The tax and IRA expert weighs in on tax-savvy retirement planning, Roth conversions, and the new rules for inherited IRAs.
Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar. Today on the podcast, we welcome back retirement and tax expert Ed Slott. Ed is the president and founder of Ed Slott & Company, which provides retirement and tax-planning education to investment advisors and financial institutions. Ed has written several books, including his latest, The Retirement Savings Time Bomb Ticks Louder. PBS viewers may know Ed from his frequent appearance on public television. Ed also co-hosts a podcast with Jeff Levine, called The Great Retirement Debate. In addition, he hosts the popular website IRAHelp.com, where the Slott report regularly dispenses wisdom about retirement, tax, and estate planning. Ed is a certified public accountant.
Background
“Ed Slott: Act Now on Historically Low Tax Rates,” The Long View podcast, Morningstar.com, Aug. 19, 2020.
The Great Retirement Debate podcast
The Retirement Savings Time Bomb Ticks Louder, by Ed Slott
Tax-Loss Harvesting
“The Ins and Outs of Tax-Loss Selling,” Interview with Christine Benz and Ed Slott, Morningstar.com, Dec. 14, 2022.
“The Best Investments for Taxable Accounts,” by Christine Benz, Morningstar.com, Jan. 23, 2024.
“Yes, You Can Still Find Tax-Loss Harvesting Opportunities in 2024,” Investing Insights with Christine Benz and Margaret Giles, Morningstar.com, Nov. 22, 2024.
“The Big Retirement Myth,” Interview with Christine Benz and Ed Slott, Morningstar.com, Aug. 7, 2024.
Required Minimum Distributions and IRAs
“IRS Issues Final SECURE Act Regulations: Controversial Annual RMD Requirement During 10-Year Rule Stands,” by Sarah Brenner, irahelp.com, July 22, 2024.
“Best Advice? Ignore the 10-Year RMD Rule,” by Ed Slott, investmentnews.com, Aug. 19, 2024.
“The New Rules for Missed RMDs,” Interview with Christine Benz and Ed Slott, Morningstar.com, July 24, 2024.
“Brace Yourself for Higher RMDs in 2024,” Interview with Christine Benz and Ed Slott, Morningstar.com, March 13, 2024.
“Inherited IRAs: What to Know About Taxes, RMDs, and More,” by Tori Brovet, Morningstar.com, Sept. 13, 2024.
Qualified Charitable Distribution
“12 QCD Rules You Must Know,” by Sarah Brenner, irahelp.com, July 10, 2024.
“Year-End QCD Mistakes to Avoid,” by Ed Slott, investmentnews.com, Nov. 18, 2023.
“Year-End Charitable-Giving Strategies,” Interview with Christine Benz and Ed Slott, Morningstar.com, Nov. 1, 2023.
Tax-Law Changes in 2025
“401(k) Contribution Limits Increase for 2025,” by Sarah Brenner, irahelp.com, Nov. 6, 2024.
“Higher Catch-Up Contributions Available for Certain Older Employees Starting in 2025,” by Ian Berger, irahelp.com, Oct. 21, 2024.
“IRS Announces New Income Limits for IRA Contributions in 2025,” by Denise Appleby, Morningstar.com, Nov. 20, 2024.
“Ed Slott: What Investors Need to Do Before the Tax Cuts and Jobs Act Expires,” Interview with Christine Benz and Ed Slott, Morningstar.com, Feb. 6, 2024.
Christine Benz: Hi and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar. Today on the podcast, we welcome back retirement and tax expert Ed Slott. Ed is the president and founder of Ed Slott & Company, which provides retirement and tax-planning education to investment advisors and financial institutions. Ed has written several books, including his latest, The Retirement Savings Time Bomb Ticks Louder. PBS viewers may know Ed from his frequent appearance on public television. Ed also co-hosts a podcast with Jeff Levine, called The Great Retirement Debate. In addition, he hosts the popular website IRAHelp.com, where the Slott report regularly dispenses wisdom about retirement, tax, and estate planning. Ed is a certified public accountant.
Ed, welcome back to The Long View.
Ed Slott: It’s great to be here. Thanks.
Benz: Well, it’s great to talk to you always. We want to talk about tax planning as 2024 winds down, some things that should be on people’s to-do list. One thing that you often hear that people should take a look at as a year winds down is whether tax-loss selling is an opportunity. How likely are most investors, given that we have had a pretty strong stock market here in 2024, likely to find tax-loss-selling candidates?
Slott: I don’t know. We don’t know what’s going to happen the rest of the year, but it’s hard to find losers today.
Benz: Right.
Slott: But there could be some old dregs that you say, well, these other ones did really well. Maybe clean the plate, consolidate, maybe get rid of some old-time losers the hangers on, maybe.
Benz: So how about cost-basis accounting? How does that figure in? Because it’s my understanding that if you’re using that specific share-identification method where you’re actually able to cherry-pick certain lots, you may have more opportunities. Do you have any thoughts on how people should be tracking their cost basis and does that specific share-identification method give them more flexibility to find tax-loss sale opportunities?
Slott: Technically, yes. And people always talk about, I see it in articles, use the specific identification method. But it generally, in the real world, doesn’t work because then you’re locked into that. You must use that for all assets. You can’t just use it when it benefits you. So you really have to have a good accounting of each stock, each share. You may have lots of shares of a certain company, but they’re all purchased at different dates, at different amounts. And you better have great records to back it up. And you have to keep those. Those go in the past and going forward. So it’s a record-keeping nightmare. And it’s not just one year. You have to stick with the plan once you do it.
