We’re Answering Listener Calls

In last week's episode, we had a lot of callers we weren't able to get to. This week, we are doing a full episode of your calls - providing you with guidance on Inherited IRAs, uses for home equity, Required Minimum Distributions, Qualified Charitable Distributions, and a thorny family estate planning issue.

Kevin Zywna, Wealthway Financial Advisors: Tonight’s going to be a continuation of the last show. We’re going to talk about financial planning moves to start the new year right. I had a bunch of them for the show we did two weeks ago, and I couldn’t get to all of them. So, this is a continuation of that show from last week. What are some of the things that you should consider at the start of the new year to set yourself up for success?

Recap From Last Week’s Episode

Well, last show we talked about some personal issues, things that you should take stock of. Do you need to assess the progress that you’ve made towards goals over the course of the year identifying any new goals for this year? Life events that may be coming up for you – any marriages birth moves, higher education, job change, retirement, illness, medical procedures? Do you need to confirm whether you and your family members will reach an important age milestone this year? 59 and a half age when you can start withdrawing from IRAs and, and old 401 K plans without penalty 59 and a half. 62, first the age that you can start claiming Social Security benefits for most people. There are some exceptions to that. 65, year to sign up for Medicare, health insurance, so on and so forth.

How about some cashflow issues? We talked about those as well. Last show you expect your household income expenses to change material this year. Need to review your cash flow plan have you saved as much as you want it to as you intended to this year. You need to review your employee benefits to ensure that you’re taking full advantage of everything that your employer offers. How about contributions to IRAs? Did you make those Roth IRA, traditional IRA deductible IRA nondeductible IRA, a lot of different issues there to consider if you want more details on some of those things that we talked about. You can go back and check that show from two weeks ago.

Today, we’re going to jump into some new material. But before we do that, as promised, when you have a call on the line, we’re going to go out and speak with that caller.

Caller Question: Understanding IRA RMDs (Required Minimum Distributions)

Kevin Zywna, Wealthway Financial Advisors: We’re going to go to Chesapeake right now and speak to George. Good evening, George, you’re Dollars & Common Sense.

 Caller: My brother passed away after a short illness. And we had our accounts kind of mixed together already. But then there was an IRA, it’s worth about $100,000. I already have a smaller IRA, I was the beneficiary. And so the credit union has given me options on which way to go to maybe defer taxes. I’m 65 and kind of work kind of part time now. So I had to take Social Security early during COVID. Just trying to figure out which way to go with that rather than just cash it out, put it in maybe a CD or keep it in some type of IRA, for tax purposes. And just wondering what your thoughts were on that.

Kevin Zywna, Wealthway Financial Advisors: Well, sorry to hear about your brother’s passing there. George. You said you receive some money via inheritance. And let’s, I guess, focus exclusively on the IRA portion of it for right now. So, I assume you were the beneficiary of the IRA?

Caller: Yes.

Kevin Zywna, Wealthway Financial Advisors: Okay. Were you the only beneficiary? Yes,

Caller:  Yes, I was the only person in the will, the person to get everything.

Kevin Zywna, Wealthway Financial Advisors: Okay. So, mom’s IRA would have been in her name only. So unlikely, say a joint bank account. It does not pass to another person. It’s owned by your brother individually, and then transfers via beneficiary. A beneficiary transfers at death and supersedes any instruction in a will. And they’re very cheap, easy, and an efficient way to pass add assets to loved ones at death. And so sounds like mom did a good job by putting you on her IRA as beneficiary.

Now, what they’re probably talking to you at the bank about is how this Ira will now become yours. The money in it, the investments in it, if there were CDs, if there were mutual funds, if there were stocks, bonds, whatever is in the IRA will become an inherited IRA to you. As long as it stays in an inherited IRA, you still have tax protection, tax deferred growth in the IRA.

Now, there are rules on when you receive an inherited IRA, when you have to take the money out. And while it used to be fairly generous, tax code changes with Secure Act 2.0 has rendered most IRA distributions to be completed inherited IRA distributions to be completed over a 10 year period. So, and you could take it all out on day one that you get the inherited IRA, you could wait till the very last day of the 10th year to take it all out. Or you could take it out, say, 10%, over the next 10 years. So anywhere in between is when you have to exhaust the IRA. And what happens is when the money comes out of the inherited IRA then it is taxable income to you, George.

