Mail Bag: Avoiding beneficiary IRA taxes, OBBB, tax deductions, and 529 planning

0:00 Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner practitioner and senior vice president financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to another edition of Something More with Chris Boyd. Chris Boyd is off today. So my name is Jeff Curry. I'm sitting in the co-host seat with my co-host Russ Ball.

0:42 Russ, thanks for joining. Thanks for having me, Jeff. Happy to be here. I was just, for the listeners, we're going to do a mailbag episode today. We're going to take a number of questions from issues with the big beautiful bill questions about that to 529 questions, college savings questions. So we'll see where we go when we dig into the questions from listeners and clients that we've developed over the last month or so. But Russ, before we get into those questions, I was looking at the date. It's the date of my granddaughter's birthday today. So happy birthday, Faith. I'm sure you're not listening. But I'm realizing, like, this is halfway through summer.

1:27 I mean, if you count July and August as summer, it's halfway. If you count June, July, August, September as summer, you're halfway. So summer is half over. Are you achieving your summer goals? Are you, like, out there doing those summer things? Oh man, I'm trying. I'm trying. You're behind. I'm definitely behind. I've been to the beach, I think, twice. And I had a goal much more than that. But no, it's been a good summer. Of course, when August hits, it starts feeling like, all right, it's already winding down. But there's still more time. There's more time to do some fun stuff and enjoy Cape Cod in the summer. Yeah, I think when August hits, people are like, you know what, we haven't done this.

2:10 We haven't gone here. We haven't done this. We said we were going to do this, you know, and it's like the time to focus or it's going to go by. Yeah, it's true. It's true. It's going to flash by and then soon it's going to be fall and we're going to be cold again. Or not you. You're going to be cold. Not you. You're going to be comfortable. I'll be less hot. For our listeners, Russ is on Cape Cod at our team office in Hyannis, team AMR office of Wealth Enhancement. And I am, although from Cape Cod, I am living in Florida. So we're coming back to the Cape from Florida at the end of August a little bit.

2:51 So we'll get some of that Cape summer and get a relief from the Florida summers. Yeah, that's always good to look forward to. Hopefully it's good weather when you come. It's been pretty hot here lately. Yeah, I have, you know, most of my family is still in Massachusetts on the Cape or Rhode Island or where they happen to scatter. And I hear from them almost every day. And this summer, it's been hotter in New England, if you will, in southern New England, than here many days. It's been a hot summer. Yeah, yeah, no, it's it's been feeling hot. And I was in I was in the city in New York City last weekend.

3:32 It was scorching in New York City. So definitely, you know, it's comparable to what you've got going on in Florida. It seems like it. Yeah, we're just kind of used to it. Yeah. All right, let's dig into the mailbag. I'm going to start with you. I get a question from a I think that's a client question that now this one was a listener question. So here we go. My elderly grandfather has informed me that I, the person writing the question, will be inheriting a traditional IRA, presumably when the grandfather passes. I'm already in the 24% tax bracket and was wondering if there's anything I can do to lessen my income taxes with the additional funds coming from the beneficiary IRA.

4:15 So here's a busy young person that seems to have a good salary. They're in the 24% tax bracket already. And they're worried about future taxes when they get this IRA, beneficiary IRA. So do you have any advice? Yeah, I have a couple thoughts. So, you know, when when children are inheriting or plan to inherit or expect to inherit anything from from their parents, a lot of time it is going to be IRA dollars, money that will be taxed as part of the SECURE Act. There's no more stretch rule for those IRAs. So you have to take those if you're not a spouse, beneficiaries have to take those inheritance over 10 years.

5:02 So there has to be nothing left in the IRA after 10 years. As you might imagine, that could create a significant tax event. Yeah. And for a lot of people that are inheriting, it's in their peak earning years. And so they're at the highest or as high as they're going to be in their life. And they have to withdraw from these IRAs that they inherited. Of course, you know, it's it's it's money. It's not it's still it's still inheritance. It's still a gift. But it does create a tax burden. And I recently had a client come in and ask, you know, the legacy planning was sort of part of their goal or one of their goals. And they're saying, you know, I have all this inheritance.

