  The amount over $15,000 simply eats into your lifetime exemption amount of $11.7 million. 

Let’s say, for example, that you give away $100,000 to your son to help him purchase a home.  If you have no spouse, then the first $15,000 passes without any gift tax.  The remaining simply $85,000 eats into your $11.7 million lifetime exemption (and your $11.7 million exclusion at your death). 

In other words, in addition to $15,000 per year, you may now pass on $11,700,000 during your lifetime without gift taxes.

The way the federal government keeps track of this is through your gift tax return which you must file if you provide a gift in excess of $15,000. 

To summarize this point, and clear up any confusion, if you make a gift during any given year of more than $15,000, it’s highly likely that you have no gift tax due.

Your only obligation is to submit a gift tax return with your income tax return which simply notifies the federal government to subtract that excess amount from your lifetime exclusion amount (currently $11.7 million.)

What is the tax rate?

Federal gift tax rates mirror estate tax rates and reach 40% very quickly (at $1 million).

Let me repeat that: 40%

After working and saving your entire life, in addition to paying income, sales, and real estate taxes, you then have to pay gift and/or estate taxes when you pass away.

Do I pay the tax when I make the gift?

Gift taxes are paid by the giver.  So, if you give away money or assets that trigger a gift tax being due, you would have to file a gift tax return that year and pay the tax.

If you are the recipient, you do not pay gift taxes.  And, in most cases, as the recipient, you don’t pay income taxes. 

The exception to this is if you receive an appreciated asset such as a stock.  If the stock was purchased for $10,000, and it is now worth $100,000, upon the sale of the stock, the recipient would be responsible for paying capital gains taxes, but not gift taxes.

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