In the latest episode of Bogleheads® on Investing, I step in once more for Rick Ferri, CFA, to host a conversation with Ed Slott, CPA, regarded as America’s top expert on IRA distributions. Together, we unpack some provisions of the newly enacted One Big Beautiful Bill (OBBB)—signed into law on July 4, 2025—exploring tax implications for everyday investors.
Episode
Or, listen on:
Show Notes
- Bogleheads® Live with Mike Piper: Episode 36
- Bogleheads® Live with Mike Piper: Episode 23
- Bogleheads® Live with Mike Piper: Episode 9
- Bogleheads® Live with Sean Mullaney and Cody Garrett: Episode 11
- Bogleheads on Investing with Cody Garrett: Episode 61
- Asset Location For Stocks In A Brokerage Account Versus IRA Depends On Time Horizon
- Bogleheads on Investing with Phil Demuth, “The Tax-Smart Donor”: Episode 83
Transcripts
Jon Luskin: Welcome to the 85th edition of the Bogleheads® on Investing Podcast. In this episode we’re going to talk about the new tax law changes under the One Big Beautiful Bill Act with questions about the new tax law sourced from the Bogleheads® community both from the forum and elsewhere on social media.
Answering our questions is none other than Ed Slott, CPA, a nationally recognized IRA distribution expert, professional speaker, television personality and best-selling author.
Ed is known for his unparalleled ability to turn advanced tax strategies into understandable, actionable, and entertaining advice. He has been named the best source for IRA advice by the Wall Street Journal and USA Today wrote, it would be tough to find anyone who knows more about IRAs than CPA Slott. Hello everyone, my name is Jon Luskin, filling in for the normal host of the Bogleheads® on Investing podcast, Rick Ferri.
And since we’re changing up the host of the episode, why not change up the format too? If you’re listening on YouTube, you already know what I’m talking about. We have video! So if you’d like to watch this podcast on video, go to boglecenter.net where we’ll have the video linked or just jump straight to YouTube at the Bogleheads® page.
This episode, as with all episodes, is brought to you by the John C. Bogle center for Financial Literacy, a nonprofit organization that is building a world of well informed, capable and empowered investors. Visit the Bogle Center at boglecenter.net where you will find a treasure trove of information including transcripts of these podcasts. While there you can make a donation to support the mission of financial literacy at boglecenter.net/donate.
Before we begin, a special announcement. Tickets for the 2025 Bogleheads® Conference are now on sale at boglecenter.net/2025conference. This year’s conference will begin at noontime on Friday, October 17th, running through noon time on Sunday, October 19th. We will be at the Hyatt Regency San Antonio Riverwalk Hotel. You can find a list of speakers at boglecenter.net as well as a full agenda soon. I look forward to seeing many of you there.
Lastly, a disclaimer. The following is for informational and entertainment purposes only. It should not be relied upon as tax planning or investment advice.
And now, the 85th episode of the Bogleheads® on Investing Podcast with Ed Slott, CPA. Ed, thank you for joining us for the Bogleheads® on Investing Podcast.
Ed Slott: It’s great to be here with you.
Jon Luskin: As you know, we’re going to talk about some of the changes under the One Big Beautiful Bill Act. We got some great questions from the bullheads community beforehand. But before we dive into the questions, maybe let’s talk about some of the highlights of the One Big Beautiful Bill Act. Some things that you may see are opportunities or challenges in light of those recent changes.
Ed Slott: There are big items that really some of them will apply to everybody. And the interesting part, because of the budget gimmickry, some things start in ‘25, some provisions start in ‘26, some provisions end in ‘28, some provisions end in ‘29. Some provisions are permanent.
Not only are there different years to the different provisions, there’s different income limitations on a lot of them. So what we really have is a tax code that has devolved into a game of whack a mole. You get one benefit, but then you may lose something else, or you get that one and you lose this one.
A perfect example when we get into it, the $6,000 senior deduction. That sounds good on its face, but it phases out at relatively low income rates. Many people may want to raise their income to take advantage of still lower brackets for a Roth conversion, and they may have to concede on the $6,000, which is not really $6,000. It’s a $6,000 deduction.
But the largest bracket you’d be in because of the income levels that you would get is about 22%, comes out to about $1,300 in tax savings. Over the long haul, you may do much better with a Roth conversion, even if you have to concede this deduction.
Jon Luskin: Jon Luskin jumping in for a quick post interview note to provide some helpful context. Ed mentioned the new $6,000 senior deduction, $12,000 for joint filers, available from 2025 through 2028. It phases out starting at $75,000 of income for singles and $150,000 for joint filers, and is gone entirely at $175,000 and $250,000 of income, respectively.
Roth conversions increase taxable income, which could push you into the phaseout range and even wipe out the new deduction entirely. Ed’s view on this for many, it’s still worth skipping the deduction to get more money into Roth accounts. And now back to the show.
Ed Slott: It’s a lot of delayed gratification. That’s the key to all tax planning by the way. You want to give up something now to get something bigger and better later.
Jon Luskin: Yeah, I know you’re a big fan of Roth conversions. And for folks in the audience who aren’t familiar with your work. Now they know. And certainly a big part of that is based on that assumption that tax rates might go up.
There’s other assumptions that you don’t need me to tell you, Ed, that goes into calculating the quote unquote value of Roth conversions. What your investment returns are going to be, what inflation is going to be, your life expectancy. How do you think about those other considerations when doing Roth conversion planning?
Ed Slott: Well, as you said, I am totally biased. I love Roth conversions because I love anything tax free. To me, that’s money in the bank. You never have to worry about the uncertainty of what future higher taxes could do to your standard of living and spending ability in retirement.
