A piece of each of these questions probably will touch and impact most of the people listening to this today. So I think these are great episodes to kind of show behind the curtain how a lot of this interplay between these different factors between healthcare, between IRA rules, regulations, taxes, penalties, what people need to spend and to live intentionally in their lives as they're actually doing the most fun part of what we talk about and what we advise folks on. And that is spending their money. Welcome to Keenan Retirement, a show dedicated to helping you thrive before and during your retirement years.
If you are looking to grow and protect your wealth and want to make the second half of your life the best half, then listen in as well as advisor Bill Keenan and his host sort through the key issues that you need to know in a lively and candid way. Hello everybody and welcome back to Keenan Retirement. I'm your co-host Steve Sandeski and joining me as always are Bill Keenan and Matt Wilson. Gentlemen, how are you today?
We're doing well here. Kansas City Steve, how's it going up in your area? Good actually warm weather is here. We had a deep freeze like some parts of the country.
But things have warmed up and snow is melting still a little gray, but we'll take it. Yeah, you know, time seems to pass quicker. Yes, we get older. I wrote a blog on that one time.
I used to think that summer time when I was out of school was the same time frame as the time I was in school. And then as I got older, I realized I was getting ripped off. Yeah, I was in school most of the time. You're just getting smarter, Bill.
Yeah. Yes. And you know, now winter has felt longer than summer. Always to me it does.
I feel longer. I really would like to go to Scottsdale or Florida or something like that January, February. One day, one day I'll be recording the minute. It's time of year, okay?
Not today. Okay. All right. Well, hey guys, usually Matt is the guy that's got a trivia question, but I got one for you today.
So what happened on February 7th, 1964, and I give you a little bit of a hint, it happened in New York City. Okay. Oh, that really narrows down. I'll give you another hint.
It has to do with music. Music. Hmm. Live concert happened.
Okay, Bill. I had no idea. It could be so random. It has to do with music.
Yeah. Okay. A concert happened. Well, if you go back and think of the bands, I mean, he might be angling toward a specific band, Matt, the Rolling Stones, Pink Floyd, were they back then?
I don't know. Maybe they were newer than that. Oh, come on. The Greatest Band of All Time.
The Rolling Stones. Wrong answer, Matt. Now, we may have some folks listening to this that are going to take exception to this. The Beatles.
The Beatles. The Beatles arrived on the Pan-A. Oh, no way. Yankee Quizmer.
It was like 101 from London Heathrow. Wow. They arrived at New York's Kennedy Airport in Beatle, Mania officially hit the US shores. It was their first visit to the US, and they had just scored their first number one US hit.
Okay, another question. What was their first US number one hit song? I couldn't tell you. Love me, too.
That's a good guess. That was certainly one of their very first hits, but their first number one in the US was, I went to hold your hand. Okay. Well, you know, you said Beatle, Mania started in 1964.
Hasn't ended. It's not on TikTok. That's right. I think I mentioned to you guys that last summer, Linda and I were able to see Paul McCartney in concert in Seattle.
Yes, it did. So it hasn't ended for me. And he's now 80 years old. He was 79 at the time, and it was phenomenal.
So it's pretty amazing what he's been able to accomplish. So, well, I know this is not a music show, and I'm very the listeners are wondering when you guys get to talk about money here. So, yeah, we have some listener questions today. Got a few that have come in here.
So we want to go through those. So, Matt, why don't you tee up the first question here. Does the five-year withdrawal penalty apply to Roth principal deposits? Well, we got to fill that in a little bit.
Like, we're assuming our listeners know what the five-year withdrawal penalty is. So, that's right. Yeah. So, first and foremost, this question, basically what they're asking is, I'm depositing money into a Roth IRA.
Making it a deposit, I'm going to invest the money. And if I withdraw the money within a certain time frame, there is a penalty, but that penalty only applies to growth. They're asking, does it apply to principal? The answer is no.
But again, you have to kind of understand what are we trying to accomplish here. So, the five-year rule for Roth IRA distribution, it stipulates that five years must have passed since the tax year of your first Roth IRA contribution before you can withdraw the earnings in the account income tax rate. It doesn't matter if you're under over $8.59. You always have this five-year window, and it's only on the growth.
