The Retirement Planning Gap—and How to Close It
On this episode of Simply Money presented by Allworth Financial, Bob and Brian reveal the surprising gap between thinking about retirement and actually planning for it, explain why paying taxes now could save you thousands later, and welcome Allworth estate planning expert Paul Schwartz to uncover common estate planning mistakes. Plus, smart strategies for selling a vacation home, making the most of tax losses, gifting appreciated stock to your kids, and the surprising role money plays in keeping relationships together.
Download and rate our podcast here.
Bob: Everyone's thinking about retirement, so why are so many people not planning for it? We're going to dig into those numbers tonight. You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James.
There's a pretty remarkable story out there about how many Americans are preparing for retirement, or maybe I should say, how they're not preparing. Brian, let's walk through this study tonight. This was interesting.
Brian: Yeah, this is a study from LIMRA, which is a nonprofit research and education organization, and they focus on the insurance, retirement, financial services industries. Us, Bob, they're looking at us. Anyway, they've been around since about 1916, and that research is widely used by financial institutions, advisors, and the media. Just to understand how people are saving, investing, preparing for retirement, and so forth. So, this time around, they surveyed about 500 Americans age 45 and older who expect to retire within the next decade. Now, there's some younger folks in there from 45 and expecting to retire the next decade. That's when I'm 55 or earlier. And so, we've got a fairly broad range of people here. The first number sounds pretty encouraging though. Eighty-eight percent say they've thought about how they're going to generate income once they stop working. Can they actually do it? Is a different question. But have you thought about it? Well, that's an important one to start. But...
Bob: Brian, that first number reminds me of, I watch a lot of sports on TV, as you know, and I see often this commercial. I'm pretty sure it's from the annuity company, Voya. Have you ever seen that one where the two guys are having lunch together and the one guy's obviously planned for his retirement and his friend obviously hasn't. And he basically says, "Here's my retirement plan. And he puts both hands in the air with his fingers crossed and says, "Come on, good retirement." You ever seen that one?
Brian: I think I see it every other day or so here in my office. That's why we do financial planning. But, yeah, so people are thinking about it. Now, here's another number that came out of this survey. This one kind of jumped off the page a little bit. Three out of four people are the finger crossers, right? They either have no retirement plan or have spent fewer than five hours developing, reviewing, or updating one over the past year. In other words, what that means is, "Yeah, I thought about it and it looks so bad, I just stopped thinking about it." And that's the solution for now.
So, there's a big time psychological component here. While you're working, the goal is straightforward. And I say this to my clients and their kids all the time. It's really simple earlier in your career. The answer is save money, invest aggressively, don't panic when the market wobbles, and don't make a mess of your credit. If you do those things for 30 years, you will reach the point where you really do need a plan because a plan means you have options. If you haven't given yourself options, then you don't need a plan. The plan is simply keep your expenses below your Social Security check because that's all you'll ever see. That's why you need to plan so that you can make it more complicated because you will have options to choose from, which means someday, you'll have to understand those options.
Bob: Yeah, and then here's another number, and I'll get into why the case. I've got thoughts on this. Only 40% of people out there are actually getting any kind of professional help for their retirement. You know, there are so many financial decisions, Brian, you and I talk about them often all day every day, so many decisions that are packed into those final years before retirement. Things like Social Security claiming decisions, Medicare, Roth conversions, investment allocation, your Required Minimum Distribution strategy down the road. And if you've accumulated significant wealth, you may have additional questions around things like estate planning, charitable giving, capital gains tax management, how to leave money to your children. Those decisions all overlap and interact with each other. And you might be great at picking stocks or ETFs or managing your investments. That doesn't necessarily mean you figured out the rest of this, the coordination between all those other things, decisions that need to be made. And I know you want to walk us through an example of what we're talking about here.
Brian: I think that's the best way to educate on these things. Let's go through a real life case here straight from the files of Allworth Financial, kind of sort of. This is an amalgamation of, basically, everything we talk to every day. So, let's take a couple here in Cincinnati. $3 million saved. And they decide they want to retire at 63. And they've done a wonderful job accumulating money. But maybe they haven't considered whether things like doing Roth conversions between retirement and age 73 or 75, depending on their birth year, could reduce their lifetime taxable bill.
And that's kind of what I was referring to before. That's an option. A Roth conversion is a choice. It's not something you have to do. It's something you should understand and look at the pros and cons, and then you can determine whether it's worthwhile for you. It's not something to agonize about when you're in your 20s and your 30s in that accumulation stage. But these folks have saved so much money, they have given themselves options, and it's time to understand those options.
And then another question that comes up, does delaying Social Security make sense for the higher earning spouse? That's another option. I've given myself the option versus a different couple who may have no choice but to file for Social Security as soon as possible because they simply need every last dollar that they can have flowing into the checking account to put money or to put food on the table and a roof over their heads. So, again, these are the examples of the things where people get to the point where they have to choose something. And it can be very stressful because we feel like we're missing opportunities if we don't understand it correctly.
Bob: Yeah, and that's where there's a confidence gap here, and a rather big one, between folks that have worked with a good fiduciary financial professional and those that have not or are not. The gap is significant. Seventy-seven percent of folks feel highly prepared. The ones that have sat down and done an actual coordinated plan like you're talking about. Among those that have not sat down and done any planning, gotten any professional help, the number sinks to only 47%.
And, Brian, I'll go back to the last point. You made the main point here several minutes ago. The simple blocking and tackling here for 20, 30, 35 years, spending less than you have coming in, investing the difference wisely, and just letting the miracle of compound growth work for you for a variety of reasons that we don't have time to get into. A lot of folks have done that and they've got sizable resources to work with. And unfortunately, you know, at least half of the population out there has not. So, they're either trying to play catch up here later in life or they're kind of just throwing up their hands and saying, "I'm never going to get there. I'm not going to have all these choices that you talked about."
And I think that's the real gulf or difference here between those working with a financial advisor and those who are not. I think it comes down to resources in a lot of cases, but not all cases. We run into folks, Brian, that say, they think that all an investment advisor or financial advisor does is manage investments, and they're missing the real value add here on all the things a good fiduciary advisor does for people completely separate from picking different investments.
Brian: That's right. And a lot of this is driven by fear. So, let's talk about the fear part of this that the same LIMRA study looked at. So, LIMRA asked pre-retirees what their biggest retirement concerns were. And the number one answer, believe it or not, was not a stock market crash. Forty-three percent of them, almost half, cited cost of living volatility. I'd love to hear what that was 10 years ago, right? About 10 years ago, I'd say we were much more afraid of the stock market falling apart and taking our investments with it. But now, we worry about just the cost of living because inflation has become such a part of our lives. Thirty percent of them cited outliving their savings, which is almost kind of the same thing, right? "If life costs more than I anticipated, I'm probably not going to have enough." And there's, you know, so one out of three people is saying that inflation is very, very, very much on their minds, and that that's the big boogeyman for them.
