James Lange is a nationally recognized IRA, 401(k) and retirement plan distribution expert, and the president and founder of the Roth IRA Institute, which helps financial professionals and IRA and retirement plan owners to get the most from their retirement plans using Roth IRA conversions as an integral part of the planning strategy. More importantly, his ideas have affected my own thinking about investing, particularly the use of retirement accounts. In this interview, we discuss all these things as well as his recent book, Beating the New Death Tax, which he is giving away to WCI listeners. I really like his writing. He is not afraid to get into the weeds and give hard recommendations. So many books out there are so full of fluff. His are not. If you're into the details, this is an episode you will enjoy.
Why Is the Roth IRA So Important?
The first proposal of law for a Roth IRA was in 1997. Jim has particularly strong feelings about Roth IRAs. He founded an Institute promoting the Roth IRA. Why does he feel so strongly about Roth IRAs?
“When I read about it in 1997, I thought, ‘Boy, this is going to be so cool'. I took out an Excel spreadsheet and I started saying, ‘Okay, what if you don't do anything and you have the status quo?' And then example number two, ‘What if you do some Roth conversions? Where are you in 10 years, 20 years then?' Because of one of the great values of the Roth IRA conversions, ‘Where will your kids be in 30 years and 50 years?' There was such an enormous difference between getting the Roth conversion right and not getting it right or doing nothing. I got very excited.”
He wrote an article for The Tax Advisor, the CPA world equivalent of the New England Journal of Medicine. That was the beginning of his proselytizing about Roth IRA conversions. He says it is really about math.
“If you accept the idea of purchasing power as your measurement tool, given certain assumptions, you can prove again and again, the value of Roth IRA conversions. The objective advice is to do a series of Roth IRA conversions based on tax bracket.”
There are lots of ways to get money into a Roth IRA. You can contribute directly. You can contribute it indirectly via the backdoor Roth IRA process. You can contribute to a Roth 401(k) or Roth 403(b) or a governmental Roth 457(b) and then eventually roll that into a Roth IRA. And you can do Roth conversions. The classic teaching on Roth conversions is that they're good things to do in low-income years, particularly in the years between retirement and when you start taking social security.
Obviously, Roth conversions make a lot of sense for people with estate tax problems, too, if you have a very large estate. But would Jim go beyond there? Does he think people should be doing more Roth conversions than they are? And if so, why?
“The best time to make a Roth conversion is when your income tax bracket is the lowest that it will ever be. So, let's say that you're working, in your mid-sixties, and you're at the height of your career. You're in a very high tax bracket. Then you retire. At 70, you hit social security. At 72, you hit minimum required distributions. Ideally you do the Roth conversions in your low tax brackets.
On the other hand, if you work out the math on just doing Roth conversions with a level tax bracket, you're still ahead. If you believe as I do that in the long run income tax rates are going to go up, doing a Roth IRA conversion will have even more value for both you and your family.
But if you're going to be in an even higher bracket because of the Tax Cut and Jobs Act of 2017, if your minimum required distribution is going to go up, if eventually either you or your spouse are going to die and the survivor's going to have to file as single, meaning the tax brackets go up and up, then the value of the Roth IRA conversion becomes that much greater.”
The reason why it's beneficial even if your tax rate, your marginal tax rate, doesn't go up is because you are moving money to pay the taxes on that tax-deferred account from a taxable account into a tax-protected account. That is the benefit of converting even if you're in the same tax bracket. Jim pointed out that there is another factor involved that might apply to older listeners. The 2017 Tax Cut and Jobs Act also reduces the exclusion. So now we not only have to worry about income tax, but we might have to worry about estate tax or transfer tax. If you are paying taxes on a Roth conversion, even though you're maintaining the same purchasing power, you're reducing your taxable estate, which by itself might save hundreds of thousands or in some cases millions of dollars. If you have to pay 40% on all that money above $23 million or whatever the exclusion is right now, then that's great if you can reduce your estate size by doing a Roth conversion, because you're really passing the same amount of money, but paying a whole lot less tax to do it. The law says it's going to revert back to where it was in 2017 plus inflation, so maybe all your money above $11 million will be subject to estate taxes.
Jim is not saying you should just go out and convert everything because that's going to throw you into higher tax brackets. But most IRA experts would say, for most people, that they should convert at least a portion of their traditional retirement plan to Roth at some point in their life. If you can both reduce the size of the estate while maintaining the purchasing power and getting tax-free growth on your retirement plan for generations, or at least one generation or part of a generation with the new SECURE Act, that is a great way to go.
Why You Should Be Using a Retirement Account
Jim is a pretty big fan of retirement accounts in general, as am I. His book, Retire Secure, makes perhaps the strongest case I've ever seen for the use of retirement accounts over a standard taxable non-qualified brokerage account. Several of the charts in his books show that preferentially investing in retirement accounts, especially if there's an employer match, can result in 50% to even 300% more money after 40 years of accumulation. That tax sheltered growth benefit continues to accrue during the decumulation years.
We discussed why so many people pass on these accounts and invest in a taxable account instead. Is it ignorance? Is it because they want to invest in asset classes that are tricky to get into retirement accounts like cryptocurrency or real estate?
He suspects it is a combination of ignorance and stubbornness. If you want something a little bit different like cryptocurrency or something like that, he suggests doing that outside your retirement plan. One of the ideas of working is to put money away while you are young so when you are, let's say in your fifties, then working becomes optional. I just gave a talk and one of the slides I put up is my clinical schedule for next month and demonstrated what it looks like when work is optional. There are no night shifts on there. There are very few shifts and there's plenty of room for vacations around them. It is a powerful demonstration of just what you can do if you get your financial ducks in a row.
What Accounts Should You Spend First in Retirement?
Jim advocates for depleting your taxable accounts in retirement before touching either your tax-deferred or your tax-free accounts. Is there any nuance to that advice? And if not, why is that better than a more balanced approach of taking a little from this account and a little from that account and trying to set your tax rate?
“This is math. I don't think any of this is nuclear science. Subject to exceptions, which I'm going to get to because there are certainly exceptions, it works out better if you spend your after-tax dollars first. Let's say that you need a dollar to spend, and let's forget about capital gains for a minute. You need a dollar to spend, or let's say a hundred thousand dollars to spend. You have a hundred thousand dollars in your taxable account. You withdraw a hundred thousand dollars. There's no tax on it.
If you need a hundred thousand dollars to spend and you go into your IRA, let's just say at 28%. In order to get the hundred thousand, you have to pick out $140,000 and spend $40,000 in taxes. Now you have your hundred thousand dollars left. The $40,000 that you had to take out of your IRA that was used to pay the taxes on the IRA withdrawal is now no longer available to earn interest dividends and capital appreciation. Where if you just take the $100,000 out of your after-tax account, you still have that $40,000. So, the math on it, again, subject to exceptions, you want to preserve the money that you would have had to have paid in taxes when you make that withdrawal.”
Perhaps more importantly, you don't have that tax drag that you get when money is grown in a taxable account. Every year it kicks out those dividends, it kicks out those capital gains. You have to pay taxes on them as it grows. All that money in the retirement accounts is growing without that tax drag. I wonder if that isn't the bigger factor even though that percentage of the money is going to go to the taxman eventually.
But what are the exceptions? We discussed the old exceptions and the new exceptions, as the old ones still apply.
“The old ones might be based on tax brackets. So, let's say for example, you're at the top of say the 24% bracket. If you take more money out of your regular account, then your IRA is going to push you into potentially a higher than 24% bracket. So, you're better off keeping some distributions so that you won't go beyond a certain tax bracket.
The other exception is new, it's not a wonderful thing, or at least not as wonderful to die with an IRA or a retirement plan, because under the SECURE Act effective January 1st, 2021, your heirs are going to have to pay income taxes. Subject to exception again, there's always exceptions. They're going to have to pay income taxes on the inherited IRA within 10 years of your death. That's much faster than the old rule that said that they could defer it to some extent over their entire lives. The heirs might end up in a higher tax bracket. So, it might make sense for you to take some money out of your IRA.
