Mailbag Edition – Answering Listener Questions About IRAs, Long Term Care, Tax Brackets & Much More

Ryan: But once you get to about age 70 or above, the costs for the policies go up dramatically and it may not make sense for you to buy a long-term care policy.

Announcer: When it comes to financial planning, you need to cut through the jargon so that you can understand how to achieve your own retirement success. This is Candid Conversations: Retirement Talk with Ryan Cravitz of Cravitz Financial and Insurance Solutions.

Ben: Well, hello and welcome back in to Candid Conversations: Retirement Talk with Ryan Cravitz over at Cravitz Financial in Irvine, California. I am Ben George. Great to have you on the show today as we go into the mail bag. Really going to answer some questions that have been sent to Ryan recently. We compiled a list of them. I think, Ryan, this is going to be a good episode because we really will cover on a lot of different topics, so no matter where you are in your stage of financial planning, there's probably something in here that will catch your attention.

Ryan: Yeah, absolutely. I think this is a good way, because these are questions that everyone can learn from.

Ben: Yeah. Absolutely. So we'll get that. We got about 10 questions or so today, so should be a really good episode. Again, if you have questions for us afterwards, have your own questions you want to send in to Ryan, you can do so at Cravitzfinancial.com. Also, while you're on the website, you can also get your retirement ready check up, so make sure you check that out after you get done listening to today's episode.

All right, so let's just jump right in, Ryan, and begin with this one. "I turned 72 at the beginning of the year, so I have to start taking money out of my IRA this year, even though I don't really need it. Can I just take it out and reinvest it back in something else?"

Ryan: This is a great question because if you turned 72 at the beginning of the year, and we're recording this in 2023, you actually don't need to take an RMD this year. At the end of last year, the Secure Act was passed. Secure Act 2.0 it's called, and as a result of that, anyone that's turning 72 in the year 2023 does not need to take an RMD. So you can wait until next year to take that.

That said, if you're already taking RMDs, you have to continue taking your RMDs out, so this just applies for new people turning 72 this year. To answer your question, when you have to take out your RMDs, can you just take that money and then reinvest it back somewhere else? Yeah, absolutely. You could put that into a taxable brokerage account, as an example, and you could invest it right there. Not a problem.

Ben: That's a good question. I know a lot of people may not be aware of the new RMD age changes with the Secure Act 2.0, so that is perfect timing on that question, so thank you for that one.

Ryan: Let me actually give the new details around these RMDs. Anyone that's born between 1951 and 1959, your new age when you have to start taking out RMDs is age 73. And for anyone that's born in 1960 or later, it's age 75.

Ben: Okay, that's good to know, and I'm sure people will have further questions about that and I'm sure we'll talk more about some changes with the Secure Act 2.0, but if you have questions for Ryan, you can always reach out directly, 714-462-9155.

All right, another question here. This one, dealing with Roth IRAs. "I'm not 59 and a half yet, but I heard I may be able to have access to my Roth IRA without a penalty anyway. Is that true?"

Ryan: This is a good question. Here's how it works. With a Roth IRA, if you make a contribution to it, you can get back that money at any time. Even if you're under 59 and a half, and let's just say that you've contributed $5,000 to a Roth IRA and now the value has grown to $8,000. Well, you can take your $5,000 back at any time. That's a return of your contribution, return of your own money, you can get that back. There's no penalty. The question is, can you access the interest? And because you're under 59 and a half, you're not going to be able to without penalty.

Ben: Okay. Good to know. I'm sure that's a question a lot of people will have at some point getting close to that age and needing to pull from that money. That's good there.

All right, how about a question about financial advisors here? "I'm considering working with a new financial advisor, but only with half of my money. I want to keep the other half with a different advisor. Since you're a neutral third party without a vested interest, I'm hoping you can confirm that this is a good idea since I'd be able to get advice for multiple people."

Ryan: I could say, I'm not a fan of this. To me, this is not a good idea. It's like going to the doctor and saying, "Okay, you're my primary physician. I want you just to operate on the left side of my body and I'm going to get another primary physician and they're going to operate on the right side of my body." It just doesn't work.

The question that I would have you think about is if you're thinking about adding a second advisor is, what do you feel is missing from that first advisor that's making you feel that way? The first thing that I would do is explore that relationship with your advisor and make sure that if there's anything that you do feel is missing, that you have a conversation about that, so you can get on the same page and then maybe there's just a few tweaks that need to be made, and once they're made, you'll feel 100% comfortable where you are. Or maybe you're going to find out that it's just not the right fit for some reason. And if that's the case, maybe you do need another advisor. But I just don't feel that it's in somebody's best interest to have more than one advisor for their retirement planning.

Ben: Have you ever worked with someone in that situation where they've wanted to bring a portion of their money to you, or is that just a situation you just probably wouldn't work with?

Ryan: It just doesn't work very well. The reason is, when we think about financial planning, a lot of times the first thing that people think about is the investment part. The investment piece is just one part of the overall financial picture. And so if you're really working with an advisor that's really focused on the overall big picture, a real holistic advisor, if that person doesn't understand the broad scope of everything that's going on within the financial household, it makes it hard to make good recommendations overall.

