Larry Swedroe

Larry Swedroe is principal and director of research for Buckingham Asset Management, LLC, a Registered Investment Advisor firm in St. Louis, Mo. He is also principal of BAM Advisor Services, LLC, a service provider to investment advisors across the country, most of whom are affiliated with CPA firms. Swedroe's mission is to educate people on [...]

Jack E Kosakowski

Jack is the President and Chief Executive Officer (CEO) of Junior Achievement USA. Junior Achievement is the world's largest organization dedicated to giving young people the knowledge and skills they need to own their economic success, plan for their future, and make smart academic and economic choices. Today, JA reaches 4.8 million students per year [...]


Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
May 15, 2017

Show Notes

  • Index funds and The Oakland A’s (:51)
  • Larry Swedroe: Why Past Performance Isn’t Guaranteed (9:21)
  • Larry Swedroe: The Complete Lie Wall Street Needs You To Believe (19:27)
  • Trump’s Tax Plan and Interstate Taxation (28:32)
  • Five Things Parents Need To Teach Kids About Money from Jack Kosakowski, President, and CEO of Junior Achievement (38:00)
  • Big Al’s List: 10 Retirement Planning Moves To Make in your 20s (US News & World Report) (46:44)
  • Audience Question
    • My deceased father’s beneficiary for his traditional IRA was my parent’s trust. The IRA account type is now an inherited deceased IRA. The account pays required minimum distributions based on the deceased spouse’s life expectancy using the single life table. My mom receives the RMD and pays ordinary income tax on the distribution. She is also the primary beneficiary, with me as the contingent. So, I assume as she passes, I will receive the RMD and pay taxes at my tax rate. Should I change the beneficiaries to my children to reduce the taxes paid on the RMD? (57:59)




Wall Street, unfortunately, has totally misled the public into thinking that indexing, or passive investing in a broader sense, is going to get you average returns. That’s a complete lie that Wall Street needs you to believe.” – Larry Swedroe, author, Think, Act And Invest Like Warren Buffett

That’s Larry Swedroe, author of “Think, Act And Invest Like Warren Buffet” and 14 other books on investing. Today on Your Money, Your Wealth, Larry tells Joe and Big Al what kind of returns you can expect with passive investing, and how he relates investing performance to Babe Ruth and Roger Federer. We’ll also learn Five Things Parents Need To Teach Kids About Money from Jack Kosakowski, President and CEO of Junior Achievement, 10 Retirement Planning Moves To Make in your 20s, and we’ll take a closer look at Donald Trump’s tax outline. Now, get ready for the sports analogies, here are Joe Anderson, CFP and Big Al Clopine, CPA.


:51 – Index funds and The Oakland A’s

JA: You heard of Michael Lewis haven’t you?

AC: Michael Lewis. Yeah but if you ask me who he is I couldn’t tell you.5

JA: Have you heard of Moneyball, Big Short?

AC: Yes.

JA: Flash Boys?

AC: Yes, I’ve heard it. I’ve seen the first two, I didn’t see the last one.

JA: Liar’s Poker?

AC: Hmm didn’t see that one.

JA: Well, they’re books. He’s an author.

AC: Oh. (laughs) Well, Moneyball is a movie too.

JA: Yeah, so they made it into a movie.

AC: Yeah that’s what I thought you were talking about was movies. (laughs)

JA: (laughs) Big Al, you’ve been reading a lot.

AC: Yeah I read through the theater. (laughs)

JA: Closed captions. (laughs)

AC: I actually do read a lot, but it’s the books on audio. I actually don’t really enjoy reading a book. I know that’s sacrilegious for a baby boomer, but I enjoy listening to books on tape, is what I enjoy.

JA: That’s not reading, that’s listening.

AC: I know but it’s still getting through the material. (laughs)

JA: Got it. So he spoke at a conference – Morningstar in Chicago. And there was a bunch of financial people there, and he was talking about the industry itself. And so, when he was researching Moneyball, he was in the locker room of the Athletics – Oakland Athletics. Billy Beane, he was the coach. And so he had an unorthodox way of recruiting. When he met… Who’s that chubby guy?

AC: Jonas Hill?

JA: (laughs) yeah, Jonas Hill.

AC: I could tell you who the actors are. I don’t know about the book. (laughs)

JA: Yeah, he runs into Jonas Hill/whatever his name is.

AC: Yeah, the real guy.

JA: Right. And so he’s using computer algorithms to say, “these are the people,” and then the guy goes, “well no he’s a schlep, what are you talking about?” Well now, let’s just kind of take a look, and you look at these algorithms among all these different people. Instead of going off of gut, let’s just have a little bit more scientific approach, and how we’re recruiting our players, and then this guy got all upset and things like that. And Michael Lewis was saying that he was in the A’s locker room and he’s looking around, everyone’s getting out of the shower. He was like, “man, these guys don’t look like professional athletes. They’re not in shape.” And they were like, “yeah that’s the point. You know the big ripped muscle guy, they’re a hot commodity. We could get these guys on the cheap, but if you play these people together…”

AC: They’ll be just as good as the athletes.

JA: I guess, and it worked. So if you have ever seen the movie or read the book, Moneyball, Michael Lewis, so he referred back and he was correlating this to the financial services industry because he used to be a bond trader. He wrote The Big Short and so on. So now with his rave of index funds, exchange-traded funds, where there is really no analytics behind an index fund or an exchange-traded fund, for the most part, you’re taking a collective group of assets or stocks in a specific asset class and then they market cap weight those, and then that is the index fund. So if I want a large company growth index fund. You could buy the S&P 500. And so it’s the top 500 growth companies, basically, here in the U.S.

AC: Yeah, it is what it is.

JA: It is what it is. It’s not complicated. You kind of take a look at book-to-market ratios or price-to-earnings, price-to-cash flow, depending on what analytics that you want to use, and then if it’s a growth company, we’ll just put them in this basket and call it good. We charge you 20 basis points and there is your investment. So he’s saying that there’s so much money now going into exchange-traded funds and index funds, he’s thinking that the pendulum might be switching the other way. Where there is no thought or process in your overall strategy, that you’re just buying an index, or you hear that hey I want to buy the index fund, versus having a complete strategy around it. Could disrupt the industry a little bit. So interesting, and I agree with that to some degree, because you and I have argued in the past, of saying hey Alan has his S&P 500 and Barclay’s bond portfolio, and yes, you have very low cost and I might use more expensive type funds. But you have to take a look at the allocation and how you’re constructing the overall portfolio.

AC: Yeah and I think that’s the message that gets lost. It’s the allocation first, then when you figure the allocation, is how do you fill those pieces of the pie. So what I say, and I think you would agree with me, is you fill the pieces of the pie with lower cost funds. But the lower cost funds are not going to save a poor allocation. It never will.

JA: It doesn’t matter if you have the most expensive or the cheapest. It’s what you’re investing in. And then, how is your behavior going to react?