If you want to take it to the next level, do some Roth conversions, take money out of your IRA, pay the tax on it. Then with money that is left over, sometimes it makes sense to gift money to the next generation or the next two generations, have them invested in something tax free, like a 529 plan or their own Roth IRA or Roth 401(k). You end up with literally multi-generational wealth far in excess of the status quo doing nothing.”
When that next generation isn't maxing out its own retirement accounts, getting money in there is even more beneficial than leaving an inherited IRA. The other advantage is all that growth occurs outside of your estate.
After the taxable account, what should you spend next in retirement? What principles determine which one they spend next?
In those sweet years between retirement and 70 or 72, you are in your lowest tax bracket and need money to live and want to make a series of Roth IRA conversions while you are in a low tax bracket, he suggested, but you could take money from your house with a home equity loan or a HELOC or reverse mortgage, that's a non-taxable distribution. So, you spend that money and take another couple hundred thousand dollars to do Roth conversions.
Then when you are 72 and have these high minimum required distributions on your IRA, you start paying back the loan. He said, when you run the numbers on that scenario, sometimes the families are hundreds of thousands of dollars, sometimes more than a million dollars better off.
“Now that will violate the stomach test and it's more important to sleep well than to maximize your retirement and your estate. But I'll just say that there you have more options than just going into your retirement plan and your Roth plan, assuming you have some other source of tax-free income. And in this case, borrowing money would be a source of tax-free income.”
It's like the old adage. You can either sleep well or you can eat well. So, if you're having to not eat well, that's certainly a good option. A lot of people and probably me, too, wouldn't feel super comfortable borrowing against their house in retirement. Even if the numbers seem to work out well.
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Who Should Consider Buying an Annuity?
Who should consider an annuity as part of the decumulation strategy? If you have the choice between annuitizing your taxable account or your IRA, which would you choose?
First Jim distinguished between annuities because there are all kinds of different products from an insurance company that are called annuities.
“The type that I'm not such a big fan of are known as commercial or deferred annuities. They typically have very significant fees, commissions, and are typically not purchased, they're sold. So, sometimes some of those annuities might have a sales commission of 5%, 8%, 10%, 12% to the salesman.
And very frankly, in my line of business, in order to make that kind of money, I might have to work for 20 years where I run numbers and I do a lot of work. It'd be much better if I could just sell somebody an annuity. So sometimes they have worked out for people and they often come with a guarantee. By the way, be careful because that guarantee is often a death benefit guarantee, not a living guarantee.
Anyway, I've never sold one of those. I kind of call that going to the dark side. Again, I know that there are very reputable people who genuinely believe in them, and I don't want to rag on those advisors, but I'll just say that I'm not typically a fan of those types of annuities.”
The immediate annuity is much more interesting to him. An immediate annuity is a bit like a substitute for the old pension plans. Annuitizing at least a portion of your retirement plan gives you at least a base income. Now might not be such a great time because interest rates are low. The amount that you get is going to be based on how old you are and what the interest rates are.
If you have a taxable account and an IRA, which one should you annuitize?
“If they annuitize their IRA, the money that they're going to receive is going to be taxable. Particularly if they have not reached 72, they are at a low tax bracket. Maybe we're interested in keeping them in a low tax bracket, and do Roth conversions. I might prefer doing the after-tax dollars. And again, that's a form of spending your after-tax dollars before your IRA dollars, which we talked about before.
But on the other hand, I'm too much of an attorney and say, it depends and each case is different. But the general rule is I would do it with your after-tax dollars before your IRA dollars.”
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Recent Changes to the Stretch IRA
Jim might have been angrier about the changes Congress made to the inherited IRA than any other single person in the country. Why did he feel so passionately about getting the word out about those changes to the stretch IRA?
“I did think that it was coming and we incorporated that in our planning more than five years before it came. I just thought it was too good. So, under the old laws, if you had an inherited IRA and your mom or dad died, they left you a million dollars in your IRA. And you were 40 years old at the time. And let's say that you had a life expectancy of 40 years. So, you'd take two and a half percent of the inherited IRA, which was a million, which you have to take out $25,000 in year one.
Then year two would be one over 39 times the balance. By the way, if you only took out $25,000 and it would be an account with earning, say 6%, then the account continues to grow, even though you were taking money out. That was called the stretch IRA. I was trying to get the stretch IRA and better yet the stretch Roth IRA down to multiple generations. To me, it was Nirvana doing a Roth IRA conversion, having it go to young grandchildren and getting 80, 85 years of tax-free growth. And we literally did build tax-free empires with that or generations of tax-free growth.
Then, and it happened practically overnight, just literally several days before the end of the year, effective January 1st, as they said, subject to exception, instead of the beneficiary being able to stretch or defer the taxes on the IRA distribution or the time that they have to withdraw money from the inherited Roth IRA over their lifetime, they have to take it all out within 10 years of the IRA owner's death.
So just simple math, you inherit a million dollars. You do nothing. It's invested at 7%. Now, 10 years later, it's 2 million. Now you have to pay income taxes on 2 million which is misery. Now, yeah, you can pay taxes a little bit along the way, but it's much, much worse than the old law.”
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What Are the Financial Benefits of Being Married
Jim wrote a book called “Live Gay, Retire Rich”. I imagine that prior to same-sex marriage becoming the law, that there were many investing, tax estate planning and asset protection nuances and strategies that these couples had to keep in mind. Have most of those differences gone away now?
“I wrote the book because I saw a really cool tax opportunity of how a group that I think has been treated unfairly, can gain parity. So, under the old law, when you could not legally get married in most states, there were some terrible tax problems with that. Usually more for the older gay couples. One is there are disadvantages in calculating your minimum required distribution. Two, there was something called an unlimited marital deduction. Meaning you can leave a billion dollars in your account for your spouse, and there's no tax. And so, they couldn't get married so they couldn't get that. Three, there were social security benefits of being married. Particularly if you had two people or a couple with unequal social security records, if you were married, the survivor would be able to take the social security record of the first to die.
All of these benefits were denied for same-sex couples. So, what I did is I said, ‘Well, gee, is there a work around?' And there was. What I essentially said, ‘Go to New York, that does allow same-sex couples. Get married in New York, come back to Pennsylvania. Pennsylvania must respect the marriage of New York'. So, for federal purposes, even though you weren't allowed to get married in Pennsylvania, you were treated as married, which gave you the estate tax advantages, the social security tax advantages, etc.
Now that you can get married in any state, that book is kind of moot. If I was to take the idea of that book, which is one of my long-term projects, I would probably repurpose it and call it something cynical, like ‘Get married for the money'. And there's some disadvantages too, and I go through that in the book, but particularly for inheritance tax purposes, IRA purposes and social security purposes, it can make a huge difference.”
Protecting Your Family Against the SECURE Act
Jim's latest book is “The IRA and Retirement Plan Owner's Guide to Beating the New Death Tax: 6 Proven Strategies to Protect Your Family from The SECURE Act”. Is the SECURE act so bad that we need to be protected from it? The lower tax brackets I've had in the last few years, the 199A deduction, I've enjoyed all of that. Was the SECURE act really so terrible? What's so bad about it?
“Well, the SECURE act is so terrible because, particularly as physicians age, they just keep working, working, working, and sometimes they're literally too busy working to spend money. So, the growth continues to go up, typically, in their retirement plan. And they may end up with this income tax time bomb.
So, the status quo that used to be bad is now horrendous. And I did think, yes, this is worth a book. And I go through examples where somebody dies with a million dollars in an IRA under the old law, their kid towards the end of their life has $2 million and under today's law has zero. Well, that's a big difference between your kid having zero and your kid having $2 million towards the end of their life.
And no, I can't undo the law, but maybe you, you qualify for some exceptions and there are a lot of clever strategies that can at least reduce the impact of the law. The status quo is that good kids are going to get nailed if you die with a big IRA and it's going to be brutal. There are proactive things that you can do while you're alive, and the earlier you start, the better, that will significantly enhance generational wealth.”