So you can’t assume you’ll always be in a lower bracket in retirement. You may have less income, but taxes may be higher. So you really have to plan. That’s why I love the Roth conversion. You lock in today’s rates now, but that means paying taxes now.
But here’s the secret to all good tax planning. I shouldn’t even give you the secret, but since it’s a great show, I’m going to give you the secret. The secret to all good tax planning, always. And it’s in every one of my books. Always pay taxes at the lowest rates. That’s it. It’s that simple.
If you always pay not at the rates, at your rates, because rates could be high, but your rates personally because of deductions could be low or rates could be low, but your rate is higher because you had to increase business or personal income.
So always pay at your lowest rates, even if that means, and here’s the part that gets people, why they blow my always rule. Even if it means paying a tax before it’s required. And that’s where the Roth conversion comes in.
People don’t like to pay a tax before they have to. Many people have this minimum mentality, I call it. They focus on RMDs, required minimum distributions, which means I am not touching my IRA till they take me out screaming and kicking and force me to take it out at age 73.
But then look at all the years of low rates that you blew. You never want to waste a low tax bracket. The sweet spot really is people in their 60s. The key to the Roth conversion is when you convert, you control your tax rates by converting certain amounts. Looking at the brackets, you can convert and control the taxes you want to pay. And given today’s low rates, I would make sure that nobody wastes 24% bracket or lower. These are historically low brackets.
Now that means converting some money now using up those brackets. Because if you waste those brackets, if you don’t fill up a low tax bracket, you don’t get credit in the future years.
In fact, over the years, my CPA colleagues used to tell me they said they would be so happy, they’d say, Ed, you’re not going to believe it, but I kept one of my clients in a 0% tax bracket. And you know what my answer would be? Oh, I’m sorry to hear that.
That means you wasted the 10%, the 12%, the income you could have got out. Or I’ll give you another example. This happened during COVID. A lot of small businesses suffered huge losses. A lot of small business owners had these pass through entities like S Corps and LLCs and partnerships, and they had huge losses which were deductible on their taxes. In some cases they even had negative income.
Yet nobody thought of converting in those years when they could have converted a lot of their IRA and almost no tax. So you have to look at getting money out while tax rates are the lowest, you’ll always end up with more.
So the benefits of the Roth, you’re in control of your tax rates and you get to use the lower brackets and hopefully by the time you get to RMD age, you won’t have much in IRAs where you’re forced to take money. So you’re getting the point. I love Roth IRAs.
Jon Luskin: Absolutely. One reason I ask about those other variables when it comes to tax planning, Bill Richtenstein, he’s a co-creator of Income Solver Income Strategy. And this is, and I’m sure you’re familiar with it, for those folks who aren’t, it’s some tax planning software, looks at Roth conversions.
And one thing that’s interesting about it is that it lets you move the levers on terms of life expectancy investment return is future tax rates. And even if you leave that future tax rate lever alone, just increasing life expectancy or increasing investment returns makes a case for Roth conversion. So even if tax rates stay the same, Roth conversion still might make sense in some situations.
Ed Slott: Absolutely true. See, the Roth conversion decision comes down to a very simple concept. It’s one big giant bet on where you believe your future tax rates will be when you’re forced to take that money out if you don’t convert.
And for most people, again like me, that believe in math, I got to look at the numbers and say, you know, I got to believe tax rates will be higher.
Jon Luskin: Let’s jump to some questions from the Bogleheads® community for you, Ed, about the new tax law change. We got a couple of related questions from the Bogleheads® forum, username 5k and eagle33, both wanted to know about some misconceptions, misunderstandings that you’ve maybe seen about the new tax law change. What folks are getting wrong.
Ed Slott: Oh, yeah. So the big misconception or things that were actually wrong and even in the professional tax services, on the new deductions, the whole business of whether they are above the line or below the line. Let me explain what that means.
Above the line means it will reduce AGI, your adjusted gross income. That is the key number on your tax return that will tell you if you qualify for certain benefits, credits, deductions, like a lot of these deductions have income limitations. That’s the key number.
But these deductions do not reduce that number. It’s after that number. So they’re below the line. They reduce taxable income, but not adjusted gross income.
So I’ll give you one, which actually the misconception was right on the Social Security website. There’s the $6,000 extra deduction for seniors. It was booked that nobody pays tax on Social Security. Has nothing to do with Social Security. Nothing to do.
Just an extra standard deduction for people 65 or over that meet certain income limitations, like I talked to you about before. Basically it’s $75,000 for individuals, $150,000 for joint married couples. After that, it phases out.
So it’s a $6,000 deduction that can reduce all taxable income, even if you have no Social Security income. And it’s only for 65 or over. So somebody collecting Social Security, say early at 63, they don’t get this deduction.
Or somebody who waits, who’s 66 and would qualify, but they didn’t take Social Security. I think smartly waiting till age 70, where they can get the maximum check, they still get the deduction even though they’re not taking Social Security. So it does not reduce the amount of your Social Security benefits that are taxable.
Here’s a good way to think of AGI on a tax return. I’ll use a football analogy. Football has two halves, the first half and the second half. So does a tax return. Tax return has the first half and halftime is AGI, adjusted gross income. Let’s say you’re losing the game. You’re way down at halftime, right? But you have an amazing comeback. You got five touchdowns in the second half. Does the score at halftime change?
No, the score at halftime is what it was at halftime. You just did better in the second half or worse. That’s what a tax return is. AGI is halftime. No matter what happens after that.
