Jeff Levine: Smart Tax Moves for 2023 and Beyond

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Our guest on the podcast today is tax and retirement planning expert, Jeffrey Levine. Jeff is the chief planning officer for Buckingham Strategic Wealth. He’s also the lead financial planning nerd at kitces.com, home of the popular Nerd’s Eye View blog. Jeff recently launched a podcast with Ed Slott called The Great Retirement Debate. He has authored several books, including The Baby Boomer’s Guide to IRA Planning, The Financial Advisor’s Guide to Savvy IRA Planning, and The Definitive Guide to Required Minimum Distributions for Baby Boomers. Jeff is a frequent public speaker and media commentator and maintains a high profile on social media and on the Nerd’s Eye View blog, where he readily shares tax and retirement planning insights. ThinkAdvisor recently named Jeff Thought Leader of the Year for 2022.

Background

Bio

The Great Retirement Debate podcast

The Baby Boomer’s Guide to IRA Planning and The Financial Advisor’s Guide to Savvy IRA Planning by Jeffrey Levine

The Definitive Guide to Required Minimum Distributions for Baby Boomers, by Jeffrey Levine

Nerd’s Eye View blog

The Great Retirement Debate podcast

“Should I Take Social Security at Age 62?” Episode 1, greatretirementdebate.com, Nov. 10, 2022.

Changes in 2023

“Getting Clients Comfortable Delaying Social Security With Reversible Delays,” by Jeffrey Levine, financial-planning.com, March 14, 2022.

“4 Ways Inflation Can Help Clients Cut Taxes in 2023,” by Ed Slott, thinkadvisor.com, Dec. 14, 2022.

“Inflation and Rising Interest Rates Have Stressed the 60/40 Investment Portfolio Strategy—'But It’s Not Dead,’ Says Financial Advisor,” by Greg Iacurci, cnbc.com, June 24, 2022.

“How the TCJA Tax Law Affects Your Personal Finances,” by Amy Fontinelle, Investopedia.com, Dec. 27, 2022.

Secure Act. 2.0

“The Impact of New IRS Proposed Regulations on the SECURE Act,” by Jeffrey Levine, financial-planning.com, May 17, 2022.

“Secure 2.0 Act Needs a Fix: Jeff Levine,” by John Manganaro, thinkadvisor.com, Dec. 22, 2022.

“Jeff Levine Answers Secure 2.0 Tax Questions From Advisors,” by John Manganaro, thinkadvisor.com, Jan. 6, 2023.

“SECURE Act 2.0: Later RMDs, 529-to-Roth Rollovers, and Other Tax Planning Opportunities,” by Jeffrey Levine, kitces.com, Dec. 28, 2022.

Taxes in Retirement

“How Advisors Can Help Clients Get Early Retirement Account Distributions—Without Paying a Penalty,” by Jeffrey Levine, financial-planning.com, May 4, 2022.

“3 Reasons the New RMD Tables for 2022 (and Beyond) Are Overrated,” by Jeffrey Levine, forbes.com, Feb. 14, 2022.

Other

“Jeff Levine: Cracking the New Retirement Code,” The Long View podcast, Morningstar.com, Feb. 12, 2020.

“Michael Kitces: Does Portfolio Customization Pay Off?” The Long View podcast, Morningstar.com, Aug. 23, 2022.

Transcript

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance for Morningstar.

Jeff Ptak: And I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is tax and retirement planning expert, Jeffrey Levine. Jeff is the chief planning officer for Buckingham Strategic Wealth. He’s also the lead financial planning nerd at kitces.com, home of the popular Nerd’s Eye View blog. Jeff recently launched a podcast with Ed Slott called The Great Retirement Debate. He has authored several books, including The Baby Boomer’s Guide to Savvy IRA Planning, The Financial Advisor’s Guide to Savvy IRA Planning, and The Definitive Guide to Required Minimum Distributions for Baby Boomers. Jeff is a frequent public speaker and media commentator and maintains a high profile on social media and on the Nerd’s Eye View blog, where he readily shares tax and retirement planning insights. ThinkAdvisor recently named Jeff Thought Leader of the Year for 2022.

Jeff, welcome back to The Long View.

Jeffrey Levine: It’s great to be here. Thanks so much for having me.

Benz: It’s great to have you back. We had you on shortly after we launched the podcast and there are lots of new developments to cover with you. We want to start by talking about your podcast, which you recently launched with Ed Slott. It’s called The Great Retirement Debate. You each argue one side of some retirement-related questions, such as whether to file for Social Security early, various tax matters. I’m curious, how do you decide which questions or what debates that you and Ed want to tackle?

Levine: When we first started talking about the idea, it was very much what are the questions that come to us most often from consumers and the advisors that we speak with on a regular basis. What are they seeing in the field? What are the problems that people are having, where they’re just looking for an understanding of what they should potentially do, and that comes first from educating themselves about the benefits and drawbacks of any potential options. So that’s where the initial group came from. And then, of course, now since we’ve launched, we are actively soliciting and taking suggestions for future topics. We’ve recorded a couple already from people that have submitted as a proposed topic, which has been great. We’d love to see the feedback, and I’m sure that when it comes to retirement, there’s no shortage of things to discuss. So, I don’t anticipate we’ll run out of topics anytime soon.

