1 00:00:00,000 --> 00:00:02,340 INTRO: Hi, I'm Ed Slott and I'm Jeff Levine. 2 00:00:02,460 --> 00:00:06,090 And we're two guys who just love to talk about retirement and taxes. 3 00:00:06,120 --> 00:00:10,050 Look, our mission is simple to educate you the saver so that you can make 4 00:00:10,050 --> 00:00:14,160 better decisions because better decisions on the whole lead to better outcomes. 5 00:00:14,190 --> 00:00:16,500 And here's how we're going to do that each week. 6 00:00:16,590 --> 00:00:21,270 Jeff and I will debate the pros and the cons of a particular retirement strategy 7 00:00:21,270 --> 00:00:25,890 or topic with the goal of helping you keep more of your hard earned money. 8 00:00:26,040 --> 00:00:29,680 Yeah, but we won't know which side of the debate we're taking until we flip a. 9 00:00:30,180 --> 00:00:33,630 Winner of the coin flip gets to pick which side of the debate they want to argue. 10 00:00:33,660 --> 00:00:37,950 And both of us will have to argue in favor of our respective positions, 11 00:00:38,190 --> 00:00:40,500 whether we agree with them or not. 12 00:00:40,500 --> 00:00:43,770 At the end of each debate, there's going to be one clear winner. 13 00:00:43,980 --> 00:00:47,640 You a more informed saver who can hopefully apply the merits of 14 00:00:47,640 --> 00:00:50,790 each side of the debate to your own personal situation, to decide 15 00:00:50,790 --> 00:00:52,740 what's best for you and your family. 16 00:00:52,800 --> 00:00:53,700 So here we go. 17 00:00:53,700 --> 00:00:55,860 Welcome to the great retirement debate. 18 00:01:02,040 --> 00:01:05,160 Ed Slott: Welcome back everyone to the great retirement debate. 19 00:01:05,190 --> 00:01:07,740 I'm Ed Slott, along with Jeff Levine. 20 00:01:08,070 --> 00:01:09,270 How you doing today, Jeff? 21 00:01:09,509 --> 00:01:09,929 Jeff Levine: I'm good. 22 00:01:09,929 --> 00:01:10,170 Ed. 23 00:01:10,175 --> 00:01:11,399 I, I warmed up today. 24 00:01:11,549 --> 00:01:12,870 I feel like I'm in peak form. 25 00:01:12,870 --> 00:01:16,199 I spent the last few hours arguing with my three year old. 26 00:01:16,440 --> 00:01:17,670 So you're in trouble today. 27 00:01:17,880 --> 00:01:19,160 There's no, no better. 28 00:01:20,115 --> 00:01:23,655 No better protagonist or antagonist than a three year old. 29 00:01:23,895 --> 00:01:25,095 Ed Slott: Did was the problem. 30 00:01:25,095 --> 00:01:26,505 He said, roth IRA. 31 00:01:26,505 --> 00:01:28,335 And you said, absolutely not. 32 00:01:28,604 --> 00:01:28,935 Jeff Levine: That's right. 33 00:01:28,935 --> 00:01:32,685 Well, you know, ed, my children I've taught them well, they knew how to roll 34 00:01:32,685 --> 00:01:34,244 over before they knew how to roll over. 35 00:01:34,244 --> 00:01:37,514 That's uh, that's very, we start young in this house. 36 00:01:38,135 --> 00:01:39,575 And, and I've got one for us today. 37 00:01:39,575 --> 00:01:42,395 And, you know, we talk a lot about those who've saved and who've kind 38 00:01:42,395 --> 00:01:45,215 of reached a peak and pinnacle of retirement, and what should they do. 39 00:01:45,545 --> 00:01:49,295 Let's talk about someone who maybe, uh, is, has fallen on a little bit 40 00:01:49,295 --> 00:01:53,405 harder times or has retired early any one of these where they may need 41 00:01:53,405 --> 00:01:57,575 to access money in their retirement account prior to 59 and a half. 42 00:01:57,575 --> 00:02:01,339 Let's say the traditional age at which distributions from retirement accounts 43 00:02:01,339 --> 00:02:03,110 are no longer subject to a penalty. 44 00:02:03,530 --> 00:02:08,900 And one of the ways in which you can do so is so-called 72 T distributions 45 00:02:08,900 --> 00:02:12,500 named after the tax code under which effectively they're authorized. 46 00:02:12,505 --> 00:02:16,810 So 72 T sometimes you'll hear these referred to as SEPs or so SEPs. 47 00:02:17,010 --> 00:02:21,480 Short for a series of substantially equal periodic payments, but at the 48 00:02:21,480 --> 00:02:25,410 end of the day effectively, what it is, it's a manufactured way to access 49 00:02:25,410 --> 00:02:31,620 money in a retirement account via payments over time that, uh, will 50 00:02:31,620 --> 00:02:33,420 just allow you to avoid the penalty. 51 00:02:33,420 --> 00:02:35,520 No, no, you don't get outta tax. 52 00:02:35,520 --> 00:02:36,450 You still have to pay the tax. 53 00:02:36,450 --> 00:02:38,010 Everybody has to pay tax, right. 54 00:02:38,015 --> 00:02:39,330 But no 10% penalty. 55 00:02:39,330 --> 00:02:41,100 So, and we gotta flip a coin. 56 00:02:41,370 --> 00:02:42,690 Uh, you could flip today. 57 00:02:42,750 --> 00:02:48,840 I will take, I will take heads, since you always take heads, I'm taking heads. 