Benz: So does my brokerage platform help with that type of tracking or is that something that I have to do separately? Or does it depend on the brokerage firm?
Slott: I guess it depends on what information you get. But I think this is one of those things. You have to keep track of your old information because maybe you bought some of the shares 20 years ago. You were a different broker, a different custodian, whichever you were. You have to have your own records to identify—that’s why they call it specific identification—which shares you’re selling. Normally people use the average cost and things like that, which is a lot easier. You just use the cost of the shares, but not specific shares. Once you do specific shares, you have to have backup and records for that.
Benz: Increasingly we’re hearing about advisory firms offering these direct-indexing portfolios where you get a basket of individual securities instead of a mutual fund or ETF. And a key selling point there is the ability to do active tax-loss harvesting. Do you feel like these solutions are all they’re cracked up to be from a tax-saving standpoint?
Slott: I don’t know about that. I think you could do just as well on your own without these baskets, especially if you’re a person that has…. First of all, most people—well, I shouldn’t say most people, but a lot of people have the funds, not the actual stocks. I don’t know what you find, but back in the day—I hate to date myself—but people actually held stocks rather than funds, consisting of many stocks. So it’s a little tougher because most items are in these funds.
Benz: So, you’ve got the funds and then you need to make a switch into this custom portfolio and that itself may entail some tax consequences. Is that what you are saying?
Slott: Yeah, you could do it with funds and things because the fund gives you the report at the end of the year—which stocks are up and down. You can pick and choose and all that. So in that way, you can treat them like you have individual stocks because technically you do. You have a bunch of individual stocks in the umbrella of a fund. But those people that do individual stocks, and you don’t see as many of them, but maybe they’re out there, it’s easier for those people.
Benz: We’ve been talking about tax-loss selling. But what do you think about the strategy of preemptively realizing gains? If I think I’ll be in a higher tax bracket down the line, and I can maybe realize gains today at perhaps even a 0% capital gains rate. What do you think about that strategy of preemptively selling tax-gain harvesting, I guess they call it?
Slott: I don’t think it’s a great strategy, and it depends where you are in life. Remember, not everything is about tax planning. Well, in a sense it is, but tax planning today compared with what you might have long term, you have to look at the long term. Let’s say you’re an older person and you’re thinking about doing this. If you were my client, I’d say, “Well, why are you selling this? For taxes?” Well, if you’re selling it for taxes, don’t sell because you’re 80 years old. You may as well hold it to death, and everybody gets a step up in basis and then the whole gain goes away anyway. So you have to look longer term. If there’s a reason you have to sell, you think something about the stock, you think maybe it’ll go down, or you need to cash in to get a better investment. But just for tax-loss selling, you have to watch it because there are huge benefits. Like I said, at death, the biggest benefit of a stock portfolio is the step up in basis at death. All the capital gains are eliminated for beneficiaries at that point.
Benz: Before we leave selling tax-loss harvesting, you’re so good at talking about the administrative Ps and Qs that people need to be aware of. Can you talk about if, for some reason, I’m taking a tax loss in my portfolio this year, any year, what documentation do I need to have to make that a legit tax loss?
Slott: Well, you have to match up, when you do tax returns—and I’ve done thousands of them—the matching is everything now. You’d better make sure what you’re reporting is what the 1099-Bs that these the Schwabs and Fidelities, all the big custodians, report. They have that information. So hopefully it’s correct, and I believe most times it is. But if you have a situation where maybe it’s not correct because maybe you have additional basis for some reason that they didn’t count on or something was inherited, maybe, and they don’t know about that. Or sometimes we see problems with certain stock. You and I have talked about this—say net unrealized appreciation on employer securities. If you take that tax break on stock in a 401(k), that comes out on the broker statement that might come out at taxed ordinary income rates because the broker might see, or the custodian, that it wasn’t held for more than a year. But in that case, that’s an exception. When we’ve had that on tax returns, that automatically gets long-term capital gain rates, even if you sell it the next day after the distribution. But you wouldn’t know that from the broker statement.
What we do is we have to go into the tax program and actually proactively say, no, this qualifies, this particular sale qualifies for long-term capital gain rates, even though it wasn’t held for more than a year. Same thing with certain inherited items where you get a step up in basis. You have to make sure that the basis carried over from the person you inherited from, that those items are right, that they’re not showing the original cost, say your dad got it in 1912 or something, or grandpa. You’re supposed to get your starting point for calculating gain or loss is a data debt value. You have to make sure those carry over. The statements are usually good, but you may have to look at them and say, I may need an adjustment for my particular situation. Everything comes down to, you’ve got to check your info.
Benz: So sticking with my punch list of things that we want people to knock out at year-end 2024, let’s talk about required minimum distributions. Maybe you can talk about how much latitude people have, who are subject to required minimum distributions, to pick and choose where they go for those distributions. So if I have various types of accounts, how much leeway do I have to pull all from one and leave another one alone?
Slott: Well, with IRAs, you can take your RMD. But let’s say even if you have several IRAs, the tax law considers your IRAs one, even if you have 10 IRAs, they’re considered one IRA. And you have to calculate the RMD for each one. But the actual RMD can be taken from any IRA or combination of IRAs as long as you hit the minimum that you’re required to take out. But let’s tie this back into something you were talking about. You were talking about the tax-loss harvesting. And you mentioned in the prior topic, you mentioned talking about even getting some long-term capital gains out at 0%. Remember you were talking about that? That almost never happens. I know if you look at the tax tables, I’m looking at them right now. Well, you can go married, filing joint for 2024, 0 to 94,000, 0.50, 0% long-term capital gain rates. But the tax law works a little strange in that area purposely. Ordinary income cuts into that first. So when you take an RMD, and here’s the connection back to that 0%, that RMD cuts it. Let’s say that the RMD is 100,000. Well, now you’ve just wiped out your 0%. So none of your capital gains will be taxed at 0%. Most people end up in the 15%. I only mentioned that because ordinary income, like Roth-conversion income or RMD income, pushes, that’s ordinary income. That eats up the lower capital gain, basically the 0% bracket in a lot of cases. But you can take the RMD from any place, any IRA you wish.