Ben: Gotcha. Makes sense. All right. Again, if you're thinking about maybe splitting it up, try to think again. Try to work with one advisor if possible. But again, if you want to sit down and get an overall opinion on where you stand and what might fit for you, you can always reach out to Ryan as well, to have that conversation.

All right. "I'm retiring next month and it occurs to me that I don't really know where my income is going to come from. I'll have social security, but that won't be enough to live on. Should I just start withdrawing from my 401K next month when the paychecks stop?"

Ryan: Well, the first thing that I would say here is that... And I don't know this person's situation. So let's just say that this was a planned retirement. If this was a planned retirement, then my concern here is that these types of questions should have been addressed long before. Before the moment that you plan to actually retire, you should know, okay, this person has social security, they have a certain amount there, but then where are they going to get their income from, which accounts and how much? Whether that's the 401k or the IRA or other brokerage accounts or savings or whatever they may have, you have to have a clear picture. You have to have a defined income plan that's telling you where you're going to get that.

Now, perhaps this person was in a situation where they were forced into retirement, maybe the company downsized or they were laid off or something like that. Really, it's too hard to answer the question until we know what other assets this person has available to them.

Ben: Yeah, I think that's a big part of it too, Ryan, is all these questions are great and they are very, very good questions, but it is tough to answer them without knowing the full picture.

Ryan: You really have to know. I mean, in this case, this person has a 401k, but what is the balance there? What do they have in savings? Do they have an IRA? Do they have a Roth IRA? What do they have overall? What are their expenses? What are they needing? There's just so many questions.

Ben: Yeah, always is. All right. Very good. Next question here. "What do you think about reverse mortgages? My sister is looking into getting one, but I'm not sure it's a good idea from what I've heard." Can you first, I guess, for people that don't know what a reverse mortgage is, explain that and then we'll answer our question.

Ryan: All right. For anyone that's not familiar with what a reverse mortgage is, it's a type of mortgage that you can take out. You have to be 62 or older. It's got to be on your primary residence in order to take it. The main benefit is that you're able to, depending upon how much you might owe on the house when you take it, so let's say for instance, you have a loan that's completely paid off, you own the place free and clear, you would be able to tap the equity that's in your home and still continue to live in the home. So you could take it out through a line of credit, a lump sum, a 10 year option. There's various choices there that you could take advantage of. If you had a loan already but it wasn't completely paid off, you might be able to get a reverse mortgage and use that to end up paying off the rest and still being able to get some money back from the home through, like I was just mentioning, the line of credit or lump sum or something like that.

So that's really what it is in a nutshell. And is it a good idea? Of course the answer is going to be, it depends. But here's what I can say about it is that, in the past it didn't have such a great reputation. But over the years the products have improved, and some of the retirement income literature nowadays shows that there are strategic ways where you may be able to incorporate a reverse mortgage to put you in a better financial situation. In other words, what I mean is this, is that a lot of times it's been thought about as that the reverse mortgage is just, I'm going to take that perhaps if I need it. In other words, if I run out of all my other savings and investments, then I may tap my home equity by taking a reverse mortgage.

But now there's some strategic ways that people may want to consider taking a reverse mortgage, taking a line of credit, taking out a portion, for various things. Maybe your investment accounts are down for the year. Instead of taking money from your investment accounts because there's a market loss, you may not want to, maybe you tap the reverse mortgage and by doing that, you don't have to pay any taxes either on that because that's a loan, so that's a tax free. And then maybe the next year your portfolio recovers, and then maybe you just go back and start withdrawing money from your retirement portfolio.

One other thing that could be considered is, taking some money out through the course of a reverse mortgage, using that money to strategically pay the tax when doing a Roth conversion, and that may put you in a better position overall financially. Keep in mind there's costs to the reverse mortgage, but in that case there's also costs to paying taxes. So it's just a numbers game, it's a math question and figuring out really what makes most sense.

Ben: Yeah, it all comes down to the math. A good question though, but I know a lot of people in retirement think about reverse mortgages or consider that option, so I'm glad we're able to address that one.

All right, long-term care, another common question that comes up about retirement and planning. "I haven't found a long-term care policy that I like. Are they all this expensive?"

Ryan: In buying a long-term care policy, the pricing is going to depend on two things. Number one, how old are you? And number two, what's your health like? And then of course the pricing is going to depend on the type of policies and the different riders or provisions that you have within your policy as well.

Here's what I will say about long-term care insurance. If you're considering buying it, I definitely recommend looking into buying it when you're in your fifties. And if you don't get it in your fifties, maybe look into buying it in your sixties. But once you get to about age 70 or above, the costs for the policies go up dramatically and it may not make sense for you to buy a long-term care policy.