The second part of the tax return, it doesn’t reduce AGI. Those are called below the line deductions. That’s what most of these deductions are. They do not reduce AGI. They’re below the line.
So I’m talking about the $6,000 one. I’m talking about the misnamed in the law, no tax on tips, no tax on overtime. That money is still included in income, but you get a deduction that can reduce all income.
So the deductions, that’s the biggest misinformation out there that I’ve seen. I think a lot of that’s been corrected by now. But the big deductions people are looking at do not reduce adjusted gross income, whatever that is. That’s the number you’re going to still have to use to determine if you’re eligible for some of these big benefits.
Jon Luskin: Yeah, I’ve seen that as well. I think another thing that I’ve seen a lot is misunderstanding that the no tax on tips and no tax on overtime. And it’s only for a limited amount.
Ed Slott: Yeah. So here, this is the actual law. You see what I highlighted here? The name of that section. Can you read it there? It’s called that. That’s not what it does.
The same thing with overtime. If you look at the section of the law, this is the actual law. The name of that provision, what does it say there?
Jon Luskin: No tax on overtime.
Ed Slott: All right, that’s the title. It doesn’t do that. Let’s take the tips, for example. And there’s certain income limitations. A great provision. You just have to understand what it does. If you’re in the tip business, you know, a waiter, a waitress, something like that could be great for you. You can get a big deduction. But here’s the catch.
To get the tip deduction, you would have to report that it has to go on W2. Your tip income and most tip income actually is on a W2, unless you’re working off the books. When I’m talking to people, if they’re thinking, oh, they’re working off the books and they get a deduction. No, the tips have to be on the books.
And for most, you know, upstanding places, the tips are on the W2. And you have to pay payroll taxes, FICA and Medicare taxes on those tips. But you do get a nice corresponding deduction, but it doesn’t mean there’s no tax on those tips.
You get a deduction related to the tips, which is nice, but it can reduce all income. Same thing for overtime.
Jon Luskin: And Ed mentioned a Social Security claiming strategy delayed till 70. Generally the high earner does definitely want to do that. For those folks who want to dive into that topic a little bit more, I’ll link to some interviews we did with Mike Piper, a Social Security expert, so folks can check those out. That’ll be in the show notes.
Ed Slott: Right? That’s a no brainer I think for most people waiting till age 70 to get a larger check for the rest of your life.
Jon Luskin: Yep. Yeah. At least that higher earner. Right. Two person households, lower earner, what they do, they have some options. Higher earner always wants to delay until 70. Lower earner going to inherit that higher earner’s benefit in that scenario if that higher earner passes first. That’s why that higher earner wants to wait until 70. But let’s go back to OBBBA.
Ed Slott: The big winners are a lot of people in business. They have that QBI qualified business income deduction was retained. That’s a big 20% deduction for a lot of businesses. So you know the big items are there, increased depreciation. If you’re a small business owner with pass through income, you do great on this.
Jon Luskin: With respect to QBI, I’m curious to hear what your thoughts are on making and gosh, I think I know this answer given you know your pro-Roth approach. But given that in some circumstances if you make a traditional contribution, you’re going to lose that QBI deduction.
Those self-employed folks like myself, they make a Roth contribution to an individual workplace retirement plan like an individual 401(k), they get to keep that QBI. So that is argued for at least personally or for some other self-employed folks.
I really like making a Roth contribution for that reason because you get to keep that QBI deduction. I’m curious to hear what your thoughts are on that.
Ed Slott: You are brilliant. Most people, even the accountants don’t pick up on this. This is one of the few provisions where a Roth conversion can actually increase the deduction.
It’s counterintuitive because if it’s based on income limits for those people, if you’re a writer, a performer, accountant, attorney, not a manufacturer, they don’t have the income limits. But it’s mostly professionals.
Like I said, accountants, attorney, all of that, they’re subject to these income limits anyway. The Roth conversion, what you said is brilliant. The Roth conversion is one of the strange items that can either increase the QBI and it stands for Qualified Business Income deduction.
It’s a 20% deduction off your based on the taxable income of your business. And here’s the key. Or your taxable income on your return, whichever is lower. So you can have a high taxable income on your business. But if you have a lot of other deductions and your taxable income on other stuff is low, the QBI goes to your lower amount.
So a Roth conversion can increase your other taxable income and increase the deduction. But watch it. If you do too much of a Roth conversion, you go over the limit and you lose the 20%.
So this is why I say what you picked up on is brilliant. Because the Roth conversion has to be really projected. So make sure it’s a balancing act. You want to convert enough to maximize the 20% QBI deduction, but not so much that you lose it.
And remember, Roth conversions cannot be undone anymore. They cannot be recharacterized. You have to know your business income or have a good projection of it by year end.
Let’s say you think your business income is going to be, I don’t know, $300,000. So you may be in line for a 20%, $60,000 deduction. And let’s say your income is getting close and you’re subject to the limit getting close. Leave yourself some breathing room. Don’t over convert to a Roth thinking I’m going to go right up to what that number is. Because all kinds of wacky stuff happens at the end of the year.
Like you get capital gain distributions from mutual funds. You have other sources of income you didn’t count on. Anything can happen at year end, especially that first week in December. And as a tax preparer, I used to have a CPA tax practice. I stopped that a few years back. But people used to come in and say, what are all these capital gains?
Well, the funds you have throw off capital gain distributions at the end of November, early December, the funds report them. So when it’s a year like this, those numbers could be pretty big.
Jon Luskin: Gosh. Yeah, quick tangent there. That’s why sometimes when folks come to me and they have all these actively managed mutual funds in a taxable account and they have gains on them and they don’t want to sell the funds because of the gains.