Ptak: What have been some of your favorite conversations or topics that you’ve taken on so far?

Levine: The Social Security one we launched with as our first episode just because it’s relevant to so many individuals and it’s still such a hotly debated subject. And I think personally I’m obviously showing my cards as to which side of the debate I tend to be on for more people than not. Obviously, every situation is different. But I still find that far too many people claim Social Security far too early. So, that was a really fun one. I’ve enjoyed a couple of them where I’ve had to argue against what I really believe. That’s always a challenge, but it’s a fun challenge to try and figure out what it is that I can say that if I was trying to argue with myself, how would I try and beat me in a debate. And so that’s been really exciting to try and look at the other side of things. And that’s really what the show is all about. It’s to highlight both sides because everyone’s situation is different. Our tag line is: There are two sides to every coin, but your particular decisions are too important to leave up to a coin flip. And that’s why we always encourage individuals to reach out to knowledgeable financial advisors, tax advisors, legal professionals to help them work through some of life’s more difficult decisions.

Benz: A question I had is the convention of the podcast is that you two are having an argument or a spirited debate. Are there any major issues in retirement planning that you and Ed disagree on? I know you worked together for a long time.

Levine: I’d be hard-pressed to say there’s nothing we don’t disagree on. I think Ed, by his very nature, is slightly more conservative in his approach toward retirement in general than I am and some of that probably has to do with our age. He likes to point out a lot that there’s a bit of a generational gap between us and we perhaps see the world through different eyes because of that. I wonder how much of that is the generation gap versus how much of it is just simply our personalities and how we go about approaching things. But I would say on most of the big issues we really do see eye to eye on most things. And you mentioned, we worked together for a long time. I would say, I trained—that’s probably a good way to say it—I trained under Ed for many years before branching out and going different ways.

It’s like the NFL coaching tree. I always joke around like that where everybody has a different flavor of how they do things. But if you look at the Bill Parcells coaching tree, or you look at the Andy Reid coaching tree—some of the great coaches in NFL history—a lot of their assistant coaches and position coaches that have gone on to do amazing things in their own right, they’ve done it in a very similar way. And to that end, I think Ed and I for the most part, we’d probably be in real life be arguing on the same side of the coin more times than not.

Ptak: We wanted to shift gears and talk about notable changes for 2023, and maybe it makes sense to start with what’s changing tax-wise for 2023. We have a lot of inflation-related changes going into effect. Higher 401(k) and IRA contribution amounts, for example. What do you think of the main things that jump out when you think about what’s changing for 2023, and what should financial advisors and individual investors have on their radars?

Levine: I think inflation is a big one, and you hit on it—2022 will be remembered for a year of significant inflation where we went from having basically little to no inflation for many years to rather significant inflation, it seemed like almost overnight. And of course, along with that inflation came along higher interest rates to try and fight back inflation, and so on. And so, lots of challenges there and opportunities. You mentioned a couple of them, which is, we’ve got some significant bumps in the inflation-adjusted amounts that individuals can contribute to retirement accounts. The inflation-adjusted numbers for things like who can make deductible IRA contributions, or who can make Roth IRA contributions are also up significantly.

But beyond that, I would say for retirees, while 2022 certainly saw a significant amount of inflationary pressure eating away at retirees’ spending, from Dec. 31, 2022, to Jan. 1, 2023, it’s not like that inflation took effect overnight. It was gradual throughout the year. But from Dec. 31, 2022, to Jan. 1, 2023, effectively overnight, there were some significant changes. For instance, a sizable bump up in Social Security benefits for those who are receiving them, coupled with the unusual situation, despite inflationary pressures, of Medicare premiums actually going down. And so, actually from December 2022 to January 2023, retirees will feel a pretty significant, or did feel, a pretty significant increase in their spendable dollars. Again, that’s just catching up for what may have been lost in 2022, but that was a gradual thing where, again, overnight from December to January, all of a sudden, people got bigger checks and had less amount taken out of those checks for Medicare. That’s a pretty sizable win, and it gives a number of retirees a good amount more of spendable dollars here in 2023 than they had in 2022.

Benz: Sticking with that, Jeff, at the other side of the ledger, people who are still working and earning paychecks will see a bigger share of their income taxed for Social Security tax. Is that correct?

Levine: That’s correct, of course. As we get wage inflation and so forth, you see more of those dollars taxed for Social Security up to the annual limit each year. That’s been a discussion for years in Washington as to whether we should eliminate it, whether it should be increased, or there’s even been talks from time to time of creating a doughnut hole where we would have the limit that we have today, then a brief period where those with higher earnings wouldn’t pay anymore, but then discussions of sometimes whether we should bring it back for those who earn more than $400,000 or so forth. Those have just been proposals. I don’t think they’re going to happen today. But we are going to have to do something here in the relatively near future to ultimately deal with the fact that Social Security is, right now, scheduled to see its trust fund exhausted within the next decade or so. And I like to say “the trust fund exhausted” as opposed to “go broke” because going broke gives the connotation that there’s nothing left. The reality is, even if we did nothing, retirees would still get about $0.75 to $0.80 on the dollar that they were promised, which is certainly not what anybody wants. But it’s a lot better than getting zero cents on the dollar. So, that continues to be an interesting discussion to have with those in retirement now as well as those who are approaching is how do we think about Social Security and how much should we count in it as part of an individual’s financial plan as we move forward?

