Bogleheads® on Investing Podcast 020 – Jeff Levine, CPA/CFP, host Rick Ferri (audio only)

00:00:00.000 | [music]

00:00:11.320 | Welcome to Bogleheads on Investing podcast number 20.

00:00:15.120 | Today, I am happy to have Jeff Levine, a tax expert and a financial advisor, and we'll

00:00:24.080 | be talking about the CARES Act, the SECURE Act, and tax loss harvesting.

00:00:31.440 | [music]

00:00:39.560 | Hi everyone, my name is Rick Ferry and I'm the host of Bogleheads on Investing.

00:00:45.040 | This episode, as with all episodes, is sponsored by the John C. Bogle Center for Financial

00:00:50.880 | Literacy, a 501(c)(3) corporation.

00:00:55.080 | Today, my special guest is Jeff Levine.

00:00:59.120 | Jeff is a certified public accountant, a certified financial planner, and a nationally recognized

00:01:04.560 | thought leader on tax issues within the financial planning community.

00:01:08.920 | Jeff is the lead financial planner nerd for Kitsis.com, home of the popular Nerd's iView

00:01:14.320 | blog, and the founder of Fully Vested Advice Incorporated, which provides financial education

00:01:19.820 | and consulting services to industry professionals.

00:01:22.920 | He is also the director of advanced planning at Buckingham Strategic Wealth.

00:01:28.360 | With no further ado, I am very happy to have on our show Jeff Levine.

00:01:35.080 | Welcome Jeff.

00:01:36.080 | Thank you, Rick.

00:01:37.080 | Thank you for having me.

00:01:38.080 | Jeff, you're a great resource for everything that's been going on with various legislation

00:01:45.480 | and taxes, and you are a bona fide tax geek, and we're really pleased to have you on the

00:01:52.560 | show today.

00:01:54.160 | Before we get into the nitty gritty details, could you tell us how you became a tax geek?

00:01:59.160 | Sure.

00:02:00.160 | You know, I kind of by accident, probably like most people who end up in that.

00:02:04.000 | I don't think anybody grows up and like, "Man, I want to be nose deep in the tax code every

00:02:08.240 | day of my life."

00:02:09.600 | But it all started really by happenstance.

00:02:13.720 | When I was younger, my parents got divorced and my mom started looking for work, and as

00:02:18.760 | it turns out, I had gone to school with Ed Slott, who probably many of your listeners

00:02:24.840 | know.

00:02:25.840 | I went to school with his niece.

00:02:27.240 | His sister-in-law had said to my mother, "You know, I think he's looking for an administrative

00:02:32.920 | assistant, a secretary, something along those lines," and I was pretty young at the time.

00:02:38.360 | But my mom ended up taking that job, and over the course of the years, she's actually become

00:02:42.360 | the managing partner of the firm and has been for quite a while sometime.

00:02:46.760 | For our listeners who don't know, Ed Slott is probably one of the nation's most respected

00:02:52.120 | authorities on individual retirement accounts, and he gave you your first job and I guess

00:02:59.520 | your first paycheck.

00:03:00.520 | I mean, Ed Slott's father gave me my very first $100 bill after working a week on school

00:03:06.400 | spring break, I think when I was like 13 or 14 years old.

00:03:10.000 | And when everybody hears that story, and they also know that I worked for Ed Slott and Company

00:03:13.920 | for about a decade, they just kind of think like, "Oh, of course, you were anointed from

00:03:19.200 | birth to work there, like the boy king."

00:03:22.880 | And it couldn't have been further from the truth.

00:03:25.320 | I actually wanted to be a doctor from the time I was two until 21, 22, my kind of senior

00:03:31.520 | year in college, and I spoke with a lot of doctors in the emergency room, and I had been

00:03:38.600 | doing EMS, and so I got very close with them.

00:03:41.920 | And they all told me, "If you can find something else you love, go do that."

00:03:46.440 | And so, here I am trying to take their advice, I say, "You know what, I've always loved math.

00:03:51.560 | I enjoy working with people and helping people.

00:03:53.720 | I'm going to become a financial advisor.

00:03:55.560 | I've heard Ed talk about these people for years and how they can help people.

00:03:59.280 | That's what I'm going to do."

00:04:00.800 | And so I started and I called up and asked around a bunch of people who I trusted.

00:04:04.760 | They said, "Here's a good company to go to and do your training with."

00:04:08.720 | So I called them up, and I got an invitation to come work with them.

00:04:13.480 | And the first week we went in and it was, "Rah, rah, we're going to help people," and

00:04:17.560 | I was all excited.

00:04:18.560 | Week two was an unbelievable motivational lecture, still probably the best motivational

00:04:23.320 | concept I've ever heard.

00:04:25.160 | For those listeners who are not familiar with it, it's called 212 Degrees, and the whole

00:04:29.240 | concept was essentially water from 32 degrees on up to 211 degrees, goes from cold water

00:04:35.640 | to hot water, but it's still water, right?

00:04:39.160 | And you put in all this energy into the system, but by putting one extra degree of energy,

00:04:43.920 | now you go from 211 degrees to 212, and you create steam and you power locomotives and

00:04:49.720 | engines and all these sorts of things.

00:04:51.360 | So I've always asked myself, whenever I'm not seeing the results that I think I want

00:04:55.760 | to see, am I at 211 degrees?

00:04:59.120 | Have I done so much work, but just not that one little extra bit?

00:05:03.320 | So that was awesome.

00:05:04.320 | And as a science nerd also, it really resonated with me and has still stuck with me to this

00:05:08.160 | day so many years later.

00:05:10.560 | Then week three was all about life insurance, which was fine, you have to understand the

00:05:14.960 | tools of the trade if you're going to be a financial planner.

00:05:18.080 | But by week four it was, "Great, you're all experts, bring in a list of 100 people

00:05:22.600 | you know and let's see how we can help them."

00:05:25.240 | Which of course, Rick, as you know, was, "Let's see how many people you know that we can call

00:05:29.160 | and shove product down their throat."

00:05:31.400 | And I had this real crisis of conscience, I said, "What am I going to do?

00:05:36.120 | I can't do this."

00:05:37.400 | How could I legitimately look somebody in the eye and say, "Trust me with your life

00:05:42.400 | savings," when because of my unique relationship, knowing Ed Slott and the group of advisors

00:05:47.840 | that he was training, I literally knew like 300 people who were way more qualified than

00:05:52.580 | I was to do it.

00:05:54.440 | So I did something I almost never do, I quit and I said, "I'm sorry, this is not for

00:05:58.200 | me."

00:05:59.200 | And I had no idea what I was going to do with my life.

00:06:01.160 | At the time, I was actually thinking about going back to school for emergency disaster

00:06:04.340 | management and working with FEMA.

00:06:06.800 | Ultimately, I happened to go down and help my mother and Ed at a program they were having

00:06:12.320 | purely for registration, they were just short on people, and was sharing the story I told

00:06:16.200 | with you and an advisor at another table happened to hear me and said, "You know, I happened

00:06:22.480 | to overhear you last night, I work in a CPA firm and we do all the planning for that firm,

00:06:27.280 | so we don't have to like hunt down people, there's just plenty of people who need help

00:06:31.600 | and we just help the ones that want it.

00:06:33.960 | And would you like to come work with me?

00:06:35.400 | You seem like a nice kid and a bright kid.

00:06:37.640 | How would you like to come move down to Miami and work with us in the CPA firm?"

00:06:40.880 | And so I went down to Miami and after about a year or so, it wasn't quite what I had

00:06:46.520 | expected.

00:06:47.960 | So to end this very long story and kind of to get to where we are today.

00:06:52.460 | So Ed called me up into his office and said, "How would you like to work with us?

00:06:56.880 | Essentially, we need some young blood here.

00:06:59.380 | You seem to have an ability to grasp this stuff, how would you like to work with us?"

