Ed Slott - Stay Rich for Life!: Growing & Protecting Your Money in Turbulent Times

A message from Ed

If youre like me, you may find yourself tempted to skip over a books introductory material in the belief its just fluff and dive straight to the chapters where the real meat is. But if you give in to that temptation, you will miss out on key information about how to use this book to secure your financial future. So, please read on. You have been advised!

Ill call her Sylvia. Some years back, when I was more active as a tax preparer, she came to me as April 15 approached for some help going over her tax returns. She told me that the previous fall she had been to a seminar on estate planning, where shed learned about creating a living trust to protect her assets from going through probatethe court-supervised process of proving a will, appointing an executor, and settling an estate. Sylvia was eighty-five at the time and, not knowing how many years she had left, she thought the living trust was a very good idea. So she decided to do it.

Of course, a trust is worth nothing until you put something into it. Sylvias largest asset was a tax-deferred $850,000 individual retirement account (IRA), and thats what she funded the trust withputting the entire amount in. What she had not learned at the seminar (because it wasnt covered) and, therefore, was totally unaware of was this: With that simple transfer, she had unwittingly made the entire tax-deferred $850,000 accumulation suddenly vulnerable to taxation. I realized this when I spotted a Form 1099-R for a taxable $850,000 distribution in the papers shed brought with her.

Whatd you do? I asked. You emptied your IRA!

No, I didnt, she replied. I transferred it to a living trust.

You cant do that, I said. Its considered a withdrawal. Now you owe taxes on the whole kit and caboodle. Youve got nothing to protect, except whatever will be left after Uncle Sam gets through with you.

As you might expect, Sylvia was beside herself at this news. In fact, I thought that day might turn out to be the final day of her eighty-five years, right there in my office. So I quickly added, Maybe I can fix thiseven though I wasnt sure I could. This brought her back to life.

The IRS will allow you to put the money back in your IRA within sixty days of taking it out and not be liable for withdrawal tax, I said. When did you take it out?

Five months ago, she replied downheartedly.

Okay, its still a taxable distribution then, I said. Unless I put my thinking cap on. Effective a year earlier, in 2002, the IRS had been granted the authority to waive the sixty-day rule in cases just like this one in which somebody with all good intentions had simply made a terrible error. The only way to take advantage of the waiver was to file what is called a Private Letter Ruling request for relief with the National Office of the Internal Revenue Service in Washington. It is a costly processthough not as costly as losing the bulk of her IRA to taxes would be if we made no requestand a time-consuming one. It took about nine months, but we got a favorable ruling and Sylvia was allowed to put all the money back into her IRAno tax, no penalty; all was forgiven. She was able to undo her mistake. The IRS is not as liberal in these rulings as it once was, so today mistakes like this might not be fixed and that could result in losing a lifetime of savings for making one wrong move.

Over the years, and while touring the country with my Public Broadcasting Service special, Ive heard many stories like Sylvias, most of them with not-so-happy endings. It takes a long time to build up that kind of money, but it can be gone in a flash if, as the result of ignorance or poor advice, youre not extremely careful about whenand howyou move that money and use it. I refer to this problem as the Whatd you do? syndrome because thats often how I react, as I did with Sylvia, when people relate their tales of woe about money and taxes to me.

I realized there was a huge void that needed to be filled to prevent investors and savers from doing dumb things as they try to build and preserve wealthmistakes that can cost them big-time in taxes and troubleand instead guide them to do smart things that can lead to staying rich for life.