So what they’re probably telling you at the bank is there are some tax efficient ways on how to use this money. So if you don’t have a large immediate cash need, it’s usually best to keep the money in the IRA, growing tax deferred until you do have a cash need, or you develop a distribution plan that suits your budget and current lifestyle. So for example, like you said, maybe take 10%, roughly over each year over the next 10 years, you generally do not want to take it out all at once, because then it all becomes taxable in the year that you take it out, it runs you up the tax ladder, exposes a lot more of that money to the higher tax brackets, and you end up sending a lot more money to the federal state government, then you need to, if you judiciously apportion it out over a period of time. So does that provide you with some context?

Caller:  Yes. There was also a CD that went to my name upon his death. They said, you could also just take it out by a different one, or leave it in there until it matures, like in June or something.

Kevin Zywna, Wealthway Financial Advisors: Was the CD in an IRA?

Caller: No, it was separate.

How To Handle A Windfall Inheritance

Kevin Zywna, Wealthway Financial Advisors: So a whole different set of circumstances, then. The CD is not subject to any of those sort of distribution rules that I just explained. That CD was passed to you via beneficiary.  You own it outright. There would be no inheritance tax implication on the receipt of that CD. So, that is money that you could go ahead and like use right now or turn around and reinvest it in another CD. But essentially, it’s yours, it should be thought of as part of your overall financial plan. And however, you need to use that CD money to best benefit yourself at the generous bequest of your brother, you can now do that.

Caller:  Okay. All right. So, yes, that’s kind of where things are. Because at some point, I either have to try to maybe. I sold my house a few years ago, during COVID, my business went bad. And so either try to get something out versus spending money on rent for the next three years, and then just maybe going back broke. Next thing coming up for me.

Kevin Zywna, Wealthway Financial Advisors:  How about your debt situation? Any high interest credit cards or personal loans?

Caller: No, my taken out a small business loan during COVID It was only 3%. But then I paid it off after I sold the house because it wasn’t really using it to invest more in the business because the type of business my hat had kind of really slowed down during COVID and hasn’t really returned. But

#1 Pay Down High Interest Debt

Kevin Zywna, Wealthway Financial Advisors: I was just going to suggest that that’d probably be the first place you go with some of this inherited money. Go and pay off any high interest rate debt that you have.

#2 Build Up An Adequate Emergency Fund

Kevin Zywna, Wealthway Financial Advisors: Then build up an emergency fund, generally described as three to six months of household expenses. Get that socked away in a safe secure bank account. Then look to maybe invest either in traditional forms of investments like stocks, bonds, mutual funds, or into another home or something like that. So hopefully that was helpful to you, George. Thanks for the call.

 

Kevin Zywna, Wealthway Financial Advisors: Tonight we’re talking about issues to considering the start of the new year. Okay, some of the new items that I want to discuss about what to do to get yourself set up for success at the beginning of the new year that has to do with assets and debts. So let’s focus on some of those areas. Do you need to adjust or replenish your emergency fund? I was just talking to George there and telling him that that’s one of the most fundamental things that you can do when you come into an inheritance or any sort of newfound wealth. Work your way up to building that emergency fund. Make sure you have three to six months of household expenses set aside in a safe secure bank accounts. Not earning much of anything these days, that’s okay. That’s not the primary purpose of this money. The primary purpose is liquidity, safety and security.

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Caller Question: Should You Consider A Mortgage Refinance?

Kevin Zywna, Wealthway Financial Advisors: We’re out to Virginia Beach, speak to William. Good evening, William, you’re on Dollars & Common Sense. Thanks for the call.

Caller: Oh, thank you. I’m just glad that you’re out there. I was looking to get some equity out of my mortgage. And wanting to know if that money is to be taxable.

Kevin Zywna, Wealthway Financial Advisors: You know, as long the money that you take out of your house, in the form of a home equity line of credit, say or a second mortgage or refinance? No, pulling out that equity is not taxable.

Caller: Okay, because I’m refinancing seven and three quarters down to five and a quarter. Now I have approximately $300,000 in equity. Or should I, I don’t know, should I pull it out and put it into other sorts of investments?

Kevin Zywna, Wealthway Financial Advisors: Well, what is the purpose of pulling that equity out of the house? Do you have a good reason for it?