Benz: So how about if I have company retirement plans? I’ve got assets in that. I have to take an RMD from that, separately from the IRA, right? They can’t be commingled from the standpoint of RMDs?
Slott: That’s exactly right. The IRAs are the only ones that have this aggregation rule, actually 403(b) plans have that same aggregation rule, which means you could take the RMD from any type of similar account in the basket of IRAs. But you can never satisfy an RMD from one type of account, like an IRA, from taking from a 401(k). The RMD from the 401(k) has to be taken only from that 401(k). Even, let’s say you had three 401(k)s from other employers or whatever, and they were all subject to RMDs, probably not likely, but let’s say you had that. You would have to take the separate RMD from each 401(k), even though you have a basket of three 401(k)s subject to RMDs, you can’t do the same thing you can do with IRAs and aggregate them because they’re separate company plans. The RMD has to be taken from each one separately. So you can’t satisfy, by taking a lot from a 401(k), satisfy what would have come out of the IRA.
Here’s an error because of logic, and any time you try to mix logic with tax law, that’s when errors happen. This is a common theme. You have a husband and wife. They both have IRAs, very common, right? And they’re both subject to RMDs. So maybe the husband says, “You know what, I have a much larger IRA. Why don’t I take the RMDs for both of ours, mine and my wife’s, from my IRA to kind of even the balances.” You can’t do that. Well, you can do that. But remember, when anybody asks this, and I get this from advisors a lot too, because here’s where logic comes in. The client or even the advisor might say, “Well, what’s the difference? It goes on the same return. The income will be exactly the same.” And that’s right. But here’s what actually happened. The I in IRA stands for Individual Retirement Arrangement, actually, Individual Retirement Account. Not joint. There’s no such thing as a joint IRA. So the husband, all he did, if he took both his and his wife’s from his own IRA, he more than satisfied his RMD from his own IRA. But now the wife is subject to a penalty for not taking her RMD. She can’t get credit even though it goes on the same tax return. And when the smoke clears, they’re reporting the right income. But technically, she didn’t take her RMD and can be subject to now a penalty of 25%, or even 10%, if they catch it in time. So that’s a common mistake we see.
Benz: I wanted to ask about those penalties, Ed, because this is, I think, part of Secure 2.0 where the penalties are lower now than they once were. They were, what, 50% of what you should have taken but didn’t. So let’s talk about that because I believe some tax experts think that people are more likely to get hit with these extra taxes if they miss their RMDs. Can you talk about that?
Slott: I may be one of those people and we don’t know yet. See, when it was 50%, I believe even IRS felt that that’s crazy. That’s egregious. We’re not going there. We’re not taking 50% of somebody’s IRA because they missed an RMD. And they would waive, they have the power to waive that penalty just because somebody didn’t take the right amount of RMD or RMD at all. And for just about any excuse—the dog ate my homework—as long as you file Form 5329 and put an excuse there, they waive the penalty. In all my years, I only saw one case where the penalty was paid. And that’s because in an oddball case where an advisor didn’t know the tax rules, asked IRS to assess the penalty. IRS said, well, okay, if you insist. And they asked them to assess the penalty because they didn’t understand, without getting too complicated, the old stretch IRA rules. They had a client that was subject to RMDs, a beneficiary on the stretch IRA, and they missed the first three years. So they filed, they paid all this money, tens of thousands for the filing of a private letter ruling to ask IRS, “If you will let us pay the penalty for the first three years, can we still get the stretch IRA?” And the IRS said yes. You asked the wrong question. If they asked the right question, say, do we have to pay the penalty? They would have said no. That reminds me of that.
You got to ask the right question. That reminds me of this movie. Oh, the Pink Panther with Peter Sellers. Remember those nutty movies? And he’s Inspector Clouseau. And he comes across a man, he’s walking down the street with a dog barking, and he says, “Does your dog bark?” And he said, “No, my dog doesn’t bark.” And he goes to pet it, and the dog eats his arm off and it’s blood splattering everywhere. And he says, “I thought your dog doesn’t bite.” He says, “That’s not my dog.” He asked the wrong question. So it’s the same thing. So that was just one oddball thing. IRS actually said all you did was miss RMDs that didn’t affect the stretch situation. They didn’t know the rules. So that’s the only time I ever saw the penalty assess. And that’s because the taxpayer through their advisor asked IRS to assess it thinking that would help, but it didn’t. So anyway, that’s when it was 50%. So now they lowered it all the way down to 25%, which almost nobody will pay, or even 10% if you catch it in two years and pay the penalty. But still, even with all of that, you still have the ability to have it waived.
