How to Maximize Your Tax Savings with Employee Benefits with Corina Delugos
We've all seen that long list of options your employer hands you. Do you need all of them? Which ones are worth it?
In this episode, Corina Vakira Delugos, MBA, EA talks to us about which benefits can save you in taxes - so you're spending tax-free money for your expenses. Corina is a financial services professional with over 25 years of experience in tax, mortgage, and insurance planning.
Key Takeaways:
Utilize Flexible Spending Accounts (FSAs) Wisely:
Depend Care FSA: Set aside up to $5,000 pretax for child or dependent care.
Healthcare FSA: Use for out-of-pocket medical expenses, but remember that funds generally don’t roll over.
Maximize Health Savings Accounts (HSAs):
Paired with high deductible health plans.
Triple tax benefits: contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are also tax-free.
Explore Employee Stock Purchase Plans (ESPPs):
Purchase company stock at a discount.
Hold for over a year for favorable long-term capital gains tax treatment.
of your employee benefits!
Links:
Contact Corina - www.keenfinancialsolutions.com
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Overview of IRA Changes
Today we are going to talk about how IRA. Contributions have changed. There was a new law that was passed, I wouldn't say new now, but in 2019, and it is requiring beneficiaries to take all of the money out of an IRA within 10 years, and I'm gonna explain.
Why this is such a huge deal. So if you are a retiree or if you're listening and you are 40 plus and you have elderly parents, I really think that you need to listen to this because there's, these are some big changes that could save you or will, could cost you a lot in taxes. Or if you're listening, that could save you a lot in taxes.
Impact of the Secure Act on Inherited IRAs
So the Secure Act was passed in 2019 and it was a huge tax overhaul. And the way that I would give the synopsis is it gave a lot of businesses tax breaks. It raised our taxes slowly over four or five years. And one of the other major changes and it also changed the way [00:01:00] trusts were handled and then it also made this change to IRAs.
And essentially what this says is that if you inherit an IRA from like your parent, if you're more than 10 years younger than the IRA owner, you need to take out the money within 10 years. Yeah, obviously they have a few little exceptions to this rule. If you are a dependent, if you are special needs, but there are very few exceptions.
So if you are 10 years younger than the owner of an IRA, you need to get all the money out within 10 years. And when this passed, I was super angry. I. Thought, 'cause everybody, usually when you get an IRA, you stretch it out over your lifetime and then maybe even pass it on to your kids or to whoever you were going to give it to.
And so it provided income for your lifetime. And so you need to think about what this did. Is a lot of people that are inheriting these IRAs are [00:02:00] usually 50 to 65 years old when their PA parents are passing away, and those are prime money making years. Those are, that's when you are making the most amount of money and you are gonna be inheriting this IRA and then you have to have it out, the money out within 10 years.
And thinking about the older generation, what they did was they put all their money into a 401k. So it's not like it is now where we're like, let's do a Roth, let's do an IRA, let's have some real estate. They were taught to put everything into a 401k and which is then like an IRA. And because of this, they have these very large IRA accounts that are going to be inherited.
Giving it to a husband and wife, not a big deal, right? They can still operate just along the old rules, still take the money out the way that they used to. But if you inherit one of these and you are a child, this, your parents passed away, your last parent, and you inherit an IRA and you have to get this money out in 10 years and you're 55 years old and you're [00:03:00] making.
You know the most money you've ever made in your life, what are you gonna do? Are you gonna stop working for a year so that you can take all of that out? Are you gonna stop working for two years so you can take it all out? We are talking some huge tax. Penalties just for passing away and having a lot of money in an IRA.
And so I get it why they passed it 'cause they needed to pay for all these tax cuts. But when I think about what this is gonna do to future generations and the way that inheriting IRAs has helped different clients that I've worked with it. Almost breaks my heart because IS you know, having money makes it, it the worry that goes with money, right?
And having that go away when you inherit something and you're able to stretch out an IRA and know that you're gonna have some money every single year from this IRA, there's a certain like comfort that comes with that. [00:04:00] And so to have that go away and force people to basically spend this money and take it out of these, out of these qualified accounts, then you're forcing it out and into the system.
Strategies to Mitigate Tax Impact
And I'm gonna talk about ways that you can get around it, if you will, or different ways that you could plan. But I don't think, my first piece of advice with this is that the IRA is not what it used to be. And so I don't think that you should be trying to get a gigantic IRA and the whole balance between saving taxes and putting money into some sort of qualified account, whether it's a 401k, a 4 0 3 B, whatever you might have.
Those days are gone.
Importance of Roth IRAs
I don't think that you should be maxing out and just trying to save taxes at whatever cost that there is, because now I think that you really need to focus on trying to get your Roth IRA balance bigger because even if your child or your parents have a Roth IRA and you inherit it, getting it out of there [00:05:00] is tax free even though you have to get it out.
You're not gonna have to pay taxes on it. And so that's my I did a couple weeks ago, I did a episode on Backdoor Roth IRAs. And then there's other things that you can do, like mega backdoor Roth IRAs, and a lot of 401k options are offering Roth IRAs now. And in fact, it's gonna become mandatory here really soon.
So you should have that option. And so that's what I want you to think about is how much tax savings do you want in the IRA versus the Roth IRA, and I'm gonna take this Roth IRA even further, and you'll hear me say this a lot this year in the podcast, but with the Roth IRA, you can put the money in.
You're not gonna get the tax deduction. But then it's gonna grow tax free. And then when you get into retirement, if you can put something in there that is then spitting off some income. So let's pretend that you bought a piece of land and now you're leasing it. And so then you just take that income out of the Roth IRA every single year.