AC: Yeah, will you stay in when you should?

JA: Right, Or are you going to hedge, thinking that a certain area of the market is going to do better than others, so you’re going to maybe have more money into that. Like recency bias. Well, this area of the market has not performed, so I don’t want to buy any of that. I want to buy these assets that have performed. So it’s the allocation. 96% of the variability of your overall expected return is based on the asset allocation. Not necessarily, hey, if you have an S&P 500 Index Fund, by all means. And the construction of those funds is huge too, because if I’m in a market-weighted capped index fund, versus having something that is getting me a little bit more equal exposure across the overall markets, because if I have a large cap index fund, the major component of that expected rate of return are going to be just probably the top 25 holdings of 500 companies. Well is that really diversification? Is that really what you want to do? So then, if I can get more diversification, and equal-weighted across different asset classes, I think you can start constructing a better portfolio. And then when it comes to rebalancing and tax managing those overall accounts is key. So, it’s just not always price. It’s not always, “let’s buy an index fund,” which, Al and I, we’re big fans of index funds and exchange-traded funds. But, it’s not the end all be all. And I think people are getting lost in the shuffle and they’re only hearing half the message, and they’re probably making investment decisions based on half truths or half messages.

AC: I think that’s right Joe because I think people are assuming they’re going to get the same rate or return regardless of what investments they pick. And so now they’re looking at cost because there’s been such a movement on reducing costs over the last couple of years, which by the way, I think is fine, I have no problem with that movement. But the bigger issue is, to make sure you’ve got the right investments and the right allocations first, and then make sure they’re lower cost and it’s not the other way around. And I think that’s what people are doing right now.

JA: I think most people, too, back into their overall financial plan, is well I want to buy this particular fund or this particular stock, and then they back it in, into their overall cash flow tax strategy, which is the opposite of what you really want to do. It’s looking at, how do you construct a portfolio, to begin with, is going to be the demand on the portfolio to create the cash flow that you need long term. And so that’s the starting point. Then you have to take a look at the taxation of the income, and depending on where your assets are held, and how those are going to be taxed, and then tax manage that, and then you look at the overall allocation to make sure the allocation is appropriate for what your cash flow and tax implications are. So it’s not just buying Apple stock and riding that thing out, because I love Apple and everything I use is Apple, and blah blah blah blah blah. So anyway, I thought that article was somewhat interesting, I guess.

AC: We’ll let our listeners… you can e-mail us if you thought that was interesting.

JA: Please don’t. (laughs)


Nobody knows what’s ahead for investors, but Larry Swedroe’s book “Playing The Winner’s Game: Think, Act, And Invest Like Warren Buffett” offers bedrock investing principles that can help you profit in today’s shaky markets. Right now it’s available for FREE to Your Money, Your Wealth listeners, just click “Special Offer” at YourMoneyYourWealth.com to get yours. Learn how to think like Warren Buffett and build a well-designed portfolio based on solid evidence and your highest interests. “Playing The Winner’s Game: Think, Act And Invest Like Warren Buffett” by Larry Swedroe – with a foreword by Joe Anderson, CFP and Big Al Clopine, CPA. Click Special Offer at YourMoneyYourWealth.com to get your free copy.


9:21 – Larry Swedroe: Why Past Performance Isn’t Guaranteed


JA: It’s been a while, Alan, that we have our good friend Larry Swedroe on.

AC: I can hardly remember when we had him last. It has been a while.

JA: Well you’re getting older; it wasn’t that long. It might have been a couple of months.

AC: As you just mentioned on our TV show, I’m coming up to a big birthday.

JA: So let’s welcome Larry to the program, so we can make fun of Al some more about his 60th birthday coming up. Larry welcome to the show.

LS: Thanks for having me, and you’re making fun of him, I just had my 65th and imagine how that made me feel.

AC: (laughs) So I’m not the oldest guy in the room.

JA: I guess not.

LS: Well you’re the oldest guy in the room, but you’re not on this phone call.

AC: Alright, perfect.

JA: Larry has written, what, 14?

LS: 15, to be exact, but you’re close.

JA: 15. Some of the best personal finance books. I’m going to ask you a question, Larry. This is probably asking what is your favorite child, but if you look back, what would you say is your favorite book that you’ve written in your legendary career?

LS: Well answer it in two ways. The one I’m most proud of is the most recent one, called Your Complete Guide to Factor-Based Investing, co-authored with a good friend now, Andy Berkin, who is the director of research at Bridgeway. And I’m most proud of that because of the great work we put in to document all of the academic research on factors. We site 106 papers, and it’s the first book of its kind, examining this world of factor-based investing. But the book I think that I’m equally proud of, in a different way, was a little book called Wise Investing Made Simple, in which I use 27 of my favorite stories to help investors who aren’t technically oriented, and certainly wouldn’t read a book like Your Complete Guide To Factor Based Investing.. But to help them understand how markets really work, and how simple investing really can be if you understand how the markets really work, and not how most people on Wall Street want you to think it works.

JA: And when you think of investing, you use some of the best analogies. I was talking to Larry before we got on. I butchered the heck out of him. So I want to ask Larry, for our audience, let’s go back a little bit and share with our audience some of your favorite analogies that you use to help investors really understand basically how markets work by using different types of analogies.

LS: Sure. Long ago somebody once told me that if you tell somebody a fact, they’ll learn, if you tell them the truth, they’ll believe, but if you tell them a story, it will live in their heart forever. So what I learned to do is tell stories. The best stories are ones that maybe have a difficult concept that you’re trying to teach. So if you can create an analogy to that difficult concept, in a world where everyone can understand it, then you can translate that knowledge and understanding into the more difficult realm. And one of my favorites is this question about the persistence of performance.

Now everybody’s familiar with the SEC warning that says “Past performance isn’t guaranteed,” and those of us who are aware of the academic literature know, the SEC requires that because there is literally no evidence of active managers outperforming beyond the randomly expected. And yet, the hard thing for people to understand is, why is that true? When in every other endeavor that we engage in, active management or “the best people” outperform. That’s true of managers: when we hire for companies, you look for a manager who has had a successful track record in their private jobs. When you look to bring players to your major league team, you look at people who have been successful in the minors. When you draft somebody for your NBA or NFL fantasy team or whatever, you are looking at their past performance, because we know it’s predictive. So I had to come up with a way to help people understand why that isn’t true.

