Transcription:

Episode 5 – Retirement Investments & Taxes with MFS Investment Management

00:11:37

Announcer: The money experience where experts in finance and life experience professionals, chat amongst friends. Get comfortable and listen in while we uncomplicate all things money, how to save it, how to invest it, and even how to spend it. Here are your hosts.

Kevin: Welcome everyone. This is Kevin McGarry managing partner of Value Financial Group. Welcome to the Money Experience Podcast. I’m really, really excited today we got some special guests and a great friend of mine, Miles Manheimer from MFS. He’s on with us. He’s a senior regional consultant. He’s been working with myself and our team for over 25 years. So, welcome Miles.

Miles: Thank you Kevin. Great to see you. And I have Doug with me today. Doug Orton. He’s been with MFS also since 2007. He’s worked in the financial services since 1993. He’s going to do a great job on talking about tax and compliance with IRA planning mistakes.

Kevin: That’s awesome.

Miles: So, when you’re thinking about retirement accounts, look, let’s don’t make this intimidating. Today’s not a bad news presentation about mistakes that you can make. If we’re in front of these IRA planning mistakes and you’re talking to Kevin about these planning mistakes, a lot of these problems can be avoided. But it’s also not just about the mistakes that you can make, it’s also about your family members. If you’re in front of helping out with some of the family members mistakes, a lot of those also can be avoided. So, that’s why we brought Doug on us with Kevin. So, thank you for bringing us on and where to get right into it. And so Doug, I’ll let you start talking right away.

Kevin: Hey Doug, real quick bud. Thank you for joining us. Could you tell the listeners where you’re from?

Miles: Yeah, I’m from MFS Investments. I’m based out of our Boston office.

Kevin: Are you a Sox fan?

Doug: Actually I don’t have the attention span to watch a complete baseball game, so I am one of the three non-Red Sox fans who live in Boston.

Kevin: That’s awesome. That’s great. I appreciate you joining us. Because right here, when we’re doing our planning and Valley Financial Group, when it comes to IRA planning, there is a lot of confusion. People think it’s should be simple but it’s not one area. And you and I spoke briefly this morning. One area that we see issues in the planning is around passing that IRA to the next generation. Can you walk us through some of those mistakes that you see from other advisors and clients that are making mistakes in within their IRAs?

Doug: Absolutely. And this one is I think absolutely critical because if we make mistakes in this area, it could result in our entire IRA going to somebody that we don’t want it to go to. So, there’s really two steps that you want to consider. The first is reviewing the beneficiaries on all your retirement accounts. So not just your IRA, but if you have an employer plan at work, taking a look at that and one, making sure that you’ve named beneficiaries. Sometimes people leave those forms blank and that’s generally not ideal. And then just checking to see if it’s still who you want to receive the account. So, just as an example, the way I set up mine, my wife Amber is my primary beneficiary on all my accounts. That means she’s first in line to receive it. And then we named our children as contingent beneficiaries on all l those accounts. And so what that means is when I pass away, if Amber died before I did, it won’t cause any problems because it’ll just go right to the contingent beneficiaries. And if she’s still around, she’ll have the option to either accept the account or if maybe there’s some tax reasons where it isn’t ideal for her to accept it. She can do what we call a disclaimer and then it goes to the next people in line, which again in that case would be the kids. So, it is a very flexible way to set up the account.

Kevin: Let’s just say that nobody named the beneficiary in their IRA and they unfortunately pass away and the beneficiary’s there. What happens?