The downside is, well, those funds are going to keep spitting out capital gains for as long as you hold them. So it really is worth considering to sell those things sooner, get rid of that annual distribution you’re going to get from those funds.
You mentioned Roth conversions. With respect to the QBI issue, is there anything distinct between making a Roth conversion or if I’m just going to flat out make a contribution to my individual 401(k) because naturally I can do.
Ed Slott: Yeah, yeah, it’s pretty, but I’m not a big fan of that. But it gives you a deduction. But here’s why I’m not a big fan of 401(k)s anymore. First of all, this has nothing to do with the OBBBA bill. But people say, well, isn’t a 401(k) good? No. And they say, well, you get a deduction. Like you just said, people call it a deduction. It’s not a real deduction, it’s a fake deduction. Why do I say that?
Because you have to give it back. What I call a real deduction is your mortgage interest. You deduct it, you keep it. Charity. You deduct it, you keep it. Now, state and local taxes. You deduct it, you keep it.
When you make a 401(k) contribution and get this so called deduction, all you’re really doing is taking a loan from the government that will have to be paid back at the worst possible time in retirement when the last thing you want is a big tax bill at who knows what rates then.
So I don’t like taking those deductions anymore. I think most people should now contribute smartly to a Roth. Yes. Give up the deduction again. Always pay taxes at the lowest rates.
If you go back to my theme there, remember, you shouldn’t remember because I told you to keep it secret. Always pay taxes at the lowest rates. In tax planning, you want to take deductions when rates are high, not when rates are historically low like they are now.
You want to take income when rates are low. So you’re better off with the Roth 401(k). Then people say. But Ed, the match, you know, I get the company match. That law changed. Now you can have the match and catch up contributions in your Roth 401(k). Young people especially should only be doing Roth IRAs and Roth 401(k)s at work. That’s my two cents.
Jon Luskin: Thanks for answering my question. Selfishly, I appreciate it.
Ed Slott: Whatever questions you have, I will answer in person. Where, Jon?
Jon Luskin: At the Bogleheads® Conference this year?
Ed Slott: That’s in. Let me check my schedule. I speak on the 18th. October 18th. I’ll be there. And I’ll give you the skinny on all of this in person and I’ll stick around for all your questions. We’re going to have a great time.
You’re going to hear things from me like on Jon’s program here, that you never heard anywhere else. And it will make you money. I’m telling you. Everybody says they can make money in stocks. Stocks go up and down. There’s a lot of uncertainty.
You can make bigger money in good tax planning. The other thing, you can lose more money if you don’t do good tax planning. Because with stocks, if the stock market goes down, all right, it’ll recover. You’ll get your money back. If you lose money to taxes, you’re never getting that money back. That is a loss.
Jon Luskin: And the full days for the Bogleheads® Conference this year are the 17th through the 19th. So we’re going to have you right in that middle day, Ed, and that’s going to be in San Antonio this year, folks. Go to boglecenter.net/2025conference to register.
And gosh, one thing that I do love about the conference is that you do get to ask your questions to the speakers on a one on one. It’s phenomenal. A few years back, I cornered Clark Howard for a little while and got to pick his reign since I’m a huge Clark Howard fan. Yeah.
Ed Slott: Oh, that guy’s great.
Jon Luskin: All right, let’s jump to some community questions. We have two related questions about Roth conversion case studies. First one is from JocDoc from the Bogleheads® forums.
He writes, my income in retirement is over $75k as a single filer. What does Ed think about the value of Roth conversions in this lower income period, also known as gap years in retirement? First doing no Roth conversions to maintain a low income to get the highest extra senior deduction. So we touched on this a little bit, but if there’s anything else you’d like to add, please go ahead.
Ed Slott: Personally, I would concede the senior deduction. It’s only a $6,000 deduction, which relates down at about 22% to about $1,300 actual tax savings.
If you give up that and convert more to Roth, you using the 22% and 24% brackets, I believe you’ll be in much better shape down the line when RMDs start and you don’t have any. So you keep your future income low and your money starts building tax free. We are in an era of the lowest tax rates in history and it’s going to continue at least for another few years.
And you don’t want to lose out on any one of these years to take advantage of the low brackets. So in that case, if he was sitting in front of me, I’d say concede. Concede on the $6,000.
Jon Luskin: Yes. Interesting. Clark Howard talked about how excited he was to sell a rental property that he had that was no longer fit for his goals. And that’s because tax rates for him, with his long lifespan, he had seen much higher rates. He was excited to sell that rental at the 15% long term capital gain rates. He knew that was effectively a tax sale, if you will.
This question comes from Cody Garrett, a similar question about Roth conversions. This one about Roth conversions while working. Cody asked a married couple age 65 has gross income of $100,000 this year. They have an effective 5.9% federal rate.
So was making Roth contributions while working the answer?
Ed Slott: When we talk about tax rates, we’re talking about not the general tax rates. Everybody knows what those are. It’s your tax rates based on your situation, your own deductions and income.
So while tax rates may be low, maybe your rate is high or vice versa. But then we have something called marginal rates. These are the taxes you pay on the last dollar of income.
For example, if you had a Roth conversion at your 24%, you’ll be taxed at 24%, but not on all of it. Because we have something called a progressive tax system, graduated rates, which means, yeah, maybe on a few dollars you’ll pay at 24%, but most of them will be at the lower rates, the 10, 12, 22%.
So it’s kind of like a bunch of buckets of water. Once you fill up the 10%, then the next goes to 12% and 22% and 24%. It’s only the last dollars. That’s the marginal rate.
