Podcast Summary: The Long View - Ed Slott: Tax Planning for 2025 and Beyond

Introduction

In the November 26, 2024 episode of The Long View hosted by Christine Benz from Morningstar, retirement and tax expert Ed Slott returns to discuss comprehensive tax planning strategies as the year concludes and looks ahead to 2025 and beyond. Ed Slott, renowned for his expertise in retirement and tax planning, shares invaluable insights on topics ranging from tax loss selling and required minimum distributions (RMDs) to Roth conversions and estate planning.

1. Year-End Tax Planning Strategies

Christine Benz: "We want to talk about tax planning as 2024 winds down, some things that should be on people's to-do list." ([01:26])

A. Tax Loss Selling in a Strong Market

Ed Slott addresses the viability of tax loss selling in a robust stock market environment. He notes the difficulty in finding loss candidates in a strong market but suggests that investors might consider eliminating underperforming assets or consolidating their portfolios.

Ed Slott: "It's hard to find losers today...clean the plate, consolidate, maybe get rid of some old time losers that hangers on." ([01:55]-[02:14])

B. Cost Basis Accounting and Specific Share Identification

The discussion shifts to cost basis accounting, particularly the specific share identification method, which allows investors to select specific lots for sale to optimize tax outcomes. Slott explains the complexities and record-keeping challenges associated with this method.

Ed Slott: "You have to have backup and records for that... it's kind of a record keeping nightmare." ([02:44]-[03:27])

He emphasizes the importance of maintaining detailed records, especially when dealing with multiple purchase dates and amounts, and suggests that while some brokerage platforms offer tracking tools, investors often need to manage their own records comprehensively.

2. Direct Indexing and Tax Loss Harvesting

Christine Benz: "We're hearing about advisory firms offering these direct indexing portfolios... Do you feel like these solutions are all they're cracked up to be from a tax-saving standpoint?" ([04:13]-[04:40])

Ed Slott expresses skepticism about the effectiveness of direct indexing portfolios for tax loss harvesting, suggesting that seasoned investors might achieve similar results independently without the complexity and potential tax consequences of switching from mutual funds or ETFs.

Ed Slott: "You could do just as well on your own without these baskets." ([04:40])

3. Tax Gain Harvesting

The conversation moves to the strategy of preemptively realizing gains, known as tax gain harvesting. Slott advises caution, particularly for older investors, emphasizing that selling assets solely for tax purposes might not be beneficial in the long term.

Ed Slott: "I don't think it's a great strategy... you have to look at the long term." ([05:54]-[07:21])

4. Documentation for Tax Loss Harvesting

Slott underscores the critical need for accurate documentation when engaging in tax loss harvesting. He highlights the importance of matching reported losses with brokerage 1099-B forms and ensuring that records reflect any special circumstances, such as inherited assets.

Ed Slott: "Everything comes down to you. You gotta check your info." ([07:44]-[09:59])

5. Required Minimum Distributions (RMDs)

Christine Benz: "Let's talk about required minimum distributions... how much leeway do I have to pull all from one and leave another one alone?" ([09:59]-[10:28])

A. Flexibility in Taking RMDs

Slott explains that for IRAs, regardless of the number of accounts held, RMDs must be calculated individually but can be satisfied from any or all of the accounts. However, he warns against attempting to consolidate RMDs from multiple employer-sponsored plans like 401(k)s, as they must be taken separately.

Ed Slott: "You can take your RMD from any IRA or combination of IRAs as long as you hit the minimum." ([10:28])

B. Changes in Penalties under Secure 2.0

Discussing the penalties for missing RMDs, Slott notes that while previous regulations imposed hefty penalties, Secure 2.0 has reduced these significantly. He advocates for a more lenient approach by the IRS, especially for legitimate mistakes or misunderstandings.

Ed Slott: "We're not taking 50% of somebody's IRA because they missed an RMD." ([15:22])

He shares anecdotes illustrating how minor errors can be rectified without steep penalties, emphasizing the importance of timely corrective actions and proper documentation.

Ed Slott: "The penalty was paid... if they have a legitimate reason... they get it waived." ([15:47]-[23:27])

6. Roth Conversions

Christine Benz: "Qualified charitable distribution as a really nice strategy for people who are age 70 and a half or older... converting some of those traditional IRAs... Can you talk about that?" ([23:27]-[24:12])

Slott champions Roth conversions as a strategic tool to mitigate future tax liabilities and eliminate the burden of RMDs. He highlights the long-term benefits, especially when conversions are initiated early in retirement, allowing for tax-efficient growth and greater control over taxable income in later years.

Ed Slott: "I love Roth conversions. I think everybody should, at a minimum, look at these things." ([24:12])

He advises gradual conversions to leverage lower tax brackets and underscores the estate planning advantages, noting that Roth IRAs offer significant benefits for beneficiaries under the new Secure Act rules.

