Paul Winkler: All right, I’m live. Is anybody else live? That’s what I want to know.
Paul Winkler, “The Investor Coaching Show.” Jeff, was anybody?
Jeff Malinoff: Not a soul.
PW: See? Dedication, I’m telling you. Or obsession. One of the two.
JM: Obsession. I’m going to go with that one.
PW: You’re going to go with obsession. How you doing, buddy? How was Thanksgiving for you?
JM: I was here working.
PW: Oh, that’s right. That’s right. You and Matt had that conversation. I remember hearing that conversation.
JM: Yes.
PW: Yes. And you were there.
JM: I had Cracker Barrel. It was all good.
PW: That’s not bad. That’s not bad at all. So did you have it there in the studio?
JM: Yeah, I brought it to the studio.
PW: They let you eat in the studio? They let you eat in there?
JM: Oh, I didn’t think that …
PW: He’s, like, not saying anything.
JM: Because I’m working. No one’s here. I’m eating.
PW: All right. “If they’re going to make me be here, I’m going to eat.”
Fraud in Companies
You know what I did? I studied, studied, studied, studied. No, I didn’t really study on Thanksgiving. I need to take that back.
But yesterday and today so far. Oh, my goodness. Getting in the CE work that we’ve got to do by the end of the year because I have CE in not only, well, I don’t technically have to do it in psychology yet, but I do anyway. But I did there and also, of course, the finance stuff, there’s just a ton of stuff that I’ve been studying in the past couple of days.
Really, really interesting. I took this course on fraud and I was telling my son, I said, “You got to check this out. This would be a really kind of cool career.”
But I was fascinated when they were going into fraud and companies and things like that. A lot of times I talk about private equity here — investing in private equity versus public markets and those types of things.
And I talk a lot about how it’s so easy to hide things, easier to hide things with private corporations. This is something that is an issue because a lot of companies have been trying to broaden into other areas for investors and get into private equity and private companies because they want to try to boost returns because you only have so many public corporations.
It’s just the belief that “Hey, maybe we can increase returns even higher when we go to this private equity stuff.”
But I was absolutely blown away by the different schemes these companies will engage in to defraud their companies and get money through all kinds of nefarious means. One of the things that I thought was fascinating was getting into this: They were talking about the food industry. And I sent my son this, it was about this to talk about DNA testing.
They were talking about using DNA testing with the food industry, and they had this organization called Oceana, and they found that 93% of the samples that were labeled red snapper were not red snapper as an example of how companies are defrauding people. Just as one example.
Changes to Companies Overseas
Then the other thing that they had done was my son was actually online. He was doing some shopping and he found these things that were pictures of pieces of clothing and he found the same exact picture someplace else on one of these public sites. Same exact picture, but it was a fraction of the cost.
So I sent this one thing, which was a catalog that a company had come out with supposedly. And their competitor goes, “How on earth are you guys selling these products this cheaply in your catalog?” This is the competitor asking this. And the executive from the company in question says, “What catalog?”
Then they got into talking about different companies overseas. There was something in India this week, there was a company, and there’s actually apparently some really bad stuff going on over in India.
And that is even bringing into question as far as who the suppliers for various corporations will be. Because remember, China was a supplier for so many companies. Then they switched over to India.
This is, I think for me, interesting simply because I never tried to predict the future and I had heard so much talk about how we’ve got to look at companies in India. We got to be focusing on that because they’re going to be the new suppliers and we have to position ourselves as to the way it’s put in our investment portfolios to take advantage of the changes.
Well, this thing that’s happening over there could upend all of the suppliers over in India and it could upend a lot of the industry over there.
And they’re just where it’ll end. Who knows?
Some people are saying it’s just going to be all swept under the rug. And for me, I don’t know. But that’s why I think it’s so important when we talk about diversification that we do that, we indeed engage in diversification because we just really don’t know.
The changes that are taking place on a daily basis are astounding to me. But looking at the area of fraud was just fascinating for me.
The 10-Year Rule
Then the other thing that I got into in a pretty big way was regarding inheritances and inheriting IRAs and retirement accounts. So that was one of the other courses that I engaged in and it was talking about changes under the Secure Act and untangling the changes that are taking place in inherited IRAs.
And that was really interesting because there have been some changes, and I’ve talked about this here on the show before that I think people ought to be very aware of. We’ve talked about the 10-year rule.
If you’re a beneficiary that’s not a spouse beneficiary or non-qualified beneficiary, so to speak, you have a ten-year rule.
You have to pull money out of your IRA if you inherit one, and of course, that can get really complicated. You have non-eligible designated beneficiaries, and let’s say that you are a child of the person that has passed away and you’ve inherited the IRA, you’d be a non-eligible designated beneficiary.
And what happens is you have two different things that can happen. The person that had the IRA dies prior to their required beginning date, which is when they have to start taking required distributions from their IRA, and then you’ll have people that die after their beginning date.
Now, if you’re a non-eligible designated beneficiary and inherited an account from someone who died before the beginning date, all you have to do is empty the account by the end of the 10th year of the owner’s death. And that was something that we didn’t really know how to interpret the law, but the idea is you inherit this thing.