58 00:02:48,900 --> 00:02:49,170 Ed Slott: All right. 59 00:02:49,170 --> 00:02:54,960 Let me do an actual coin tails it is. 60 00:02:55,060 --> 00:02:55,440 Tails, 61 00:02:55,459 --> 00:02:55,720 Jeff Levine: all right. 62 00:02:55,740 --> 00:03:00,480 So you get to pick, would you like to argue that you should use 72 T or that 63 00:03:00,485 --> 00:03:02,310 you should avoid them like the plague. 64 00:03:02,745 --> 00:03:05,325 Ed Slott: Uh, I will go avoid them like the plague, although I 65 00:03:05,325 --> 00:03:08,715 really don't totally believe that because there are uses for them, 66 00:03:08,715 --> 00:03:09,975 but that's where you'll come in. 67 00:03:10,215 --> 00:03:10,695 Jeff Levine: That's right. 68 00:03:10,700 --> 00:03:13,605 That's the, if you go, if you do start to do that, ed, we don't have a show. 69 00:03:13,609 --> 00:03:14,385 We have to debate. 70 00:03:14,745 --> 00:03:15,825 You have one side. 71 00:03:15,825 --> 00:03:17,265 I have the other, that's the way this works. 72 00:03:17,295 --> 00:03:21,524 Ed Slott: I say no to 72 T and a lot of financial advisors won't like to hear 73 00:03:21,524 --> 00:03:23,894 that, because we get questions on that. 74 00:03:23,954 --> 00:03:28,305 Both from consumers and financial advisors, who, who, as Jeff said, really 75 00:03:28,305 --> 00:03:33,180 need to tap in to their retirement savings and the last thing they wanna do is get 76 00:03:33,180 --> 00:03:37,560 hit with a 10% penalty because they're withdrawing before age 59 and a half. 77 00:03:37,650 --> 00:03:37,859 Jeff Levine: Right. 78 00:03:37,859 --> 00:03:41,220 And the, and the, and the 72 T distributions allow them to do that. 79 00:03:41,220 --> 00:03:43,020 So why, why so against them ed? 80 00:03:43,200 --> 00:03:45,090 Ed Slott: Because I don't like commitments. 81 00:03:45,210 --> 00:03:45,690 All right. 82 00:03:45,960 --> 00:03:47,700 Uh, to the, let me explain, 83 00:03:47,700 --> 00:03:50,310 Jeff Levine: I'm sending this podcast to your wife with a little note. 84 00:03:50,410 --> 00:03:50,700 Ed Slott: Yeah. 85 00:03:50,700 --> 00:03:50,900 Right. 86 00:03:51,329 --> 00:03:53,650 That's exactly where I'm going with this actually. 87 00:03:54,000 --> 00:03:59,160 Uh, the, the rules are so strict and unforgiving, you 88 00:03:59,160 --> 00:04:00,899 know, the, the rules generally 89 00:04:01,309 --> 00:04:03,350 Jeff Levine: Are you're talking about marriage or are we back on 72 T? 90 00:04:03,515 --> 00:04:03,720 Ed Slott: Oh no. 91 00:04:03,720 --> 00:04:05,519 We're back on 72 T. 92 00:04:05,549 --> 00:04:06,989 Yeah, they've applied to both. 93 00:04:07,019 --> 00:04:09,899 It, it's a very similar, you're going to see you're gonna come 94 00:04:09,904 --> 00:04:11,339 out on my side at the end. 95 00:04:11,820 --> 00:04:16,200 Uh, it's very similar, but in general, the rules, the tax rules surrounding 96 00:04:16,200 --> 00:04:20,219 retirement accounts are not only among the most complex in the tax code. 97 00:04:20,490 --> 00:04:25,230 But often rigid and unforgiving as this one is yes. 98 00:04:25,230 --> 00:04:27,930 The tax code allows you to access your money. 99 00:04:27,930 --> 00:04:32,970 If you need it before, let's say retirement age dictated by the tax code, 100 00:04:33,150 --> 00:04:38,430 age 59 and a half, without that dreaded 10% penalty for withdrawing early. 101 00:04:38,700 --> 00:04:42,750 To me, the 10% penalty is throwing money away. 102 00:04:42,750 --> 00:04:47,910 It's a deal breaker, but if you use these so-called 72 T schedules, you 103 00:04:47,910 --> 00:04:52,165 can get money out, you pay the tax, as Jeff said, without the penalty. 104 00:04:52,165 --> 00:04:55,315 So right away you might say, well, why would you be against that? 105 00:04:55,615 --> 00:05:00,685 Because to do that, you have to create as the name, the official name, a series 106 00:05:00,685 --> 00:05:06,505 of substantially equal periodic payment says you have to stay on a payment plan. 107 00:05:06,835 --> 00:05:08,815 And here's where the commitment comes in. 108 00:05:09,115 --> 00:05:15,205 You have to commit to that payment plan without changes for the longer of age of 109 00:05:15,205 --> 00:05:22,305 five for the longer of five years or until you reach age 59 and a half years old. 110 00:05:22,605 --> 00:05:25,095 Now let's say you're doing this at 40 years old. 111 00:05:25,305 --> 00:05:29,055 You'd have to stick to that commitment for 19 and a half years. 112 00:05:29,055 --> 00:05:31,275 Most marriages don't last that long. 113 00:05:31,575 --> 00:05:34,065 And here's the thing let's say you were great. 