"It would almost be malpractice for any financial or tax advisor to ignore the coming tax storm," according to Ed Slott of Ed Slott & Co.
That's one of the central themes in his new book, "The Retirement Savings Time Bomb Ticks Louder," Slott told ThinkAdvisor in a recent email exchange. "The taxes growing in the IRAs are what my book title refers to, a ticking tax time bomb."
The main point of the book, Slott relayed, "is to help people prepare for that tax storm now, before it unleashes financial damage in the form of excessive and unnecessary taxes." And advisors are at the forefront of helping their clients prepare for that.
Slott talked with ThinkAdvisor about his new book's focus on the Labor Department's new fiduciary rule and rollovers, as well as why he devoted entire chapters to how Roth conversions, life insurance and estate planning can withstand future assaults by Congress.
THINKADVISOR: You discuss retirement plan distribution and rollover strategies in the book — which align with the Labor Department's new fiduciary rule. Please talk about what consumers and advisors should know as it relates to the fiduciary rule.
ED SLOTT: In my book … I title this section "What to Do with the Biggest Check of Your Life" which includes a 50-page section called "Roll Over, Stay Put, Withdraw, or Convert?"
The "biggest check" I refer to is the distribution from a person's retirement savings in their 401(k) or other employer plans. This may indeed be the biggest check a person receives in their lifetime, in some cases the amount is even larger than the value of their home, so this is a critical, once-in-a-lifetime decision that people will be making when they retire from their job.
They may only have one chance to get this right, and don't want to suffer adverse tax consequences if a mistake is made, or if they are advised to choose a distribution option that may not be best for them.
The Department of Labor (DOL) also recognizes that a large chunk of workers' lifetime retirement savings needs to be protected, and they recently issued rules that are highly focused on "rollover" options from these retirement plans.
The DOL wants to make sure that financial advisors will help their clients with this important distribution decision and do that by putting their clients' interests first. In fact, the DOL is so concerned about this situation that in the staggering 476 pages of this ruling, IRA rollovers are referred to 300 times!
That's because the DOL knows this is where the big money is, and they want people to get the advice that serves them best.
In short, the DOL wants advisors first to be educated on the tax rules for each of the possible distribution options — meaning advisors should be able to explain both the benefits and drawbacks (pros and cons) of each option, have a process to do that, and then document that process with the goal of providing the advice that would best serve the client.
The three main distribution options are:
- Roll over the funds to an IRA;
- Stay put in the company plan, or roll the funds to a new company plan; or
- Take a lump-sum distribution and pay the tax now
Of course this is such a big decision, involving a lifetime of savings, that consumers will need professional help here. But consumers also need to be educated, and this section of the book clearly lays out each option, providing the pros and cons, along with the tax consequences so that they can be better informed when seeking professional advice.
To that end, there's also an in-depth section (beginning on page 73) on the lump-sum distribution option since the tax benefits of using the NUA (net unrealized appreciation) in employer securities strategy is probably the costliest oversight, especially given the stock market growth over the past decade.
There are potentially huge tax benefits here that should be considered, when applicable.
Due to the unforgiving nature of some of these tax rules, consumers may have only one chance to get this decision right, and there's a lot riding on it for them, and their families.
In most cases, the IRA rollover may be the best option. But the DOL does not want advisors to simply recommend that option (which may be in the advisor's best interest, since they gain access to the assets under management) without first going through the process of exploring each option with the client to see what will serve that client the best.
The message for advisors is to always put their clients' interests ahead of their own. That's good business in any business.
Can you talk a bit about the chapters on Roth conversions, life insurance and estate planning, and how they focus on new tactics designed to withstand future assaults by Congress?
Yes, this is an essential theme of the book.
I'm worried (and anyone with an IRA or 401(k) should be equally worried) about future higher taxes as our national debt keeps increasing. At some point, maybe sooner than we think, Congress will be desperately seeking revenue. Where will they look? That's easy.