So this gets back to the original question: Will IRS be as liberal and generous about waiving the penalty on an RMD not taken or you didn’t take the right amount? It’s too soon to know because we haven’t seen anything on this. But I think they kind of will be because they do help seniors. And this is who it applies to—people 73 and older who are being asked to calculate, and it gets complicated. They have a few accounts. Maybe they didn’t take the right amount, or they had that husband and wife issue that I talked about, or their advisor gave the wrong amount. I saw a situation recently where the investment—I forget what custodian it was—but it’s one of those situations where they moved their IRA from one custodian to another. And when they entered the new information—this is why you have to keep track of this stuff—at the new custodian, they put the person’s birthday as the date they moved the money rather than the date they were born, which was 66 years earlier, so they were way off on RMDs. So I think IRS understands that if you have a legitimate reason why you had the wrong calculation and any legitimate reason, like I said, good faith.
I wasn’t aware of the rules, I’m 73 years old, I didn’t know. That’s good. My advisor made a mistake. I went to the bank. The bank, the custodians are supposed to give you your RMD if you ask for it, but there’s no requirement for them to give you the correct one. You don’t know if they’re giving you the right amount or with the aggregation rule we talked about before, they don’t know you may have taken the right amount from some other IRA. And now you don’t have to take from this. This is why you have to look at all these IRAs. Or you had a medical situation or a death in the family. So any of those reasons are fine, but you have to ask for a waiver by filing Form 5329 and attaching it to your tax return. And I think for most of these cases, if they’re legitimate good faith reasons, the IRS, I believe, I don’t know for sure, but being the population of people, seniors, starting this new phase of RMDs, I hope they’ll be more liberal.
And I’ve seen people in my career, even doing tax returns, I remember having a new client one time doing taxes as my first return with him. And he was 80 years old, and I said, “What about the RMDs?” “What are those?” I said, “What do you mean, what are those?” This is when it was 70.5. I said, “For 10 years you haven’t taken these things?” “Nobody ever told me.” Well, he filed a waiver, took the back. You have to make up the missed RMD and file the waiver, and with a little explanation, which we did and that was fine. It happened on my mother, actually.
Benz: Oh dear. I don’t believe it.
Slott: Oh, yeah, it was an oh dear. She had an advisor, financial advisor. Remember, I’m a tax advisor. I don’t do investments or anything like that. But it was the end of December, the last week and never do this the last week. Here’s the best tip I can give you. The last week of December, you don’t want to do any of these transactions because anybody who knows what they’re doing at the custodians knows to be off that last week of December, because that’s when everybody hits with RMDs and Roth conversions, and it all hits the fan. Anyway, so this broker of hers called me sheepishly knowing that I specialize in IRAs. He said, “Ed, I don’t know how to say this, but I miscalculated your mother’s RMD and I’m short. I forgot that she got older.” That was such a lame excuse. Well, every year you do get older. And I said, “Don’t worry about it. I’ll file the 50.” You could tell that—this was on the phone—even on the phone, I could tell how relieved he was when I said, don’t worry about it. I’ll file it. And what we did, here’s another tip. I’ve always done this when it happened. The makeup distribution, which gets you out of the penalty because you first have to make it up before IRS will waive the penalty. It’s first thing you have to do that you made a corrective distribution. That shows good faith is we caught it, and we made it up. I always have the broker in this case, or whoever it is, take a separate distribution for the makeup distribution. Don’t tie it in with her regular RMD because it’s easier to trace if it’s questioned. Yes, this was her RMD. You don’t have to do it. This is just a practical tip. This is our RMD, and this was a makeup distribution of last year where she was short, something like that.
Benz: So people love to hate these RMDs. And one workaround or one thing you often hear is that if you can convert some of those traditional IRAs or traditional tax-deferred company retirement plan assets to Roth, then you can avoid required minimum distributions. Can you talk about that, Ed? And I often hear that this is a particularly fruitful strategy in the early years of retirement when maybe your income is at a low ebb because you’re not working, and you may not have filed for Social Security and you’re not yet subject to RMDs. Can you talk about converting during that window of time and the benefits of that and what people should bear in mind if that’s one of their strategies?
Slott: Well, Christine, you know me well enough to know exactly what I’m going to say. I love Roth conversions. I think everybody should at a minimum look at these things. The benefits are off the charts, especially now while rates are low, historically low. We don’t know what they’ll be and the big benefit, obviously, you pay the tax upfront, but the big benefit is no RMDs for the rest of your life and 10 years beyond to the beneficiaries, even other than the Secure Act. I’ve had people over the years, several clients that converted everything because they couldn’t stand RMDs. “I hate these things,” they would say. “I can’t calculate them. Just convert everything.” And it’s a little more expensive if you convert once you start RMDs because the RMD amount, required minimum distribution amount, itself cannot be converted. And the first dollars out of an IRA are deemed to go toward satisfying the RMD and that amount cannot be converted. Once that’s satisfied, then yes, you can convert all or any part of the remaining balance for that year, but you paid more to do it because you had to pay tax on an RMD, which couldn’t be converted. So a better plan is to think more long-term and start earlier and do a series of maybe smaller conversions over time each year using up low brackets, which we have now incredibly low brackets.
And what a great goal it would be to have no IRAs at RMD time. But it’s not for everybody. Not everything I’m saying is for everybody. There are some people who might like to keep some traditional IRAs. For example, maybe they’re using qualified charitable distributions to lower their IRA balance. What a great tax move if you already give to charity, IRAs are the best assets to give. So you might want to keep some IRAs to do your charitable giving with or maybe you’re anticipating heavy medical expenses. IRAs would be a good source to take down and get somewhat of an offsetting deduction. But other than those two scenarios, you’d like to really empty out IRAs before RMDs begin and especially before they may go to beneficiaries. Because now with this 10-year rule, Congress, what they really did with the Secure Act, they made IRAs the worst possible asset to inherit. It’s absolutely the worst asset. It was always complicated before the Secure Act. But at least the beneficiaries put up with all the complicated rules because they got the benefit of the long extension deferral, the stretch IRA, to extend distributions over their lives 30, 40, 50 years, having all that growth extended and the tax deferred.
