Nate Reineke (00:00)
Hello physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor.
Kyle (00:06)
And I'm Kyle Hesley, certified financial planner and retirement investment specialist.
Nate Reineke (00:11)
Kyle, good to have you back. We have some investment related questions, especially for you. You ready to get rolling?
Kyle (00:20)
Yeah, let's do it.
Nate Reineke (00:22)
All right, so I got this question last week, and I think I forwarded it to you, but β I'll let you answer on the podcast. It's from a pediatrician in California. How do required minimum distributions work on the inherited IRA I received from my mother?
Kyle (00:38)
Yeah, so this is a non-spouse inherited IRA, assuming it's after the person who originally owned the IRA passed away January 1st, 2020 or later is what I'm assuming, right? If I remember the case. And it's a traditional IRA. So that's one of those IRAs are subject to that 10 year rule.
Nate Reineke (00:55)
Mm-hmm.
Mm-hmm.
Kyle (01:05)
That's why that date of January 1st, 2020 was so important. That's when you inherit an IRA from someone who passed before or after January 1st, 2020. It makes that inherited IRA subject to the 10-year rule. Assuming you're not a qualified beneficiary, which is a special type of beneficiary. There's about five of them, I believe, that are not subject to the 10-year rule if you qualify for one of those. That's pretty rare cases. So in this case, the client β
did not qualify for those. it was a 10 year IRA. β there's an important distinction you need to make once you've identified this as a 10 year IRA. First of all, the 10 year IRA means that you have to take that IRA, the full balance out of that traditional IRA, that inherited IRA by the end of the 10th year following the date of death of the original account owner. That's for sure. That's because of that, you know, they passed away on or after January 1st, 2020.
got to take the full IRA out by the 10th year. But the thing that's kind of up in the air with a lot of these inherited IRAs I see is, was the original account owner at that required beginning date, which is called the RBD, meaning they were required to take a required minimum distribution from that IRA while they were alive. If that was true, then you need to take that required minimum distribution as the beneficiary.
Each year at least the minimum throughout those 10 years the original account owner was not taking required minimum distributions And they were before their RBD when they passed then you do not have to take a required minimum distribution each year, so that's That's the things that I'm thinking about when I see these I'm asking these questions just trying to figure out and make sure that we β Follow the rules with these inherited IRAs and distribute the money accordingly
Nate Reineke (02:34)
Okay.
I see.
Yeah. Okay. That's good. So there's very specific rules. Hard to give β a well-rounded answer, but for this person in particular, it's a 10-year rule for them. And so, β you know, when we looked at this, they could essentially take it all out today. They could take it all out, you know, right before the 10-year timeline, or they could take a little bit out at a time. And so if you're a listener and you have a...
an identical situation, you obviously want to check to make sure the rules for you, then the only thing I can think of to kind of add value to the answer for this question would be that if you had a year where your income was lower, you would consider taking out the distribution during that year so it can be taxed at a lower rate. Otherwise, you're kind of want to look at your income every year and then strategically take it out within tax brackets, you know, if you
It's usually not best unless you know you're going to have a down income year β to take it all out in one year or take it all out in any one of the 10 years. So you kind of take out a little bit at a time is usually what we see. But in this case, know, a pediatrician in California isn't in the top tax bracket. And there are years where maybe more comes out than other years based on just based on their individual tax bracket.
So this is a rules-based question. You have to do certain things. And it's in the planning portion of this is a tax-related question. And then ideally, you just funnel this in after the rules and the taxes are considered, you'd funnel it into your retirement if you can. OK, next question is from a, go ahead.
Kyle (04:45)
And we've seen,
oh no, it's fine. was just going to say that I've seen a whole bunch of scenarios too, where taking that required minimum distribution in years one, two, three, four was worth it because in year five, this event happened, you know, and some of the common events that we've seen is I've seen clients take sabbatical leave from work to travel for extended periods of time. I've seen clients switch jobs and take three or four months off in between jobs. I've seen,
Nate Reineke (05:05)
Mm-hmm.