Jim is giving this book away to everyone listening to this, if they want it. If you would like Beating the New Death Tax, you can get a copy of it by going to www.paytaxeslater.com/getmybook. The first 400 people who asked for a free book are going to get a hard copy, but everyone who asks for it is going to get an electronic copy. It's a super interesting book, especially for those who expect to have significant IRAs or already have significant IRAs and are looking at ways to maybe make sure as much of that money as possible goes to charities and to their heirs rather than the IRS.
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SECURE Act – 8 Things You Need to Know
Using a Charitable Remainder Trust
One of the things in the book that I thought was pretty interesting was that it can be more beneficial to your heirs to leave your IRA to a charitable remainder trust than directly to the heirs. Which I found surprising, because typically when you're using a charitable trust, you are splitting the asset between the heirs and the charity. So, how is it that it can work out to actually be more beneficial to leave it to a charitable remainder trust than to the heir directly?
“Well, first I want to give some limit on that. Since we wrote the book, we found more cases that it wasn't more favorable, it was maybe a tie or even less favorable, but if you had shared even some charitable intent, it was still great.
But here's the basic math why it's much better than you would expect. Let's just say you leave a million dollars to one child. To keep life simple, the child must take that money out in 10 years.
Let's forget about the fancy strategies where they take it out a little bit each year, and they take it all out at the end of year 10. The money was invested at 7%. So, that $1 million is now $2 million. Then they have to pay tax on that 2 million, let's call it $800,000. So, they've $1.2 million left. By the way, they're spending along the way, which is probably more realistic.
Example number two, you leave a million dollars to a charitable remainder trust. The trust is paying out. It's technically not income, but I don't want to get into that. They're paying out certain payments, actually, let's call it a very good income to the beneficiary. And the beneficiary is only paying taxes on those distributions.
But then instead of the beneficiary getting whacked with taxes in year 10, the plan continues and the trust isn't paying taxes and the beneficiary is only paying taxes on their distributions. So, you end up with a huge tax deferral.
And yes, it's true when the child or the lifetime beneficiary of the charitable trust dies, whatever is left goes to the charity of your choice or even the beneficiary's choice, that is still sometimes better than just leaving it to the beneficiary outright. It really works much better if you have at least some charitable intent.”
Spend Your Money
When asked what final advice he had for our listeners, Jim said some of the biggest mistakes that many of his older physicians have made over time, assuming that they're doing a lot of things right, is their spending.
“Figure out how much money you can afford to spend and then at least come close to spending it. Seriously, and it doesn't mean go out and buy a new Cadillac or fly first class. It could be money to charity. It could be money to your kids. Buy experiences. I’m a big fan of taking your whole family on vacation. Be smart about your money, spend it on experiences, gift it to your kids. And in addition to getting all the things like Roth IRA conversions and the investments right, and the estate planning. If I was just going to keep it simple, I would say the person who dies with the most money is not necessarily the winner. The person who has best utilized their money for themselves, their family, their charities, etc., to me, that person is more of a winner.”
Sponsor
This episode of The White Coat Investor is sponsored by Biohaven Pharmaceuticals. Biohaven is a commercial-stage biopharmaceutical company with innovative therapies designed to improve the lives of patients with debilitating neurological and neuropsychiatric diseases, including rare disorders. Biohaven offers a broad pipeline of late-stage product candidates across three distinct mechanistic platforms, including developing therapies for patients with Amyotrophic Lateral Sclerosis (ALS), Alzheimer’s, and obsessive compulsive disorder (OCD). The FDA also recently gave Biohaven’s Nurtec® ODT (rimegepant) its second indication. To discover more about Nurtec ODT and Biohaven’s neuroinnovative portfolio of treatments in development, visit www.biohavenpharma.com.
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Sponsored by Set For Life Insurance
Jeremiah took a balanced approach to his student loan debt. With a high savings rate you can pay off your loans and invest along the way. Resulted in him being debt-free and having a seven-figure investing portfolio. Of course, taking advantage of geographical arbitrage really helps with that.
Full Transcription
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 221 – Beating the new death tax with James Lange
Dr. Jim Dahle:
Welcome back to the podcast. It's been a little while since we recorded one. We're recording this on July 15th. It's going to run on July 29th. So, you're probably listening to this the end of the month, maybe even into August.
Dr. Jim Dahle:
I'm actually between two trips. I just got back from Minnesota, where I was canoeing on the boundary waters with my family. We had a great time up there. Shout out to all of you in Minnesota. You have a beautiful state. We had a lot of fun. And then next week we're going rafting on the green river here in Utah. So, a wonderful, exciting July with our kids.
Dr. Jim Dahle:
But in the meantime, we got to work this week. I got a bunch of shifts in the ER, and of course we got a lot of White Coat Investor work to do today. We're going to have a great guest on today, but before we get into that, let's have a word from our sponsor.
Dr. Jim Dahle:
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Dr. Jim Dahle:
Thanks for what you do. I know a lot of you aren't out canoeing and rafting like I am this month. You are slave in a way in the bowels of the hospital, taking care of people. So, thanks for doing that. It's not easy work, and sometimes it doesn't even pay that well for those of you still in residency. Don't calculate your hourly rate. That's a very bad idea. I did that once. It was a very depressing calculation I made. You don't want to do that.
Dr. Jim Dahle:
All right. We're still giving away anyone who refinances more than $100,000 in student loans through the WCI links, free access to our flagship course, Fire Your Financial Advisor. Not only will you continue to get the amazing cash rebates that we have negotiated with each of these lenders, but now you also get another $799 in value.
Dr. Jim Dahle:
The course must be claimed within 90 days of loan disbursement. In order to claim it, go to whitecoatinvestor.com/refibonus after you refinance your student loans through WCI links at whitecoatinvestor.com/student-loan-refinancing.
Dr. Jim Dahle:
We've got a very special guest on today. I'll bring him on and then introduce him and we'll get into our conversation. My special guest today is Jim Lange. He's a CPA at JD and owns a tax planning and a registered investment advisory firm. He's the author of Retire Secure: Pay Taxes Later, and The Roth Revolution: Pay Taxes Once and Never Again among other books.
Dr. Jim Dahle:
Jim is a nationally recognized IRA, a 401(k) and retirement plan distribution expert, and the president and founder of the Roth IRA Institute, which helps financial professionals and IRA and retirement plan owners to get the most from their retirement plans using Roth IRA conversions as an integral part of the planning strategy.
Dr. Jim Dahle:
He speaks all over the country and has been published many times in the Wall Street Journal and the Pittsburgh Post-Gazette. He has a radio show and graciously had me on it a couple of years ago. We'll put a link to that in the show notes.
Dr. Jim Dahle:
More importantly, his ideas have affected my own thinking about investing, particularly the use of retirement accounts. We're also going to be talking today about a book he came out with just last year, Beating the New Death Tax, and you'll even have an opportunity as you listen to the rest of this podcast to get that book for free, which is my favorite price. All right, Jim, welcome to the show.
Jim Lange:
Well, thanks so much for having me, Jim.
Dr. Jim Dahle:
Tell us a little bit about your upbringing and how that affected your views on money.
Jim Lange:
Well, the one thing that kind of stands out for my upbringing is after I came back from college, some of my friends are getting cars, some are getting big checks, everything else. My dad hands me an envelope and I go, “Boy, what is this?” I opened the envelope and it was my first dental bill that I was expected to pay. And I think that that set me up for, “Okay we're not going to kick you out of the house, but you're on your own better go out and get a job and make some money because you're not on the doll anymore”.
Jim Lange:
I think that that's probably a good thing. And I know that even though, sometimes for business reasons and tax reasons, I want clients to give money to their kids because they don't need it and they're going to get taxed on it but they very legitimately say, “Hey, I'm a little bit concerned about reducing motivation for people who were too young”. So that's my early experience with money.
Dr. Jim Dahle:
Certainly, your dad seemed to understand that point.
Jim Lange:
I think he did.
Dr. Jim Dahle:
And it’s worked out well for you. You've been very successful in your career. Tell us a little bit about it, about both your education and your career so far.
Jim Lange:
Well, I started out as a young accounting major. I got a job in a CPA firm, and became a CPA. And then my dad gave me some other advice. He said, “Whatever you do, don't go to law school”. So, I had to go to law school. But it was a good experience because I didn't come out of let's say accounting, and then go right into law. I worked for a couple of years, was a CPA and then went to law school by the way on my own dime, at night.