That isn’t the case anymore. Now all of those funds must come out by the end of the 10th year after death for most beneficiaries other than mainly spouses. So Roth IRAs work beautifully for beneficiaries because not only are there no RMDs during the person’s lifetime, which gives you total freedom to do whatever you want for the rest of your life and keep your income low. Even if you need the money, it’ll be tax free. But you’re in control. You can take the money out on your terms. But even under the 10-year rule, beneficiaries who inherit a Roth IRA don’t have to touch it till the end of the 10th year after death. There are no RMDs, like if they inherited traditional IRAs in certain cases for years one through nine of the 10 years. So the beneficiaries can keep that growing, building, and compounding for the full 10 years, absolutely income tax-free. And that may work out really well for beneficiaries who may be in their own highest tax bracket in earnings years. So many people that asked me about, in fact, I just had a seminar last week where an older woman came up to me. She was, I guess, around 80. She said, “Ed, should I convert?” And I said, “Well, it depends who you’re doing it for. If you’re doing it for yourself, the cost to pay tax upfront, given, sorry to say, your shorter life expectancy may not be worth the benefit. But if you’re doing it for the kids or grandkids, it’s a great estate planning move. The Roth is a great asset to leave to kids.” And what she said was, “Well, I’m doing it for myself. So forget the kids, let them pay, you know, whatever it is. You answered my question.”
So she was going the other way. But if you want to look long term, paying the tax now is really not only a great tax deal, but what you do when you pay tax on a Roth conversion before RMDs begin, you control your own tax rates. You can’t do that once RMDs begin. You’re locked into taking a certain amount that might push you into a certain bracket. It’s out of your control. When you convert, say, in your late 50s or early 60s, like you set up until retirement, you can say how much you want to pay. You control your own tax bill. You can say, well, I want to use up the 22% bracket or something like that. So you can control how much tax and to keep the tax bill as low as possible but do it over many years. That’s the big benefit of Roth conversions, you being in control of your tax planning.
Benz: That’s helpful. I’m glad you addressed the inherited IRA thing, because I sense there’s mass confusion there.
Slott: I’ll tell you why there’s mass confusion, because if you inherit an IRA in these just recently released IRS regulations, if you’re inheriting traditional IRA, which we know is subject to tax, from somebody who already began taking RMDs, then you must take RMDs for years one through nine of your 10 years. On a different schedule based on your old stretch IRA. It’s so complicated. With Roth IRAs, it doesn’t matter who you inherit from, you can inherit a Roth IRA from somebody 100 years old. Now you might say, but they have already passed their required beginning date. No, under the tax law, anybody who dies with a Roth IRA is deemed to have died before reaching RMDs, because Roth IRAs during your lifetime are not subject to RMDs. So that’s a great benefit. And that’s why there’s confusion.
Benz: Ed, you referenced earlier the qualified charitable distribution as a really nice strategy for people who are age 70.5 or older, and there is that disconnect—RMD age is 73, 70.5 is the QCD age. I want to move on to charitable giving and discuss that QCD as a potential opportunity for people who are that age.
Slott: Let me first give my thoughts on charitable giving. Some of my CPA colleagues and tax advisors don’t agree with me, but I think eventually they come around when they see what happens when they do it for the wrong reasons. I don’t believe in giving to charity, totally for tax reasons, because at some point, the reason you got a tax break, at some point you have to give that property away. And most people that are only doing it, that are not charitably inclined, that are only doing it for tax benefits, when that day comes and they actually have to give the asset or the money away, they say, “Well, this is lousy. I didn’t want this, I wanted to keep it, just get the tax break.” And it doesn’t work like that. So eventually it causes problems, or maybe for the beneficiaries that said, “Well, we didn’t really want to give it away, we just wanted to get the tax break.” So my thoughts on this is, I would only do charitable planning for people who are charitably inclined. In other words, they give anyway. If you’re giving anyway, IRA is by far, not even close, are the best assets to give because they’re loaded with taxes. It’s like you’re giving the charity your dregs, your worst assets, but the charities don’t pay tax. So if you give a charity $100,000 IRA, they keep $100,000. The only loser is Uncle Sam.
So if you have IRAs, both during your life, and we’re talking about either during your life or post-death, the QCDs are during your life. If you qualify and you do like to give to charity, first, you’re probably, if you’ve been giving to charity the last few years, you’re probably getting no tax benefit out of those gifts you’re making because most people take the standard deduction now since the change back from the Tax Cuts and Jobs Act. So 90%, according to IRS, of people take a standard deduction. So they get no separate tax deduction for the gifts they’re already making. The QCD, the qualified charitable distribution, actually fixes that and then some because even if you qualified for a charitable itemized deduction, which most people, as I said, don’t take, that’s what we call below the line, that’s after adjusted gross income on a tax return. With the QCD, it’s an exclusion from income. It lowers your income, and it can lower AGI. And the reason that’s such an important number on your tax return, virtually, so many benefits, tax credits, deductions and opportunities are based on your level of AGI. So even if you take a tax deduction as an itemized deduction, your AGI might be 300,000 and if you did a $200,000 charitable contribution as an itemized deduction, your AGI is still 300,000, it doesn’t reduce it. QCDs do reduce it, plus it gets money out of your IRA at a 0% tax cost. That’s the key to this tax plan to get your money out of that IRA at the lowest possible rates.