Ptak: When there’s pending legislation in Congress related to taxes, how do you figure out what might realistically find passage and what’s probably dead in the water? Do you have sources on Capitol Hill, or do you find other means of keeping apprised and making good calls?

Levine: I think it’s a combination of many factors. So, certainly, some good connections with some folks who are tied into Washington politics. That’s always a help. Obviously, I try to just read everything I can get my hands on. And then, you get a sense as to what is on the legislative docket.

In 2023 and into 2024, I think it’s safe to say that I expect a lot less of significance to happen here just because we don’t have one party controlling all elements of Washington anymore. For a few years we had Democrats controlling the House, the Senate with the narrowest of margins in the White House, and they were able to do some things. Not as much as they had hoped because of the slim majority. But they were able to do some significant things. The Inflation Reduction Act in 2022 was pretty meaningful for a number of reasons. Perhaps not the home run that Democrats had hoped for after the 2000 elections, but still meaningful legislation. But now with a divided House and Senate, I think it’s likely we’re going to see gridlock.

And that also brings me to discussing, or perhaps bringing up one of the most common questions I’ve been seeing lately and receiving is what’s going to happen here at the end of 2025? So, as you both know, Christine and Jeff, we’ve got the sunset of many of the changes made by the Tax Cuts and Jobs Act from 2017, and that lowered taxes for the overwhelming majority of Americans. Well, it stands to reason that if changes expire that lowered taxes for the overwhelming majority of Americans, if they expire, we’re going to see higher for the majority of Americans. And people keep saying, will they get extended? What’s going to happen? And obviously, my crystal ball is no less cloudy than anyone else’s. But if we’re looking at Washington, especially a divided Congress right now, I think it’s always better to bet on the under in terms of new pieces of legislation, things happening. Every once in a while, you’re wrong. It’s a probability thing. Every once in a while, Congress actually passes something, and they move some piece of legislation forward. But if you’re forced to take the over or under on Washington legislation, especially when one party is not in complete control, the under is always the best bet. So, I think we’re likely to see an expiration of those, or at least the majority of those provisions as scheduled, at least right now.

Benz: I guess a counterpoint, though Jeff, is that it seems like Congress, regardless of who’s in charge, is disinclined to raise taxes on anyone. It seems like that’s been a recurrent theme over the past couple of decades. I think the carried interest loophole, the fact that it’s still alive and well is maybe exhibit A of that. So, what do you think about that? Is that just perhaps the path of least resistance for Congress that it just doesn’t feel good to raise taxes on people and so they don’t?

Levine: I think that’s part of it. Obviously, you’ve got politics at play. But I would also say that in 2010 we did see the Healthcare Act and as part of that the 3.8% surtax was created, and that had a material impact on a lot of higher-net-worth families. There was a significant push by Democrats in 2021 and then into 2022 to raise taxes. They just needed another vote or two in the Senate. That would have easily gotten through the House and could have seen higher tax rates and ending of the Tax Cuts and Jobs Act changes. And part of it also is, when things expire where you go back to where they were, is it a tax-rate increase or is it getting rid of the tax cut? It’s all a matter of how you spin it. If you’re a Republican, you argue, look at this, the Democrats are raising the taxes again. And if you’re a Democrat, you just argue, we’re not raising taxes; we’re just getting rid of that tax cut that the Republicans gave all the rich people. Again, which side of the aisle you happen to sit on is your own personal preference. But those are the arguments that both sides make.

I do think raising taxes is challenging from a political perspective. I think even the most fervent supporter of modern monetary theory, which basically states that you don’t really have to balance what comes in with what goes out each year, and I’m oversimplifying. But even the most fervent supporter of MMT—modern monetary theory—would tell you that there is a limit to the amount of deficit you can run, to the amount of inflation you can drive up before that no longer works effectively. So, I do think that at some point, even if they don’t want to, Washington and Congress is going to have to tighten the belt and they’re going to have to raise taxes on at least some folks to cover what we’re looking to do here as a country.

Ptak: I guess this would cut in the opposite direction, but we did want to ask you about state and local taxes. In 2021, there did seem to be some energy around the idea of repealing the cap on state and local tax deductions that’s currently in place. What’s the status of that?

Levine: The status as we sit here right now is that it is here. The SALT cap of $10,000 remains, and I think it is exceedingly unlikely to see that change. Now that we have Republicans in control of the House, it would take something pretty special that the Democrats would have to concede to get Republicans to budge on that issue. So that is not likely to change. As I say that though, that doesn’t mean that there are no other ways in which individuals can look to mitigate that. In fact, there are many states that have created workarounds for not all taxpayers, but some, notably small-business owners in many states have the ability to pay taxes at the business level, which is not subject to the $10,000 limit, and then effectively receive a credit for their personal state income taxes. So, it is a workaround that’s quite effective and works in quite a number of states now. About maybe a third of states have something that looks a little bit like that. And remember, not all states even have a state income tax. So, it is an effective tool where it is in existence, people should look and see whether it would apply to them. But for most individuals, we’re only talking about those who would be small-business owners who have some sort of S-Corporation or a partnership or something like that. So, it is a consideration that those in that situation should look into but does not unfortunately apply to everyone.