Jim Lange:
And I was terrific because I was at Duquesne, which is one of the two law schools in Pittsburgh. The distinguishing factor in Duquesne is that they had a lot of adjunct professors for corporate and law classes. So, I had some great practical professors and it was very good. And I worked for some of the big, Arthur Anderson, which is no more, but at the time, it was one of the big CPA firms, one of the big law firms, built a little side practice.
Jim Lange:
And then ultimately when I got out of law school, I knew the corporate world was not for me. I'd already had a CPA practice, added an estate planning practice and was off and running.
Jim Lange:
And then later, I realized two things. One, there was a lot of power in actually being the financial advisor. To be honest, there was more money in it. So, I added that credential too. And that's a nice combination to be a CPA and attorney and a financial advisor. And even though we have three separate firms that are ultimately under the same roof.
Dr. Jim Dahle:
Yeah. It's a rare combination for sure. And obviously a lot of people hire an accountant and hire an attorney and hire an advisor and expect them to all work closely together. But it's helpful when you get all of that in one person.
Jim Lange:
Well, yeah, and obviously it's not like I sit around and do all three functions myself. I have a staff of 22 people, but the CPA literally is sitting next to the estate attorney and there's a lot of communication back and forth.
Jim Lange:
And the other thing is, I don't know if you want to call them company values or company beliefs, but we're all working from the same core set of understanding. And we tend to be concentrated on people that have IRAs retirement plans, 401(k)s, 403(b)s, et cetera.
Jim Lange:
So, we're a little bit of a specialty firm. If you have a $20 million business and you're interested in business planning, we're not the type of firm that you go to. If you have a big IRA or retirement plan, and you're trying to get the most out of it and plan for it, if you're interested in Roth IRA conversions and that kind of stuff, that's closer to what we do.
Dr. Jim Dahle:
Now you have particularly strong feelings about IRAs and about Roth IRAs in particular. I mean, you've founded an Institute promoting the Roth IRA. Why do you feel so strongly about Roth IRAs?
Jim Lange:
Well, I've felt this way ever since. In 1997, it was the first proposal of law about Roth IRAs. And usually, I ignore proposed legislation because then I get it mixed up with what they really passed and it's a big mess. So, I usually ignore it. But when I read about it, I thought, “Boy, this is going to be so cool”.
Jim Lange:
And I took out an Excel spreadsheet because they didn't have all the wonderful software that they have today. And I started saying, “Okay, what if you don't do anything and you have the status quo?” And then example number two, “What if you do some Roth conversions and where are you in 10 years, 20 years then?” Because of one of the great values of the Roth IRA conversions, “Where will your kids be in 30 years and 50 years?”
Jim Lange:
There was such an enormous difference between getting the Roth conversion right and not getting it right or doing nothing. I got very excited. And in medicine as your physicians know, if they get very excited about an idea, they want to prove it to the world. They do their study. They try to get it peer reviewed. Maybe I guess the highest in your world was the New England Journal of Medicine. The equivalent of that in the CPA world is The Tax Advisor. I went to them and got permission to write the article. They published it. And that was, let's say the beginning of my proselytizing, if you will, about Roth IRA conversions.
Jim Lange:
And it's a matter of math. See, that's what a lot of folks don't understand. This isn't like you like Brahms, I like Mozart or you like a particular artist or musician or something where people could have reasonable differences of opinion. This is a matter of math. And if you accept certain premises, which I'd be happy to go into if you like.
Jim Lange:
But if you accept the idea of purchasing power as your measurement tool, given certain assumptions, you can prove and prove again and again, and again, the value of Roth IRA conversions.
Jim Lange:
So, I sometimes have this reputation, “Laying in his firm, they're really into Roth IRA conversions”. And I would prefer the reputation, “Lange and his firm like to run the numbers”. And they love to give objective advice. And more times than not, the objective advice is to do a series of Roth IRA conversions based on tax bracket. But sometimes we can't control our reputations.
Dr. Jim Dahle:
Now there are lots of ways to get money into a Roth IRA. You can contribute in it there directly, for higher earners, like most listeners to this podcast. You can contribute it indirectly via the backdoor Roth IRA process. You can contribute to a Roth 401(k) or Roth 403(b) or a governmental Roth 457(b) and then eventually roll that into a Roth IRA. And you can do Roth conversions.
Dr. Jim Dahle:
The classic teaching on Roth conversions is that they're good things to do in low-income years. And particularly in the years between retirement and when you start taking social security.
Dr. Jim Dahle:
Obviously, Roth conversions make a lot of sense for people with state tax problems too, if you have a very large estate. But would you go beyond there? Do you think people should be doing more Roth conversions than they are? And if so, why?
Jim Lange:
Well, first of all, I agree with your premise. The best time to make a Roth conversion is when your income tax bracket is the lowest that it will ever be. So, let's say that you're working and you're in your mid-sixties and you're at the height of your career. You're in a very high tax bracket. Then you're going to retire. Then at 70, you hit social security. At 72, you hit minimum required distributions. So, your bracket is up here, then it's going to sink, then it'll stay low, then it comes up. Ideally you do the Roth conversions in your low tax brackets.
Jim Lange:
On the other hand, if you work out the math on just doing Roth conversions with a level tax bracket, you're still ahead. And if you believe as I do that in the long run income tax rates are going to go up, doing a Roth IRA conversion will have even more value for both you and your family.
Jim Lange:
So just for example, even forgetting the Democrats and any legislation they might get passed, the 2017 tax cut and jobs act says that the tax rates are going to go way up in 2026, meaning nobody has to pass anything, tax rates go way up in 2026. So, it's even a greater incentive to make a Roth conversion. Even if for example, you're older than 72. So, you're already taking your minimum required distribution. You're already taking your social security. So that would sound like, “Oh, well, it wouldn't be that great to convert because you're already in a higher bracket”.
Jim Lange:
But if you're going to be in an even higher bracket because of the tax cut and jobs act of 2017, if because your minimum required distribution is going to go up and up and up, if it's because eventually either you or your spouse are going to die and the survivor's going to have to file as a single, meaning the tax brackets go up and up and up, then the value of the Roth IRA conversion becomes that much greater.
Dr. Jim Dahle:
Understood. And in case my listeners don't understand, the reason why it's beneficial even if your tax rate, your marginal tax rate doesn't go up is because you're moving money to pay the taxes on that tax deferred account from a taxable account into a tax protected account. And that's the benefit of converting even if you're in the same tax bracket, correct?
Jim Lange:
That is correct. And you actually nailed the math on that, which a lot of people don't really get. But yeah, that's right. And there is another factor involved. This might apply to some of your older listeners or viewers, and that is the same tax law the 2017 tax cut and jobs act also reduces the exclusion.
Jim Lange:
So now we not only have to worry about income tax, but we might have to worry about a state tax or transfer tax again. And if you are paying taxes on a Roth conversion, and we can get into this if you like, even though you're maintaining to store the same purchasing power, you're reducing your taxable estate, which by itself might save hundreds of thousands or in some case millions of dollars,
Dr. Jim Dahle:
Yeah, if you got to pay 40% on all that money above $23 million or whatever the exclusion is right now, then that's great if you can reduce your estate size by doing a Roth conversion, because you're really passing the same amount of money, but paying a whole lot less tax to do it.
Jim Lange:
Well, that's true. But according to this new law, unless they change it, instead of $23 million is going to be $10 million plus inflation, even call it $11 million. Well, now we're taught, there's a lot of people between $11 and $23 million that are probably right now pretty relaxed.
Jim Lange:
And even forgetting the federal transfer tax, many individual states have either inheritance taxes or pickup taxes or state taxes of their own. So, all of these factors do favor Roth. Now, I'm not saying you should just go out and convert everything because that's going to throw you into higher tax brackets.
Jim Lange:
But I think most IRA experts, in fact, I don't know, one that would not say this would say for most people that they should convert at least a portion of their traditional retirement plan to Roth at some point in their life.