114 00:05:34,065 --> 00:05:36,045 You did it every, every year. 115 00:05:36,045 --> 00:05:39,375 You came up with the right number and you're going to need software to do 116 00:05:39,375 --> 00:05:44,025 this in most cases and the help of a financial advisor, because you don't wanna 117 00:05:44,025 --> 00:05:46,395 break the plan, go off the commitment. 118 00:05:46,715 --> 00:05:49,815 Because let's say, in my example, you're doing okay. 119 00:05:49,815 --> 00:05:52,695 You know, you started at 40 and you did it perfectly took 120 00:05:52,695 --> 00:05:54,015 the right amount every year. 121 00:05:54,015 --> 00:05:56,895 You're 15, 16, 17 years into this. 122 00:05:57,675 --> 00:06:02,775 And then for some reason you go off the wagon, you make a change with 123 00:06:02,780 --> 00:06:04,395 the tax law coils of modification. 124 00:06:04,835 --> 00:06:07,565 Even if you take more, that's where I see a lot of mistakes. 125 00:06:07,565 --> 00:06:09,484 People figure, oh, I'll take more. 126 00:06:09,635 --> 00:06:12,065 IRS will love me because I'm paying more tax. 127 00:06:12,065 --> 00:06:16,085 No, then you've broken the 72 T schedule. 128 00:06:16,234 --> 00:06:17,674 And here's what happens. 129 00:06:17,794 --> 00:06:20,195 This is a horror show of a penalty. 130 00:06:20,465 --> 00:06:24,034 The 10% penalty is then triggered. 131 00:06:24,995 --> 00:06:29,505 Retroactively for all of those back years undoing the very thing you were 132 00:06:29,510 --> 00:06:34,905 trying to avoid plus interest at a time when you may need the money the most, 133 00:06:35,094 --> 00:06:36,679 Jeff Levine: Well, you just made a good point, Ed. 134 00:06:36,684 --> 00:06:41,689 You need the money the most, you, you, you need the money. 135 00:06:41,900 --> 00:06:44,629 So it's going to have to come from somewhere and chances are, if you're 136 00:06:44,629 --> 00:06:49,069 thinking about a 72 T schedule that you've already exhausted 137 00:06:49,069 --> 00:06:50,599 your after tax savings, right? 138 00:06:50,604 --> 00:06:52,759 Your regular emergency fund is gone. 139 00:06:52,999 --> 00:06:55,999 You probably don't even have Roth IRA dollars because as we know the 140 00:06:55,999 --> 00:06:59,509 contributions, there can come out tax and penalty free at any time. 141 00:06:59,509 --> 00:07:03,409 So you're probably stuck between a rock and a hard place and you need money. 142 00:07:03,770 --> 00:07:08,174 And if you need money from an IRA, There is no hardship 143 00:07:08,174 --> 00:07:10,155 exception to the 10% penalty. 144 00:07:10,155 --> 00:07:13,414 Now, one of the most common misconceptions that we run across, and Ed, I'm sure 145 00:07:13,434 --> 00:07:16,774 you've seen it hundreds of times over the course of your career is 146 00:07:16,774 --> 00:07:20,854 people thinking that because they've fallen on tough times, they can 147 00:07:20,859 --> 00:07:23,614 get money into their, out of their retirement account without a, without 148 00:07:23,619 --> 00:07:25,294 a penalty you've seen that I'm sure. 149 00:07:25,294 --> 00:07:25,534 Right? 150 00:07:25,694 --> 00:07:26,044 Ed Slott: Right. 151 00:07:26,049 --> 00:07:26,854 Have I seen that? 152 00:07:26,854 --> 00:07:30,664 We teach that in all our advisor training programs, it seems like every. 153 00:07:31,509 --> 00:07:35,179 A couple of times a year, maybe more, we see an actual court case where somebody 154 00:07:35,179 --> 00:07:39,139 went to tax court and pleaded with the judges that said, but I needed the money. 155 00:07:39,379 --> 00:07:40,789 I lost my job. 156 00:07:41,029 --> 00:07:42,829 Uh, I have financial hardship. 157 00:07:42,829 --> 00:07:46,589 Shouldn't I be able to access my retirement account, not tax free, tax 158 00:07:46,589 --> 00:07:50,749 you always pay, but shouldn't, shouldn't I be relieved of the 10% penalty. 159 00:07:50,749 --> 00:07:54,919 And in every one of those cases, not almost everyone in every 160 00:07:54,919 --> 00:07:59,139 one of those cases, the judge has always seemed simpathetic. 161 00:07:59,339 --> 00:08:02,279 You've seen some of the, uh, the court rulings where they'll 162 00:08:02,279 --> 00:08:03,719 say, no, we agree with you. 163 00:08:03,719 --> 00:08:07,649 It's a tough thing, but we didn't write the tax code, the tax code 164 00:08:07,859 --> 00:08:12,209 lists certain exceptions for the 10% penalty and financial 165 00:08:12,214 --> 00:08:14,699 hardship is just not one of them. 166 00:08:14,939 --> 00:08:19,409 Now, some people might be watching this or listening to it, uh, or this 167 00:08:19,414 --> 00:08:22,589 program and saying, wait a minute, you might even be a financial advisor. 168 00:08:22,589 --> 00:08:24,059 Say, Ed, I don't know if you're right. 169 00:08:24,329 --> 00:08:27,269 There is a financial hardship penalty, exception. 170 00:08:27,359 --> 00:08:29,099 For 401k plans! 