I’ve been having a mid-life crisis of sorts regarding the value of tax-deferred savings. I decided to go back and reread the “conventional” wisdom before I disrespect it in front of my people.
Ed Slott is one of the foremost experts on IRAs in the country. He knows every single nuance of how to milk an IRA to the absolute tip top tax advantage possible. He speaks from the same perspective as I do as a CPA tax accountant, except he writes for Money Magazine and the Wall Street Journal and I write for, uh, you.
I have to admit, I learned a thing or two that I either never knew or forgot about the nuances of inheriting IRAs. I’m glad I read this book as it is quite possible that I would be better able to advise people regarding inherited IRAs after reading this.
My main problem with this book was that he lives in a bizarre world totally unlike mine. In his world people have millions of dollars in their IRAs and the main problem they have is how to keep from having to take any of their money out of there so it continues to defer taxes. In his world elderly parents die leaving their untouched retirement savings instead of living into their 90’s in an $100K/year nursing home. In his world IRAs make 8% on average after inflation every year! (I want to visit that world!!!)
My people almost never come to me to say, “My Mom left me $25K in an IRA, how should I best stretch that so that it grows tax deferred as long as possible?” Instead, they come to me at tax time and say, “Oh, and I got this weird piece of paper I don’t know what to do with from when my Mom died and I inherited some money from her.” I try to teach them to call me first, but usually I lose any chance to fix it before they break it.
There are some occasions when converting an IRA to a beneficiary IRA and taking distributions over the lifetime of the beneficiary is a good plan. I’ve got exactly one non-spousal person doing that right now out of 400 people. What I’m telling you is that it is a RARE problem in my world.
This book assumes as a basic premise of all these calculations that you do not actually need any of this money for any reason at all during your lifetime or even your children’s lifetimes, or even… uh… ANYONE’s lifetimes. The whole point of the IRAs in this book is to defer the taxes for some unknown moment. He shows chart after chart detailing the miracle of tax-deferred compound interest. It really is a thing of beauty… if you don’t take out the money.
In my world the moment actually DOES come when people need to access the money in their IRAs, and it almost always turns out to be paid at a higher tax rate than they have ever paid in their lives. Traditional IRAs are a sweet kiss of a tax deduction when you’re earning money, but they slap you harshly when you go to withdraw it under most real life circumstances. I spend my time trying to convince people to STOP deferring taxes in years when they’re in low brackets: convert to a Roth, withdraw it and buy tangibles, whatever: if you’re in a 0% or 10% or even a 15% bracket now, what are you waiting for?
This book did not discuss what happens to you when you withdraw $100K from your IRA to buy into an assisted living center, how it makes your medicare be surcharged for being a “high earner” and how taxes phase in on your social security income or how it pushes your income into a higher bracket than you’ve ever been in during your lifetime.
Nor did this book discuss what happens when your only savings are in tax-deferred accounts and the inevitable happens and you need the money – because it is de facto your emergency account if that’s the only place you have savings – and you end up being taxed at a higher bracket than ever before PLUS a 10% penalty.
Nor did this book discuss what happens when you put your money in a mutual fund with a 2% annual expense ratio and hidden fees of $2,000/year get siphoned off your income from your $100K nest egg. Or what happens when you put it in a CD making 2% when inflation is 3%.
In fact, this book did not discuss in the slightest bit the effective tax rate after inflation decreases the buying power of your nest egg and yet you have to pay taxes on the nominal value, leaving you with less actual buying power than ever.
Instead, Ed Slott works for the benefit of the governmentally-incentivized mutual fund industrv bonanza that is the modern IRA culture.
I’m not sad I read this book. It was a good overview of IRA laws. But it did nothing for helping me figure out how to plan for retirement. What it did do was to remind me to go make sure my beneficiaries were updated and fully filled out on each of our retirement accounts. That was nice. If you have an IRA you should do this. That’s a good tip.
Here’s another: don’t buy this book unless you’re deeply concerned with the burdens of dynastic wealth. But if you happen to be sitting on IRA money you don’t need, and/or you just inherited one you don’t plan on using right away, it’s worth taking out of the library.
Originally published January 1, 2011 at ProsperiTeaPlanning.blogspot.com