WEBVTT
00:00:00.160 --> 00:00:04.480
Welcome back, everybody, to the Self-Directed Edge Podcast.
00:00:04.639 --> 00:00:10.160
I'm your host, Joel Landon from Heritage IRA, and I've got a good friend.
00:00:10.400 --> 00:00:12.880
Um, dare I call him a colleague.
00:00:13.039 --> 00:00:20.480
He's much more experienced than I am in the industry, but good friend, great business partner, JP Ruiz from Ruiz Consulting.
00:00:20.559 --> 00:00:21.359
How are you doing, sir?
00:00:21.600 --> 00:00:22.239
I'm doing well.
00:00:22.399 --> 00:00:24.000
Thank you for having me on your podcast.
00:00:24.239 --> 00:00:25.039
Yeah, of course.
00:00:25.120 --> 00:00:25.839
It's a pleasure.
00:00:26.000 --> 00:00:29.519
You know, we've uh you and I have a lot of history, so to speak.
00:00:29.679 --> 00:00:31.920
You know, we got we go back how many years?
00:00:32.000 --> 00:00:33.679
Would it be like five or six years?
00:00:33.920 --> 00:00:35.679
Oh I think more than that, right?
00:00:35.920 --> 00:00:43.920
Yeah, especially with uh sister and um places that uh I do consulting for, you know, that that you've you've worked at.
00:00:44.000 --> 00:00:44.799
Yeah, absolutely.
00:00:44.960 --> 00:00:46.159
We go way back for sure.
00:00:46.560 --> 00:00:48.799
Needless to say, you get around.
00:00:48.880 --> 00:00:51.600
And so it's my job, man.
00:00:51.679 --> 00:00:55.840
I mean, I educate the industry, so I go from institution to institution, you know.
00:00:56.240 --> 00:00:56.479
True.
00:00:56.719 --> 00:01:01.200
Yeah, I I worked for a couple of different offices, and there's no doubt about it.
00:01:01.359 --> 00:01:06.079
We all in the industry um kind of lean on you and depend on you.
00:01:06.239 --> 00:01:08.799
So um appreciate you being on the show.
00:01:08.879 --> 00:01:13.680
I know you and I spent some time uh face to face years ago in southern Utah.
00:01:13.760 --> 00:01:15.200
You came to Cedar City, I think.
00:01:15.519 --> 00:01:15.840
That's right.
00:01:15.920 --> 00:01:17.680
I was at Cedar City, yeah, yeah.
00:01:17.920 --> 00:01:23.680
I actually you met my wife, and we did a little tour of downtown, and I think we even broke bread together at a restaurant.
00:01:23.920 --> 00:01:26.959
Well, I I even met your kids, man, so they that's so cool.
00:01:27.599 --> 00:01:28.079
Yeah, yeah.
00:01:28.400 --> 00:01:28.959
That's awesome.
00:01:29.040 --> 00:01:30.480
Yeah, at the soda shop now.
00:01:31.200 --> 00:01:31.439
Yeah.
00:01:31.840 --> 00:01:33.200
At the soda shop, that's right.
00:01:33.280 --> 00:01:36.079
Yeah, that was bullet drug down in in southern Utah.
00:01:36.239 --> 00:01:37.599
So great, yeah.
00:01:37.680 --> 00:01:51.200
We've got great history, and uh, I'm thrilled to bring you on today because there is a topic that we've found um in the industry, so to speak, or within the self-directed retirement investor, even just the IRA owner.
00:01:51.439 --> 00:01:51.840
Sure.
00:01:52.079 --> 00:01:54.959
Um, and it's related to the five-year rule.
00:01:55.200 --> 00:01:55.359
Okay.
00:01:55.760 --> 00:02:05.599
I wanna yeah, I want to set the table and welcome to the self-directed edge, a podcast for investors who want their retirement capital doing more than sitting in the market.
00:02:05.840 --> 00:02:08.639
I'm your host, Joel Landon, with Heritage IRA.
00:02:12.879 --> 00:02:29.919
And and just kind of mention, you know, people they do Google search, they get on social media, and they're asking, what is this five-year rule that I've either heard about or that my tax advisor or maybe even financial professional is talking to me about.
00:02:30.080 --> 00:02:39.520
And, you know, they heard it one time, it went in their ear and out the other, and they're just trying to go back to learn more and do their own due diligence, so to speak.
00:02:39.599 --> 00:02:47.840
Uh I figured we could dive into that a little bit, and you can give your perspective and and education on on this topic if that's okay with you.
00:02:48.240 --> 00:02:48.719
Absolutely.
00:02:48.879 --> 00:02:49.520
Yeah, okay.
00:02:49.680 --> 00:02:50.960
Well, well, yeah.
00:02:51.599 --> 00:02:53.759
So yeah, yeah.
00:02:54.000 --> 00:03:04.719
Well, I was gonna say, yeah, if you want to kick it off, you know, when people hear um, you know, the IRA five-year rule, what do they usually think it means in your experience?
00:03:04.879 --> 00:03:06.240
You're a wise man, you know.
00:03:06.479 --> 00:03:10.639
What what do you think they're capturing when they hear the five-year rule?
00:03:10.960 --> 00:03:13.199
I I think I think what happens is confusion.
00:03:13.280 --> 00:03:20.400
So actually, so what we're trying to do, what we'll try to do in this in this conversation is demystify the five-year rule.
00:03:20.639 --> 00:03:29.680
There's really three purposes of the five-year rule and um or or three um three terms that it's associated with.
00:03:29.919 --> 00:03:33.680
One is taxation of Roth earnings.
00:03:34.319 --> 00:03:38.080
You know, a lot of people like the Roth because they go, it's tax-free, right?
00:03:38.159 --> 00:03:42.319
So but what makes the earnings tax-free, it's not automatic.
00:03:42.560 --> 00:03:51.919
The five-year rule term is associated with that, along with another five-year clock for what we call conversions.
00:03:52.240 --> 00:03:52.719
All right.
00:03:52.960 --> 00:03:55.360
Conversions are not a spiritual experience as you know.
00:03:55.439 --> 00:03:57.759
I mean, like that jokes keep coming, right?
00:03:58.479 --> 00:03:59.599
Although it could be, right?
00:03:59.680 --> 00:04:12.800
Because a conversion just means you have a taxable retirement plan, like an IRA or a 401k plan that has, you know, that's eligible to be rolled over to what we call a Roth, as an example.
00:04:13.120 --> 00:04:19.199
And a conversion converts that uh account that's gonna be taxed in the future, right?
00:04:19.279 --> 00:04:22.240
Because keep in mind a lot of retirement plans are tax deferred.
00:04:22.399 --> 00:04:25.360
Tax deferred just means you're postponing your agony, right?
00:04:25.439 --> 00:04:28.720
Because you're gonna be taxed later on, you're deferring your taxation.
00:04:29.120 --> 00:04:45.199
A conversion basically allows for you to pay the tax today so that in the future, not only will the converted amount be tax-free, the earnings will also be tax-free under what we call a Roth IRA.
00:04:45.279 --> 00:04:56.160
So you're moving it from the from a traditional IRA account or a CEP IRA or a simple IRA that's never been taxed before, and you're moving it into what we call a Roth IRA.
00:04:56.319 --> 00:04:57.680
That's why they they call it a conversion.
00:04:57.759 --> 00:05:04.639
You're converting the characteristics of your original contribution to another type of IRA, which will be tax-free in the future.
00:05:04.800 --> 00:05:05.199
All right.
00:05:05.360 --> 00:05:05.600
Yeah.
00:05:06.000 --> 00:05:13.519
There's a five-year rule there as well, and I I can explain those and break it down separately so that it doesn't get confusing.
00:05:14.079 --> 00:05:19.920
Another five-year rule term is used when we're dealing with what we call beneficiary options.
00:05:20.160 --> 00:05:21.199
And what does that mean?
00:05:21.360 --> 00:05:33.920
When an account holder dies and you inherit and you're named as a beneficiary in an account, generally there's what we call the five-year rule option, all right, which has dramatically changed after 2019.
00:05:34.639 --> 00:05:36.800
But let me just explain what that means.
00:05:37.040 --> 00:05:45.920
You know, when when you're inheriting assets from an individual's account, the the IRS gives you, or actually, Congress gives you two options.
00:05:46.079 --> 00:05:47.839
How do you want to deplete the account?
00:05:47.920 --> 00:05:50.720
And one of them will be slower than the other, right?
00:05:51.040 --> 00:05:55.519
In other words, it's not the form of distribution that they're talking about when it comes to options.
00:05:55.600 --> 00:06:02.639
It's not like you want it as a check, or do you it's really how do you want to postpone taxation on the amount you just inherited?
00:06:02.800 --> 00:06:06.000
Because keep in mind, these assets have never been taxed before generally, right?
00:06:06.160 --> 00:06:06.480
Right.
00:06:06.639 --> 00:06:15.360
Imagine if you had inherited a half a million dollars and you were you were forced to take a total distribution of the whole thing, that would be a grave tax consequence.
00:06:15.680 --> 00:06:18.079
You want to know what your options are.
00:06:18.560 --> 00:06:18.879
Okay.
00:06:19.519 --> 00:06:27.360
So one of the options I I try to simplify it for people when I teach is like, you know, the IRS is basically telling you you got two options.
00:06:28.079 --> 00:06:31.759
You want to take it in a big chunk, or do you want to take it in little chunks?
00:06:32.079 --> 00:06:34.800
Yeah, and it depends on everybody's financial situation.
00:06:35.040 --> 00:06:39.439
Some people probably want to take that big chunk up front.
00:06:39.600 --> 00:06:43.120
They might benefit from it, or maybe it aligns with their investment strategy.
00:06:43.279 --> 00:06:44.079
Do you run into that?
00:06:44.399 --> 00:06:48.560
Well, if it's if it's a small enough balance, why would you want to prolong the agony?
00:06:48.639 --> 00:06:50.560
You just take the big chunk, right?
00:06:50.800 --> 00:06:55.120
Yeah, the big chunk just means you don't have to distribute the big chunk right away.
00:06:55.279 --> 00:06:58.079
You've got five years to do it.
00:06:58.240 --> 00:07:03.600
In other words, you have five years to keep that account if that's the option that you chose.
00:07:04.399 --> 00:07:05.839
So I'm not allowed to keep it forever.
00:07:05.920 --> 00:07:06.720
I can't keep it.
00:07:06.879 --> 00:07:08.079
You're not allowed to keep it forever.
00:07:08.240 --> 00:07:10.319
It's how do you postpone taxation?
00:07:10.639 --> 00:07:12.399
But you've got five years to do it.
00:07:12.560 --> 00:07:19.759
But on the fifth year that contains the fifth anniversary of the IRA holder's death, you've got to take out the big chunk.
00:07:20.399 --> 00:07:22.959
At least whatever is remaining in the IRA.
00:07:23.199 --> 00:07:23.759
That's right.
00:07:23.920 --> 00:07:26.319
And if you don't distribute it, you get penalized.
00:07:26.480 --> 00:07:29.040
See, that's that's the that's the next part to it.
00:07:29.279 --> 00:07:37.199
If you don't take the big chunk out, if you chose what we call the big chunk option or the five-year-old option in the past, well, guess what?
00:07:37.360 --> 00:07:38.560
You're gonna get penalized.
00:07:38.639 --> 00:07:40.639
It used to be the penalty used to be 50%.
00:07:41.519 --> 00:07:42.079
All right.
00:07:42.319 --> 00:07:45.600
Now, now keep in mind, I'm gonna put I'm gonna put some perspective to it.
00:07:45.839 --> 00:07:50.399
There are beneficiaries out there, they didn't even know there were beneficiaries of an IRA.
00:07:50.639 --> 00:08:00.879
So therefore, sometimes they miss out on the fact that the the they had five years to to deplete it, where in actuality they didn't even know there was an IRA there.
