Castle Wealth Group

August 15, 2021

Who is a Good Candidate For a Roth 401k If It is Offered? |Weekly Wednesday Wisdom Webinars

Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers retirement and estate planning questions every Wednesday at 1pm.

Want to join our live webinar? go to www.wisdomwebinar.com to register or give our office a call at 844-885-4200.

Want to book a 15-minute call with Chris Berry? Register at 15chris.com to book a schedule in his calendar.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi offices.

On this week’s webinar, attorney and advisor Chris Berry of www.castlewealthlegal.com answers the below questions.

• 00:00 Introduction / Positive Focus
• 02:12 Is a TFRA(Tax-free Retirement Account) right for me at my age, and how do they work?
• 11:06 Self-directed IRA
• 13:12 Who is a good candidate for a Roth 401k if it’s offered?
• 16:39 Market downturn?
• 20:15 I’m named as a successor on my parent’s financial and medical power of attorney. They both have dementia at this point, how do I get involved?
• 25:25 What is a QLAC?
• 26:51 Disability Panel

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Episode Transcript

All right we are going live so hello everyone this is Chris Berry with Castle Wealth Group. We do these webinars each Wednesday at one o’clock and it’s really a chance where if you have questions you can get your questions answered as it relates to legal finances on the tax plan. And I always like to start with a positive focus. Something positive that’s happened and this week we are actually just yesterday we celebrated my son’s 11th birthday. His birthday isn’t actually till next week but we are probably traveling and so we wanted to get family together. So my son Ryan is turning 11 and he had a wonderful birthday. So that’s my positive focus now with that I’ll go ahead and share my screen and like I said if you do have questions please put them into the question and answer section or the chat. I do have two questions that were submitted ahead of time so I will go ahead and address those and if you want to see how this applies to your situation feel free to schedule some time on my calendar by going to www.15.chris.com and we can set up a short little phone call to discuss. But with that let’s go ahead and get into I didn’t mean to do that good thing we can always undo and let’s go ahead and get into the two questions we had. And again if you do have a question either related to what we’re talking about today or you have a different question feel free to put it into the chat or the question and answer or if something I say is unclear please let me know all right. 

So the question submitted was what is a or is a TFRA right for me in my age and how do they work. So definition time TFRA you might see this floating around the internet tax-free retirement accounts. So what is a tax-free retirement account well most likely it’s not really a term I use but most likely what it’s referring to is cash value life insurance and more specifically index universal life. So we need to understand that there are different tax buckets we have taxable tax-deferred and tax-free and taxable accounts are like your checking savings your brokerage accounts tax-deferred IRAs traditional IRAs 401ks 403bs. This money is pre-tax and you’re taxed on any INC or anything you pull out of here is a tax or ordinary income tax rates and then tax-free. We have our Roth accounts and then we have cash value life insurance typically index universal life 529s and health savings counts. So with a couple of things so taxes and we’ve been talking about these really since like 2015 if not sooner the big reason was the federal deficit the amount of debt this country has prior to 2020 was at about 22 trillion dollars in debt. And now we’re approaching 30 trillion dollars in that. So a lot of people think taxes have to go up and then second we have the tax cuts and jobs act that runs from 2018 to 2025 that says in 2025 taxes are going up about three to four percent across the board which means the value of these accounts go down.

So and I’m trying to give you context of why this is so important but a big thing is just a lot of people are worried about taxes going up in the future because of the debt because the way the current laws are and then even President Biden’s proposals all of these things have the potential of raising income taxes. So if taxes go up the value of these tax-deferred accounts go down because I had a review meeting with the client today and right now they typically with their social security and everything they make about they need about a hundred thousand dollars worth of income per year. Well, that’s going to put them in the 22 tax bracket right now, and when the tax cuts and jobs act expires that’s going to the 25 tax bracket. So what we’ve been doing the last couple years is filling up this 22 tax bracket by pulling another 70 000 out of the tax-deferred account and that brings them up to the top of the 22 tax bracket about 170 000 and then we’re actually going to the 24 tax bracket filling that up which takes them to about 326 000. So we’re pulling about 226 well let me do this over here we’re pulling about 226 000 annually from their pre-tax accounts and moving it over to something that’s tax-free. And so we can’t do that to a 529 or health savings account instead we look at Roths or IUL or it’s also called tax-free retirement accounts and there are pros and cons of each depending on the situation.