7. Inherited IRAs

Christine Benz: "My sense is there's mass confusion there. I want to..." ([29:56])

Slott clarifies recent IRS regulations surrounding inherited IRAs, explaining the distinctions between traditional and Roth IRAs and the specific RMD requirements for beneficiaries. He dispels common misconceptions, emphasizing the importance of understanding the nuanced rules to optimize tax outcomes for heirs.

Ed Slott: "Anybody who dies with a Roth IRA is deemed to have died before reaching RMDs." ([29:56]-[30:53])

8. Qualified Charitable Distributions (QCDs)

Christine Benz: "Qualified charitable distribution... eligible for people who are 70 and a half or older." ([30:53]-[31:17])

Slott elaborates on QCDs as a powerful tool for those aged 70 and a half or older, allowing them to donate directly from their IRA to a qualified charity. He explains how QCDs can satisfy RMD requirements while providing tax benefits by reducing adjusted gross income (AGI).

Ed Slott: "That's an exclusion from income. It lowers your income, and it can lower AGI." ([35:56]-[38:38])

He provides practical examples, demonstrating how QCDs can replace traditional charitable donations, offering dual benefits of meeting RMDs and enhancing tax efficiency.

9. Gift Tax and Estate Tax Interplay

Christine Benz: "Interplay between the gift tax and the estate tax... annual gift tax exclusion amount." ([44:32]-[45:05])

Slott breaks down the three tiers of tax-exempt gifting: annual exclusion gifts, direct gifts for tuition and medical expenses, and using the estate tax exemption. He emphasizes the substantial opportunities for high-net-worth individuals to transfer wealth tax-efficiently during their lifetimes.

Ed Slott: "You could give that $18 million away. Absolutely tax free." ([45:05]-[50:09])

He advises leveraging these gift exemptions to reduce future estate tax liabilities, highlighting strategies like targeted gifting to ensure assets flow as intended without unintended tax consequences.

10. SALT Deduction Cap

Christine Benz: "SALT cap... possibly rolling back the $10,000 limit." ([50:09]-[50:44])

Slott discusses the state and local tax (SALT) deduction cap, acknowledging the challenges it poses for taxpayers in high-tax states. He speculates on potential legislative changes, suggesting that any adjustments may benefit lower-income individuals while providing minimal relief to those affected by the cap.

Ed Slott: "If they want to raise it to $20,000 or $30,000, it will help lower income people... the heavy hitters that are subject to AMT, they're not going to get anything out of it anyway." ([51:01]-[52:28])

11. Future Tax Outlook

Christine Benz: "You have had the assertion that tax rates are low today relative to where they've been historically... political will to increase taxes." ([52:28]-[53:04])

Slott presents his thesis that tax rates are likely to rise due to mounting national debt and fiscal pressures. He argues that proactive strategies like Roth conversions are prudent to hedge against future tax increases, offering long-term tax certainty and estate planning advantages.

Ed Slott: "When they have to round to the nearest trillion, it's a lot. So Congress could keep kicking the can down the road or they'll have to raise taxes." ([53:04])

He emphasizes the inevitability of higher taxes and the strategic importance of diversifying tax exposure through Roth accounts to secure more favorable tax treatment in retirement.

Conclusion

Christine Benz wraps up the episode by thanking Ed Slott for his thorough and enlightening discussion on tax planning strategies. Listeners are encouraged to subscribe to the podcast and provide feedback.

Christine Benz: "Ed, I always learn from you. Thank you so much for taking time out of your very busy schedule to be with us today." ([56:35])

Ed Slott: "Well, this was great. We covered a lot of ground." ([56:44])

Key Takeaways

• Tax Loss Selling: Challenging in a strong market, but possible by consolidating underperforming assets.
• Cost Basis Accounting: Specific share identification offers flexibility but requires meticulous record-keeping.
• Direct Indexing: Potentially beneficial for tax loss harvesting, though independent investors might achieve similar results.
• Roth Conversions: Highly advantageous for eliminating future RMDs and providing tax flexibility.
• RMDs: Crucial to understand aggregation rules and ensure compliance to avoid penalties.
• Qualified Charitable Distributions: Excellent for those aged 70 and a half to satisfy RMDs while donating to charity.
• Gift and Estate Tax Strategies: Utilize annual exclusions, direct gifts for education/medical expenses, and estate tax exemptions to transfer wealth efficiently.
• Future Tax Rates: Anticipated increases make proactive tax planning essential, with Roth conversions serving as a strategic hedge.

Notable Quotes

• Ed Slott: "I love Roth conversions. I think everybody should, at a minimum, look at these things." ([24:12])
• Ed Slott: "Qualified charitable distribution... it's one of the best breaks in the tax code." ([35:56])
• Ed Slott: "Roth IRAs work beautifully for beneficiaries because not only are there no RMDs during the person's lifetime... the beneficiaries can keep that growing, building, and compounding for the full 10 years, absolutely income tax-free." ([29:56]-[07:21])

This episode serves as a comprehensive guide for investors and retirees seeking to optimize their tax strategies, offering actionable advice grounded in Slott's extensive expertise.