00:08:01.040 --> 00:08:02.639
What if we're in the sixth year?
00:08:02.879 --> 00:08:05.920
It used to be Uncle Sam will take 50% of it.
00:08:06.240 --> 00:08:07.839
That's a 50% penalty.
00:08:08.079 --> 00:08:08.560
Big hit.
00:08:09.360 --> 00:08:11.600
There, there are some changes to it though.
00:08:11.680 --> 00:08:17.279
Um, the Secure Act uh 2.0 um basically reduced that penalty to 25%.
00:08:17.600 --> 00:08:18.959
It's still quite a big chunk.
00:08:19.040 --> 00:08:26.000
Um, you know, not only will you get penal penalized when that amount is distributed, keep mind it's never been taxed before, right?
00:08:26.160 --> 00:08:27.920
You're gonna be subject to tax as well.
00:08:28.000 --> 00:08:30.240
So you've got to know what your options are.
00:08:30.720 --> 00:09:00.240
So you know, it when it comes to that five-year clock, and I mentioned that there has been some changes, the um Secure Act Um of 2019 changed that five-year clock to what we call a 10-year clock, specifically for individuals that are what we call a non-spouse beneficiary, that someone who's not the spouse of the individual, and someone who is greater than 10 years younger.
00:09:00.399 --> 00:09:02.320
So, in other words, your child, you know.
00:09:03.600 --> 00:09:08.879
I hope your child is more than 10 years younger than you are, or if you name a niece or a grandchild.
00:09:09.120 --> 00:09:21.600
In other words, you you you can you you instead of having a five years to deplete it or little chunk distributions, they no longer have the little chunk distributions called life expectancy payments.
00:09:21.840 --> 00:09:25.679
They're gonna be forced to take everything out on the 10th year.
00:09:25.919 --> 00:09:29.600
So, in other words, they expanded the five-year clock to a 10-year clock.
00:09:29.679 --> 00:09:31.200
It's called a 10-year rule now.
00:09:31.440 --> 00:09:34.639
This this is only for an this is only for an inherited accounts.
00:09:34.879 --> 00:09:38.639
In other words, the IRE holder had to have died and you inherited something.
00:09:39.200 --> 00:09:39.759
Naturally.
00:09:40.000 --> 00:09:50.639
If you fall, if you fall under under that term called a designated beneficiary, which is someone who is not the spouse of the individual, and they're greater than 10 years.
00:09:50.799 --> 00:09:52.559
You know, put yourself in that spot.
00:09:52.639 --> 00:09:56.320
You know, if you're a child of somebody who died, that's that could be you.
00:09:56.559 --> 00:10:03.759
If you're a niece or yeah, a grandchild or somebody who's young, a lot younger than the IRA holder, and they left you some money.
00:10:04.000 --> 00:10:04.720
Guess what?
00:10:04.879 --> 00:10:07.279
You have 10 years to deplete that account.
00:10:07.519 --> 00:10:07.840
Interesting.
00:10:08.480 --> 00:10:20.639
Expanded that five-year clock over to the 10-year rule, and you no longer have the option to extend that further, meaning you don't have the option of taking little chunks or life expectancy distributions every year.
00:10:20.799 --> 00:10:22.799
You just have 10 years to deplete it.
00:10:23.200 --> 00:10:32.000
Wow, they really tried to maybe make it simple for the IRS, but in all reality, did they take away some value for the entire.
00:10:33.200 --> 00:10:49.919
And the reason for that is they didn't want this uh uh uh tax-deferred account to be to be there perpetually because because imagine if you had somebody who's age 30 that inherited something, the life expectancy of a 30-year-old, I think is like 51 years.
00:10:50.080 --> 00:10:55.759
Imagine postponing taxation for 51 years by just incrementally taking small amounts every year.
00:10:55.919 --> 00:10:56.720
That's it.
00:10:56.799 --> 00:10:59.200
Let's we got up because we we need the tax money.
00:10:59.360 --> 00:10:59.600
Yeah.
00:10:59.840 --> 00:11:05.120
So basically we'll give you 10 years and 10 years alone if you fall under that category.
00:11:05.519 --> 00:11:05.840
Okay.
00:11:06.000 --> 00:11:10.879
So let's say I'm an inherited owner of an IRA that my parents left me.
00:11:11.600 --> 00:11:13.759
It's a tax-deferred IRA.
00:11:14.000 --> 00:11:17.759
I know that I have some timelines that I'm gonna be up against.
00:11:18.000 --> 00:11:18.559
Correct.
00:11:18.879 --> 00:11:26.799
How do I start taking those essentially required distributions all the way up until that final year tax-free?
00:11:26.960 --> 00:11:34.720
What are my do I even have options if it's a tax-deferred IRA that I've inherited and I've essentially got five years to distribute?
00:11:34.879 --> 00:11:36.720
Can I distribute that tax-free?
00:11:37.360 --> 00:11:38.399
Talk about 10 years, right?
00:11:38.480 --> 00:11:40.480
So it's an inherited account.
00:11:40.639 --> 00:11:40.799
Yep.
00:11:40.960 --> 00:11:52.480
If it's an inherited account, depending upon how old the IRA holder was, will determine whether or not there's a distribution required every year, but and and everything to be distributed on the 10th year.
00:11:52.639 --> 00:11:54.799
Uh I I I I I visualize this.
00:11:54.879 --> 00:11:56.879
I mean, you think about an IRA is a sink, right?
00:11:56.960 --> 00:12:04.240
You fill it up with water, contributions, transfers, rollovers, all those different things that you're doing throughout the years, right?
00:12:04.399 --> 00:12:11.039
As an IRA holder, it so happens that when you reach a certain age, that age is age 73.
00:12:11.600 --> 00:12:12.159
All right.
00:12:12.480 --> 00:12:16.799
That when you reach age 73, you're gonna have to start taking minimums out of that account.
00:12:17.039 --> 00:12:19.200
They call that the RMD, if I'm not mistaken.
00:12:19.519 --> 00:12:19.759
Correct.
00:12:19.840 --> 00:12:22.159
It's called a required minimum distribution.
00:12:22.639 --> 00:12:26.240
And if you don't take that required minimum distribution, well, guess what?
00:12:26.320 --> 00:12:27.120
You get a penalty.
00:12:27.360 --> 00:12:28.480
Sound familiar, right?
00:12:28.879 --> 00:12:31.919
That's that 50% penalty, but lowered down to 25.
00:12:32.320 --> 00:12:41.519
Now, if that IRA holder died, you know, prior to that age, which which means in our analogy, you haven't pulled a plug from the sink.
00:12:41.679 --> 00:12:43.120
In other words, there's nothing required.
00:12:43.360 --> 00:12:45.519
Let's say somebody died at age 55.
00:12:45.759 --> 00:12:50.879
All right, very young, not haven't pulled a plug, there's nothing required to be distributed.
00:12:51.120 --> 00:12:52.639
Until 73 years old.
00:12:53.120 --> 00:12:53.600
Correct.
00:12:54.720 --> 00:12:55.600
Does that make sense, right?
00:12:55.759 --> 00:12:56.799
So folder.
00:12:57.200 --> 00:12:59.600
However, if they died, guess what?
00:12:59.679 --> 00:13:00.879
Who's going to be receiving it now?
00:13:01.120 --> 00:13:02.159
The beneficiary, right?
00:13:02.399 --> 00:13:02.639
Yep.
00:13:03.120 --> 00:13:17.759
So if the beneficiary is going to be receiving it and they fall under that category called a designated beneficiary, meaning that they are greater than 10 years younger and they're not the spouse of the individual, they have 10 years to deplete it.
00:13:18.000 --> 00:13:18.240
Right?
00:13:18.559 --> 00:13:20.320
Same thing they don't have to do anything.
00:13:21.200 --> 00:13:27.360
There's no minimum amount done due because the IRA holder had not started taking required minimum distributions yet.
00:13:27.679 --> 00:13:31.039
But they still have to follow that doggone 10-year rule that the IRS.
00:13:34.639 --> 00:13:45.919
However, let's say let's look at that sink again, and and let's say this person died at age 75, meaning that you pulled a plug on the sink already, which means this individual started to take distributions already.
00:13:46.080 --> 00:13:46.639
All right.
00:13:46.960 --> 00:13:50.399
And they died, and you are a designated beneficiary.
00:13:50.480 --> 00:13:54.639
In other words, you're not a spouse and you're greater than 10 years younger.
00:13:54.960 --> 00:13:58.080
Well, once you pull the plug on that sink, you can't stop it.
00:13:58.799 --> 00:14:01.759
Meaning something has to come out every year.
00:14:02.000 --> 00:14:10.879
In other words, you know, even if you're 33, the IRA holder is 75, you have to take out what we call a life expectancy payment every year.
00:14:11.039 --> 00:14:15.279
But here's the kicker you're still subject to that 10-year rule.
00:14:15.519 --> 00:14:26.399
In other words, even though you're taking distributions on a yearly basis by virtue of the fact that the IRA holder who died was a lot older, yeah, you're gonna have to take everything out in the 10th year.
00:14:26.559 --> 00:14:35.279
In other words, they really they really eliminated uh a designated beneficiary from prolonging the tax deferment of that account.
00:14:35.440 --> 00:14:38.240
In other words, they want their tax in 10 years.
00:14:38.480 --> 00:14:44.879
Yeah, regardless of whether or not the plug has been pulled from the sink, the 10-year rule will always apply.
00:14:45.039 --> 00:14:51.600
However, if that plug got pulled to your point, 75 years old, they were already taking required minimum distributions.
00:14:51.679 --> 00:15:04.240
The beneficiary will follow is it the the decedents' um no life life expectancy in terms of how much they are required to have to distribute.
00:15:04.320 --> 00:15:07.919
No, here's the beautiful part they can use their own life expectancy.
00:15:08.320 --> 00:15:12.399
In other words, this the the younger they are, the smaller amount required.
00:15:12.559 --> 00:15:24.879
However, you know, the fine under the final regulations, I'm gonna go techie on you, but the IRS says, Yeah, once you pull that plug, you can't stop it, so you have to take out distributions, but using the beneficiary's single life expectancy.
00:15:24.960 --> 00:15:29.120
All right, okay, and then from there, you still have to distribute everything in the tenth year.
00:15:29.600 --> 00:15:34.000
That that's what happens in accounts that have never been taxed before.
00:15:34.159 --> 00:15:34.799
Yeah, all right.
00:15:34.879 --> 00:15:37.120
I'm gonna transition your segue you a little bit.
00:15:37.279 --> 00:15:37.600
Okay.
00:15:37.840 --> 00:15:39.200
What if this was a Roth?
00:15:39.600 --> 00:15:41.360
Yeah, that's where my mind's going right now.
00:15:41.759 --> 00:15:44.960
What if it was a Roth or yeah, that's one of the benefits of a Roth.
00:15:45.279 --> 00:15:51.679
In in a Roth uh uh IRA, all right, the beneficiary options are still the same.
00:15:51.759 --> 00:15:56.799
But let's transition our thought process on the five-year clock a little bit different, right?
00:15:58.000 --> 00:16:03.759
Contributions in a Roth have been taxed already, so now which means that when that comes out, it's gonna get taxed again.
00:16:04.159 --> 00:16:04.639
All right.
00:16:05.039 --> 00:16:09.919
What we're talking about right now are the earnings or the growth, right?
00:16:10.720 --> 00:16:19.120
The earnings or the growth of a Roth IRA are gonna be taxed unless the distribution is what we call qualified.
00:16:20.000 --> 00:16:20.320
Okay.
00:16:21.600 --> 00:16:24.960
Qualified means you must have had a Roth for five years.
00:16:25.200 --> 00:16:26.000
Sound familiar?
00:16:26.159 --> 00:16:26.320
Sure.
00:16:26.639 --> 00:16:27.759
Five year rule, yeah.