171 00:08:29,339 --> 00:08:30,599 No, there isn't. 172 00:08:30,809 --> 00:08:35,519 What they're talking about there, just for your own knowledge, 401k plans 173 00:08:35,519 --> 00:08:40,319 have a financial hardship exception, but that only allow allows you access 174 00:08:40,319 --> 00:08:44,920 to those funds, where you otherwise wouldn't be, wouldn't have that access. 175 00:08:44,920 --> 00:08:45,410 Jeff Levine: That's right. 176 00:08:45,425 --> 00:08:48,389 You have the privilege of paying tax and a penalty. 177 00:08:48,389 --> 00:08:49,259 If you're under 59 and a half, yes. 178 00:08:49,309 --> 00:08:51,109 Yes of using your own money. 179 00:08:51,109 --> 00:08:52,489 That's what a hardship exception is. 180 00:08:52,489 --> 00:08:57,199 And you said that there's this, uh, you, you said you, you, when talking about 181 00:08:57,199 --> 00:09:00,769 these cases that you just mentioned, you referenced the fact that the judges 182 00:09:00,769 --> 00:09:05,179 often say there's an enumerated list of, of exceptions to the 10% penalty 183 00:09:05,179 --> 00:09:06,439 and hardship is not one of them. 184 00:09:06,444 --> 00:09:09,079 Well, let's talk about some of them death. 185 00:09:09,729 --> 00:09:10,599 That's not good. 186 00:09:10,779 --> 00:09:11,169 Right? 187 00:09:11,169 --> 00:09:13,229 You can't use your own money if you're not here. 188 00:09:13,599 --> 00:09:15,449 Ed Slott: The ultimate hardship, but not on you! 189 00:09:16,979 --> 00:09:17,939 Jeff Levine: Disability. 190 00:09:18,059 --> 00:09:20,729 Certainly not something that you're going to create. 191 00:09:20,729 --> 00:09:22,829 If it doesn't already exist, right? 192 00:09:23,159 --> 00:09:24,779 Uh, education. 193 00:09:24,779 --> 00:09:28,919 Well, if you're not using it for education, It doesn't apply. 194 00:09:29,099 --> 00:09:30,119 A birth of a child. 195 00:09:30,119 --> 00:09:33,059 If you haven't had a child or adopted a child within the 196 00:09:33,059 --> 00:09:34,829 last year, it doesn't apply. 197 00:09:34,829 --> 00:09:37,079 They're very narrow exceptions, right? 198 00:09:37,079 --> 00:09:42,479 They're, they're very specific case scenarios for all of these or for almost 199 00:09:42,479 --> 00:09:49,139 all, except the 72 T, the 72 T exception is effectively the great equalizer 200 00:09:49,409 --> 00:09:51,449 to say it doesn't matter who you are. 201 00:09:51,449 --> 00:09:53,039 It doesn't matter why you need the money. 202 00:09:53,039 --> 00:09:54,179 You need it for diapers. 203 00:09:54,359 --> 00:09:54,869 Fine. 204 00:09:55,109 --> 00:09:58,169 You need it for, uh, you know, uh, uh, rent. 205 00:09:58,379 --> 00:09:58,679 Fine. 206 00:09:59,089 --> 00:10:02,329 Do you need it because you want to go on a vacation around the world. 207 00:10:02,389 --> 00:10:03,679 That's okay, too. 208 00:10:03,949 --> 00:10:08,609 So unlike any other exception, you are effectively able to manufacture 209 00:10:08,614 --> 00:10:13,369 your own excuse to tap into your retirement funds for any reason. 210 00:10:13,369 --> 00:10:13,669 Yes. 211 00:10:13,669 --> 00:10:17,089 There are other restrictions you talk about, but that restriction comes with 212 00:10:17,089 --> 00:10:22,399 the flexibility of being able to use these dollars for any reason, for any purpose 213 00:10:22,399 --> 00:10:25,939 and no other exception really offers that. 214 00:10:26,244 --> 00:10:30,474 Unless you find yourself in an unfortunate position, like being 215 00:10:30,474 --> 00:10:35,514 disabled already or being dead already, your beneficiary could use the money 216 00:10:35,514 --> 00:10:37,044 for any reason without a penalty. 217 00:10:37,254 --> 00:10:40,644 But certainly we wouldn't create a scenario where someone dies or 218 00:10:40,644 --> 00:10:44,514 becomes disabled just to allow penalty free access to dollars. 219 00:10:44,844 --> 00:10:49,014 Outside of that, all the other exceptions effectively that would apply 220 00:10:49,434 --> 00:10:51,894 are, uh, expense driven exceptions. 221 00:10:52,859 --> 00:10:55,769 Ed Slott: They're all targeted to certain uses and you're right. 222 00:10:55,769 --> 00:10:58,019 You could use that money for anything you want. 223 00:10:58,019 --> 00:11:00,659 You talked about a need, you don't even have to have a need. 224 00:11:00,959 --> 00:11:04,679 I know some people that use it just to create a flow of income 225 00:11:04,679 --> 00:11:06,689 to maybe invest in other vehicles. 226 00:11:06,689 --> 00:11:09,209 Some people use it to pay insurance premiums. 227 00:11:09,539 --> 00:11:13,379 And there are reasons I I'll take your side if somebody's maybe 228 00:11:13,379 --> 00:11:15,569 closer to 59 and a half, maybe. 229 00:11:15,569 --> 00:11:19,559 And I have used it in this case where I had somebody who was 55 230 00:11:19,559 --> 00:11:21,209 years old, they left their job. 231 00:11:21,214 --> 00:11:23,399 Most of their money was in their retirement account. 