Business Innovators Radio - Interview w/ Michelle Boyce, RICP, VP w/ Rosenzweig Financial Services Discussing Qualified Funds-How is Too Much?

Episode Date: September 25, 2024

Michelle has over 20 years of experience in Financial Services and her main goal is to always focus on her client’s long-term financial planning strategy to optimize retirement income.She prides herself on analyzing a financial situation, finding any potential issues, and creating adequate solutions to ensure her clients’ prosperous future. With her extensive insurance and planning experience, Michelle adds great knowledge to the already specialized team at RFS.She has worked in various capacities in the financial industry from being part of top producer teams to teaching new financial advisors through agency leadership. Michelle’s passion is to help educate consumers by taking complex financial strategies and explaining them in an easy way to understand the concept. Michelle is originally from Pittsburgh, PA, and a graduate from Penn State University in Business.She now resides in Boynton Beach, FL with her husband Rob, their two daughters Olivia and London, and their three pets. When Michelle isn’t working with RFS’s clients or spending time with her family, she is likely exercising or on her Peloton, competing her way to the top of the leaderboard.Michelle has always loved sports as she grew up playing Basketball, Volleyball, and Softball. While living in Pittsburgh, she became part of Steeler Nation and that devotion has carried with her to South Florida.Michelle joined Rosenzweig Financial Services in October 2021 as Vice President, specializing in the professional marketplace.Learn more: https://www.rfsny.com/Registered representative of, and securities and investment advisory services offered through Hornor, Townsend & Kent, LLC (HTK), Registered Investment Adviser, Member FINRA/SIPC, 1 North Federal Hwy, Suite 201, Boca Raton, FL 33432. 561-314-3100, http://www.htk.com. HTK is a wholly-owned subsidiary of The Penn Mutual Life Insurance Company. Rosenzweig Financial Services is unaffiliated with HTK. HTK does not offer tax or legal advice. Always consult a qualified adviser regarding your individual circumstances.Retirement Income Authority is not affiliated with HTKInfluential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-w-michelle-boyce-ricp-vp-w-rosenzweig-financial-services-discussing-qualified-funds-how-is-too-much

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us, Michelle Boyce, who's a vice president with Rosenzwegg financial services, and we'll be talking about qualified funds. Michelle, welcome back to the program. Thank you, Mike. Thanks for having me back.

Hey, so I know a lot of times people like, well, how much money should I have in this type of account and that kind and what percentage? And we know it's all different. But we kind of want to go, how much should we have in qualified funds? And before we kind of talk about that, define what are qualified funds? Yeah. So I like to say qualified funds is a term that we use all the time, right, in the financial services. and then oftentimes when I talk to the clients, they look at me like I have three heads and like, well, what does that mean? So there's really two types of funds, qualified funds, non-qualified funds.

Qualified funds are your retirement accounts, right? So if you've got a 401k at work or a 403B, if you work in, you know, a hospital, that's a qualified fund, an IRA, a step, anything that's tax deferred where you're not paying taxes on the money today, but you're going to take it out retirement and pay taxes then. That's what we're referencing when we say qualified funds. You know, that's a good point. And I think a lot of times people think like, oh, I got my first job set up a 401k. And you really don't think about it really is like, okay, money's going in there, but it's going in there pre-tax. So the government's never been paid any taxes on that at all. And they're actually delaying getting the taxes for many decades at some point, right?

Correct. Yes. Good. So qualified funds are funds where it might be a variety of things, like you said, IRA or 401K, but where money goes in before taxes have been paid out. And that's a whole big bucket. And that's actually when you see research, I'm sure, where the government's like, okay, people that have this many gazillions of dollars in qualified funds, we need to start getting some money out of that. So when you start thinking about your retirement portfolio, and putting money in qualified accounts like that, how much is too much? What's the percentage? What's the amount we should be thinking about? Yep. So I like to say 401K IRA, all of those are great accumulators of wealth, but they're awful distributors of wealth, right?