Doug: Yeah, so one of the things that can happen is if I leave it blank or the person I left it to passed away and there’s no contingent, the state law will determine who gets it. And a lot of cases it’ll be who you probably want to get it but it interferes with the tax rules. In general, a beneficiary will have about a 10 year period to liquidate the account and that allows them to spread the taxes out over a 10 year period. An unnamed beneficiary in a lot of cases will have a five year period to liquidate the account, which is just less likely to work out from a tax perspective because you get what we call Bracket Creep. The faster I have to liquidate the account, the worse the tax liability can be in a lot of circumstances. Not everybody has that 10 year period and this is where getting advice from your financial advisor or your tax advisor or ideally I think both when you inherit an account is a good idea because some people will have the ability to spread it out over a much longer period. It might be a 20-30 year period or longer. It varies widely by your individual circumstances. So, one thing I do want to stress as we talk about these IRA mistakes is what I share are kind of rules of thumb that work for a lot of people but they don’t work for everybody. The real key is getting individualized advice about your circumstances relatively quickly after you inherit an account because who you are, how you were related to the benefit to the decedent can really vary. And particularly when you inherit your spouse’s IRA, you’re going to have some pretty attractive options. But which option you choose is going to vary widely based on your individual circumstances.

Kevin: That’s correct. Based off the planning, is there any other issues you see when the IRA is passed on to the next generation?

Doug: The biggest one is really heirs that don’t understand they have options. We see a lot of inheritors liquidate the retirement account in the year that they receive it. And as you could imagine, if I inherit let’s say a $500,000 IRA and I liquidate that in a single tax year, now all of a sudden I’m in the maximum tax bracket no matter where I started, I’m now at the max. Where if a beneficiary understands that okay, instead of doing that I can spread this out over multiple tax years. It is much more likely to be more tax efficient than just jamming it all in one year.

Kevin: Right, right. And do you have any like particular issues like if when you’re planning for wealth transfer on an IRA, do you prefer more planning with a Roth or a traditional IRA?

Doug: So, one of the benefits of the Roth IRA. If people are unfamiliar with it, basically a Roth IRA withdrawal, if you follow some basic rules will be tax free. And that would be both for the original owner of the Roth. It would also be for the beneficiaries. Beneficiary withdrawals for a Roth are generally federally tax free. So, you don’t necessarily have that issue of, okay, I’ve got all this taxable income in a single tax year but you also have the opportunity for the beneficiary to get in general another 10 years of tax-free growth after you pass. So, when you make the decision of whether a traditional is right for you or a Roth is right for you, talking through with your advisors about how the money is going to be used and when the money is going to be used can be an important consideration.

Kevin: Absolutely. And I mean you think about it, just planning for that asset to move on to the next generation that IRA most clients that come in here, well first prospects that walk in, they don’t even have a will. So, when you dive into this planning, you see that they do not understand unfortunately. And there are a lot of mistakes potentially in the future on that wealth transfer. Doug, to wrap this up, your three bullet points that you think the takeaway for the listeners are have a name beneficiary or review your beneficiaries. Correct?

Doug: Absolutely. A lot of times it’s that dotting the i’s and crossing the T’s that can make a really large impact on whether your plan is successful. I can’t tell you the number of times I’ve seen accounts that were accidentally left to an ex-wife or an ex-husband just because people didn’t go through the basic thing of, hey, is my named beneficiary still who I want to receive the account? And they just didn’t do that detail and it causes a lot of problems and in fighting for the family.

Kevin: I mean that is a car accident that you do not want to witness. I mean, and that’s one of the scary things by not planning correctly when you leave situations and the family doesn’t understand the planning. So yeah, I agree with that.

Doug: Absolutely.

Kevin: I would like to wrap up the podcast there. I want to thank Miles and Doug for joining us today. They are IRA specialists. They’re the people we go to really dive into the planning. We’re very lucky to have them on. We’re going to have them on a few more times throughout the year. Miles and Doug, thank you for joining us.

Miles: Thanks Kevin. Thanks for having us.

Kevin: For the listeners, if you have any questions, give us a call, email us, our information will be on the show notes. Have a great day.

Announcer: Thank you for listening to the Money Experience where we’re helping you create experiences and memories to last a lifetime. To reach out to Kevin or to learn more about how Kevin can help you start saving, please visit valleyfinancial.com. To listen to previous episodes of the Money experience, go to valley financial.com/podcasts/the money experience.

This material is intended to be educational in nature and not as a recommendation for any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended for any form of substitute or individualized investment advice. This discussion is general in nature and therefore non tended to recommend or endorse any asset class, security or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment clients, as well as all other readers are encouraged to consult with their own professional advisors, including investment advisors and tax advisors.