So here’s the analogy that I came up with: imagine you’re Babe Ruth, and you’re the best hitter in the history of baseball, everyone would agree. And you had a fantastic career, you batted career average I think was 349, you hit over 700 homers, the greatest slugging percentage of all time. Now imagine, instead of facing not only great pitchers like Walter Johnson and others of that era, you actually – and then, of course, you also face some very poor pitchers – but imagine instead of that, you were facing somebody who had Walter Johnson’s fastball, Sandy Koufax’s curveball, Hoyt Wilhelm’s knuckleball, and on and on and on. Each pitcher, a great pitcher who had one great pitch – Carl Hubbell’s screwball, etc. – and every pitcher you faced, had all of those skill sets and could throw pitches just like that. If you did that, Babe Ruth certainly wouldn’t have hit 350, or 700 home runs. Who knows what he would have hit, but it certainly wouldn’t have come close to that. And this is the problem that people have. They think of investing in the same way that Babe Ruth is competing, one on one, against the average person, #1. And some good, some bad. And #2, the problem is that, in those kinds of situations, small differences in skill sets can lead to very large differences in outcomes.

So let me give you a good example there.

So I’m a pretty good tennis player. I’m a weekend player, I don’t play all that often, but I would consider myself, from a ranking, a 3.5 tennis player, at a high level. Now, I can play people, most of the time, who are only slightly better than me, they’re 4.0 solid players. If I play them, they’ll win 9 out 10 times, even though there’s only a small difference in our skill set. If you see that in the tennis players when you get to the tennis tournaments, Roger Federer: best player in the world. He almost never has lost. I don’t think he actually has ever lost a match in the first round of a Grand Slam Tournament, and he wins every single one. By the time he’s getting to the last round, and he’s now facing the best players in the world, like Rafael Nadal, or Djokovic, now his winning percentage is much closer to 50-50 in a coin flip.

OK, so, how does this relate to the world of active investing?

When we’re playing sports, whether it’s a one on one game like tennis, or baseball where it’s one on one when you’re against the pitcher, that’s a very different game than you and I play when we’re trying to outperform the market, because think of it this way: If Warren Buffett or some active manager was competing against me, they would win all the time, but they’re not competing against me. Buffett is competing against if you think about it, the Peter Lynches of the world, the great hedge fund managers. They do, today, institutions, 90% of all trading. So every time, when Merrill Lynch is trading against Goldman Sachs, 9 times out of 10, they’ve got another institution on the other side of the trade. Very hard to know who will win. And they are setting prices. So you have to think about investing as much more of a game where you’re competing against, #1, the very best players in the world, not just the average person. So that gets to Babe Ruth not just facing average pitches, but only the Walter Johnsons. But it’s even worse because he’s facing the Walter Johnsons who have Sandy Koufax’s curveball, Hoyt Wilhelm’s knuckleball, etc. So the collective skill sets of all of those great pitchers. That’s the problem. And that’s why the vast majority of active managers fail with great persistence. It’s a totally different game.

JA: Hey Larry, hold on just a second we’ve got to take a short break.


When it comes to planning for retirement, what you have now, versus what you actually need are two entirely different things. How do you get from point A to point B? Do you have a plan to achieve your retirement goals? Visit YourMoneyYourWealth.com to sign up for your free financial assessment. There are so many things to think about – income; risk; asset allocation; inflation; taxes; Social Security; health care; Medicare; long-term care; the list goes on and on. Talk to a professional. Sign up for a free two-meeting assessment with a Certified Financial Planner™ at YourMoneyYourWealth.com


19:27- Larry Swedroe: The Complete Lie Wall Street Needs You To Believe


JA: Hey welcome back to the show, the show is called Your Money, Your Wealth. Big Al Clopine, Joe Anderson here, Certified Financial Planner, talking to our good friend Larry Swedroe. In your book The Incredible Shrinking Alpha, you talked about the markets back after World War II, where direct stock ownership, a lot of it was held by individuals and very small by the institutions. Now that has flip-flopped today. And there was also a good analogy there, like Ted Williams batting 400, or Wilt Chamberlain getting 100 points and 30 rebounds. But if you take a look today, the best player in the NBA is getting, what, 15-16? Half of that. And the analogy kinda ran is that, well back then, if Wilt played today, with the players today, would he be as dominant as he was? Because now there’s better training, there are better diets, there’s a lot more money involved, and the players are getting better, the coaches are getting better, so the competition is that much more vast today. That’s kind of true with the markets, because I think before, as you might have said, maybe portfolio managers back then had a liberal arts degree. Now today they have PhDs in finance. And there was no such thing back then, so the competition has raised so much as well.

LS: Exactly. The competition is dramatically higher. Everybody who runs money today, or the vast majority, they’re all PhDs in finance. They’re aware, certainly, of all the academic research that I’ve published in my books, which makes it much harder to outperform, because the average investor you’re competing against, is a lot more skilled, as you said. 60, 70 years ago, 90% of the money was run by individuals trading their own stocks, and today it’s 90% of the money is run by institutions, in terms of the trading. So the competition has gotten much more difficult, and that’s why you don’t see 400 hitters anymore. The competition has gotten much, much better in baseball as well.

JA: With that information then, what do we do as investors? Because we’re looking to try to get a higher expected rate of return. So when people hear this information, they might have a different idea of what they should do, versus using that information to their advantage in putting the probability in their hands, versus Wall Streets.

LS: The problem is that nobody likes to be average, and Wall Street, unfortunately, has totally misled the public into thinking that indexing, or passive investing in a broader sense, is going to get you average returns. That’s a complete lie that Wall Street needs you to believe. And the reason it’s a lie is very simple, it’s that indexing does not get you average returns, it gets you market returns in the asset classes you’re choosing, whether it’s small caps, or emerging markets, or value stocks. And by definition, because indexes have lower costs, they must earn higher returns than the average investor. Because, by definition, all stocks have to be owned by somebody, and that means if one group outperforms before expenses, because they’re overweighting, say, Netflix, which has had a great return, then somebody else must, by definition, have under-owned Netflix. And collectively, they wash out. But net, adding the two, they’re going to underperform, both of them when you add their returns together, the indexer because the indexer has lower costs. It’s simple math. Anyone who doubts that there’s a wonderful little short paper by William Sharp called The Arithmetic of Active Management. So simply by accepting market returns in the asset classes that you want to invest, you are virtually guaranteed to outperform the vast majority of active investors. The only reason I say “virtually guaranteed” is that you have to have the discipline to stay the course. So the last point I’ll make is this: if you want to outperform, as my books explain, then you’ll have to own certain types of stocks that have generated historically greater returns, mostly because they are riskier investments, and riskier investments should have higher returns. And in our portfolios we do that, we tilt our portfolios. Owning more small and value stocks than the market does as a whole. And that’s the best way to generate above-average returns because you’re taking above average risk.

JA: Right. I think when people hear “indexing” or “passive,” they might say, “I’ll buy some index funds,” and they’ll buy, let’s say, the S&P 500. So I have my portfolio, and then you have the Larry portfolio. You are going to significantly outperform me, because now you’re using the sophistication that you’ve learned throughout your career, of how markets work, of saying, well they’re somewhat efficient, the pricing is fair. But knowing that information, then you can overweight or underweight certain asset classes and still buy those asset classes at a very low cost. But it’s the construction of the portfolio that really means everything, not necessarily timing markets, or picking the exact right stock.