And this is completely understandable. Because when you're working, your income increases over time. It's sort of a natural byproduct of working hard in a career or moving from job to job seeking better opportunities. It's just what you do. You get raises, bonuses, promotions, and then you retire. You're relying on a portfolio and income sources that don't necessarily keep pace with inflation. And then there's also the volatility of those investments. What kind of income can they continue to produce? And as we talk about all the time, what about drawdown situations where the market has come down and I still have a bill to pay? So, I have to take my money out. My investments may be down 10%, 15%. I got to take cash out to pay my bills. And therefore, does that mean have I shortened the lifespan of my portfolio in terms of keeping it able to support me?
So, if you got $3, $4 million, let's talk about inflation here, they can still make a difference over a twenty five, thirty year retirement. If expenses rise 3% every year, that means they're going to double over twenty four years. So, if you're spending one hundred thousand now today to keep yourself happy, then now, that same lifestyle without improving anything, without reflecting the increased cost of health care because of whatever is happening to you physically, you're looking at $200,000 just to maintain exactly what you were doing 24 years ago. I don't know about you, Bob, but I don't I don't plan on only spending as much on health care 30 years from now as I'm spending right now. I'm fairly sure that number is going to go up for me.
Bob: No. And we talked about that on yesterday's show. I think that's a lot of reason why older folks or people that are aging are a little resident to part with some of their money for some of these splurges like trips and things. I mean, we do not want to become dependent on our kids or dependent on draining our portfolios due to a health care event. That's why people that have resources tend to want to hold on to them and have them grow. Hey, let's boil all this down. I know you and I threw out a lot of numbers and percentages just now. Let's just land the plane here. Eighty-eight percent are thinking about retirement income. That's no surprise. But 76% have no plans.
Brian: You know, Bob, what are the other 12% think of it?
Bob: You know, they might be hanging out with you down in Athens, Ohio, on the weekends.
Brian: That could be. Maybe just really not focused on it.
Bob: How much retirement planning conversations are you having down there on the weekends?
Brian: That's a pretty happy place, so sometimes it feels like retirement.
Bob: All right. Well, 88% are thinking about it. And I think Brian's point is 100% of us should be thinking about it. But 76% have no plan or have spent fewer than 5 hours working on one in the past year. And only 40% are working with a financial professional. And therefore, just 25% of folks believe their protected income sources are going to cover their essential expenses down the road. So, as a society here, we've got some work to do like a lot of things that we talk about every day.
People understand retirement is a big deal. They know they need to prepare. But there's a huge gap between recognizing the problem and actually doing something about it. Here's the Allworth advice, thinking about retirement is not the same thing as planning for it. The sooner you turn your savings into a real income strategy, the more prepared you'll be for the years ahead. Coming up next, why paying taxes now could save you a pile of money down the road. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Could moving into your vacation home save you a fortune in taxes when you sell? Plus, when should you cash in those tax losses that you've accumulated if you're doing a direct indexing strategy? We'll answer all those questions straight ahead. Well, I'm going to say something right now that might sound a little strange coming from a financial advisor, and it's this, sometimes one of the smartest financial decisions you can make is to voluntarily pay a little bit more in taxes now. That's counterintuitive for a lot of folks out there, Brian.
Brian: What, Bob? Pay taxes now? That's idiotic. Why would I do that? So, no, it's certainly not something you hear every day. Most people are just doing everything they can to pay less in taxes. As a matter of fact, that becomes an obsession for some people who are still looking under every stone, every nook and cranny. Back in the days when the commercials used to advertise, "Let's find all the deductions in your tax return." None of those tax prep companies do that anymore because there, basically, aren't any deductions unless you're going to be super charitable. Nobody takes garbage bags of T-shirts to Goodwill anymore and asks for a receipt. As a matter of fact, Goodwill doesn't even offer receipts anymore because nobody wants them.
So, why in the world would we be thinking about this, right? So, for a long time, we've been focused on maxing out that traditional 401(k), defer your taxes as long as possible. Don't sell your investments if that's going to trigger capital gains. Can't have that. Capital gains are evil. Just sit on it, let it grow. Those are all great strategies. But eventually, we get to a point, as we're sneaking up on retirement and accumulating more wealth, where that mindset can really start working against you because there's a bit of a tax time bomb out there. A lot of people who are, you know, I mentioned maxing out that traditional 401(k), if you spend decades upon decades hiding your money from the IRS, legally of course, in your 401(k), well, then guess what? They know it's there. They're very well aware that it's there because they know they've got something in their back pocket called the Required Minimum Distribution.
If you plow millions of dollars into your 401(k) over decades, and then you retire, that eventually is going to come back around. You're going to be required to start taking money out at age 73 or 75. Those ages do move. When I started this industry, it was 70 and a half, and it's just slowly moved forward over the decades. But basically, you will be required to take out and pay taxes on 4% to 5% of whatever that amount is worth. So, if you built up a $3 million 401(k) that rolls into your IRA, well, guess what? On January 1st, the first day that you are a 73 or 75, then you have, basically, already had taxable income of $150,000 in that case because that's roughly what the IRS is going to require that you remove from that 401(k) or IRA and pay taxes on. And that is, of course, in addition to any other taxable sources of income you might have, pension, Social Security, rental income, whatever it is out there. So, you'll, basically, at that point, never see a really low bracket again because of those pre-tax piles of money.
Bob: Yeah. And here's something else people don't think about, Brian, I'll admit I probably don't think about this enough, what happens when one spouse passes away? Let's say a married couple has been filing jointly for decades, one spouse dies. And let's face it, this becomes a bigger issue if there's a significant age gap between the spouses, or heaven forbid, one of the spouses gets a terminal illness or disease and passes away way sooner than actuarial life expectancy. But if one spouse does die, that surviving spouse eventually has to file as a single taxpayer. And that big, huge IRA that you just talked about, now, that's delivering the same required distribution.
But now, we've got much narrower tax brackets to work with, so you can end up even paying a higher tax rate even though the household has lost an income source, maybe through virtue of a pension or a drop in Social Security benefits. So, it's something to keep an eye on. We never want to play God or predict if somebody's going to die prematurely, but it's another reason to at least keep an eye on that growing, looming Required Minimum Distribution down the road.
Brian: Yeah, and I think this is an opportunity for me to talk about something that happens not that often, but it does happen. So, I've got two cases right now that I'm working on where there was about a 10-year difference between spouses age-wise, and the younger spouse unexpectedly passed first. So, normally, if you're married to somebody and your spouse passes away, unfortunately, then usually, the go-to move is, "Well, I'll just take their IRA, their pre-tax dollars or their Roth or whatever into my own, and it's as if it was mine all along." That is how the tax code works. That's normally the go-to move.
However, if there is a significant age difference, you may not want to do that. Reason being is because, in these cases where one client is 10 years older than the deceased, then that older surviving client, they're going to hit Required Minimum Distribution age, obviously, sooner, and if there's just more money in that account, then those RMDs go up. So, the solution for them is, "Let's keep it separate." There's nothing wrong with a spouse having an inherited IRA from their deceased spouse. That is perfectly legal. You can do that. What that buys you the time to do is now, you don't have to take those Required Minimum Distributions until your deceased spouse would have reached that age. So, that's another way to push it out. There aren't that many people. That's a fairly rare case, but hopefully, somebody's ears just perked up in dealing with the situation they're in right now.