And if you’re at RMD age, it can satisfy your RMD. So let’s say you normally give to charity— just to make a simple example—let’s say you normally give $5,000 to church or alma mater, some qualified charity, hospital, or something like that. So you normally give $5,000 to them, but now you’re going to do it as a direct transfer from your IRA and it’s only available from IRAs and only for people 70.5 years older, or older, and only from your IRA, not from a 401(k). So if you have a 401(k) and you’d like to do that, you’re able to roll to an IRA, that may be a reason to do that, only from your IRA and it must be a direct transfer from your IRA to the qualified charity. And if in my example, you normally give $5,000, but just to make the example super easy, let’s say your RMD on your IRAs for that year was also $5,000, that gift satisfied your RMD. That’s $5,000 of income that would have been on your tax return and now isn’t. So in effect, it lowered your AGI, you gave to the charity, you got a tax benefit, and you lowered your IRA balance. It’s one of the best breaks in the tax code. The only negative part, it’s not available to enough people. Only those IRA owners 70.5 years old, or older.
Benz: Yeah, you’ve said to me that you wish that were available to all of us who aren’t 70.5.
Slott: But you can also do charitable giving at death. You could leave an IRA to charity. This is during life. You can leave an IRA to charity. And often I see people, when I did more planning with actual clients, I haven’t done that in a few years when I had my tax and estate planning practice. Now, mostly as you know what we do, we train financial advisors around the country and all this planning. So in effect, we’re reaching a lot more people through all these advisors. But I would always tell, and I did this too, when we were doing estate planning for clients, I would look through their will. I’m not an attorney and I always tell people, don’t play lawyer. But I would look for bequests they would make to charities, because people are often told, if you want to make a bequest, do it in your will. So I might see a $10,000 bequest—and they’re easy to spot in a will because they’re usually in numerics and then in caps like 10, like when you write a check out, you write the number and then you write it in alpha. You write out $10,000 to my alma mater or to a hospital or whatever it is. The minute I see that in a will, I tell the people, get that out of there. Don’t leave them that money, you have an IRA. Cut out a separate IRA, leave them $10,000 of your IRA. This way they get money that otherwise would have been taxable.
Plus now there’s more money for your beneficiaries, better money that gets a step up in basis. So I always do this thing in our advisor training where I show them how to basically reverse the bequest. If you have somebody that’s charitably inclined because they had the bequest in their will, don’t leave them good money, leave them bad money, IRA money, because the charity doesn’t care what kind of money they get, they don’t pay taxes. Imagine if it was a much bigger bequest and some more wealthy people, maybe it was a $250,000 bequest. Now that might make a difference to beneficiaries. If you had a large enough IRA and you said instead we’re going to leave the charity $250,000, well that’s less tax the beneficiaries will have to pay on that IRA, they won’t inherit, but they’ll inherit better money, more of the other money, say stock account that gets us step up in basis where they don’t have to pay any tax. So that’s a simple strategy if you’re charitably inclined to use IRAs, they’re the best assets to give to charity because they’re loaded with taxes.
Benz: That’s really helpful, Ed. I want to talk about people who aren’t 70.5 so they can’t do that qualified charitable distribution. Charitable giving strategies for them if they are not itemizing normally, it doesn’t seem like there are many opportunities. But one I hear about is this idea of maybe bunching my contributions into a single year where I’m making a very large gift. Can you talk about that?
Slott: Well you’d have to have enough to get over the standard deduction amount, which is very high. So since most people as I said, 90%—according to IRS—take a standard deduction because it’s higher than the itemized deductions they would get especially since the Tax Cuts and Jobs Act cut out a lot of deductions. They cut back, as you know, the state and local income tax to $10,000 what they call the salt deductions especially for people in high-tax states, they don’t get big deductions. A lot of people giving to charity are older and no longer have mortgage interest expense. So they’d have to have enough. So what you’re saying there’s bunching, we would tell people, well if you’re going to give to charity instead of doing it just this year, over five years you give somebody $10,000 a year for five years, make it $50,000 this year and you will get a charitable deduction. But it won’t reduce your AGI, it will reduce taxable income. So you’ll get some benefit out of it.
Benz: One thing I want to ask about, so just moving away from the year-end punch list, looking forward at the end of 2025, next year, we’re set to see this whole passel of tax laws, sunset I guess is the term they use, it’ll expire. Can you talk about that? What are the changes that are set to go into effect at the end of next year unless Congress takes some action to keep that set of tax laws in place?
Slott: Nobody knows, everybody has an opinion. And I guess it depends on the election and what Congress can get through. But not only are higher rates supposed to come back in—the 39.6, all of these things, some deductions may come back, it’s back to the future, whatever you call it, back to what it was. But there are big items, and now we’re moving away from, it’s not the income tax that’s big, it’s the estate and gift tax items. That’s where the big change is. Right now, people, believe it or not, have a federal estate tax exemption of $13.6 million, going up to almost 14 million next year per person. So when it goes up, I think it’s going up, we’ll get the actual numbers soon, but I think it’s going up to about $13.9 million for 25. So let’s call it $14 million per person. A married couple could give away $28 million. I would think that covers most people.
Benz: Most of us, yeah.