What he’s talking about is the average rate, or what we call the effective rate on all his taxable income. So you take all your tax liability or what you project it will be and divide it by your taxable income. That’s why he’s coming up with 5.9%.
He may have a lot of deductions, so he’s a great candidate for Roth. Again, always pay taxes while the rates are low. And the reason I say Roth means paying taxes, you’re paying if you want to convert, but you’re also paying for a Roth contribution in the loss of a deduction.
But again, the IRA deduction is not a real deduction because you have to give it back and then some. You got to look at the long term big picture. And even people that say I’m going to be in a lower bracket in retirement. And that’s what a lot of people think. They say, well, I had a big W2, maybe $300,000 or $400,000 of income and I won’t have that in retirement. Well, it doesn’t usually work that way because first of all, you don’t have the deductions in retirement.
You generally, your house is paid off, you don’t get tax benefits for dependent kids. So you have lower deductions. And you may have larger income because your RMDs, if you do nothing and it continues to grow and build and compound and snowball, your RMDs can be larger than your highest W2 ever was.
And I’ve seen that with people and they say, how can this be? I’m retired. How can my tax bracket be higher? So even if rates are the same, you may not be in a lower tax bracket and we don’t even know about future rates.
Jon Luskin: And Cody Garrett, he’s a planner himself. He’s been on our show before. So I’ll link to some of those episodes in the podcast notes for those who want to check that out. Let’s jump to a question about Trump accounts.
Again, we had a couple users from the Bogleheads® forums asking about this. Users djm2001 and user slowandsteady. And then we also had Catherine Payton ask about this on LinkedIn.
Questions being would Ed recommend Trump accounts once they become available, or should we wait until the final details are sorted out? Can they be converted to traditional IRAs after age 18, et cetera? What’s his take and what’s his take on the restriction to hold only equities within the account? Doesn’t that result in worse tax treatment in the long run, namely long term capital gains tax at ordinary rates?
Ed Slott: Well, number one, they’re not available till July 4 next year, one year after the date of enactment. So nobody can do it. But some people qualify already. Babies born between 1-25. So already 25 through 28 babies born in those years get an automatic seed starting a kickoff of $1,000. So for that alone, nobody’s going to say, I don’t want a Trump account because it’s free money. But there’s a catch.
One of them is the investment restrictions you mentioned. The biggest downside I see, there’s nothing wrong with a free $1,000 except you can’t get to it till you’re 18.
It’s not like, oh, I’ll take it, but I’ll pay a penalty. No, it’s a lockbox. You can’t touch it. So I have a feeling some people, maybe parents that put a thousand in for a newborn and then all of a sudden the pipe breaks and they need $1,000. Can’t get it.
You have to wait 18 years to get to any of that money. It’s only for people that can put the thousand dollars in and forget about it. But I wonder how many people will do it for the thousand dollars thinking they can touch it. Can’t touch it for 18 years. So that’s one downside. And the investments. US companies. Are very strict and it’s meant to be conservative and nationalist, but that’s okay.
But there’s three sources of contributions. The government seed, I said the child themselves or the parent. The grandparent could put in $5,000. Employers can put in $2,500.
The great thing about the Trump accounts, forget about the thousand. If you really dedicated to not touching that money, let’s say you have a new child, you get the thousand. You could put another $5,000 in even though the child isn’t working because he’s lazy.
He’s just born and he’s not working yet. How is that possible? But remember with IRAs, to put money in an IRA, you have to have compensation, wages or self-employment income. This you don’t have to have compensation.
So you can keep putting money in for all the early years of a child’s life up to 18. $5,000 a year. So you can really compound wealth. If you’re okay saying we’re going to load this account up, I’m not touching it because you can’t touch it until the child turns 18.
Jon Luskin: I’m curious, Ed, any thoughts on the practical considerations of having an 18 year old inherit whatever amount that’s going to grow to 18 years from now?
Ed Slott: Well, that’s a problem too. It’s their money. That’s why some people put it in a trust or something. Even the uniform gifts to minors or transfers to minors. It’s there when they’re no longer a minor. So I guess you have to educate your kids. You do what I did. I had a counsel my kids, they’re in their 30s. They still don’t know about it.
Jon Luskin: That is not the first time I’ve heard that.
Ed Slott: And I’ve got it covered too. Nobody can find out because I do their taxes.
Jon Luskin: Yeah, that’s certainly something I encourage folks to think about. Whether it’s the Trump account or the account, UGMA custodial, Roth IRA also pretty common.
Ed Slott: I would say it’s a good bet for the, I don’t know, the first 12 to 15 years of the child’s life. Why do they even need to know they have an account?
Jon Luskin: I worked with someone once and that was their plan. And then they were getting statements in the mail and then the kid came home and the kid was, you know, an adult. Right. The adult kid came home and they saw the statement and you know, they said, you know, hey dad, what is this? And at that point the dad had to turn the account over, but he had the same strategy as it sounds like most folks just don’t tell the kid about it. Which is right. Obviously, given that anecdote doesn’t always necessarily work.
Any thoughts on the commenters question with respect to ordinary income tax treatment on what would otherwise receive long term capital gain treatment?
Ed Slott: Well, that’s true. Yeah, it’s going to be ordinary income tax on the earnings, which will be a lot. Normally we say, well the earnings are the smaller part, but compounding over many years, yes, there will be earnings and you make money. So yeah, you could put it in a stock account and get capital gains. That’s true.
