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Financial Planning > Tax Planning

Ed Slott: Why IRA Changes Aren’t in Biden’s New Plan

By Melanie Waddell

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What You Need to Know

  • Slott explains why the retirement planning provisions aren't in Biden's plan.
  • Advisors are still woefully unprepared to help clients with tax planning.
  • Clients are relying on advisors to have knowledge of how new tax bills will affect their retirement plans.

IRA whiz Ed Slott of Ed Slott & Co. doesn’t mince words when criticizing policies coming out of Washington.

Slott spoke this week with ThinkAdvisor about how he got started teaching the IRA retirement tax rules, what he thinks of President Joe Biden’s Build Back Better spending plan — with IRA changes like the elimination of backdoor Roth strategies notably absent — and advice to advisors heading into the new year.

The American Retirement Association reported Thursday that a number of key retirement-related provisions that had been under consideration were stripped out of Biden’s plan late Wednesday, including House Ways and Means Committee Chairman Richard Neal’s auto-IRA plan.

ThinkAdvisor is set to recognize Slott on Nov. 9 as a winner of its new recognition program, the LUMINARIES, for the work he and his firm do in industry thought leadership.

THINKADVISOR: What do you think of Biden’s Build Back Better framework that was released Thursday?

ED SLOTT: It’s not controversial; this is more like a PR piece. … The funny part of it is that a lot of the retirement provisions do provide revenue. But I don’t think they want to promote that; if they talk too much about it they might get pushback on that.

They’re at the point now they just want to push this thing through, so they don’t want to bring in new items that might get pushback. Maybe that’s why the retirement stuff isn’t in there.

Do you think the retirement provisions will get thrown into Build Back Better?

I just don’t think [lawmakers] want to put a spotlight on it now because that could bring new questions, and they’re not looking for, with a train analogy, stops along the way, more passengers on there to complain about things.

But the retirement provisions were originally revenue enhancement provisions; they were all meant to provide additional revenue, so why wouldn’t they throw that in?

That’s what happens with all legislation. Once they think it’s going to the White House, … they throw everything they have at it. But with this one, it looks like all the wheels are coming off.

How did you get started working with IRAs?

I morphed into it almost accidently. As you know I was an accountant, CPA, with a tax practice. I realized early on then that … doing people’s taxes, it was a commoditized service. I also saw the problems with it early on; this was when I was in my late 20s, early 30s.

People would come in the next year and say, ‘We should have done this, we should have done that’ … I realized: This is not the way to help people. And I still say it in a lot of my seminars, a lot of my CPA colleagues that prepare tax returns are really just history teachers.

They tell you what already happened. I was telling them on a form what already happened in most cases can’t change it anymore … Reactive, like looking in the rearview mirror. What value is there in that?

So I said: “Maybe I ought to change and do proactive planning.”

I looked for more high-value ways to bring in higher fees. This was back in the early 80s … The Reagan tax act brought major changes to the estate planning field. That was a good angle because estate taxes were very high, you didn’t have the big exemptions; it was very low then, a few hundred thousand dollars, and that meant the value of a home could cause you to have a 55% estate tax. It was very high.

So I said, ‘Well, there’s value in that; if I could save people a lot more money than a few dollars by finding some more charitable deductions, something on a tax return, that would produce higher fees.’ And then that, combined with the IRA tax rules that came out in the ’86 tax act …

All these rules [was what] our company ended up making the core of our business — teaching the IRA retirement tax rules.

When the rules came out it was like a section of tax law written in a different language, like Sanskrit. Nobody knew what it was — and it hit me … When the ’86 law came out with all these rules, someone said to me at a seminar: “Look at all these pages and pages of rules. This is going to affect everyone and nobody is ever going to understand it.”

That was my epiphany. … I said, “Wait a minute. Not only are these rules complicated but they tie into estate planning, which is high value because IRAs will be included in the estates.”

It’s fair to say tax planning has continued to get more complicated?

Yes. And the situation is the same 30 years later: Most practitioners, lawyers, accountants, financial advisors still avoid this stuff like kryptonite. Don’t go near that!

Even though their clients need them to go near that — taxes, that is.

Right, but most financial advisors are trained to gather assets — to accumulate the assets.

And I’ve been banging them over the head for 30 years with my constant message: ‘it’s not what you have, it’s what you can keep out of that.’ These IRAs and 401(k)s that are getting big —they’re loaded with taxes. … It really does affect everybody. Most people today have most of their savings in an IRA or 401(k) accounts that are loaded with taxes, so this kind of put me on the map.

What’s your advice to advisors heading into the new year?

Expand your knowledge to where the people are most worried. They’re relying on advisors to have this knowledge of how new tax bills may affect what may be their largest single asset — their IRA or 401(k).

Most advisors are still woefully unprepared … out of 500,000 advisors, only 1% have any real knowledge of this area where most of their clients have most of their money.

Melanie Waddell

@Think_MelanieW

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