Dr. Jim Dahle:
Yeah, I think that's fair to say for sure. So, the way the law is currently written, the estate tax exemption is going to drop automatically in 2026, if Congress does nothing.
Jim Lange:
Yeah, it will. So, in 2017 it was $5 million. So, if you were married, it became $10 million. The law says it's going to revert back to where it was in 2017 plus inflation. I don't know exactly where that would put you, but maybe at $11 million and maybe there will be additional legislation that will raise that.
Jim Lange:
On the other hand, frankly, I am concerned with my clients who could go over the top. And if you go over the top, it's like a 40-cent penalty. It doesn't start at 4%, but it can be a very substantial penalty.
Dr. Jim Dahle:
It gets there pretty quick though.
Jim Lange:
It sure does. And if you can both reduce the size of the estate while maintaining the purchasing power and getting tax-free growth on your retirement plan for generations, or at least one generation or part of a generation with a new SECURE act, that's just a great way to go.
Dr. Jim Dahle:
Now you're a pretty big fan of retirement accounts in general, as am I. And your book, Retire SECURE, this is not the latest book, but one of your books. I think this was out last updated for 2015, making perhaps the strongest case I've ever seen for the use of retirement accounts over a standard taxable non-qualified brokerage account.
Dr. Jim Dahle:
Several of the charts in your books show that preferentially investing in retirement accounts, especially if there's an employer match, can result in 50% to even 300% more money after 40 years of accumulation. And that tax sheltered growth benefit continues to accrue during the decumulation years.
Dr. Jim Dahle:
Why do you think so many people pass on these accounts and invest in a taxable account instead? Is it ignorance? Is it because they want to invest in asset classes that are tricky to get into retirement accounts like cryptocurrency or real estate? Why do you think they do that?
Jim Lange:
I suspect it's a combination of ignorance and stubbornness. For example, I work with a lot of university professors and at the University of Pittsburgh, once you've been there three years, if you put in 8% of your salary, the University will put in 12%. So that's 150% return on day one. All that money is tax favored.
Jim Lange:
You would think that everybody who's smart enough to be a professor at University of Pittsburgh would at least put in 8%, but they don't. By the way, these are some of the same people's kids. Medicine too, by the way.
Jim Lange:
But anyway, I think a lot of people just don't know the math and they might get caught up in whatever the retirement plan options are at the University level, what might be Vanguard and different hospitals will have different providers. They might not have the exact investment that somebody might want, but usually they have a relatively good choice of investments.
Jim Lange:
And if you want something a little bit different like cryptocurrency or something like that, we call that Las Vegas money, do that outside your retirement plan. One of the ideas of working is to eventually, and this is one of the great points of your book is to put money away while you are young so when you are, let's say in your fifties, then working becomes optional. And I love that by the way, that's such smart advice. I don't know how many thousands of doctors that you have influenced by saying that, but it's terrific advice. And even for people who are like me, who are working well beyond my mid-fifties, it's great knowing that it's optional.
Dr. Jim Dahle:
Yeah, that’s for sure. I just gave a talk a couple of hours ago actually on Zoom. And one of the slides I put up is my clinical schedule for next month and demonstrated this is what it looks like when work is optional. There are no night shifts on there. There are very few shifts and there's plenty of room for vacations around them. And so, I think it's a powerful demonstration of just what you can do if you get your financial ducks in a row.
Jim Lange:
Yeah. I don't know how good you are as a physician, but I suspect that you're probably close to being in your prime in terms of your knowledge, your experience, your expertise. You're good at it. You like it. You're providing a great service to the community. You're making money and why not do it, but on your own terms? On the days that you want to let somebody else do the night shifts, take a couple of weeks and go wherever you want to. I think that that's just great advice and your idea of getting people to do this early in their career as opposed to late, I think is wonderful.
Dr. Jim Dahle:
Yeah, for sure. All right. Let's get back to those retirement accounts. You also advocate for depleting your taxable accounts in retirement before touching either your tax deferred or your tax-free accounts. Is there any nuance to that advice? And if not, why is that better than a more balanced approach of taking a little from this account and a little from that account and trying to set your tax rate?
Jim Lange:
Well, again I'm going to go back to “This is math”. I don't think any of this is nuclear science. And one of the nice things about working with physicians and other scientists is that with all due respect, even though you guys can be a little bit stubborn and have your own way of thinking about the world, most of you are legitimate scientists and legitimate scientists are data driven.
Jim Lange:
Even if you come in with a certain idea and you see a spreadsheet and you're given the chance to attack the spreadsheet, which a lot of you do with zest, but the spreadsheet holds up and you see it. Well, subject to exceptions, which I'm going to get to because there are certainly exceptions, it works out better if you spend your after-tax dollars first.
Jim Lange:
And here's the simple math. Let's say that you need a dollar to spend, and let's forget about capital gains for a minute. You need a dollar to spend, or let's say a hundred thousand dollars to spend. You have a hundred thousand dollars in your taxable account. You withdraw a hundred thousand dollars. There's no tax on it.
Jim Lange:
If you need a hundred thousand dollars to spend and you go into your IRA, let's just say at 28%. In order to get the hundred thousand, you have to pick out $140,000 and spend $40,000 in taxes. Now you have your hundred thousand dollars left. The $40,000 that you had to take out of your IRA that was used to pay the taxes on the IRA withdrawal is now no longer available to earn interest dividends and capital appreciation.
Jim Lange:
Where if you just take the hundred thousand out of your after-tax account, you still have that $40,000. So, the math on it, again, subject to exceptions, is it you want to preserve the money that you would have had to have paid in taxes when you make that withdrawal.
Dr. Jim Dahle:
And perhaps more importantly, you don't have that tax drag that you get when money's grown in a taxable account. Every year it kicks out those dividends, it kicks out those capital gains. You've got to pay taxes on them as it grows. All that money in the retirement accounts is growing without that tax drag. And I wonder if that isn't the bigger factor even because that percentage of the money is going to go to the tax man eventually.
Jim Lange:
Yeah. I don't know which one is the bigger drag, because I haven't tested them separately. It's an interesting question, but I can reliably say, subject to exception, you're better off spending your after-tax dollars first.
Dr. Jim Dahle:
Yeah, for sure. What are the exceptions? Let's talk about those.
Jim Lange:
All right. Let's talk about the old exceptions and the new exceptions. And the old ones still apply. The old ones might be based on tax brackets. So, let's say for example, you're at the top of say the 24% bracket. If you take more money out of your regular account, then your IRA is going to push you into potentially a higher than 24% bracket. So, you're better off keeping some distributions so that you won't go beyond a certain tax bracket.
Jim Lange:
The other exception that is new, it's not a wonderful thing, or at least not as wonderful to die with an IRA or a retirement plan, because under the SECURE act that just passed effective January 1st, 2021, your heirs are going to have to pay income taxes. Subject to exception again, there's always exceptions. They're going to have to pay income taxes on the inherited IRA within 10 years of your death.
Jim Lange:
That's much faster than the old rule that said that they could defer it based to some extent over their entire lives. The heirs might end up in a higher tax bracket. So, it might make sense for you to take some money out of your IRA.
Jim Lange:
If you want to take it to the next level, do some Roth conversions, take money out of your IRA, pay the tax on it. Then with money that is left over, sometimes it makes sense to gift money to the next generation or the next two generations, have them invested in something tax free, like a 529 plan or their own Roth IRA or Roth 401(k). And you end up with literally multi-generational wealth far in excess of the status quo doing nothing.
Dr. Jim Dahle:
Yeah, for sure. When that next generation isn't maxing out its own retirement accounts, getting money in there is even more beneficial than leaving an inherited IRA.
Jim Lange:
Yeah, it certainly is. The other advantage is all that growth occurs outside of your estate. So again, if we do come back to $5 million each or 10 million plus inflation, say $11 million or even $12 million, then we're avoiding that problem. And we're also reducing state, whether it's Pennsylvania, where I work in practice, or pickups tax. And many states have very high transfer tax. So, it does a lot of good.
Jim Lange:
And the other thing is depending on how you feel about giving money to your kids, there's a difference between giving money to your kids and saying, “Go out and get a Corvette” versus “Here's some money. I want you to put it in your Roth IRA. Show me the statement. If you do, I'll give you some more”.
