Ric Answers Your Questions

How old is too old to invest, asset management, IRAs and more

Ric Edelman: It's Monday, April 8th. On today's show, I thought I'd answer some of the questions. That you've been sending me. You can do that to Ask Rick at thetruthAYFcom. Here's a question from Edward. He's in Connecticut. He says, Rick, I'm 77 years old. Do you think I'm too old for investing? 

Edward, not at all. Investing isn't about age. Pretty much everybody, regardless of their age, can benefit from their investing. Even newborn babies. We know that the sooner you start saving, the more wealth you'll create, thanks to the power of compound growth. Maybe at the other end of the spectrum, if you know your death is imminent, then maybe you could argue you don't really need to be saving. 

But even there, I could argue that you do need to be, because when you are older, and let's face it, you probably have plenty of assets, plenty of income, you know, between pensions and social security. Maybe you have ample amount of investments that are generating lots of investment income. You're generating more in income than you'll ever spend in a year, let alone over the course of your life. 

You could argue, I don't need to be investing anymore. But I'll give you a reason why you do need to invest in such a case. For your children and your grandchildren. Oh, you don't like them, or you don't have any? Then community. Lots of folks could be beneficiaries of your good fortune. So you would consider that the money isn't yours that you're investing. You're merely the steward of that money, which you're going to use for the benefit of others. So Ed, no matter your age, you're only 77. I would argue that yes, you do need to be investing and no, you're not too old to do it.  

The real question you should be asking is not whether you're too old to invest. The real question you should be asking is based on my age, and I'd add in a whole bunch of other related circumstances, such as, how much you have in assets, how much you spend on a monthly basis, what your annual income is, what your risk tolerance is, what your interest is in legacy and inheritance for others and support of community and things like that. But we'll set all that complicated element to the side from the moment. The simple question I would ask you is not, am I too old? I would ask you, what kind of investments should I buy? That's the real key for you. Because if you think about it, unless you're going to spend or give away the money, anything you do with the money is an investment, burying it under the mattress, hiding it in the backyard, those are investments. Buying bank CDs, putting the money in a bank savings or checking account, those are investments. Now we don't normally think of bank accounts or mattresses as investing, but in essence, they really are. We typically think of investments as stocks and bonds and real estate and gold and Bitcoin and such, but everything is an investment. 

If you plan to use the money, or if you desire to access the money in the future, then you're investing it. You're saving it. You're setting it aside. Now, the features of those investments, the benefits of those investments, will vary widely. From guaranteed investments, where you know that if you put a dollar away, that dollar will be there in the future. 

Mattress qualifies pretty good for that, so does burying it in the backyard. Sticking it in a safe deposit box counts pretty high, too. You put in a dollar into a vault, that dollar will be there when you are ready for it. Now, we know that there are some disadvantages to that super safe element. Under the mattress, for example, you might forget that it's there. It might get destroyed in a fire. You might die and your heirs don't know that it's there. Even if none of that occurs and you do go to retrieve that dollar in the future, The dollar won't be worth a dollar, even though the dollar bill will still be there, due to inflation, it'll buy less in the future than it is able to buy today. A fact we have all painfully experienced over the past several years, right? With the very high inflation rates we've suffered. So you're earning no interest, which means you are generating no income from it and you're not getting any offset to the impact of inflation.  

So there's a cost to super safe investments. You can reduce that cost by putting it into a safe place that does pay interest, a bank savings account or a CD or a US Treasury bill. These are super safe investments because they are widely regarded as not risking the money you invest. But the rate of return is also pretty low, typically lower than the rate of inflation, but at least it reduces the erosion rate that you would otherwise incur by burying the money in the backyard or stashing it under the mattress. 

And so you really have to ask yourself, how much of a return do you want to earn? Because there's one fundamental fact about all investments, the higher return you seek, the higher risk you're going to take. Now, there are two key words there that I want to make sure you emphasize. Seek and take. You might seek a higher return. That doesn't mean you're going to get it. But you are absolutely going to take higher risk. So you're guaranteed more risk. You're not guaranteed higher return. You're willing to go for the higher return in an effort to get it. Doesn't mean you'll succeed. So that's really how you want to frame the question. 

Yes, with an age of 77, you should be investing. You are not too old. Where you invest, how you invest - that's an entirely different question, and I'm not really able to answer that question for you because I don't have any facts about you other than the fact you're 77. I don't know anything about your marital status. I don't know anything about your family. I don't know anything about how much money you have, how much income you need. I don't know anything about your attitude about investing in terms of your risk tolerance or your need for liquidity or your attitude about inheritances and support for charity and community. For all these reasons. I recommend that you meet with a financial advisor who can assist you in answering all these questions and mapping out for you a strategy that fits your needs in your best interest. That was Edward from Connecticut. 

Here's a question from Andy in Virginia. He says, Ric, if I have Bitcoin in my IRA and I sell it, but I don't take a distribution from the IRA, do I answer no to that IRS question? Well, here's the question that Andy is referring to. I don't know if you've gone yet to the trouble of preparing your tax return for 2023. We're in the middle of tax season right now. What you may have noticed is that the IRS has inserted a brand-new question at the very top of the 1040. 

Right after you provide your name and address and date of birth and social security number, the IRS asks its very first tax question. And the question is this, quote, “At any time during 2023, did you A, receive as a reward, award, or payment of property or services, or B, sell, exchange, or otherwise dispose of a digital asset or a financial interest in a digital asset?” 