00:07:03.840 | And when somebody who's the best in the country at something says, "Would you like to work

00:07:09.320 | with me?"

00:07:10.320 | The answer is yes.

00:07:11.320 | I don't care what they do.

00:07:12.320 | If they're the best garbage man in the country, I'm going to go work with them because I want

00:07:15.600 | to learn how to do things really well.

00:07:17.280 | But I kind of took it as a challenge and went ahead and did that.

00:07:19.760 | And they were almost 10 years of the best years of my life.

00:07:22.880 | I mean, it was a great learning experience.

00:07:25.920 | But as I ventured out and created my own RIA about three and a half years ago, that began

00:07:31.920 | to take more of my time and I decided to ultimately, Ed and I parted ways very amicably.

00:07:36.680 | We're still great friends.

00:07:38.520 | So I went out on my own and shortly after that, Michael Kitsis, who I know you're familiar

00:07:43.640 | with as well, he reached out to me and said, "Jeff, I don't know what you're planning

00:07:47.720 | on doing, but would you like to do some stuff together?"

00:07:51.040 | And again, when anybody who's a top in the country at anything, and I think Michael really

00:07:55.200 | is the preeminent thought leader of our industry right now, when it says, "Would you like

00:07:59.520 | to do something together?"

00:08:00.520 | The answer is yes.

00:08:01.520 | So Michael and I began to work there.

00:08:03.600 | I ultimately became the lead financial planning nerd, technically, is my title over at that

00:08:07.920 | platform.

00:08:09.120 | And then after about three years, the RIA had grown to the point where we really felt

00:08:14.000 | for Michael and I to be aligned and for us to have some more scale on the advisory side.

00:08:19.000 | So Michael and I both left our existing advisory firms to team up.

00:08:22.640 | And so now I spend part of my time as the director of advanced planning over at Buckingham

00:08:28.200 | Strategic Wealth and Buckingham Wealth Partners.

00:08:31.120 | And in addition to that, I spend the rest of my time with Michael over on the Nerds

00:08:35.320 | Eye View platform at kitsis.com.

00:08:37.120 | I wake up every morning and I'm excited to go to work.

00:08:40.600 | So let's get into some tax stuff.

00:08:42.440 | Sure.

00:08:43.440 | So the most recent thing is the Corona's Aid Relief and Economic Security Act or CARES

00:08:50.920 | Act, which is a $2 trillion emergency fiscal stimulus package.

00:08:57.800 | And it's just loaded with all kinds of stuff.

00:08:59.780 | So my first group of questions will be about the CARES Act.

00:09:03.760 | And then we'll talk about the SECURE Act, which was signed into law late last year,

00:09:09.120 | which changed a lot of things.

00:09:10.980 | And then we'll talk about tax loss harvesting, which is something Boglehead have near and

00:09:15.740 | dear to their hearts.

00:09:16.740 | So I want to get through those three big things today, and we're going to do it in 50 minutes

00:09:21.840 | or less.

00:09:22.840 | So are you ready?

00:09:23.840 | That's a big ask, but let's do it.

00:09:26.420 | Let's try.

00:09:27.420 | All right.

00:09:28.420 | So CARES Act.

00:09:29.420 | Go.

00:09:30.420 | It's like, tell me the history of the world.

00:09:35.720 | So I mean, I think the question that's on most people's mind is, what am I getting?

00:09:40.220 | Like, what type of check am I getting?

00:09:42.080 | That seems to be the number one question people have asked so far is, am I getting a check?

00:09:45.900 | And once the answer is yes, how much is it?

00:09:49.360 | Each adult taxpayer is entitled to a $1,200 recovery rebate check as a starting point.

00:09:57.640 | Now I say as a starting point because we're going to have to adjust this for some higher

00:10:00.720 | earners that are listening.

00:10:02.060 | But as a starting point, $1,200 to adult taxpayers, single individual, $1,200, head of household,

00:10:10.540 | let's give them $1,200, and a married couple who filed a joint return, $2,400 for two times

00:10:16.640 | 1,200.

00:10:17.840 | In addition to that, each taxpayer is also entitled to a $500 credit for each qualifying

00:10:24.500 | child.

00:10:25.500 | And qualifying child here is the same way as a child tax credit is qualified for.

00:10:31.560 | So we're looking for children under the age of 17 here, so 16 and under, and there's an

00:10:36.920 | additional $500 there.

00:10:38.440 | So for argument's sake, a married couple with a joint return who have three children would

00:10:44.800 | be entitled as a starting point to a $3,900 recovery rebate check.

00:10:50.920 | Are these checks actually going to be coming in the mail?

00:10:54.640 | Are you getting a credit against your income taxes when you file your income tax?

00:10:58.640 | How is it going to work?

00:11:00.400 | So it is considered a credit against your 2020 taxes.

00:11:05.880 | The easiest way I could think about explaining it is, imagine that the government is pretending

00:11:11.720 | that everybody who's entitled to their rebate check paid that amount in for their 2020 taxes

00:11:18.440 | already on January 1st of this year, and now they're just refunding it back to you.

00:11:23.600 | They said, "Oops, you paid too much, here's your own money back."

00:11:26.920 | That's the simplest way to think about this in one's mind.

00:11:30.240 | Now in terms of how those checks are actually going to be processed, it's going to vary.

00:11:34.480 | So for individuals who are receiving social security benefits, the likelihood is that

00:11:39.560 | those checks will be processed, or those distributions will be processed to the account into which

00:11:44.120 | they're getting their social security payment.

00:11:46.360 | For individuals who have a direct deposit account on file with the IRS from either their

00:11:52.080 | 2018 or 2019 tax return, whichever is the most recent, then those direct deposit accounts

00:11:59.640 | will receive that rebate.

00:12:01.240 | And then for all others, it will likely go to the address of record where you filed your

00:12:06.240 | last tax return.

00:12:07.240 | And notably, there are some problems here.

00:12:09.480 | For instance, somebody who had a refund in 2018 that was processed, that might've been

00:12:15.040 | over a year ago already, and what if they closed that account?

00:12:18.840 | What happens?

00:12:19.840 | Where does that check go?

00:12:20.920 | Or what if somebody moved from the last time they filed their tax return?

00:12:25.280 | In that second instance, there is actually a remedy, something I would encourage your

00:12:28.760 | listeners to do right now if they're thinking they may get a check, is go online, print

00:12:33.400 | out IRS form 8822, form 8822.

00:12:39.200 | And what that is, it's just a simple change of address form with the IRS.

00:12:42.240 | It says to the IRS, "Hey, you have my old address, use this one going forward."

00:12:48.280 | And that would be a good way to make sure that your check, if it's going to be a check,

00:12:52.080 | goes to the correct place.

00:12:53.740 | So this is a 2020 tax refund, but of course, you're not filing your tax returns until 2021.

00:13:01.020 | Now, some people have already filed their 2019 taxes and some people have not yet.

00:13:06.580 | So there must be some sort of a strategy here.

00:13:09.140 | In other words, if your income for 2019 is lower than your income for 2018, you probably

00:13:16.180 | want to file your tax returns, especially if you want to get it below the $150,000 for

00:13:21.420 | married filing jointly, or less than that if you're single, correct?

00:13:26.060 | That's exactly right.

00:13:27.060 | And the reason that's important is, I think you just hit on it.

00:13:30.020 | So we talked about a starting point before, right, for those checks.

00:13:33.660 | But as income exceeds certain thresholds, notably, as you mentioned, for married couples

00:13:38.100 | filing a joint return, $150,000; for single filers, $75,000; and for head of households,

00:13:45.100 | $112,500.

00:13:47.060 | Because your AGI for those applicable years, 2018 or 2019, exceeds those amounts, the recovery

00:13:54.500 | rebate check that you get now, or recovery rebate direct deposit, whatever you want to

00:13:58.820 | say, will be lowered by $5 for every $100 you're over those thresholds.

