If you're a client of Keen Well, you're going to be grateful that we are checklist people here, and that we keep our checklists up to date. Welcome to Keen On 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 Keen and his host sort through the key issues that you need to know in a lively and candid way. Hey everybody, welcome back to Keen On Retirement.
I'm your co-host Steve Sandusky, and I am here with Bill Keen and Matt Wilson. Guys, how you doing today? We're doing good down here, Steve. How are you doing this tax season?
Doing well, doing well. I haven't turned in all my papers yet to my tax person, but I am slowly but surely accumulating all the documents in my file, and before long I'm going to have to send that off and see how much I owe. We're still early in the game in taxis and here, aren't we, Steve? There's still an eternity till it's due.
Yeah, not until middle of April. Yeah, even then you can extend it out till October. Well, you know, I know we keep suggesting that Steve is sitting on a big pile of Bitcoin that he's hoarding over there, so we're still not sure about that. He might have to extend his taxes to get all that figured out.
Yeah, well, I think Bitcoin and these cryptocurrencies are starting to become a recurring theme in these episodes. We have to make sure that all this tees and Steve here, that our listeners aren't actually thinking that he actually does own a bunch of it. Maybe if we talk about it often enough that it will actually come true, that I didn't even know, maybe unconsciously I ended up buying a whole bunch of Bitcoin when it was $100. And I am sitting on a gold mine.
You might be a target then for hackers and everybody else trying to steal your Bitcoin. Yeah, and maybe I was smart enough to take it offline and write down my codes and put it in a safe deposit box. Yeah, that's a good piece of advice there. Yeah.
All right, well, hey guys, I know we have a few listener questions that we're going to go through today. I'm looking at the list here. We've got some really good ones. So if you guys are ready, we'll just jump right into it.
Let's do it. All right. Well, the first one I'm looking at here says that I just inherited some money from my father who recently passed away. There is a life insurance policy that I am the beneficiary of and they say it's $200,000 and they have an IRA worth $37,000 and some after-tax investments in stocks and mutual funds of about $300,000.
And the question is, is all of this taxable? What's say you, gentlemen? Yeah, that's a great question because there are some different rules around the taxes with each one of those items. So depending on when this person passed away, there could be some different rules now based on the values.
It won't really matter. But what I'm referring to is the estate tax. So it doesn't kick in. If you passed away in 2018 until an individual has an estate worth more than $11.2 million.
So this person's under that threshold. Now, if they passed away in 2017, the threshold was half that. So it was only $5.6 million. So still not an issue, but did have a little change there with the new tax laws that went into effect at the end of last year.
We get this question a lot when people inherit money like this. And when they're asking, aren't you, is it taxable? I don't know that they know that they're asking this question, but to Matt's point here, I'll let him finish, is that there's different types of taxes that they need to be thinking about. Yeah, most people, I think when we get this question referring to the estate tax, so they just want to know, will all of this money just be lumped together?
And will I have to pay tax on it? Or will the estate have to be taxed on it? And the answer in this situation is no, no estate tax. So the next piece then is okay, well, depending on how the account is held, what type of account it is, there's then some different tax ramifications.
The first component there, I believe was the life insurance policy of $200,000. That's right. There would be no tax on that. So life insurance, yep, that is distributed tax-free to the beneficiary.
So that is good. There's an IRA, we're $37,000. So the answer on that is it transfers to the beneficiary tax-free, but the beneficiary is now responsible for all of the deferred tax that's within that IRA. We had a lot of these, don't we, Matt?
Our clients even in their 50s and 60s are now inheriting these IRA accounts. So we have quite a few of these inherited IRAs he's talking about here. We do. And the balances are in that range.
None of them are any huge amounts of money where I would say they're north of a million dollars or anything like that. But I think we'll start to see more and more of that as time goes on. The way the rule works says the IRS is, yes, it passes to the next generation or to the beneficiary, but that beneficiary has to take out a minimum amount based on their life expectancy. A lot like the required minimum distribution rules.