Caller: No, not, really, and the prices are up right now. And so my numbers will be there. So if the economy really tanked? Would that be a good idea to do that, if the economy didn’t get any better? To do that was really a loss just to just to get it out. So I wanted to refill my six months planned, of, you know, having enough money for the mortgages, etc. You know, those kinds of things like you were just talking about.

For The Purpose of Additional Liquidity

Kevin Zywna, Wealthway Financial Advisors: You just want some more additional liquidity?

Caller: Yes. Yes.

Kevin Zywna, Wealthway Financial Advisors: Well, you know, it’s a little bit of a sticky wicket, it’s a more aggressive strategy, I should say, to pull equity out of your house, and then perhaps use it for investment purposes in common stocks and equities. It’s not something that we typically recommend, because it is a more aggressive strategy. But it is something that can definitely pay off, if circumstances are right. I would say if you don’t have a lot of liquidity right now, and if you have any high interest debt and if you don’t have your emergency fund built up, then yes. If you’re going to refinance anyway, to lower your mortgage rate, which – great job by the way, then taking some money out and building up the rest of your financial fortress – that can be a good use of those funds.

Caller: Yes, I was thinking about that. So I’m not a spending kind of person, I like to save money, but it just about destroyed me. Well I run a business and it went down to flat. And I did the PPP but it didn’t pay nearly what it needed to. So I’m still lagging behind, you might say. So that’s the way that worked out. But, the thing is, I’m only going to take 70,000 out of that 300 equity. So that’s to pay just one quick credit card offering high interest is all I have.

Using Mortgage Refinancing To Pay Off Debt

Kevin Zywna, Wealthway Financial Advisors: Yes, now that can be a real good use of home equity because as you point out, you can borrow at about five and a half is what you’re dropping down to. And if you’re paying off a credit card at 12, 18, 20, to 25%. Now that’s a good use of home equity. If you get that high interest rate debt paid off, but you’ve got to keep it paid off as well. Don’t get back in the hole there and then you owe more on your mortgage as well.

Caller: That was part of the backlog I have was trying to pay that off from COVID. You know, that’s why I use my credit card first, to try to solve it. And then everything… it just got in a bad way.

Caller Question: Understanding IRA Required Minimum Distribution (RMD) Tax Implications

Kevin Zywna, Wealthway Financial Advisors: We’ve got another caller on the line, Jake out in Virginia Beach. Thanks for waiting so patiently you’re on Dollars & Common Sense.

Caller: Hi, Kevin, I appreciate you taking my call, letting me explain my situation and maybe you can give me some advice. I’m 71 years old and retired for over a decade on a defined benefit plan. I have an IRA and I’m quickly approaching the required minimum distribution age. And of course, when you take those distributions, they are taxable income. And I’m wondering is there a way to minimize that tax impact, and also being on Medicare, the Medicare premiums are based upon your income. Once I start drawing the money from the IRA, my income will be considered as going up which will drive the Medicare premiums up. So is there a solution?

Kevin Zywna, Wealthway Financial Advisors: There isn’t a magic one. Tell you that, Jake. So it sounds like the required minimum distributions might be sort of substantial enough that they might push you up into a higher tax bracket, is that true?

Caller: Well, not initially, but as each year goes by, you know, it’s been it’s piling on to the year before, right? So ultimately going to put me into a higher bracket for Medicare premium,

Kevin Zywna, Wealthway Financial Advisors: Right, and you’re pretty clued in to the whole process there. Yes, you’re going to have to start taking required minimum distributions out of traditional IRAs. All the money that comes out of an traditional IRA is taxed as ordinary income, just like when you used to get a paycheck, all subject to federal and state taxes. And if those required minimum distributions are large enough, they can start pushing people up into higher tax brackets. Which then you also identify can affect your Medicare premiums as well. So, if you’ve done such a good job of saving over your lifetime, that your required minimum distributions are substantial enough that they put you into higher tax brackets, well, one, congratulations, you did a real good job saving. But today, now comes the time to pay back those tax breaks you got for the contributions you made into the plan.