Benz: One strategy that sometimes comes up in this context of trying to alleviate the pain associated with that SALT tax cap is this idea of bunching deductions together into a given year. It seems like every tax-savvy person is very enthusiastic about this idea of bunching. Can you discuss that as well as how people should decide when to bunch their deductions?

Levine: I think I would start by just framing what bunching is. If we imagine that we have a household that has $15,000 of expenses that qualify for itemized deductions each year, well, if it’s a married couple, unfortunately, the $27,000, roughly, deduction amount that some of them would have—or this year, almost $30,000 here in 2023—well, in that case, you’re not going to ever exceed your standard deduction amount, which means, even though you have these expenses that qualify for itemized deductions, you’re not seeing a tax benefit. But if you were somehow able to take three years’ worth of expenses and squish them together, if you will. So, $15,000 x 3. Well, now in one year, you have $45,000 of eligible expenses that is higher than your standard deduction, and so you can get a tax benefit. And maybe the next two years afterward you just go back to the standard deduction. You alternate: One year, you squish the deductions together. A few years, you take the standard deduction. Then another year, you squish them together again.

In terms of whether or not this works, well, it certainly works for those who have the ability to more or less control those itemized deductions. But whether you squish deductions or not, you’re still subject to the same $10,000 maximum limit on state and local taxes. So, even if you push together maybe property tax bills from a couple of years, it doesn’t matter. You can’t get over $10,000. Your mortgage interest is what your mortgage interest is. You can’t really bunch that. So, when we’re talking about bunching, it often comes down to two types of expenses: medical expenses, which for most people are not deductible anyway, because they’re not spending more than 7.5% of their adjusted gross income. And if you don’t spend more than 7.5% of that adjusted gross income amount, you don’t get to deduct anything as a medical expense.

The other one is charity. And even there again, charity, even if you bunch, it’s tough sometimes to bunch enough to get above that standard deduction amount. So, a lot of people today, even with bunching, still can’t get higher than their standard deduction. And for those individuals, you don’t have to worry about it. If you’re someone who gives away a significant amount of money each year, or perhaps you are someone who has recently purchased a home with a significant mortgage, and so your interest is not only, are you getting maybe $750,000 of a mortgage that is subject to interest, where you’re getting a deduction, but also interest rates are higher than they were. So, that can create higher itemized deduction amounts, but we just don’t see it quite as often as we used to. Again, even with mortgage interest, mortgage interest was so low for so long. It’s only in the last year or so that we saw the interest rates shoot up. Mortgage rates were so low for so long that everybody refinanced 18 times to get to a lower rate. Even the mortgage-interest deduction that people had was lower than it would have been historically. So, bunching is a great strategy where it works. It just doesn’t work for that many people anymore, which is why less than 10% of people today itemize their deductions.

Ptak: As we record this in late 2022, we’re waiting to hear how the fate of a bill called, I think it’s called informally Secure 2.0, whether it would raise the age for required minimum distributions among other initiatives. Can you discuss some of the key provisions in the bill and handicap the likelihood that we’ll see anything like that pass?

Levine: Let’s take the second question first—handicap the likelihood. I said I’d always take the under earlier, and so perhaps I’m going against my own rule here. But I think it is extremely likely that we see Secure Act 2.0 happen here in the near future. And in fact, I wouldn’t be surprised if by the time this podcast is released, it’s already there. So, I think it is a high degree of likelihood that it happens. I think it’s most likely to happen late in 2022, as long as Congress gets together and takes care of some things to keep the lights on, so to speak. I think they’ll turn to the Secure Act 2.0.

The challenge is, as we sit here, you mentioned Secure Act 2.0 is what it’s informally called, and that’s because formally it’s actually three different bills that don’t all align with each other. There’s a House bill that passed earlier in 2022 overwhelmingly with more than 400 “yes” votes. That is a rarity today in Washington to see both sides come together and pass something so—I don’t want to say unanimously because it wasn’t unanimous—but it was pretty darn close. For Washington standards, that’s about as bipartisan as it gets in the house. In the Senate, there are a couple of different bills that are retirement-related that have some similar provisions, some same provisions, some different provisions. So, that’s still the rub here is, will everybody be able to get together on these three bills and work everything out in time. I still say yes, but that’s where the question comes in.

In terms of provisions that people should be aware of, the reason it’s called Secure Act 2.0, informally, is because we had Secure Act 1.0, or what I commonly call like the OG Secure Act, the original version. And as part of that original version, there was an elimination of the stretch IRA for most nonspouse beneficiaries. Not all. There’s a couple people, select groups of individuals such as persons who are chronically ill, persons who are disabled, and so on. But for most nonspouse beneficiaries, the stretch method of taking distributions from an inherited IRA or inherited 401(k) after someone died was eliminated and replaced with a new 10-year rule. That really changed the landscape significantly for estate planning when it came to IRAs. And on the planning Richter scale, if you will, I would put that at a 7.5 or maybe an 8—it is a pretty significant change.

I say that to compare Secure Act 2.0. I don’t think there’s any 7s or 8s on the planning Richter scale there. Things that are going to be so significant for so many people across the board that it would rise to that level. But there are a lot of 3s and 4s and 5s inside that bill. In fact, Secure Act 2.0 may contain more of those 3s, 4s, and 5s than Secure Act 1.0 did. So, what are some of those things? Well, you already mentioned one, which is perhaps a pushing back of the required minimum distribution age from 72 to 75.