5:44 I mean, all this IRA money. When my kids inherit it, they're going to have to pay taxes on it, right? Well, they are. There are a few that you can do. One and the one that we talked about at the time was doing some Roth conversions. So getting more of that money out of IRAs and into out of traditional IRAs and into Roth IRAs, which does not have that tax impact when you when you pass and there isn't. In this case, the father or mother, the people who would be passing and leaving the IRAs have to pay the taxes when they do the conversion.

6:25 That's exactly right. So it's it's you're you're taking on the tax burden that you would have passed on to your heirs. And they may be in, you know, depending on the circumstances. But sometimes people when they're retired are in a lower tax bracket. Right, right. So so that's definitely one and probably the most common solution to that to that issue. If you if you don't if you're worried about the tax hit for those 10 years for your heirs, probably doing some Roth conversions would make sense. I did, however, come across an article recently that talked about using a life insurance policy as sort of a hedge against having to pay those taxes yourself or for or for your heirs.

7:12 It's a little bit complicated, but but the the basics are that, let's say you and your spouse are 65 years old or in that area, rather than just building up your IRA and then slowly withdrawing it. Let's say you have other income from Social Security or other retirement assets. You can use some of those some of the IRA money to purchase a life insurance policy and have that pass on to your heirs. And basically the thinking is you're drawing down your IRA, but at a smaller rate. So it's about like, let's say it's a policy in this article I'm thinking of.

7:53 It was like $40,000 a year. So significant premium for a universal life insurance policy. But then you're not restricted as far as having to do Roth conversions. You can just use your money as you want. And then there's always going to be that inheritance that's tax free to your heirs. So it's a little bit complicated. It's definitely a specific case by case basis. If the person is already elderly and that would be passing those funds along, that might be a little bit more difficult because you can't get insurance up to a certain point. But this is a math problem. If someone's interested in exploring that, you really have to sit down with someone who's experienced at doing these calculations and time value of money and taxes.

8:41 And it's not a back of the napkin analysis, I guess. No, I wouldn't call it that. It's definitely a little bit more complicated. But it is an interesting solution that I hadn't heard of before reading this article talking about using life insurance to reduce the tax impact for heirs and for yourself, presumably. It's interesting in that I'm not trying to be negative about life insurance. But don't ask your life insurance salesman to do this analysis. Yes, very good point. Right. So this isn't going off of our program today. But it's a good reminder that when you're getting advice from someone, you should always ask.

9:27 I always have these three questions in the financial world. One is, are you a fiduciary? And a fiduciary means someone who works for you and your best interest. They're legally and ethically bound to help you ethically and legally for your best interest, not in their best interest, like how much commission, how much fee they have to give you advice that's in your best interest. Number two is, how are you compensated? The person you're dealing with, how are you paid? Everybody's going to get paid for helping you, selling you something, giving you advice. Just have an understanding of how you're going to get paid. If someone's getting paid to sell you a certain product, you should know that.

10:08 Before you listen to them. And three is, if it's an investment vehicle, where's my money being kept? Where's it invested? How's it kept? How's it protected? Is it insured? All of those things. So, you know, I'll give you a funny story to make an analogy. If I have a friend, for obvious reasons, when I finish the story, I'm not going to say the person's name, but they're a surgeon. And he says, if he gets a referral from a physician to him for surgery, it's most likely you're going to have surgery. You know, so he, you know, very few people who get referred to a surgeon, get a referral back and say, no, we're not going to do the surgery.

10:50 It's not a good option. So, and just know who you're talking to, know if there's some motive there, if there's some financial benefit for them selling you something. But so in this case, you know, if you're working with a financial advisor and you're like, you know, you're thinking that the strategy that Russ just talked about might make sense for you in your situation, go to your financial advisor who's not selling you that life insurance. Right. For example, in Russ's example. So sorry to take up a couple minutes. No, no, I think it's important. I think that's a great point. Like rather than going to the person who sold you a life insurance policy, which and their life insurance policy is going to be very complex, especially universal insurance policy.

11:33 So, you know, that would be like a permanent life insurance policy. So definitely talking to your advisor, putting this all out in a plan is definitely going to be the way to go rather than going directly to the source. And then who knows what kind of product you'll end up getting when you leave. But yeah, we, you know, this is a big part of what we do as advisors. We're fiduciaries. We're paid by a percentage of the assets under our management. In most cases, sometimes it's a fee-based if people don't want to do it that way. But this is an example of like the breadth of issues that we get from our clients.