Kyle (05:12)
where a client actually inherits an IRA and they plan to retire in four to five years. So we take the required minimum up until their first full year retirement when their income is super low. And then we take the whole thing out as for their first source of income in retirement, just get that inherited 10 year IRA emptied. So yeah, there's a whole bunch of scenarios where it might make sense to take that required minimum and wait for that special year where your income is lower. β But oftentimes we see clients who are, know, mid forties,
Nate Reineke (05:26)
Mm-hmm.
Kyle (05:41)
in their highest earning years, don't plan to slow down for the next 10 years. You know, does it really make sense to allow this traditional IRA to grow and push that, have allowed that tax burden to grow and to have to take it all out on the 10th year? You know, β maybe, maybe it does make sense. Maybe it doesn't, but typically it doesn't, you know, it's better just to get it out right away, get reinvested in like a taxable account or something where you control the taxes, you know, so.
Yeah, it's definitely an individual-based β decision to make.
Nate Reineke (06:18)
Yeah.
Definitely, yeah, and it's hard to know. β You just laid out a ton of really good scenarios where you wouldn't, it's not, β you can't answer this question once. You kind of have to answer it year by year. And if you don't know, just take the minimum and wait for an opportunity. So that's great. All right, next question is from a GI doc in Virginia. It says, I feel stuck in my house.
because we still have a 3 % interest rate on our mortgage. We want to upgrade. Is it ever mathematically sound to trade a 3 % rate for a 6.5 % rate? The answer is obviously no. It is not ever mathematically sound. I hear this, it's got to be once a week at this point because we're finally getting to the point where people who had owned homes or bought a home
while rates were low. We're kind of getting to that, I guess you could call it, maturity point. There's no actual maturity point of owning a home, but typically it's about every seven years people move. We're kind of in like the fifth or sixth year after people got these rates. β I'm in the same boat. I bought a house several years ago, a couple of years before rates were really low. And I feel like, man, this is a great rate.
I don't want to move because of this rate. But I worked with a client β maybe three years ago and they were in a similar boat. wanted to buy, they wanted to move. They're living kind of in a congested suburban area. β But there was not, their daughters were growing. Their daughters played volleyball.
β They were also on the swim team and there was you know, everything different things are important to different people They really wanted an infinity pool. I Actually learned what those were β when I think I'd heard of it but I never knew they were like the greatest thing ever for first β swimmers who you know lived in Oregon and can't have Usually you don't have like a legit a full pool in Oregon
or like an in-ground pool. So they wanted an infinity pool and their HOA would not allow it. They also wanted space for their children to play volleyball. They got in the backyard. β And they had this question, like, should we spend more money on a house? And it had a worse interest rate. And the mathematically sound thing to do would be to live in the house that you most recently bought forever. Of course, that's the mathematically sound to do. But is that
β The best life decision. Well, right now, I'm assuming right now, β they are in that infinity pool. I'm imagining in my head that right now in this very moment as we're recording, they're swimming in that pool. β Their children or their girls are high school playing volleyball outside. They have more space. They can host. They made this choice to the wrong choice mathematically.
to move. And the only reason they could do that is because they looked at their retirement plan, they looked at their college plan, and they decided they could afford it. Was it more expensive? Of course it was. Of course it was. You know what's also not mathematically sound? Buying a pool. Right? But we have to make decisions in life to improve our life. That is what money is for. And as long as you're on track, you know, with your plans and you have
plenty of money to make your payments and pay your mortgage off before you retire. You can make these choices, but if you're just going to get stuck in this loop of, yeah, but I'm saving money if I stay here, I'm saving money if I do X, Y, or Z, you're not optimizing your life. You're only optimizing money. So right now in this moment, they are happier, they feel secure.
And the best thing that I've seen over the last couple of years is they are no longer stuck in this decision or thinking about longing for a new house. They're just, have the house that their family wanted and somewhat needed at the time. They have it. They have a decent interest rate. It's like in the fives. β
And every time I meet with them, rather than talking about socking away money to someday buy this dream house, which was, you know, they could afford the house. wasn't some obscene house. But rather than someday buying this dream house, they're just investing their extra money now. And I see people all the time, they get stuck on these short term goals and they just let their money kind of rot in a savings account because they want this thing.