00:14:06.460 | So as you mentioned, if your income is lower in 2019 than it was in 2018, it very well

00:14:12.140 | may pay to file that 2019 return to get that on file with the IRS.

00:14:16.980 | So they use that as the number to base this recovery rebate credit on.

00:14:21.980 | What if it's the case where in 2018 that person didn't make that much money, but in 2019 they

00:14:29.220 | made a lot of money, but they already filed their return?

00:14:32.180 | Can they pull it back?

00:14:34.380 | Unfortunately, I don't see a way for you to pull back that.

00:14:38.100 | I didn't say it was me.

00:14:39.100 | I didn't say that.

00:14:40.100 | Fair enough.

00:14:41.100 | And it is not me.

00:14:43.260 | But I was saying, boy, if this person did not file their 2019 return, they would have

00:14:50.380 | gotten a larger check by waiting.

00:14:54.300 | But unfortunately, you're saying they can't pull it back.

00:14:57.780 | Once that return is submitted and it's on file with the IRS, and the last thing you

00:15:02.420 | want to do is do anything that is fraudulent on a tax return.

00:15:07.100 | I've heard some people who said, "Oh, you know what I'm going to do?

00:15:10.260 | I'm just going to report $1 of income for 2019 on a tax return.

00:15:15.340 | This way I get my recovery rebate check, and then I'll just amend my return later."

00:15:19.700 | That's still filing a return, and when you file your return, you're saying under penalties

00:15:25.380 | of perjury that the information on there is true to the best of your knowledge.

00:15:29.400 | And so that is not something you want to be doing right now.

00:15:32.980 | If your return's on file, unfortunately, you should have procrastinated more.

00:15:37.100 | What's wrong with you?

00:15:39.020 | Being a procrastinator really helped with the CARES Act in a lot of ways.

00:15:43.900 | For instance, one, as you just mentioned, the other one is if you didn't take your 2019

00:15:48.180 | RMD as a first-year person who has RMDs, in other words, you turned 70 and a half last

00:15:53.380 | year in 2019, this year you can actually waive two of them.

00:15:58.260 | They've rewarded procrastination in this law.

00:16:00.540 | It's very strange.

00:16:01.540 | Well, let me ask a question about that because you hit upon it.

00:16:04.300 | I know you were getting ahead.

00:16:06.140 | One of the other provisions of the CARES Act is if you're 72 and a half or if you're

00:16:12.880 | 70 and a half and you started taking required minimum distributions and therefore you would

00:16:17.840 | have to continue taking them, that you can skip a year.

00:16:22.300 | So you can skip.

00:16:23.300 | Indeed.

00:16:24.300 | Right.

00:16:25.300 | But what if you already took it for 2020?

00:16:28.920 | This is a tough one.

00:16:29.920 | So first off, let's start with the easy answer is if you are a beneficiary, a non-spouse

00:16:35.720 | beneficiary like you had a parent or grandparent who left you an IRA or a 401(k) and you took

00:16:40.220 | that distribution, you are just SOL, as they say, right?

00:16:44.480 | There's nothing you can do to fix that.

00:16:46.560 | You're out of luck, unfortunately.

00:16:48.520 | For owners of an account like an IRA owner or 401(k) owner, there's a couple of ways

00:16:53.560 | which this may be fixable.

00:16:55.680 | The first and easiest way it could be fixed is if you happen to be within the 60-day window,

00:17:01.400 | which essentially means at this point you took your distribution from, you know, beginning

00:17:05.600 | of February on forward, roughly.

00:17:08.320 | If that's the case, then if you're within the 60-day window and you're not violating

00:17:12.960 | the once-per-year rollover rule, which means if it's coming from an IRA, you haven't done

00:17:17.080 | an IRA to IRA 60-day rollover within the past 365 days, then you can simply roll your distribution

00:17:24.480 | back in.

00:17:25.480 | Normally, you can't roll over an RMD, but this isn't an RMD.

00:17:28.800 | They just said no RMDs for that year.

00:17:31.120 | So that's very interesting.

00:17:33.160 | I can actually say, oh, no, no, this was not my RMD.

00:17:36.200 | It was just a rollover.

00:17:37.720 | I can put it back into the account within 60 days, and then I'm good.

00:17:42.000 | Yes.

00:17:43.000 | Yes.

00:17:44.000 | That would be the simplest way.

00:17:45.000 | There is a more complicated way for those who may be outside that 60-day rollover window,

00:17:51.000 | and that's by using a separate provision of this CARES Act, which created what's called

00:17:55.840 | a coronavirus distribution, and we can kind of get into the details of that later, but

00:18:01.200 | one of the key points of a coronavirus distribution is that you have up until three years after

00:18:09.280 | the distribution to repay it.

00:18:11.580 | So you have to qualify for a coronavirus distribution, which essentially means you or someone you

00:18:17.800 | know, either you or someone that's a member of your household, a dependent, your spouse,

00:18:23.200 | contracted the coronavirus, or you had some sort of financial hardship because of it related

00:18:30.960 | to your work.

00:18:31.960 | So you were furloughed, you lost hours, business closed, something along those lines, and I

00:18:37.120 | think the way it's written, I think IRS means for this to be interpreted fairly liberally,

00:18:42.800 | and if you can kind of force that distribution into this coronavirus-related distribution

00:18:48.680 | box, if you will, then again, you have three years from the date you took that distribution

00:18:53.840 | to pay it back.

00:18:54.840 | So those are two ways you could potentially fix an unwanted "RMD" that is no longer really

00:19:01.040 | an RMD for this year.

00:19:02.480 | Okay, let me ask one last question about this and we'll move on to the next thing.

00:19:05.880 | That is that I have a lot of clients who take an RMD monthly.

00:19:10.900 | So they started taking it in January, they took it in February, they took it the beginning

00:19:15.160 | of March before this law came out.

00:19:18.240 | Can they stop, or do they have to take their full distribution?

00:19:21.280 | In other words, once you begin to take it for the year, do you have to take the whole

00:19:25.200 | thing or can you stop right now?

00:19:27.720 | You absolutely do not have to continue taking it.

00:19:31.840 | And here's the thing, normally there's, well, not normally, but there is this once-per-year

00:19:36.920 | rollover rule.

00:19:38.560 | There may be ways to help resolve that for individuals.

00:19:41.680 | For instance, two suggestions I would have.

00:19:44.600 | One is if this distribution came from a plan, and let's say you took a February 15th RMD

00:19:51.640 | and a March 15th RMD, and you're listening to this today, and whatever today is as you're

00:19:58.400 | listening to it, you're within 60 days from both of those distributions.

00:20:02.440 | If they came from a plan, like a 401(k), they can actually both go back to an IRA.

00:20:07.640 | The once-per-year rollover rule doesn't apply to plan to IRA distributions.

00:20:13.280 | The second thing would be, let's say this did come from an IRA, which is very likely

00:20:17.160 | because a lot of people end up rolling over their dollars to IRAs later on for more flexibility

00:20:22.700 | in terms of investments, et cetera, more control.

00:20:25.000 | If it is the case that those February 15th and March 15th distributions already occurred,

00:20:31.200 | and let's just say hypothetically today is April 3rd, we're still within 60 days, then

00:20:35.960 | one of those distributions could go back into the IRA you took it from, or another one.

00:20:41.560 | The other one you could convert, because an IRA to a Roth IRA conversion, like via a 60-day

00:20:48.680 | rollover from the IRA to the Roth IRA, is also not considered part of the once-per-year

00:20:55.580 | rollover rule restrictions.

00:20:57.560 | So yes, it still means it's taxable, but now at least it's growing tax-free in a Roth IRA.

00:21:02.000 | So there's another way to potentially go about that.

00:21:04.400 | >>COREY: Let's talk about the unemployment aspect of it, and something that's pretty

00:21:07.700 | interesting, besides going in and getting basic unemployment benefits if you get laid

00:21:12.880 | off or furloughed, or you're out of work because of this, is a couple of interesting things

00:21:18.160 | about the CARES Act.