00:16:28.240 --> 00:16:38.320
Yeah, the five year rule on a Roth qualified distribution means that you must have had a Roth, any Roth, for five years.
00:16:38.720 --> 00:16:40.720
You know what that means if you don't have a Roth?
00:16:41.440 --> 00:16:42.720
You gotta start one now.
00:16:42.879 --> 00:16:43.919
Go get one.
00:16:44.320 --> 00:16:46.080
I mean, that's what I tell people.
00:16:46.240 --> 00:16:48.720
You why are there only 51% of households?
00:16:48.879 --> 00:16:50.080
That's statistics, by the way.
00:16:50.240 --> 00:16:52.879
Only 51% of households in the United States have Roth.
00:16:53.360 --> 00:16:53.919
That's ridiculous.
00:16:55.120 --> 00:16:59.840
Yeah, I mean, go make a contribution of what,$100 and at least start that five-year clock.
00:16:59.919 --> 00:17:00.879
Is that what you're telling us?
00:17:01.120 --> 00:17:02.000
Correct.
00:17:02.559 --> 00:17:06.079
Because the Roth, you know, that could be another podcast that we have.
00:17:06.160 --> 00:17:12.960
I mean, I I I I go through, I mean, I went with uh an organization for 15 years touch talking about the power of a Roth.
00:17:13.599 --> 00:17:16.319
And man, they blow, you know, blows your mind.
00:17:16.400 --> 00:17:22.000
I said the Roth has a deeper strategic role in your retirement.
00:17:22.079 --> 00:17:23.759
But anyway, going back to the five-year clock.
00:17:23.920 --> 00:17:26.640
You must have had a Roth, any Roth for five years.
00:17:26.720 --> 00:17:35.759
And by the way, the five-year clock starts from January 1st of the year for which you make a contribution.
00:17:36.000 --> 00:17:36.160
Nice.
00:17:36.480 --> 00:17:39.680
So you know that would you make a contribution right now in July?
00:17:39.920 --> 00:17:40.559
Well, guess what?
00:17:40.640 --> 00:17:42.240
Your clock started January 1st.
00:17:42.400 --> 00:17:43.039
Love that.
00:17:43.200 --> 00:17:49.279
What if you made a contribution on April 15th next year, which is the deadline for this year's IRE contribution?
00:17:49.440 --> 00:17:50.000
Guess what?
00:17:50.160 --> 00:17:53.519
The clock actually started January 1st of 2026.
00:17:53.759 --> 00:17:54.640
Oh, you're kidding me.
00:17:54.720 --> 00:17:59.200
So it you have all the way up until the tax deadline to open up a Roth and start that clock.
00:17:59.359 --> 00:17:59.599
Wow.
00:17:59.680 --> 00:18:05.519
Okay, because remember the wording is January 1st of the year for which the contribution was made.
00:18:05.680 --> 00:18:10.799
So if you make a contribution in 2027 by your tax return due date, guess what?
00:18:10.880 --> 00:18:14.640
It's your clock started on January 1st of 2026.
00:18:14.799 --> 00:18:18.240
So if you don't have a Roth, what's what's your objective?
00:18:18.400 --> 00:18:19.519
Go get yourself one.
00:18:19.680 --> 00:18:19.920
Totally.
00:18:20.240 --> 00:18:26.400
Look for the I mean, look for the uh financial institution that would take the smallest contribution.
00:18:26.640 --> 00:18:28.559
A dollar will start your clock.
00:18:28.799 --> 00:18:29.200
Amazing.
00:18:29.440 --> 00:18:33.119
Imagine young people out there, you know, as long as they have earned income, right?
00:18:33.359 --> 00:18:36.880
In other words, you get a W 2 or you know, some of them work.
00:18:36.960 --> 00:18:46.720
I mean, some of them babysit, you know, just because they don't have to file taxes because it's not taxable, in some cases, because not large, it's not large enough, it doesn't mean they didn't have earning.
00:18:46.960 --> 00:18:49.440
They did they still earned it as long as they can prove it.
00:18:49.519 --> 00:18:50.640
You do you see what I'm saying?
00:18:50.880 --> 00:18:51.200
I do.
00:18:51.359 --> 00:18:55.359
But how many young people do you know out there that have uh uh that have part-time jobs?
00:18:55.440 --> 00:18:56.000
Well, guess what?
00:18:56.079 --> 00:18:57.359
They're eligible for a Roth.
00:18:57.759 --> 00:19:01.279
They may not be able to sign their own document because they're a minor.
00:19:01.519 --> 00:19:03.599
Parents may have to sign in on their behalf.
00:19:03.759 --> 00:19:04.480
Well, guess what?
00:19:04.559 --> 00:19:10.160
The moment you contribute, you've you started your Roth and you started your five-year clock.
00:19:10.720 --> 00:19:13.200
But that's only one half of the story.
00:19:14.160 --> 00:19:18.799
What a lot of people don't realize for a qualified distribution is there's two parts to it.
00:19:19.039 --> 00:19:26.240
One is the five-year clock, and the other one is that you have to satisfy one of the four.
00:19:26.720 --> 00:19:27.200
Ready?
00:19:27.440 --> 00:19:28.559
Oh my gosh, okay.
00:19:28.799 --> 00:19:29.359
There we go.
00:19:29.519 --> 00:19:35.920
You have to be 59 and a half, and they must have had around for five years for your earnings to be distributed.
00:19:36.400 --> 00:19:37.039
Tax what?
00:19:40.079 --> 00:19:42.480
You you you can be disabled.
00:19:42.720 --> 00:19:46.640
In other words, if you're disabled, you can no longer work, as well, you can have to retire.
00:19:47.519 --> 00:19:58.319
Five years and disability death, disability, um purchase of a primary residence.
00:19:58.480 --> 00:20:16.480
In other words, imagine if a young person started their RA really young and they've been contributing, not only can they take the contributions out tax-free, they can take up to ten thousand dollars of the earnings tax-free.
00:20:17.279 --> 00:20:20.960
At any at at any time after 59 and a half, is that correct?
00:20:21.200 --> 00:20:23.200
No, just for purchasing a first-time home.
00:20:23.440 --> 00:20:23.839
Oh my god.
00:20:24.079 --> 00:20:25.839
Let's say you're let's say you're 33.
00:20:26.400 --> 00:20:31.839
You're not 59 and a half, but you've had a raw for five years, because you started it as a miner, right?
00:20:32.079 --> 00:20:32.400
Yes.
00:20:32.559 --> 00:20:39.599
You hired her for five years, now you've got the you know, you got the five-year clock done, and you want to purchase your first-time home.
00:20:39.839 --> 00:20:43.680
All right, up to ten thousand dollars of the earnings is tax what?
00:20:43.920 --> 00:20:44.400
Free.
00:20:44.720 --> 00:20:45.519
Yeah, you go.
00:20:45.759 --> 00:20:47.279
So now you're getting excited, right?
00:20:47.440 --> 00:20:48.799
Yeah, no, that's amazing.
00:20:49.279 --> 00:20:53.359
So you've got a first-time home buyer, let's just say they're 35 years old.
00:20:54.240 --> 00:20:57.279
Mom and dad helped them start their clock decades ago.
00:20:57.440 --> 00:20:57.759
Yep.
00:20:58.000 --> 00:20:59.920
And they made earned income, yeah.
00:21:00.400 --> 00:21:01.920
They made contributions.
00:21:02.480 --> 00:21:04.240
Um, they invested it.
00:21:04.400 --> 00:21:08.559
Let's say they invested some of it in in the stock market with Robin Hood.
00:21:08.640 --> 00:21:16.720
Maybe even they started investing some of it in alternative assets, and they had let's say they had enough money in there to loan it to somebody at 10%.
00:21:18.240 --> 00:21:18.960
Wait, tell me.
00:21:19.119 --> 00:21:20.319
Oh, I see what you're saying.
00:21:20.559 --> 00:21:20.880
Absolutely.
00:21:20.960 --> 00:21:27.759
Yeah, they can do the same things anybody, anybody, anybody can get you can do a note on secured, secured note at 10%.
00:21:28.240 --> 00:21:30.720
You can grow that account exponentially.
00:21:30.960 --> 00:21:31.599
That's incredible.
00:21:31.680 --> 00:21:34.960
And I can go partnering or partnering with somebody.
00:21:35.119 --> 00:21:46.000
You don't have enough money in there, but but you want to have another Roth or another traditional or somebody's uh personal assets, partner up to be able to do a loan for somebody else.
00:21:46.240 --> 00:21:47.039
Yeah, you can keep it.
00:21:47.200 --> 00:21:48.160
A lot of people miss that.
00:21:48.319 --> 00:21:48.799
Yeah.
00:21:49.119 --> 00:21:49.599
Yeah, yeah.
00:21:49.759 --> 00:21:50.960
I mean, that's a good point.
00:21:51.200 --> 00:21:59.759
Structure an LLC, bring in a couple of partners, um, you know, structure structure it accordingly, but using some of that Roth money to grow it.
00:22:00.160 --> 00:22:00.720
During that period.
00:22:01.359 --> 00:22:01.920
Yeah.
00:22:02.400 --> 00:22:10.720
Going back to your point, my gosh, being able to take out$10,000 for a down payment or at least to help supplement some of my down payment.
00:22:10.960 --> 00:22:11.440
Correct.
00:22:11.920 --> 00:22:14.960
And I don't have to pay any taxable burden on that.
00:22:15.039 --> 00:22:19.119
I don't have to, I have to report it, but there's not going to be a tax bill at the end of the year.
00:22:19.200 --> 00:22:19.680
Is that right?
00:22:19.920 --> 00:22:23.519
There's not going to be a tax bill up to$10,000 of the earnings.
00:22:23.759 --> 00:22:30.720
There is an IRS form$8606 that an individual goes through to determine the taxation of a Roth.
00:22:30.960 --> 00:22:38.079
So in other words, the IRS actually has that all planned out under IRS tax form 8606, part three, by the way.
00:22:38.160 --> 00:22:45.680
So if you want to research that, they can do that there and they can determine the taxability of a Roth distribution because it's capped at 10,000.
00:22:46.319 --> 00:22:46.640
Okay.
00:22:46.799 --> 00:22:47.200
Got it.
00:22:47.279 --> 00:22:47.839
That's amazing.
00:22:48.400 --> 00:22:49.519
Okay, now let's transition.
00:22:49.599 --> 00:22:50.960
I gave you three out of the four.
00:22:51.119 --> 00:22:51.599
Oh, that's right.
00:22:51.680 --> 00:22:52.079
Yep.
00:22:52.319 --> 00:22:54.079
The last one is death.
00:22:54.480 --> 00:22:57.200
Because I'm bringing the inherited accounts again, right?
00:22:57.519 --> 00:23:01.119
An IRA holder has had a Roth for let's say three years.
00:23:01.359 --> 00:23:01.680
Okay.
00:23:01.839 --> 00:23:03.119
And now they're dead.
00:23:03.599 --> 00:23:05.759
They haven't satisfied the five-year clock, right?
00:23:06.000 --> 00:23:06.480
Correct.
00:23:07.039 --> 00:23:18.400
When an inheritor inherits uh um somebody's Roth, their subaccount or the their portion of what they've inherited is kept under the umbrella of the deceased individual.
00:23:18.880 --> 00:23:19.200
Okay.
00:23:19.599 --> 00:23:30.240
So what what that means is that if they've satisfied three years already, and the person's dead, just keep in mind, five years in death means tax-free distribution of earnings.
00:23:30.400 --> 00:23:33.039
However, the IRA holders only had it for three.
00:23:33.759 --> 00:23:36.640
What what what what's what's the what's the moral of the story?
00:23:36.799 --> 00:23:40.319
Wait another two years, everything in that account is tax what?
00:23:40.799 --> 00:23:41.359
Free.