So the key is to, the reason planning is so impactful for a lot of people is that they can stay on track and accomplish their short-term goals. But β you can't let this 3 % interest rate curse your family. I have to stay in this house forever because of this 3 % interest rate. Right? So β get a plan, see what you can afford that makes sense with the, holistically makes sense and make a good decision for your family.
That was good question though, I like the mathematically sound.
Kyle (11:53)
I could see psychologically
getting stuck on that 3 % rate. yeah, I mean, was such historically low rates. It's so hard to, it's almost like market timing. It's like you bought a stock at like the perfect timing in the market and you never want to sell it because of the gains or something. know, one thing that I've learned in my time as an advisor is that the
Nate Reineke (11:59)
Yes.
Yeah, that's right.
Kyle (12:19)
the home buying or whether to buy a new home or move homes, it's driven by family. know, like, like if you're making the right decisions about a house, it's family driven, right? Like all the, all the, I don't want to say the good reasons, but all the like profound reasons that clients will have to buy a new home when it's, when it's to help an ailing β parent move into their home.
Nate Reineke (12:27)
Mm-hmm.
Kyle (12:45)
and have a studio apartment on the property or something like that, or an out, you know, an outbuilding or something that they live in. Or if it's, you know, I had two kids and this house and I have four kids and I don't have enough bedrooms. Like my family has grown. you know, there are real world indicators for like, this is not working for us. We need to move in. And it almost makes it so like all the other noise goes away. It's almost like the interest rates don't really matter as much, you know.
Nate Reineke (12:59)
Mm-hmm.
Kyle (13:15)
And then, you know, of course, you said, like feeling empowered by your plans, you know, having knowing that you can go out and and make this change and that you're still going to be on track. I think that's that's huge. I think that's those two things come together and it's just it all works out. You know.
Nate Reineke (13:26)
Mm-hmm.
Yeah, agreed.
Kyle (13:34)
you
Nate Reineke (13:35)
Okay, β next question for you, Kyle, a radiologist in Ohio. Should I overfund my 529 on purpose with plans to convert it to a Roth IRA for my child later on? So β start by explaining what they made a jump where they understand the 529s can be converted to Roth. β Can you just explain that a little bit?
Kyle (13:58)
Yeah, it's a fairly new rule that has came out recently. β
You know, they want, you know, the, powers to be, they want to encourage people to save for college, but there's always this kind of fear in the investor that money is going to get stuck in the 529 plan. And it by stuck just for the, for listeners who don't quite get, get the whole concept with the 529s. You know, if you don't use it for the qualified education expenses, then you have to pay, uh, income tax and a little bit of a tax penalty to get the money out, to use it for a non qualified education expense. So people don't want to put too much money in their 529s because then when their children are
done with college or maybe they never go to college and they have this money sitting at 529. It just gets kind of hammered on its way out a little bit with taxes. So this new rule basically gives people an out, know, instead of keeping it in there for the family, for education, you know, for maybe grandkids to use it or whatever, it gives you another avenue where you can go, oh, I'm going to take it from this original beneficiary.
Nate Reineke (14:41)
Mm-hmm.
Kyle (14:59)
this 529, I'm going to put in a Roth IRA for that child. And there's limits on it. You can do up to 35,000 from the 529 into the Roth total overall in the strategy, which is a really nice, which is awesome. mean, it kickstarts a young person's retirement savings. I'm talking about time value of money, assuming like someone finishes college and there's money left over. They're like,
22, 26, 28, depending how much schooling went through and then they get a Roth, 35K potentially in a Roth. So that's the mechanism. Back to the original question though, I wouldn't plan to leave extra money in the 529s necessarily. That doesn't make sense to me. That's not what it's intended for. I think that I would...