232 00:11:23,399 --> 00:11:25,049 They wanted to start enjoying it. 233 00:11:25,319 --> 00:11:27,299 And that would be the reason you would use it. 234 00:11:27,304 --> 00:11:32,219 So we created this schedule form, but you still have to monitor the schedule, 235 00:11:32,429 --> 00:11:37,214 you know, it's so easy to fall off the schedule to break the commitment. 236 00:11:37,214 --> 00:11:39,584 That's what worries me most about these things. 237 00:11:39,884 --> 00:11:41,384 They have to be monitored. 238 00:11:41,384 --> 00:11:43,814 You have to have the exact amount. 239 00:11:44,294 --> 00:11:48,134 Jeff Levine: You know, Ed, speaking of the amount, there's, there's actually new 240 00:11:48,134 --> 00:11:50,474 information just as of earlier this year. 241 00:11:50,654 --> 00:11:50,894 Ed Slott: That's right. 242 00:11:50,894 --> 00:11:55,214 Jeff Levine: That makes me feel even better about using the 72 243 00:11:55,214 --> 00:11:57,254 T schedules than ever before. 244 00:11:57,254 --> 00:11:59,844 At least not, maybe not ever before, but at least in recent history. 245 00:12:00,324 --> 00:12:03,664 One of the ways in which you calculate this, or one of the 246 00:12:03,664 --> 00:12:07,384 inputs in the calculation, there are technically three ways that the 247 00:12:07,444 --> 00:12:09,034 IRS is approved to calculate this. 248 00:12:09,034 --> 00:12:13,594 One is using what they call the required minimum distribution method, which is 249 00:12:13,594 --> 00:12:17,074 a lot like regular required minimum distributions for those, once they 250 00:12:17,074 --> 00:12:23,059 reach 72, the problem is it produces a really small distribution amount. 251 00:12:23,239 --> 00:12:27,049 The other two ways of going about calculating the amounts you can 252 00:12:27,049 --> 00:12:30,649 take out are the annuitization and amortization methods and you 253 00:12:30,649 --> 00:12:31,639 don't have to know what those are. 254 00:12:31,639 --> 00:12:34,549 If you're listening, candidly, most CPAs don't even know what they are. 255 00:12:34,549 --> 00:12:37,729 They just open up their calculator and plug in the interest rate. 256 00:12:37,729 --> 00:12:39,019 But that's the input, right? 257 00:12:39,019 --> 00:12:42,799 Is there's an in there's an interest rate that has to be used. 258 00:12:42,799 --> 00:12:44,559 That's set by the IRS. 259 00:12:44,869 --> 00:12:49,519 And that helps to effectively dictate the maximum amount that you can take 260 00:12:49,519 --> 00:12:51,649 out of your IRA without a penalty. 261 00:12:51,649 --> 00:12:55,009 So it's not just, when we talk about creating a series of substantially 262 00:12:55,009 --> 00:12:58,249 equal periodic payments, we're not just saying, come up with a number, whatever 263 00:12:58,249 --> 00:13:00,139 suits you and take the same amount. 264 00:13:00,344 --> 00:13:03,914 The IRS has, uh, very precise procedures for this. 265 00:13:04,094 --> 00:13:07,904 And one of the things the IRS did earlier this year is it announced that 266 00:13:07,904 --> 00:13:14,444 at a minimum you can use a 5% interest rate for your calculations when you 267 00:13:14,444 --> 00:13:16,784 go about running these, these numbers. 268 00:13:16,784 --> 00:13:20,644 And at least for years, we have seen interest rates incredibly 269 00:13:20,649 --> 00:13:23,099 low in the one to 2% range. 270 00:13:23,469 --> 00:13:23,699 Yeah. 271 00:13:24,069 --> 00:13:26,594 Thereby reducing the amount that people could take out 272 00:13:26,594 --> 00:13:27,704 of their retirement accounts. 273 00:13:27,704 --> 00:13:32,684 Now using a 5% interest rate, all you need to know today is that there's a 274 00:13:32,689 --> 00:13:34,934 lot larger distribution you could take. 275 00:13:35,234 --> 00:13:39,104 So you have the ability to get more penalty, free dollars out of your IRA. 276 00:13:39,104 --> 00:13:44,244 Again, for any reason, whatever serves your purpose, then you have 277 00:13:44,464 --> 00:13:46,034 at any point in recent history. 278 00:13:46,624 --> 00:13:47,144 Ed Slott: That's true. 279 00:13:47,174 --> 00:13:50,174 You could get a larger payment and that's the key strategy. 280 00:13:50,174 --> 00:13:56,564 If you are going to use the 72 T payment plan, most people want to, uh, get the 281 00:13:56,564 --> 00:14:00,404 largest payment, but I would add on top of that, the best strategy for this 282 00:14:00,674 --> 00:14:06,679 is to create the largest payment using the smallest amount of your retirement 283 00:14:06,679 --> 00:14:09,349 savings to get the most out of the least. 