And what that means is, but when you need to start taking that money out, it's not very advantageous the way that you have to take it. Right. So there's things, first of all, every dollar that comes out after your 59 and a half, right, you have to pay ordinary income tax on. So, and that's whatever your tax bracket is at that time. So only thing we know to be true is change, right? And if you are deferring today when you're in the 20% bracket, you might be taken out

at the 25% bracket. You don't know, right? So we want to use these different vehicles to save, but we don't want to save in there too much and to getting, you know, back to the question you're asked, and because they might be saying, well, why? Why don't I want to save too much in there? And it's because when you get to retirement, right, and you have to start pulling that money out, you're paying the tax. But then even there becomes a point where the government says, well, hold on there. You've been deferring, deferring, deferring. You now have to start taking income out of these of your IRAs and 401ks and start paying

the tax if you need it or not. And then, you're going to be deferring, and then. there's what we called required minimum distributions or RMDs. Right. So when that comes out. Because in reality, that was instituted because the government, and they would probably never admit this, they're like, come on, we haven't gotten a dime of taxes from people for 20, 30, 40 years. We need to start getting some and make sure it's coming in.

But talk a little bit about what these required minimum distributions actually are. Yes. So they're, you know, they're a forced distribution. Now, when they start, they're based off your age. but that's been a moving target, right? When I got into the industry, the RMDA age was 70 and a half. Then it went to 72. As we are recording this today, it's 73, right?

But then if you're born after 1960, it's moving to 75 in a year. So it's kind of a moving target, but it's the same story once you get there, right? Whatever your account value is at that point in time, there's a factor of how much you have to take out at that age. and it starts kind of low at like three and a half percent, but then it increases each year. And by the time you get to your mid-80s, you know, it's between five and a half, six percent of the account value that you have to take out. Now, the main thing here is that you have to take that if you need it or not. Yeah.

Well, that's a good point because I'm sitting here thinking, what if someone has got a bunch of money squirled away and, you know, a CD or a savings account and, oh, they got, they started. sold their boat and they don't need any money this year. So they might think, I'm good. But if you don't take it, there's consequences, right? Absolutely. So the consequence used to be a 50% penalty. They changed that language a little bit in the recent amendment to the Secure Act. And I believe they took the penalty down to 25%, very generous of them.

But that's still a lot. Right, right. Exactly. Nobody wants to pay any penalty on their own money. let alone something that high, right? So, but it's exactly why you said, you deferred, you deferred. And the last statistic I saw is that there's something like, you know, $12 trillion in retirement plans.

And it's growing at a 10% per year clip. So the government needs to be able to get that money back in taxes, which is why the RMDs exist. Yeah. That's a, I feel like that is. not something that you can just Google and go, okay, here's what I need to do. It's something where you need to sit down with someone that knows what they're doing, knows what questions to ask about your situation, and then puts together a good plan. So required minimum distributions, keyword there in all bold and 40 point font required. And I will tell you, I haven't. So I'm not sure if I mentioned this by work with a lot of retirees, right, getting ready to retire in retirement. In my 20 years of working, I have not met one retiree that said, oh, I can't wait to take my R&D this year. It's always the opposite.

It's the conversation of, oh, do I really need to take that much? I don't need this. I don't want it. Is there any other options? Right? And it's kind of like, no, you know, at this point, you need to pay the Piper and take that out. But it just, it doesn't give the consumer flexibility.

And so when we do planning, we want to try to. give them flexibility so that when you get to retirement, you can take your, you're not forced to take income if you don't need it. Yeah. Yeah, for sure. So let's back up a little bit because a couple questions that I thought of about these qualified accounts like the 401k's IRAs. Talk a little bit about a little bit of the planning that people should be thinking about regarding like even what are some of the limitations? Like are there limits? Can you put a gazillion dollars in some of those accounts? and what should people be thinking about even on the front end? Like if someone is younger or starting their first job

or rolling their first job 401k into their second job, what are some of the thoughts around that to be prepared for it to grow and then we get into RMD, you know, thoughts and things like that? Yeah, so it really depends on the instrument, right? So, you know, an IRA per se has the lowest limits, right? And right now it's, you know, 7,000 a year. But then there's 401K, which has a train. now at $23,000 a year limit, but then you can do a qualified plan such as defined benefit plans,

which you can defer, you know, a large percent of your income. I've got clients putting several hundred thousand a year into those types of plans. So it really depends, but always I have two rules of thumbs when I'm working with individuals who are still in the accumulation phase. The first, if they're in a 401k plan, we only want to contribute up to the match, right? So we want you to be saving and we want you to take advantage of the free money but pay those taxes the difference pay those taxes today at a rate you know and while you have income and then save those in other type of taxation locations maybe into a tax free location or like a brokerage account for that type of um taxation but we don't want to have too much going in to just that tax deferred.