But with a Roth the money’s going to be in the market kind of going up and down tax-free retirement account or IUL it’s tied to an index where if the market goes down you don’t lose anything plus another benefit. So this is the IUL plus another benefit with IUL is that death benefit that you might not be super excited about could double as a long-term care benefit. So I’m not saying a tax-free retirement account or IUL is better than a Roth they’re both tools it’s all about figuring out what is what are your goals develop the best strategies and then pick the right tool. So and typically there are two ways that we kind of deal with this one and it really depends on are in an accumulation stage in your life versus preservation okay really what I’m working on what I’m talking about here is are you saving still or are you retired or close to retirement. 

Okay so if you’re accumulating think about where you’re saving your money too often and I see this all the time with people coming in for retirement they saved everything here now they’ve accumulated everything in this tax-deferred account. And they look around now that they’re retired and my gosh I’m in the same if not higher tax bracket than while I was working especially if taxes are going up in the future. So if you’re still working think about where you’re saving your money don’t over-fund that traditional 401k leaving yourself a big tax problem at the end of the day instead fund maybe a Roth and fund a tax-free retirement account okay create tax diversification while you’re saving. So while you’re accumulating wealth while you’re saving if you’re younger and still working don’t over a fund that traditional 401k. Always take the employer match but then look to other areas to save money maybe into a Roth or you might not be able to save into a Roth then you could then for sure look at that tax-free retirement account or index universal life. The same thing this is just more of a kind of like a marketing internet term for it or a slang term for it is tax-free retirement account really all it is is cash value life insurance policy. Where the accumulation of the growth grows tax-free and it’s tied to insurance. So it has this tax-free nature to it and then if you’re close to retirement then we look at ways of moving money paying the tax on these pre-tax accounts and then moving it over to tax-free whether it’s Roth or IUL. Sat down with some wonderful clients yesterday they have a lot of accumulated wealth millions inside of the pre-tax accounts and they see this tax train coming down the tracks and they want to remove as much as possible and they don’t have a lot of cash sitting here. So doing Roth conversions where you pay the tax out of the taxable account isn’t as feasible for them. 

So instead we’re withholding and moving the money to IUL because they want a much more tax-efficient retirement and by doing this and doing it sooner rather than later they’re actually going to get to a zero percent tax bracket. So that if taxes double even if 12 goes to 24 or something like that two times zero is still zero. So I’m not saying everyone can get to that zero percent tax bracket retirement but I’ll tell you as I’m accumulating wealth and saving that’s what I’m trying to do I’m saving as much as I can over here okay. So I have a Roth I have a tax-free retirement account I’m saving I have a 529 I have a health savings account and then if you’re close to retirement it’s what can we do to get money out of that tax-deferred account. Where we know if income taxes go up the value of that account goes down especially given that we have this window of opportunity where we know taxes are lowered unless President Biden’s proposals go through. So again I think taxes are one of the biggest risks and biggest opportunities right now so yeah. So what is a tax-free retirement account right for you at your age? We’d have to sit down and figure out what are your goals figure out the best strategy to help you achieve the goals and then see if that’s the right tool because again we get a lot of requests like should I do a Castle Trust or do I need this tool or that tool starts with what is your goal and then figure out how to what strategies to help you address that. Okay here’s a question coming in have an SD IRA with oh self-directed IRA. I have to take 2020 RMDs can I write tracks directly into my kid’s college from my as part of an RMD all right. So let’s kind of answer this question now. So the question is we have a self-directed IRA self-directed IRAs you basically have more control over what you can invest in like people invest in real estate and you could do like even crypto coins inside of a self-directed retirement account or a self-directed IRA. 

You could have businesses in it there’s a lot of it can be a little complex and so you have self-directed IRA you have to take out RMDs because that happens once you turn 72 and the question is can I write a check to college as part of the RMD. Well, I guess it really doesn’t matter. So it’s not like writing a check to your kid’s college would be a qualified charitable distribution. We’re using all the acronyms today so a QCD qualified charitable distribution is when you have RMDs that you have to take out but you send that RMD but you send that RMD instead of coming to you and you pay taxes to it. You pay taxes on it instead what you do is you send it to a charity and now you’ve made a charitable gift and it’s above the line deduction. So even before your standard deduction, it kicks in. So this would pay your kids college would not be a qualified charitable distribution. So hopefully that’s not what we’re trying to accomplish there. I don’t see an advantage of writing the check directly to the college so the answer is yes. You can pull out the RMD pay the tax and then you could pay for a kid’s college with that. So hopefully that answered your question I might need some more clarification. Another question here is who is a good candidate for a Roth 401k if it’s offered all right. So the question is who is a good candidate for a Roth 401k if it’s off so employee employers in the past typically would offer what’s called a 401k or you might see a 43b if you’re working for non-profit or schools both of these are tax-deferred. 