Dr. Jim Dahle:
Trust, but verify, right? Trust, but verify. Okay. So, let's say you're heading into retirement. His retiree has followed your advice. They burned through their taxable account. They've got the tax deferred IRA and they have a tax-free Roth IRA. What principles determine which one they spend next?
Jim Lange:
I'm going to go out on a limb here and I'm going to make a potential recommendation that might be a violation of what I call the stomach test. So, in your question, you started with, “Okay, they basically wiped out their after-tax dollars. Now they have IRA dollars. They could add some Roth dollars”. But then the only money that they could spend would be their choice of IRA dollars or Roth dollars, or there might be something else.
Jim Lange:
So, this is for the tigers. And I know that Jim, you have a number of tigers and you yourself might be called a tiger. What if they have a million-dollar house that's paid up? What if they take some money from their house to either live or in addition to make a Roth IRA conversion.
Jim Lange:
So, let's say that they're in those sweet years between retirement and 70 or 72, they're in their lowest tax bracket. They need money to live and want to make a series of Roth IRA conversions while they're in a low tax bracket. They take the money out of their IRA. They have to add that to their income. And if you work out the math, it's slightly favorable, but it's not great. Take money out of a Roth IRA to make more Roth conversions. I think that's going to be a breakeven.
Jim Lange:
And in either case, it's not going to be great, but if they take money from their house with a home equity loan or a HELOC or reverse mortgage, that's a non-taxable distribution. So, they spend that money and let's say they need $100,000 or $200,000 a year for two years and they need another couple hundred thousand dollars to do Roth conversions.
Jim Lange:
Then when they're 72 and they have these murderously high minimums required distributions on their IRA, they start paying back the loan, or this will really shock some of the readers, they never pay back the loan and that's okay. But when you run the numbers on that scenario, sometimes the families are hundreds of thousands of dollars, sometimes more than a million dollars better off.
Jim Lange:
Now that will violate the stomach test and it's more important to sleep well than to maximize your retirement and your estate. But I'll just say that there you have more options than just going into your retirement plan and your Roth plan, assuming you have some other source of tax-free income. And in this case, borrowing money would be a source of tax-free income.
Dr. Jim Dahle:
Yeah. It's like the old adage. You can either sleep well or you can eat well. So, if you're having to not eat well, that's certainly a good option. I'm sure you're right though. A lot of people and probably me too, wouldn't feel super comfortable borrowing against their house in retirement. Even if the numbers seem to work out well. Because those numbers will work out well throughout your career. If you run the numbers, it always makes sense to borrow all the equity out of your house and invest it in something with a higher return.
Jim Lange:
Well, that's a different idea. You're talking about arbitrage there. I'm not talking about arbitrage. I'm talking about tax planning. Now the fact that interest rates are pretty low today, that helps the strategy. But for whatever it's worth, when I bring this up in real life, a lot of people store off with “No, no, no”. And we like to run the numbers and test the different scenarios.
Jim Lange:
One of the things that we love to do is start out with what I'll call the status quo. And I hate to say it, but if people don't think they have a problem, they're not as motivated to do something, then if they have the problem. But we sometimes run the status quo and we show massive amounts of taxes and then they feel a little ill like that.
Jim Lange:
So sometimes some of these measures that sound a little bit extreme all of a sudden don't seem so extreme. But by the way, I'm not going to recommend this for somebody who might get in trouble because they don't have the liquidity to make the mortgage payment.
Jim Lange:
This is more advanced and frankly, people who have more money idea. But it's not totally off the wall. I'm a contributor to forbes.com. And I wrote an article saying, let your house pay for your Roth IRA conversion.
Dr. Jim Dahle:
All right. Let’s talk about another thing a lot of people consider verboten. Let's talk about annuities for a minute. Who should consider an annuity as part of the decumulation strategy? And as a follow-up, if you have the choice between annuitizing your taxable account or your IRA, which would you choose?
Jim Lange:
All right. Well, first I want to distinguish between annuity and annuity. Because there's all kinds of different instruments. Typically, products from an insurance company that are called annuities.
Jim Lange:
The type that I'm not such a big fan of are known as commercial or deferred annuities. They typically have very significant fees, commissions, and I don't know how to say it nicely. And some of your listeners, and maybe even you have some, they're typically not purchased, they're sold. So, sometimes some of those annuities might have a sales commission of 5%, 8%, 10%, 12% to the salesman.
Jim Lange:
And very frankly, in my line of business, in order to make that kind of money, I might have to work for 20 years where I run numbers and I do a lot of work. It'd be much better if I could just sell somebody an annuity. So sometimes they have worked out for people and sometimes they often come with a guarantee. By the way, be careful because that guarantee is often a death benefit guarantee, not a living guarantee.
Jim Lange:
Anyway, I've never sold one of those. I kind of call that, going into the dark side. Again, I know that there are very reputable people who genuinely believe in them, and I don't want to rag on those advisors, but I'll just say that I'm not typically a fan of those types of annuities.
Jim Lange:
Now, another type of annuity that is called an immediate annuity is much more interesting to me. By the way, with the commercial annuities, since they are so profitable for the advisor, they're always coming out with new ones. Every single major insurance company is going to come out with a couple every year. They all have slightly different rules and variations and things like that.
Jim Lange:
So, if you have one or a lot of times, people come into our office and they have one, we don't say, “Oh, you should sell it tomorrow”. Because a lot of times they have very valuable guarantees. We have to actually read the paperwork and find out what people have, which they often don't know.
Jim Lange:
Anyway, that's the type I'm not such a big fan of. Then there's something called an immediate annuity. And an immediate annuity is a little bit of a substitute for the old pension plans. So, the old TIAA-CREF participants, including my mother. When she came to the end of her career back then they had mandatory retirement at age 70. They said, “Dr. Lange, you have X dollars in your TIAA-CREF accounts, you must annuitize. Meaning you give up the entire amount and we will pay you X dollars a month every month for the rest of your life”.
Jim Lange:
Now she was 70 years old. I'm not exactly sure how long they expected her to live. My guess would be maybe in her mid-eighties. She lived in until 95. So, they had to keep paying her. Now that was a pretty good deal for her.
Jim Lange:
Now today that's not a requirement, but for a lot of people, annuitizing at least a portion of their retirement plan gives them at least a base income. Sometimes I like to say, well, consider annuitizing or doing an immediate annuity for let's say the amount of the annuity and social security is roof over head, food on the table, gas and car. So, no matter what happens, you have a base.
Jim Lange:
Now, right now might not be such a great time because interest rates are low. And the amount that you get is going to be based on how old you are and what the interest rates are. So, I'm not sure now's a great time to annuitize. But an immediate annuity, which is kind of like a pension substitute, I'm not going to say is a terrible idea.
Jim Lange:
By the way, that has very low commissions. And I think you might even be able to do it. I think Vanguard and some other companies might have an effect no fee immediate annuities. So again, I'm going to distinguish between types of annuities now.
Dr. Jim Dahle:
So, someone's decided they're the right person for an annuity. And they're going to annuitize 25% of their nest egg or whatever. And they've got a taxable account and they've got an IRA, which one should they annuities?
Jim Lange:
Well, if they annuitize their IRA, the money that they're going to receive is going to be taxable. Particularly if they have not reached 72, they are at a low tax bracket. Maybe we're interested in keeping them in a low tax bracket, and do Roth conversions. I might prefer doing the after-tax dollars. And again, that's a form of spending your after-tax dollars before your IRA dollars, which we talked about before.
Jim Lange:
But on the other hand, I'm too much of an attorney and say, it depends and each case is different. But the general rule is I would do it with your after-tax dollars before your IRA dollars. The other problem is that you are committing yourself to an attack strategy when you're doing it with the IRA dollars. And everything always changes. So I tend to like to preserve flexibility.
Dr. Jim Dahle:
That’s a good perspective. I like that. Now let's talk a little bit about these recent changes to the stretch IRA. Now you've been writing about that for a long time when people were just batting it around in Congress, you were writing about it. You're writing about it as is happening. You wrote about it afterward. I think you might've been more angry about those changes than any other single person in the country. Why did you feel so passionately about getting the word out about those changes to the stretch IRA?