00:21:20.280 | I'll say them both here, but number one is you're eligible for it if you're self-employed,

00:21:26.880 | and secondly, everybody gets an extra $600 per week.

00:21:32.280 | So why don't you tackle the $600 one first, and then talk about the unemployment benefit

00:21:36.980 | for self-employed people, which normally you don't get?

00:21:41.720 | >>ANDREW: That's absolutely correct.

00:21:43.720 | So in terms of the extra $600, first off, I would say when it comes to unemployment

00:21:49.280 | as a general rule of thumb with this bill, just think it's bigger, it's longer, and more

00:21:55.120 | people qualify.

00:21:56.120 | It is like unemployment on steroids.

00:21:59.520 | With that said, the unemployment of $600, really what they were looking for is like,

00:22:04.240 | "Hey, we've got to replace more of someone's regular income," because believe it or not,

00:22:09.640 | the average unemployment today across the nation, and unemployment, I should mention,

00:22:13.360 | is a very fractured system.

00:22:15.960 | Unemployment is not a federal benefit that is typically offered.

00:22:19.000 | It's a state benefit that now the federal government is going to help fulfill and to

00:22:23.920 | backstop in terms of the finances of it, but each state has its own unemployment rules

00:22:29.280 | and time frame for how long they may last and amount of money, but the average unemployment

00:22:34.840 | across the US is only about $385, so less than $400.

00:22:40.920 | Let's just call it even $400.

00:22:42.160 | >>COREY: Per week.

00:22:43.160 | >>ANDREW: Per week.

00:22:44.160 | That's not going to be enough to support most families getting through this tough time.

00:22:48.040 | So by adding the $600, now we're up to $1,000 a week, a meaningful amount that, again, at

00:22:54.600 | least has the ability to help make sure that most people can pay the immediate bills that

00:22:59.440 | they need to pay in order to continue to exist during this really unprecedented time.

00:23:04.640 | Notably, that $600 plus the $400, so let's call it $1,000 for roughly the average payment

00:23:10.960 | that someone would receive under these unemployment provisions, is more than what some people

00:23:15.600 | make on a regular basis.

00:23:18.200 | And so that was one of the holdups, very temporarily, albeit, but there was a temporary holdup because

00:23:24.560 | there was some debate in the Senate as to, is this right?

00:23:27.960 | Should we actually incentivize people to collect unemployment and make more money rather than

00:23:32.800 | go back to work and earn less?

00:23:34.600 | And ultimately they came to the decision that it would be too challenging to do this separately,

00:23:39.800 | one-off for each state, because again, each state has different programs, and that may

00:23:44.160 | ultimately be the result of what happens, but it'll be a small percentage of people,

00:23:48.480 | and of those it applies to, only a small percentage will likely take advantage of the system that

00:23:53.320 | way.

00:23:54.320 | Now, with regard to the second part of the question, or really the first part, but kind

00:23:57.400 | of circling back to that first part about self-employed individuals, you're right, because

00:24:01.520 | unemployment means like, you typically don't get an unemployment unless you've been fired

00:24:05.680 | or let go, and you can't do that to yourself if you're, I mean, otherwise, any time a self-employed

00:24:10.520 | person wasn't having a good run of it, they would just say, you know what, I fired myself,

00:24:14.840 | let me collect some unemployment insurance.

00:24:18.040 | However, in disasters, we very frequently see legislation coming about that creates

00:24:25.200 | an unemployment fund for individuals who are self-employed, because they are also impacted,

00:24:32.400 | and that's exactly what we see here.

00:24:34.080 | So there's a special provision of this law called Pandemic Unemployment Assistance.

00:24:40.040 | And Pandemic Unemployment Assistance is basically a catch-all provision that says, if you don't

00:24:45.240 | qualify for unemployment compensation for some other reason, i.e. maybe you're self-employed,

00:24:51.560 | then you will get an equivalent unemployment compensation check via this Pandemic Unemployment

00:24:59.720 | Assistance program.

00:25:00.720 | I just want to clarify one thing.

00:25:03.120 | If it's a couple and both spouses are unemployed now, and one of them may have been self-employed

00:25:10.720 | and have lost business, and the other one was employed and lost their job, they both

00:25:16.280 | can collect unemployment and they both can collect the $600?

00:25:21.840 | Is that true?

00:25:22.840 | Generally speaking, the answer would be yes.

00:25:26.520 | But I would say that the other thing to keep in mind is you always want to know what your

00:25:30.920 | state laws are for unemployment assistance, unemployment compensation, because at the

00:25:36.360 | heart of it, there's a lot of state law that goes into this.

00:25:40.120 | Now, certainly if you didn't collect unemployment because of state law, you should be able to

00:25:44.960 | potentially qualify for that same Pandemic Unemployment Assistance program that we had

00:25:49.440 | just referenced.

00:25:50.440 | I just want to clarify one thing.

00:25:52.200 | If I'm self-employed, am I only going to get the $600 that the federal government is giving

00:25:58.880 | me?

00:25:59.880 | Or am I also going to qualify for state unemployment insurance, which I normally wouldn't get?

00:26:04.880 | So you will ultimately qualify for what amounts to your state plus the federal $600.

00:26:11.680 | But it may all ultimately be administered to you via this federal Pandemic Unemployment

00:26:18.720 | Assistance program.

00:26:20.360 | The state is not creating an unemployment compensation fund for self-employed individuals,

00:26:24.800 | but the net result to someone is the same as if they would have gotten a state check

00:26:28.400 | plus a federal check.

00:26:29.720 | Let me ask an investment question, because this has been asked to me already a couple

00:26:32.840 | of times.

00:26:34.920 | Part of the provision of the CARES Act is someone who is paying rent can stop paying

00:26:41.800 | rent, and I don't know under what circumstances they can stop paying rent, and they will not

00:26:47.720 | be evicted.

00:26:49.520 | And since the courts are basically closed, even if you wanted to evict them as a landlord,

00:26:54.200 | you could not.

00:26:55.200 | Now, you could talk about that, but since this is an investment show, I'm going to look

00:26:59.280 | at the other side of that.

00:27:00.960 | The other side of that is a lot of people own rental property.

00:27:05.160 | They own a house, they own a couple of apartments, they own some condos or whatever, and they

00:27:09.320 | rent it out.

00:27:10.480 | Now, I've already run into two people who their renter has said, "I'm not paying you,"

00:27:18.920 | because of the new law.

00:27:20.520 | What recourse would those people have?

00:27:23.160 | Because they still have to pay their mortgage on that property.

00:27:26.720 | Absolutely, and the first thing I would make sure to caution listeners is that we'll mention

00:27:32.640 | here what's going on in the CARES Act, but it's always important to check your local

00:27:37.400 | laws and see what's happened there as well, because property issues are often a matter

00:27:42.120 | of state law, and governors, et cetera, may have instituted certain emergency regulations

00:27:47.540 | that may supplement what we're about to talk about here.

00:27:50.840 | But in particular, what the CARES Act does is it says that if an individual has a federally

00:27:57.920 | backed loan, and there's a forbearance there, so if you're pausing that essentially, then

00:28:04.760 | there can be a pause, if you will, of the renter as well, paying that rent to the individual

00:28:10.320 | who owns that property.

00:28:11.760 | In addition, there's also some rules in there that prevent individuals from what they call

00:28:16.920 | covered dwellings, which means that you're getting help some way, shape, or form from

00:28:21.480 | the federal government.

00:28:22.480 | So either you participate in any number of programs that are organized for housing, or

00:28:27.480 | you've got a federally backed mortgage on the property, either as a loan or as a multifamily

00:28:32.920 | loan, then there's going to be certain restrictions on you being able to evict tenants, even if

00:28:38.360 | they're not paying their rent at this point in time.