There are different thoughts on how to do that. Some proposals have said, let’s do it gradually, similar to the way Social Security full retirement age was phased back from 66 to 67 in smaller increments. So, some people had a full retirement age of 66, others 66 and two months, others 66 and four months and so forth. One proposal would have the RMD age go from 72 for people today, to 73 for some, to 74 for others and then 75 for everyone else. Whereas other versions would just say, beginning at some point in the future, generally early in the 2030s, we’re going to make 75 the new RMD age for everyone after that point. So, there are some differences in how to go about it but pushing back the RMD age continues to be a high priority item as far as this bill goes.

Some of the other things that are in the bill are Roth-related. And I think that is a significant thing for a lot of people to hear is that not only does this bill not look to curtail the ability to go to a Roth, but if anything, it is encouraging or requiring those individuals to use Roths more. So, how could that be requiring? Well, one of the things it would do is versions of the bill would call for increased ability for catch-up contributions. Those are those special contributions that those who reach today age 50 can add more to, let’s say, their IRA or their 401(k) and so on. It would enhance the ability for some to make even additional plan-level catch-up contributions. But it would require some to make them in Roth contributions as opposed to pretax contributions. It would create SEP and SIMPLE Roth IRA options, and it would allow employers for the first time to put matching contributions into Roth accounts. All of that has never been allowed before and is just another sign that Congress doesn’t want to get rid of the Roth; they want to keep the Roth. And I know that’s a concern a lot of people have is can I trust Congress to keep this thing around? It seems too good to be true. That’s because you’re thinking about things like a normal person and not like a Congressperson. Congress people only look at 10 years. That’s the federal budget window, 10 years. And the Roth, you might say it’s giving away the farm down the road. But who cares? Because it’s after 10 years. It looks good today because it brings in money now. I would sit here and ask either of you to name me one provision, one, just one other provision that raises revenue for the federal government that people like. You can’t do it. There is none. That’s it. It’s one. It’s the Roth IRA. So, it’s not going anywhere, in my opinion.

I’ll give you one more that’s in this bill that I think when I share this, you might at first say, wow, that sounds really good. I’m glad to see Congress doing that. I, however, am a cynical jerk and I don’t like what they’re doing or I’m at least very leery of it. So, Congress is considering taking the 50% penalty for missing an RMD and dropping it to 25%. Sounds great, right? You say, why does he like that? Well, in fact, they would even lower it further from 25%, the proposed lower amount, to “just” 10% if someone fixed it in a timely fashion—if they fixed their mistake in a timely manner. Again, you, at first glance, would say, well, how could that possibly be bad? What could he possibly not like about taking a 50% penalty that seems rather egregious and making it just 10%, taking it to just a fraction of what it was?

Well, here’s the thing. Today, because the penalty, in my opinion, is so egregious, I think the IRS when you apply for relief kind of feels almost an obligation that if you’re trying to fix it and you realize you made a mistake—by the way, at a point in people’s lives when, certainly not everybody who’s 72 is cognitively impaired, but certainly that is a more likely age at which to start to see mental faculties begin to decline. At that point in your life, I think Congress, or rather the IRS, is just like, “Give us any reason, like the dog ate my RMD. OK, good, you get out of the penalty.” But if they drop it to just 10%, I’m a little worried that the IRS is going to start to tighten the belt and not give relief anymore. So, 50% penalty that no one pays basically because everybody can get out of it seems a lot better to me than a 10% penalty that people are actually required to pay. So, that’s the cynical part of me that’s looking at this a little leery saying, all right, what’s really going on here.

Benz: Good point. You’ve convinced me. I wanted to talk about some of the changes in Secure 2.0 that are aimed at making it easier for lower- and middle-income earners to save for retirement. It seems like anyone who looks at this retirement savings issue points to the fact that we’ve got a lot of people working who do not have any sort of employer-provided plan. Do you have a favorite way to address this issue apart from or maybe including some of the things that are in Secure 2.0?

Levine: I’m actually going to go apart from Secure Act 2.0, and maybe it could help us a little bit. But my favorite issue for addressing this is education. That I think is the key here is education. That’s why podcasts like yours, it’s why the articles that you all put out and so many others spend so much of their time and countless hours researching, writing, and so on. Getting people educated is absolutely critical. Access to workplace retirement plans is definitely important, and there are a lot of things in that bill whether it’s auto-enrollment or whether it is getting more part-time workers mandatorily involved in their small-business employer plans, increasing credits perhaps for businesses so that they are more likely to adopt these plans. All those things are awesome. But if people aren’t educated about why they need to invest and how it works, if they’re scared of it, or they don’t understand—people, we’re humans. We’re humans first. And if we don’t understand something, we don’t like to do it. It’s just natural part of evolution. It’s kept us safe for many years, and it’s great. When we don’t know what that big giant animal over there looks like and what it’s going to do to us, it’s great to stay away from it. But when we don’t know what that big scary market, or investment, or whatever it is, is going to do and we stay away from it, that hurts us for a long period of time.