Slott: Most people. But with this sunset, that’s supposed to go back to half of that amount, which is still pretty good. But that’s something you may want to look at if you have a large estate. We’ve been telling people with large estates to make these gifts that you can use this exemption during life, you don’t have to wait till you die and use the estate exemption, it’s also a gift exemption. And even IRS has said a few years ago, when the questions arose, the question that arose, what if we use this large exemption in gifts? But now it goes down to half. Is IRS going to claw that back and say, oh, we’re over the limit? And IRS came out and said, no, we’re not going to claw it back. In essence, what IRS said, use it or lose it. So you may want to think about making big gifts and using that exemption, the full exemption. Like I said, right now it’s $13,610,000 per person. If you have that kind of wealth and your plan was to get it out to beneficiaries, you could give that money away under that Federal estate tax exclusion right now over $13 million at no cost, even if it goes down to half that after ’25. So, that is the biggest item change because of the sheer numbers from whatever happens in 2026. But my feeling is, I don’t know, they’ll leave some things, it might be a patchwork. I think they’re going to do something. And if it’s a typical Congress, if I had to make a prediction, they’re going to make a big thing about it. The last week in December, just like most big tax legislation on Dec. 29th or 30th, they’ll all run home for Christmas, or by then, Chris, they ran home already. And patchwork it together and it’ll be a mess like most tax laws—poorly written, hastily written—and they’ll fix some things and fix it up later. I think they’ll do something just to say they did something, whoever’s in power.
I don’t think it’ll be anything drastic, because I think anything drastic just rubs people the wrong way. For people that have asked me specifically on the estate exemption, do you think they’ll actually cut it in half? Well, even if they do, it’s still a pretty big exemption. But in history, they’ve never reduced—if you go back to the history of estate tax—the estate exemption has never been reduced. It’s only been increased under either party. I don’t know if you remember this, it was only actually reduced one year in 2010, when there was no estate tax at all. So, there was no need for an exemption. Do you remember that?
Benz: I do.
Slott: They eliminated the estate tax. Yeah, and that’s when George Steinbrenner, the owner of the Yankees, died and said, well, look at the tax planning, I’m out.
Benz: Ed, I want to ask about the interplay between the gift tax and the estate tax. There’s a lot of confusion there. You referenced that doing some preemptive giving could help you on the estate tax front. But can you talk about how those two things work together? The other thing I want you to talk about is this gift tax, this annual gift tax exclusion amount, how that works and what that means. Because I think there’s some confusion. People think if they exceed it, that they will automatically owe tax in that year. So, maybe talk about that whole thing.
Slott: Most people don’t realize how great these tax laws are, especially if you’re well-heeled, you have a lot of money. You can give away literally tens of millions of dollars. People don’t realize this, absolutely tax-free. It’s unbelievable. So, there’s actually three tiers of tax-exempt gifting. By gifting, we mean you give it away during life as opposed to leaving it to a beneficiary at death, then it becomes part of your estate. So, the three tiers of tax-exempt gifting, the one most people know is the annual exclusion gifts, which you just mentioned. For 2024, it’s $18,000. You can give anybody $18,000 a year, absolutely tax-free, and it doesn’t even cut into your $13 million exemption. So, in effect, it adds to the exemption.
Here’s a crazy example just to make of this. Let’s say, I doubt it, but with online, everybody has millions of friends—until the time comes for money and stuff. But let’s say you have this $18,000 annual exclusion gift, and you have 1,000 friends, because that’s what your Facebook says—you have 1,000 friends that you want to give $18,000 to. What’s 1,000 times $18,000? That’s $18 million, just to make an extreme ridiculous example. You could give that $18 million away, absolutely tax-free, $18,000 to all your 1,000 friends. So, in effect, you just got an $18 million exemption; plus you still have the $13 million, you’re over $30 million just on that. It didn’t cut into your estate tax exemption.
So, that’s an easy one. When I talk about gifts, by the way, I want to be clear, I’m talking about cash gifts. I’m not talking about giving away appreciated stock. I would never give that away because you get a step up in basis and you eliminate the capital gain at death. That’s not what I’m talking about. I’m talking about actual easy, you don’t have to set up trusts or fancy estate planning vehicles. You just give away. You write a check; $18,000-a-year freebie. If it’s a married couple, they could do $36,000 per couple with gift splitting. So, that’s the first tier of tax-exempt gifting.
The second tier maybe the biggest loophole and the lesser known one in the whole tax code. Remember I said, the first one, the $18,000 annual exclusion gift, it’s limited to $18,000 once per year. The second tier of tax-exempt gifting is unlimited, unlimited to an unlimited group of people. What’s the catch? The catch is it’s for direct gifts for tuition and medical expenses. Most people are not aware of this, but you can make unlimited gifts to an unlimited amount of people as long as they’re made directly. The catch is the gift cannot go to, like say, you’re making a gift of tuition, cannot go to the child. It has to go to the college or university or if it’s medical, the doctor or the hospital. And those gifts don’t count again against the $13 million exclusion and they’re unlimited, and you don’t have to report them anywhere. I found in my practice over the years, this is the area where most older people—a lot of my clients were grandparents that wanted to do things, but they never liked giving cash to kids because, “Oh, they’ll squander it. I saw what he spent it on.” They spent it on—now they’ll say, he spent $5,000 on Taylor Swift tickets. They don’t like that generally.
They like to know that their gifts are going for the intended purpose. So, they love this provision because they are the ones who made out the check right to the college. So, it didn’t go through the child’s hands. I call it targeted gifting because they know it went for the intended purpose, whether it’s medical, hopefully not, but the big item is tuition. You could have 10 grandchildren and pay for college for all their years or even high school or private school or anything, and absolutely free of gift and estate tax, and it still preserves your $13 million exemption. That, I think, is one of the biggest loopholes in the tax code. Grandparents especially love this one because their gift goes exactly where they intended. The third tier of tax-exempt gifting we talked about, it’s using—this one is using the tax exemption, the $13 million because you can use it during life. So, you put these together, if you’ve got a lot of money and you want to make gifts to children and grandchildren, you can literally move tens of millions of dollars absolutely tax-free.
