THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 12: Q&A… Continued!
Welcome to Round 4 of our Q & A series! What in world is going on with the markets lately?! Today we are going to discuss this and put this information in perspective. Additionally, we’re going to discuss how to effectively stretch out a spousal IRA. This is our last episode of our 4 part Q & A series. Of course we will always answer listener questions (on future shows) so please keep-em coming!
(1:00) Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you’re a client I can’t give you advice because I don’t know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
Practical planning segment:
(1:40) Lets Welcome Joani my co-host and sidekick on most of the shows. Joani has been a busy woman lately! She is our RMD Queen and because we are nearing the end of the year, we’re going to talk about them on today’s show.
(3:50) Market Volatility: What’s going on with the crazy volatility lately? We get so many phone calls regarding this because people tend to get pretty nervous when this kind of extreme volatility occurs within the global markets.
It’s important for investors to look at what’s going on in a much broader context. Volatility is normal in global markets. When you are invested for the long-term, always keep in mind your time horizon and your original goals. Ask yourself if your goals have changed and look at where you are at in your personal time horizon.
(5:15) The market is up, but my portfolio isn’t… why? The question is what is your definition of the market? This person is probably talking about the S&P 500 or the DJIA. The S&P includes 500 of the largest stocks, and the Dow includes only 30 stocks. So although these indices are widely publicized, they are hardly indicative of the entire market.
A globally diversified portfolio includes international stocks, large companies, small companies, microcap companies, value & growth stocks, emerging markets and fixed income. If you’re comparing your globally diversified portfolio to the S&P or the Dow… then you are comparing Apples to Oranges!
(8:15) Fun Facts! If you go all the way back to 1970, The S&P was the best performing asset class in only ONE of those years. Guess how many times it was the WORST performing asset class… 14!!
From 1926 until 2017, after a drop of more than 10%, the following one-year average return of the S&P is 11.2%. The following 3-year average return is 10.2%, and the following 5-year return is 9.6%. After the S&P 500 has reached a new high, the subsequent one-year return has been 13.6%; 3-year has been 9.8%: 5-year 8.2%.
Maintaining discipline in the long-term will reward you! If investors want to achieve higher long-term returns in capital markets, then they have to be able to withstand market volatility. It’s not for the faint of heart. If you’re ever feeling nervous, talk to your coach. A good coach will explain this to you and help you manage your emotions and fears that are constantly being stoked by negative news and media on a daily basis. IF you haven’t done so already, go back and listen to episodes 5-8 of our podcast. These episodes are part of the series “Mind Over Money” where we discuss the investors brain!
(14:40) Here is a listeners very specific question on “Understanding “stretch” options for surviving spouses”! What in the world is a “stretch” option?
This may be a subject worthy of an entire 4 part series! The reason I think its worthy of an entire 4 part series is because it can be very complicated subject and when you start to explain the options it tends to lead you down a rabbit hole.
Here is the listeners question: I turned 70 1/2 years old in March 2018 and am the beneficiary of my deceased wife’s IRA who died in 2010. I never converted it to my own IRA but am still the spousal beneficiary. The custodian’s IRA department told me I must take the RMD by December 31, 2018 by using the Single Life Expectancy Table which is double what the Uniform Lifetime Table would be. My wife would have been 70 ½ this year as well.
My CPA does not agree with the custodian. Who’s right?
Here’s the short answer: It depends on what this listener wants to accomplish.
If he wants to keep the deceased wife’s IRA as an inherited IRA, he must take an RMD for 2018 calculated using the single life expectancy, just as the custodian is recommending. However, if he has decided that the time has come to treat this IRA as his own, then taking an RMD based on his age and the Uniform Lifetime Table (because he is also 70 ½ this year) will accomplish exactly that. This IRA will be treated like any other IRA of his and RMDs will be required, that are usually calculated using the Uniform Lifetime Table. This would be a good time to move the inherited IRA funds into his own IRA to avoid any confusion in the future.
I think you can attest to the fact that this is an area of great confusion and also an area where some very bad planning mistakes can be made by the spouse beneficiary and also by some advisors out there. We see misinformation in this area all the time simply due to lack of understanding the rules. And I don’t blame them! It can be super confusing and complicated at times.
(17:50) Lets first give the audience some basic terminology in regards this subject. First what’s a custodian?
A custodian is a company that has physical possession of your assets. You deposit money or own investments which are held in their capacity for convenience and MAINLY security. They hold the assets in “book form,” meaning it is an electronic entry. Our recommendation is to always have a 3rd party custodian. No matter how much you trust or like your advisor, you should not let them have physical possession of your assets. (think: Bernie Madoff, Charles Ponzi)
Bonus Read: “Lessons From the Bernie Madoff Fraud, 10 years later. “If you’re giving someone money to invest, insist that an independent, third-party custodian hold your money and send statements directly to you. If anyone asks to handle your accounts directly, run—don’t walk—away.”