00:23:41.680 --> 00:23:42.480
You got it.
00:23:42.720 --> 00:23:43.519
That's amazing.
00:23:43.680 --> 00:24:01.279
So that clock continues, it perpetuates as long as they meet that five-year rule, the beneficiary now has the option to hold that Roth IRA and take distributions if they wanted to, tax-free the basis plus the earnings.
00:24:01.519 --> 00:24:02.160
Correct.
00:24:02.480 --> 00:24:06.880
Are they now limited to the 10-year rule with this Roth IRA?
00:24:07.359 --> 00:24:09.759
Now that that's that's where that comes into play.
00:24:10.079 --> 00:24:27.920
If you are a designated beneficiary, and which means you're not the spouse, you're not a non-spouse beneficiary less than 10 years younger, like your sister was only three years apart, you're not disabled or chronically ill or a minor.
00:24:28.160 --> 00:24:29.279
Well, guess what?
00:24:29.440 --> 00:24:33.440
If if you're not any one of those, you're subject to the 10-year rule.
00:24:34.160 --> 00:24:36.079
But still, it's tax-free.
00:24:36.319 --> 00:24:36.720
True.
00:24:36.880 --> 00:24:44.079
Yeah, I might be forced to make those distributions, but regardless, I have essentially a decade to continue to grow that money tax-free.
00:24:44.319 --> 00:24:44.960
Correct.
00:24:45.440 --> 00:24:55.119
And gosh, going back to your point, I draw up a myriad of personal loan note, you know, loans and uh invest in other assets.
00:24:55.279 --> 00:25:08.319
I could grow that money significantly and and and leverage all of the benefits that my father or that my grandfather, you know, um started years before his death and before I became the beneficiary.
00:25:08.640 --> 00:25:10.559
Let me take this a step further, all right?
00:25:10.720 --> 00:25:13.839
Remember that sink that I was talking about in a tax preferred account?
00:25:14.000 --> 00:25:14.240
Yeah.
00:25:14.400 --> 00:25:14.960
Well, guess what?
00:25:15.039 --> 00:25:18.240
In a rock IRA, there's no such thing as an RMD.
00:25:18.960 --> 00:25:22.480
So therefore, I never put never pulled a plug on the sink, right?
00:25:22.799 --> 00:25:28.640
So if I never pulled a plug on that sink, that 10 years, you don't have to do anything.
00:25:28.960 --> 00:25:31.519
But on the 10th year, you have to distribute everything.
00:25:31.839 --> 00:25:34.640
That was a good clarifying point, JP.
00:25:35.279 --> 00:25:45.119
I'm I'm sure some listeners might have had the impression that every year for 10 years they'd have to make a distribution of that inherited IRA.
00:25:45.279 --> 00:25:49.599
But really, what you're saying is if it makes sense, you have multiple options.
00:25:49.680 --> 00:26:00.079
You can actually wait until the very end of that 10th year because it makes sense for you for whatever reason, you can take that full distribution as long as you take the full amount.
00:26:00.240 --> 00:26:04.000
Otherwise, if I'm not mistaken, there's a 25% tax hit on the balance.
00:26:04.400 --> 00:26:04.640
Okay.
00:26:05.200 --> 00:26:06.240
Which is still not bad.
00:26:06.319 --> 00:26:09.759
I mean, if you you know, I mean, it beats 50, right?
00:26:10.000 --> 00:26:10.880
Oh my gosh, yeah.
00:26:11.200 --> 00:26:11.920
That was a good change.
00:26:12.000 --> 00:26:15.039
You said that was back in 2019 during the Secure Act.
00:26:15.759 --> 00:26:18.160
Uh well, the the 25% penalty.
00:26:18.400 --> 00:26:18.720
Yeah.
00:26:18.960 --> 00:26:21.519
Yeah, no, that's actually the Secure Act 2.0.
00:26:22.000 --> 00:26:25.680
Okay, got it after the 2019 Secure Act.
00:26:26.000 --> 00:26:26.400
Got it.
00:26:26.559 --> 00:26:26.880
Okay.
00:26:27.119 --> 00:26:27.359
Yeah.
00:26:27.599 --> 00:26:27.920
All right.
00:26:28.000 --> 00:26:39.519
I I'm I'm going through some questions in in my mind here, but anything else that you want to cover on on uh the beneficiary inherited IRA section versus the individual owner.
00:26:39.839 --> 00:26:41.759
Well, let's go to the beneficiary again.
00:26:41.920 --> 00:26:42.319
All right.
00:26:42.480 --> 00:26:47.119
Let's say a person has had a Roth for three years and now they're dead, right?
00:26:47.279 --> 00:26:47.599
Yeah.
00:26:47.759 --> 00:26:50.880
You know, some some some people say, Well, I can't touch any of that money.
00:26:50.960 --> 00:26:58.400
I would say I beg to differ with you because you because the the the contributions have already been taxed.
00:26:58.720 --> 00:26:59.599
Oh, okay.
00:26:59.839 --> 00:27:04.160
This five-year rule only applied to the earnings.
00:27:05.440 --> 00:27:14.880
See, see, this is there's a difference there, and it also generally will not apply to amounts that were converted.
00:27:15.279 --> 00:27:15.599
Okay.
00:27:16.160 --> 00:27:22.640
Because if an individual made contributions, those come out first, and if somebody did a conversion, well, guess what?
00:27:22.960 --> 00:27:27.599
You know, in other words, a person took money out of their traditional and they put it in a Roth, right?
00:27:27.680 --> 00:27:28.960
That's the second layer.
00:27:29.519 --> 00:27:37.359
What I'm talking about right now is what we call the ordering rules, the order in which money comes out of an individual's Roth.
00:27:38.319 --> 00:27:49.359
So, in other words, if a person if an IR a Roth IRA holder has only had their Roth for three years, and of course they're dead, it doesn't mean that you can't take any money out.
00:27:49.599 --> 00:27:51.279
Just don't touch the earnings.
00:27:52.160 --> 00:27:54.400
There's a delineation that between that.
00:27:54.480 --> 00:27:57.359
Now, how are you gonna find out how much contributions have been made?
00:27:57.519 --> 00:28:00.319
Talk to the executor of the person's estate.
00:28:00.640 --> 00:28:01.759
They'll have those details.
00:28:02.400 --> 00:28:02.799
That's right.
00:28:02.880 --> 00:28:20.000
Well, the details are there are what we call uh IRS form 5498 that must have been issued to that IRA holder who's now dead, and it keeps track or reports to the IRS all contributions that have been made in a particular year.
00:28:20.160 --> 00:28:25.359
So there's gonna be multiple 5498s if they've made multiple contributions in separate years.
00:28:25.759 --> 00:28:26.240
Understood.
00:28:26.880 --> 00:28:32.079
If you total them all up, that's the amount you can touch at any time, no tax, no penalty.
00:28:32.400 --> 00:28:33.920
Because those are contributions.
00:28:34.160 --> 00:28:34.960
That's right.
00:28:35.759 --> 00:28:41.039
On box three of the 5498 of the Roth, you will also see conversions.
00:28:41.519 --> 00:28:52.240
So, in other words, that will allow for you to reconcile all the amounts that have been taxed already to be able to figure out how much you can distribute without tax no pen nor penalty.
00:28:52.799 --> 00:29:02.880
You see, so proper record keeping is essential so that when financial institutions send them what we call an IRS from$54.98, half of the time they go, I don't know what this is for.
00:29:03.200 --> 00:29:04.720
Boom, you can't find it.
00:29:04.960 --> 00:29:10.960
Well, that's that's gold right there because you've got dollars that have been taxed already, you can take out at any time.
00:29:11.119 --> 00:29:11.759
For sure.
00:29:12.000 --> 00:29:13.039
Does that make sense?
00:29:13.279 --> 00:29:14.079
Totally, yeah.
00:29:14.240 --> 00:29:19.599
Okay, you know, JP, we we're coming up on time here, and this is amazing information.
00:29:19.759 --> 00:29:23.519
I'm gonna have you come back next month and we're gonna pick up where we left off.
00:29:23.599 --> 00:29:29.279
And you know, I I just want to leave both of us with a couple of um words of wisdom here.
00:29:29.440 --> 00:29:45.359
Obviously, when most people are reading the back of the cereal box at breakfast, you're you know, you're reading IRS code, and it's obvious in how much you know and and and what you can um cite, you know, from internal revenue code.
00:29:46.000 --> 00:29:48.559
This is a complex topic, so to speak.
00:29:48.720 --> 00:29:51.279
There's a lot of people, like I said, who are asking about it.
00:29:51.359 --> 00:29:54.240
They're they're searching online for answers.
00:29:54.480 --> 00:30:02.319
Who are the best people to go to to seek this guidance professionally and sit down and you know go beyond just a podcast?
00:30:03.440 --> 00:30:10.079
Um, well, for me, financial institutions like Heritage, you know, I work with other financial institutions.
00:30:10.160 --> 00:30:13.119
I I'm I'm their um O Darn line.
00:30:13.200 --> 00:30:16.000
They call me their O Darn, I don't know the answer to that.
00:30:16.160 --> 00:30:20.559
So they yeah, they give me a call and I give them the answer and then they regurgitate that to the client.
00:30:21.039 --> 00:30:26.400
So I I do have uh Ruiz ConsultingLLC.com as my website.
00:30:26.640 --> 00:30:35.279
Um, I I I generally don't just respond to any questions, but you know, there's there's uh an education piece in my website.
00:30:35.359 --> 00:30:50.160
Uh, I do have a school that is approved by the American Bankers Association that is approved for what we call the certified IRA services professional designation certification, which is issued by the American Bankers Association.
00:30:50.319 --> 00:30:56.799
Um, there's modules in there that talks about what is a conversion, you know, what are the reporting requirements?
00:30:56.880 --> 00:31:00.720
Uh, what how what are the eligibility requirements for contribution?
00:31:00.880 --> 00:31:02.160
Start with that first.
00:31:02.319 --> 00:31:02.640
Yeah.
00:31:02.799 --> 00:31:11.680
And from there, for institutions that have availed in my consulting line, ask those institutions and they can tap into JP, man.
00:31:11.759 --> 00:31:13.759
So yeah, that's that's good insight.
00:31:13.839 --> 00:31:16.960
And yeah, we use your resources all the time professionally.
00:31:17.039 --> 00:31:24.079
And I'll say this there's self-directed IRA listeners right now that love to do things on their own, they love to learn.
00:31:24.319 --> 00:31:24.559
Sure.
00:31:24.720 --> 00:31:29.119
Um, we've got investment sponsors that listen and they're looking for resources as well.
00:31:29.200 --> 00:31:31.119
So I would encourage them to go to your website.
00:31:31.279 --> 00:31:35.039
I've been there, we we leverage those resources, and it's gold.
00:31:35.119 --> 00:31:36.000
It it really is.
00:31:36.079 --> 00:31:40.160
It's it's professional um wisdom and in and education.
00:31:40.319 --> 00:31:42.480
So I appreciate you, JP.
00:31:42.720 --> 00:31:48.799
Uh fortunately, you and I we get the privilege to talk again, likely in the next 24 hours, maybe 48.
00:31:49.279 --> 00:31:57.200
Um but real really I I do appreciate you, and I appreciate everybody who's taken the time today to listen to our message.
00:31:57.359 --> 00:32:06.480
And if you have information and you want to just pick up the phone and and talk a little bit more, you're welcome to reach out to us at Heritage IRA.
00:32:06.640 --> 00:32:08.400
Um, but thank you so much, JP.
00:32:08.480 --> 00:32:11.359
I appreciate all you've done today, and uh, we'll talk to you later.
00:32:11.680 --> 00:32:12.079
All right.
00:32:12.720 --> 00:32:13.359
Till next time.
00:32:13.599 --> 00:32:14.079
You bet.
00:32:14.160 --> 00:32:15.039
Bye bye.