Bob: No, Brian, that's an excellent planning point there. Good for you for helping those folks through that. All right, for the rest of the normal situations out there, and we talk about this often, I mean, let's say you retire at 62 after a successful career. You were making, say, a quarter million dollars a year, and now, obviously, that paycheck is gone. You haven't started Social Security yet. You haven't reached that Required Minimum Distribution age. Your taxable income could now be significantly lower for several years, you know, 10 or 12 years now, as you pointed out. And that's where we've got that opportunity.
You might consider converting a portion of your traditional IRA to a Roth IRA, or you might just use some of that IRA money now, spend it to pay for your living expenses, you know, paying taxes at a lower rate. The important thing is to look at this, run different scenarios. And not just try to minimize taxes this year, but look longer term at what's going to be the most efficient way to manage your retirement income and pass down your assets to your family down the road. Here's the Allworth advice, the goal is not to simply pay the taxes every year, it's to make smart decisions that could reduce your total tax burden over your lifetime. Well, do you think your estate planning is all set and good to go? Coming up next, what the pros check that you might not be checking. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
[00:20:56.054]
[silence]
[00:20:16.492]
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James, joined tonight by our senior estate planner at Allworth's private client group, Mr. Paul Schwarz. Paul, thank you for making some time for us tonight. We want to talk about something called an estate planning audit. And what we really want to hit on right now is, occasionally, Brian and I come across clients, we ask them about their estate plan all the time in meetings and they say, "Yeah, we got that done. That box is checked." And then when we start to ask some follow-up questions, things often aren't as buttoned up as people think they are. So, what we're going to talk about is something called an estate planning audit. What exactly does a competent estate planning audit look like? And what do you tend to find when you do those audits, Paul?
Paul: Well, thanks for having me. An audit is basically just, it's a full review of whether your estate planning documents still match your intent and goals if something were to happen to you tomorrow. And it's less about rewriting everything, but more about spotting gaps, outdated choices, or inconsistencies. So, what we're going to do is we're going to look at all of your estate planning documents in depth. Your wills and trusts, your durable power of attorneys, your healthcare power of attorneys, your living wills, if you own a business, we're going to look at your business documents. And just as important, we're going to look at asset ownership and titling and beneficiary designations, payable-on-death designations and transfer-on-death designations. And we're going to make sure that any review is going to align with your will and trust.
Brian: Paul, can you walk through, what does it look like when somebody...? I'm sure you've got some horrific war stories. What does it look like when this goes sideways and people haven't done these things and then a death occurs unexpectedly? What can you do to help after the fact?
Paul: Well, there's not a lot you can do to help after the fact because things didn't go as planned. So, what I usually see in those situations is they've put all these documents together to avoid probate. And then when somebody passes away, they didn't really have the proper documentation or the proper titling of the assets, and some of the assets are going to go through probate, which is just going to cause some extra money in terms of the attorney fees and some delays with going through probate because that usually takes anywhere from about six months to a year.
Bob: Hey, Paul, we hear an awful lot about trust. I mean, people are out there marketing trust in seminars and webinars. And I think there's a lot of confusion out there about trust. Are they needed? How are they best used? How common is it that people spend a lot of money to get one of these trust-dones, and then we come to find out that they're either outdated, or in a lot of cases, never even properly funded in terms of asset titling?
Paul: Back in the old days, we used to do a lot of trust, and we used to do a lot of them to save on estate taxes. With the federal exemption amount at $15 million and the tri-state, Ohio, Indiana, and Kentucky not having an estate tax, they're a little bit less common today. What most people want to do with the trust is either avoid probate, they want them for privacy, or they want to control the funds from the grave and they want to control them from creditors. So, we don't see them as much nowadays as we did back in the old days, but there are still a lot of ways to avoid probate. And that goes through the asset titling. It also goes through the beneficiary designations that you put on life insurance, annuities, any type of retirement accounts. Bank accounts can have a payable on death to beneficiaries. And then your brokerage accounts can also have a transfer on death to avoid probate. And they're all going to pass by contract and not pursuant to the terms of your will.
Brian: So, here's my non-lawyer observation, not being a lawyer, and glad you're on staff so I can say, "If Paul tells you something else, he's smarter than me," whatever. Most people have a fairly simple situation. Seventy, eighty percent, I'm making this up, of the clients I meet with, they've got their assets and their kids are doing okay, their adult children are doing well enough, and they're not really concerned about doing anything other than just making sure this passes efficiently and simply to my children. Which as you mentioned is really as simple as just naming beneficiaries on everything, either through beneficiary designations or POD, TOD arrangements at banks.
But that said, the one you can't do that very easily with is the house. And this is where, over the past few years, I've come a little more around to. Now that it's relatively inexpensive to set up a simple trust, it does seem... And am I correct here or am I wrong? Is setting up a simple trust and not spending tens of thousands of dollars to an overpriced attorney, no offense, that's not you, but there are some out there. Is that the easiest way to get a house to pass, or are there easier ways through the...? I know it's not easy to name a beneficiary, so is it easier to just change the ownership to a trust to cover the house?
Paul: There's two different ways to do it, Brian. And the first is, yes, you could create a trust, and then you can transfer title into the name of the trust. The other way is, a lot of states, I think over 30 of them, have enacted a transfer-on-death-deed or a transfer-on-death affidavit. So, it's usually about a two-page document that gets filed in the counter recorder that you can just transfer your real property without going through the probate process. Either one works and it works well.
Bob: All right, I got...
Brian: Go ahead, Bob.
Bob: All right, I got one last one for you. Oftentimes, Paul, we see great documents drafted. Everything appears to be buttoned up and whatever, but there's something called family dynamics, let's spit that out, that always enters the equation. You can have the best documents known to man, but this is still impacting people at the end of the day. One of the biggest issues you run into just in dealing with heirs, clients, family dynamics that we got to get out in front of so that this estate plan at the end of the day really is going to accomplish what folks want it to accomplish.
Paul: Well, as you both know, life happens. And whether that's children getting married, whether that's the person who drew up the documents, they get a divorce, whether it's maybe a new grandchild, whether it's moving to another state to retire, all of these things can trigger possibly reviewing your documents because things aren't going to pass according to your intent. So, there's a lot of different triggers to look at for an update, and that's why we always recommend clients take a look at their documents every two to five years just to make sure that it follows their intent and goals.
Bob: All right, great stuff as always tonight, Paul. Thank you for carving out time to join us. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you could click while you're listening to the show if you're listening on the iHeart app. Simply record your question and it will come straight to us. Jim, down in Lexington leads us off tonight, Brian. He says, "We bought a lake house for a little over $400,000 about 20 years ago and it's now worth $1.6 million." Nice investment, Jim. "We've considered making it our primary residence for a couple of years before selling. Would that actually save us meaningful taxes, or are there rules that make this strategy less attractive than it sounds?"