00:28:41.740 | If your renters stop paying rent because they lose their jobs, and you have a loan that

00:28:48.700 | is backed by some federal program, and you're the landlord, you could go to your lender

00:28:55.820 | and get forbearance.

00:28:57.140 | So in other words, you could ask for leniency in delaying your own mortgage on that property.

00:29:04.820 | Many states have already done that as kind of a proactive measure, too.

00:29:09.500 | They've just said there is a general moratorium on rent payments, all you have to do is call

00:29:15.540 | your mortgage provider and do that.

00:29:17.260 | So it's really worth checking out the rules where you are locally here, because again,

00:29:22.620 | this issue is so intertwined between state rules and the federal rules that we now have

00:29:27.420 | altered by the CARES Act.

00:29:30.300 | The last item on the CARES Act that I'd like to address is the payroll tax, and there's

00:29:34.780 | two items here.

00:29:36.420 | Could you talk about those, please?

00:29:38.420 | Sure.

00:29:39.420 | There is one available credit that is for certain businesses who have really struggled.

00:29:46.580 | Either parts of their business or all of their business has been essentially shut down by

00:29:51.180 | government order of one sort or another, or they've seen revenues from their business

00:29:57.220 | drop by more than 50% from the same quarter in the previous year.

00:30:02.680 | So for argument's sake, in Q2 of 2019, they had $100,000.

00:30:07.380 | They would have to have below $50,000 in Q2 2020 for that to kick on and for that credit

00:30:14.780 | to be available.

00:30:15.780 | But look, a lot of businesses are having a tough time right now, and many of them have

00:30:19.780 | seen their revenues cut in such a fashion.

00:30:22.020 | So they would be eligible for a credit of up to 50% times the W-2 wages that they're

00:30:29.140 | paying to each employee, up to a maximum of $10,000 per employee.

00:30:34.300 | So that credit is for employment taxes only.

00:30:38.860 | So people need to make sure that this doesn't, you know, they don't conflate this with income

00:30:41.980 | taxes.

00:30:42.980 | This just applies to the employment taxes, so things like FICA, et cetera.

00:30:47.220 | But still, a nice credit.

00:30:48.860 | Now, for anybody who doesn't qualify for that credit, or even those that do but still, let's

00:30:53.420 | say, owe a tax in addition to it, there is another provision of the CARES Act that says

00:30:58.820 | the payroll taxes, again, the employment taxes that you owe from now through the end of the

00:31:06.620 | year, you can delay those for a significant period of time.

00:31:12.460 | Half of them can be delayed up until December 31st of 2021, so we're looking at almost two

00:31:18.580 | years from now.

00:31:20.260 | And the other half can be deferred up until as late as December 31st, 2022.

00:31:26.260 | So a really significant liquidity break.

00:31:29.940 | Now, it doesn't get rid of the liability for those companies.

00:31:32.300 | In other words, that's a tax you're still going to have to pay.

00:31:34.940 | But from a liquidity point, like if you need money now, that's a nice way to help reduce

00:31:41.040 | your current expenses on your cash flow statement.

00:31:44.260 | Okay, this is the absolute last two questions on the CARES Act.

00:31:49.860 | When do I have to file my tax returns?

00:31:51.500 | That has all changed.

00:31:52.500 | And if I'm self-employed, do I have to pay estimated taxes?

00:31:56.420 | And that would include retirees.

00:31:58.340 | So as it stands now, we've seen a couple bits of IRS information and guidance, and frankly,

00:32:03.340 | I wouldn't blame any of your listeners if they were confused.

00:32:06.080 | It's been so piecemeal over the last couple of weeks.

00:32:08.780 | There's been kind of conflicting guidance out there simply because they put out one

00:32:12.640 | thing today and two days later, they change it.

00:32:15.420 | As it stands now, as we're recording this, the tax filing deadline for individual taxpayers

00:32:22.260 | has been shifted out to July 15th of 2020.

00:32:27.700 | And that is also the payment date for taxes, so July 15th, 2020, for both of those items.

00:32:33.620 | Two things I would note, though, for listeners.

00:32:36.140 | One is that your business returns, if you didn't do that, let's say you had a S Corporation

00:32:41.100 | or a partnership return, as of now, they were still scheduled to be submitted on March 15th

00:32:48.600 | of 2020.

00:32:50.200 | So if you haven't filed an extension yet, I would encourage you to do so immediately.

00:32:54.160 | The other thing I would point out here is that a question that has come very frequently

00:32:58.040 | to me so far since this guidance was released was, does this mean now that the extension

00:33:03.080 | for a tax return is January 15th next year, in other words, six months from the July 15th

00:33:08.680 | deadline?

00:33:09.680 | And the answer is no.

00:33:11.680 | The extended deadline continues to be October 15th of 2020.

00:33:16.780 | What about paying estimated quarterly taxes?

00:33:20.400 | Sure.

00:33:21.400 | So self-employed individuals, really anybody who has to pay employment tax, excuse me,

00:33:25.840 | quarterly estimated taxes, their Q1 is due on July 15th at the same time the 2019 income

00:33:35.200 | tax return is due.

00:33:36.960 | Now, interestingly, some of your listeners who've been paying estimates for many of years,

00:33:41.240 | they probably are thinking to themselves, "But wait, what about Q2's estimate?

00:33:45.400 | Isn't that due June 15th?"

00:33:47.400 | And the answer is yes, it still is.

00:33:50.240 | Of course.

00:33:51.240 | Yeah.

00:33:52.240 | It's very strange.

00:33:53.240 | So this year, you'll be paying your Q2 estimate before you pay your Q1 estimate, but that's

00:33:57.360 | just the way it looks.

00:33:58.840 | Look, Rick, we need ... This is employment guarantee for people of my ill.

00:34:05.200 | It's just always inventory when it comes to this stuff because the rules are just ... Simplification

00:34:11.280 | is never simplification.

00:34:13.160 | If there's anything else you could add that's important about the CARES Act for most investors,

00:34:18.520 | then we need to move on to the SECURE Act.

00:34:20.520 | Sure.

00:34:21.520 | I would simply state that for those listeners who are business owners as well, and if you're

00:34:26.240 | having a hard time, there are a variety of loan programs that you may be eligible for

00:34:31.320 | through the Small Business Administration in particular.

00:34:34.320 | So some of those, in particular what's called the Paycheck Protection Program, is something

00:34:39.480 | I would highly encourage listeners to look at.

00:34:42.280 | It is an opportunity to get up to a 10-year loan at a 4% interest rate, so very favorable

00:34:49.140 | interest rate over that period of time, especially for a small business that is potentially struggling.

00:34:53.920 | The loan will be 100% backed by the Small Business Administration.

00:34:58.080 | And in particular, if the loan is used for certain items in the first eight weeks following

00:35:04.520 | issuance of that loan, so things like payroll, etc., health insurance, benefits for employees,

00:35:12.360 | that portion in the first eight weeks is entirely forgivable.

00:35:16.260 | So it's as close to free money as one can get.

00:35:19.300 | In fact, it's so good even if they forgive the loan as part of that process in those

00:35:23.800 | first eight weeks for the specified expenses, then it's not even included in your income.

00:35:29.160 | Normally discharging debt is included in taxable income.

00:35:32.520 | It's not here.

00:35:33.520 | So I would strongly encourage business owners to look at these things, in particular, again,

00:35:38.680 | what's called the Paycheck Protection Program, PPP.

00:35:42.680 | Check it out.

00:35:43.680 | Yeah.

00:35:44.680 | And unfortunately, I was just reading today that one of the states have stopped taking

00:35:48.000 | applications because they've been overwhelmed, which I would understand why.

00:35:53.440 | Okay.

00:35:54.440 | Then we need to get on to the SECURE Act, which happened back December.

00:35:58.000 | What are the highlights?

00:36:00.000 | Well, I think the biggest highlight for those who are savers and who have for many years

00:36:05.640 | planned on leaving IRA, 401(k), 403(b), and other retirement assets to children, grandchildren,

00:36:12.600 | etc., is that the stretch IRA has been eliminated for the majority of beneficiaries that are

00:36:19.400 | not a spouse.