12:13 You know, a client may hear this podcast and say, hey, is this right for me? They come in, we do the analysis and we give them our advice. And if it's to buy that life insurance, then we, you know, they buy it from somebody else. We don't sell it. So, or some other thing that they hear about or some other thing that maybe their estate planning attorney tells them to talk to us. So a big part of what we do is not just manage portfolios, is we help our clients through these questions of, is this the right thing for me? And whatever that thing might be is, you know, from investing to financial planning, to legacy planning, to gifting and strategies around taxes.

12:54 So I think it's a good question that highlights all those things, right? Yeah, definitely. All right, Russ, let's take a big shift because we're getting a lot of questions as I think all advisors are and accountants and lawyers about the one big beautiful bill, the bill that President Trump agenda bill that had a lot of different provisions in it, but they also had a lot of different opportunities for people to save money. We had a question recently that came up in a client meeting and you're talking about the deductions on overtime and tips. So this was actually this question was specifically about overtime.

13:35 You know, there is this new deduction and I have the numbers here. So for overtime, the maximum deduction is $12 ,500 for individuals. And that's starting this year, starting for 2025 and going until 2028. $12,500 for individuals and $25,000 for married filing jointly. So for married couples. For tips, it's $25,000 for individuals and for married couples is the same for both. There are income restrictions on that. So it's those those deductions do phase out after $150,000 for individual income and then $300,000 for married filing jointly.

14:16 But those deductions are going to impact a lot of people, obviously. So one of the questions was, I have overtime, you know, I get paid overtime. So how are they going to know what part of my salary is overtime? How are they going to know how many overtime hours I work? What is deductible? The current pay stubs and even further, the W-2s don't have that. It's just one long number. Exactly. It's not broken out. Did some research because, you know, there are a lot of things, different moving parts with this new legislation and not everything is is fully known right now. So I think they're still trying to work out some details. But there is a new requirement for employers to break it down on W-2s when those come out at the end of the year.

15:00 So it's going to break down what you got in tips. They're supposed to and what you were paid in overtime as separate line items on the W-2. And that way you can know what you're able to what qualifies to be deducted on your tax return. Sounds like it's going to be the one big number with your overtime, those four tips in the number and then a number that you'll be eligible to deduct on a separate line item on the tax bill. That's what it seems like. It's not entirely clear at this point. And, you know, other questions were like, well, what about for the overtime I already worked this year? Are they, you know, they didn't know that this law was going to be this way. So basically, as things stand, I'm sure there will be changes.

15:43 But as things stand, companies are expected to come up with an estimate for the amount of overtime worked in the first half of the year before this bill was passed. In any case, I noticed something important about overtime as well. So it's not all hours of overtime, like it's not your full pay for overtime that's deductible. It's only the premium amount. So it's the amount over your base pay. If you make $20 an hour and you get time and a half, so you get $30 for overtime. It's just the $10 part of it. That's exactly right. Yeah. It's just the additional amount that you get paid for overtime that would be going towards that $25,000 deductible.

16:27 I didn't know that. That's interesting. So it's still good for people who work overtime. There's going to be an advantage there. But it's not quite as good as you might have been doing the math on, right? Not quite as good as it might have looked off the bat without hearing the fine print there. So definitely some things to know. But the good news is that there is going to be some sort of definition of what amount qualifies on your W-2 when you do your taxes. Well, the big beautiful bill is big. I'll leave it to the pundits to say it's beautiful. But it's certainly a bill that's going to keep accountants and estate planning and financial advisors working.

17:08 Oh, yeah. For sure. I think every other webinar I'm getting emails about is about the one big beautiful bill. So much for simplifying the tax code. And I think that trend is that bus has left the station as they speak. Definitely. Definitely. But there's a lot to stay on top of. But that's what we're working on behind the scenes. For you, Jeff, I have another question on the one big beautiful bill act. No surprise. We're sticking with this. Yeah, yeah, yeah. I imagine there will be more for our next middle bag episode. But for this one, here's the question. I'm retired and receive monthly social security benefits. I heard that the newly enacted one big beautiful bill act eliminates federal income tax on social security benefits.

17:54 Is that true? No. It's not true. And I get why people are confused whether it's, you know, we talked about taxes and tips and social security. The president, President Trump, during the campaign and, you know, even afterwards, for a while, he was, I won't say promising. He uses this rhetoric as indications of what he'd like to do. And then he compromises, right? So but there was a lot of rhetoric that social security, no taxes on overtime, no taxes on tips, no taxes on social security. So, you know, then people who aren't paying close attention to this and who should, right, besides people who need to like us.