Brian: Yeah, so the rules to everything, right? So, yes, moving into that lake house could save a decent amount of taxes, but two years of living there, that generally doesn't unlock the full $500,000 exclusion there. So, these are rules specifically addressing homes that were vacation properties before becoming somebody's primary residence. So, let's start with the rule that most people are least vaguely familiar with. A married couple filing jointly can generally exclude up to $0.5 million of gain on a qualifying home sale. By the way, this isn't just a once in a lifetime thing. You can do it whenever you buy a primary home.
That rule is specifically focused on your primary home. So, at least one spouse has to meet the two-year ownership requirement, but both must meet the two-year residency requirement. I know that sounds funny. Most people, both spouses own everything. That's mostly, but sometimes there are cases where that's not how it works. Two different rules though. One is about ownership, the other is about living in the place to begin with. Also, neither of them can have used the exclusion on another sale within the previous two years. So, you can't flip every year and expect to do this, but you can do it more than once in life.
Now, here's what you're asking about. The catch is something called non-qualified use. So, in the years after 2008, when the house was a vacation home, that generally makes up a proportional share of the gain ineligible for exclusion, meaning, moving in doesn't erase those years, even if you never rented the property and only use it as your second home. But vacation use before January 1st, 2009 doesn't count against you in that calculation. So, these are things to be very mindful of.
You definitely want to get a CPA or an accountant involved when you do sell to make sure you don't run afoul of these rules. And the specific question you want to look for, the term you want to Google, non-qualified use. You're basically saying, how does the time count since I've owned this for such a long time? Some of it was second home use, some of it was primary home use. How does that affect the rules? That's called non-qualified use. Something to Google this afternoon.
Let's move on to Jack and Mason. Jack says, "We've been using a direct indexing strategy for three years and have accumulated about $110,000 in realized tax losses." Jack, I appreciate you asking your question that way, because now, we have real numbers that we can share with clients about how those types of strategies actually can benefit. But back to Jack's question, he says, "The advisor wants to use these losses to help diversify some appreciated stock. But if we use them all now, are we giving up a potentially more valuable tax benefit later?" What do you think, Bob?
Bob: Well, first of all, his question mentions realized tax losses. I think what Jack is saying is unrealized tax losses, meaning, you know, they're there for the taking if we want to realize them. But in answer to your question, Jack, I honestly think, in this case, I think you're getting good advice, good, solid advice from your current financial advisor. He or she is being out there proactively trying to manage for you on two fronts, tax efficiency and good, sound portfolio management. So, you know, there must be a pretty good reason to want to look at diversifying some of that appreciated stock. It's probably become, you know, too much or too high of a percentage of your portfolio.
And in any good tax loss harvesting or tax smart investing strategy, that's the whole point of it, is over time, you're always going to be able to realize short term losses in a broadly diversified portfolio. So, I think in this case, you're getting good advice. And, you know, just based on what I see here, I think you should follow the advice. You know, it's a coin flip if you're going to have this more valuable tax benefit later. That's only if tax rates go up and a lot of things that we can't control. So, I say, take the advice that you're being given now and, you know, harvest these unrealized losses, get your portfolio all set up and good to go and diversified. I think you're being led in the right direction here.
All right, we've got time for one more. Paul in Anderson says, "We're considering giving our daughter $100,000 in appreciated stock to help her purchase a home. Our advisor suggested giving her cash instead and keeping the stock ourselves. If the value is the same, why would one type of gift be significantly better than the other?" Brian?
Brian: Yeah, so obviously, you're trying to help her out, and taxes are always going to be a thing here. So, here's the immediate... I'm not 100% certain why the advisor would be passionate about one versus the other. There are differences, but I don't know that they're deal breakers. But in any case, $100,000 in appreciated stock. Well, obviously, if this is going to be used to buy a home, she's going to have to sell it, which means, she's going to be subject to 15%, maybe 20% of capital gains on that stock depending on what her other income is. I'm going to guess, if you're helping her buy a home, she's probably not super high income, so safe to say it's probably the 15% bracket. That means it's really only $85,000. So, as long as you've got that in mind, no big deal. If you give her $100,000 cash, she gets $100,000. That's not a taxable situation.
That's not a deal breaker. If you need her to get $100,000 and you want to use the stock, well, you might have to give her $117, $118, something like that so that she will net the $100,000. But the other thing you might be thinking about too is gift taxes, right? So, nobody's going to get taxed on this particular transaction. $100,000, yes, that's above the annual exclusion of $19,000, but that doesn't mean it gets taxed. It simply means it has to be reported because the other $81,000 of that $100,000 gift is going to go against your lifetime $1 million exemption. You have to file a piece of paper to record that that transaction occurred, but that does not mean you're paying taxes. So, just something before you get sideways on that.
Bob: Love or money. Well, for a growing number of Americans, it's both, and sometimes, money wins. We'll explain next. You're listening "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, there are literally a zillion studies out there that show that money is a major stressor in relationships. We see it every day. But for some, Brian, it's actually the glue that's keeping people together.
Brian: Yeah, it can work the opposite direction. So, new survey from Talker Research and Chime reveals something pretty eye opening. So, one in five Americans admit that they're staying in a romantic relationship primarily for financial reasons. I would say, there's nothing romantic about that kind of a relationship, but whatever. So, that means that the shared bank account or maybe it's the mortgage or just the cost of splitting it up is what's keeping couples together, whether the romancer is there or not.
Now, when I've been involved in these situations and discussions recently, the super scary thing is interest rates right now, right? "We're going to fight over the house because one of us is going to have to buy another house and subject themselves to a 7% rate while the other spouse gets to keep the 2% or 3% rate from 10 years ago." That's a topic that's coming up in dissolution agreements all the time. So, you know, it doesn't matter, if you've got real estate investments or estate plans tied together, that breakup, of course, is not just emotional, it is financially strategic. A lot of couples have to quietly weigh that cost of separation against the comfort of financial stability. "I'm not happy in my situation, but can I afford to have a different situation? Is that even on the table for me?"
Bob: Well, and of course, stating the obvious, money can mask relationship issues. And if you've got combined finances, but not combined long-term values, it's easy to mistake shared account for shared goals. Brian, I think for so many couples, a lot of people come into marriage without any financial education whatsoever. To say nothing of the fact that we all come from different financial backgrounds and different assumptions about how money works. And a lot of that tends to be handed down from our parents. And when you're merging two families into one in a marital situation, that can create some stress.
So, I'm a big fan of some premarital counseling, number one, and then even post-marital counseling just to unearth some of these stressors that are really being brought into the relationship. Because oftentimes, if you can get those issues on the table and talk about them with a qualified professional, you can work your way through this and not have to completely split the relationship or the marriage up. But I've seen this work sometimes, and I've seen it not work because we're just too far down the road here with accumulated debt and pressure mounting and resentment building. But if you see that you're a disconnect with the person that you're living with, try to get these financial issues on the table. Talk them out, maybe with the help of a professional, before you just have to blow the whole thing up. Any last thing to add there, Brian?
Brian: No, I think you kind of nailed it. I think it's easier to start with nothing. This is more often going to come up with people who came to the relationship with different assets. But if you were dirt poor, then smooth sailing ahead.