So we would call this like your traditional 401k and then a lot of times on top of this there would be some type of match offered by the employer well what’s happened within the last couple of years is now they’ve offered a Roth 401k and the Roth 401k is post-tax money that now grows tax-free. So the question is who would be a good candidate for that Right now with where I think taxes are going I would say just about everyone would say if you are currently working you’re accumulating wealth and you’re saving see if your employer offers a Roth 401k. The downside of it is that the downside of the Roth 400k is you’re paying the tax now. So some people are saying well if I’m working now my taxes can be much lower in retirement but I can almost guarantee you across the board people are surprised by how much tax they’re paying in retirement because you lose a lot of the common deductions you had while you’re working like mortgages and kids. And all this and then you factor in social security and then your RMDs and like I said I I’ve said this before but to generalize a majority of my clients while they’re working are in the 24 to 22 to 24 tax brackets. So make as a married couple between 100 to 326 thousand dollars a year. Now I have clients to make more of clients that make less but I would say a hefty portion while they’re working fall in that category well guess what when you retire a majority of my clients are falling in the 22 tax bracket right now which is between 100 80 000 and 170 000. So if you’re in the 24 or 22 why you’re working and then you’re in 22 while you’re retired your taxes aren’t that much less while you’re working now yeah you’re because you’re still in basically the same tax break. So if you think taxes are going up now I would rather pay the tax now and then put it into the Roth.

So yeah I don’t do this often but I would say just about everyone should be looking at that if you’re working in a 401k Roth option now the match that the employer offers would still go in the traditional 401k but that’s free money. So you always take the free money okay. So you get the free money that goes into the traditional 401k okay that’s good. Free money is always number one but then the rest of your savings will now grow tax-free. So I don’t say this often usually I say it depends but who is a candidate for a Roth 401k I’d say just about everyone if and see if your employer offers them there’s something that’s relatively new. Here’s another question so in a market downturn a great time to convert deferred IRA to Roth should we do dollar-cost averaging as a chance trigger is it a chance to do some good during the downturn. Yeah okay so the question is so let’s say we’re thinking there’s going to be a market downturn or one has happened so mark a downturn and we have an IRA is that a good time to convert to a Roth. Yeah, let me see I actually have a tool I use for this analysis to describe it. So let’s say we have an IRA and let’s say it’s a million dollars and then let’s say the last march happens and everything drops to like 20 percent. So now the slinky has shrunk well now is that opportune time and it’s kind of counterintuitive a lot of times we say don’t sell during a downturn. But now if we were in XYZ mutual fund and it was at a hundred thousand dollars actually let me let’s say we were in like XYZ mutual fund and it’s valued at a million dollars and then it drops to 800 000.
Let’s do a Roth conversion and now if we keep it in XYZ mutual fund and it rebounds back to a million dollars we now have a million dollars tax-free uh and we’ve only paid tax on the 800 000. So yeah a market downturn is an awesome opportunity to do things like Roth conversions or pulling money out of those tax-deferred accounts moving it to something tax-free and now getting all that grows tax-free. So yeah like last march when the pandemic hit and everything was down for a month if you just moved to cash and you sat there you missed the rebound. But if you did like a Roth conversion of saying okay you know what everything’s down let’s do a conversion and then let’s invest aggressively again or at least in the same thing you were in that would have been a perfect time to do something like that. I don’t like to get into market timing too often but yeah if we see the market drop 20 percent hey that’s a perfect time to do a Roth conversion or move or at the very least move money from the tax-deferred while it’s at a discount and then move it into that tax-free bucket or even taxable anything’s better than tax-deferred. So again tax-deferred IRAs 401ks not the most efficient from a tax perspective for your retirement and then with that secure act it’s the last thing that your kids want to inherit they’d much prefer to inherit tax-free money and then even now with President Biden’s proposal of getting rid of the step-up in basis.

Kids don’t even want to inherit taxable money because they might be taxed on the gains if they were to lose that step up in basis. So again if you’re looking at which tax bucket is the best tax bucket to leave assets to the next generation tax-free is number one tax-deferred is number three and taxable is number two and then really the estate tax-free would be number one but you get the idea all right. And here’s the last question I have and so if you do have any questions or you want me to clarify anything please put it in the question and answer or the chat. So this last question is I’m named as a successor on my parent’s financial and medical power of attorney. They both have dementia how do I get involved okay. So this is why we always are as much as possible when we’re setting up these documents like a financial power of attorney or medical power of attorney we call these our disability documents. You get a knock in your head who’s going to make decisions for you a lot of times we name spouse first if you’re married but we always want to have a backup because what happens if something happens to a spouse then we need to have someone else involved and let’s just say kid right. So in this situation it sounds like both spouses have dementia meaning mom shouldn’t serve for dad and dad shouldn’t serve for mom at this point. So the question is how do we get them removed so now the child steps, in reality, there are three ways one so how to get them removed and how to have that child now serve so that that child can get involved and work with the banks and financial institutions.