18:36 But then they see, oh, the bill passed. So they make they make these assumptions that the rhetoric of no taxes on this in this case on social security passed and they get excited. But now the one big beautiful bill doesn't make social security benefits fully taxable. Right. Just as a refresher. Many, I won't say most because low income people, you know, would be exempt from this. So many social security recipients pay income taxes up to 85 percent of the benefits. And don't get confused with this statement often confuses people with them thinking that if they work, they're going to lose part of the social security. That's not what I'm talking about.

19:17 I'm talking about when you reach a certain income level, your social security benefits are taxed up to 85 percent, depending on your income. Right. So the president had said he would hopefully end all taxes on social security. But what the big beautiful bill did was not eliminate income tax on social security. There is now a new senior deduction of six thousand dollar per filer age 65 and older. So if you're 62 and decided to go like social security. This is not for you. You have to be 65 and meet certain income limits, as you referenced in the other provisions.

19:58 And you have a deduction which will be a new line on the income taxes. Another line on the income taxes where you can deduct six thousand dollars from your taxable amount of social security. Yeah. So, you know, another thing that sounded real good when we started, like people maybe were counting their monies, but the actual provision that was passed in the compromise with the Democrats and Republicans House and Senate. This is what came up. So still some good news, but not as good as one might hope. Similar to the overtime needs. It's very similar. When you were talking about it, I was thinking, yeah, there's a lot of things like that.

20:40 Yeah. But at the end of the day, I was looking at some, you know, projected tax returns on our planning software and seniors over 65 can earn can have up to like a. I think it was. Don't quote me on this number exactly, but I think it was about forty seven thousand five hundred as the total standard deduction for 2025, which is considerable for a married couple. So it's because it's the the standard deduction plus the there is a I think sixteen hundred dollars or double that for a married couple that was already in place for people over 65. And there's this additional six thousand per person.

21:21 So and so here's another answer to that question, which I kind of answered, but I want to emphasize it. So sometimes people, when something new happens, they say, oh, but I do the standard deduction. Will I still be able to deduct? And yes, this is going to be a separate line item, not included in the standard deduction, the six thousand dollars. So this is this this is for every senior who may see income qualifications. So that's good news for a lot of people. OK, I have one more question for you, Jeff. This is not on the beautiful bill, at least not.

22:04 So it says we've been investing in a five twenty nine for our son's college expenses. Five to nine is invested in a growth stock mutual fund and has been doing great as our son will be a senior in high school this fall and using the five to nine money next year. My wife and I are nervous about the stock market and what happens as it goes down. What happens if it goes down at the same time? Our son needs the money. Should we be doing anything about this? It's a good question. You know, we get this question in many contexts, like in retired people, you know, people even when they're just retiring, you know, they'll they'll come in and they'll have a 401k say that they want to roll over and they've had it aggressively invested in their accumulation years and they they feel like I'm not working anymore.

22:58 I want to reduce risk. That's a very normal feeling. Right. And sometimes it's appropriate. Sometimes it's not. We spend a lot of time with these clients to see to see what their needs are, what their cash flows are, other income. But oftentimes we encourage them not to de -risk completely because a 65 year old very well could have 25 plus years left of living and needing those money. So maybe it's a bucket approach. Um, this is different. It's the same where someone's having a feeling about risk. But this is different because the time frame where this family will want to access those funds, those 529 funds, which are college savings funds, tax tax free is used for education.

23:44 Um, it's very, it's a short window. It's between now one and say five years, first year of college, next year in the example in the next four years when they'll need these funds. And so thinking about what if next year we have a bear market or we have a significant correction or a period of the down market, which happens, you know, we don't like them, but they happen and they know parts of the market. It doesn't mean that investing in a growth mutual fund wasn't a good idea. It probably was a great idea. Obviously, you know, to think about the last 18 years, it's been some ups and downs, but I'm sure that 529 fund has done really well. Right. So they're at the end, they're getting close to the end.

24:25 So I think they have two choices. And I think leaving it in a growth mutual fund with that short time frame and the markets being at record highs begs the question of, should we? And the answer is yes, you should de -risk a portion or all of it. So you get two different approaches here. And many people don't, aren't aware of this. Within a 529, they usually have you pick one investment as your money's going in, but you can once, it's either once a year or once every six months, depending on your state and the rules, but you can segregate some funds out. You can put them in a separate investment, meaning making a change in your investment choice.