Jon Luskin: And for those folks who want to nerd out more on the issue of having stocks which would otherwise qualify for long term capital gain rates be taxed at the ordinary rate if held in a tax deferred account, Michael Kitces has a phenomenal article on the subject and it almost sort of debunks the issue. Because Michael points out, yes, stock funds normally tax efficient because they are taxed at lower rate, they’re still not perfectly tax efficient because they still have that dividend tax drag.
And on a long enough timeline because of that dividend tax drag, it might actually make sense to put something like a stock fund in a tax deferred account because you eventually will have more wealth even after taxes by shielding that annual dividend tax drag with that tax mechanism that you get with that IRA.
Again, I’ll link to that article in the show Notes for folks who want to nerd out on that subject.
Ed Slott: That reminds me of another point on the other side to the stock account. And this goes way out because we’re talking about kids. So who knows what the rules will be when they die at age 90 or 100 or maybe 150. Whatever life expectancy will be the benefit. There’s a step up in basis on those. You never pay the capital gains tax, but you do pay tax on the dividends.
Jon Luskin: Absolutely.
Ed Slott: Which you have to remember to add to your basis, I’m told by the brokers and so forth. They figure that in. But just in case they don’t, I keep track of my all my reinvested dividends. I keep a running total. It’s easy. You go to the 1099 just to make sure if you ever sell a stock position, you’re not paying tax on money you already paid tax on.
Jon Luskin: I know this is something that Rick Ferri has advised in the past. You want to opt for what’s called specific identification with your custodian, at least that’s what Vanguard calls it.
And then that’s going to help you identify what your tax lots are, how many shares you bought at what cost and when. Helps you figure out the tax consequences and helps you with tax planning. Helps you decide, you know, which lots you want to share to optimize your tax planning for the year. Hey, it’s low tax year. Maybe I want to sell, you know, some of the stuff with a lower basis first.
Selling stuff with a higher basis during a high tax year, given cash needs. All right, let’s jump to charitable contributions. Slowandsteady from Bogleheads® forums asks about this. He wants to know what your take is on this new provision.
Ed Slott: The charitable provisions, the benefits, the big one, the charitable deduction for non-itemizers that doesn’t start till next year. Everybody gets $2,000 married or $1,000 and that’s also below the line deduction. But everybody gets it. It’s not related to income.
Jon Luskin: One more quick clarification, Ed, also mentioned here from the recent tax law change. Starting next year, in 2026, you’ll be able to deduct cash charitable contributions of up to $1,000 for single filers or $2,000 for married filers, even if you don’t itemize. That’s a shift from the prior rules.
In the past, if your itemized deductions including charitable contributions didn’t exceed the standard deduction, you likely receive little to no tax benefit for your giving. But under this new rule, non-itemizers, folks who take the standard deduction, which is most people, can now get a small deduction for charitable giving even if they continue taking the standard deduction. Back to the show.
Ed Slott: But this brings up another issue. To do the charity wait for next year, what do you do this year? Maybe. And you have to tie in the new soft deduction estate and local taxes, because more people in high tax states because of this law will now be qualifying to itemize their deductions so more people can take more charitable contributions if you’re in a high tax state like where I am in New York, New Jersey, California.
So if you’re in a high tax state, you’re probably going to start itemizing your real estate taxes and state taxes. You can go up to $40,000. You can put in mortgage interest, charitable deductions and other deductions that you may have.
So you can really do well with itemizing. And I may take the deductions they’re talking about. Take more of that. Now again, while you’re able to itemize now, if you’re in a state that doesn’t have any state tax like Florida, Texas and some of those, that’s not an issue for you.
But also next year, even if you do itemize and this may be a reason for some people to do their charitable planning now while they can itemize. And also if your charitable deduction is large enough, that might get you into the itemizers club anyway.
What I mean where the itemized deduction is higher than you would have got from the standard deduction. So if that gets you into the club, you’re better off doing it this year because next year your deductions are limited if you’re a high earner.
Number one, charitable deductions have this 0.5% floor half of 1%. People say, oh, that’s nothing. Let me give you an example. If you think that’s nothing, let’s say you make $400,000 a nice W2. So the first $2,000 of charitable deductions you don’t get. So let’s say that person makes a $2,000 charitable gift and goes to itemized, they don’t get that deduction.
So it doesn’t sound like a big number, 0.5%. But if you have a high income and you’re making relatively low, and I’m not saying $2,000 is a low deduction, but you’ll lose it. And then if you’re in the top bracket, in the 37% bracket, and again these things I’m talking about happen next year. So you may want to front load your charitable and bunch them into this year.
Next year if you’re in a 37% bracket, you only get a tax deduction for all your itemized deductions, including charity, worth 35%. You don’t get to deduct 37 cents on the dollar. So for the charity I would look at what you can put in this year where there’s no restrictions and you may be able to itemize because of the SALT deduction or if not, if you’re in a low tax state because you’re giving a lot.
Jon Luskin: And we just had Phil DeMuth on a previous episode of Bogleheads® on investing talking about some charitable gifting strategies. I’ll link to that in the show notes for folks who want to check that out.
Ed Slott: I will tell you another thing that he picked up on. It was in the Wall Street Journal last week I believe. For those who I said qualify now for the $40,000 soft deduction, state and local taxes, the extra $40,000 it go went from $10,000 to $40,000 that $30,000 additional. That’s what you got in the ABBA law.
It cuts off when income goes over $500,000 it starts phasing out. What he pointed out in that article is that once you’re in that $500,000 at $600,000 you lose it completely. So it’s not most people. But if you’re in the $500,000 to $600,000, the tax because of the phase out in that last $100,000 of income is actually 45.5% because of the loss of that $30,000 salt.