00:00:00.160 --> 00:00:04.480
Welcome back, everybody, to the Self-Directed Edge Podcast.
00:00:04.639 --> 00:00:10.160
I'm your host, Joel Landon from Heritage IRA, and I've got a good friend.
00:00:10.400 --> 00:00:12.880
Um, dare I call him a colleague.
00:00:13.039 --> 00:00:20.480
He's much more experienced than I am in the industry, but good friend, great business partner, JP Ruiz from Ruiz Consulting.
00:00:20.559 --> 00:00:21.359
How are you doing, sir?
00:00:21.600 --> 00:00:22.239
I'm doing well.
00:00:22.399 --> 00:00:24.000
Thank you for having me on your podcast.
00:00:24.239 --> 00:00:25.039
Yeah, of course.
00:00:25.120 --> 00:00:25.839
It's a pleasure.
00:00:26.000 --> 00:00:29.519
You know, we've uh you and I have a lot of history, so to speak.
00:00:29.679 --> 00:00:31.920
You know, we got we go back how many years?
00:00:32.000 --> 00:00:33.679
Would it be like five or six years?
00:00:33.920 --> 00:00:35.679
Oh I think more than that, right?
00:00:35.920 --> 00:00:43.920
Yeah, especially with uh sister and um places that uh I do consulting for, you know, that that you've you've worked at.
00:00:44.000 --> 00:00:44.799
Yeah, absolutely.
00:00:44.960 --> 00:00:46.159
We go way back for sure.
00:00:46.560 --> 00:00:48.799
Needless to say, you get around.
00:00:48.880 --> 00:00:51.600
And so it's my job, man.
00:00:51.679 --> 00:00:55.840
I mean, I educate the industry, so I go from institution to institution, you know.
00:00:56.240 --> 00:00:56.479
True.
00:00:56.719 --> 00:01:01.200
Yeah, I I worked for a couple of different offices, and there's no doubt about it.
00:01:01.359 --> 00:01:06.079
We all in the industry um kind of lean on you and depend on you.
00:01:06.239 --> 00:01:08.799
So um appreciate you being on the show.
00:01:08.879 --> 00:01:13.680
I know you and I spent some time uh face to face years ago in southern Utah.
00:01:13.760 --> 00:01:15.200
You came to Cedar City, I think.
00:01:15.519 --> 00:01:15.840
That's right.
00:01:15.920 --> 00:01:17.680
I was at Cedar City, yeah, yeah.
00:01:17.920 --> 00:01:23.680
I actually you met my wife, and we did a little tour of downtown, and I think we even broke bread together at a restaurant.
00:01:23.920 --> 00:01:26.959
Well, I I even met your kids, man, so they that's so cool.
00:01:27.599 --> 00:01:28.079
Yeah, yeah.
00:01:28.400 --> 00:01:28.959
That's awesome.
00:01:29.040 --> 00:01:30.480
Yeah, at the soda shop now.
00:01:31.200 --> 00:01:31.439
Yeah.
00:01:31.840 --> 00:01:33.200
At the soda shop, that's right.
00:01:33.280 --> 00:01:36.079
Yeah, that was bullet drug down in in southern Utah.
00:01:36.239 --> 00:01:37.599
So great, yeah.
00:01:37.680 --> 00:01:51.200
We've got great history, and uh, I'm thrilled to bring you on today because there is a topic that we've found um in the industry, so to speak, or within the self-directed retirement investor, even just the IRA owner.
00:01:51.439 --> 00:01:51.840
Sure.
00:01:52.079 --> 00:01:54.959
Um, and it's related to the five-year rule.
00:01:55.200 --> 00:01:55.359
Okay.
00:01:55.760 --> 00:02:05.599
I wanna yeah, I want to set the table and welcome to the self-directed edge, a podcast for investors who want their retirement capital doing more than sitting in the market.
00:02:05.840 --> 00:02:08.639
I'm your host, Joel Landon, with Heritage IRA.
00:02:12.879 --> 00:02:29.919
And and just kind of mention, you know, people they do Google search, they get on social media, and they're asking, what is this five-year rule that I've either heard about or that my tax advisor or maybe even financial professional is talking to me about.
00:02:30.080 --> 00:02:39.520
And, you know, they heard it one time, it went in their ear and out the other, and they're just trying to go back to learn more and do their own due diligence, so to speak.
00:02:39.599 --> 00:02:47.840
Uh I figured we could dive into that a little bit, and you can give your perspective and and education on on this topic if that's okay with you.
00:02:48.240 --> 00:02:48.719
Absolutely.
00:02:48.879 --> 00:02:49.520
Yeah, okay.
00:02:49.680 --> 00:02:50.960
Well, well, yeah.
00:02:51.599 --> 00:02:53.759
So yeah, yeah.
00:02:54.000 --> 00:03:04.719
Well, I was gonna say, yeah, if you want to kick it off, you know, when people hear um, you know, the IRA five-year rule, what do they usually think it means in your experience?
00:03:04.879 --> 00:03:06.240
You're a wise man, you know.
00:03:06.479 --> 00:03:10.639
What what do you think they're capturing when they hear the five-year rule?
00:03:10.960 --> 00:03:13.199
I I think I think what happens is confusion.
00:03:13.280 --> 00:03:20.400
So actually, so what we're trying to do, what we'll try to do in this in this conversation is demystify the five-year rule.
00:03:20.639 --> 00:03:29.680
There's really three purposes of the five-year rule and um or or three um three terms that it's associated with.
00:03:29.919 --> 00:03:33.680
One is taxation of Roth earnings.
00:03:34.319 --> 00:03:38.080
You know, a lot of people like the Roth because they go, it's tax-free, right?
00:03:38.159 --> 00:03:42.319
So but what makes the earnings tax-free, it's not automatic.
00:03:42.560 --> 00:03:51.919
The five-year rule term is associated with that, along with another five-year clock for what we call conversions.
00:03:52.240 --> 00:03:52.719
All right.
00:03:52.960 --> 00:03:55.360
Conversions are not a spiritual experience as you know.
00:03:55.439 --> 00:03:57.759
I mean, like that jokes keep coming, right?
00:03:58.479 --> 00:03:59.599
Although it could be, right?
00:03:59.680 --> 00:04:12.800
Because a conversion just means you have a taxable retirement plan, like an IRA or a 401k plan that has, you know, that's eligible to be rolled over to what we call a Roth, as an example.
00:04:13.120 --> 00:04:19.199
And a conversion converts that uh account that's gonna be taxed in the future, right?
00:04:19.279 --> 00:04:22.240
Because keep in mind a lot of retirement plans are tax deferred.
00:04:22.399 --> 00:04:25.360
Tax deferred just means you're postponing your agony, right?
00:04:25.439 --> 00:04:28.720
Because you're gonna be taxed later on, you're deferring your taxation.
00:04:29.120 --> 00:04:45.199
A conversion basically allows for you to pay the tax today so that in the future, not only will the converted amount be tax-free, the earnings will also be tax-free under what we call a Roth IRA.
00:04:45.279 --> 00:04:56.160
So you're moving it from the from a traditional IRA account or a CEP IRA or a simple IRA that's never been taxed before, and you're moving it into what we call a Roth IRA.
00:04:56.319 --> 00:04:57.680
That's why they they call it a conversion.
00:04:57.759 --> 00:05:04.639
You're converting the characteristics of your original contribution to another type of IRA, which will be tax-free in the future.
00:05:04.800 --> 00:05:05.199
All right.
00:05:05.360 --> 00:05:05.600
Yeah.
00:05:06.000 --> 00:05:13.519
There's a five-year rule there as well, and I I can explain those and break it down separately so that it doesn't get confusing.
00:05:14.079 --> 00:05:19.920
Another five-year rule term is used when we're dealing with what we call beneficiary options.
00:05:20.160 --> 00:05:21.199
And what does that mean?
00:05:21.360 --> 00:05:33.920
When an account holder dies and you inherit and you're named as a beneficiary in an account, generally there's what we call the five-year rule option, all right, which has dramatically changed after 2019.
00:05:34.639 --> 00:05:36.800
But let me just explain what that means.
00:05:37.040 --> 00:05:45.920
You know, when when you're inheriting assets from an individual's account, the the IRS gives you, or actually, Congress gives you two options.
00:05:46.079 --> 00:05:47.839
How do you want to deplete the account?
00:05:47.920 --> 00:05:50.720
And one of them will be slower than the other, right?
00:05:51.040 --> 00:05:55.519
In other words, it's not the form of distribution that they're talking about when it comes to options.
00:05:55.600 --> 00:06:02.639
It's not like you want it as a check, or do you it's really how do you want to postpone taxation on the amount you just inherited?
00:06:02.800 --> 00:06:06.000
Because keep in mind, these assets have never been taxed before generally, right?
00:06:06.160 --> 00:06:06.480
Right.
00:06:06.639 --> 00:06:15.360
Imagine if you had inherited a half a million dollars and you were you were forced to take a total distribution of the whole thing, that would be a grave tax consequence.
00:06:15.680 --> 00:06:18.079
You want to know what your options are.
00:06:18.560 --> 00:06:18.879
Okay.
00:06:19.519 --> 00:06:27.360
So one of the options I I try to simplify it for people when I teach is like, you know, the IRS is basically telling you you got two options.
00:06:28.079 --> 00:06:31.759
You want to take it in a big chunk, or do you want to take it in little chunks?
00:06:32.079 --> 00:06:34.800
Yeah, and it depends on everybody's financial situation.
00:06:35.040 --> 00:06:39.439
Some people probably want to take that big chunk up front.
00:06:39.600 --> 00:06:43.120
They might benefit from it, or maybe it aligns with their investment strategy.
00:06:43.279 --> 00:06:44.079
Do you run into that?
00:06:44.399 --> 00:06:48.560
Well, if it's if it's a small enough balance, why would you want to prolong the agony?
00:06:48.639 --> 00:06:50.560
You just take the big chunk, right?
00:06:50.800 --> 00:06:55.120
Yeah, the big chunk just means you don't have to distribute the big chunk right away.
00:06:55.279 --> 00:06:58.079
You've got five years to do it.
00:06:58.240 --> 00:07:03.600
In other words, you have five years to keep that account if that's the option that you chose.
00:07:04.399 --> 00:07:05.839
So I'm not allowed to keep it forever.
00:07:05.920 --> 00:07:06.720
I can't keep it.
00:07:06.879 --> 00:07:08.079
You're not allowed to keep it forever.
00:07:08.240 --> 00:07:10.319
It's how do you postpone taxation?
00:07:10.639 --> 00:07:12.399
But you've got five years to do it.
00:07:12.560 --> 00:07:19.759
But on the fifth year that contains the fifth anniversary of the IRA holder's death, you've got to take out the big chunk.
00:07:20.399 --> 00:07:22.959
At least whatever is remaining in the IRA.
00:07:23.199 --> 00:07:23.759
That's right.
00:07:23.920 --> 00:07:26.319
And if you don't distribute it, you get penalized.
00:07:26.480 --> 00:07:29.040
See, that's that's the that's the next part to it.
00:07:29.279 --> 00:07:37.199
If you don't take the big chunk out, if you chose what we call the big chunk option or the five-year-old option in the past, well, guess what?
00:07:37.360 --> 00:07:38.560
You're gonna get penalized.
00:07:38.639 --> 00:07:40.639
It used to be the penalty used to be 50%.
00:07:41.519 --> 00:07:42.079
All right.
00:07:42.319 --> 00:07:45.600
Now, now keep in mind, I'm gonna put I'm gonna put some perspective to it.
00:07:45.839 --> 00:07:50.399
There are beneficiaries out there, they didn't even know there were beneficiaries of an IRA.
00:07:50.639 --> 00:08:00.879
So therefore, sometimes they miss out on the fact that the the they had five years to to deplete it, where in actuality they didn't even know there was an IRA there.