Bob: Here's the Allworth advice, if money is keeping you together, make sure it's also bringing you closer. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
There's a pretty remarkable story out there about how many Americans are preparing for retirement, or maybe I should say, how they're not preparing. Brian, let's walk through this study tonight. This was interesting.
Brian: Yeah, this is a study from LIMRA, which is a nonprofit research and education organization, and they focus on the insurance, retirement, financial services industries. Us, Bob, they're looking at us. Anyway, they've been around since about 1916, and that research is widely used by financial institutions, advisors, and the media. Just to understand how people are saving, investing, preparing for retirement, and so forth. So, this time around, they surveyed about 500 Americans age 45 and older who expect to retire within the next decade. Now, there's some younger folks in there from 45 and expecting to retire the next decade. That's when I'm 55 or earlier. And so, we've got a fairly broad range of people here. The first number sounds pretty encouraging though. Eighty-eight percent say they've thought about how they're going to generate income once they stop working. Can they actually do it? Is a different question. But have you thought about it? Well, that's an important one to start. But...
Bob: Brian, that first number reminds me of, I watch a lot of sports on TV, as you know, and I see often this commercial. I'm pretty sure it's from the annuity company, Voya. Have you ever seen that one where the two guys are having lunch together and the one guy's obviously planned for his retirement and his friend obviously hasn't. And he basically says, "Here's my retirement plan. And he puts both hands in the air with his fingers crossed and says, "Come on, good retirement." You ever seen that one?
Brian: I think I see it every other day or so here in my office. That's why we do financial planning. But, yeah, so people are thinking about it. Now, here's another number that came out of this survey. This one kind of jumped off the page a little bit. Three out of four people are the finger crossers, right? They either have no retirement plan or have spent fewer than five hours developing, reviewing, or updating one over the past year. In other words, what that means is, "Yeah, I thought about it and it looks so bad, I just stopped thinking about it." And that's the solution for now.
So, there's a big time psychological component here. While you're working, the goal is straightforward. And I say this to my clients and their kids all the time. It's really simple earlier in your career. The answer is save money, invest aggressively, don't panic when the market wobbles, and don't make a mess of your credit. If you do those things for 30 years, you will reach the point where you really do need a plan because a plan means you have options. If you haven't given yourself options, then you don't need a plan. The plan is simply keep your expenses below your Social Security check because that's all you'll ever see. That's why you need to plan so that you can make it more complicated because you will have options to choose from, which means someday, you'll have to understand those options.
Bob: Yeah, and then here's another number, and I'll get into why the case. I've got thoughts on this. Only 40% of people out there are actually getting any kind of professional help for their retirement. You know, there are so many financial decisions, Brian, you and I talk about them often all day every day, so many decisions that are packed into those final years before retirement. Things like Social Security claiming decisions, Medicare, Roth conversions, investment allocation, your Required Minimum Distribution strategy down the road. And if you've accumulated significant wealth, you may have additional questions around things like estate planning, charitable giving, capital gains tax management, how to leave money to your children. Those decisions all overlap and interact with each other. And you might be great at picking stocks or ETFs or managing your investments. That doesn't necessarily mean you figured out the rest of this, the coordination between all those other things, decisions that need to be made. And I know you want to walk us through an example of what we're talking about here.
Brian: I think that's the best way to educate on these things. Let's go through a real life case here straight from the files of Allworth Financial, kind of sort of. This is an amalgamation of, basically, everything we talk to every day. So, let's take a couple here in Cincinnati. $3 million saved. And they decide they want to retire at 63. And they've done a wonderful job accumulating money. But maybe they haven't considered whether things like doing Roth conversions between retirement and age 73 or 75, depending on their birth year, could reduce their lifetime taxable bill.
And that's kind of what I was referring to before. That's an option. A Roth conversion is a choice. It's not something you have to do. It's something you should understand and look at the pros and cons, and then you can determine whether it's worthwhile for you. It's not something to agonize about when you're in your 20s and your 30s in that accumulation stage. But these folks have saved so much money, they have given themselves options, and it's time to understand those options.
And then another question that comes up, does delaying Social Security make sense for the higher earning spouse? That's another option. I've given myself the option versus a different couple who may have no choice but to file for Social Security as soon as possible because they simply need every last dollar that they can have flowing into the checking account to put money or to put food on the table and a roof over their heads. So, again, these are the examples of the things where people get to the point where they have to choose something. And it can be very stressful because we feel like we're missing opportunities if we don't understand it correctly.
Bob: Yeah, and that's where there's a confidence gap here, and a rather big one, between folks that have worked with a good fiduciary financial professional and those that have not or are not. The gap is significant. Seventy-seven percent of folks feel highly prepared. The ones that have sat down and done an actual coordinated plan like you're talking about. Among those that have not sat down and done any planning, gotten any professional help, the number sinks to only 47%.
And, Brian, I'll go back to the last point. You made the main point here several minutes ago. The simple blocking and tackling here for 20, 30, 35 years, spending less than you have coming in, investing the difference wisely, and just letting the miracle of compound growth work for you for a variety of reasons that we don't have time to get into. A lot of folks have done that and they've got sizable resources to work with. And unfortunately, you know, at least half of the population out there has not. So, they're either trying to play catch up here later in life or they're kind of just throwing up their hands and saying, "I'm never going to get there. I'm not going to have all these choices that you talked about."
And I think that's the real gulf or difference here between those working with a financial advisor and those who are not. I think it comes down to resources in a lot of cases, but not all cases. We run into folks, Brian, that say, they think that all an investment advisor or financial advisor does is manage investments, and they're missing the real value add here on all the things a good fiduciary advisor does for people completely separate from picking different investments.
Brian: That's right. And a lot of this is driven by fear. So, let's talk about the fear part of this that the same LIMRA study looked at. So, LIMRA asked pre-retirees what their biggest retirement concerns were. And the number one answer, believe it or not, was not a stock market crash. Forty-three percent of them, almost half, cited cost of living volatility. I'd love to hear what that was 10 years ago, right? About 10 years ago, I'd say we were much more afraid of the stock market falling apart and taking our investments with it. But now, we worry about just the cost of living because inflation has become such a part of our lives. Thirty percent of them cited outliving their savings, which is almost kind of the same thing, right? "If life costs more than I anticipated, I'm probably not going to have enough." And there's, you know, so one out of three people is saying that inflation is very, very, very much on their minds, and that that's the big boogeyman for them.
And this is completely understandable. Because when you're working, your income increases over time. It's sort of a natural byproduct of working hard in a career or moving from job to job seeking better opportunities. It's just what you do. You get raises, bonuses, promotions, and then you retire. You're relying on a portfolio and income sources that don't necessarily keep pace with inflation. And then there's also the volatility of those investments. What kind of income can they continue to produce? And as we talk about all the time, what about drawdown situations where the market has come down and I still have a bill to pay? So, I have to take my money out. My investments may be down 10%, 15%. I got to take cash out to pay my bills. And therefore, does that mean have I shortened the lifespan of my portfolio in terms of keeping it able to support me?