That's the key to understanding this. We advise folks to go ahead and fund their Roths even now, people. And some parents have helped their kids put money in Roth IRA's because it's tax-free forever. We know the compound over many, many years and decades.
It's so powerful. And they think, well, no, I can't tie the money up until I'm 59 and a half. But what you're saying is that, no, if you put in, I guess what this year, Matt, 6500, right? Right.
Right. Under 50 limit. So, you put in 6500 this year. And two years from now, the accounts grown from 6500 to 9,000.
Yeah. You can get your 6500 back without a penalty because it was after tax principle. The government cannot encumber those funds because it was after tax money you put in. It doesn't matter if you're not 59 and a half or if that part had been there, five years correct.
That's right. Neither of those apply to that principle. So if you don't need the money, then you can leave it in there and let it run. You should try to.
But if some reason you did, it's there. So I think what's neat about what I think you're getting ready to share with us though is even if you're under 59 and a half, you can still take the growth out under certain circumstances without a penalty. And again, we're not recommending this because ideally you left this thing run for decades. But is that true?
Yeah. The point being is like, there's really no downside to making the deposit. You're making the trading process to the contributions. And the way it works is when you actually take the money out, there's a form when you file your taxes.
And it just looks at it from a first in first out basis. What that means is I first made it a positive 6500 after tax money. So that's going to be the first amount that comes out when I take a distribution. Right.
Yeah. You just track that. So if you only take out $2,000, well, you still have another $4,500 using the $6,500 amount that you can deposit this year available to you for tax free withdrawal in the future or penalty free under this five year rule in the future. There are some exceptions.
So if you're under 59 and a half, and you need more than the actual initial deposit. Yes, you want some of the growth out. You're gonna have to take some of the growth out and you're gonna pay income taxes and a 10% early withdrawal penalty as well. You wanna avoid that as much as you can if you're under a 59 and a half.
Now there's exceptions. These are similar for the ones that are for IRAs. You can use up to $10,000 to buy your first home. You can use the money to pay for educational expenses.
You can use it for expenses related to birth or adoption. If you become disabled or you pass away, which basically what that means, it's confusing that it's written that way, but it means that your inheritors, your beneficiaries avoid the 10% penalty. And then you can use it for unremersed medical expenses, health insurance, premium employer, unemployed. Last rule, you can take substantially equal periodic payments called Rule 72, which we've talked about before, how you can take money out kind of pre-59 and a half.
But I've never talked about it based on a Roth IRA though. So essentially you kind of loop those two things together today. Yeah, you have the option. So not only do you pay the taxes and the penalty if you're under 859 and a half, you really wanna be careful with taking those distributions.
Because again, it's tax free. So if we could just get past that hump of the age, well, now you're like, it's such a better position. Really no downside to making the deposit into the Roth IRA because you can always get the principal back, it's just that growth has to stay in there to avoid taxes and penalties in these situations. Makes sense.
You know, we talk about these exceptions and I've been in this industry now 31 years. Matt, you're what, 21? I've got 10 on you. I guess I'll always have 10 on you and tell somebody I retire and then you maybe passes me up Steve.
Maybe, but anyway, how many times would you say we see people have to tap their accounts like this for exceptions? I mean, of course, when folks pass away, I mean, that's the one where these penalties are waived of course, but these other ones, not very often, right? Yeah, in our experience. On an annual basis, there may be one distribution a year that's kind of outside of what maybe we're planning for, where it's, hey, there's an emergency and the Roth IRA is where we're gonna suggest they take a distribution from.
Not common when you have access, maybe to some other tools that can get you through something so you can avoid making those early withdrawals from those Roth IRAs. All right, we have another question. Mom who passed away in April of 2021, she had just turned 70 in January of 2021 and her beneficiary on her IRAs, her daughter Megan, who is four years old. Megan, she took receipt of the IRA, she opened up an inherited IRA for herself in 2021.
So the question is, when does Megan need to start taking distributions from her inherited IRA? These rules changed with the secure act that passed in 2019. Because of that, we have a new RMDH. So RMDH is 72, this is why this is important, 72 for mom.