LS: Yeah. The only thing I would say is, I would add the word you have an expectation that if you own small and value stocks, you’re going to outperform. In my book, “Your Complete Guide to Factor-Based Investing“, we show a table showing the odds of outperformance for every one of the factors we recommend investors consider. And no matter how long the horizon is, there is still some chance that that factor will underperform. And that includes the factor known as a market beta which is the market outperforming riskless Treasury bills. So, at one-year horizons, the market outperforms roughly two-thirds of the time. As you extend that out, that number increases. But even at 20 years, there’s roughly a 5% chance that the market will underperform riskless Treasury bills. So roughly once every 20 or 25, 5 years, 20 year periods, you’re going to underperform, and you have to accept that risk. Small and value is the same thing. We just went through a 10 year period where values likely underperformed by roughly 1% a year for 10 years. So it can happen. That’s the nature of risk. If it was a guarantee that value and small would outperform, then everybody would adjust, prices would get pushed higher, and the premium would go away. That’s a risk, and that’s actually the biggest risk to most investors, because when they go through those long periods of underperformance, they don’t understand that that’s a random outcome, could have happened, they panicked and sell, because most investors we found, and I’m sure you’ve found this with working with your clients, investors without the knowledge that we have of the history of returns, they think 3 years is a long time, 5 years is an eternity. And therefore, they panic and sell after such short periods, when you and I know that 10 years, when it comes to investing, is literally noise. You need even 20 years and longer to make good decisions.

JA: That’s Larry Swedroe folks, awesome stuff my friend, it’s been too long. Hey, where can people read your stuff?

LS: On ETF.com is where I write every Monday, Wednesday, and Friday.

JA: Monday, Wednesday, Friday? Do you sleep?

AC: That’s why he wants to retire some day!


Nobody knows what’s ahead for investors, but Larry Swedroe’s book “Playing The Winner’s Game: Think, Act, And Invest Like Warren Buffett” offers bedrock investing principles that can help you profit in today’s shaky markets. Right now it’s available for FREE to Your Money, Your Wealth listeners, just click “Special Offer” at YourMoneyYourWealth.com to get yours. Learn how to think like Warren Buffett and build a well-designed portfolio based on solid evidence and your highest interests. “Playing The Winner’s Game: Think, Act And Invest Like Warren Buffett” by Larry Swedroe – with a foreword by Joe Anderson, CFP and Big Al Clopine, CPA. Click Special Offer at YourMoneyYourWealth.com to get your free copy.


28:32 – Trump’s Tax Plan and Interstate Taxation


JA: I got the Kiplinger tax letter here, did you read this?

AC: I did see it. Yes.

JA: What did you think? It kinda went through a couple of things that we’ve been discussing over the past couple of weeks, with Trump’s proposals.

AC: Well, it did. It was a pretty good summary of it. And I guess, if you hadn’t been paying attention, Trump announced his tax plan, actually, I guess maybe you would call it a tax outline because it was one page with a few bullets on it. But what was on the page was the intention to grow the economy, create millions of jobs, and simplify our tax code.

JA: According to the Kiplinger tax letter here Alan, details are sparse in his one-page outline.

AC: They’re very sparse. Let me highlight a couple of those details. The individual tax brackets, which there are seven brackets, starting at 10% going to 39.6%, would change to three brackets, 10%, 25% and 35%. The standard deduction would be doubled. But then there’d be no exemptions for yourself or your children. And then certain itemized deductions would be retained, like home mortgage interest and charity. But the other ones may go away. Alternative Minimum Tax would be repealed, the estate tax would be repealed, the 3.8% Obamacare Medicare surtax would be repealed.

JA: The Affordable Care Act.

AC: Yes. To be exact. But a lot of people know it as Obamacare so I just say that. But what does Kiplinger say? They say this is a starting point for negotiation. And they also say that several things in it are probably not going to pass. So that’s a summary of what it said.

JA: Yeah, he goes the write-offs for home mortgage interest and charitable giving are safe, but that’s about it. Every deduction facing the ax has backers in the private sector and on Capitol Hill… So there’s already a ton of backlash across party lines, from Congressional lawmakers from New York to California, and other high tax states against Trump’s idea to drop the popular deduction of state, local, and property taxes for a deduction. And Al and I were doing the numbers recently, and so for high-income earners, if you’re in the 39.6% tax rate., well given the proposal, your tax rate will go to 35%. So that sounds really good.

AC: Sounds like you’re improved.

JA: Yeah you are. You’re improving. But guess what. You can’t write off the state of California. If you’re in a 39.6% tax rate on the federal side, you’re  about 10, 12% and the state of California. And that is equivalent to what, about 5% tax?5

AC: Yeah. It’s about, if you’re in the highest bracket, 13.3%, let’s just say, that tax write off from the current federal tax is the equivalent rate of just over 34%. So your tax rate will actually, in California, be going up. Whereas other people in other states, their tax rate will be going down because they live in states where there’s a lower tax, or like Nevada, Texas, Washington state, Florida, they don’t have any tax.

JA: Are you thinking there’s going to be a mass exodus out of…

AC: To Nevada? Washington?

JA: Well no, but we get this question quite a bit. “The state tax here in California is way too high. I’m going to move to Nevada.” And how about if I have deferred comp? Because there are some things that will – like a pension plan or 401(k)  plan, you move to Nevada, you actually move to Nevada. So you get a driver’s license, voter registration, you have a primary residence. Everything is Nevada. You don’t have a house in California. You’re living in Nevada now, you’re not paying state tax in Nevada. But you have a 401(k) plan. You take distributions, still state tax-free in Nevada, even though you accumulated those dollars in California.

AC: That is right.

JA: And then like a pension plan. But what are some things that will follow you? Or the Franchise Tax Board will follow?

AC: They’ll try to follow you. And if you actually do legitimately move to Nevada, there are certain things in California that are still going to be taxed in California, even though you’re a full-time Nevada resident. For example, (I’ll just go over the obvious and easy ones) if you own real estate or rental property in California, well it’s still taxable to you in Nevada. There’s no state tax in Nevada. But it’s located in California, so you’ve got to pay California tax on that.

JA: So you have to pay California state tax on the income that I received from their rental?