00:36:21.060 | In short, the previous law allowed individuals who are named on a beneficiary form to take

00:36:26.880 | small distributions over the course of their lifetime.

00:36:30.120 | And that meant, in general, you know, for even middle-aged individuals, fairly small

00:36:36.000 | distributions.

00:36:37.000 | For argument's sake, a 40-year-old has an IRS-given 43.6-year life expectancy, meaning

00:36:44.080 | that they would have to divide their account by 43.6 and take that as a requirement of

00:36:48.300 | distribution that year.

00:36:49.840 | At age 40, you're talking about taking like 2.5% of the account.

00:36:55.380 | That's a really small percentage.

00:36:56.780 | So many individuals not only had small distributions for years, but in addition to that, they were

00:37:03.000 | able to see their account grow.

00:37:04.120 | You know, you did better than 2.5% when you're only taking out 2.5%.

00:37:07.840 | Your account's bigger the next year.

00:37:09.360 | Now, the SECURE Act says, with the overwhelming—I should say, rather, with very few exceptions,

00:37:16.160 | the overwhelming majority of beneficiaries that are not a spouse will now have to take

00:37:21.960 | everything out of the inherited IRA, inherited 401(k), et cetera, within 10 years after

00:37:27.800 | the year of death.

00:37:28.920 | So really compressing the time over which those distributions must occur.

00:37:34.280 | And just for your listeners' sake, they're probably wondering, "Well, Jeff, you said,

00:37:37.960 | you know, a very limited number of beneficiaries, but what are they?

00:37:41.360 | What are those groups?"

00:37:42.360 | Well, it's a spouse, which we've already said.

00:37:44.840 | It could also be a disabled individual, which is defined under law essentially as someone

00:37:49.040 | who can't work at all, unable to engage in any substantially gainful activity is the

00:37:53.680 | term.

00:37:54.680 | A chronically ill individual, so those are the individuals that typically can't do two

00:37:59.840 | out of six, what are known as activities of daily living, so eating, bathing, going to

00:38:06.200 | the bathroom, transferring, those sorts of things on their own.

00:38:10.640 | The fourth group would be any individual who's not more than 10 years younger than the person

00:38:16.080 | who died.

00:38:17.120 | So if you leave it to a brother or a sister and they're, you know, three years younger,

00:38:20.600 | they can stretch, but they aren't really getting that many more years since they were only

00:38:23.880 | three or four years younger than you to start with.

00:38:26.540 | And the last one, and the one that causes the most confusion is the decedent's minor

00:38:31.660 | children.

00:38:32.660 | Now, note, Rick, I said the decedent's minor children, not minor children in general.

00:38:38.320 | And that's been one of the confusing areas that I've seen since the law was passed, people

00:38:42.600 | thinking any minor child qualifies.

00:38:44.560 | It's only if the person who died left it to their own minor children and they only get

00:38:50.960 | that break of not having to take it out over 10 years until they reach age of majority.

00:38:55.880 | Once they hit age of majority, the 10 years starts then and they have to take it out over

00:38:59.560 | that 10 year period.

00:39:01.200 | So I've been working with a lot of clients on trying to figure out how to stretch this

00:39:05.300 | IRA.

00:39:06.840 | And one of the things I came up with was if you are a spouse or you're a couple, and let's

00:39:14.520 | say you each had equal IRA but you really didn't need the required minimum distributions

00:39:21.400 | on it to live because you had other money, that you might want to, in each of your IRA

00:39:27.680 | accounts, you might want to name the children as the beneficiaries instead of the spouse

00:39:34.040 | as the beneficiary.

00:39:35.360 | Therefore, if it's a husband and wife and a husband dies younger, which historically

00:39:42.080 | has been the case, the children would get the husband's beneficiary in which they would

00:39:46.480 | have 10 years to take the money over that 10 year period of time.

00:39:50.720 | And then the wife lives another 10 years and then she dies and then the children get the

00:39:56.440 | second half of it and they take that over another 10 years.

00:40:00.520 | So actually you've been able to stretch it out over 20 years.

00:40:03.560 | Absolutely.

00:40:04.560 | And one of the things that I would also say is people may run into pushback sometimes

00:40:09.320 | if they look to do that now and say, maybe the spouse says, "Well, what if I need the

00:40:13.960 | money?"

00:40:14.960 | Well, no big deal.

00:40:15.960 | You can kind of have your cake and eat it too here.

00:40:19.040 | You can name the spouse as the primary beneficiary, name the kids as contingent beneficiaries

00:40:25.200 | and people should always have contingent beneficiaries on their beneficiary form.

00:40:29.040 | And if at the time the first to die spouse passes away, the surviving spouse says, "You

00:40:35.080 | know, I really don't need that money," then they can disclaim it.

00:40:38.560 | In fact, they can disclaim a portion of it and whatever they disclaim is essentially

00:40:42.280 | the legal equivalent of plain dead.

00:40:44.720 | That money will then pass down to those kids who will get the 10 year window at that point.

00:40:49.320 | But that's absolutely a great way to extend and artificially create a longer period of

00:40:56.240 | time to take that distribution out.

00:40:58.380 | Another way potentially to do that would be just to have more beneficiaries instead of

00:41:02.320 | naming the kids directly for 50% each, let's say there were two kids.

00:41:07.960 | If each of those two kids had two adult children of their own, so talking grandparents here

00:41:12.400 | doing this for their children and adult grandchildren, maybe they decide to do 30% to each kid and

00:41:19.400 | then 10% to each grandkid as an immediate way to pass assets simply to spread that income

00:41:27.240 | out over more returns.

00:41:28.240 | In other words, if I can't make more years to spread it out over, I'll make more returns

00:41:32.600 | to spread it out over to keep that tax bill low.

00:41:35.440 | So a lot of different ways you can go to try and mitigate the impact of this secure act

00:41:40.440 | for sure.

00:41:41.560 | One of the other things we discussed was if you have one child who is doing very well

00:41:47.760 | financially making $500,000 a year and you had another one who decided to go into a non-profit

00:41:54.840 | and is making a much, much, much lower amount and is in a much lower tax rate that you leave

00:42:01.680 | other assets, after-tax assets to the one who is making half a million a year and you

00:42:08.400 | leave the IRA retirement assets to the one who is only making $30,000 or $40,000 a year

00:42:15.320 | because they're in a low tax bracket.

00:42:17.240 | So you could equal that out somehow, but that would keep more wealth in the family overall

00:42:23.160 | based on how you distributed your assets.

00:42:25.400 | Yeah, absolutely.

00:42:26.600 | That's another great way to go and certainly even for those who really want to force the

00:42:32.920 | stretch.

00:42:33.920 | Let's say, "I really wanted my kids to stretch."

00:42:36.800 | There's even a potential way to artificially recreate that potentially for some individuals

00:42:41.380 | using what's called a charitable remainder trust, essentially leaving your IRA to a trust

00:42:46.800 | where when the beneficiary of that trust dies, the rest goes to charity.

00:42:51.880 | But during their lifetime, they can take an income stream from that trust and it can replicate

00:42:56.680 | to a large degree for certain individuals the benefits of a stretch IRA.

00:43:02.680 | Now obviously, there are some downsides to it as well that people need to be aware of.

00:43:07.760 | For instance, if the beneficiary of that trust dies relatively young, a lot of those assets

00:43:12.960 | could be "lost" to charity, which is not the worst thing in the world from an altruistic

00:43:18.320 | standpoint but from protecting one's family might have some consequences.

00:43:22.600 | So there's at times a need for generational planning.

00:43:25.920 | But this is what I would encourage your audience to do and it's just simply to talk with a

00:43:31.080 | knowledgeable professional.