Exactly like that. They call it a required minimum distribution for an inherited IRA. So the IRS basically says, well, this money's been sitting in this account, tax deferred for however many years, and this person that owned it might have already been taking required minimum distributions. But the next generation, they have to continue taking requirement minimum distributions, but it's just based on their age.
So the amount they have to take out is different. It's not based on the person who passed away from it. Now, there is one caveat to this is that if you forget to take it in that first year, then you have a five-year window to take the entire account out. You have to take the balance to zero.
So in this case, that's probably not going to be a big deal. And we might even recommend, depending on this listener's tax situation, that they take the whole thing out anyway as part of their maybe next year's income. It just totally depends on whether or not they're retired. They need the money or not.
I think when our clients start to pass away the ones that we're working with, where the IRAs are seven figures plus, now this is going to be a much different situation for their kids inheriting and not being forced to take that out over the course of five years. That's right. Hey, man, I got a question here if I could. So let's say this was maybe one of those million-dollar IRAs.
Could it be set up so that there are three beneficiaries of this and each one gets a third, a third, a third, a third? And if so, mechanically, how does that work? Are they taking this million dollars and let's say it's invested in a lot of different things? How do they know which third goes to each of the people and are they setting up three new accounts?
How does that all work? So what happens when you have multiple beneficiaries, which is very common, is the custodian will set up inherited IRAs for each of the beneficiaries based on the percentages that was predetermined by the owner of the account. So in your example, Stevie has a third, a third, a third, a third, a third. Now you have to equal 100%.
So someone might be getting a little bit more in that case. But it is predetermined. In other cases, you might have three beneficiaries, but it's 75% to one, 20% to another, and 5% to the third. So it doesn't have to be equal at all.
And the other thing to remember with this too is it doesn't matter what any of your state planning documents say. So if you've created a will, if you didn't update your beneficiaries, it doesn't matter. It goes by whatever it says on that IRA. So that's one of our checklist items is just reviewing beneficiaries on an ongoing basis because sometimes things do change.
And each owner of the inherited IRA now has their own tax ramifications for whatever decision they make. So if one, one of the individuals inheriting the funds decides to just take it all out and pay all the income tax, that doesn't impact any of the other beneficiaries. Okay, that makes sense. Very tax friendly.
That's right. Okay. One thing we have to do, Steve, and this question has kind of opened up a lot of different scenarios here is educate the kids. We want to try to do the best we can to let them know about the stretch IRA, which allows these accounts to be taken out over the course of a lifetime and not all consumed in the first year or the first five years, like Matt mentioned.
And in some cases, you can educate all you want, but there's going to be the kid, if you will, that's not going to care about the stretch IRA and that's going to want the money now as soon as possible. So we do try to educate the kids and let them understand. This truly could be a retirement account for you over the course of your lifetime. Yes, taking small distributions that are required over the course of your life, but not taking it all out all at once.
So how about the other part of this question where they said they also have some after tax investments in stocks and mutual funds of about 300,000? How is that taxed or not taxed? We call this a step up in cost basis. It doesn't matter what the person who passed away, what they paid for the investments, what the IRS says is at the date of death, whatever the value of everything is at that time, your basis resets to that new value.
That's quite a gift, isn't it? It is. So let's just say, for example, this person paid $100,000 for these investments. They're now worth $300,000.
If they sold those while they were living, they're going to have a capital gain on $200,000 and they're going to pay tax on that because they passed away and left this on without triggering that sale. That $200,000 capital gain gets basically wiped out by the IRS and the beneficiary gets to decide. Now they don't have to sell anything. They can do whatever they want with those funds and just hold on to the stocks and mutual funds.
But if they choose to sell them, then if they sell them essentially at the date of death or real near that, there would be very minimal gain or loss, of course, depending on what the investments are doing. But they don't have to worry about going back and figuring out all the old cost basis records. It's enough just to talk about what the actual tax bill is that passed. So it's maybe unnecessary to go back and talk about prior versions that didn't pass, but Steve, they were talking about eliminating that step up in basis that Matt just described.
That had a lot of people up in arms because this is a big deal for after tax investments. Things like family farms. Real estate, real common with stocks and bonds and mutual funds and those types of investments. But anything that is invested in after tax dollars, that capital gain goes away.