AC: From that rental, correct. Now when it comes to employment, interestingly enough, about 10-15 years ago, the states got together, because every state had their own interpretation. It was so confusing. But they’re all in pretty much alignment now, which is money that you take out of qualified retirement accounts are taxed in the state of residence. So you put a whole bunch of money into 401(k) in California. You move to Nevada. You pull the money out of the 401(k) or IRA, it’s Nevada income, it’s not California income. That’s for qualified retirement plans. Non-qualified payments, like a non-qualified deferred comp, some companies have executive plans where they can defer some of their compensation. And then when they retire, they get it paid out over five years, or 10 years or something like that. That would likely be still considered California income because it was actual compensation. It was deferred compensation. Same thing with stock options. If you exercise stock options as a Nevada resident, well that was actually earned as a California employee. So it should still be California. Now, interestingly enough, I will tell you this from experience. Not all companies do it correct on their W-2, and the IRS really has no way to know this. And so a lot of accountants, just whatever it says on the W-2 is what they go with. Like if it says Nevada, Nevada taxable, a lot of accounts just follow that. But that is the rule if it’s non-qualified compensation.

JA: So that could be non-qualified stock options.

AC: Non-qualified stock options, it would be deferred compensation, it would be deferred bonuses. It would be, you moved out of state, and then they pay your vacation pay. That’s still California because you earned all that, that’s compensation from your service in California. Where it gets a little bit hazy, to be honest, is, maybe you move to Nevada in the last year of your business, or the last year of your career, you work in Nevada. So now when you exercise the stock option, is it California, is it Nevada? It gets a little trickier at that point.

JA: But you’re still employed. It doesn’t really matter where the company is headquartered. As long as where your residence is.

AC: That’s right. It’s where your residence is. Actually, it’s where you’re working.

JA: Right. So I’ve got a buddy. He’s starting a small business. He’s selling tactical gear.

AC: Tactical?

JA: Oh yeah. Do you need a harness? Do you need to carry a body out of a ditch? He’s got a harness for you.

AC: That’s your guy, huh?

JA: Oh yeah. He’s a buddy of mine from high school.

AC: Do you get a catalog?

JA: Oh yeah, I got catalogs of harnesses and tactical gear. Whatever. Whatever you need. (laughs) So I went to high school with him. So he ran into some firm in Los Angeles, they were going to make his harnesses. I don’t know whatever. So he’s like, “Do you think I can stay with you for a little bit?” I said, “Yeah no problem, I’m going to hostel out my house.” (laughs)

AC: You do, you’ve got several bedrooms. (laughs)

JA: Oh jeez. That’s the worst mistake I’ve had. So that was January. He’s still there.

AC: Really? Wow, I didn’t know.

JA: Oh yeah. So I get home from the office a couple of nights ago, and there’s like all these Army Rangers, they’re all tacked out. There are dogs, there’s tactical gear for dogs. I’m like, “what the hell is going on here?” We are preparing for war. So anyway, I guess I digress. He’s like, “well, how about if I have my LLC in Florida?” I said OK, sounds good. Please do. He’s like, “well no, I just set up the L.L.C, but I still live here.” It’s like, “no, that doesn’t work.” I said, “please move to Florida. Save yourself some taxes and get the hell out of my house. ”

AC: Right. He would be a Florida LLC doing business in California, still taxed in California.

JA: Yeah. It doesn’t matter where your little LLC is created.

AC: That’s accurate. A lot of people think they can escape state taxes. No. It’s where you actually do the business.


It’s been three decades since the last major tax reform, but as you just heard, this could be about to change in a major way. That said, the President and the Republican Party are still divided on a number of key policy questions. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com to download the white paper “Tax Reform: Trump Vs. House GOP” for a deeper look into the proposals. How might income tax, estate tax, and business tax change? Are your tax strategies at risk? Download the Tax Reform white paper to find out more. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com


38:00 – Five Things Parents Need To Teach Kids About Money from Jack Kosakowski, President and CEO of Junior Achievement


JA: Hey Al, our crack research team was on the ball.

AC: Yeah. Just a little late.

JA: Just a smidge.

AC: But we were close.

JA: Very close.

AC: Yeah, National Financial Literacy Month was actually April, but we’re close.

JA: Yeah. What’s it, June?

AC: Almost. (laughs)

JA: But we have a very special guest, I’m honored to have him on. Jack Kosakowski, he’s the President and CEO of Junior Achievement. Susan Brandeis, who’s our director of financial planning, is a huge, huge supporter of Junior Achievement. Jack, I want to welcome you to the show. Thank you so much for joining us.

JK: Well, thank you for having me on. I really appreciate it.

JA: So what are some of the things that you’re doing? We have a financial camp here in San Diego, which is phenomenal, that kind of helps kids understand money, and things like that. Tell us a little bit about, for our parents and grandparents that are listening, what lessons should we be teaching our children when it comes to money?

JK: Well it’s a great question, and it’s one we get often. Tied in with that, people are always asking, when do you start talking to kids about money? And through all of our research and experience, we think the earlier you start the better. Just to give you an example, as part of Financial Literacy Month, we conducted a survey along with the Jackson Charitable Foundation, of kids ages seven through 10. And what was unique about it, we did this with their parents as well. And what we saw out of that is that, even at that really young age, kids had an awareness about money, but it was really kind of limited to just a few topics: saving money, counting money, those kinds of things. But there was clearly a desire on their part to learn more. But the first teacher of kids in this is typically parents, and we’re seeing what parents think that they should be doing, that they’re really not doing as good a job as they could be.

AC: Yeah, and it seems that the schools really don’t teach much about finance, and dollars and cents as well, and you guys actually go into schools, right?

JK: Yes. Junior Achievement, and just to give your listeners a little background for those not familiar, we’re a global organization here in the United States. We reach over 4.8 million students every year, in kindergarten through 12th grade. And we focus on financial literacy, workforce readiness, and entrepreneurship education. All three of which are kind of inextricably linked. And the majority of our programs take place, actually, right in the schools. But what makes us unique is, we don’t rely solely on the professional educator to deliver the information. We bring nearly a quarter of a million business and community volunteers into the schools from the “real world” that share personal examples. And we find that that mentorship adds a great deal to their understanding and their interest in money.

AC: So here’s what I’d like to know, based on experience, and I’ve been a CPA, I’ve been in finance my entire career. I remember distinctively, one time my kids – my oldest son was probably 13 or 14, my younger son, a couple years younger. And I really wanted to teach him a bunch of financial concepts, and we sat down, and the kids, I think because I was their dad, the kids looked at me and they just started laughing, and they were laughing so hard they were crying and it didn’t go very well.

JA: Well you’re a funny guy, Al. Compound interest.

AC: Yeah. Because I’m an accountant. (laughs) Here’s my question. How should parents talk to their kids and what should they talk to them about?

JK: Well first of Al, don’t feel bad. Our research shows that 41% of the kids feel negative emotions or fear, confusion or boredom. I haven’t heard laughter, but those three items, when adults have these conversations…

JA: (You haven’t met his kids.)