β Like we're not changing our planning to account for this, right? Like we're continuing to help clients save for college for the expected college costs. And we're not striving for this Roth IRA contribution at the end, but. β
It's a great thing to be aware of. It's a great, you know, just to know that if you are in that situation and you have these extra funds in the 529, that that is an option because that might be an option you want to pursue. β
Nate Reineke (16:21)
It's
kind of a β way out, I guess I would describe it as. β I mean, this is a great role. This is a cool new thing. But just to bring some perspective to it so that you don't complicate your life with investing, 35,000 bucks, especially like, even if you're planning to just send a child to public school, public state university, that's gonna be about...
Kyle (16:24)
Right.
Mm-hmm. Mm-hmm.
Nate Reineke (16:48)
half a year of college. If college is 10 years away, it's about $30,000 a year right now, a year of public school, a tuition room board. And if it's 10 years away at the rate that cost of college is going up, 35,000 bucks is going to get you about half a year of college. So you're basically going to have a little bit leftover. And if you happen to be so lucky that your college plan went just according to plan,
and you have 35,000 bucks or 20,000 bucks left over in your 529, this is a nice efficient way of getting the money out. But there's some issues here with planning for it. So with 529 plans, β at least if you're taking my advice, the years leading into college, you're not really planning for a ton of growth. It's mostly bonds. You know, maybe you're
barely outpacing inflation in there because you're in sort of you want to be in a steady asset class so that the money doesn't β go up and down with the market right as you're about to pay for college. So let's say you did plan for this and you have two options you can either have the money separate so like move the $35,000 money into a totally different 529 plan so that you can invest it more aggressively right or if you don't
want to have multiple accounts, you're going to leave all the money in there. It's going to be invested in one lump, one big pile. And you're going to have a low performing asset for something that theoretically could be invested for the next 50, 60, 70 years. Well, the second option is what most people fall into. They don't want to have multiple accounts. They're not that active in their account structuring. β And if they do that, it would have been better for you as the parent to just put the money in a brokerage account.
and the day they graduated from college, you write them a check. Write them a $35,000 check. Mom and dad can write a $35,000 check under the gift limit, and when they have earned income, you just request that they take money from the pile of the check money you gave to them and funnel into their Roth. So for that reason, and the benefit of doing that is that you're more aggressive with the money, you have more control over the money.
So I like to write the college plans just to get it just right. And it will still be wrong because you don't know what school your children are going to choose. But this is mainly a nice little back door. β I shouldn't say back door. That means something in our world. This is a nice little escape hatch β to get some money out if you accidentally have a little bit too much money in there. I will say, though, I do have a few families that
heard me on this, still decided to overfund by a bit and that's fine. I am never going to tell someone not to save a little bit more on their 529s because usually you do fall just a hair short, especially if you have multiple children. That just brings the likelihood that someone's going to choose a more expensive college up. And so you'll find a way to spend the money. And if you don't, great for you. You have this little escape hatch.
Still a good rule though, I like it. It preserves sort of that tax free growth. So it's cool and creative. All right, last question for the day is from a general surgeon in Texas. I've already maxed out my 401k, I'm back to a Roth IRA for the year. What is the most tax efficient place for me to put my extra savings?
Kyle (20:01)
Very cool.
Nate Reineke (20:20)
β The most tax efficient way to do this, very, the best way, you wouldn't pay any taxes is if you took all your extra money out of your bank account and stuffed it under your Not a penny owed on taxes. And obviously you would never do that, right? β Because that would give you some β abysmal returns. So, but my point in saying that is, β
I believe this is β inherently β just, it's just the wrong way to look at this. Okay, so β I always screw up the saying, but I think you say it, everyone says it. β You don't let the tax tail wag the investment dog. There you go, I got it right. So when you're looking at investing, you can't only look at it through the lens of taxes. So the way that this question was formed, I just disagree with.