284 00:14:09,589 --> 00:14:13,939 And maybe a better strategy if you're going to go this way is to isolate one 285 00:14:13,939 --> 00:14:16,369 retirement account and just use that one. 286 00:14:16,374 --> 00:14:20,269 So the other funds you have in other retirement accounts are not 287 00:14:20,274 --> 00:14:24,439 committed and don't get hurt if you fall off the schedule on that. 288 00:14:25,004 --> 00:14:25,334 Jeff Levine: Yeah. 289 00:14:25,334 --> 00:14:26,414 So essentially Ed, right? 290 00:14:26,414 --> 00:14:30,104 If you have a million dollars or so here in an account, but you find you 291 00:14:30,104 --> 00:14:35,924 can get the amount you need to last you through 59 and a half with only $600,000. 292 00:14:35,924 --> 00:14:41,114 Calculating that 72 T distribution, before you start the payments split the 293 00:14:41,114 --> 00:14:46,114 account, put 600,000 in one account, do the 72 T distribution there. 294 00:14:46,689 --> 00:14:48,699 Put 400,000 in the other account. 295 00:14:48,939 --> 00:14:51,489 And effectively, that means that if something goes wrong, you 296 00:14:51,489 --> 00:14:54,129 have an emergency, there's a leaky roof, something like that. 297 00:14:54,369 --> 00:14:57,489 You can still access the $400,000 in the account. 298 00:14:57,494 --> 00:15:01,419 You've peeled away without breaking the schedule and triggering all 299 00:15:01,419 --> 00:15:04,269 those back taxes and or oh, back penalties that Ed was talking 300 00:15:04,269 --> 00:15:06,249 about earlier, along with interest. 301 00:15:06,249 --> 00:15:10,689 Now, obviously some people will find themselves in a situation where. 302 00:15:11,644 --> 00:15:13,504 Where they don't, they don't have enough, right. 303 00:15:13,534 --> 00:15:16,744 They, they need $500,000 to calculate the payment they really 304 00:15:16,744 --> 00:15:18,604 need, but they only have 400,000. 305 00:15:18,604 --> 00:15:22,774 Well, you can't get blood from a stone, so you're not gonna be able to calculate 306 00:15:22,779 --> 00:15:28,324 that payment even there, Ed, uh, I often suggest that, uh, people still 307 00:15:28,354 --> 00:15:32,524 take a little bit aside, you know, if you needed 500, but you only have 400. 308 00:15:33,079 --> 00:15:36,139 A lot of times, I'll say put 20 aside in another account. 309 00:15:36,139 --> 00:15:40,909 And even though that does slightly reduce your payment, uh, it, it does like you're 310 00:15:40,909 --> 00:15:45,319 still not, you're getting even less than what you needed and it's still not enough. 311 00:15:45,409 --> 00:15:48,349 It does mean that if you have some sort of emergency, you still have 312 00:15:48,349 --> 00:15:50,479 this other account in which to access. 313 00:15:50,484 --> 00:15:54,259 And even if you took the whole 20,000 out, in my example, you would 314 00:15:54,259 --> 00:15:58,729 have a $2,000 penalty because you'd have the 10% penalty on top of the 315 00:15:58,729 --> 00:16:03,744 income tax, but you wouldn't have the penalty on all the back distribution. 316 00:16:03,744 --> 00:16:04,784 Ed Slott: Right, the retroactive. 317 00:16:04,904 --> 00:16:09,554 What I don't like about it, the buildup at the worst possible time. 318 00:16:09,884 --> 00:16:12,614 I understand, like you said, most people need the money and that's 319 00:16:12,614 --> 00:16:16,874 another reason the schedule doesn't work, especially the younger you 320 00:16:16,874 --> 00:16:19,064 are, the smaller the payments are. 321 00:16:19,094 --> 00:16:23,264 So it may not be enough to, to fill the need it's based on 322 00:16:23,264 --> 00:16:25,304 life expectancy, these payments. 323 00:16:25,544 --> 00:16:28,939 So the younger you are, even if you are in your fifties the payments, 324 00:16:28,939 --> 00:16:32,929 unless you have a very large IRA are not going to be enough. 325 00:16:32,929 --> 00:16:37,069 And if you have a very large IRA, you probably don't have a problem. 326 00:16:37,219 --> 00:16:40,489 So you may be better off if you have a one time need. 327 00:16:40,549 --> 00:16:45,079 And I, I hate to even say that this, if you have a one time need, maybe it's 328 00:16:45,079 --> 00:16:47,239 better to take the hit and the penalty. 329 00:16:47,329 --> 00:16:51,259 I hate to paying the penalty because it's just money down the drain, but 330 00:16:51,259 --> 00:16:57,144 it might be a better one time fix then having to get stuck with a commitment 331 00:16:57,294 --> 00:17:00,954 where you may end up paying that penalty anyway, if you can't stay 332 00:17:00,959 --> 00:17:02,814 on the schedule for all those years. 333 00:17:03,984 --> 00:17:05,034 Jeff Levine: Well, I think. 334 00:17:05,764 --> 00:17:10,624 We've covered a good cross section here of some of the pros and cons, but let's just 335 00:17:10,624 --> 00:17:16,264 say you let's just take a step back Ed and think of someone in this situation who's 336 00:17:16,264 --> 00:17:20,584 trying to figure out what they can do or, uh, you know, they're in need for funds. 