And so, I think the very first thing we need to do is to continue to reach people at younger ages, whether that’s in high school or in college to get into workplace environments as financial professionals and just educate people about the benefits of long-term investing, long-term saving, forming good habits, making good choices. So often the folks that have the greatest success financially in life are not those who have this one-time decision that they made that was an immediate windfall, or they did this one thing that just worked out for them. It’s those who have made good decisions, but small decisions, repeatedly over and over for many years, decades in many cases, and that has produced the greatest results. So, perhaps a little bit of a cop out saying which provision it is—I think, certainly auto-enrollment, the research is indisputable. It has been shown to be a phenomenal way to get people involved in savings because it reduces the problem of inertia. Once it’s gone or it’s in process, people are less likely to undo it than they are to actually go and actively do it. But I still think education is the key to helping to resolve our savings crisis in this country.

Ptak: Inherited IRAs are an area that seems to be confusing a lot of people since the passage of the Secure Act in 2019.

Levine: Yeah, count me among that group.

Ptak: You alluded to the Secure Act, I think 1.0, the OG, if I’m not mistaken, that was the word that you used for it that did away with the stretch IRA. What have been the key changes to the rules around inherited IRAs?

Levine: The big change was that historically before the Secure Act, the first version—and by the way, this was passed back in 2019. And people listening today might say why are they talking about this? Hasn’t everybody at least dealt with this already? No. No, not everybody has and for good reason. First off, again, a lot of times, people are very loath to address things in their financial lives, especially when it comes to death and their passing. People just don’t like to talk about it. But let’s not forget the state of affairs in the world.

Secure Act 1.0, the OG, as we said, was passed in late December of 2019, began to impact people just a few weeks later, less than two weeks later at the beginning of 2020. But something else happened at the beginning of 2020 that we may all remember. That little thing called COVID, a pandemic. And people, all of a sudden and for good reason, weren’t worried about, oh my goodness, what happens to my IRA when I die? They were worried. I don’t want to die, and that was the only thing we cared about for a really long time and for good reason. COVID-19 was a horrible scourge that came across our country, the world. People tragically lost their lives. People lost their jobs because of the financial chaos that came about it. People weren’t concerned about, gee, they changed the rules for postdeath distributions. But they were pretty significant.

And really, what that law did was it took the old classification of beneficiaries of an IRA, which in the past it fit into two broad groups, designated beneficiaries, which were generally living, breathing people along with some special trusts and nondesignated beneficiaries, which were everything else, things like charities, someone’s estate, and so on. And designated beneficiaries, that living, breathing people side of the equation, were able to take distributions from an inherited account over their life expectancy. So, what that meant was they were able to spread out distributions over many years, which can help to control the income that comes out each year, which keeps the average tax bill lower for most people, and so on. Plus, the money that remained in the inherited IRA that wasn’t distributed could continue to benefit from the tax-deferred wrapper of the account, so no annual tax on the interest, the dividends, the capital gains, and so on. And depending upon an individual’s age, they were able to stretch for many years and in many cases, it was several decades or longer.

For example, a 40-year-old was actually able to stretch distributions for more than four decades. That was pretty significant to spread out income over 40-plus years. Well, the Secure Act, the first one, said, we’re going to take that group of living, breathing beneficiaries, that group of designated beneficiaries, and we’re going to split it into two groups of its own. We’re going to have eligible designated beneficiaries and noneligible but still designated beneficiaries. Eligible designated beneficiaries—I like to think of them as almost the group that time stood still for, kind of like Rip Van Winkle. They fell asleep and woke up and the Secure Act didn’t even happen for them, because for surviving spouses, as we talked about earlier, for chronically ill persons, for persons who are disabled, for those who are not more than 10 years younger. So, let’s say, you left your IRA to your brother, who was only six years younger, or for minor children. Those specific groups of individuals—again, I’ll just repeat it one more time for those listening: It’s surviving spouses, persons who are chronically ill, persons who are disabled, beneficiaries who aren’t more than 10 years younger than the IRA owner, or minor children of that IRA owner, if the beneficiary is any one of those, they get to continue to stretch, just like before the Secure Act. But for everyone else, they are no longer eligible to stretch, and they are stuck with taking money out over what is called the 10-year rule, which means by the end of the 10th year after death, everything in that inherited IRA has to be out. Everything in that inherited IRA has to be out. That might mean taking what would have been 30-, 40-, or 50-plus years of distributions and compressing them down to just 10 years, which can significantly increase the amount of income coming out each year, which could cause more of it to be taxed at a higher rate and the loss of tax deferral. If all these things sound bad, it’s because they are. I do realize we’re talking about people who have just inherited money, so no one is going around, going, “Oh my God, save the beneficiaries, save the inheritors.” There’s no group out there like Greenpeace for beneficiaries. But there is a challenge for those individuals who have inherited as to what we should do with this money to try and preserve as much of it as possible and see as little of it lost in the form of taxation.

Benz: We want to spend some time talking about tax planning before and during retirement. We sometimes hear about the years just after someone’s retired, so maybe they retire at 65 or whatever and before those required minimum distributions begin at age 72 as a particularly opportune time to do some tax planning and to embark on some strategies to reduce future tax bills. Can you talk about that particular period in life? Or perhaps you would even start the clock even earlier before someone retires.

Levine: I think certainly the year that someone retires and if they are in between, let’s say, retirement and taking required minimum distributions and having Social Security, and so on, so-called gap years, you often hear it referred to like that. Those are opportune times for sure for individuals to take these sorts of distributions or to do some tax planning, I should say. But for some, it’s earlier.