Now one of the things you can do, if you are charitably inclined, or you are already giving to say, a church, or charities or colleges or schools, or what have you, is donating your required minimum distribution directly to a charity. And those are called qualified charitable distributions that come out of an IRA. And if you do that directly from the IRA, then that money that comes out for the charitable contribution is never taxed as ordinary income. It’s like it didn’t happen. So that is a much more efficient way, a lower tax way of donating to those charities, instead of having the money come out of the IRA, you claim it as income, and then you try to write it off on your taxes later. You do the math on all that, it’s a lot cheaper from a tax standpoint, to make those qualified charitable distributions directly to charity. So that is a potential strategy for you. To help lower your overall tax burden.

Caller: Do you have to do the entire RMD as a donation? Or can you do part of it? Is there a cap? Is there a cap on the amount that you can donate in one year?

Kevin Zywna, Wealthway Financial Advisors: No, you do not have to donate your entire required minimum distribution. You can donate just a portion, any portion of it. You could ostensibly give more than the required minimum distribution as well. And there is an annual contribution limit (that escapes me), I want to say it’s around $100,000. But it’s usually fairly substantial for most people’s required minimum distributions. They don’t approach that quite yet.

Caller: Okay, I appreciate it.

Kevin Zywna, Wealthway Financial Advisors: You do have some flexibility there, Jake, on how you donate that money. So instead of giving to your church, say on a weekly basis, like some people do, we have some of our clients just write one big check at the beginning of the year. The church is happy. The client is happy because it’s easier administratively. And it donates that money directly from the IRA. So it never shows up as income and it’s a lot more tax efficient, doing it that way.

Caller: Okay, and that’s, that’s pretty much the only thing available to minimize this impact.

Kevin Zywna, Wealthway Financial Advisors: Yes, it’s going to have to come out, and it’s going to come out as ordinary income. So, donating it directly to a charity can prevent that from showing up as ordinary income. But beyond that, yes, you’re just going to have to take it out and pay tax at your current income tax rates.

Caller: Okay. Okay. All right. Thank you, Kevin.

Kevin Zywna, Wealthway Financial Advisors: You’re welcome. Thanks for the call. Appreciate it. All right.

Caller Question: Understanding The Oversight Nuances Of A Power Of Attorney

Kevin Zywna, Wealthway Financial Advisors: Right now we’re going to go back out to Virginia Beach and speak with John. Good evening, John, you’re on Dollars & Common Sense.

Caller: Kevin, I have a two part question. My wife’s mom passed over the holidays. And the situation is muddy because her older sister has had power of attorney for use of the funds which are supposed to be split in half. But we don’t know, to what extent the sister may have dipped into the fund for things other than taking care of the medical needs and other such things for my mother in law. And I didn’t know if it was recommended or how we went about requiring an audit before the thing is split up? And then the second question is when it is split up, and the portion that’s my wife’s gets turned over to her? Are there any pitfalls or gotchas or “make-sure-you-do-this” type thing that we need to be aware of before we start doing anything?

Kevin Zywna, Wealthway Financial Advisors: Yes, okay. So, you know, estate planning is one of those things that it’s usually the last thing that most people do, because it deals with an unpleasant subject, passing of assets via death. But we often sit with the inheritor’s adult children. And as you describe right now, John, you can see how sort of dirty, messy, and complex that transfer can be in real life. So, one part of your question was, so your wife’s sister was acting as Power of Attorney?

Caller: The power of attorney for all things with the estate, and for her mom’s medical care. And she being you know, rather than just making it a joint thing or keeping us advised of things. She’s one of these knowledge is power type people. So she arranged that the only person that the nursing home or the financial people could talk to is her. So we have no idea what has gone on in a couple of years.

Kevin Zywna, Wealthway Financial Advisors: Do you suspect improprieties?

Caller: I’m not convinced that it’s taken place, but I wouldn’t put it past them.

Kevin Zywna, Wealthway Financial Advisors: Well, the power of attorney is a power of attorney for a reason. And, you know, Mom gave that to the sister. And, yes, it’s a powerful position over mom’s financial situation as well as her health situation. Did you see two different types of power of attorneys, one for health care and one for finances? They can be separate people who have the powers. But whoever is granted those powers by mom, you know, does have a fair amount of discretion on how to use the funds. And while the power of attorney is supposed to be held to a fiduciary standard, much like we are in our world, which is a very serious legal obligation to act on behalf of someone else in their best interest. Whether it’s in your interest, or not, the fiduciary interest or not, you’re doing it for someone else. So if you feel that there were some improprieties, and that’s going to be an awfully gray area, then I would recommend contacting an estate planning attorney and getting them involved. They would be the expert here. And they would be best to advise you on how you would approach the situation going forward. But if the sister has been using the money largely to benefit Mom, that’s fine, then. Right? And that’s, that’s what she’s supposed to do.