And Andy's wanting to know that if he has Bitcoin in his IRA, even though he sells it, he doesn't take a distribution from the IRA, does he answer yes or no to the question? The simple fact is this, Andy, the fact that you are doing this in your IRA is not relevant. You would answer yes, because you're saying that you sold Bitcoin in 2023 and the question specifically refers to that - at any time during 2023, did you sell? That's it, just says it that bluntly - it doesn't say except for IRAs, the IRS wants to know if you sold any digital assets last year you did. So you would answer yes to the question, pretty much that simple. 

Here's Joseph from Oregon. He says, Ric, I listened to your podcast today about custodial accounts. By the way, if you missed that it’s here. And he says, can an account be opened and funded by parents at a brokerage firm for an infant? So the account cannot be withdrawn until the infant reaches retirement age? 

Joseph, it sounds a whole lot like you're familiar with my RIC-E Trust, the retirement income for everyone trust that I invented way back in the 1990s that thousands, I think it's over 5,000 people, have established RIC-E Trusts for children and grandchildren all across the country. I think this makes me the person who's going to be creating more future millionaires than anybody in history, simply by virtue of this. The RIC-E Trust was really very cool. It's not currently available to my knowledge. You'd have to check with the folks at my former firm. But the fundamental premise of the RIC-E Trust was simple. You create an irrevocable trust under the rules of the irrevocable trust. The money gets funded for a child as young as a newborn. You could do it for anybody of any age. And then once the money's invested, it cannot be withdrawn until the child reaches age, 62 or 65 or whatever age you designate. So it does lock the money up until the retirement age of the child. And then once you've created the trust, you fund it with a variable annuity. 

Trust provides irrevocability and inability to access the money. The variable annuity provides tax deferral. So that way, the money grow for 65 years and it'll grow without taxation for 65 years. You can see why the RIC-E Trust was so very popular. That product, to my knowledge, is not currently available for people to obtain on their own today, but you could certainly go do this with your own estate attorney. Just have them create for you an irrevocable trust, and once it's done, you can then go fund it with a variable annuity of your choosing. The key here is that you'd have to go through it in that fashion. You would not be able to use an ordinary custodial account, which is the basis of your question, from having heard my podcast recently about custodial accounts.  

A custodial account is established by a parent or grandparent for the benefit of a child or grandchild. Simple, easy to do at any brokerage firm. You can open a custodial account at Schwab, online, you don't even have to make a phone call. But here's the key about custodial accounts, when the child turns age 18 or 21, depending on the state you live in, the child gets the access to the account. You cannot prevent the child from having the money. In other words, at age 18 or 21, the only question at hand is what color’s the Corvette? Because let's face it, you give 18 year old kid or a 21 year old kid access to tens of thousands, hundreds of thousands of dollars. Yeah. You know what I'm talking about. So if you really want to establish an account for the benefit of a baby that they, that they won't touch until 61 or beyond, then you do need to establish an irrevocable trust.  

There's an alternative way to do this as well. Instead of going to the bother of creating a trust where you'll spend several thousand dollars in legal fees and annual reporting, which is a bit of a nuisance, you could instead just leave the money in your name. Add a paragraph to your will, that says, upon your death, money will be set aside for the baby, who by then could be in their twenties or fifties, for them to receive when they are in their sixties or seventies. In other words, you don't create the trust today, you create a provision in your will that will establish the trust upon your death. That's called a springing trust. It springs to life when you die. And by the way, if you haven't died when the child is 60, you might be in your nineties when your children today, maybe they'll be in their sixties. You're still alive. You just give them the money at that point. Again, you'll want to talk with an estate attorney because there are state tax implications, gift tax implications, and that's why you want to establish these things in a proper way. Not just an irrevocable trust, for example, but something called a crummy trust, which helps solve the tax problem associated with all of this. Bottom line is, wonderful idea. I'm really glad you're thinking about it, Joseph, and I encourage you to talk with a state attorney.  

And our final question today comes from Mary. She's from Maryland and says, in two years, I'm going to have to start taking an RMD of $95,000. I've got taxable accounts of $175,000 that have a cost basis of $134,000. Should I liquidate my nonretirement accounts before, so that my taxable income isn't made higher by the RMD? Well, Mary, this is a really good, thoughtful and detailed tax question. And the answer is, it depends. What we need to do is run a couple of pro formas. We need to run a couple of analyses. If you do it this way, versus if you do it that way, not just to determine what is the lower way to reduce taxes this year, but the impact on taxation in future years. Sometimes people make a decision that lowers their taxes now only to cause higher taxes later. We want to avoid that mess as well. A good accountant, a tax preparer is going to be able to do that math for you. So should be able to be done by a good financial advisor. So you want to run through the math because there's more going on on your tax return than merely the issue of the RMD. That's the required minimum distribution out of your IRA. So I really don't have a more specific answer for you than to say, talk with a tax advisor or financial advisor, preferably both with the two of them working closely together. 

I'm Ric Edelman. I hope you've enjoyed my Q&A. If you've got questions, I might read them here on the air and provide answers. You can send them to Ask Rick at thetruthAYFcom.  

On tomorrow's show, who are crypto owners going to vote for? 

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Links from today's show: 

When Must You Check “Yes” to the IRS Crypto Question on Form 1040? (3/12/24 Episode): https://www.thetayf.com/blogs/this-weeks-stories/when-must-you-check-yes-to-the-irs-crypto-question-on-form-1040  

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