So, if you got $3, $4 million, let's talk about inflation here, they can still make a difference over a twenty five, thirty year retirement. If expenses rise 3% every year, that means they're going to double over twenty four years. So, if you're spending one hundred thousand now today to keep yourself happy, then now, that same lifestyle without improving anything, without reflecting the increased cost of health care because of whatever is happening to you physically, you're looking at $200,000 just to maintain exactly what you were doing 24 years ago. I don't know about you, Bob, but I don't I don't plan on only spending as much on health care 30 years from now as I'm spending right now. I'm fairly sure that number is going to go up for me.
Bob: No. And we talked about that on yesterday's show. I think that's a lot of reason why older folks or people that are aging are a little resident to part with some of their money for some of these splurges like trips and things. I mean, we do not want to become dependent on our kids or dependent on draining our portfolios due to a health care event. That's why people that have resources tend to want to hold on to them and have them grow. Hey, let's boil all this down. I know you and I threw out a lot of numbers and percentages just now. Let's just land the plane here. Eighty-eight percent are thinking about retirement income. That's no surprise. But 76% have no plans.
Brian: You know, Bob, what are the other 12% think of it?
Bob: You know, they might be hanging out with you down in Athens, Ohio, on the weekends.
Brian: That could be. Maybe just really not focused on it.
Bob: How much retirement planning conversations are you having down there on the weekends?
Brian: That's a pretty happy place, so sometimes it feels like retirement.
Bob: All right. Well, 88% are thinking about it. And I think Brian's point is 100% of us should be thinking about it. But 76% have no plan or have spent fewer than 5 hours working on one in the past year. And only 40% are working with a financial professional. And therefore, just 25% of folks believe their protected income sources are going to cover their essential expenses down the road. So, as a society here, we've got some work to do like a lot of things that we talk about every day.
People understand retirement is a big deal. They know they need to prepare. But there's a huge gap between recognizing the problem and actually doing something about it. Here's the Allworth advice, thinking about retirement is not the same thing as planning for it. The sooner you turn your savings into a real income strategy, the more prepared you'll be for the years ahead. Coming up next, why paying taxes now could save you a pile of money down the road. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Could moving into your vacation home save you a fortune in taxes when you sell? Plus, when should you cash in those tax losses that you've accumulated if you're doing a direct indexing strategy? We'll answer all those questions straight ahead. Well, I'm going to say something right now that might sound a little strange coming from a financial advisor, and it's this, sometimes one of the smartest financial decisions you can make is to voluntarily pay a little bit more in taxes now. That's counterintuitive for a lot of folks out there, Brian.
Brian: What, Bob? Pay taxes now? That's idiotic. Why would I do that? So, no, it's certainly not something you hear every day. Most people are just doing everything they can to pay less in taxes. As a matter of fact, that becomes an obsession for some people who are still looking under every stone, every nook and cranny. Back in the days when the commercials used to advertise, "Let's find all the deductions in your tax return." None of those tax prep companies do that anymore because there, basically, aren't any deductions unless you're going to be super charitable. Nobody takes garbage bags of T-shirts to Goodwill anymore and asks for a receipt. As a matter of fact, Goodwill doesn't even offer receipts anymore because nobody wants them.
So, why in the world would we be thinking about this, right? So, for a long time, we've been focused on maxing out that traditional 401(k), defer your taxes as long as possible. Don't sell your investments if that's going to trigger capital gains. Can't have that. Capital gains are evil. Just sit on it, let it grow. Those are all great strategies. But eventually, we get to a point, as we're sneaking up on retirement and accumulating more wealth, where that mindset can really start working against you because there's a bit of a tax time bomb out there. A lot of people who are, you know, I mentioned maxing out that traditional 401(k), if you spend decades upon decades hiding your money from the IRS, legally of course, in your 401(k), well, then guess what? They know it's there. They're very well aware that it's there because they know they've got something in their back pocket called the Required Minimum Distribution.
If you plow millions of dollars into your 401(k) over decades, and then you retire, that eventually is going to come back around. You're going to be required to start taking money out at age 73 or 75. Those ages do move. When I started this industry, it was 70 and a half, and it's just slowly moved forward over the decades. But basically, you will be required to take out and pay taxes on 4% to 5% of whatever that amount is worth. So, if you built up a $3 million 401(k) that rolls into your IRA, well, guess what? On January 1st, the first day that you are a 73 or 75, then you have, basically, already had taxable income of $150,000 in that case because that's roughly what the IRS is going to require that you remove from that 401(k) or IRA and pay taxes on. And that is, of course, in addition to any other taxable sources of income you might have, pension, Social Security, rental income, whatever it is out there. So, you'll, basically, at that point, never see a really low bracket again because of those pre-tax piles of money.
Bob: Yeah. And here's something else people don't think about, Brian, I'll admit I probably don't think about this enough, what happens when one spouse passes away? Let's say a married couple has been filing jointly for decades, one spouse dies. And let's face it, this becomes a bigger issue if there's a significant age gap between the spouses, or heaven forbid, one of the spouses gets a terminal illness or disease and passes away way sooner than actuarial life expectancy. But if one spouse does die, that surviving spouse eventually has to file as a single taxpayer. And that big, huge IRA that you just talked about, now, that's delivering the same required distribution.
But now, we've got much narrower tax brackets to work with, so you can end up even paying a higher tax rate even though the household has lost an income source, maybe through virtue of a pension or a drop in Social Security benefits. So, it's something to keep an eye on. We never want to play God or predict if somebody's going to die prematurely, but it's another reason to at least keep an eye on that growing, looming Required Minimum Distribution down the road.
Brian: Yeah, and I think this is an opportunity for me to talk about something that happens not that often, but it does happen. So, I've got two cases right now that I'm working on where there was about a 10-year difference between spouses age-wise, and the younger spouse unexpectedly passed first. So, normally, if you're married to somebody and your spouse passes away, unfortunately, then usually, the go-to move is, "Well, I'll just take their IRA, their pre-tax dollars or their Roth or whatever into my own, and it's as if it was mine all along." That is how the tax code works. That's normally the go-to move.
However, if there is a significant age difference, you may not want to do that. Reason being is because, in these cases where one client is 10 years older than the deceased, then that older surviving client, they're going to hit Required Minimum Distribution age, obviously, sooner, and if there's just more money in that account, then those RMDs go up. So, the solution for them is, "Let's keep it separate." There's nothing wrong with a spouse having an inherited IRA from their deceased spouse. That is perfectly legal. You can do that. What that buys you the time to do is now, you don't have to take those Required Minimum Distributions until your deceased spouse would have reached that age. So, that's another way to push it out. There aren't that many people. That's a fairly rare case, but hopefully, somebody's ears just perked up in dealing with the situation they're in right now.
Bob: No, Brian, that's an excellent planning point there. Good for you for helping those folks through that. All right, for the rest of the normal situations out there, and we talk about this often, I mean, let's say you retire at 62 after a successful career. You were making, say, a quarter million dollars a year, and now, obviously, that paycheck is gone. You haven't started Social Security yet. You haven't reached that Required Minimum Distribution age. Your taxable income could now be significantly lower for several years, you know, 10 or 12 years now, as you pointed out. And that's where we've got that opportunity.