At the heart of this, I would say, there are a few principles that people should live by when it comes to tax planning. The first principle that people should adopt is the winner of the tax-planning game is not the person who has the lowest tax bill in any one year, but he or she who pays the lowest lifetime tax bill. That is the key here. So sometimes having a lower lifetime tax bill means paying more taxes today. That’s OK if it’s in service of the higher principle, which is the lowest lifetime tax bill wins.

The other thing I would say, is that a low-income year is a terrible thing to waste. Sometimes I hear people say, “I had almost no tax bill this year.” And I look, and I say, “I’m so sorry.” If you’ve done a good job saving over the course of your lifetime and you have a $0 tax bill or a very low tax bill, you have wasted the opportunity to use lower tax brackets. And there’s a couple of ways you can do that. So, perhaps one of the most common ways and probably the one I imagine you were thinking of when you started this discussion, is Roth conversions. Certainly, Roth conversions are one of the most effective ways of utilizing those low-income years. You’re able to pay tax, add income at a time of your choosing, effectively wave the magic wand, create income and have it taxed, if it’s by your choice, at a time when you believe your tax rate today is lower than it would otherwise be in the future.

But that’s certainly by no means the only strategy that people can use. For instance, others might want to look at using the 0% long-term capital gains bracket. This is one of the very best strategies that you can use if you have money in a taxable account that has gone up in value and you find yourself in either the 10% or the 12% ordinary income tax bracket. Because at those brackets, the long-term capital gains tax rate is 0%. And the only thing better than not paying tax is paying tax at a 0% rate. And the reason is, once you’ve paid tax at a 0% rate, that money is considered to be aftertax. Even though you only paid $0 because you had a 0% rate, it’s all aftertax, which means it’s basis to you. It can be spent at any time tax- and penalty-free. And so, even those individuals who really, let’s say, like an investment that they’ve held for a long time that is appreciated in value, maybe that’s why they like it so much, well, they can sell some or all of that investment depending upon their income and how much gain they have and then almost immediately repurchase that investment with a higher basis amount, and that allows an individual to take advantage of that 0% capital gains rate, and you don’t have to worry about things like the wash sale rule. That’s what comes up all the time: “Don’t I have to wait 30 days? What if I like this investment? What if I think it’s going to go up?” You don’t have to wait 30 days because the wash sale rule only cares about what you rebuy when you sell something that had a loss. But here, we’re trying to sell something with a gain to take advantage of paying tax at the 0% rate on the gain that you have. So, those are two tried-and-true strategies about figuring out how to bring more income into your return now while you have those so-called gap years and not wasting them. Because once again, low-income years are a terrible thing to waste.

Ptak: One of the key questions that investors and their advisors often wrestle with is how to decide which accounts to pull for their withdrawals in retirement. We sometimes hear about how taxable assets should go first, followed by traditional tax-deferred, followed by Roth, and people like rules of thumb. But is that one too simplistic to be useful, in your opinion?

Levine: Yes, it is certainly better than the alternative. So, if you told me I’m spending my Roth dollars first and then I’m going to take my IRA, and then I’m going to take my taxable assets, well, that would be a problem. I’d be hard-pressed to think of a situation where I would think that would work well. So, it is certainly better. And as a rule of thumb, or as a guideline, a starting point, OK, starting with your taxable dollars and going tax-deferred and tax-free, that makes sense. But ultimately, it is often a combination of many things.

For instance, sometimes early on, like if we have those gap years we were just talking about, maybe you’re better off living off of your taxable assets and trying to use tax-loss harvesting and selecting the right lots and all that sort of stuff to create a very low-income situation. But where you still have income—when I say income, you have money coming in, mostly principal at that point, or hopefully, gain that’s been offset with losses. You can use that to keep your income for the year low but meet your spending needs and then use that low income that you’ve created to take money out of your traditional IRA—not to spend it but to convert it. And down the road, sometimes it’s a combination of things. You may take some out of your IRA and some out of a Roth IRA. At the end of the day, what we’re really trying to do is to keep the lifetime tax bill as low as possible.

And so, if that’s the case, if you find you have a particularly high need for income in one year—let’s say, the roof leaks and you need $30,000 unexpectedly, and that might push you into a much higher bracket. Well, while generally you want to leave the Roth dollars for last, if you see it’s going to force you to go into a much higher bracket, or it’s going to phase you out of some sort of credit, or it’s going to trigger some sort of surtax, well, that can be a situation where you want to buck the trend and take money from the Roth ahead of time even if it means taking some of that money from the Roth before you take all the money out of your traditional IRA. So, yes, it’s an OK starting point, but you want to be much more granular, and this is where, again, a good financial advisor or a good tax advisor can look at your situation, not just once, but each and every year, and sometimes multiple times throughout the year, and figure out how to get you the income you need or the dollars you need from your portfolio of assets at the lowest long-term cost.

Benz: I wanted to ask about required minimum distributions again, Jeff. As you know, many older adults love to hate their RMDs. They get them really mad. So, can you quickly outline these strategies that one could potentially employ with an eye toward reducing their RMDs, or perhaps reducing the taxes due on their RMDs?