So that's for yeah. Yeah. So you want to stay in the habit of saving. and investing for the future and all of that. But what if the employer match is, let's just call it 5%. But what if you wanted to say 15% of your income? Great. Put the 5 in that 401k, but then put more money in other types of accounts. So don't limit your saving or you're investing for the future. Just limit what goes into that qualified account. Exactly. Exactly. And then maybe for people that are self-employed, right? Or we're not talking like a company match. we look at how much are you saving? How much can you save? Which the rule of thumb there is you really should be saving about 15% of your annual income into your financial model. That's how you're going to get to retirement. But I work with people who are just starting out, saving 5% to people that are saving 50% of their income, right? It all depends. But what we have a conversation before I recommend anything is say, let's look a breakdown of where you're saving.

saving, okay? Because there's a concept that I like to show people called the tax triangle, right? So if you picture a triangle, a triangle has three different points, right? Each of those points are a different type of taxation. There's tax deferred, like with qualified plans, there's tax free with like a Roth IRA, and then there's taxable, which is like a brokerage account. On your current savings level, what percent is going into each of those three, right? And does it have balance. Most of the time it doesn't have balance and most of it is into tax deferred. So I show them we want to be able to get you to a place in retirement that you have the ability and flexibility to pull from different types of taxations. So we want to change your savings today

to be a more equal split between the three different taxation buckets. That makes sense. Now what about I'm kind of trying to think, I like to think, logistically, you know, beginning of your career, do the things you were mentioning. Then it starts to grow. But before we get to RMDs or when we get to RMDs, we need to start taking money out. So are there some ways to optimize withdrawing from these qualified funds? Because RMD percentages are a certain percent. And it's, you know, we don't need to get into the numbers of that.

But it still might mean that you sit down with a client and go, okay, we got to do this for RMDs. But then also, let's start moving. money out of your qualified funds in this strategy. What are some ways to optimize that? Yes. So there's several different ways you can optimize that. First, we do kind of projection, the different modeling to say, okay, if you do it this way, what your taxation look like? How much is left? How much does you get to enjoy? Then we can say, well, what if we start doing, you know, Roth conversions along the way? Because that's now triggering that other tip of the tax triangle with a

tax free bucket. So they could do Roth conversions. And if you have a Roth IRA, there's no RMDs that are needed to be taken in the future. So that's one strategy that helps you reduce your RMDs throughout your life, which that reduces your taxes. Another strategy is just to accelerate the paydown of that IRA, right? So rather than waiting for the government to say, now you have to take it at 73 and you have to take X, what if we start taking it at 70, right, age 70?

and what if we take more than the RMD? 99% of the time we end up paying less in taxes because we haven't let that compound, right? Because as the account compounds, the taxes compound. So I use financial modeling software to show these side-by-side analysis to individuals to say, hey, here's your current path, here's how much you pay in taxes,

and then we'll get into how much your kids pay in taxes. But if we do it this way, here's how much you save in taxes and how much more money you have left on your side of the balance sheet. You know, that's a great point because it kind of is perspective, you know, like, hey, I want to accumulate as much as I can wisely. Then I want to have enough to make it two and through retirement. That's great. But then there comes a point where it's like, okay, I have done well and I've got plenty of money to make it two and through retirement times two. I'm good.

Now let's talk about leaving money to my heir. So what happens if funds are left in those qualified accounts when you're transferring it to your heirs? Because I know like you just mentioned there, there now becomes another aspect to be considering. Right. So I've heard a lot throughout my career, right? I'm not going to need that IRA. I'm just going to leave it for my kids, right? And prior to the end of 2019, it kind of worked, right?

they still inherited and had to pay the tax over the course of their life, but it's what I call a quality problem. But when the Secure Act got passed, leaving an IRA to the next generation became the worst asset to leave. Because not only do you pay the taxes during your life, but when they inherit that, your children, for example, they have to take that balance and pay it down over a maximum of 10 years. Right. So if you're not, If there's a million dollars left in that account, simple straight math, they have to pull out 100,000 a year of income, right? Now, let's think of timing when most individuals that pass away, their children are probably

in there maybe mid to late 50s, early 60s, likely still working and likely in their highest earning years. So maybe they're making a couple hundred thousand of income. and now they have to take this additional income on top of it, which is throwing them into a higher tax bracket. So now there's the amount that gets paid on the tax on Generation 2. When you add that to Generation 1, it's an astounding figure, right? And most times the government is who gets the most out of that account, right? It doesn't sound like a win-win situation right there at all, does it?