In addition to holding securities for safekeeping, most custodians also perform other services, such as account administration, transaction settlements, collection of dividends and interest payments, tax support and reporting (MYTH: That’s right, a consolidated 1099 form should be postmarked by February 15, according to the Internal Revenue Service (IRS). Actually, that’s been the case for a while now—the 1099 mailing deadline changed starting with the 2008 tax year)
They also issue either monthly or quarterly statements that you can access online. Examples of popular custodian for IRA’s and other types of accounts are: Charles Schwab, TCA, Fidelity, TD Ameritrade.
(20:30) The next term we need to define is ………. Inherited IRA and Beneficiary IRA: These terms are interchangeable. They are the exact same thing. Folks get really confused by the term “Inherited IRA”. They think “OK my spouse just passed away so I Inherited their IRA”…………….so its an inherited IRA correct?
Well technically yes! You inherited the IRA but as a spouse you have some options on what to do at that point. It could remain TITLED as an Inherited IRA there are some very specific rules that may have to be followed. However, a SPOUSE and only a SPOUSE has another option to inherit their deceased spouses IRA!
YES, rolling it over into their own IRA.
Let’s Review: A surviving spouse has an option to:
- Title the account as an “INHERITED or BENEFICIARY IRA ………
- ROLL IT OVER INTO THEIR OWN IRA. Very important here………only a spouse has this option. A non-spouse does not!
- CASH IT OUT ENTIRELY. Why someone would do this I have no idea unless they really needed the money. Because there would be serious tax consequences depending on how large the IRA was. Tax as ordinary income and can trigger additional taxes on your SS.
Lets explore the 1st two options in a little more detail:
Option 1 : Titling the account as an Inherited IRA. This listener has the option to leave it and title it as an inherited IRA. The titling would go something like this.
Each custodian is a little different “Jane P Doe inherited IRA beneficiary of John H Doe IRA”
(23:50) Why would a spouse leave it as an inherited IRA?
One reason would be if there was a big age difference between spouses. Not the case in this question but for example what if the husband was 75 and the deceased wife was 65. If he does a direct rollover into his own IRA it would be subject to RMDs at his age of 75. If he leaves it as an INH IRA he can defer RMDs until his deceased spouse would have reached age 70 ½.
And guess what? He can, at that time, roll it over to his own IRA if he chooses.
What he would do if he wanted to take out the least amount possible, he would compare the two options at that time.
Now this brings in the subject of how the IRS calculates the RMDs for retirement accounts. If its your own IRA you would use what’s called the Uniform Life Table. If its an inherited IRA you would use the Single Life table.
The advice in this situation would most likely be to have this individual roll the inherited IRA into his own. The reason being that the uniform life table has a much higher divisor, therefore less money has to be withdrawn to satisfy the RMD. Of course, this would depend on his goals i.e. whether or not he needs the money.
Alternatively, you can title it an inherited IRA, and keep deferring the RMD’s until the decedent is 70 ½ and then roll it over into your own IRA.
(27:00) IMPORTANT: you cannot do it the other way! Lets say you moved it to your own IRA and then for some reason you thought you made a mistake and you wanted to move it back to an INH IRA. You cannot do that. Not allowed!!!! Additional side note, you cannot contribute to an inherited IRA.
Another side note, if you have an inherited IRA and you are under 59 ½ , then it might make sense to NOT roll it over into your own IRA because you would be allowed to take distributions without the 10% additional tax penalty.
Do you see how we can go down the rabbit hole on this subject? It’s like each turn we take leads to more and more explanation. That’s why I think this would be a good 4 part series!
(33:30) OK Let’s do another example: Husband age 75 and deceased wife was 10 years younger.
Option #1; leaving it as inherited IRA (Titled that way) the RMD would be calculated using the Single Life table using the age of the deceased. In this case it would be the year in which she would have reached her age of 70 ½. The divisor at that age is 17. Example $1 million IRA you would have to take out $58,824 and pay taxes as ordinary income at that point.
Option #2; move it to his own IRA. If his deceased wife was 70 ½ at the time and he is 10 years older than he is 80 ½. His RMD would be calculated using the Uniform Life Table of a 80 year old which would be 18.7. If he does it this way a $1 million IRA would equate to $53,475. $5,000 less than the other way.
So that’s one strategy… Leave it as an inherited IRA until the year before your deceased spouse would have reached age 70 ½ and then move it to your own!
So you can see how complicated it can get. So please folks ………. make sure you seek competent advice on this subject. We just really scratched the surface because there are other considerations based on which option you choose
Closing Segment: We appreciate you joining us today for this episode of The Fiscal Blueprint. Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.
Remember it’s not about the money but about your life! Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
Final Disclaimer: “Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”