JK: …and it’s primarily because everything we deal with kids, needs to be age appropriate. And so, those of us that have been out of school for a while, tend to focus on the more complex topics. And so, if I could just share with you and with your listeners five simple items that, when it comes to managing money, that the parents need to get across to kids, and that you can do it in different ways at different ages. And the first one is one probably people don’t think about much. But we have to teach our kids how to make money. if you don’t have a job, or a career, or are able to move through careers where you make money, you don’t have to worry about managing it, because you don’t make any. So that’s the number one thing. We got to make sure we get kids ready for the world of work. Number two is conveying to kids that you can’t spend more money than you earn. And of course, as a CPA, you know that gets into budgeting, very basic kind of information. So, you can’t spend more than you earn. Number three is that you should save a little bit out of everything that you make, either for a rainy day, or on a more positive note, saving for that new bicycle, or your first automobile, or for college. Number four we’d like to have parents talk to their kids about credit, because, since 2008, credit has really gotten a bad name as a terrible thing, and what we try to convey to kids is that credit is just a tool, and if you take a hammer, for example, and use it appropriately it’s a great tool. If you hit yourself on the thumb, not so much. So you have to understand it, know how to use it appropriately. And number five gets into a little bit more complex topic. But, talking to kids about insurance and managing risk. And so what I’ve seen, and I’ve known this over 40 years, is that we as adults tend to want to talk to kids about mutual funds, and stocks, and these items that the majority of the adult population doesn’t understand, and we lose ’em. So stick to the basics.

AC: Well that’s that’s good advice. Now that they’re in their mid-20s, I’ll try again.

JA: But still, if you look at the statistics Jack, most adults fail miserably at financial literacy.

JK: Absolutely, and that’s the problem. I kind of refer to this issue as the new birds and the bees talk. Parents who, in our surveys, overwhelmingly say where kids learn about money? At home, from mom and dad. But the problem is nobody ever taught mom and dad. They’re doing a woeful job of managing their own money so that when it comes to talking to kids, they just don’t feel adequately prepared. And that’s kind of why we see these mentors that we put into the schools, people that are trained and professional and having these conversations, as a way to get in these very important discussions.

JA: Hey, where can our listeners get some resources in regards to the work that you’re doing there at Junior Achievement?

JK: Oh that’s a great question. Love to have them go to our website, and it’s a real simple one, it’s http://ja.org. And we even have a parents section on the website that will introduce them to activities and games that they can do with their children that are sort of age appropriate. And that’s a great tool. And I would say for parents who have younger children, in that 7-10 age group. one of our partners, Jackson Charitable Foundation, on their site, and that’s https://www.JacksonCharitableFoundation.org/for-kids/, has a program called Cha-Ching, very appropriate, Cha-Ching Money Smart Kids. And it’s a series of cartoons that the parents could watch, right along with their kids. And it would introduce topics that they could then, in a very natural way, have a conversation with their children.

JA: Hey we’ll put all of that information there on our show notes. So if you missed any of that driving in the car, whatever, you can always go to our website at YourMoneyYourWealth.com to get that information. Jack, appreciate your time. I want to thank you for coming on. We got to take a short break. The show’s called Your Money, Your Wealth, we’ll be back in just a second.


Get social with Your Money, Your Wealth and Pure Financial Advisors. Follow us on Twitter @ymywshow. To connect with us on Facebook, LinkedIn, YouTube and Google Plus, just search for Pure Financial Advisors.


46:44 – Big Al’s List: 10 Retirement Planning Moves To Make in your 20s (US News & World Report)


AC: Usually, Joe, we’re talking about retirement planning and some tax planning strategies for retirees. I wanted to kind of go the other direction today. And that’s difficult, Joe, you get your first job, and you’re barely getting by, and you’re trying to pay off your student loans and buy a car, and maybe even in your late 20s save for a home. How do you save for retirement at the same time? It’s a lot. It’s a lot.

JA: Yeah. The last thing on your mind in your 20s is retirement. It is what bar am I going to.

AC: Of course. So I’m going to give you an alternative to that kind of thinking because it’s good for your future. So here are some things you have to think about. And I’m not saying in your 20s you need to save 20% of your income. I mean maybe start saving $50 a paycheck, or $25 a paycheck, you just get started. That’s probably the main point. But here’s the 10 ideas. Number one is to save automatically, like if your employer has a 401(k) get enrolled in that, have it come directly out of your paycheck. We find that when people are thinking that they’ll save with whatever is leftover from their income minus expenses at month end, there’s nothing ever leftover. So if you have it taken right out of your paycheck, then it’s automatic. You don’t think about it. Out of sight out of mind. And there you go. You started your savings program even though it may be small.

JA: You’ll be able to live off of the net income after you save. Without a doubt. You’ll figure it out.

AC: You’ll figure out a way. The second one is, if possible, find a job with retirement benefits. And I think for a lot of people in their 20s, they don’t really understand that some employers have great retirement benefits, like 401(k) plans, others don’t have any kind of benefit. Now 401(k) plan is a plan where you can take some of your salary, you can actually defer it, put it into a retirement savings account, so you don’t get taxed on it. And then generally, not always, but generally, your employer matches, at least the first few dollars that you put in. You put in $50, your employer matches $50. So every time you put in $50, $100 is going into your account. It’s a really, really good deal. And I think a lot of kids in their 20s don’t really understand how that works, and why it’s so important to participate in your 401(k) if your company has one. And of course, if you have two same-same jobs, and one has the 401(k), you take the one with the 401(k), although that’s not realistic. Really, you want to take the job that’s going to propel your career. But given the choice… (laughs) I’m just going off this list.

JA: That’s the top of Alan’s list. (laughs) Well, do they have a good 401(k) plan?

AC: That’s the first question you ask.

JA: “If you’re paying me 30 grand, it’s great. Well, the other one, I turned down $150,000. They didn’t have a 401(k).” “Good for you, son. Good job.” (laughs)

AC: You made the right choice. (laughs) This is U.S. News and World Report. Number three is, don’t pass up the 401(k) match. We already talked about that. Four is open up an IRA if you don’t have a 401(k).

JA: Or even if you do.

AC: Or better yet, number five contributes to a Roth IRA. So an IRA, or Roth IRA, you can put up to $5500 of your salary directly into an account. Realize that a regular IRA, you get a tax deduction. A Roth IRA, you don’t. So on the surface, you might think, “well, maybe a regular IRA is a better way to go because I get a tax deduction.” Well if you’re young and in a low tax bracket, and you’re not going to save that much in taxes anyway, a Roth is going to be a lot better because all the money in the Roth will grow tax-free. In other words, when you withdraw the money from the Roth at retirement, you never pay a dime of tax. And a regular IRA is completely different. You get a tax deduction now, but it grows to a higher balance. Every dollar that you pull out is fully taxed at your ordinary income tax rate.