00:08:01.040 --> 00:08:02.639
What if we're in the sixth year?
00:08:02.879 --> 00:08:05.920
It used to be Uncle Sam will take 50% of it.
00:08:06.240 --> 00:08:07.839
That's a 50% penalty.
00:08:08.079 --> 00:08:08.560
Big hit.
00:08:09.360 --> 00:08:11.600
There, there are some changes to it though.
00:08:11.680 --> 00:08:17.279
Um, the Secure Act uh 2.0 um basically reduced that penalty to 25%.
00:08:17.600 --> 00:08:18.959
It's still quite a big chunk.
00:08:19.040 --> 00:08:26.000
Um, you know, not only will you get penal penalized when that amount is distributed, keep mind it's never been taxed before, right?
00:08:26.160 --> 00:08:27.920
You're gonna be subject to tax as well.
00:08:28.000 --> 00:08:30.240
So you've got to know what your options are.
00:08:30.720 --> 00:09:00.240
So you know, it when it comes to that five-year clock, and I mentioned that there has been some changes, the um Secure Act Um of 2019 changed that five-year clock to what we call a 10-year clock, specifically for individuals that are what we call a non-spouse beneficiary, that someone who's not the spouse of the individual, and someone who is greater than 10 years younger.
00:09:00.399 --> 00:09:02.320
So, in other words, your child, you know.
00:09:03.600 --> 00:09:08.879
I hope your child is more than 10 years younger than you are, or if you name a niece or a grandchild.
00:09:09.120 --> 00:09:21.600
In other words, you you you can you you instead of having a five years to deplete it or little chunk distributions, they no longer have the little chunk distributions called life expectancy payments.
00:09:21.840 --> 00:09:25.679
They're gonna be forced to take everything out on the 10th year.
00:09:25.919 --> 00:09:29.600
So, in other words, they expanded the five-year clock to a 10-year clock.
00:09:29.679 --> 00:09:31.200
It's called a 10-year rule now.
00:09:31.440 --> 00:09:34.639
This this is only for an this is only for an inherited accounts.
00:09:34.879 --> 00:09:38.639
In other words, the IRE holder had to have died and you inherited something.
00:09:39.200 --> 00:09:39.759
Naturally.
00:09:40.000 --> 00:09:50.639
If you fall, if you fall under under that term called a designated beneficiary, which is someone who is not the spouse of the individual, and they're greater than 10 years.
00:09:50.799 --> 00:09:52.559
You know, put yourself in that spot.
00:09:52.639 --> 00:09:56.320
You know, if you're a child of somebody who died, that's that could be you.
00:09:56.559 --> 00:10:03.759
If you're a niece or yeah, a grandchild or somebody who's young, a lot younger than the IRA holder, and they left you some money.
00:10:04.000 --> 00:10:04.720
Guess what?
00:10:04.879 --> 00:10:07.279
You have 10 years to deplete that account.
00:10:07.519 --> 00:10:07.840
Interesting.
00:10:08.480 --> 00:10:20.639
Expanded that five-year clock over to the 10-year rule, and you no longer have the option to extend that further, meaning you don't have the option of taking little chunks or life expectancy distributions every year.
00:10:20.799 --> 00:10:22.799
You just have 10 years to deplete it.
00:10:23.200 --> 00:10:32.000
Wow, they really tried to maybe make it simple for the IRS, but in all reality, did they take away some value for the entire.
00:10:33.200 --> 00:10:49.919
And the reason for that is they didn't want this uh uh uh tax-deferred account to be to be there perpetually because because imagine if you had somebody who's age 30 that inherited something, the life expectancy of a 30-year-old, I think is like 51 years.
00:10:50.080 --> 00:10:55.759
Imagine postponing taxation for 51 years by just incrementally taking small amounts every year.
00:10:55.919 --> 00:10:56.720
That's it.
00:10:56.799 --> 00:10:59.200
Let's we got up because we we need the tax money.
00:10:59.360 --> 00:10:59.600
Yeah.
00:10:59.840 --> 00:11:05.120
So basically we'll give you 10 years and 10 years alone if you fall under that category.
00:11:05.519 --> 00:11:05.840
Okay.
00:11:06.000 --> 00:11:10.879
So let's say I'm an inherited owner of an IRA that my parents left me.
00:11:11.600 --> 00:11:13.759
It's a tax-deferred IRA.
00:11:14.000 --> 00:11:17.759
I know that I have some timelines that I'm gonna be up against.
00:11:18.000 --> 00:11:18.559
Correct.
00:11:18.879 --> 00:11:26.799
How do I start taking those essentially required distributions all the way up until that final year tax-free?
00:11:26.960 --> 00:11:34.720
What are my do I even have options if it's a tax-deferred IRA that I've inherited and I've essentially got five years to distribute?
00:11:34.879 --> 00:11:36.720
Can I distribute that tax-free?
00:11:37.360 --> 00:11:38.399
Talk about 10 years, right?
00:11:38.480 --> 00:11:40.480
So it's an inherited account.
00:11:40.639 --> 00:11:40.799
Yep.
00:11:40.960 --> 00:11:52.480
If it's an inherited account, depending upon how old the IRA holder was, will determine whether or not there's a distribution required every year, but and and everything to be distributed on the 10th year.
00:11:52.639 --> 00:11:54.799
Uh I I I I I visualize this.
00:11:54.879 --> 00:11:56.879
I mean, you think about an IRA is a sink, right?
00:11:56.960 --> 00:12:04.240
You fill it up with water, contributions, transfers, rollovers, all those different things that you're doing throughout the years, right?
00:12:04.399 --> 00:12:11.039
As an IRA holder, it so happens that when you reach a certain age, that age is age 73.
00:12:11.600 --> 00:12:12.159
All right.
00:12:12.480 --> 00:12:16.799
That when you reach age 73, you're gonna have to start taking minimums out of that account.
00:12:17.039 --> 00:12:19.200
They call that the RMD, if I'm not mistaken.
00:12:19.519 --> 00:12:19.759
Correct.
00:12:19.840 --> 00:12:22.159
It's called a required minimum distribution.
00:12:22.639 --> 00:12:26.240
And if you don't take that required minimum distribution, well, guess what?
00:12:26.320 --> 00:12:27.120
You get a penalty.
00:12:27.360 --> 00:12:28.480
Sound familiar, right?
00:12:28.879 --> 00:12:31.919
That's that 50% penalty, but lowered down to 25.
00:12:32.320 --> 00:12:41.519
Now, if that IRA holder died, you know, prior to that age, which which means in our analogy, you haven't pulled a plug from the sink.
00:12:41.679 --> 00:12:43.120
In other words, there's nothing required.
00:12:43.360 --> 00:12:45.519
Let's say somebody died at age 55.
00:12:45.759 --> 00:12:50.879
All right, very young, not haven't pulled a plug, there's nothing required to be distributed.
00:12:51.120 --> 00:12:52.639
Until 73 years old.
00:12:53.120 --> 00:12:53.600
Correct.
00:12:54.720 --> 00:12:55.600
Does that make sense, right?
00:12:55.759 --> 00:12:56.799
So folder.
00:12:57.200 --> 00:12:59.600
However, if they died, guess what?
00:12:59.679 --> 00:13:00.879
Who's going to be receiving it now?
00:13:01.120 --> 00:13:02.159
The beneficiary, right?
00:13:02.399 --> 00:13:02.639
Yep.
00:13:03.120 --> 00:13:17.759
So if the beneficiary is going to be receiving it and they fall under that category called a designated beneficiary, meaning that they are greater than 10 years younger and they're not the spouse of the individual, they have 10 years to deplete it.
00:13:18.000 --> 00:13:18.240
Right?
00:13:18.559 --> 00:13:20.320
Same thing they don't have to do anything.
00:13:21.200 --> 00:13:27.360
There's no minimum amount done due because the IRA holder had not started taking required minimum distributions yet.
00:13:27.679 --> 00:13:31.039
But they still have to follow that doggone 10-year rule that the IRS.
00:13:34.639 --> 00:13:45.919
However, let's say let's look at that sink again, and and let's say this person died at age 75, meaning that you pulled a plug on the sink already, which means this individual started to take distributions already.
00:13:46.080 --> 00:13:46.639
All right.
00:13:46.960 --> 00:13:50.399
And they died, and you are a designated beneficiary.
00:13:50.480 --> 00:13:54.639
In other words, you're not a spouse and you're greater than 10 years younger.
00:13:54.960 --> 00:13:58.080
Well, once you pull the plug on that sink, you can't stop it.
00:13:58.799 --> 00:14:01.759
Meaning something has to come out every year.
00:14:02.000 --> 00:14:10.879
In other words, you know, even if you're 33, the IRA holder is 75, you have to take out what we call a life expectancy payment every year.
00:14:11.039 --> 00:14:15.279
But here's the kicker you're still subject to that 10-year rule.
00:14:15.519 --> 00:14:26.399
In other words, even though you're taking distributions on a yearly basis by virtue of the fact that the IRA holder who died was a lot older, yeah, you're gonna have to take everything out in the 10th year.
00:14:26.559 --> 00:14:35.279
In other words, they really they really eliminated uh a designated beneficiary from prolonging the tax deferment of that account.
00:14:35.440 --> 00:14:38.240
In other words, they want their tax in 10 years.
00:14:38.480 --> 00:14:44.879
Yeah, regardless of whether or not the plug has been pulled from the sink, the 10-year rule will always apply.
00:14:45.039 --> 00:14:51.600
However, if that plug got pulled to your point, 75 years old, they were already taking required minimum distributions.
00:14:51.679 --> 00:15:04.240
The beneficiary will follow is it the the decedents' um no life life expectancy in terms of how much they are required to have to distribute.
00:15:04.320 --> 00:15:07.919
No, here's the beautiful part they can use their own life expectancy.
00:15:08.320 --> 00:15:12.399
In other words, this the the younger they are, the smaller amount required.
00:15:12.559 --> 00:15:24.879
However, you know, the fine under the final regulations, I'm gonna go techie on you, but the IRS says, Yeah, once you pull that plug, you can't stop it, so you have to take out distributions, but using the beneficiary's single life expectancy.
00:15:24.960 --> 00:15:29.120
All right, okay, and then from there, you still have to distribute everything in the tenth year.
00:15:29.600 --> 00:15:34.000
That that's what happens in accounts that have never been taxed before.
00:15:34.159 --> 00:15:34.799
Yeah, all right.
00:15:34.879 --> 00:15:37.120
I'm gonna transition your segue you a little bit.
00:15:37.279 --> 00:15:37.600
Okay.
00:15:37.840 --> 00:15:39.200
What if this was a Roth?
00:15:39.600 --> 00:15:41.360
Yeah, that's where my mind's going right now.
00:15:41.759 --> 00:15:44.960
What if it was a Roth or yeah, that's one of the benefits of a Roth.
00:15:45.279 --> 00:15:51.679
In in a Roth uh uh IRA, all right, the beneficiary options are still the same.
00:15:51.759 --> 00:15:56.799
But let's transition our thought process on the five-year clock a little bit different, right?
00:15:58.000 --> 00:16:03.759
Contributions in a Roth have been taxed already, so now which means that when that comes out, it's gonna get taxed again.
00:16:04.159 --> 00:16:04.639
All right.
00:16:05.039 --> 00:16:09.919
What we're talking about right now are the earnings or the growth, right?
00:16:10.720 --> 00:16:19.120
The earnings or the growth of a Roth IRA are gonna be taxed unless the distribution is what we call qualified.
00:16:20.000 --> 00:16:20.320
Okay.
00:16:21.600 --> 00:16:24.960
Qualified means you must have had a Roth for five years.
00:16:25.200 --> 00:16:26.000
Sound familiar?
00:16:26.159 --> 00:16:26.320
Sure.
00:16:26.639 --> 00:16:27.759
Five year rule, yeah.