You might consider converting a portion of your traditional IRA to a Roth IRA, or you might just use some of that IRA money now, spend it to pay for your living expenses, you know, paying taxes at a lower rate. The important thing is to look at this, run different scenarios. And not just try to minimize taxes this year, but look longer term at what's going to be the most efficient way to manage your retirement income and pass down your assets to your family down the road. Here's the Allworth advice, the goal is not to simply pay the taxes every year, it's to make smart decisions that could reduce your total tax burden over your lifetime. Well, do you think your estate planning is all set and good to go? Coming up next, what the pros check that you might not be checking. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
[00:20:56.054]
[silence]
[00:20:16.492]
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James, joined tonight by our senior estate planner at Allworth's private client group, Mr. Paul Schwarz. Paul, thank you for making some time for us tonight. We want to talk about something called an estate planning audit. And what we really want to hit on right now is, occasionally, Brian and I come across clients, we ask them about their estate plan all the time in meetings and they say, "Yeah, we got that done. That box is checked." And then when we start to ask some follow-up questions, things often aren't as buttoned up as people think they are. So, what we're going to talk about is something called an estate planning audit. What exactly does a competent estate planning audit look like? And what do you tend to find when you do those audits, Paul?
Paul: Well, thanks for having me. An audit is basically just, it's a full review of whether your estate planning documents still match your intent and goals if something were to happen to you tomorrow. And it's less about rewriting everything, but more about spotting gaps, outdated choices, or inconsistencies. So, what we're going to do is we're going to look at all of your estate planning documents in depth. Your wills and trusts, your durable power of attorneys, your healthcare power of attorneys, your living wills, if you own a business, we're going to look at your business documents. And just as important, we're going to look at asset ownership and titling and beneficiary designations, payable-on-death designations and transfer-on-death designations. And we're going to make sure that any review is going to align with your will and trust.
Brian: Paul, can you walk through, what does it look like when somebody...? I'm sure you've got some horrific war stories. What does it look like when this goes sideways and people haven't done these things and then a death occurs unexpectedly? What can you do to help after the fact?
Paul: Well, there's not a lot you can do to help after the fact because things didn't go as planned. So, what I usually see in those situations is they've put all these documents together to avoid probate. And then when somebody passes away, they didn't really have the proper documentation or the proper titling of the assets, and some of the assets are going to go through probate, which is just going to cause some extra money in terms of the attorney fees and some delays with going through probate because that usually takes anywhere from about six months to a year.
Bob: Hey, Paul, we hear an awful lot about trust. I mean, people are out there marketing trust in seminars and webinars. And I think there's a lot of confusion out there about trust. Are they needed? How are they best used? How common is it that people spend a lot of money to get one of these trust-dones, and then we come to find out that they're either outdated, or in a lot of cases, never even properly funded in terms of asset titling?
Paul: Back in the old days, we used to do a lot of trust, and we used to do a lot of them to save on estate taxes. With the federal exemption amount at $15 million and the tri-state, Ohio, Indiana, and Kentucky not having an estate tax, they're a little bit less common today. What most people want to do with the trust is either avoid probate, they want them for privacy, or they want to control the funds from the grave and they want to control them from creditors. So, we don't see them as much nowadays as we did back in the old days, but there are still a lot of ways to avoid probate. And that goes through the asset titling. It also goes through the beneficiary designations that you put on life insurance, annuities, any type of retirement accounts. Bank accounts can have a payable on death to beneficiaries. And then your brokerage accounts can also have a transfer on death to avoid probate. And they're all going to pass by contract and not pursuant to the terms of your will.
Brian: So, here's my non-lawyer observation, not being a lawyer, and glad you're on staff so I can say, "If Paul tells you something else, he's smarter than me," whatever. Most people have a fairly simple situation. Seventy, eighty percent, I'm making this up, of the clients I meet with, they've got their assets and their kids are doing okay, their adult children are doing well enough, and they're not really concerned about doing anything other than just making sure this passes efficiently and simply to my children. Which as you mentioned is really as simple as just naming beneficiaries on everything, either through beneficiary designations or POD, TOD arrangements at banks.
But that said, the one you can't do that very easily with is the house. And this is where, over the past few years, I've come a little more around to. Now that it's relatively inexpensive to set up a simple trust, it does seem... And am I correct here or am I wrong? Is setting up a simple trust and not spending tens of thousands of dollars to an overpriced attorney, no offense, that's not you, but there are some out there. Is that the easiest way to get a house to pass, or are there easier ways through the...? I know it's not easy to name a beneficiary, so is it easier to just change the ownership to a trust to cover the house?
Paul: There's two different ways to do it, Brian. And the first is, yes, you could create a trust, and then you can transfer title into the name of the trust. The other way is, a lot of states, I think over 30 of them, have enacted a transfer-on-death-deed or a transfer-on-death affidavit. So, it's usually about a two-page document that gets filed in the counter recorder that you can just transfer your real property without going through the probate process. Either one works and it works well.
Bob: All right, I got...
Brian: Go ahead, Bob.
Bob: All right, I got one last one for you. Oftentimes, Paul, we see great documents drafted. Everything appears to be buttoned up and whatever, but there's something called family dynamics, let's spit that out, that always enters the equation. You can have the best documents known to man, but this is still impacting people at the end of the day. One of the biggest issues you run into just in dealing with heirs, clients, family dynamics that we got to get out in front of so that this estate plan at the end of the day really is going to accomplish what folks want it to accomplish.
Paul: Well, as you both know, life happens. And whether that's children getting married, whether that's the person who drew up the documents, they get a divorce, whether it's maybe a new grandchild, whether it's moving to another state to retire, all of these things can trigger possibly reviewing your documents because things aren't going to pass according to your intent. So, there's a lot of different triggers to look at for an update, and that's why we always recommend clients take a look at their documents every two to five years just to make sure that it follows their intent and goals.
Bob: All right, great stuff as always tonight, Paul. Thank you for carving out time to join us. You're listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. If you have a financial question you'd like for us to answer, there's a red button you could click while you're listening to the show if you're listening on the iHeart app. Simply record your question and it will come straight to us. Jim, down in Lexington leads us off tonight, Brian. He says, "We bought a lake house for a little over $400,000 about 20 years ago and it's now worth $1.6 million." Nice investment, Jim. "We've considered making it our primary residence for a couple of years before selling. Would that actually save us meaningful taxes, or are there rules that make this strategy less attractive than it sounds?"
Brian: Yeah, so the rules to everything, right? So, yes, moving into that lake house could save a decent amount of taxes, but two years of living there, that generally doesn't unlock the full $500,000 exclusion there. So, these are rules specifically addressing homes that were vacation properties before becoming somebody's primary residence. So, let's start with the rule that most people are least vaguely familiar with. A married couple filing jointly can generally exclude up to $0.5 million of gain on a qualifying home sale. By the way, this isn't just a once in a lifetime thing. You can do it whenever you buy a primary home.
That rule is specifically focused on your primary home. So, at least one spouse has to meet the two-year ownership requirement, but both must meet the two-year residency requirement. I know that sounds funny. Most people, both spouses own everything. That's mostly, but sometimes there are cases where that's not how it works. Two different rules though. One is about ownership, the other is about living in the place to begin with. Also, neither of them can have used the exclusion on another sale within the previous two years. So, you can't flip every year and expect to do this, but you can do it more than once in life.