Jim Lange:
By the way, a quick note on that. You and I would go back and forth sometimes on email. Again, you were on my radio show and I've always admired your work and told every doctor I know that they should go out and get White Coat Investors. I guess I emailed you about something. And I didn't hear anything. And Sandy, who works for my office, said, “Jim is mad at you because you keep predicting the death of the stretch IRA and it didn’t come”. That's a true story by the way.
Jim Lange:
But anyway, I did think that it was coming and we incorporated that in our planning more than five years before it came. I just thought it was too good. So, under the old laws, and unfortunately the exceptions are relatively well, under the old laws there, you didn't need an exception. If you had an inherited IRA and your mom or dad died, they left you, let's keep that simple, a million dollars in your IRA. And you were 40 years old at the time. And let's say that you had a life expectancy again, let's keep the math easy at 40 years. So, you'd take one over 40 or two and a half percent of the inherited IRA, which was a million, which you have to take out $25,000 in year one.
Jim Lange:
Then year two would be one over 39 times the balance. By the way, if you only took out $25,000 and it would be an account with earning, say 6%, then the account continues to grow, even though you were taking money out. And that was called the stretch IRA. And we loved the stretch IRA. I was trying to get the stretch IRA and better yet the stretch Roth IRA down to multiple generations. To me, it was Nirvana doing a Roth IRA conversion, having a go to young grandchildren and getting 80, 85 years of tax-free growth. And we literally did build tax-free empires with that or generations of tax-free growth.
Jim Lange:
Then and it happens practically overnight, just literally several days before the end of the year, effective January 1st, as they said, subject to exception, instead of the beneficiary, being able to stretch or defer the taxes on the IRA distribution or the time that they have to withdraw money from the inherited Roth IRA over their lifetime, they have to take it all out within 10 years of the IRA owner's death.
Jim Lange:
So just simple math, you inherit a million dollars. You do nothing. It's invested at 7%. Now, 10 years later, it's 2 million. Now you have to pay income taxes on 2 million which is misery. Now, yeah, you can pay taxes a little bit along the way, but it's much, much worse. And I have all kinds of numbers to prove it than the old law.
Jim Lange:
And to me, that dilemma for IRA and retirement plan owners, and there's a lot of physicians who tend to spend their salaries and they're not great savers of money outside their IRA. Particularly they have house payments and they have braces for their kids and they're putting their kids through college, et cetera, et cetera. But they're dutiful savers in their retirement plans. So, towards retirement, they have these big IRAs and 401(k)s and 403(b)s and SEPs, and that's the main source of their money.
Jim Lange:
And now they find out they have this massive income tax problem, not only when they're alive, when they have to take big minimum required distributions, but also after they die. So that is if you will, one of the great problems that a lot of the older physicians have.
Dr. Jim Dahle:
All right, let's turn the page a little bit. And let's talk about another book you've written, called “Live Gay and Retire Rich”. And I suspect you also have quite a few members of the LGBTQIA plus communities as clients.
Dr. Jim Dahle:
Now, these are all separate communities with unique financial aspects of their lives, but let's talk for a minute about same-sex couples. I imagine that prior to same-sex marriage becoming the law land, that there are many investing tax estate planning and asset protection nuances, and strategies that gay and lesbian people had to keep in mind. Have most of those differences gone away now? What unique aspects and strategies still exist for these communities?
Jim Lange:
Yeah, they have. And interestingly, now everybody assumes I'm gay because I wrote that book. And not that that is necessarily a bad thing, but I'm not. But I wrote the book because I saw a really cool tax opportunity of how a group that I think has been treated unfairly, put in effect can gain parody.
Jim Lange:
So, under the old law, when you could not legally get married in most states. Let's say you had a partner in Pennsylvania. This was a long-term relationship, two men, two women, and you live together as husband and husband. You did many of the things that married couples do, but you weren't allowed to get married.
Jim Lange:
Well, there were some terrible tax problems with that. Usually more for the older gay couples. One is there are disadvantages in calculating your minimum required distribution.
Jim Lange:
Two, there was something called an unlimited marital deduction. Meaning you can leave a billion dollars in your account for your spouse, and there's no tax. And so, they couldn't get married so they couldn't get that.
Jim Lange:
Three, there were social security benefits of being married. And particularly if you had two people or a couple with unequal social security records, if you were married, the survivor would be able to take the social security record of the first to die or the stronger one.
Jim Lange:
All of these benefits were denied for same-sex couples. So, what I did is I said, “Well, gee, is there a work around?” And there was. What I essentially said, “Go to New York that does allow same-sex couples. Get married in New York, come back to Pennsylvania. Pennsylvania must respect the marriage of New York”. So, for federal purposes, even though you weren't allowed to get married in Pennsylvania, you were treated as married, which gave you the estate tax advantages, the social security tax advantages, et cetera.
Jim Lange:
Now that you can get married in any state, that book is kind of moot. If I was to take the idea of that book, which is one of my long-term projects, I would probably repurpose it and call it something cynical, like “Get married for the money”. And there's some disadvantages too, and I go through that in the book, but particularly for inheritance tax purposes, IRA purposes and social security purposes, it can make a huge difference.
Jim Lange:
So, I was a big fan of it then and I still am. But the book itself, it has no more bearing for a gay couple than a straight couple. And frankly, there were obviously cases where people were not out, whether it was because of their job or their friends or their reputation or things like that. So, I even had clients that secretly got married and they didn't have a wedding, they didn't tell anybody about it, but it was a form of protecting the survivor particularly.
Jim Lange:
Let's take your world, the physicians. Yes, you might have two male physicians that get married, but you also might have a male physician, let's say a manual laborer. Well, the physician still wants to protect their husbands and getting married might be a great way to do it. And with a prenuptial agreement, you could still protect money that you want to protect.
Dr. Jim Dahle:
Now you got a book coming out soon for professors. But I want to talk about the latest book that you've actually published. And that is this one that we referred to at the top of the podcast, “The IRA and Retirement Plan Owner's Guide to Beating the New Death Tax: 6 Proven Strategies to Protect Your Family from The SECURE Act”.
Dr. Jim Dahle:
Is the SECURE act so bad that we need to be protected from it? The lower tax brackets I've had in the last few years, the 199A deduction I've enjoyed all of that. Was the SECURE act really so terrible? What's so bad about it?
Jim Lange:
Well, the SECURE act is so terrible because here is the reality of the situation. And I think you probably have a wider age range. Particularly as physicians age and particularly if they've been following your advice, but many of them, frankly, aren't clever enough to slow down and control their schedule. They just keep working, working, working, and sometimes they're literally too busy working to spend money. So, the growth continues to go up typically in their retirement plan. And they may end up with this income tax time bomb.
Jim Lange:
So, the status quo that used to be bad is now horrendous. And I did think, yes, this is worth a book. And I go through examples where somebody dies with a million dollars in an IRA under the old law, their kid towards the end of their life has $2 million and under today's law has zero. Well, that's a big difference between your kid having zero and your kid having $2 million towards the end of their life.
Jim Lange:
And no, I can't undo the law, but maybe you, you qualify for some exceptions and there are a lot of clever strategies that can at least reduce the impact of the law. I'm happy to talk about those strategies, but that's the big picture. The status quo is that good kids are going to get nailed if you die with a big IRA and it's going to be brutal, and there are proactive things that you can do while you're alive. And the earlier you start, the better, that will significantly enhance generational wealth.
Dr. Jim Dahle:
And one of the things in the book that I thought was pretty interesting that I want to hear you explain is you mentioned that it can be more beneficial to your heirs to leave your IRA to a charitable remainder trust than directly to the heirs.
Dr. Jim Dahle:
Which I found surprising, because typically when you're using a trust like that, a charitable trust, you are kind of splitting the asset between the heirs and the charity. So, how is it that it can work out to actually be more beneficial to leave it to a charitable remainder trust than to the heir directly?
Jim Lange:
Well, first I want to give some limit on that. Since we wrote the book, we found more cases that it wasn't more favorable, it was maybe a tie or even less favorable, but if you had shared even some charitable intent, it was still great.