One of the proposals was get rid of the estate tax completely, but there would be a capital gains. That step up in basis would be eliminated as well. In that case, a lot more people would be subject to that step up in basis situation. Oh yeah.
So by raising the estate tax limits now to, would you say 11 to per person, right? Yeah. 22 for, it essentially eliminates mathematically everyone. I mean, there's very few people that will get hit by that.
Not quite everybody will be eliminated, but mathematically most. And then the people, quote, normal people got to retain this type of basis. So we appreciated that working out the way it did. So to answer this listener's question, if you look at this, they just inherited over $500,000.
And they're going to only OAT income tax on the 37,000 in the IRA, of which a very small portion of that even needs to be brought out under the RDPs. So good news for this listener and others out there listening to us today. We get this question a lot in the firm. I mean, probably once or twice a month, folks are going through this and they're just certain that there's going to be at least a good chunk coming out of something like this.
In most cases, there's not. So I think the moral of the story is it's good to inherit money. Yeah, we have to do some calculations. That's a strategy we recommend.
Yes, exactly. Yeah. Right. Hey, let's take a look here at the second question that we've got.
And the question is they say, I had a zero tax year last year due to a tax deduction. I realize now that I could have converted part of my IRA to a Roth IRA and had virtually a non-taxable event. Can I still do this now in 2018 for 2017 tax year? Ooh, yeah, unfortunately not.
There's a lot of things that we talk about in being proactive in your tax thinking and planning. So there's a checklist that we go through every year so that we're not doing exactly this. And that's looking back at history and saying, what could we have done? Unfortunately, with these Roth conversions, they have to happen in the tax year that you want to make that transaction occur, unlike making a Roth contribution or an IRA contribution.
Now we have until you file your taxes to do that. And like right now, someone could make contributions for 2017 still. The Roth conversion has to happen by December 31 of the year. We've seen this haven't we several clients that have had big tax deductions.
We have several that have businesses that have different accounting methodologies that every so often they'll buy some capital equipment or they'll have something that comes up that they're in as zero tax year. There's not any taxes to for them that year. And those are years, just like this listener asked that, yes, if you have money in IRAs, you can make a conversion over to a Roth and take advantage of that. And we had at one point a client bought into a long-term facility.
It wasn't a nursing home, although it had that level of care. It was an independent living, but then you'd basically sell your home and make a large contribution. I think it was several hundred thousand into this facility. And then you're there, you can stay there the rest of your life.
Good portion of that was considered a qualified medical expense. And above the floor that year, they had a nice deduction that we were able to convert a Roth IRAs to a Roth, take advantage of that deduction in that year. Have we not done that and been aware of it and had been looking back at it like this listener is, client would have missed it. So unfortunately, this answer isn't as positive as probably the one that we had to listen to question number one.
If you missed it, you missed it, unfortunately. Yeah, that's why it's important to just sit down in the fourth quarter of every year and really just get conscious of where your ad income-wise and what some of your expenses have been and run through a mock tax return just to see, okay, is there any potential strategies that I can utilize before the end of the year? Because that is the key to this on some of these strategies, these conversions specifically though, you've got to do them in the tax year. One thing I want to add here, Bill, as I've heard you use the word checklist a couple of times and I know we've done previous episodes and some blog posts on checklists and how you guys are using that in the practice there at Keyn wealth advisors.
And so I would just say anyone listening to this, if you're working with a financial professional and they're not using checklists or they don't have some method and process whereby they are able to go through a list of all these different things that they should be talking to you about to make sure that nothing falls through the cracks and that they don't miss anything just like in this example here with the Roth IRA needing to be able to do that during the current tax year to take advantage of it. So if you are working with someone who doesn't have a checklist or some kind of process like that, then you might want to think twice about that. Well, for sure. And you know, I always say, make sure you're working with people who are keeping their checklist updated as well.
Yeah. You know, Steve, I'm a pilot and we talk about that a little bit over the course of our episodes. And I sometimes I get a hard time from people, my friends and relatives and others. They say, oh, Bill, you're so obsessive.
