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Introduction
 
 
 
FIVE STEPS TO STAYING RICH FOR LIFE
 
A message from Ed …
     
If you’re like me, you may find yourself tempted to skip over a book’s introductory material in the belief it’s 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!
 
What’d You Do?
 
I’ll 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 she’d learned about creating a living trust to protect her assets from going through probate—the 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. Sylvia’s largest asset was a tax-deferred $850,000 individual retirement account (IRA), and that’s what she funded the trust with—putting the entire amount in. What she had not learned at the seminar (because it wasn’t 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 she’d brought with her.
 
“What’d you do?” I asked. “You emptied your IRA!”
 
“No, I didn’t,” she replied. “I transferred it to a living trust.”
 
“You can’t do that,” I said. “It’s considered a withdrawal. Now you owe taxes on the whole kit and caboodle. You’ve 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 this”—even though I wasn’t 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, it’s 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 process—though not as costly as losing the bulk of her IRA to taxes would be if we made no request—and 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 IRA—no 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, I’ve heard many stories like Sylvia’s, 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, you’re not extremely careful about when—and how—you move that money and use it. I refer to this problem as the “What’d you do?” syndrome because that’s 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 wealth—mistakes that can cost them big-time in taxes and trouble—and instead guide them to do smart things that can lead to staying rich for life.
 
So, I asked myself what it is that I do when I sit down with my clients and work with them to create a plan to protect their life savings for themselves and their families. And it suddenly hit me that I take them through five very specific steps—a blueprint, if you will—to real retirement savings success that works every time.
 
Furthermore, I was struck that while the focus of my own career has been on wealth preservation, these five steps are equally suited to creating a plan for building wealth. This is because the two disciplines, although separate, are part of the same overall equation.
 
Certainly managing taxes on investments is essential to staying rich for life, but you still need to get rich by first building your wealth the right way. So this book includes that information as well.
 
As I am primarily a tax advisor and expert on the retirement end of things, I took advantage of my extensive Rolodex of seasoned financial and legal professionals whom I have come to know in my travels and asked for their insights and advice on the broad areas of investment planning and wealth accumulation, estate planning, and insurance planning, not to mention special experience in the planning concerns of women and other niche areas. These are some of the most savvy, successful, and respected advisors in the nation, with hundreds of years of experience in their respective areas among them—literally the “best of the best.”
 
You will benefit greatly from the candor and wisdom they offer throughout this book. And the reason I was able to get them to talk so openly is not just that they are colleagues and friends, but also that I agreed to quote most of them anonymously
 
There’s an old adage that from anonymity comes the truth. That may be right. But the main reason I agreed to anonymity for contributors to this book is compliance issues at their respective companies or in the financial services industry at large. Such regulations often restrict what advisors can say on the record in print, which typically leads to watered-down generalizations and sometimes muzzles them outright. But I have persuaded these professionals to spill the beans like never before so that you can benefit from their unfiltered knowledge and advice. And because I want you to know that they really exist, I have acknowledged all of them together, by name, in the Acknowledgments at the back of the book. Take a look—it’s an impressive list!
 
Are You Ready for Some Football?
 
Think of financial security as a football game. The first half is the accumulation half. You work for, say, thirty or forty years, earning income. Some of that income you put aside for savings and investment. Assuming average investment results over the years, you’re proud of what you’ve accomplished. You enjoy looking over the numbers when the statements come in, unless the market has tanked that month.
 
However, amassing a retirement fund is only half the game. At some point—probably when you are in your fifties or sixties— you’ll stop working and the paychecks will likewise stop coming in. Then you may well have another thirty or forty years (or even longer) to live off that retirement fund you’ve built up. That’s the second half of the game: the distribution half. If you don’t play well in the third and fourth quarters, you’ll wind up losing.
 
Some people play well in the first half, building up substantial amounts in their retirement accounts. However, they have no plan for the second half—the half during which money is withdrawn. In fact, most people don’t even come out onto the field in the second half.
 
The IRS plays all four quarters, though. That’s the government’s plan. If you don’t have your own plan, you’ll be forced into the government’s plan, the one whereby most of your retirement savings goes to the government, in the form of taxes.
 
What’s more, scoring in the first half is much easier than winning the endgame. There are many resources out there to help you succeed in the first half. Your employer probably offers a retirement plan in which you can participate, setting aside today’s income for tomorrow. There are many books, articles, TV shows, and websites telling you how to invest your money. Many financial advisors have enough knowledge and experience to guide you through a successful plan for building wealth. That’s not the case for the second half of the game. What could go wrong? You might discover that the money you’re withdrawing from your IRA won’t go as far as you expected, after you pay tax. Thus, you might take out more money, to meet your living expenses. Before you know it, your IRA could be gone, long before you are. You could wind up watching your money carefully as you grow older, but better planning would have provided for the ability to meet your goals along the way, a comfortable retirement for yourself, and a sizable inheritance for your beneficiaries. You might have built enough to live well from now through retirement, but the money was lost to tax mistakes, made by you or by a financial advisor who was not educated about how to withdraw and use the money without triggering unnecessary taxes or penalties. Tax mistakes are tougher to stomach than market losses, since tax mistakes are within your control and can be avoided with proper planning and competent advice.
 
An alternate scenario: You could scrimp on spending now and throughout your retirement, denying yourself pleasurable experiences with your loved ones. This penny-pinching might enable you to leave a sizable estate—only to have most of it taxed away before your beneficiaries can enjoy this inheritance.
 
But getting the best of both worlds—building enough wealth to live comfortably now and through retirement as well as being able to leave a substantial legacy for your family—can be done if you follow these five steps.