#47 | The Roth IRA is no longer the ideal wealth transfer vehicle

Guest Profile

Jason Hosler holds Series 7 and 66 FINRA securities registrations. He brings a technological edge to our firm and helps many of our clients stay current in the fast-moving age of the internet.

Transcript

Protecting and Preserving Wealth – Why The Stretch IRA is No Longer Ideal

Speakers: Jon Gay, Bruce Hosler, & Jason Hosler.

[Music playing]

Jon Gay (00:05):

Welcome back to Protecting and Preserving Wealth. I’m Jon Jag Gay, along with Bruce and Jason Hosler. Good morning gentlemen.

Bruce Hosler (00:11):

Good morning, Jon.

Jason Hosler (00:12):

Good morning.

Jon Gay (00:13):

Alright, I understand today we’re talking about the death of the Roth Stretch IRA. Bruce, give us a little bit of a recap before we start us to what happens and where we are now.

Bruce Hosler (00:22):

Prior to January 1st of 2020, if you had saved your entire life, then converted or saved your money in a Roth IRA and you died, you could leave your money to your family, and it would get stretched out over required minimum distributions over the remainder of their life.

And so, essentially, you could leave a legacy to your children of a tax-free lifetime income stream that they could inherit.

Jon Gay (00:52):

I know tax-free is a phrase that we all like around here, so continue.

Bruce Hosler (00:56):

Yes. So, that was a thing that was very beautiful. But then, in 2019, Congress passed the SECURE Act 2.0, and that SECURE Act basically stopped the ability to leave a lifetime income stream. In other words, the stretch IRA (that’s the term we want to use), it stopped the stretch and now made it so that your children had to withdraw the IRA in its entirety by the end of the 10th year.

Jason Hosler (01:28):

Jon, the Roth stretch IRA was really an ideal wealth transfer strategy. If you had a Roth IRA that after you and your spouse died, you left to your children, based off of their IRS life expectancy, they could take out just a portion of that every year for the rest of their lives.

And now, being limited to only 10 years, after those 10 years are up, you lose that tax-free nature of the funds and the account.

Jon Gay (01:58):

So, the SECURE Act, just again to recap this, was passed in 2019, went into effect in 2020. It’s now killed the ability of our listeners to use that stretch Roth IRA to leave the tax-free income to their kids for the rest of those kids’ lives.

Bruce Hosler (02:12):

Exactly. And so, the whole Roth IRA leaving the stretch IRA planning as a legacy tool, not just an income tool, but now, you’re leaving a legacy to your children that has been limited to just 10 years. And when you give your children the choice, many of them may make the wrong decision and not even leave it grow for the 10 years. They may take it out earlier than that.

And so, the idea that they can’t take it as an income stream has just killed the benefit of the tax-free stretch Roth IRA.

Jason Hosler (02:48):

And Jon, going forward, that tax-free nature is going to be more important to our clients and listeners than ever.

We have discussed many times about why we think tax rates are going higher, but just a quick recap, we’re at a $34 trillion national debt with expenses going up every year. The income from taxes is not able to keep up with that.

The interest payments going higher with the higher interest rates we have now. Social security and Medicare trust funds expected to run out over the next 10 years, and that’s before we even get to all the unfunded liabilities of the U.S. government.

We think that those tax rates are going much higher than they are now, and that tax-free pot that you have, that bucket that you have, not being able to provide that for your children is a big problem for a lot of our clients’ and listeners.

Jon Gay (03:33):

Well, on that uplifting note, Jason, let’s pivot here. If our listeners want to leave a tax-free income stream for their children, how would they go about that at this point, Bruce?

Bruce Hosler (03:44):

Let me kind of introduce the concept of the two-generation tax-free legacy plan with all the benefits that it can provide. So, the idea is parents purposefully plan to leave an income stream or at least a portion of their legacy as an income stream that is tax-free, that will last for the life of their children, and importantly, will also leave the assets in an asset protected state.

So, if your child goes through an unexpected divorce, a car accident, business failure, bankruptcy, just anything where they’re sued, you’ve left this income stream that the creditors can’t get to, or that no good son-in-law or daughter-in-law divorces … (Jon laughs)

Yeah, the parents worry about this, that their kid may go through a divorce. They don’t want their life savings to go to the in-law or the out-law that they don’t like. And so, this is a very important option that I’ve introduced with my new book, Moving to Tax-Free.

Jon Gay (04:56):

I do have to ask, when you say out-law, is that former in-law or is that like an Arizona Wild, Wild West thing Bruce?

Bruce Hosler (05:03):

No, it’s a former in-Law.

Jon Gay (05:05):

Okay. I did not know that term. I now know it, okay.

Jason Hosler (05:10):

And Jon, this planning requires integration of several disciplines of financial expertise needed to implement the two-generation tax-free legacy plan. You have the retirement income planning because this planning starts while you’re alive and in retirement.

You’ve got the tax planning aspect of it and how it’s going to affect your and your children’s tax situation. You have the insurance expertise that is needed to prepare this. And you have to be able to manage the risk with the planning and be able to adjust the planning for every client’s risk tolerance.