337 00:17:20,764 --> 00:17:26,264 I think we both agree that, uh, whether you set up the 72 T schedule or you 338 00:17:26,264 --> 00:17:30,344 pay the penalty, the first thing you most likely should do in, in, 339 00:17:30,374 --> 00:17:34,874 again, not all, but most situations is look for other sources of dollars. 340 00:17:34,874 --> 00:17:35,384 Ed Slott: Oh, absolutely. 341 00:17:35,384 --> 00:17:38,654 I mean, we we're assuming, and you made that assumption up front, 342 00:17:38,659 --> 00:17:39,944 that everything else is gone. 343 00:17:39,944 --> 00:17:42,134 There are no, this is the last resort. 344 00:17:42,164 --> 00:17:44,084 I believe this should be the last resort. 345 00:17:45,290 --> 00:17:47,779 Jeff Levine: What about someone who says, I don't want debt. 346 00:17:47,839 --> 00:17:52,129 I, you know, I own my home, but I, I don't wanna take a home equity loan. 347 00:17:52,129 --> 00:17:54,379 Would you oftentimes look for something like that before 348 00:17:54,384 --> 00:17:55,759 going into a 72 T discount? 349 00:17:55,759 --> 00:17:56,840 Ed Slott: A reverse mortgage! 350 00:17:57,110 --> 00:17:57,379 Jeff Levine: Yeah. 351 00:17:57,409 --> 00:17:57,769 Okay. 352 00:17:58,189 --> 00:18:00,080 I, I, I don't necessarily disagree. 353 00:18:00,139 --> 00:18:03,110 I mean, there's where if you can't get. 354 00:18:03,264 --> 00:18:07,314 To, uh, you know, to a, to dollars in other accounts, cause they don't exist 355 00:18:07,314 --> 00:18:10,915 in your choices, an IRA distribution and setting up a 72 T schedule or 356 00:18:11,185 --> 00:18:13,374 perhaps, you know, tapping other assets. 357 00:18:13,374 --> 00:18:17,155 I mean a home is an asset and if you have equity in that asset, uh, 358 00:18:17,159 --> 00:18:20,364 oftentimes that can be a, a less expensive, certainly don't need to keep 359 00:18:20,364 --> 00:18:24,774 the home equity line in place until your 59 and a half or until five years. 360 00:18:25,044 --> 00:18:26,604 So you have some more flexibility. 361 00:18:27,299 --> 00:18:28,829 Ed Slott: Your age is a big factor. 362 00:18:28,829 --> 00:18:32,370 If you're close to 59 and a half, it may just be a stop gap measure 363 00:18:32,370 --> 00:18:35,909 until you're over the threshold where a penalty no longer applies. 364 00:18:36,299 --> 00:18:37,079 Jeff Levine: That's a great point. 365 00:18:38,189 --> 00:18:42,269 You're only looking there, you know, if you start a 72 T distribution of 58, 366 00:18:42,274 --> 00:18:44,069 you've gotta keep that until you're 63. 367 00:18:44,924 --> 00:18:49,644 If you, uh, start just taking a distribution at 60, uh, 58, you've 368 00:18:49,644 --> 00:18:53,424 only got a year and a half to go until you've got the ability to take all 369 00:18:53,424 --> 00:18:55,494 those penalty free distributions again. 370 00:18:55,494 --> 00:18:56,194 So absolutely. 371 00:18:56,194 --> 00:18:56,794 That's a great point. 372 00:18:57,334 --> 00:19:01,414 But Ed, in summing up some of our key pros and cons of the day. 373 00:19:01,804 --> 00:19:05,284 Uh, I think some of the key cons you mentioned, and, and probably the single 374 00:19:05,284 --> 00:19:10,894 biggest issue with 72 T distributions is the fact that they are, uh, a long 375 00:19:10,899 --> 00:19:14,404 and rigid schedule at the very least we're talking about five years, but 376 00:19:14,404 --> 00:19:19,084 in many cases it's a decade plus of commitment that you have to stick 377 00:19:19,084 --> 00:19:21,814 to and get it right for a long time. 378 00:19:21,814 --> 00:19:24,965 And the other challenge with these distributions is that you don't get 379 00:19:24,965 --> 00:19:26,554 to make the amounts up yourself. 380 00:19:26,560 --> 00:19:30,870 You have to stick to a calculation and that's limiting the dollars that you can 381 00:19:30,870 --> 00:19:36,120 take out at any one time on the pros Ed, we said that, uh, one of the biggest pros 382 00:19:36,120 --> 00:19:40,049 relative to all the other exceptions that are available is that you can effectively 383 00:19:40,049 --> 00:19:42,120 manufacture this one for yourself. 384 00:19:42,124 --> 00:19:45,479 It doesn't require some sort of nasty event, like a death 385 00:19:45,479 --> 00:19:46,949 or disability to happen first. 386 00:19:47,099 --> 00:19:50,399 It doesn't require that you spend the dollars on certain things such 387 00:19:50,399 --> 00:19:54,599 as education or home purchase, etc., as other exceptions do. 388 00:19:54,779 --> 00:19:58,149 So this one is just if you want the dollars and you adhere to 389 00:19:58,149 --> 00:20:00,849 the schedule, you can do whatever you want with those dollars. 