Benz: That’s helpful. I want to follow up on that SALT cap that we currently have, the state and local tax cap. You referenced that it is something that affects mainly people who are in higher-tax states with high property taxes, where they are capped at that $10,000. We’ve heard rumblings of a rollback there. I know that some of the blue state people in Congress have been looking at that and have been trying to see if we can get some relief there. What do you think about that? Is that likely to stay, go at the end of 2025?
Slott: I think if they’ll do it, they’ll be sneaky about it. I said people are limited to $10,000. Taxes—I’m in Long Island here, the taxes on an average house are $20,000 alone. Forget about your state income taxes, it’s crazy.
Benz: Exactly.
Slott: So, they’re $10,000. But here’s the truth about this. Everybody screamed about it, but people like me, you don’t get the deduction anyway because of alternative minimum tax. So, anybody that thought, look at my taxes, with these estate taxes and this, I have over $100,000 deduction for state income taxes. And then, when you do the return, it gets wiped out by alternative minimum tax. So, most people didn’t get the deduction anyway. I had clients over the years, and I learned how to, I don’t want to say play the game, but avoid questions. They would say, Ed, you left out $50,000 of state taxes off my return. I learned quickly—this is years ago—I said, “You don’t get it because of AMT.” “But I want to see it.” So, I would put it on there and then they’d be happy. I’d never get any questions. Yeah, $200,000 estate taxes, you have a big income. There it is. They think they’re getting the deduction, but they’re not. So, when I say sneaky, I think that Congress might put the whole thing back if they want to raise it. They can be big shots and say, we’ll raise it to $20,000 or $30,000. And it will help lower-income people that are not subject to AMT, so that would be great. But the heavy-hitters that are subject to AMTs, they’re not going to get anything out of it anyway. So, it costs the government nothing to be big shots.
Benz: You often make the assertion—you have during this conversation—that tax rates are low today relative to where they’ve been historically. And you believe it’s likely they’ll go higher. That’s one reason why you are perennially a cheerleader for Roth accounts because you think they’re a good deal. Wondering if you can state your thesis and also address, I feel like there isn’t a lot of political will to increase taxes. That doesn’t seem like either party really wants to do that. So, maybe you can talk about that issue as well, but maybe start with your thesis on why you think taxes will go higher from here?
Slott: Well, as a CPA, I have to believe in math, unfortunately. And I look at the debt levels, I don’t know what it is $34, $35 trillion. All I know is when they have to round to the nearest trillion, it’s a lot. So, Congress could keep kicking the can down the road or they’ll have to raise taxes. Now, you’re right, I agree with that. It’s going to be tough to raise taxes, but it’s easy to get taxes from people with IRAs and 401(k)s because we all made that deal. We got a deduction upfront. That was the deal with the devil we made. And there’s a day of reckoning that that was a deal we would take it and pay the tax later. So, we owe that.
So, I think people with the largest IRAs are most at risk of higher taxes. But even if they don’t raise the rates by doing nothing, and I say doing nothing is not an option, not converting and start trimming your IRA balance, I don’t think that’s an option because it’s eroding in front of your eyes. Why? Because when you get to retirement, if you do nothing, you’ve caused the problem, even if rates are the same, your large IRA could be throwing off RMDs that are larger than your best check in retirement—your best paycheck, your W-2. We did a program on that, I think earlier this year, on what I call the retirement myth that I’ll be in a low bracket in retirement. Remember that?
Benz: Yeah.
Slott: Because everybody thinks that. Well, I won’t have my big W-2. You won’t, but if you did nothing, your RMDs on your large IRA that you did nothing to trim down, say, with Roth conversions, are now producing RMDs that are out of your control that you must take, that are far in excess of what your W-2 was. Plus you don’t have the deductions you had, putting money into a 401(k), probably don’t have a whole mortgage, probably get no tax benefits for dependent children anymore. So, chances are your income will be up, even if rates stay the same, your income may be up and deductions may be down, and you’ll still pay more, even if rates are the same. But with the Roth conversion, even if I’m wrong—let’s say I’m wrong, Congress does nothing, because as you said, they don’t like to raise taxes. Let’s say, I’m wrong and they don’t raise taxes, because that’s what the Roth conversion is. It’s a giant bet on where you think future rates are going, but it also removes the uncertainty of worrying about it, because you’ve locked it in.
So, let’s say I’m wrong. I always say to people, consumers and advisors, what if I’m wrong? I always go to the worst-case scenario when you have to make a decision like that, especially financial decision. What’s the worst-case scenario if I’m wrong? Let’s say you converted everything. All right, and I’m wrong, and it turns out tax rates went down. If I’m wrong, you’ve locked in a 0% tax rate on this money for the rest of your life and 10 years beyond to beneficiaries. That’s not a bad consolation prize. You can’t beat a 0% tax rate. Plus, you remove the uncertainty of worrying about what if taxes go up. So, I still think it’s a pretty good bet. You shouldn’t leave everything in IRAs. It’s just like you shouldn’t have all your eggs in one basket with one stock. You have to have some tax risk diversification.
Benz: Well, Ed, I always love talking to you. I always learn from you. Thank you so much for taking time out of your very busy schedule to be with us today.
Slott: Well, this was great. We covered a lot of ground.
Benz: We did. We did. Thanks, Ed.
Slott: Thanks, Christine.
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