00:16:28.240 --> 00:16:38.320
Yeah, the five year rule on a Roth qualified distribution means that you must have had a Roth, any Roth, for five years.
00:16:38.720 --> 00:16:40.720
You know what that means if you don't have a Roth?
00:16:41.440 --> 00:16:42.720
You gotta start one now.
00:16:42.879 --> 00:16:43.919
Go get one.
00:16:44.320 --> 00:16:46.080
I mean, that's what I tell people.
00:16:46.240 --> 00:16:48.720
You why are there only 51% of households?
00:16:48.879 --> 00:16:50.080
That's statistics, by the way.
00:16:50.240 --> 00:16:52.879
Only 51% of households in the United States have Roth.
00:16:53.360 --> 00:16:53.919
That's ridiculous.
00:16:55.120 --> 00:16:59.840
Yeah, I mean, go make a contribution of what,$100 and at least start that five-year clock.
00:16:59.919 --> 00:17:00.879
Is that what you're telling us?
00:17:01.120 --> 00:17:02.000
Correct.
00:17:02.559 --> 00:17:06.079
Because the Roth, you know, that could be another podcast that we have.
00:17:06.160 --> 00:17:12.960
I mean, I I I I go through, I mean, I went with uh an organization for 15 years touch talking about the power of a Roth.
00:17:13.599 --> 00:17:16.319
And man, they blow, you know, blows your mind.
00:17:16.400 --> 00:17:22.000
I said the Roth has a deeper strategic role in your retirement.
00:17:22.079 --> 00:17:23.759
But anyway, going back to the five-year clock.
00:17:23.920 --> 00:17:26.640
You must have had a Roth, any Roth for five years.
00:17:26.720 --> 00:17:35.759
And by the way, the five-year clock starts from January 1st of the year for which you make a contribution.
00:17:36.000 --> 00:17:36.160
Nice.
00:17:36.480 --> 00:17:39.680
So you know that would you make a contribution right now in July?
00:17:39.920 --> 00:17:40.559
Well, guess what?
00:17:40.640 --> 00:17:42.240
Your clock started January 1st.
00:17:42.400 --> 00:17:43.039
Love that.
00:17:43.200 --> 00:17:49.279
What if you made a contribution on April 15th next year, which is the deadline for this year's IRE contribution?
00:17:49.440 --> 00:17:50.000
Guess what?
00:17:50.160 --> 00:17:53.519
The clock actually started January 1st of 2026.
00:17:53.759 --> 00:17:54.640
Oh, you're kidding me.
00:17:54.720 --> 00:17:59.200
So it you have all the way up until the tax deadline to open up a Roth and start that clock.
00:17:59.359 --> 00:17:59.599
Wow.
00:17:59.680 --> 00:18:05.519
Okay, because remember the wording is January 1st of the year for which the contribution was made.
00:18:05.680 --> 00:18:10.799
So if you make a contribution in 2027 by your tax return due date, guess what?
00:18:10.880 --> 00:18:14.640
It's your clock started on January 1st of 2026.
00:18:14.799 --> 00:18:18.240
So if you don't have a Roth, what's what's your objective?
00:18:18.400 --> 00:18:19.519
Go get yourself one.
00:18:19.680 --> 00:18:19.920
Totally.
00:18:20.240 --> 00:18:26.400
Look for the I mean, look for the uh financial institution that would take the smallest contribution.
00:18:26.640 --> 00:18:28.559
A dollar will start your clock.
00:18:28.799 --> 00:18:29.200
Amazing.
00:18:29.440 --> 00:18:33.119
Imagine young people out there, you know, as long as they have earned income, right?
00:18:33.359 --> 00:18:36.880
In other words, you get a W 2 or you know, some of them work.
00:18:36.960 --> 00:18:46.720
I mean, some of them babysit, you know, just because they don't have to file taxes because it's not taxable, in some cases, because not large, it's not large enough, it doesn't mean they didn't have earning.
00:18:46.960 --> 00:18:49.440
They did they still earned it as long as they can prove it.
00:18:49.519 --> 00:18:50.640
You do you see what I'm saying?
00:18:50.880 --> 00:18:51.200
I do.
00:18:51.359 --> 00:18:55.359
But how many young people do you know out there that have uh uh that have part-time jobs?
00:18:55.440 --> 00:18:56.000
Well, guess what?
00:18:56.079 --> 00:18:57.359
They're eligible for a Roth.
00:18:57.759 --> 00:19:01.279
They may not be able to sign their own document because they're a minor.
00:19:01.519 --> 00:19:03.599
Parents may have to sign in on their behalf.
00:19:03.759 --> 00:19:04.480
Well, guess what?
00:19:04.559 --> 00:19:10.160
The moment you contribute, you've you started your Roth and you started your five-year clock.
00:19:10.720 --> 00:19:13.200
But that's only one half of the story.
00:19:14.160 --> 00:19:18.799
What a lot of people don't realize for a qualified distribution is there's two parts to it.
00:19:19.039 --> 00:19:26.240
One is the five-year clock, and the other one is that you have to satisfy one of the four.
00:19:26.720 --> 00:19:27.200
Ready?
00:19:27.440 --> 00:19:28.559
Oh my gosh, okay.
00:19:28.799 --> 00:19:29.359
There we go.
00:19:29.519 --> 00:19:35.920
You have to be 59 and a half, and they must have had around for five years for your earnings to be distributed.
00:19:36.400 --> 00:19:37.039
Tax what?
00:19:40.079 --> 00:19:42.480
You you you can be disabled.
00:19:42.720 --> 00:19:46.640
In other words, if you're disabled, you can no longer work, as well, you can have to retire.
00:19:47.519 --> 00:19:58.319
Five years and disability death, disability, um purchase of a primary residence.
00:19:58.480 --> 00:20:16.480
In other words, imagine if a young person started their RA really young and they've been contributing, not only can they take the contributions out tax-free, they can take up to ten thousand dollars of the earnings tax-free.
00:20:17.279 --> 00:20:20.960
At any at at any time after 59 and a half, is that correct?
00:20:21.200 --> 00:20:23.200
No, just for purchasing a first-time home.
00:20:23.440 --> 00:20:23.839
Oh my god.
00:20:24.079 --> 00:20:25.839
Let's say you're let's say you're 33.
00:20:26.400 --> 00:20:31.839
You're not 59 and a half, but you've had a raw for five years, because you started it as a miner, right?
00:20:32.079 --> 00:20:32.400
Yes.
00:20:32.559 --> 00:20:39.599
You hired her for five years, now you've got the you know, you got the five-year clock done, and you want to purchase your first-time home.
00:20:39.839 --> 00:20:43.680
All right, up to ten thousand dollars of the earnings is tax what?
00:20:43.920 --> 00:20:44.400
Free.
00:20:44.720 --> 00:20:45.519
Yeah, you go.
00:20:45.759 --> 00:20:47.279
So now you're getting excited, right?
00:20:47.440 --> 00:20:48.799
Yeah, no, that's amazing.
00:20:49.279 --> 00:20:53.359
So you've got a first-time home buyer, let's just say they're 35 years old.
00:20:54.240 --> 00:20:57.279
Mom and dad helped them start their clock decades ago.
00:20:57.440 --> 00:20:57.759
Yep.
00:20:58.000 --> 00:20:59.920
And they made earned income, yeah.
00:21:00.400 --> 00:21:01.920
They made contributions.
00:21:02.480 --> 00:21:04.240
Um, they invested it.
00:21:04.400 --> 00:21:08.559
Let's say they invested some of it in in the stock market with Robin Hood.
00:21:08.640 --> 00:21:16.720
Maybe even they started investing some of it in alternative assets, and they had let's say they had enough money in there to loan it to somebody at 10%.
00:21:18.240 --> 00:21:18.960
Wait, tell me.
00:21:19.119 --> 00:21:20.319
Oh, I see what you're saying.
00:21:20.559 --> 00:21:20.880
Absolutely.
00:21:20.960 --> 00:21:27.759
Yeah, they can do the same things anybody, anybody, anybody can get you can do a note on secured, secured note at 10%.
00:21:28.240 --> 00:21:30.720
You can grow that account exponentially.
00:21:30.960 --> 00:21:31.599
That's incredible.
00:21:31.680 --> 00:21:34.960
And I can go partnering or partnering with somebody.
00:21:35.119 --> 00:21:46.000
You don't have enough money in there, but but you want to have another Roth or another traditional or somebody's uh personal assets, partner up to be able to do a loan for somebody else.
00:21:46.240 --> 00:21:47.039
Yeah, you can keep it.
00:21:47.200 --> 00:21:48.160
A lot of people miss that.
00:21:48.319 --> 00:21:48.799
Yeah.
00:21:49.119 --> 00:21:49.599
Yeah, yeah.
00:21:49.759 --> 00:21:50.960
I mean, that's a good point.
00:21:51.200 --> 00:21:59.759
Structure an LLC, bring in a couple of partners, um, you know, structure structure it accordingly, but using some of that Roth money to grow it.
00:22:00.160 --> 00:22:00.720
During that period.
00:22:01.359 --> 00:22:01.920
Yeah.
00:22:02.400 --> 00:22:10.720
Going back to your point, my gosh, being able to take out$10,000 for a down payment or at least to help supplement some of my down payment.
00:22:10.960 --> 00:22:11.440
Correct.
00:22:11.920 --> 00:22:14.960
And I don't have to pay any taxable burden on that.
00:22:15.039 --> 00:22:19.119
I don't have to, I have to report it, but there's not going to be a tax bill at the end of the year.
00:22:19.200 --> 00:22:19.680
Is that right?
00:22:19.920 --> 00:22:23.519
There's not going to be a tax bill up to$10,000 of the earnings.
00:22:23.759 --> 00:22:30.720
There is an IRS form$8606 that an individual goes through to determine the taxation of a Roth.
00:22:30.960 --> 00:22:38.079
So in other words, the IRS actually has that all planned out under IRS tax form 8606, part three, by the way.
00:22:38.160 --> 00:22:45.680
So if you want to research that, they can do that there and they can determine the taxability of a Roth distribution because it's capped at 10,000.
00:22:46.319 --> 00:22:46.640
Okay.
00:22:46.799 --> 00:22:47.200
Got it.
00:22:47.279 --> 00:22:47.839
That's amazing.
00:22:48.400 --> 00:22:49.519
Okay, now let's transition.
00:22:49.599 --> 00:22:50.960
I gave you three out of the four.
00:22:51.119 --> 00:22:51.599
Oh, that's right.
00:22:51.680 --> 00:22:52.079
Yep.
00:22:52.319 --> 00:22:54.079
The last one is death.
00:22:54.480 --> 00:22:57.200
Because I'm bringing the inherited accounts again, right?
00:22:57.519 --> 00:23:01.119
An IRA holder has had a Roth for let's say three years.
00:23:01.359 --> 00:23:01.680
Okay.
00:23:01.839 --> 00:23:03.119
And now they're dead.
00:23:03.599 --> 00:23:05.759
They haven't satisfied the five-year clock, right?
00:23:06.000 --> 00:23:06.480
Correct.
00:23:07.039 --> 00:23:18.400
When an inheritor inherits uh um somebody's Roth, their subaccount or the their portion of what they've inherited is kept under the umbrella of the deceased individual.
00:23:18.880 --> 00:23:19.200
Okay.
00:23:19.599 --> 00:23:30.240
So what what that means is that if they've satisfied three years already, and the person's dead, just keep in mind, five years in death means tax-free distribution of earnings.
00:23:30.400 --> 00:23:33.039
However, the IRA holders only had it for three.
00:23:33.759 --> 00:23:36.640
What what what what's what's the what's the moral of the story?
00:23:36.799 --> 00:23:40.319
Wait another two years, everything in that account is tax what?
00:23:40.799 --> 00:23:41.359
Free.