Levine: I think one would simply be you don’t have retirement accounts or pretax retirement accounts. That’s the easiest way. You could do that through a number of different ways. A) you could just not use them; or B) you could have your money inside Roth IRAs, and Roth IRAs have no required minimum distributions during an individual’s lifetime. And so, that would eliminate that issue. Beyond that, some of the other things that individuals can do: Certainly, those who are charitably inclined and who are 70.5 or older, and the good news is, if you’re 72 and need to take RMDs, you are definitely 70.5 or older. If that’s the case, you can use what is known as the QCD, short for qualified charitable distribution, as a way to take money out of your IRA and give it directly to charity. And Jeff, Christine, this is even better than having money come out of your IRA and then writing a check to charity even if you’re able to deduct that amount as an itemized deduction, and there’s a few reasons for that.

First of all, not everybody gets to itemize as we talked about before. But even if you do itemize, the itemized deduction for charitable contributions is a below-the-line deduction. It’s an itemized deduction. It happens after AGI is calculated. And why that’s important is that even though the tax brackets apply to taxable income, which is after itemized deductions, other than the QBI deduction, that business income tax deduction for pass-throughs, that’s a 20% deduction for some—other than that, pretty much every single credit that goes away in the tax code, or a deduction that goes away in the tax code, or surtax that kicks in, or even things that aren’t even taxes, like Medicare Part B premiums, none of them look at taxable income. They care about AGI, and you can give $1 billion away to charity as an itemized deduction, but it doesn’t lower your AGI a single dollar. Using the qualified charitable distribution is a way to take money, again, from your IRA and give it directly to charity if 70.5 or older, and it never even gets added to your income in the first place. So, not only does it keep your taxable income amount low, but it keeps your AGI low too, so you don’t phase yourself out of those credits and deductions or trigger surtaxes, and so on.

I would also add one other thing there, and it’s this is that the qualified charitable distribution can be used to satisfy an individual’s RMD for up to $100,000 per year. It’s not limited to the RMD. So, if your RMD is $2,000, you can still do a QCD for five if you want to be especially generous. But if you had a larger account, you can take up to $100,000 out of that IRA each year and use it toward satisfying your IRA RMD. And by the way, that is another area where there are some proposed changes as part of Secure Act 2.0, potentially inflating that $100,000 amount each year, maybe even allowing individuals to take a one-time distribution that qualifies as a QCD and using it to fund a charitable trust that they have, or some other split interest, perhaps like a charitable gift annuity. So, there are some proposals there to keep an eye on as well.

And then, finally, I would say another way for those individuals who are still working in their 70s and beyond is to use what is known as the “still working exception.” This is not something that’s available for everyone. But if you’re still working for an employer and that employer offers a 401(k) plan, or a similar type of plan, 401(k), 403(b), and so on, that employer may allow you to delay taking required minimum distributions from that plan until you retire. So, if you’re still working at 73 and 74 and 75, you might not have to take required minimum distributions from that plan. And sometimes that plan will allow you to take all your other money that was maybe sitting in an IRA or an old 401(k) or an old 403(b) and move it into that plan, and now you don’t have to take RMDs on anything, which if you’re still working, might be exactly what you want because you don’t want to add all that retirement account income on top of your earnings from work. So, those are a few ways in which people who are struggling, if you will, and it’s a very first-class problem, we have to agree with that. But those who have required minimum distributions that they don’t want, those are some ways in which they might seek to address them.

Ptak: There’s a lot of enthusiasm about the idea of direct indexing, which is a topic that we discussed at some length with your colleague Michael Kitces when we had him on the podcast this year. Michael made the assertion that the tax benefits of direct indexing, while not nothing, are often dramatically oversold. What’s your take on that?

Levine: Wow, that’s a great question. I would probably agree with Michael that they are oversold, but I still think they’re rather significant. And there are also some additional ways in which some managers, and so on, can seek to get even more tax benefit out of a direct indexing strategy. So, for instance, you might see a manager run with something like a 130-30 portfolio, or a 140-40 portfolio with the idea of going long on an additional amount via leverage by shorting other positions. And it does require a little bit of a bet. And so, you can have maybe some tracking errors on the index that you’re trying to track. But by having those short positions in there, the goal, of course, is to find positions that you’d be able to tax-loss harvest to a greater degree.

Now the challenge with a lot of direct indexing is that once you get into it, if you’ve got these significant gains, it becomes the Roach Motel—once you check in, you can never check out. Because once you have all those embedded gains built up, it becomes exceedingly difficult to try and change strategies because of the tax cost associated with it. That doesn’t make it bad. It just means that you have to go into that as an investor with eyes wide-open. But again, while perhaps the tax benefits are oversold, I do think they’re still valuable for a lot of investors, particularly those with higher incomes, who might need tax-loss harvesting more. And there are some new innovative ways in which some managers are trying to squeeze out a little extra tax alpha, and one of them would be with a long-short strategy like we just talked about.

Benz: Well, Jeff, as always, this has been a really illuminating conversation. You managed to make this stuff fun, which is quite a feat. Thank you so much for being here.

Levine: Oh, my goodness, it is my pleasure. Thank you so much for the opportunity to speak with you all again and your listeners, and I just continue to wish everyone a very happy, healthy, prosperous year.

Ptak: Thanks so much. Same to you.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)