00:43:32.080 | Like if this is something that you've done your entire life and worked and built up a

00:43:36.160 | million or $2 million or whatever it is that's a lot of money to you and you want it to go

00:43:40.160 | to your kids or other individuals and you want it to be as tax-efficient as possible,

00:43:46.000 | take a few moments, get a little bit of information, or read up.

00:43:51.000 | Simply read up.

00:43:52.000 | There's lots of resources out there.

00:43:53.360 | I think I've probably written 100,000 words on the SECURE Act already on our Kitsis.com

00:43:58.440 | website.

00:43:59.440 | So there's plenty of information out there.

00:44:02.120 | Just make sure that you're looking at this because it's a big deal.

00:44:06.720 | It's a big deal.

00:44:07.720 | And the bigger your retirement account, the bigger the potential issue is and impact is

00:44:12.040 | for your beneficiaries.

00:44:13.080 | Okay.

00:44:14.080 | One more item on the SECURE Act is it pushes the required minimum distribution age out

00:44:19.560 | to age 72.

00:44:22.200 | Any comments on that?

00:44:23.560 | Sure.

00:44:24.560 | Yeah.

00:44:25.560 | That's precisely correct that we get a deferral of the required minimum distribution age.

00:44:30.760 | Now, notably, those who turned 70 and a half last year were going to have to continue to

00:44:36.200 | take an RMD this year in 2020.

00:44:39.080 | Of course, now the CARES Act, which we just discussed, kind of supersedes that.

00:44:42.880 | And so now they don't have an RMD this year either.

00:44:46.120 | If people want to know, you know, what does this actually mean to me?

00:44:49.200 | Very simply, here's what it is.

00:44:51.320 | If your birthday is January 1st to June 30th, so you're a first half of the year birthday,

00:44:56.960 | then you start taking RMDs now under the SECURE Act's rules.

00:45:00.840 | Two years later than you would have if the SECURE Act had not passed.

00:45:04.680 | And if your birthday is in the second half of the year, then you push back your RMDs

00:45:09.920 | one calendar year based on what it would have been had the SECURE Act not passed.

00:45:15.200 | Now, I will make one other important note here because it comes up often.

00:45:18.760 | And Rick, I know a lot of your listeners are very charitably inclined, and some of them

00:45:22.880 | may look to use their IRA to make those so-called qualified charitable distributions where they

00:45:30.400 | send certain money from their IRAs directly to charity.

00:45:33.320 | It's a fantastic tax-efficient way of supporting the causes that you're passionate about.

00:45:41.080 | That date did not get pushed back until the age 72 date along with the RMDs.

00:45:48.000 | It is still 70 and a half years of age.

00:45:51.400 | Now, obviously someone at 70 and a half doesn't have an RMD anymore.

00:45:56.000 | But if you want to give to charity, that's still a very tax-efficient way to do it.

00:45:59.840 | And you can still do it from your IRA at age 70 and a half.

00:46:03.520 | Once you hit 72, then it will also begin to offset your RMD at that time as well.

00:46:09.680 | And you can do Roth conversions between 70 and a half continued just like you would normally

00:46:13.800 | before you were 70 and a half.

00:46:15.280 | You can do those up until 72 also.

00:46:17.880 | Exactly.

00:46:18.880 | And this year for anybody because there's no required minimum distribution.

00:46:21.720 | Normally, as you know, you have to take that required minimum distribution first.

00:46:26.160 | And then you can kind of convert anything above and beyond that if you want, which has

00:46:30.760 | the effect of essentially pushing your income up first and then saying, "Well, if you want

00:46:34.200 | more income above and beyond your RMD, sure, you can add that on."

00:46:38.160 | This year, you don't have that to worry about.

00:46:40.440 | So maybe that's the answer for some people is instead of taking their RMD as normal,

00:46:45.240 | just convert it to a Roth and you're in the same tax situation as you normally would,

00:46:48.440 | except now you've got a pile of money growing tax-free forever and ever for you and your

00:46:54.080 | beneficiaries.

00:46:55.080 | So, it seems to me that you're in a really unique situation if you're maybe 71 years

00:46:59.920 | old where this year you don't have to make a required minimum distribution.

00:47:05.800 | You could donate $100,000 of your IRA to charity and you wouldn't have to pay any taxes on

00:47:14.160 | that distribution and then any other amount you could take out, you could put it into

00:47:20.200 | your Roth.

00:47:21.200 | I imagine that's true for if you're 75 or 76 years old.

00:47:24.760 | Absolutely.

00:47:25.760 | You get to do – you have free reign essentially over your IRA this year.

00:47:29.600 | You can decide how much to give via the QCD up to that $100,000 amount and at the same

00:47:34.320 | time, you could do a Roth conversion and you could do it in any order.

00:47:37.760 | You could do 10,000 Roth conversion today, a $5,000 QCD later this year.

00:47:42.960 | As long as you're just limiting yourself to that $100,000 QCD amount at some time,

00:47:48.400 | you could choose whatever you want.

00:47:49.680 | It's fantastic.

00:47:50.680 | There's a lot of flexibility that's offered in this challenging time.

00:47:54.880 | No one would choose to have the reason for these special rules apply but since they do,

00:48:00.840 | we might as well use them to the best we can.

00:48:03.120 | Let's talk about something that our Bogleheads talk about all the time on bogleheads.org

00:48:08.680 | and I had a lot of questions about this when I announced that you were going to be my guest

00:48:12.880 | and it has to do with tax laws harvesting and tax swapping into a similar security and

00:48:22.240 | what does the IRS mean by substantially identical securities?

00:48:27.400 | Boy, I wish I had a really clear cut like super knowledgeable answer that said, "You

00:48:34.320 | know, back in 1982, the IRS put out notice da-da-da-da-da."

00:48:38.960 | Unfortunately, this rule has been on the books for a long, long time and it is still

00:48:45.400 | very gray.

00:48:46.640 | Frankly, I think we've seen a further complication of the wash sale rules in the age of ETFs

00:48:55.320 | because in a world where you sell let's say Microsoft and you buy Google, you could find

00:49:02.960 | a fairly similar company but there's enough different dynamics with like an individual

00:49:07.840 | stock that you could make a pretty good argument for not substantially similar in most instances.

00:49:13.960 | When it comes to an ETF for argument's sake, and I know many of us…

00:49:17.920 | Hold on a second.

00:49:18.920 | Sure.

00:49:19.920 | You actually used a different phrase.

00:49:21.000 | The IRS talks about substantially identical, you said substantially similar, which is actually

00:49:27.640 | used in a different part of the tax law and I think that is part of the confusion by the

00:49:31.600 | way.

00:49:32.600 | That's a fair point.

00:49:34.880 | You're correct to point that out exactly, that it is substantially identical.

00:49:40.860 | So I would say that the ETF issue that's risen up with a lot of people is, you know,

00:49:48.260 | if I change my, you know, S&P 500 ETF for a S&P 100 ETF, is that substantially identical?

00:49:59.160 | And there's really not a great answer because again, you'd say it's significantly different.

00:50:04.200 | You're only having 100 companies versus, you know, versus 500 or roughly, right?

00:50:10.560 | It's a slightly more than 500, the S&P 500.

00:50:12.760 | But that's, if you look at how they track one another and the correlation, they are

00:50:19.320 | really, really close in many instances.

00:50:22.720 | And so you could, the IRS, I could very easily see the IRS coming in and having that argument

00:50:30.480 | to say like, look, you have a 98% correlation, just hypothetically, you know, speaking.

00:50:35.480 | And how could you say that these aren't substantially identical?

00:50:38.080 | 98% correlation is basically the same correlation.

00:50:41.760 | You're really essentially buying the same thing just with a different name on it.

00:50:46.640 | And so my view tends to be a little bit more conservative here.

00:50:50.360 | Of course, this goes against the whole wash sale principle, right?