Because of her date of death, right? Yeah, mom was not required to take any distributions yet. And because mom wasn't required to take any distributions, Megan has a 10 year window where she doesn't have to do anything but just have the entire balance taken out of the IRA by the end of the 10th year. If mom had to have taken RMDH, so let's say mom was 75 when she passed away, so she was taking RMDH at that point.
Then Megan would have to take distributions each year based on mom's age, mom's RMD basically, every year up until the 10th year and then have to take the entire balance out. Take the remaining balance out. The remaining balance. Whatever's left, that's right.
Because mom wasn't on RMDs, Megan's does not need to do anything until you're 10. This question is very common because this rule wasn't clarified when they first wrote it. So there was some confusion around, do you have to take RMDs or not? And they finally clarified that in 2022.
All right, lots of details there. Let's go to question three. It says, I am still working and my birthday is May 5th, 1950, making me 72 years old. I plan to stop working in June of 2024.
How does the secure act 2.0 impact the ability for individuals who have 401ks to delay RMDs as long as they continue working for the employer who sponsors the plan? What would be the deadline for such a person's first RMD if their date of birth is May 5th, 1950? And they stopped working in June of 2024. Good news for this is that the secure act did not make any mention or any changes to the rules around this.
So the rule is, is that as long as you're employed, you don't have to take an off-requirement distribution from your employer-sponsored retirement plan. Typically, that's a 401k. We use that word interchangeably, but some people have four, three Bs and 457s and all these different types of accounts. Seps, all that.
That's right. So as long as you're working, you don't have to take a distribution. As soon as you separate from service, then that 401k has its own requirement of distribution along with any other IRAs or retirement accounts that you have. So if you have an IRA separate from your employer plan, well, that IRA has a requirement of distribution at 72 because that's the RMDH.
But if you're still working, then you don't have to worry about that. Now 73, that's the new rule. It's actually 73 for RMDs with the secure act 2.0. So good news for this person.
He doesn't have to worry about that as long as he's continuing to working. And then in 2024, when he separates from service, he'll be required to take a distribution that year. All right, pretty straightforward. Although the question seemed really honorous and I would hate to be a late person trying to figure all this out and keep track of the changes.
1.0, 2.0, 3.0, you have to comment. So question four, can a parent use his or her IRA to pay tuition for a child attending law school or some other graduate program without penalty? Mm, nice thing about this question. Is they keen in on the penalty part?
Because there is a work around, we actually already mentioned that as part of the Roth IRA is that you have exceptions to penalties and education expenses are allowed. As long as they're for yourself, your spouse, your child, or your grandchild. So this question is parent using to pay for the child. They can take out distribution without a penalty.
It is still subject to income tax. So you've got to make sure that you're factoring that into the equation when you're taking the distribution. So yeah, so void the penalty, definitely subject to income tax. And they typically are making those payments directly to the institutions as well.
Yeah, I mean, you want to make sure that you're covered correctly. And there's qualified expenses too. So that's tuition, fees, books, supplies, required equipment. If the student attends eligible institution, half-time or more room and board also count as qualified expenses.
So you want to make sure all that's kind of factored in there as well when you're looking at it. Because if you don't follow the rules, then they come back and assess that penalty on you. And that can add up, especially when they start factoring in the interest and everything else that goes along with those penalties. Yes.
And so ideally, folks have money set aside outside of their retirement plans to cover these expenses. But we deal with a lot of folks here, at least in the Midwest, and that have got the majority, if not all, of their liquid net worth in their IRA accounts, their 401Ks and IRAs. So that might be the only resource they have to pull from. So these rules are really nice to understand.
So next question says I plan age 63 to live abroad permanently. But I'm debating on applying for Medicare at 65 in case I move back to the US later in life. I have coverage, and I will continue to have health care coverage by my country while living abroad. Is it worth it to apply for Medicare in the US if I have no intention of moving back to the states at this time?
I'm assuming I would want to apply for part A coverage, but potentially hold off on part B. Do you agree? What costs are incurred if I hold off on applying for part B? I'm liking our episode today because it's really taking us a lot of different places.
I mean, it definitely represents the questions that we do receive. And we see every single day here at our firm as we go through folks financial planning the broad aspect of these different things. This question about living overseas and not signing up for Medicare, we've had similar questions around this where someone might have had a retirement health care. And it's a special kind of retirement plan.