It used to be you’d be able to take the distributions based on your life expectancy. So let’s say you had a life expectancy of 35 years, you would take the account value and divide it by 35, and then the next year you divide it by 34 and the next year you divide it by 33 until you get down to one and you’ve emptied the account.
And that was the idea and that was kind of nice. Then what they did is they changed it for the ten-year rule, and then what they did is they said, “If this person that you have inherited the account from has not hit that date yet …”
So if you’re born in the 1960s, now, those people haven’t hit their required beginning date yet because their required beginning date is age 75. If you’re born in the 1950s, that age has moved to age 73.
Then you’ll have, let’s say that you’re somebody that’s inherited an account like this from somebody that has not hit the required beginning date yet. Then you’ve got those 10 years.
Waiting 10 Years
Now the thing is you really have to think about this. Do I want to wait 10 years? Because the account’s just going to get bigger and then all of a sudden, the 10th year you just have to empty the whole thing and you could drive yourself up into a very, very high tax bracket where most of the money just ends up going to the government.
So a lot of times what I’m doing with people like that is I’m saying, “Hey, let’s take out a little at a time. Keep the taxes lower.”
If you’re not maximizing your 401(k) at work, then what you could do is you could reduce your work income and then live off of some of the proceeds from the IRA that you’ve inherited. Then you’re offsetting the tax consequences of pulling the money out of the IRA with a tax deduction going into the 401(k) or 403(b) or whatever type of plan that you have at work.
So sometimes that can be really, really good, but it’s just good to know that you have the ability to wait till the end of the 10th year because your situation may be different. You maybe have a situation where your tax consequences may be terrible to taking an income this year, but next year it’s going to be next to nothing. And then the year after that, you might have taxable income that’s too high and you may want to alter how you take distributions from the IRA that you’ve inherited based on your situation.
And that’s why you don’t ever want one-size-fits-all advice on this type of stuff. Then you have, let’s say you’re an eligible designated beneficiary, let’s say you have a spouse, a spouse can take it over. You might have somebody that’s less than 10 years younger than you that inherits the IRA from the person that is deceased.
It might be, let’s say somebody is disabled or it might be a child or something like that. So these are all eligible and the rules are a little bit different.
Changes to Tax Rules
But let’s say that you’re just a child of the person that had the IRA and you inherited, that’s what they call you, a non-eligible designated beneficiary. Now let’s say that the person who passed away died on or after the required beginning date. So let’s say that maybe the person was in their late 70s and they’re taking distributions, required distributions.
Well, the rules are different. In this case, what happens is you’re subject to both rules: the tenure rule and the stretch rules. So in other words, let’s say at a minimum, you’re going to have to take a stretch type of an RMD — Required Minimum Distribution — in years one through nine, and it’s going to be based on your life expectancy, and then the rest of the account has to be emptied by year 10.
Now, you can take more than the required distribution based on your life expectancy, and you might want to for tax reasons that I was talking about, but that’s the way the rules work. Now what happened is — because nobody knew what on earth the rules were — you have the waived stretch. So if you’re one of those people and you go, “Whoa, whoa, wait, wait a minute. I inherited an IRA two years ago and I haven’t been taking a distribution.”
Well, they actually waived it for people through 2024. So literally we didn’t have that 2022, 2023, 2024 that you didn’t have to take the distribution because they couldn’t figure out what on earth the rules were. And that was the challenge.
I mean, they went and made these changes in the tax law and we’re all sitting there as financial advisors going, what do you got to do?
I don’t know, nobody really knows. So what happened is a lot of us interpreted it as that you could wait until the 10th year because of the way it was written and then take the distribution at that particular point in time. But I was having people, like I said before, take distributions and put it into qualified plans and things like that because I was looking at it going, well, it may not make sense to wait 10 years, but I know a lot of people that are just putting it off.
And if you did, you have that situation where you could actually not have any penalties for the first couple of years. That’s what ended up coming down the pike.
Required Minimum Distributions
Now the other thing is that there’s this really, really weird rule. Now, this idea was this: Let’s say that a person passes away and they’re under required minimum distributions and you end up passing away and then you haven’t taken your whole required minimum distribution for the year.
Well, you’ve got to get it out. You’ve got the required minimum distribution. How do you do it? Well, this was a really weird gray area and what they came up with, which I still don’t quite understand the thinking behind this, but the idea was that you could actually take out the required distribution for the final year, and it didn’t have to be even between the beneficiaries of the IRA.
So one of the examples in the course that I was taking gave, they said they got this guy, Clint, he’s 80 years old and has an IRA and has two children and they’re named 50/50 beneficiaries, the half-and-half, and his distribution for the year was $20,000. Okay? That’s what he was supposed to take out for that particular year.
Well, he dies in July. He hasn’t taken out the whole 20,000. He’s only taken out 5,000, so he’s got 15,000 more to do, right?