You and your checklists are they look at our blogs we put out and we always have a nice checklist about, hey, here's the things the actual items that can make a difference to look at. And then now we're talking about checklist today in the keen wealth for our clients. And I would simply say that if you're a passenger in my airplane, you're going to be grateful that I'm a quote checklist guy. For sure.
And if you're a client of keen wealth, you're going to be grateful that we are checklist people here and that we keep our checklists up to date. Yeah, well, I'm not going to test that though, because I have been a passenger when you've been at the controls of your plane. And I am grateful that you definitely go through the checklist and you're very focused on that. So yeah, I mean, it's so easy for us to forget things.
And we've got hundreds or thousands of flying hours and still, even with that, you still go through the checklist on the very basic things because it's so simple. All it takes is just one missed flip of a switch and that could be the difference between life and death. That's right. That's right.
All right. Let's take a look at the third question here. And this listener asks, it looks like now that I will be taking the standard deduction due to the higher deduction numbers. And I think they're referencing the new tax bill.
And they say, is there any strategy left to take advantage of deductions? Yeah, we've been looking at this pretty hard. We have because this new tax law increased the standard deduction to a point to where most individuals, and this is data that is coming in from several different sources, 95% of tax filers will file the standard deduction. 2017 and in previous years, it's about 70% would file the standard deduction.
So most people still file the standard. But now this is going to hit more and more people to where the itemized deductions just don't make sense or don't add up to enough. So there's definitely two strategies that come to mind. The first one is all about charitable contributions and being over 70 and a half.
That's right. So what we call that is a qualified charitable distribution, QCD, when you take out money directly from your IRA and pay it to this qualified charity, and it counts towards your requirement of distribution, but it doesn't show up on your tax return as a distribution. So as an example, for a married couple, the new standard deduction is 24,000. So, you know, you got a lot of people that we work with in the firm here don't have any mortgage interest to deduct anymore.
Their state income tax if they're retired isn't isn't too awfully bad. So some of the deductions really it was the charitable was making up a good portion of it in property taxes. But like Matt said, 95% of the folks in the US won't have enough of those combined to get over the 24,000. So it doesn't make sense for them to itemize.
They would just simply take the standard deduction. So in his example there, you take the standard, you get the full 24,000, you write that off. And then on the R&D, you were forced to take because you have to based on the rules that you direct it right over to your charity that you would have been making anyway. And it's a non taxable event.
Let me throw this idea out. This is something I've been reading about as well. So talking about these charitable contributions, let's say that you're under 70 and a half. And let's say that maybe you typically make, I'm just going to pick a number of $15,000 a year of charitable contributions.
Well, even with your 15,000 charitable contributions and maybe a few thousand of state tax, let's say you're still under the 24,000 for it. Okay. So some people are now saying that you bunch your charitable contributions and you take them all like once every two years. So if you're going to make 15,000 per year, then what you do is in one year, you contribute 30,000.
And then the next year is zero. And then the next year, 30,000. So that way, by doubling them, you're now over your 24,000 and you might be able to have a higher deduction in those years when you've doubled your contributions. Is that a valid strategy?
It is. And that's actually one of the other strategies that we're talking to folks about is that essentially, and there's a couple of different ways to go about it. So you can bunch them to where if you have a charity that you've been pretty consistent with giving funds to, just let them know, hey, this is what I'm going to give you for the next two years. So you just bunch them all into one year.
So you're able to claim the itemized deduction. Of course they forget that, by the way, by the next year, they forget that you said that was for two years. Nothing's done. That's the charities.
A whole other. They always kind of remind everybody that now another strategy with that is to use what's called a donor advised fund. We cuss the other client assets that Charles Schwab and Charles Schwab has donor advised funds here. And the client can deposit any dollar amount.
Now this is with after tax money. So it's not IRA money. It's after taxes. And they can put in, you know, in this example, Steve, they could put in two years worth, $30,000.
They could put in four years worth, $60,000, assuming they had the cash to do so, and then claim a deduction for that contribution of the donor advised fund in the year that they made that contribution. And then you can control how it's invested. So you can determine what level of stocks and bonds that you want in there. And then to you also control when the money is distributed.