Maybe they were executive somewhere and they've got all their health care coverage covered and it really doesn't fall under Medicare. It's very rare, but that does happen from time to time. And people ask, well, if I don't need Medicare, should I sign up for it? Because you got to pay for it.
I mean, if you sign up for part B this year, the base premiums $164 a month. That matter where you're living, you're still paying. Exactly. So this individual, I mean, they're going to have to just make a choice.
We can't tell them definitively if they should or shouldn't sign up for it. Because if they say they're never coming back to the US ever again, well, then I would say, yeah, don't sign up for it. If there's any possibility that they're going to come back to the US, then they probably should have it. Because if you don't, you'll be charged a 10% late enrollment penalty for every 12 month period that you go without part B.
So right now, it's $164 a month. So that's an extra $16 a month, 10%. And that's forever. So if he moves back in 20 years, because maybe his family's year has a reason that he has to come back in these healthcare, well, that's going to be a very significant increase to sign up for part B.
And the only reason that I'm thinking that this person may think that is because they're mentioning signing up for part A coverage, because part A is premium-free. You paid for that while you're working. And this person's asking, well, I'm assuming I should sign up for part A because it's free. Well, if you're never going to come back, there's no point to sign up for part A either.
So it doesn't make any difference. But if you think you could, well, then yes, you want to sign up for part A. And then part B is you're just going to have to weigh the risk of not having that coverage if you do think that you might not come back. Because the penalty, again, as I mentioned, is going to be significant if you don't sign up for it.
Well, part of the math problem that I'm looking at here is, in your example, this person is 63 today. So if they come back in 20 years, I don't know. We talk a lot about long life and longevity today, and advanced medical care. But it's likely that it's not going to be an endless amount of years that you're paying the higher premium.
So to have not had to pay the 163 plus the inflation every year for 20 years, probably the right bet. That's right. Yeah. I mean, if they don't really have an intention of coming back.
All right, guys. Any final comments here as we wrap up? You know, I always say that I like these listener question episodes, because while some of them seem very specific to each individual listener and their situation, the reality is what we talked about today in each of these questions, maybe not the moving abroad. But it will apply to more listeners than you all might think out there.
A piece of each of these questions probably will touch and impact most of the people listening to this today. So I think these are great episodes to kind of show behind the curtain how a lot of this interplay between these different factors, between health care, between IRA rules, regulations, taxes, penalties, what people need to spend and to live intentionally in their lives, as they're actually doing the most fun part of what we talk about and what we advise folks on. And that is spending their money. I mean, we worked so many years to accumulate and work toward that point in time that we're financially independent, and that we do not have to work anymore if we choose not to.
And then we get to have a good time, hopefully, without guilt and with intention, deploying our assets and enjoying our lives and making a difference in our communities and making a difference in the next generation of something we so choose to do. So thank you all for putting this episode in today. Once again, we do get a lot of questions and for you listeners out there. If you'd like to pose a question to us to answer on the program, email info at keenwealthadvisors.com and put podcast question in the memo line.
And we will move your question into the queue and hopefully get a chance to answer that for you in a coming episode. All right, two quick things to wrap up here. First is a little pan on the back here. So the keen on retirement podcast had its largest number of downloads ever in January of 2023.
So it was a fantastic month. Great job to you two for being at this every month for years now and really getting that word out there. And there's thousands and thousands of folks that are listening to this every month. So we really appreciate all of the listeners and all of you that are sharing this with your friends and colleagues.
So we appreciate that. And then second, to get all of the past episodes and the terrific blog posts that were putting out there, this great educational content, please go to keenwealthadvisors.com. And you can find all the great material there. Of course, we'd love to sit down and have a conversation with you as well and see if there's something that we can do to help you in your financial situation and just live the kind of life that you want to live.
So thank you all for listening. Bill and Matt, as always, thank you. And we'll look forward to seeing you guys on the next episode of Keen on retirement. All right, thank you.
Thanks, Steve. Steve, Sandusky and Belay advisor are not affiliated with Keen Wealth Advisers. Opinions expressed by Steve are his own and not necessarily the opinions of Keen Wealth Advisers. Keen Wealth Advisers is an SCC registered investment advisor.
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