You don’t lose the whole SALT deduction. It goes back to the $10,000. But that loss, it’s like a domino effect. The loss of that $30,000 not only puts you in a higher rate, but you lose the $30,000, which in turn puts you in into a 35% bracket. So you lose there too. And that’s how you get a 45.5% tax rate on that $100,000.
Jon Luskin: Okay, let’s talk about the value of comparing Roth conversions or having traditional dollars in retirement. This question comes from a username JBTX from the Bogleheads forums, who writes, is there value in holding a certain amount of money in traditional dollars to fill up lower tax brackets down the road? Or if one has high medical expenses in the future, in which point it’ll be good to have taxable income to offset that deduction.
Ed Slott: Should I keep some traditional IRAs? That’s a great question and the answer is yes for several reasons. You have high standard deductions even if you’re not itemizing or you may have itemized. You want some of that income to come out tax free.
Also, you may have medical expenses. You want to use taxable money to get an offset. A big reason is if you’re charitably inclined and you can take advantage of QCDs, qualified charitable distributions, only available to traditional IRA owners over 70 and a half.
IRAs are the worst assets because of the tax law. Well, they’re also, the best assets, if you give them away because they’re so lousy tax wise, give them to somebody else. But the charity doesn’t pay taxes. So IRAs are the best assets to give to charity. And you can do that now by making a direct transfer from your IRA to a qualified charity. The amount is up to $108,000 with inflation increases.
So that’s a great way to give to charity. I never say, just to be clear, to give to charity for the tax benefits. You give because you want to give. That’s really the reason. Because anybody I ever saw that did it for tax reasons was always unhappy when they realized they actually had to give the property away. What do you mean? I thought, I just get a tax benefit, so you have to want to give. That’s why I use the term charitably inclined.
But if you’re giving anyway, if you qualify for QCDs, give through your IRA, you’re giving anyway, but now you get a benefit. And that benefit is one of those above the line deductions that reduces AGI. It can also offset the income from your RMD, your required minimum distribution. That’s the way to give, but you’d need the traditional IRA balance to do it.
So if you are saying, well, I converted everything to a Roth, I don’t want to really have RMD income, and during my life my plan is to give $100,000 to charity. So keep $100,000 or so in your IRA. Little by little as RMDs come out, give it to charity and nobody pays the tax.
Jon Luskin: All right, let’s talk about some tax changes with regards to Roth accounts. This one is from username lyrat from the Bogleheads® forums, who ask what’s a good way to think about possible future tax law changes and how it should affect how much should be converted to Roth. I think one thing that the user is trying to get out here is that we don’t know what the future holds. So how do you plan? How do you do tax planning?
Ed Slott: Oh, it’s easy. You plan with things you know. You know what today’s tax rates are. That’s why I said you can lock in lower rates and you can control the taxes you pay. You can control how much you’re going to use the 22% of the 24% bracket. Hit it while you can control it.
Jon Luskin: We have another question from the Bogleheads® community. This one pits your favorite Roth accounts against the HSA, the Health Savings Account. And the user asks, If I have $1,000 to invest, which one should I put my money in a Roth IRA or an HSA?
Ed Slott: I still like the Roth because the Roth has no restrictions. The actual original contributions, most people don’t realize this can be withdrawn any time for any reason. Tax and penalty free. Not the earnings, the actual contributions.
So they could be used for education or anything. You could use it to bet on a horse. I mean, you can use it for anything. HSAs, on the other hand, is an amazing account because of the triple tax benefit. You get a deduction on the way in, you get a deferral on the income it generates. And if you use it for qualified expenses, it’s tax free. And people are using it as another type of retirement account.
But what I’m seeing happening, people have too much in these accounts that they’ll never spend. And then you get hit with a big tax at the end or at death. People are really hitting these things hard.
So you have to balance. I would definitely take advantage of the HSA if you don’t already have one, because there will be medical expenses, no question about that. But you’re limited to using it just for those.
So I would say, you know, all right, $100,000, $200,000. After that. I know expenses can get high, but you should start really diversifying and have more in a Roth that can be used for anything.
Jon Luskin: And another benefit of making HSA contributions, at least through an employer, is you got to avoid payroll tax. So there is an additional tax savings there, right?
Ed Slott: Yeah, that is a big benefit. There are big benefits.
Jon Luskin: And for folks who aren’t super tax nerds, a popular strategy is to contribute to a health savings account and then don’t spend the money immediately for qualifying medical expenses. Rather, you’re going to invest the money in that account and then spend that later in life once that money’s had a chance to grow tax free.
All right, let’s jump to another question from the Bogleheads® community. This question comes from username SC9182 from the forums. Who asks, once you finish converting all your tax deferred traditional dollars to Roth dollars, what is your next tax move?
Ed Slott: Well, two things we just talked about. Maybe it’s not a good idea to convert everything. So hold back some traditional IRAs for tax risk diversification. You using up low brackets and standard deductions each year, or for QCDs that’s charitable. Or for medical bills that may pop up. So let’s say you did everything in the Roth. You did all of that. I love, I’m going to say the cash value life insurance because to me it’s like a super Roth.
The income tax exclusion. The tax free feature of life insurance is the single biggest benefit in the tax code. And I would load up there. Especially a cash value policy that you could draw from if you need it during life.
Most people say they don’t want to do it or if they don’t want to do it, they say, well, I know about the death benefit. Most people don’t realize they have lifetime benefits. I have this myself. I have a cash value policy because I’m all Roth-ed out. Also I have a cash value policy, but it has a long term care rider. I love that feature.