JA: I have such a different belief in this because I’ve been doing this a couple of days. And human behavior is a lot stronger than arithmetic. And so I get the e-mails from this guy, Bob. I don’t know if he watches our TV show, or if he listens to the podcast. And he always needs a little nudge. He’s like all right Joe. Hey, I’m turning 50. My company just got a Roth 401(k). I’m in a fairly high tax bracket. I’ve saved a ton of money already, pretax. What do you think? Should I go, Roth? In my opinion, you’ve already saved a lot of money into your overall 401(k), you’re 50, he makes a ton, he’s in the 33% tax bracket. And I told him, I said, if you were talking to Big Al, if you’re talking to most advisors, they would probably say 33% tax bracket is pretty good. So that’s a good deduction, take that. My thought is, you know what? Go, Roth. Because you’re not going to remember in 20-30 years, that you missed that deduction.

AC: Right. Because you adjusted your spending.

JA: You adjusted your spending accordingly to say, I’m going to put my $18,000 or $24,000 after tax, yeah my income is a little bit higher. But now I got the $24,000 growing 100% tax-free for the next 20 years, and 20 years from now, I’m not going to remember the tax deduction. I’m not going to be like, “damn it! I should have taken that tax reduction! I should have saved that $5000 in tax, 20 years ago when now I have a half a million dollars all mine, tax-free.” I go, “In the future, you’re going to be so happy that you did it because you’re not going to remember the tax deduction.” Or you go the other way. Now you’ve got a half a million, or a million bucks sitting in a 401(k) plan. Guess what? Are you happy? Yeah, you’re happy, you’ve got a million bucks, but you’re going to be upset because it’s all 100% ordinary income tax, and you’re not going to remember how good that felt 20 years ago to save a couple of bucks in taxes.

AC: So here we’re a bit at odds, we have kind of financial arithmetic versus behavioral finance, I think is what we’re saying. And so, the accountant and I will say exactly that – don’t do the Roth, because you’re in a high tax bracket, and if you’re going to be a lower tax bracket in retirement, that wouldn’t make any sense. And what you’re saying is – I think you’re saying, I’ll paraphrase – that could be not a bad idea, if you can save on the taxes, but most people we know from experience, don’t save. They’d spend those savings. And if you’re going to spend it, which is what most people do, you’re probably better off just going Roth. So I think I can follow that logic and even agree with it.

JA: Right. What Al said is right. So let’s say I saved $5000 in tax, by putting it in the pretax account. That $5000 that I saved in tax, I take that five grand, and I put that into an investment account and let that thing grow. But what do we do? You pay your taxes, you save in your 401(k) plan, and you spend everything else.

AC: That’s the norm. I mean, that’s not true for everybody. So if you’re a saver, then follow my advice. If you’re like 90% the people that we meet, or 90% of everyday people, you’re probably likely to spend those savings, so maybe the Roth might be better.

JA: I don’t know. I would like to poll our audience here. And for those of you, I know where you’re at, who you are. You got a couple of million bucks in your retirement accounts, and let’s say, now that you’re 60, if you could go back in time, do you still want that tax reduction that you took on that $18,000 that you saved each year? Or now, when you look at that, would you be happier if you didn’t take the deduction? What do you think most people are going to say?

AC: They’re gonna be just like you said.

JA: They’re gonna be like, “no, Joe, I love that deduction.” They forgot about it the next year.

AC: So you should write a book, that would be a contrarian to the industry.

JA: That’s me. (laughs)

AC: Number six, I know you’ll love this one, is consider the myRA. (laughs)

JA: Oh god. That’s stupid.

AC: Why is that not a good idea? It’s a poor man’s Roth, it’s invested in T-bills.

JA: Yes. Well, you can’t say, poor man, Al. Because it was geared for lower income people.

AC: Well alright. But a Roth can be done by anybody.

JA: Right. Yes. So anyone could do a Roth IRA and have a diversified portfolio that might grow a little bit more than what the 10-year Treasury is.

AC: I will say though that, going back to our 20-year-olds, Roth IRAs are almost always going to be your best bet at that age. The tax deduction is very meaningless to you. It’s not going to mean a lot. And maybe 30-40 years of tax-free growth, that’s gigantic. Number seven is: make sure you claim the saver’s credit. Do you know about the saver’s credit?

JA: Yes I do. We talked about that for about 30 seconds on the show, about a year ago, and I think you get, I don’t know what is it, $500?

AC: You get between 10 and 50% of the amount contributed, up to $2000. So when you are putting money into a retirement account…

JA: You’ve gotta have what, less than $50,000 in income?

AC: Yeah, I’ll tell you. Stick with me. So you put money into a 401(k), IRA. If you’re single, you got to make a gross income of less than $31,000. And if you’re married it’s $62,000, exactly double, but the less that you make, the higher the credit. So like, right now, if you’re single, most people in their 20s are single, maybe not all, I don’t know, but nowadays. So we’re talking about 20-year-olds. You’re single, if your income is less than $18,500, and you’re still putting money into a retirement account, god bless you. But you get a 50% credit of your deduction. So it’s kind of like the government’s giving you a match, in a sense. Now if it’s between $18,500 and $20,000, it’s 20% credit, if it’s between $20,000 and $31,000 it’s a 10% credit.

JA: So is that credit, would that be a refund?

AC: Yeah. Yes, it doesn’t go into your into your retirement account.

JA: No, but let’s say, if I zeroed out my income, I didn’t have any taxable income, and I got that $2,000 credit, let’s say, or whatever it is…

AC: Oh, is it a refundable credit? I’m not sure. I’ll have to check that out.

JA: But the point is that, if you have kids that are making $18,000, $20,000, give ’em a couple of thousand bucks to fund their retirement account, they get a tax credit, and if that’s refundable, then that’s free money potentially.

AC: Yeah. I think that’s the best application really, is if a parent has the wherewithal to fund the child’s retirement account, they’re going to get a tax deduction or tax credit to boot. Tax credits are always better than deductions. Because you get to deduct it dollar for dollar against taxes, instead of reducing your income. Roll over your savings when you leave jobs. So many people, they leave their job and they just take their retirement account. They pay taxes plus penalties. Shop around for low-cost investments. We just talked about that last segment and build an emergency fund, that’s really very important. So, your car breaks down, you got some kind of medical emergency, you got some problem, you’ll be able to afford it.

JA: There you go. There’s this word from the wise man himself.


Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com 


57:59 – JA: All right. My deceased father’s beneficiary for his traditional IRA was my parent’s trust. The IRA account type is now an inherited deceased IRA. The account pays required minimum distributions based on the deceased spouse’s life expectancy using the single life table. My mom receives the RMD and pays ordinary income tax on the distribution. She is also the primary beneficiary, with me as the contingent. So, I assume as she passes, I will receive the RMD and pay taxes at my tax rate. Should I change the beneficiaries to my children to reduce the taxes paid on the RMD?


