By Andy Ives, CFP®, AIF®
My wife teaches elementary school kids. Been at it for years. Long enough to have former students visit her classroom as adults. She was put on this Earth to teach. Tough job, though. Even at this early age, and oftentimes through no fault of their own, students headed down a rugged path to a hard life are already identifiable. Broken families, financial problems, emotional and developmental issues, learning difficulties. Kids desperate for help. A good teacher will push and pull and inspire and challenge and guide every student to the finish line.
In my mind, a child’s education is a large wooden crate, constantly being filled with knowledge and experiences. This box needs to be carried from kindergarten through college, but no child can carry their box alone. Teachers lean in and assist. The box may rake and scratch across the floor, but it will move. Additional helping hands are needed. Parents. Siblings. Guardians. Friends. All are vital as “it takes a village” to carry a child’s education box.
I work at the other end of life’s spectrum. The elementary school student has become a retiree and now has a different box to carry, a new box to fill, and the ultimate finish line is in sight. A person can certainly try to “go it alone,” but the Retirement box is unwieldy. There are splinters and nails to avoid. Enlisting help is recommended. Financial advisors help carry the Retirement box. Tax advisors help carry the box. Planners help, and the Ed Slott team helps carry the box.
For example, an advisor called recently to discuss his 85-year-old client. He had unsold real estate in a self-directed IRA and little cash in another. RMD liquidity worries kept him up at night. His dear wife had just passed. What are his options? The advisor and I talked it through. Did his client’s wife have an IRA of her own? A spousal rollover can create liquidity, and he can aggregate RMDs. However, he was still saddled with the undesirable property sitting unsold for a decade.
Can’t buy the property himself with non-qualified money. That would be a prohibited transaction as he, the IRA owner, is a disqualified person. Can’t sell it to his son. That would also be a prohibited transaction as his son, a lineal descendent, is a disqualified person. Can’t withdraw the property in-kind and roll over “replacement cash” to avoid the tax hit. The “same-property rule” stipulates the same property withdrawn is the same property that must be rolled over. Cash moves as cash. Stock as stock. Unsold building as unsold building.
He could apply for an “Individual Prohibited Transaction Exemption” through the Department of Labor, but this is a relatively involved process and probably not worth the time and effort based on the value of the asset.
The 85-year-old is surrounded by good people helping to carry his Retirement box. A strategy is formulated. The advisor will recommend withdrawing the property in-kind next year. This will easily satisfy his client’s RMD. Future IRA RMD liquidity concerns are now off the table. Despite the large withdrawal, the tax planner will ensure he remains in his normal bracket, and the estate planner will make certain the property is transferred to next of kin if still unsold post-death.
We all have a finish line, and life is heavy. Be a good teacher. Lend a hand. Move the needle. Push the rock. Help carry the box.