And then [00:06:00] it is tax free income. So you'll have your social security, you'll have your tax free income, and then you could take money out of your Roth or your 401k, or whatever money that you did put away that you haven't paid taxes on it yet. It. So it's really about mixing these different accounts together so that your income in retirement is optimized, I guess we could say for taxes.
And just optimized for control. That's the way I think about it too, is your money is never really yours until you pay taxes on it. That's the way you need to think about it. It, like even on your account statement, it says I-R-A-F-B-O, which means for the benefit of. It's not yours yet. It's for the benefit of you.
It's not yours until you pay the taxes on it. So a Roth, you've already paid taxes on it. And then you could as I said, get the money out into, in your retirement and have it be tax free. So I really think that this should be our goal, especially if you are, in your forties and fifties, you've got the time to do [00:07:00] this.
To either do a backdoor Roth IRA every year, and I know it's only $7,000. Plus the ketchup. But at least it's gonna add up to something. And if you had a year with, maybe you were laid off or you didn't have a lot of income, maybe you could do a conversion from your IRA to your Roth. But the Roth is going to become much more important because.
I know that I don't wanna create a gigantic IRA for my kids to then have to distribute within 10 years. I know the laws could change, but we gotta work with what we have, right now. The other thing that I think that we could do instead of having these really large IRAs that I have been advising my clients on is to, they, as I've been advising them, to take a little bit out, a little bit more out every single year.
If we're taking $30,000 a year out of their IRA, I might say, Hey, let's take 40 or 45. Let's just do a little bit every single year. And what has happened too with a lot of them is that they need the cash because. When you retire, right? You [00:08:00] and I know I just did a podcast about having this life freedom, but this is what it is right now for retirees is that you retire and you have this cash, but you still have to buy cars and air conditioners and things that pop up like that.
And you're not always gonna want to go to your taxable, your qualified accounts, the ones that are taxable 'cause. There's always something in the back of your head that's yeah, but if I take that out to pay for the air conditioner, it's $10,000 and then, but then I really have to take out 12 and I already took out such and such for, it's just good to have some cash sitting in the bank for these kinds of things.
Okay. So just take a little bit extra out of your IRA every single year, even if you don't need it to just spread out the taxes. Obviously work with your CPA if you're really concerned about taxes about what level you should be taking them out at. But. Taking out another 10 or 15, I'm not sure that's really gonna break the bank and it might make a huge difference down the road if you're doing that for 15 to 20 [00:09:00] years.
Life Insurance as a Strategy
The other thing that you can do with your IRA now, if you have a very large IRA right now is doing some life insurance planning and essentially what I'm ta the. High level of this is to take money out of your IRA to pay life insurance premiums so that the beneficiary is then your kids, ideally whoever your beneficiary would be, but your, would be your kids, so that.
They would get that tax free income because so much of your IRA is gonna be eaten up with taxes and having distribute that within 10 years, that it would almost be better to just take out the money, pay a life insurance policy, and then they just get tax free income of whatever the death benefit is of that life insurance policy.
I don't love life insurance all the time, but there's certain places where it does fit. And I do have other episodes and I'll reference them in the show notes about giving. I give the basics of some of the life insurance options. [00:10:00] I do think for, if you have everything in the market, maybe getting a whole life policy would be good.
'cause by the time you get pretty old, you're not gonna buy, want to buy a term. It's really expensive. That. I do cover how to do like max funding and doing, putting money into a life insurance policy. And I think buying a whole life policy, something that if your parents live until they're, 95 years old, you're gonna want something that's in place and that the.
The premiums are not going up and down, every single five, all the five, every five years and things like that. So I really want, if you guys are thinking about these IRAs and I've, you've had that mentality of I'm just gonna save taxes and put money in there. You need to rethink that because everything has changed with the secure act being passed and getting that money out in 10 years, and it is becoming more of a.
A strategic game of using all of these different financial products in different [00:11:00] ways so that you obviously don't have to pay all those taxes. I'm not opposed to paying some taxes, but if you have a million dollar IRA and you have to get that out in 10 years and you're making $250,000 a year plus stock option bonuses and you know your restricted stock units and there's like a lot of things that could be happening.
You could even have a rental by that time. Yeah, you are not gonna wanna take out all of that money. A hundred thousand dollars a year out of an IRA that is probably also going to be growing in the stock market over those 10 years. That is not something that you're gonna want to do. And planning some of these things, and I think I'm gonna do a separate episode on exactly maybe some examples of how to do the life insurance option.
That one is. A lot more complicated just because you need to estimate the taxes and what years you're gonna be taking that money out of the IRA. And so I think that would be better to just have that as a separate. Episode down the road. But I just wanted[00:12:00]to put those three things out there that we have completely changed the game with the Secure Act, and I want you to be aware of it because this 10 year change was not covered in the media very well.
I searched and searched when this was passed and it was not covered. I did another episode on that. And again, I'm gonna, I'm gonna link all these episodes in the show notes so that if you would like to go back and listen to the one about life insurance or you'd like to listen to the different secure act ones where we just go over the act in general and this change with the 10 year rule.
You could listen to that too. Let me know if you have any questions about this, if you want me to run through any scenarios. I do have some packages now that, we could just do an hourly thing or something like that. To run through it and to see what you needed to do. And I hope you spread the word and thank you so much for listening.
Please leave a review if you have a moment and you can scroll down and just leave a starred review. I would really appreciate it, it would help the algorithm[00:13:00]and let me know if you have any topic suggestions. I appreciate you. Thank you.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.