One would be just because someone has a dementia diagnosis that doesn’t mean they’re completely incapacitated that doesn’t mean that they don’t have authority to make decisions or that they have lucid moments. So one is we could have the spouse sign an affidavit to step down that they’re resigning. So basically the spouse signs off to say you know what I’m going to resign and it doesn’t even have to be because dementia could be for whatever reason maybe they just don’t want to serve anymore. So you have mom and dad and both are starting to deteriorate a little bit mom’s named his dad’s power of attorney mom could just sign off and say you know what I’m not dealing with a checkbook anymore. I want someone else to do and so they would resign and then automatically with that resignation then the next child or the next person in line steps in to serve that next person would then have to sign an acceptance meaning they accept that role but that would be the easiest. 

The second way would be having two doctors say that the person is incapacitated okay that’s a typical trigger in these documents okay. Let’s say mom’s already in an assisted living very clear that she doesn’t have the capacity to manage her affairs then we can have the physician at the facility and one other physician at the community sign a document to say that in their opinion this person doesn’t have the authority to or doesn’t have the capacity to serve anymore then with those two doctors letters that’s the trigger to now have the child step in and serve. And then of course the child would still have to sign accepting that number. And then the third way would be going to court okay this is basically suing mom and dad to now have the court name you as a person to act. Obviously, we don’t want to go that route that is what I call that the nuclear option. We’re always trying to keep people out of court. 

So typically what we’re doing is the first number one if there is still capacity and if there’s truly not any capacity then we’d have the two doctors sign off. So that’s the trigger and then so that gets the spouse removed and then all we’d have to do is have that child accept that sometimes what we do also because financial institutions are horrible at working at these things you hear. You walk into a bank or talk to fidelity one day they tell you one thing you talk to someone else. The next day they’ll tell you something else that we also do. If we’re getting having problems at the banks is as the attorney for a client we’ll have a letter drafted up and I’ll sign an affidavit saying that I’m representing them as their actual attorney. Here’s the situation and here’s who the current acting power of attorney is because these banks and financial solutions are always in like cover my butt mode. They don’t want to get sued because someone moved an account around. So they’re always looking to cover their butt so a lot of times they make it kind of difficult even if we have well draft documents in place. Okay so yeah I’ve named successor both had dementia at this point how do I get involved yep. So that’d be how we get involved either have the spouse resign or get two doctors to say the person’s incapacitated. Worst case we get the court involved. So hopefully that was helpful. All right another question just came in what is a QLAC.

Okay, we’re doing all of the acronyms today. So a QLAC is a qualified longevity annuity contract that is a QLAC. How does this reduce RMDs until age 85. Um basically what we’re doing is three yes I’ve never done one of these but if I’m not mistaken what we’re doing is we’re basically creating an annuity for you and then if I’m not mistaken we’re having that go to the insurance or not the insurance company. We have to use an insurance company because they’re the ones that use the annuity but if I’m not mistaken then the balance at death goes to a charity. I’d have to take a look at it but again that’s why I was trying to figure out what the goals are and then get into the tool or strategies and then the tools. So it’s just a tool that to be honest I haven’t used. All right MDs don’t like to make competency decisions what about a competency committee. So this is getting back to whoops I erase the question. So this is getting back to the question of how do we get someone else named as that financial power of attorney. We have the spouse and then we have the kid and the comment is that doctors don’t like to make that competency decision. I guess maybe your primary care doctor but a lot of times in these like assist living and they’re pretty quick to make that decision but the question is could we have a committee. Yeah and this is something a lot of times we include in our trust we include what we call a disability panel. So if like we have a spouse and then let’s say we have two kids if they all raise their hand to say that hey maybe Dad shouldn’t be managed his affairs then that could be a trigger under the trust to have the next person step in line but yeah we haven’t had a problem with doctors signing those affidavits either. That but typically what we’ll do is if the person does have any type of capacity. So again you don’t go from like healthy to completely incapacitate a lot of times there’s a gray area but a lot of times we’ll just have them step down on their own. Worst case we have the two we have to get the two doctors involved and we’ve never had to go to court in situations like that. So all right any other questions going once going twice and sold. All right well everyone have a great week it was a pleasure. I have another positive focus I’m going to be on vacation next week. So we’re not going to meet next Wednesday so hopefully, you’ll miss me but we will be back on the 18th. So thank you, everyone, make it a great week take care bye-bye.