Now, here's what you're asking about. The catch is something called non-qualified use. So, in the years after 2008, when the house was a vacation home, that generally makes up a proportional share of the gain ineligible for exclusion, meaning, moving in doesn't erase those years, even if you never rented the property and only use it as your second home. But vacation use before January 1st, 2009 doesn't count against you in that calculation. So, these are things to be very mindful of.
You definitely want to get a CPA or an accountant involved when you do sell to make sure you don't run afoul of these rules. And the specific question you want to look for, the term you want to Google, non-qualified use. You're basically saying, how does the time count since I've owned this for such a long time? Some of it was second home use, some of it was primary home use. How does that affect the rules? That's called non-qualified use. Something to Google this afternoon.
Let's move on to Jack and Mason. Jack says, "We've been using a direct indexing strategy for three years and have accumulated about $110,000 in realized tax losses." Jack, I appreciate you asking your question that way, because now, we have real numbers that we can share with clients about how those types of strategies actually can benefit. But back to Jack's question, he says, "The advisor wants to use these losses to help diversify some appreciated stock. But if we use them all now, are we giving up a potentially more valuable tax benefit later?" What do you think, Bob?
Bob: Well, first of all, his question mentions realized tax losses. I think what Jack is saying is unrealized tax losses, meaning, you know, they're there for the taking if we want to realize them. But in answer to your question, Jack, I honestly think, in this case, I think you're getting good advice, good, solid advice from your current financial advisor. He or she is being out there proactively trying to manage for you on two fronts, tax efficiency and good, sound portfolio management. So, you know, there must be a pretty good reason to want to look at diversifying some of that appreciated stock. It's probably become, you know, too much or too high of a percentage of your portfolio.
And in any good tax loss harvesting or tax smart investing strategy, that's the whole point of it, is over time, you're always going to be able to realize short term losses in a broadly diversified portfolio. So, I think in this case, you're getting good advice. And, you know, just based on what I see here, I think you should follow the advice. You know, it's a coin flip if you're going to have this more valuable tax benefit later. That's only if tax rates go up and a lot of things that we can't control. So, I say, take the advice that you're being given now and, you know, harvest these unrealized losses, get your portfolio all set up and good to go and diversified. I think you're being led in the right direction here.
All right, we've got time for one more. Paul in Anderson says, "We're considering giving our daughter $100,000 in appreciated stock to help her purchase a home. Our advisor suggested giving her cash instead and keeping the stock ourselves. If the value is the same, why would one type of gift be significantly better than the other?" Brian?
Brian: Yeah, so obviously, you're trying to help her out, and taxes are always going to be a thing here. So, here's the immediate... I'm not 100% certain why the advisor would be passionate about one versus the other. There are differences, but I don't know that they're deal breakers. But in any case, $100,000 in appreciated stock. Well, obviously, if this is going to be used to buy a home, she's going to have to sell it, which means, she's going to be subject to 15%, maybe 20% of capital gains on that stock depending on what her other income is. I'm going to guess, if you're helping her buy a home, she's probably not super high income, so safe to say it's probably the 15% bracket. That means it's really only $85,000. So, as long as you've got that in mind, no big deal. If you give her $100,000 cash, she gets $100,000. That's not a taxable situation.
That's not a deal breaker. If you need her to get $100,000 and you want to use the stock, well, you might have to give her $117, $118, something like that so that she will net the $100,000. But the other thing you might be thinking about too is gift taxes, right? So, nobody's going to get taxed on this particular transaction. $100,000, yes, that's above the annual exclusion of $19,000, but that doesn't mean it gets taxed. It simply means it has to be reported because the other $81,000 of that $100,000 gift is going to go against your lifetime $1 million exemption. You have to file a piece of paper to record that that transaction occurred, but that does not mean you're paying taxes. So, just something before you get sideways on that.
Bob: Love or money. Well, for a growing number of Americans, it's both, and sometimes, money wins. We'll explain next. You're listening "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
You're listening to "Simply Money", presented by Allworth Financial. I'm Bob Sponseller along with Brian James. Well, there are literally a zillion studies out there that show that money is a major stressor in relationships. We see it every day. But for some, Brian, it's actually the glue that's keeping people together.
Brian: Yeah, it can work the opposite direction. So, new survey from Talker Research and Chime reveals something pretty eye opening. So, one in five Americans admit that they're staying in a romantic relationship primarily for financial reasons. I would say, there's nothing romantic about that kind of a relationship, but whatever. So, that means that the shared bank account or maybe it's the mortgage or just the cost of splitting it up is what's keeping couples together, whether the romancer is there or not.
Now, when I've been involved in these situations and discussions recently, the super scary thing is interest rates right now, right? "We're going to fight over the house because one of us is going to have to buy another house and subject themselves to a 7% rate while the other spouse gets to keep the 2% or 3% rate from 10 years ago." That's a topic that's coming up in dissolution agreements all the time. So, you know, it doesn't matter, if you've got real estate investments or estate plans tied together, that breakup, of course, is not just emotional, it is financially strategic. A lot of couples have to quietly weigh that cost of separation against the comfort of financial stability. "I'm not happy in my situation, but can I afford to have a different situation? Is that even on the table for me?"
Bob: Well, and of course, stating the obvious, money can mask relationship issues. And if you've got combined finances, but not combined long-term values, it's easy to mistake shared account for shared goals. Brian, I think for so many couples, a lot of people come into marriage without any financial education whatsoever. To say nothing of the fact that we all come from different financial backgrounds and different assumptions about how money works. And a lot of that tends to be handed down from our parents. And when you're merging two families into one in a marital situation, that can create some stress.
So, I'm a big fan of some premarital counseling, number one, and then even post-marital counseling just to unearth some of these stressors that are really being brought into the relationship. Because oftentimes, if you can get those issues on the table and talk about them with a qualified professional, you can work your way through this and not have to completely split the relationship or the marriage up. But I've seen this work sometimes, and I've seen it not work because we're just too far down the road here with accumulated debt and pressure mounting and resentment building. But if you see that you're a disconnect with the person that you're living with, try to get these financial issues on the table. Talk them out, maybe with the help of a professional, before you just have to blow the whole thing up. Any last thing to add there, Brian?
Brian: No, I think you kind of nailed it. I think it's easier to start with nothing. This is more often going to come up with people who came to the relationship with different assets. But if you were dirt poor, then smooth sailing ahead.
Bob: Here's the Allworth advice, if money is keeping you together, make sure it's also bringing you closer. Thanks for listening tonight. You've been listening to "Simply Money", presented by Allworth Financial on 55KRC, THE Talk Station.
Insights for Complex Wealth Decisions
Join our email list for exclusive commentary from our Chief Investment Officer, early access to expert-led webinars, and your complimentary Wealth Planning Checklist for Complex Portfolios.
We take your privacy seriously and respect your privacy choices. By submitting this information you agree to our Terms of Use Agreement, Privacy Policy, and to receive important notices and other communications electronically.