00:50:53.720 | Like a lot of times people, or the idea of what people are trying to do, the whole point

00:50:57.480 | of what a lot of times people are trying to do here is to buy something that's really

00:51:02.360 | close that does replicate the same sort of investment performance because you're getting

00:51:07.040 | rid of something, but you may have wanted it in your portfolio, you're only selling

00:51:11.060 | it to get the loss.

00:51:12.060 | So you want to replicate it with something that would mirror it as closely as possible.

00:51:16.760 | But by doing so, you may be subjecting yourself to a greater risk of having that loss disallowed

00:51:22.360 | if IRS were to examine your return.

00:51:25.320 | I will say this, it's better to give yourself more distance.

00:51:33.120 | We're talking about a period of 30 days and I know right now is maybe not the best time

00:51:37.880 | to talk about how much will things change in 30 days because my goodness, how they've

00:51:42.860 | changed in the last 30 days from when we're recording this.

00:51:46.720 | But in general, those things tend to, you know, tend to work themselves out.

00:51:50.880 | I would just buy something that's clearly different and has a difference of doesn't

00:51:56.320 | track very closely the index that you were holding before.

00:52:00.240 | I'm a little bit more conservative on this than some of my colleagues.

00:52:04.880 | Certainly going from company A, S&P 500 to company B, S&P 500, that's going to be substantially

00:52:11.840 | identical.

00:52:12.840 | I don't think there's any question about that.

00:52:14.200 | But in terms of, let's say, going even from like equal weighted to cap weighted, the more

00:52:18.400 | distance you put between yourself and the previous position you sold for this 30-day

00:52:22.540 | period, the better off you're going to be.

00:52:25.240 | I will be a little bit more liberal in my interpretation.

00:52:28.920 | Now I'm not a CPA, but I am an investment person and I've studied indexes and I've studied

00:52:36.560 | ETFs and I've studied index funds, so my interpretation is different.

00:52:42.060 | If you have Vanguard issuing an ETF that is tracking the crisp total market index and

00:52:53.200 | Vanguard is the issuer of that ETF and the market goes down 10% and you sell that Vanguard

00:53:00.360 | total market ETF that is tracking this crisp total market index and you turn around and

00:53:07.640 | you buy an iShare that is issued by a completely separate company, completely unrelated.

00:53:17.520 | The index they follow is a completely separate total market index, which is the S&P total

00:53:25.840 | market index and completely unrelated to the crisp index.

00:53:31.120 | They're different index providers.

00:53:33.600 | Yes, they are almost all the same securities.

00:53:37.720 | That it's at the issuer level, it's not substantially identical.

00:53:42.720 | Vanguard is not iShare.

00:53:44.840 | Just like Ford is not General Motors.

00:53:46.760 | They both make cars.

00:53:47.760 | In some cases, they both make almost identical cars.

00:53:51.260 | But when you have two completely separate unrelated issuers that are tracking different

00:53:57.320 | indexes, even though the indexes are very similar, they are not substantially identical.

00:54:01.860 | That's my view as a guy who has studied indexes and studied index providers and indexing methodologies.

00:54:10.200 | The methodologies of how the indexes are constructed are not substantially identical.

00:54:15.240 | That's my view.

00:54:16.240 | I would respond to that with a few things.

00:54:20.160 | First off, if I was going to court and I had to argue this before the IRS, I'd certainly

00:54:25.100 | make that argument and I'd also have you hired as an expert witness to explain why they're

00:54:29.920 | very different.

00:54:30.920 | So that's the first thing, is get your ducks in a row and have the right team.

00:54:35.520 | But the other thing I would say is, I think part of this also comes down to just the practical

00:54:40.120 | element of this.

00:54:41.120 | If you're selling a really small position and in your portfolio and you're looking to

00:54:46.320 | claim a $2,000 or $3,000 loss, at the end of the day, if that got disallowed by the

00:54:52.680 | IRS, it's not going to be the end of the world.

00:54:55.140 | On the other hand, if you were selling a big position that you had purchased and we're

00:54:59.160 | talking about the difference of being able to claim a $100,000 loss or something like

00:55:03.800 | that, then maybe that's where you tend to be a little bit more ... And I agree, my position

00:55:07.680 | is a little bit conservative.

00:55:09.560 | I will admit that.

00:55:12.040 | But as someone who doesn't want to be on the other end of the IRS disallowing that and

00:55:17.800 | popping the person's income up $100,000 and seeing Medicare Part D and Part D premiums

00:55:22.480 | inflate and all the other nasty things that come along with it, I've grown a little bit

00:55:26.320 | conservative in that element.

00:55:28.000 | I will mention one other thing about the wash sale rule, which I don't often get a chance

00:55:31.800 | to talk about.

00:55:32.800 | So it's great to be chatting about this today.

00:55:35.120 | And that's the number one thing that you should be most careful of if you're looking at wash

00:55:42.160 | sales, is to avoid selling the position inside your taxable account and buying it back in

00:55:50.600 | your retirement account.

00:55:52.820 | That is a really big no-no, because if you violate the wash sale rule in your taxable

00:55:58.000 | account and you buy it back there, as you well know, Rick, you're just adding to your

00:56:02.200 | basis in the second purchase.

00:56:04.520 | So you're ultimately going to be able to benefit from your basis and the amount that you spent

00:56:10.120 | on the various positions at some point or other, many years potentially in the future

00:56:14.400 | when you ultimately sell, but it's not lost forever.

00:56:18.060 | If you sell an investment in your taxable account and you buy it back in your IRA, that

00:56:24.520 | loss is actually lost forever.

00:56:26.880 | There's a revenue ruling out on this, and a revenue ruling applies across the board

00:56:30.160 | to taxpayers.

00:56:32.040 | And I will say this, your listeners may be wondering how are they going to know?

00:56:37.240 | And there's actually a great article, I don't remember whether it was the Wall Street Journal

00:56:40.520 | or maybe the Washington Post when this came out, they interviewed one of the old IRS commissioners

00:56:45.320 | and he said, "I have no idea how they'd ever even know that."

00:56:51.160 | But it is the rule and you're supposed to follow the rule, not what they catch you breaking

00:56:55.000 | against the rule.

00:56:56.000 | Follow the rules.

00:56:57.000 | There's one other point about that too.

00:56:58.000 | If a spouse buys it and their IRA within that 30-day period, it is still a wash sale.

00:57:05.480 | Indeed.

00:57:06.480 | Jeff, is there anything else you want to talk about?

00:57:08.880 | We have room for just one more item.

00:57:11.480 | I would just encourage everyone at this point in time, this may be a challenging year for

00:57:15.920 | a lot of individuals with income.

00:57:18.440 | If you've got savings put aside and you're living off that savings and your income is

00:57:22.880 | down this year, this may be an opportune time to look at doing Roth conversions while your

00:57:27.600 | income is lower than it otherwise would be.

00:57:30.320 | And certainly I would just say that with the few moments we have left, I know this is a

00:57:35.280 | challenging time for everybody.

00:57:37.360 | I hope that something here was of value to you today and I certainly wish nothing but

00:57:44.360 | the best of health and happiness for everyone listening.

00:57:46.880 | And I really appreciate the opportunity to chat with you and your listeners today, Rick.

00:57:50.520 | On behalf of the Bogleheads, we greatly appreciate you being on the show and hope to have you

00:57:55.160 | back again sometime soon.

00:57:57.080 | It would be my pleasure.

00:57:58.840 | Have a great day.

00:58:00.200 | This concludes the 20th episode of Bogleheads on investing.

00:58:04.320 | I'm your host, Rick Ferry.

00:58:06.600 | Join us each month to hear a new special guest.

00:58:10.040 | In the meantime, visit Bogleheads.org and the Bogleheads wiki, participate in the forum,

00:58:17.380 | and help others find the forum.

00:58:19.240 | Thanks for listening.

00:58:20.240 | [Music]

00:58:31.240 | you

Bogleheads® on Investing Podcast 020 – Jeff Levine, CPA/CFP, host Rick Ferri (audio only)

Chapters