Jon Gay (05:47):

And Bruce, I know this is a system you’ve been working on proprietarily behind the scenes, but now you’re kind of opening it up to the world.

Bruce Hosler (05:53):

With the publication of my new book, Moving to Tax-Free, I’m introducing the new two-generation tax-free legacy plan to both investors and advisors nationwide so they can provide these benefits to their families and to their clients.

Jon Gay (06:08):

I love that, Bruce. Who would this type of planning work for the best?

Bruce Hosler (06:12):

So, certainly, families and couples who have worked and saved diligently, and now, have more money than they need for their retirement. So, they’re highly likely to be leaving an inheritance to their children.

So, then the question begs, if you have a choice, how would you like to leave your wealth to your family all in one big lump sum or would you like to carve off a portion and leave it to them in a tax-free income stream that will last for their entire life, that’s also asset protected from unexpected divorce, lawsuit, or any other creditor?

Jon Gay (06:48):

Or out-laws as we said earlier.

Bruce Hosler (06:50):

In-laws or out-laws. That’s right.

Jon Gay (06:52):

I would imagine Jason, most of our listeners would want to consider this type of planning.

Jason Hosler (06:56):

Yes, we have seen many of our clients, seeking this type of planning to provide for their loved ones.

Jon Gay (07:01):

Are there people that are not interested in this type of planning?

Jason Hosler (07:05):

Certainly, some people don’t want to bother, they just want to leave their money as a lump sum, let their children spend or invest it however they want.

Bruce Hosler (07:13):

The two-generation tax-free legacy plan is generally only used for a portion of your legacy as well. So, think about it: you have IRAs, you have Roth IRAs, you name your children as beneficiaries, and all of those funds are liquid and available to your children upon your death as a lump sum.

There are many other assets that also may be left outright such as life insurance or real estate or things like that. But there may be a portion of your nest egg that you would want to purposefully plan for and leave to your children to make sure that they’re going to be okay over the coming years that you would want to leave as a secure tax-free income stream for life.

And so, some of the benefits that the two-generation tax-free legacy plan will leave is, this ability to withdraw money tax-free, and if you have other pulls of money that you leave to them, they can also put it back into the plan and take it back out.

So, it’s involving a lot of different planning that’s necessary to put in place that can leave this inheritance in a tax-free manner that your children could use for the rest of their life.

Jon Gay (08:24):

Are either of you familiar with the psychological marshmallow experiment with the kids?

Jason Hosler (08:28):

Yes.

Bruce Hosler (08:29):

You’re talking about the Stanford marshmallow test, is that right?

Jon Gay (08:32):

You both are! Bruce, do you want to explain it, or do you want me to?

Bruce Hosler (08:35):

Go ahead.

Jon Gay (08:36):

And correct me if I’m wrong since you’re both familiar with this, but it’s my understanding that a psychologist at Stanford put a marshmallow in front of a kid (and did this many times over, of course), and said, if you can wait 10, 15 minutes, whatever it is, you’ll get two marshmallows. But if you can’t wait, you only get the one.

And it’s that whole instant gratification. That’s what this whole plan is making me think of, is yes, some of these inheritances and vehicles can be that lump sum up front, but if you now have this plan to spread this out over the lifetime of your child or your heir, like the Roth stretch IRA used to do, now you’re giving them that second marshmallow as opposed to that instant gratification where they have this lump sum and depending on how responsible they are with money, might blow the whole thing.

Jason Hosler (09:20):

Well, Jon, delayed gratification is one of those personality traits that allows investors to accumulate their capital in the first place. Sometimes they’re worried that their kids might not be as good at delayed gratification, this planning can put it in place for them, forced delayed gratification, if you will.

Bruce Hosler (09:37):

And the other premise that is so important, and Jason mentioned that earlier, is that we believe that due to the debt and the unfunded social obligations that our country has, that we’re likely looking at the tax rates that are twice as high as they are right now: 40, 50, 60% in just the next 10 years.

So, if we think about our listeners that are trying to leave a legacy to their children, an income stream that’s tax-free when there’s a tax rate of 50% or 60%, becomes way more valuable than it is right now.

Jon Gay (10:15):

So, this is a way to protect heirs both from potential future higher tax rates as well as themselves.

Bruce Hosler (10:22):

Exactly.

Jason Hosler (10:23):

Yes.

Jon Gay (10:24):

This has really been some important information today and I love this whole strategy, Bruce. If our listeners want to get in touch with your team at Hosler Wealth Management to find out more, how do they find you guys?

Bruce Hosler (10:33):

So, they can reach us on the website, hoslerwm.com, and they can reach out to get an appointment there or call either one of our offices in Prescott (928) 778-7666, or in Scottsdale (480) 994-7342.

Jon Gay (10:50):

I’m going go grab some marshmallows and make some s’mores, we’ll talk to you guys soon.

Jason Hosler (10:54):

Alright, sounds good, Jon.

Bruce Hosler (10:55):

Thanks, Jon.

[Music playing]

Jon Gay (10:56):

Securities and advisory services offered through Commonwealth Financial Network, member of FINRA/SIPC, a registered investment advisor. Forward-looking commentary should not be misconstrued as investment or financial advice.

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