390 00:20:00,909 --> 00:20:05,799 And because of a change in the way that payments are calculated 391 00:20:05,799 --> 00:20:09,849 with a new IRS interest rate set earlier this year, a minimum 392 00:20:09,849 --> 00:20:12,429 interest rate, uh, that can be used. 393 00:20:12,849 --> 00:20:15,969 There's an ability to take more dollars out of retirement accounts, 394 00:20:15,969 --> 00:20:20,019 penalty free using this method that at any time in recent history, anything 395 00:20:20,019 --> 00:20:23,689 else you'd add to, to those as key takeaways for our listeners today? 396 00:20:23,870 --> 00:20:28,244 Ed Slott: The concept in all 72 is if you're going to do it, get the 397 00:20:28,244 --> 00:20:33,164 largest payment, using the least amount of retirement accounts, if you can. 398 00:20:33,194 --> 00:20:36,524 But I know Jeff, when you close up this program, you are, as you 399 00:20:36,524 --> 00:20:39,194 always say, use a financial advisor. 400 00:20:39,374 --> 00:20:42,954 This is one I would not try at home alone. 401 00:20:43,614 --> 00:20:46,074 Jeff Levine: I don't think I'd even try this one at home alone. 402 00:20:46,404 --> 00:20:49,434 I think if I ever need one of these and hopefully I don't, I'm coming to you, Ed. 403 00:20:50,454 --> 00:20:53,454 Ed Slott: And I'm going to some computer program and I'm gonna print 404 00:20:53,459 --> 00:20:56,754 it out like I used to do for my clients and check it off each time to make 405 00:20:56,754 --> 00:20:58,224 sure they made the exact payment. 406 00:20:58,229 --> 00:21:01,074 And even then sometimes they make the wrong payment. 407 00:21:01,914 --> 00:21:04,824 Jeff Levine: Mistakes happen and, and that's why you need a professional. 408 00:21:04,824 --> 00:21:07,554 And, and that's why, and that's also why, while there are two sides to 409 00:21:07,554 --> 00:21:11,994 every coin, Ed, life and retirement decisions, when they're this big, 410 00:21:11,994 --> 00:21:13,524 can't be left up to that coin flip. 411 00:21:13,854 --> 00:21:18,264 So one thing you and I always agree on is when these big decisions occur. 412 00:21:18,459 --> 00:21:22,479 Anytime there's, uh, a life changing decision or just a decision with 413 00:21:22,479 --> 00:21:24,249 significant financial consequences. 414 00:21:24,249 --> 00:21:27,129 It's best to talk through the decision with a knowledgeable financial 415 00:21:27,129 --> 00:21:30,909 advisor or a tax professional so that you can weigh the pros and cons of 416 00:21:30,939 --> 00:21:35,779 those decisions against your own set of specific goals and objectives. 417 00:21:36,109 --> 00:21:38,689 Now, if you'd like to continue the discussion with Ed or I we'd 418 00:21:38,689 --> 00:21:41,089 love to hear from you, you can reach out to us on social media. 419 00:21:41,269 --> 00:21:44,040 You can reach Ed on Twitter @TheSlottReport. 420 00:21:44,059 --> 00:21:48,749 Again, that's the @TheSlottReport and you can reach me on Twitter @CPAPlanner. 421 00:21:48,769 --> 00:21:50,509 Again, that's @CPAPlanner. 422 00:21:50,809 --> 00:21:53,399 Let us know what you think of 72 T distributions. 423 00:21:53,399 --> 00:21:54,109 Do you like them. 424 00:21:54,109 --> 00:21:54,699 Do you not? 425 00:21:54,699 --> 00:21:59,324 Have you used them before, uh, any specific set of pros or cons, uh, 426 00:21:59,324 --> 00:22:02,445 that you thought we missed or should have spent more time on, or you have a 427 00:22:02,445 --> 00:22:04,464 topic for a future debate for Ed and I. 428 00:22:04,485 --> 00:22:08,114 We'd love to hear from you until then Ed, as always. 429 00:22:08,294 --> 00:22:08,955 It's been fun. 430 00:22:09,465 --> 00:22:10,424 Ed Slott: All right, sounds good. 431 00:22:10,429 --> 00:22:14,514 Jeff, we'll see you on the next episode of the great retirement debate. 432 00:22:16,594 --> 00:22:19,809 OUTRO: Jeffrey Levine is chief planning officer for Buckingham wealth partners. 433 00:22:19,869 --> 00:22:23,079 This podcast is for informational and educational purposes only, and should 434 00:22:23,079 --> 00:22:26,349 not be construed as specific investment accounting, legal or tax advice. 435 00:22:26,379 --> 00:22:29,289 Certain information mentioned may be based on third party information, 436 00:22:29,289 --> 00:22:32,139 which may become outdated or otherwise superseded without notice. 437 00:22:32,199 --> 00:22:35,409 Third party information is deemed to be reliable, but it's accuracy and 438 00:22:35,409 --> 00:22:36,879 completeness cannot be guaranteed. 439 00:22:36,999 --> 00:22:39,999 The topic discussed in corresponding arguments are those of the speakers 440 00:22:40,179 --> 00:22:42,969 and may not accurately reflect those of Buckingham wealth partners.