Well, what happened is two children could actually satisfy in this way, which is weird. They could take out the remaining 50/50, they could do it half-and-half, 7500, 7500, or what they could do is one of the beneficiaries could take a distribution for 15,000, and they take it all, or they could take out 10,000, and the other one takes out five.
I’m like, what? What kids inheriting an IRA are going to agree to that unless they really like each other?
So I think that just goes under how weird tax laws have become. That is just bizarre to me.
Non-Eligible Designated Beneficiary
Then the other thing is that you have waivers of automatic penalties for year of death required minimum distribution withdrawals, and let’s say if somebody passes away late in the year and you don’t have time to actually get the distribution out in the year that the person passes away, then what they did is they basically gave people an entire extra year to December 31st of the year following death to satisfy the decedent’s payout. So I thought that was a pretty good one.
Now, the weirdest one. The weirdest one, well, no, I don’t know. The one before this last one was pretty weird, but this is really interesting.
Let’s say that you have an IRA and you’re a spouse of somebody and you have inherited the IRA.
Well, typically what happens is this: A spouse is able to take over their spouse’s IRA as their own.
So there’ll be some unique circumstances where they may not want to because the distribution rate was lower if they left it as the deceased spouse’s distribution rate just because of the way the tax laws work. So this is why it’s complicated and usually you really want to get advice about these things, but let me just run with this for a second to tell you a really weird one.
So let’s say that the spouse that inherits it decides that they don’t want to take over the IRA as their own and they want to do the ten-year thing. Well, what happens? They take it over as they just do the ten-year thing.
They inherit in a manner that they’re not the spouse, they’re acting like they’re not the spouse. In a way, they’re doing that. What I was talking about a little bit earlier, they’re doing. Yeah, my mind just went blank.
The non-eligible designated beneficiary option. So let’s say that they’re doing that. Now in that particular instance, they’re going one year, two years, three years, four years.
They’re not taking a distribution. They don’t have to take a distribution in this particular case, right?
Hypothetical RMDs
Let’s say that just as we’re nearing the 10th year, the spouse that inherited it says, “Oh, you know what? I think I want to take the IRA as my own because I don’t want to empty the account all in one year.”
You go, “Well, how do you do that?” Well, basically what you do is you do something called a hypothetical RMD.
They’re like, what on earth is that? Never heard of it. I hadn’t either. This is new stuff, new under the tax laws.
What they do is this. They say, well, wait a minute. Let’s say it’s a female, the spouse that actually inherits it is the wife and she’s never taken a distribution. She’s coming up on year 10, she’s got to pull all the money out.
What she does is she says, “Okay, I want to pull it all up. No, no, no, I don’t want to do that. I think I’m going to take this over as my own.”
She has to go and look back at what all the required distributions would have been over the previous nine years, take all the distributions all at once, and then she can go and take over the IRA as their own. And it sort of makes sense because the government doesn’t like getting fooled.
They don’t like you messing around with them and getting by on not taking in distributions under the ten-year rule because if she was actually under RMD’s required minimum distributions, she would’ve been taking it each year in my example. Because let’s say that she’s over the age of 73.
Now what happens is that you can make up that tax by pulling it all out at once, and you’re not really getting in the way of anything as you think about it. If you’re taking all that money out in one year, now you might be even driven to a higher tax bracket, and it wasn’t necessarily that great. You probably would’ve been better off taking a little at a time each year.
But I think it’s just interesting how creative the government can be to make sure that they don’t get taken advantage of when it comes to taxes.
What a way to start off the show. I am Paul Winkler. I love studying this stuff.
It’s just because it is so weird, but I’m telling you, we use it all the time. We end up sitting in situations where we end up having to use this stuff and oh, I’ll go to a break a little bit late.
Age of Majority for Inheriting an IRA
I want to just tell this one because this is a change that I saw in the tax law. It was minors reaching the age of majority, and they literally nailed down that the age of majority for minors getting an IRA and inheriting is at age 21, because different states have different ages of majority.
So in some states, the age of majority might be 18, and 21 in other states, and it was and I think this apparently seems to be the change that I can see right here is before, if you inherited an IRA as a child and you hit the age of majority, but you were in school, you were able to put it off, I think it was to age 27, then the 10-year period actually started.
So if you’re still in school at age 27, you could actually put off taking distributions under the 10-year rule till that time. And now what they basically do, it says that for eligible designating beneficiary purposes, when determining if an individual is a minor, they are considered to be a minor until they reach their 21st birthday.
The age at which the minor actually reaches the age of majority under state law is irrelevant for this purpose.
Upon reaching the age of majority, 10-year rule begins to apply to such beneficiaries.
So basically, that’s it. You take it, and the way it works for minors is that you take it based on the life expectancy of the minor until they hit 21. Then you’ve got the 10-year window to pull it out in that period of time.
So that’s the way that works. So I tell you what. It is, every time Congress passes tax laws, I’m telling you, it is just major excitement in the financial world because we’re just like, oh, we have to get in a planning mode and figure out how to make the best of this mess that they’ve created. And boy, what a mess they’ve created with inherited IRAs.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