No. What I found if most people have the option, right, between themselves, charity or their family, right, or the government, they're going to pick those first three before they pick the government to give the most to. Yes. I mean, that's, that's huge. And here's the thing that make, when you're describing that, it makes me think of something where the per, the retiree that is making all these plans. and then you go to the next step, the legacy planning, the, you know, passing to errors and you put strategies in place so that it mitigates and eases as much as possible for their family. What a gift of that is. You know, what a piece of mind for them to know that they're taking care of and they're setting things in place for their kids. And you know what? Their family and kids might not even have realized the contrast or the, you know, potential that it would have been. But it's just a nice gift that here's mom and dad taking care of the family.

Absolutely. Right. And I feel it's kind of part of my job to educate, right, to let them know what their options are because a lot of people don't understand, you know, Congress passed with a lot of bills. Some of them we understand some of them we don't. Most of the consumers were not familiar with all the changes that happened through the Secure Act and definitely not how it impacts their retirement. Yes. That's huge. Well, we've kind of really wrapped up this conversation. all surrounding this qualified funds. What is it? How much is too much? What's some strategies to grow in that? How do a required minimum distributions come in? Wrap us up with some final thoughts or have you worked with a client recently where you've been able to implement a strategy that really helped them out there?

Yes. So, you know, and the earlier that you can kind of work on some of these strategies, the better, right? Because oftentimes what we're doing is taking. that money that's been compounding in the taxes and now transferring that into tax-free wealth, right? And just the miracle of compound interest, as it works while you're accumulating, it works really well when you're in retirement as well if you're not using those assets, especially if it's tax-free, right? So that's just kind of a disclosure. The earlier you can think about these things the better because you will get better benefits. But I have a client we're working with

right now who, you know, they're in their early 70s and they've, they've got plenty of income in retirement. They don't really need their RMDs, right? They're set for retirement and their goal is to leave the max amount to their children that they can. So I kind of showed them, you know, well, just taking the RMDs, this is how much is going to be left in that IRA and here's how much the children will potentially get in the taxation. And I said, what if we just changed the strategy? here and rather than leaving them that asset, you start using those RMDs and maybe a little bit more that we pay it down and use that to fund life insurance. You know, and they're like, well, why would we do that? And I'm like, well, you were going to leave this asset anyway, but you're leaving

it taxable. Now we're going to leave them an asset that's tax free. And it saved them several hundred thousand dollars in taxes throughout their lives and the kids. And it ended up leaving more money on a guaranteed basis. So they're like, well, this strategy seems to make a lot of sense. Yeah, I got to take the RMD anyway. I don't need it. What do I do with it? Oh, why don't I?

Yeah, that's awesome. Yeah. Well, I'll tell you, this has been. Yeah, it's all about educating. That's the thing is people want to feel like they understand the process. And when they are educated and taught of their options, it gives them flexibility and then when they make those decisions moving forward, they feel confident and they say what you have mentioned in the past. Like, wow, the peace of mind this provides is just huge. So I think

that is just so powerful, Michelle. If someone is interested in reaching out and connect with you and learning more about some of these qualified funds and all that, what is the best way they can do that? Yes. So they can find, they can look up our website. Find me there. The address is www. N.com, which is Richard Frank Samnoy.com. And we actually do a monthly webinar series, and they're all posted on the website as well. And this is one of the topics that I have. You know, I think this topic's is the December topic. So if they want to hear more on this topic, they can sign up for the webinar as well. Awesome. Thank you so much for coming back on. It's been a real pleasure talking with you. Thanks for having me, Mike. You've been listening to influential entrepreneurs.

with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www. www.Influentialentrepreneursradio.com.