Now that said, there's different types of long-term care policies. We won't get into all of them here, or at least not the details, but there's traditional life, there's hybrid products, there's link benefit products, so you need to know what your options are first so that you can make the decision that makes the most sense for your situation. It doesn't always make sense for someone to purchase long-term care insurance, but it does always make sense for somebody to have a long-term care plan. In other words, if you do need long-term care expenses or perhaps your spouse does, you have to have a plan for how you're going to pay for that.

Ben: Always got to have a plan for everything that you do, so I'm glad these questions, they seem to indicate that people are doing their proper due diligence to make sure everything is on track, so I do like that. But a good question about long-term care.

How about this one? "I was always told that that I'd be in a lower tax bracket in retirement and that I should be putting as much money into my 401k as possible. Now that I'm retired and I'm not in a lower tax bracket and all of my savings are going to be taxed as ordinary income, what went wrong there?"

Ryan: First off, I just want to say congratulations. You obviously did a really good job of saving. Maybe you saved the max amount every year. You probably saved for many years. Congratulations on doing that and putting yourself in the position that you are now, where unfortunately you're having to pay quite a bit of taxes on that money because you have accumulated so much.

The unfortunate thing that I've found over the years is that there's been so much focus on we need to put all of our retirement savings into these pre-tax retirement accounts. However, by doing that, you're not tax diversified. So it's great in your working years, you did great in saving and investing, you got that tax deduction, you saved money then, but then now that we're here in retirement and you have to withdraw that money, like you're saying, all of that money is subject to ordinary income.

This is why it does make a lot of sense when you're in your working years to consider maybe opening up a Roth IRA or a Roth 401k or considering Roth IRA conversions, or perhaps even just investing some money in a taxable brokerage account that will put you in a position where you're only paying taxes at perhaps the long-term capital gains rate, which may be less than your ordinary income tax rate. So there's some different things that you could do there to just kind of tax diversify.

Here's the thing. You're retired, what can you do? Let's say you're 65 years old, you don't have to take any required minimum distributions now. You don't have to worry about that until you get into your seventies. Instead, now you have the flexibility as to how much you take out. Now, obviously you're going to have your income needs, so you're going to have to take out a certain amount from that, but it makes a lot of sense to do some tax forward planning and take a look at whether it makes sense to incorporate Roth conversions.

By doing so, you're able to kind of manage the tax bracket. Let's say that you're in the 24% tax bracket, but you could have some additional income before getting into the next tax bracket. It may make sense to convert some of that money before you get into that next tax bracket and move some of that over into that Roth IRA, and then that's going to give you some more flexibility for the future. And then you may be able to reduce the amount of your required minimum distributions in the future that you have to take out. You'll have your other tax-free money that you could take out from a Roth IRA and that might be able to put you in a better position financially.

Ben: Gotcha. All right. Well, just some of the questions here that have come up to Ryan and his team recently. Got one more I want to throw you away before we get out of here, Ryan. "Ever since I retired, I've had a really hard time spending money. Something about not having a paycheck makes me nervous. Do I need a shrink?"

Ryan: No, absolutely. You definitely don't need a shrink. It's a tough thing, making that transition from your working years into retirement. Because for many, for 30 or more years, your paycheck, your income, that came from your job. Every two weeks or so, you got that paycheck. Now you're retired, that paycheck is now stopped. And for a lot of people, even for people that have saved a lot of money and are in a good position to retire in retirement, for a lot of people, they still feel that anxiety. The way that you're probably feeling is pretty normal. A lot of people feel that way. That's where having a good solid retirement income plan in place so that you can feel confident that you know where your income is going to come from is so important.

Now, if you go back just a couple of generations ago, there really wasn't that anxiety in the same way about retirement, because for most people, their income came from their pension at their company, which was a guaranteed payment that was going to go for the rest of their life, and also social security. They had guaranteed checks coming in every month for the rest of their lives. Today, most people's sources of income in retirement, outside of social security, comes from their retirement accounts such as their 401ks and their IRAs. And now it's, okay, how do we turn this lump sum balances into income? What's the best way to access this and also make sure that we don't run out?

There's different strategies that can be incorporated with that, won't get into all of that, certainly here, but one thing to perhaps consider is an annuity for a portion of that money. An annuity, kind of like a pension or social security, can provide you with an income stream for the rest of your life. And for a lot of people, that can help reduce anxiety knowing, Hey, I've got my guaranteed income. I know where that's coming from month to month, and then I also have my other savings and investment dollars.

Ben: All right. Good question. You're not the only one in that position, feel that way. You definitely don't need mental help probably. But it's a fair question. People get stressed out about it, and it's an emotional process, so I can understand why someone would be feeling that way.

All right. A lot of questions to get through today, but we did a good job popping through each one of these and hopefully giving you some idea of where Ryan stands on some of these topics and the process that he goes through to help clients answer these questions. But if you have anything for him specifically for you, you can always log on. Cravitzfinancial.com is the website and the phone number is (714) 462-9155. We'll probably try to do this again, Ryan. If we get another group of questions, we'll try to bring them on and knock them out because I think it's helpful to go through these different variety of topics and it reaches the most amount of people, I think, by doing it that way.

Ryan: Yeah, I like it as well.