So you don't have to just decide upfront who it goes to and what dollar amount while it's inside this donor advised fund. You can make that choice. So if you were donating $1,000 a month to a specific charity, you can set that up directly from this donor advised fund as well. So you're not having to have this conversation that we're going to give you a lump sum every couple of years, and then reset that every so often.
And you can change your mind too. So if you felt like, well, hey, I had this charity in mind, but I'm going to maybe split this up in a couple of different ways. You can change it at any time as well. So a lot of flexibility with these donor advised funds.
And I think we'll see a lot more of that come into the planning realm. Yeah, Matt mentioned 30,000 or 60,000 as an example. The reality is, and I think he mentioned it too, but just to reiterate, any amount can go into a donor advised fund and get that tax deduction in the current year. So now if I say that though, now I've got to go talk about the percentage of, you can only deduct up to 60% now adjusted gross income in any given year.
It was 50% of the old tax rules. Now it's up to 60. So here's an example. If you made 100,000 adjusted gross income, they will only allow you to deduct 60,000 now in 18 going forward in that year.
So there is a limitation to your deduction there based on adjusted gross income. That's right. Yeah. And again, these are all for charitable contributions.
So you can't set up a donor advised fund for your child. Oh, kids, which are like, I think I already have though. And get a theory, you just don't get the tax deduction. Not technically.
You're right. Right. Yeah. Another, so this can even be coupled with this donor advised fund or this charitable bunching is making two property tax, state income tax, making two years worth of payments in one year.
Now this gets a little bit more technical in terms of how you do that and what are the penalties associated with it. If we combined a donor advised fund with some charitable bunching with this property tax strategy, we can get somebody's itemized deductions up there in every few years. So take the standard every two, three years, and then you have an off-year or an on-ball year where you have these higher deductions all pushed into one. Excellent guys.
Well, I see one more question here. And the question is, I saw in the tax bill that the step up in cost basis was repealed. What does this mean? Now, I know we talked a little bit ago about a step up in basis.
So what's going on here with what they're asking? Sounds like they read an old version of the bill, doesn't it? Yeah. We got ahead of that question, didn't we?
That one it was bantered about but never put in the law. Okay. All right. So we've already answered that one then.
Yeah. And you know, there's another question that we've been getting a lot lately too is around 529s because that was another big change. And then I think applies to a lot of folks that we work with is how 529s are now used going forward. So what the tax cuts and job act of 2017 now allows is four 529 accounts to be used for education expenses from grades K through 12.
Now that is subject to a $10,000 cap per beneficiary on grades K through 12 and then any dollar amount for any college expenses. Now prior to this year, it was just for college expenses. And so you think about saving for 18 years, yeah, you could have a nice account there. There's just a big unknown around, well, is my child going to go to college or not?
And then am I going to have this big chunk of money in this 529 account that I can't necessarily access for other purposes? If you didn't use them for qualified education expenses, it was taxed the game. The game was taxed and penalized at a 10% rate. So there were some restrictions around that.
What we're seeing from a planning standpoint is individuals who are already making education expenses for grades K through 12, now running those through a 529 account. And the reason they would do that is because they would get a state tax deduction for those contributions. In Missouri, you can deduct up to $8,000 if you're single, $16,000 if you're married off your Missouri taxes, Kansas is $6,000 per beneficiary if you're married filing jointly. So some of these strategies we've talked about today, Steve, they're all about thinking ahead, being smart, being prudent, and saying is it worth it to pivot, to understand the rules, to do a little bit of work up front, to take advantage of some of the new legislation.
For some people, the answer will be yes. For other people that will be keep it simple. These are all things though that I think as we continue to get questions and think about how these things play out, we'll continue to bring those to the show. Well guys, I think we'll wrap it up there.
So some great questions and some very important and insightful answers from you guys. So I appreciate that. Lots of good wisdom here that we talked about today and some ways for people to save some money on taxes with the new tax bill. So again, guys, thank you and we'll look forward to the next episode of Keen on Retirement.
All right. Thanks, Steve. Thanks, Matt. Thanks.