AC: Wow, that was a mouthful. All right so let me see if I can recap this. Dad died. And the beneficiary was the trust. Not the spouse, the trust. And the spouse is the primary beneficiary of the trust. So the spouse, Mom, is is taking required distributions and paying tax at her rate, which that makes sense. So I guess the beneficiary is, I suppose it’s still the trust, I guess? So if the son were to get it, then now it would be required distributions, but through the trust, and we know, Joe, there’s issues with having beneficiaries in a trust, particularly when it’s non-spouse. When it’s the next generation.

JA: This is a whole bag of…

AC: It’s a lot. This would take two segments. So see if you can summarize – you’re actually pretty good at summarizing all this stuff. I’m just going to listen and take notes.

JA: Alright, so a few different things. So this is a lesson to learn to not make this mistake. Do not name your trust as the primary beneficiary of your IRA, if you’re married. Or unless you want to control the money from your spouse, but you probably don’t want to do that.

AC: So in other words, the spouse is the primary beneficiary.

JA: Of your retirement accounts. Yes.

AC: You could have the trust as the contingent. But there are all kinds of issues there.

JA: So, because here’s what can happen. So let’s just assume that they did it appropriately if they took our advice. Some other people might say name the trust, and I could fight that, and I can tell you why it doesn’t make sense. They could tell me why it does, and so on. I’ll tell you the pros and cons to each. So the con is just what’s going on here. Because here’s what could have happened: let’s say Dad died, Mom’s still alive. Dad has an IRA. She is the beneficiary of that. What she could have done is said, “I could just roll that IRA into mine and take one distribution out of the overall account.” Maybe she wasn’t 70 and a half yet when he died. She could take it, roll it into her IRA. She would not have to take a required distribution until her age 70 and a half. So that could save some unnecessary distributions from a retirement account and get taxed on it.

AC: So because it’s in the trust she cannot do that.

JA: Correct. She is the beneficiary of the trust. The trust now is kind of the inheritor-owner of that account, even though she’s the beneficiary of the trust. So she’s got to take the required distribution. She cannot roll that now into hers because he named the trust as the beneficiary. So then, if she was the beneficiary, then she passes. Now son inherits that account. So I’ll answer the question. He wants to disclaim the overall distribution from the retirement account to his kids, to say, hey, they’re in a lower tax bracket than mine, let’s disclaim my inheritance of that retirement account to my children. Then they would take the required distribution, pay the tax at a lower rate. But I’m guessing this is what this guy wants to do. He was like, “All right, I’m going to disclaim it to my kids. They’re going to pay the tax, but it’s still my money.”

AC: Yeah, I’m gonna take it.

JA: It’s still mine. That’s kind of where I’m feeling this is going.

AC: It could be.

JA: They’re just trying to, “well I’m in a high tax rate. Mom you’re going to die soon, so let’s just name the kids as the beneficiary. The kids won’t know. I’ll take the distributions, I’ll do their tax returns, they won’t know a thing.”

AC: They’re minors.

JA: So, no, you don’t want to. Yes, that would, if your kids are in a lower tax bracket than you, you can disclaim the overall asset to the next generation, however, this is in a trust. So now you’re going to have to change the beneficiaries of the trust. And in some cases, depending on how that trust document was established, what type of trust is it in? Is it an irrevocable trust, stating that now you cannot change the beneficiaries? Because that’s usually what happens in some cases at death because they want to protect the assets to go to their beneficiaries. So let’s say, I’m married, I’m 70 years old, my wife is 30 – I’ll get aggressive here. (laughs)

AC: Is that you in a few years?

JA: It’s going to happen, brother! 30 years from now! (laughs)

AC: You’re gonna have a 10-year-old at 80. (laughs)

JA: You got it. (laughs) So it’s like, my wife might get remarried, but I want to make sure that my money doesn’t go to her new husband, her new sugar daddy. I want to make sure that it go to my 10-year-old.

AC: Right. You trust him more.

JA: Yes. Or it goes to whoever. So you’re protecting your beneficiaries by naming it in the trust. But now, if that’s an irrevocable trust, you can’t change the beneficiaries. So now that distribution comes to you… Now let me think this through. Now it depends on if it’s a conduit trust or a discretionary trust. I mean this gets way too complicated is the point, because now, does it have to stay in the trust? Are they going to get taxed on those RMDs at trust rates? Or is it going to flow through to the taxpayers 1040, then they pay tax at their rates? But now if I’m trying to disclaim the required distribution to go to the next generation? Oh, my goodness.

AC: Yeah, no, this would take a few segments to answer, and I think our general advice is, for your IRAs and 401(k), that the primary beneficiary would be your spouse if you’re married, and the contingent beneficiary would be your kids, named as beneficiaries. Now, if you name your living trust, as some people do, there are issues there, potentially. One is, it has to qualify for a look-through trust and a bunch of other things, and if it doesn’t qualify for that, then all those dollars have to come out within five years.

JA: Or it follows the RMD of the deceased.

AC: Yeah, and that’s only if the trust qualifies to be extended. Now you’ve got a 60-year-old beneficiary and a five-year-old. Well, the required distribution for both parties has to be based on the 60-year-old, the oldest life. Now, I actually do have a separate IRA trust myself, Joe.

JA: Look at the big wallet on Big Al. (laughs)

AC: I went to Big John Preston and got it done right. (laughs) So that’s different from the living trust. That’s actually set up for that purpose.

JA: Well no, the trust document itself is drafted differently to hold an IRA offset. Because if I die with my house, the kids don’t have to take a required distribution. There are no tax penalties. Step up in basis, they sell it, get rid of it.

AC: Right. And so the principal advantage is a couple of things. One is, I could control the amount of distributions. I couldn’t change the required distribution, but I could control what’s distributed to the kids. If I have a son or daughter that that was a spendthrift, or more importantly in my case, Joe…

JA: Credit protection.

AC: Yeah exactly. Because once it’s in the IRA trust if my sons get married and one of them gets divorced, or they get sued, this is not their asset. They have control, they have control of the income, they actually can pull out principal if they want to. But as far as lawsuit, divorce, it’s not part of their assets.

JA: Right, because the trust owns it. Not necessarily the individual.

AC: So I kind of like that. But just to put it in your living trust – a whole lot of issues here.

JA: That’s it for us today hopefully enjoy the show. For Big Al Clopine, I’m Joe Anderson. You just listened to Your Money, Your Wealth.



So, to recap today’s show: Trump’s new tax plan may make your state tax bite larger – or smaller, depending on where you live. If you’re a millennial, start saving automatically to get the retirement savings ball rolling. AND RMDs from an inherited IRA with a living trust as beneficiary – is a very complicated thing. Talk to a professional. Special thanks to Jack Kosakowski from Junior Achievement for giving us money lessons to teach our kids. Special thanks as well to author Larry Swedroe for explaining the lack of persistence in investing performance, and how passive investing can get you market-like returns.


Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money, Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com


Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.


Your Money Your Wealth Opening song, Motown Gold by Karl James Pestka, is licensed under a  Creative Commons Attribution 3.0 Unported License.