Jim Lange:
But here's the basic math why it's much better than you would expect. Let's just say as is, not charitable remainder trust. You'll leave a million dollars to one child. To keep life simple, the child must take that money out in 10 years.
Jim Lange:
Let's forget about the fancy strategies where they take it out a little bit each year, and they take it all out at the end of year 10. The money was invested at 7%. So, that $1 million is now $2 million. Then they have to pay tax on that 2 million, let's call it $800,000. So, they've $1.2 million left. By the way, they're spending along the way, which is probably more realistic.
Jim Lange:
Example number two, you leave a million dollars to a charitable remainder trust. The trust is paying out. It's technically not income, but I don't want to get into that. They're paying out certain payments, actually, let's call it a very good income to the beneficiary. And the beneficiary is only paying taxes on those distributions.
Jim Lange:
But then instead of the beneficiary getting whacked with taxes in year 10, the plan continues and the trust isn't paying taxes and the beneficiary is only paying taxes on their distributions. So, you end up with a huge tax deferral.
Jim Lange:
And yes, it's true when the child or the lifetime beneficiary of the charitable trust dies, whatever's left goes to the charity of your choice or even the beneficiary's choice, but that's still sometimes depending on what assumptions you use. That's still sometimes better than just leaving it to the beneficiary outright.
Jim Lange:
Now, one of the members on our team would say, “Hey, Jim, you should warn people that it really works much better if you have at least some charitable intent”. And I would have to say that I agree with that.
Dr. Jim Dahle:
Yeah, that's for sure. Well, now's the time to give something away here. We've got a sweet giveaway here. You've been very generous with this, but you are essentially giving this book away to everybody listening to this, if they want to. If you would like Beating the New Death Tax, you can get a copy of it by going to www.paytaxeslater.com/getmybook.
Dr. Jim Dahle:
Now, the first 400 people who asked for a free book are going to get a hard copy, but everybody who asks for it is going to get an electronic copy. And so, I'd encourage you to go check this out. It's a super interesting book, especially for those who expect to have significant IRAs or already have significant IRAs and are looking at ways to maybe make sure as much of that money goes to charities and goes to their heirs rather than the IRS. Anything else we should say about that deal, Jim?
Jim Lange:
I'm obviously a proselytizer of ideas and I love to spread the word if you will so people can keep some of their hard earned money. And I'm literally delighted to provide resources, whether it's a hard copy of the book and the only reason why we had 400, it wasn't “Oh, hurry up and do it tomorrow”, it was because that's roughly how many we had available. Otherwise, I'd be happy to give away more. Maybe we can even order some more.
Jim Lange:
But I do love the idea of getting that information out there. And very frankly, the thing that you told me that made me the happiest of our entire interview is when you told me that I actually influenced some of your thinking. And you are obviously an influencer yourself, which made me feel great. So, I love the idea of helping people.
Jim Lange:
There are also some charitable ideas in there that we did talk about that are relatively easy and very beneficial to both family and charity. So, I would encourage everybody to take advantage of that offer. If you want to repeat it again, I don't want to sound like one of these guys on TV.
Dr. Jim Dahle:
We'll put the link in the show notes as well for those of you who are listening in your car or whatever. Don't crash while you're writing it down, but it's paytaxeslater.com/getmybook.
Dr. Jim Dahle:
One of the cool things about that book is one of your goals has been basically to influence other people to give a billion dollars to charity. And it wouldn't surprise me at all. If you can hit that goal. Obviously, it's going to be hard to know if you did or not, but I bet you will. So, I think that's pretty cool.
Jim Lange:
Well, again, it’s hard to measure, but there's that charitable trust idea. And then there's another idea, which I don't think we have time for. I think it can get a lot more money to charity while at the same time benefiting your family, or at least benefiting them more than the traditional method of giving money to charity.
Dr. Jim Dahle:
Well, this will be listened to by 30,000 to 40,000 high-income professionals at some point in the next few months. What have we not talked about that maybe they should know?
Jim Lange:
Well, it might depend on their stage in life, but let me say something that might apply to some of the older physicians that might be listening. If I was to say what is some of the biggest mistakes that many of my older physicians have made over time.
Jim Lange:
So, this is assuming that they're doing a lot of things right. They're listening to you, let's say they get the investments right. Let's even say they get the Roth IRA conversions right. Let's even assume they get the estate planning right. Which by the way, hardly anybody gets it right. It's a terrible problem, particularly when there's a big IRA.
Jim Lange:
But let's say that they get all those rights. What do they often do that they could have done differently than if I had caught them 20 years ago? By the way, I was with a lot of them 20 years ago, but they didn't listen.
Jim Lange:
As I would say, figure out how much money you can afford to spend and then at least come close to spending it. Seriously, and it doesn't mean go out and buy a new Cadillac or fly first class. It could be money to charity. It could be money to your kids. Buy experiences, I’m a big fan of taking your whole family on vacation. Right now, I'm speaking to you from the Poconos where my father-in-law has been taking the entire family. He is 97 years old. He'll die with a few U.S. dollars but with quite a few family memories he's created in the last 25 years.
Jim Lange:
And so, be smart about your money, spend it on experience, gift it to your kids. And in addition to getting all the things like Roth IRA conversions and the investments right, and the estate planning. By the way, the estate planning is pretty horrendous for IRAs and retirement plans. And particularly with the SECURE act, people are going to get nailed.
Jim Lange:
But I guess if I was just going to keep it simple, I would say the person who dies with the most money is not necessarily the winner. The person who has best utilized their money for themselves, their family, their charities, et cetera, to me, that person is more of a winner.
Dr. Jim Dahle:
It's good advice. That hearse is not going to have a trailer hitch, is it?
Jim Lange:
I don't think it is.
Dr. Jim Dahle:
Well, James Lange, thank you for your time today. I appreciate you coming on the podcast and I suspect you're going to be giving away all 400 copies of that book plus some.
Jim Lange:
Well, I hope so.
Dr. Jim Dahle:
But we appreciate your generous offer.
Jim Lange:
All right. Thank you so much, Jim.
Dr. Jim Dahle:
Thank you.
Dr. Jim Dahle:
All right. That was great having James Lange on here. I really like his writing. He is not afraid to get into the weeds and give hard recommendations about stuff. And so, I really enjoy his books. So many books out there are so full of fluff and stuff. His are not. They are full of examples and numbers and charts. And if you're into the details, he's an author that I think you will like a great deal.
Dr. Jim Dahle:
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Dr. Jim Dahle:
All right, don't forget. If you need to refinance your student loans, and many of you will over the course of this fall as your interest rates go up from the 0% the federal student loans have been at.
Dr. Jim Dahle:
But if you refinance more than $100,000 in student loans through the WCI links, we are going to give you our flagship online course Fire Your Financial Advisor absolutely for free.
Dr. Jim Dahle:
To claim that free course enrollment, visit whitecoatinvestor.com/refibonus after you refinance your student loans through the WCI links, whitecoatinvestor.com/student-loan-refinancing.
Dr. Jim Dahle:
You have to do that, I think we've extended that through October 31st, but it's a great way to get a pretty sweet value add to refinancing your student loans, which is already a great deal to start with.
Dr. Jim Dahle:
Thanks to those of you who have left us a five-star review and told your friends about the podcast. Our most recent review came in from Tired parents of newborn twins who said, “Excellent podcast! Pro Tip: You don’t have to be a doc to benefit! Dr. Dahle gives sound, well researched, important advice for anyone looking to maximize an investing strategy while not falling for the latest gimmick. He is incredibly consistent with suggestions and directions. His website is also a great source for details like examples with screenshots or walking through spreadsheet formulas. Very little is specific to doctors so don’t let the title keep you away!”
Dr. Jim Dahle:
Shh. Don't tell the doctors, they want it specific to them. But the truth is that 95% of personal finance and investing is the same for everybody.
Dr. Jim Dahle:
Keep your head up, your shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.
The post Beating the New Death Tax with James Lange – Podcast #221 appeared first on The White Coat Investor - Investing & Personal Finance for Doctors.