25:06 In this case, maybe a money market account, right? If they want to take, if they want to go totally on the safety market. Yeah. So I would encourage them if they're working with an advisor, you know, I get a lot of questions. Are these funds dedicated completely for, are there other funds coming in? So it'd be prudent to add a minimum to take next year's, the freshman year in college, next year's funds out of the market risk. Yeah. And put them into a money market, still get four or four and a half percent, whatever it is and have those funds that, you know, whatever happens over the next year, the market goes up a little bit, you lose a little bit on return, but it's not favorable.

25:49 Then you know that you're not going to be affected by a market downturn, a market volatility. I would encourage them to at least do that. They could make, they could make a very rational decision to say, we've had a great run. We've had great returns. We're going to be needing this money. Let's switch it all to a less risky or no risk situation. It really depends on how much money they're going to need, how they view risk. Are they going to be worrying about this? Do they have other funds that they might use? But the question is a great question. And the answer is somewhere, you know, on a personal level, we try to offer guidance in these segments on the show, but it's really about the individual and, you know, how the whole fits into the whole financial plan.

26:35 But the question is a good one. And I think their, their feeling of concern is accurate. And I would, I talked to their, they should talk to their advisor and ask what they think. But I think it's very prudent to at least take the first year, maybe two, maybe all of it, depending on the situation and how they, how they view risk. Yeah. I think it also depends on if, you know, if it's solely meant for that one child or if it's going to be, you know, moved over to your next kid, let's say after the first one's out of school. But in general, you can think of it similar to you do with savings. And if you're going to be spending the money within, you know, two, three, even four years, there's, there's a big argument to be made for having that in cash and having that more liquid, if not cash, very conservatively invested at the very least, because, you know, you're going to be using that.

27:30 It's very different than when we try to, you know, project our lifespan and how long we're going to live. That's a number we don't know. We have no way of knowing. But with college, it's sort of a finite amount of years. And that's kind of it. So that's one thought. And then the other is I know some 529 plans have sort of similar to like a target date fund where they have like a, you know, they're saying that your child is going to be in college this year. So this is our target. And it auto adjusts over time. So that's, yeah, that's another investment choice within 529 plans. Not all, but some. So if these folks were in a target fund, it would have already been done. Right.

28:10 It would have been transitioning over time. Exactly. So they would have very little market risk being a year out from the funds being needed. Target funds have, you know, they kind of they're designed to reset it and forget it. In the early years and mid years, you probably lose a little bit of potential for earnings because they're being, in my opinion, a little too conservative. And some of these target funds have higher fees than others. So it's not all positive with target funds, but the principle behind it is a good principle about risk reduction. The closer you're getting to the goal, you know, we'll have clients say, OK, I'm going to start saving for a house. How long? Five years.

28:50 And they'll have in their mindset of, OK, let's invest in Nvidia or let's invest in, you know, semiconductors or let's invest in some stock that they heard about. Um, because they're trying to maximize their their returns by increasing their risk. But by doing that, they're certainly taking the risk of not reaching that goal five years. So it's really a modeling and a measurement of not their own, not only their own risk, but more importantly, is one of those funds going to be needed, whatever the goal is. And certainly going to college at a certain time is a very specific time frame.

29:31 That is not movable, obviously, but not really that movable for 99 percent of the people. Exactly. Good questions, Russ. Thanks for joining us. And let's see next time if we can have a whole episode without mentioning the one big beautiful bill. We'll see. Thank you for tuning in. Thank you for listening to us on your favorite podcast channel on YouTube. If you don't subscribe, please hit that subscribe button and your like button. We appreciate your comments. We appreciate you sharing the show with other people. It helps us and the algorithms reach more people and help more people. And we appreciate your listenership. And don't forget to tune in next time.

30:11 Until then, keep striving for something more. Thank you for listening to something more with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns or those quality of life issues that make the money matters matter. Whatever's on your mind. Visit us at somethingmorewithchrisboyd.com or call us toll free at 866-771-8901. Or send us your questions to amr-info at wealthenhancement.com. You're listening to something more with Chris Boyd Financial Talk Show. Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only.

30:52 Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.