00:23:41.680 --> 00:23:42.480
You got it.
00:23:42.720 --> 00:23:43.519
That's amazing.
00:23:43.680 --> 00:24:01.279
So that clock continues, it perpetuates as long as they meet that five-year rule, the beneficiary now has the option to hold that Roth IRA and take distributions if they wanted to, tax-free the basis plus the earnings.
00:24:01.519 --> 00:24:02.160
Correct.
00:24:02.480 --> 00:24:06.880
Are they now limited to the 10-year rule with this Roth IRA?
00:24:07.359 --> 00:24:09.759
Now that that's that's where that comes into play.
00:24:10.079 --> 00:24:27.920
If you are a designated beneficiary, and which means you're not the spouse, you're not a non-spouse beneficiary less than 10 years younger, like your sister was only three years apart, you're not disabled or chronically ill or a minor.
00:24:28.160 --> 00:24:29.279
Well, guess what?
00:24:29.440 --> 00:24:33.440
If if you're not any one of those, you're subject to the 10-year rule.
00:24:34.160 --> 00:24:36.079
But still, it's tax-free.
00:24:36.319 --> 00:24:36.720
True.
00:24:36.880 --> 00:24:44.079
Yeah, I might be forced to make those distributions, but regardless, I have essentially a decade to continue to grow that money tax-free.
00:24:44.319 --> 00:24:44.960
Correct.
00:24:45.440 --> 00:24:55.119
And gosh, going back to your point, I draw up a myriad of personal loan note, you know, loans and uh invest in other assets.
00:24:55.279 --> 00:25:08.319
I could grow that money significantly and and and leverage all of the benefits that my father or that my grandfather, you know, um started years before his death and before I became the beneficiary.
00:25:08.640 --> 00:25:10.559
Let me take this a step further, all right?
00:25:10.720 --> 00:25:13.839
Remember that sink that I was talking about in a tax preferred account?
00:25:14.000 --> 00:25:14.240
Yeah.
00:25:14.400 --> 00:25:14.960
Well, guess what?
00:25:15.039 --> 00:25:18.240
In a rock IRA, there's no such thing as an RMD.
00:25:18.960 --> 00:25:22.480
So therefore, I never put never pulled a plug on the sink, right?
00:25:22.799 --> 00:25:28.640
So if I never pulled a plug on that sink, that 10 years, you don't have to do anything.
00:25:28.960 --> 00:25:31.519
But on the 10th year, you have to distribute everything.
00:25:31.839 --> 00:25:34.640
That was a good clarifying point, JP.
00:25:35.279 --> 00:25:45.119
I'm I'm sure some listeners might have had the impression that every year for 10 years they'd have to make a distribution of that inherited IRA.
00:25:45.279 --> 00:25:49.599
But really, what you're saying is if it makes sense, you have multiple options.
00:25:49.680 --> 00:26:00.079
You can actually wait until the very end of that 10th year because it makes sense for you for whatever reason, you can take that full distribution as long as you take the full amount.
00:26:00.240 --> 00:26:04.000
Otherwise, if I'm not mistaken, there's a 25% tax hit on the balance.
00:26:04.400 --> 00:26:04.640
Okay.
00:26:05.200 --> 00:26:06.240
Which is still not bad.
00:26:06.319 --> 00:26:09.759
I mean, if you you know, I mean, it beats 50, right?
00:26:10.000 --> 00:26:10.880
Oh my gosh, yeah.
00:26:11.200 --> 00:26:11.920
That was a good change.
00:26:12.000 --> 00:26:15.039
You said that was back in 2019 during the Secure Act.
00:26:15.759 --> 00:26:18.160
Uh well, the the 25% penalty.
00:26:18.400 --> 00:26:18.720
Yeah.
00:26:18.960 --> 00:26:21.519
Yeah, no, that's actually the Secure Act 2.0.
00:26:22.000 --> 00:26:25.680
Okay, got it after the 2019 Secure Act.
00:26:26.000 --> 00:26:26.400
Got it.
00:26:26.559 --> 00:26:26.880
Okay.
00:26:27.119 --> 00:26:27.359
Yeah.
00:26:27.599 --> 00:26:27.920
All right.
00:26:28.000 --> 00:26:39.519
I I'm I'm going through some questions in in my mind here, but anything else that you want to cover on on uh the beneficiary inherited IRA section versus the individual owner.
00:26:39.839 --> 00:26:41.759
Well, let's go to the beneficiary again.
00:26:41.920 --> 00:26:42.319
All right.
00:26:42.480 --> 00:26:47.119
Let's say a person has had a Roth for three years and now they're dead, right?
00:26:47.279 --> 00:26:47.599
Yeah.
00:26:47.759 --> 00:26:50.880
You know, some some some people say, Well, I can't touch any of that money.
00:26:50.960 --> 00:26:58.400
I would say I beg to differ with you because you because the the the contributions have already been taxed.
00:26:58.720 --> 00:26:59.599
Oh, okay.
00:26:59.839 --> 00:27:04.160
This five-year rule only applied to the earnings.
00:27:05.440 --> 00:27:14.880
See, see, this is there's a difference there, and it also generally will not apply to amounts that were converted.
00:27:15.279 --> 00:27:15.599
Okay.
00:27:16.160 --> 00:27:22.640
Because if an individual made contributions, those come out first, and if somebody did a conversion, well, guess what?
00:27:22.960 --> 00:27:27.599
You know, in other words, a person took money out of their traditional and they put it in a Roth, right?
00:27:27.680 --> 00:27:28.960
That's the second layer.
00:27:29.519 --> 00:27:37.359
What I'm talking about right now is what we call the ordering rules, the order in which money comes out of an individual's Roth.
00:27:38.319 --> 00:27:49.359
So, in other words, if a person if an IR a Roth IRA holder has only had their Roth for three years, and of course they're dead, it doesn't mean that you can't take any money out.
00:27:49.599 --> 00:27:51.279
Just don't touch the earnings.
00:27:52.160 --> 00:27:54.400
There's a delineation that between that.
00:27:54.480 --> 00:27:57.359
Now, how are you gonna find out how much contributions have been made?
00:27:57.519 --> 00:28:00.319
Talk to the executor of the person's estate.
00:28:00.640 --> 00:28:01.759
They'll have those details.
00:28:02.400 --> 00:28:02.799
That's right.
00:28:02.880 --> 00:28:20.000
Well, the details are there are what we call uh IRS form 5498 that must have been issued to that IRA holder who's now dead, and it keeps track or reports to the IRS all contributions that have been made in a particular year.
00:28:20.160 --> 00:28:25.359
So there's gonna be multiple 5498s if they've made multiple contributions in separate years.
00:28:25.759 --> 00:28:26.240
Understood.
00:28:26.880 --> 00:28:32.079
If you total them all up, that's the amount you can touch at any time, no tax, no penalty.
00:28:32.400 --> 00:28:33.920
Because those are contributions.
00:28:34.160 --> 00:28:34.960
That's right.
00:28:35.759 --> 00:28:41.039
On box three of the 5498 of the Roth, you will also see conversions.
00:28:41.519 --> 00:28:52.240
So, in other words, that will allow for you to reconcile all the amounts that have been taxed already to be able to figure out how much you can distribute without tax no pen nor penalty.
00:28:52.799 --> 00:29:02.880
You see, so proper record keeping is essential so that when financial institutions send them what we call an IRS from$54.98, half of the time they go, I don't know what this is for.
00:29:03.200 --> 00:29:04.720
Boom, you can't find it.
00:29:04.960 --> 00:29:10.960
Well, that's that's gold right there because you've got dollars that have been taxed already, you can take out at any time.
00:29:11.119 --> 00:29:11.759
For sure.
00:29:12.000 --> 00:29:13.039
Does that make sense?
00:29:13.279 --> 00:29:14.079
Totally, yeah.
00:29:14.240 --> 00:29:19.599
Okay, you know, JP, we we're coming up on time here, and this is amazing information.
00:29:19.759 --> 00:29:23.519
I'm gonna have you come back next month and we're gonna pick up where we left off.
00:29:23.599 --> 00:29:29.279
And you know, I I just want to leave both of us with a couple of um words of wisdom here.
00:29:29.440 --> 00:29:45.359
Obviously, when most people are reading the back of the cereal box at breakfast, you're you know, you're reading IRS code, and it's obvious in how much you know and and and what you can um cite, you know, from internal revenue code.
00:29:46.000 --> 00:29:48.559
This is a complex topic, so to speak.
00:29:48.720 --> 00:29:51.279
There's a lot of people, like I said, who are asking about it.
00:29:51.359 --> 00:29:54.240
They're they're searching online for answers.
00:29:54.480 --> 00:30:02.319
Who are the best people to go to to seek this guidance professionally and sit down and you know go beyond just a podcast?
00:30:03.440 --> 00:30:10.079
Um, well, for me, financial institutions like Heritage, you know, I work with other financial institutions.
00:30:10.160 --> 00:30:13.119
I I'm I'm their um O Darn line.
00:30:13.200 --> 00:30:16.000
They call me their O Darn, I don't know the answer to that.
00:30:16.160 --> 00:30:20.559
So they yeah, they give me a call and I give them the answer and then they regurgitate that to the client.
00:30:21.039 --> 00:30:26.400
So I I do have uh Ruiz ConsultingLLC.com as my website.
00:30:26.640 --> 00:30:35.279
Um, I I I generally don't just respond to any questions, but you know, there's there's uh an education piece in my website.
00:30:35.359 --> 00:30:50.160
Uh, I do have a school that is approved by the American Bankers Association that is approved for what we call the certified IRA services professional designation certification, which is issued by the American Bankers Association.
00:30:50.319 --> 00:30:56.799
Um, there's modules in there that talks about what is a conversion, you know, what are the reporting requirements?
00:30:56.880 --> 00:31:00.720
Uh, what how what are the eligibility requirements for contribution?
00:31:00.880 --> 00:31:02.160
Start with that first.
00:31:02.319 --> 00:31:02.640
Yeah.
00:31:02.799 --> 00:31:11.680
And from there, for institutions that have availed in my consulting line, ask those institutions and they can tap into JP, man.
00:31:11.759 --> 00:31:13.759
So yeah, that's that's good insight.
00:31:13.839 --> 00:31:16.960
And yeah, we use your resources all the time professionally.
00:31:17.039 --> 00:31:24.079
And I'll say this there's self-directed IRA listeners right now that love to do things on their own, they love to learn.
00:31:24.319 --> 00:31:24.559
Sure.
00:31:24.720 --> 00:31:29.119
Um, we've got investment sponsors that listen and they're looking for resources as well.
00:31:29.200 --> 00:31:31.119
So I would encourage them to go to your website.
00:31:31.279 --> 00:31:35.039
I've been there, we we leverage those resources, and it's gold.
00:31:35.119 --> 00:31:36.000
It it really is.
00:31:36.079 --> 00:31:40.160
It's it's professional um wisdom and in and education.
00:31:40.319 --> 00:31:42.480
So I appreciate you, JP.
00:31:42.720 --> 00:31:48.799
Uh fortunately, you and I we get the privilege to talk again, likely in the next 24 hours, maybe 48.
00:31:49.279 --> 00:31:57.200
Um but real really I I do appreciate you, and I appreciate everybody who's taken the time today to listen to our message.
00:31:57.359 --> 00:32:06.480
And if you have information and you want to just pick up the phone and and talk a little bit more, you're welcome to reach out to us at Heritage IRA.
00:32:06.640 --> 00:32:08.400
Um, but thank you so much, JP.
00:32:08.480 --> 00:32:11.359
I appreciate all you've done today, and uh, we'll talk to you later.
00:32:11.680 --> 00:32:12.079
All right.
00:32:12.720 --> 00:32:13.359
Till next time.
00:32:13.599 --> 00:32:14.079
You bet.
00:32:14.160 --> 00:32:15.039
Bye bye.