Caller: Yes, we’re not worried about that. We’re worried about taking it off for other family type expenses.

Kevin Zywna, Wealthway Financial Advisors: Yes, and that’s where it can get muddy, because, you know, was mom involved in those expenses? Where she went to, you know, she went to the grocery store? Did you buy personal groceries? Or did you take some to mom, you know, it can get kind of muddied there. And I should say that, in some cases, you know, a power of attorney can be entitled to compensation for the work they do, even if it’s a family member, depending on how the power of attorney is worded and written. So that’s not unheard of.

Caller: Yes. We’re not worried about, you know, nickel and diming it but if there was anything substantial taken, you know, like to help somebody buy a car or do home repairs or things like that, that are not connected to my mother in law.

Kevin Zywna, Wealthway Financial Advisors: Yes, that we’re not for the benefit of mom. Well, my best advice is to get to an estate planning attorney, because they are the experts in this realm. And they would know best whether an official accounting and auditing can be sort of ordered by the sister. I am not sure about that. I’ve got to assume that there is some sort of mechanism there, some sort of oversight, whether that’s a court, or another sort of legal fiduciary, looking over the sister’s shoulder, there usually is some additional mechanism there. So I would recommend a qualified estate planning attorney to get involved if you feel strongly enough about it.

Caller: Okay, and connected to that. It’s a little muddier because I don’t know how hiring estate laws come into effect. My mother-in-law was in Florida, in a nursing home when this thing started. Sister-in-law then moved her, about six months to a year after that, to Tennessee – which is where she’s been for a couple of years and where she died. We’re here in Virginia Beach. So do I get a Virginia lawyer, a Tennessee lawyer, a Florida lawyer, one of each?

Kevin Zywna, Wealthway Financial Advisors: Yes, great question. Well, if she passed in Tennessee, the wills and the power of attorney should conform to the state of law of the residence of the person who drafted them. So, Florida when mom was in Florida, if she was moved to Tennessee, then those documents should at least be reviewed by somebody in Tennessee, because state laws can differ. Sometimes the documents can be okay. But then other times there are wrinkles. So, yes, this is the fact that you’re in Virginia Beach, that’s immaterial. What is material? Where were those documents drafted? What state were they drafted in? By what attorney were they drafted? And then the fact that she passed in Tennessee, that’s going to have some jurisdiction over the distribution of the estate. So I think an estate planning attorney in Tennessee would be the place to start. The area where this occurred till it was Nashville or Memphis or something of that, get somebody with boots on the ground.

Caller: Okay. All right. Thank you for that, I will tie the phone up any longer. We’re almost out of time anyways, and I’ll give your office a call for the other part of the question. Yes, thanks for your help.

Kevin Zywna, Wealthway Financial Advisors: Okay, John. Appreciate it. Appreciate the phone call.

Yes, you know this call from John highlights, the complexity and the messiness of estate distribution for estate plans that aren’t done thoughtfully and carefully on the front end. And it is not uncommon that we have seen in our practice, that one or more family members are close to mom or dad. And it could just be due to proximity, right? They are the ones there, the caregiver. Or they’re the ones close by, you check on mom and dad. And then they naturally become the healthcare power of attorney and the financial power of attorney. And there’s nothing wrong with that. In fact, it’s probably a preferred arrangement.

But if you have strained family relationships, then as John points out, that person, that power of attorney is in a position of power over Mom and Dad’s finances. And if mom and dad have distribution wishes through the estate, they want it to go to all three of their kids equally, say. I mean, that still can be done even if one is the power of attorney. But if one is using that power of attorney to benefit themselves a fair amount, then sometimes you have to step in and gain some oversight over the situation. Like I said, it’s not uncommon. It’s something that we see from time to time, transparency, openness, honesty, good communication by the drafters of the estate plan is paramount that would be mom and dad.

All right, that’s all the time I have for today. Thanks all our callers. We had a lot of them tonight. I appreciate that. I might have more material again on how to start the new year off right in our next show.

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