If I ever needed money for long term care and could take it right out of the policy, so what? The kids get less. Who cares about them anyway? They’re going to get plenty. So last thing I want to worry about is if I need that high medical bill, the nursing home and all of that, that kind of extended medical care. The last thing I want to do is rely on my kids to come up with the thousands of dollars needed for my care every month.
I want to know it’s taken care of and I think everybody else should know that too. So I took care of it for myself. And again, I do not sell life insurance. I have never sold any financial products. I don’t sell stocks, bonds, funds, insurance, annuity, none of that. I’m not an insurance professional, I’m a tax advisor. Always check this with your own insurance professionals.
Jon Luskin: Let’s jump to another question from the Bogleheads® community. This question is about designating a trust as a beneficiary of an IRA. This user wants to know what the downsides are of that approach and what individuals should consider if they are bequeathing to either eligible designated beneficiaries and/or spendthrift.
Ed Slott: Here’s how I answer, because I get this question all the time. When should I name a trust as my IRA beneficiary or when should I name a trust for anything? And my answer is always the same.
When should you name a trust? When you don’t trust. Because if you trusted them, you wouldn’t need a trust. So I should have called it a don’t trust. That’s when you name a trust, when you don’t trust. And there are reasons. You could have minor beneficiaries that can handle money. You can have even older adult children that also can’t handle money. They may be addicts, they have gambling and drug addiction, horrible things, divorce, bankruptcy.
If you’re in that category, you say I need a trust for this post death control and protection. You’re not doing it for tax reasons. If anything, the taxes could be higher in a trust. You’re doing it for personal reasons, control reasons, and that’s a good reason. So for those people that have those issues, do everything you can. If it’s that important to you, convert that whole IRA and it’s probably a large one, hat’s why you’re worried about it, to a Roth IRA and leave the Roth IRA to the trust. The Roth IRA is the better asset to leave to the trust because you eliminate the whole trust tax problem and the taxes to the beneficiaries.
Two has to come out at the end of 10 years after death. Or if it’s an EDB, they can stretch it, but you eliminate the tax. This gives you the freedom to use that trust that ties up the money and holds it back from the beneficiary without worrying about trust taxes.
Or better yet, take the money out and put it in a life insurance policy and leave the insurance to an insurance trust. There you don’t even have to worry about RMD rules, complicated tax rules. You make your own rules, you get your own customized plan and there’s no tax. So you want tax free vehicles going to a trust.
So to be clear, I’m saying yes, some people need a trust, but the IRA is a disaster tax wise. Leaving a traditional IRA to a trust, don’t do it. If they need a trust, use a Roth IRA which means taking the money and paying the tax now. But remember, it’s not if but when this tax will be paid, possibly at much higher rates.
You’re paying a tax now that will have to be paid anyway. May as well get it off the table. And then you have the plan you want. Leaving a Roth to a trust or the life insurance to the trust. And don’t do the life insurance to the IRA distribution going to the life insurance. If you’re under 59 and a half, there would be a 10% penalty. There is none. With a Roth you convert to a Roth. As long as all the dollars are converted, you can leave the Roth to the trust.
Jon Luskin: And the reason being to leave those Roth dollars to that trust. Making the conversion yourself is because that trust is going to reach those higher brackets more quickly than you will as an individual or even married filing jointly.
Ed Slott: Oh yeah, yeah, yeah, yeah. You can control it now, but when it goes into the trust, there are no brackets, all tax free. Same thing with life insurance. Then you can have your customized plan. You can put Anything you want pretty much in those trusts.
Jon Luskin: And our last question looks like it’s a fun one from David, who asks about the what you call the greatest benefit in the tax code.
Ed Slott: The greatest single benefit in the tax code is the tax exemption for life insurance. It’s just unbelievable that you can accumulate this kind of large amounts of money. It’s like a super Roth and it’s all tax free. And it can even be estate tax free because life insurance can be owned outside of your estate in an irrevocable trust. There’s nothing like it.
And again, I don’t sell the product. I have it myself because it’s a great product. Everything that we talked about on this show, which is why I get so passionate about it, I’ve done for myself and my family, all Roth, all the life insurance, all of these things.
Jon Luskin: And Ed, we’ll see you at the Bogleheads® conference this year.
Ed Slott: I hope to see everybody have great questions. Smart questions too. It’s a smart audience. That’s what I’m looking forward to. I hope to see you all there. It’s in San Antonio, home of the Alamo, October 17th through 19th and I’m speaking on the 18th. Don’t miss that session. You’ll love it.
Jon Luskin: And thank you so much for your time.
Ed Slott: No, you’re great. You’re a great question on that. 199A, the QBI deduction, how the Roth affects that most. Most CPAs don’t pick up on that. That was brilliant.
Jon Luskin: A lot of people always talk about, you know, shove those traditional dollars in for self-employed and like, I don’t want to give up QBI. I love QBI. Same thing I think about S Corp. A lot of people are bullish on S Corp. I’m like, well, you’re going to lose qbi and you’re also looking at a smaller Social Security benefit as well. Can’t help but think about that when people mention the S Corp strategy.
Ed Slott: Yeah, it’s a big deduction and it got extended and improved next year with larger brackets, larger phase out ranges. All right, good. Yeah, we covered a lot of great stuff. Yeah, I’ll see you there. Remember the Alamo.
Jon Luskin: Thank you for listening to the 85th Bogleheads® on Investing podcast. Rick Ferry will return next month for the 86th episode.
In the meantime, visit boglecenter.net, bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit, join one of your local Bogleheads® chapters and get others to join.
Also, be sure to like, subscribe and leave a review on your favorite podcast platform. And thank you for listening. I look forward to seeing you all at the conference later this year.
Leave a Reply