β You want to consider taxes along the way, but you have to look at the big picture here. So here's a good example. A very tax efficient way to do this would be open up a cash balance plan if it's possible. Put the money in pre-tax, it's invested and it's for retirement, just similar to a pre-tax 401k. But the problem is in those cash balance plans, usually they're invested really conservatively. So what's better?
save a little bit of taxes now or a lot of taxes now, depending on your income, or getting a better return. There's ways around this. You can be more aggressive in these plans if you're the one controlling them, but then ultimately you don't get to defer as much money if the market does well. β the right way to answer this question is you invest your extra money in a low cost way, which is not a cash balance plan, and the most tax efficient way possible after
you've considered β what vehicle will get you the returns that your plan needs. So this could be cash balance plan. You could do a mega backdoor Roth. And then after that, investing efficiently in a brokerage or taxable account. Some other things you can do with this money is you can pay off debt, right? That's you have extra money. That's perfectly tax efficient. You're paying off debt, which is, β you know, when all things considered, if you're on track for everything, which is
That's not exactly what they're saying. I've maxed out my 401k and my backdoor Roth. But β when you're saving and you have extra money, that's a good time to pay down debt, even if you have a decent interest rate, because you got to pay off your debt before you retire. But the way that it kind of goes is pre-tax 401k or retirement accounts, backdoor Roth, β any other accounts like the cash balance plan, if it makes sense for you, β mega backdoor Roths, and then a brokerage account.
So β the reality is that β when you get to this level of income, right, you double doctor family, you have a whole bunch of income. It's very difficult and almost β cost prohibitive to simply try to avoid taxes at all costs. Sometimes you have to pay some taxes. Right. And if you I'm getting a high volume of people asking me about using a tax strategist and all that.
A lot of times the recommendations they make, they're just not holistic. They're only looking at taxes. Cash balance plan is kind of the obvious example there. It costs money to maintain lots of financial professionals you have to pay to get it going. So look at the big picture, not just the taxes. Does you have anything to add on that?
Kyle (23:58)
No, I was just, I was thinking about in my position, know, β rebalancing a taxable accounts, you know, a lot of clients get, this is a little bit of side note to this, but it has to do with taxes, you know, it's this idea of I hear this more and more, know, especially with the market, how it was kind of, you know, had reached an all time high. And then we had some recent volatility here in the short term. And I'm getting this question of like, prior to the prior to the market coming back down, I had clients saying like,
Nate Reineke (24:05)
Mm-hmm.
Kyle (24:27)
I was talking to them about their allocation being off, you know, being too stock heavy, carrying too much risk in their taxable account based off of their investment strategy targets and talking about, you know, selling some stocks for some gains and realizing some capital gains. And β one of the questions I get or one of the rebuttals I get is, well, why not just wait till the market comes down and then my stocks will lose value and then it'll rebalance itself. I'm like, but that's not why we're investing. We're investing to, to
Nate Reineke (24:54)
Mm-hmm.
Kyle (24:56)
have gains and earn more. you let it go back down, then you lose the gains that you just had just obtained. so that's why I kind of try to get clients back on that path of like, don't be so focused on taxes only. Here's your other investment disciplines. This is your target stock bond ratio and you're here. This tells me your way off target. We want to rebalance when you're more than 5 % off target, you're 10 % off target right now. β
let's tax efficiently, sell some of these stocks, try to get the smallest tax bill we can get, but let's lock in these gains, let's take that risk off. Let's not be so tax adverse that we're gonna β just let the stock market ride and let our stocks come back down over time.
Nate Reineke (25:41)
Right.
Yeah, there's three ways, I think it's three, three ways that β you can take care of this tax problem. You can pay your taxes. You can let the market take them, which is the market going down. I don't know why that's celebrated. Sounds like in a roundabout way people are celebrating, well, let the market go down.
So you can either pay the taxes, let the market take the taxes, tax problem away from you by it going down or you can die. I'd rather pay the taxes. Yeah, well, that's it. Those are the three ways. Yeah. Okay. On that note, I hate to end it on that note, but I have to. β Thank you everybody for listening. If you liked this episode, please be sure to subscribe so you don't miss when a new release comes out every.
Kyle (26:14)
When you put it like that, let's pay some taxes. Let's rebalance. Yeah.
Nate Reineke (26:33)
Wednesday. If you'd like to work with us, visit PhysicianFamily.com, schedule an interview. If you aren't ready for that, send us a question at podcast at PhysicianFamily.com. We'll answer that question even if it doesn't make it on the show. Until next time, remember, you're not just making a living, you're making a life.
