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We sit down with Freddie Rappina, a financial advisor, chartered financial consultant, and accredited investment fiduciary, to explore how the SECURE Act and SECURE Act 2.0 have changed the landscape of retirement and estate planning. Freddie breaks down the new 10-year rule for inherited retirement accounts, explaining its potential tax implications for your heirs. He also shares strategies to mitigate the impact, from Roth conversions to charitable contributions, helping you pass on your hard-earned savings as efficiently as possible.
Freddie Rappina is a financial advisor, a chartered financial consultant, and an accredited investment fiduciary who founded Opta Financial.
He discusses the KevinMD article, “The hidden estate tax: How the SECURE Act could impact your heirs.”
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Transcript
Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today we welcome Freddie Rappina. He’s a wealth advisor. Today’s KevinMD article is titled, The Hidden Estate Tax: How the SECURE Act Could Impact Your Heirs. Freddie, welcome to the show.
Freddie Rappina: Thanks for having me, Kevin.
Kevin Pho: So, before we start talking about your article, just briefly share your story and journey to where you are today.
Freddie Rappina: Sure. Yeah, I am a retired police officer, and around my 14th year on the police department, I decided I wanted to share the information I had received over the years on how to build wealth. So, I got all my certifications and everything, and I started a small firm. It grew very, very quickly in the Washington, DC area.
In 2020, I retired fully from the police force. I had two careers for about seven years—I was running my financial office literally across the street from the police station, literally running across the street! Then I moved down to Tampa, where I’ve been for the last four years.
Now, I’m really getting out there and helping people understand that building wealth is very different from simply saving money.
Kevin Pho: Alright, so when it comes to the physician population in particular—as I’m sure you know—financial literacy often isn’t high on their list of things to do. If you were to point out the biggest mistake most physicians make, based on your experience and what you’ve seen, what would that one mistake be?
Freddie Rappina: The one mistake is not building wealth early enough. Think about it—when you’re a 22-year-old resident in some hospital, you’re working ungodly hours, you’re not making a whole lot, and you’re thinking to yourself, “Man, once I get to this level, when I’m making X hundreds of thousands of dollars, I’m going to be killing it, and all these years of work will be worth it.”
Then you get to those years—maybe you’re 30 or 35 years old at that point—and you’re like, “Man, I’m not feeling it. I’m making a lot of money, I’m saving a lot of money, but I don’t feel like I’m wealthy.” That’s because a lot of physicians do a really good job of saving money, but they don’t always do as good of a job building wealth. Saving and building wealth are not the same thing.
Kevin Pho: We were talking offline about a chess and checkers analogy when it comes to building wealth. What is that?
Freddie Rappina: The chess and checkers analogy I use is this: the middle class has been forced-fed checkers—almost just completely shut down and waterboarded with checkers—where they’re saving in these retirement accounts for 30 years. They hear about compound interest, compound interest, but, in my opinion, compound interest is the most oversold concept to the middle and upper-middle class. It’s only making the financial institutions, the banks, the insurance companies, and the mutual fund companies (which are really investment companies) a ton of money.
But people aren’t feeling it themselves, right? Just a few weeks ago, we had all-time highs in the stock market. And it’s like, “Well, who became wealthy over that? Do you know anybody who all of a sudden got to quit their job, buy a yacht, and move to an island?” The market will help you build wealth, but it won’t build wealth by itself.
The chess side of that is learning how to use leverage, how to use debt, how to buy cash-flowing assets such as real estate or businesses that you don’t actively work at, where you’re an absentee owner or semi-absentee owner. You get to be a doctor, and you get to enjoy being a doctor more because you don’t have these financial constraints that a lot of people, unfortunately, have. You get to enjoy your job more and maybe even expand your practice, open another office, or do some things that you’ve been looking forward to doing. So, that’s more of the chess mindset. It’s a mindset shift from checkers to chess.
Kevin Pho: Alright, let’s talk about your KevinMD article, The Hidden Estate Tax: How the SECURE Act Could Impact Your Heirs. Now, tell us the events that led you to write this article in the first place. Then, for those who didn’t get a chance to read it, tell us about the article itself.
Freddie Rappina: Okay, so yeah, the SECURE Act came about in 2019. I got wind of it in the summer, and I thought, “Man, this is a strange bill. This is going to be bad for the middle class.” At the time, there was a Democratic Congress, and I thought, “No, that’s not going to go through Congress.” Then it went through Congress. Then it got to a Republican Senate, and I thought, “They’ll kill that,” but they didn’t. Then the Senate passed it, and I thought, “I don’t believe Trump’s going to sign that—that would be awful.”
But on December 23rd, during his first impeachment trial, he signed it. I thought, “Man, this is really going to hurt the middle class.” And as the years progress, it won’t have an initial impact, but several years down the road, it’s really going to hurt. In my opinion, it’s taxing the transfer of wealth from the baby boomers to Gen X, right? They’re trying to speed up those taxes, and it can be really tough for a lot of people, especially those making considerable salaries, like physicians tend to do. It hurts that community even more than it does some other groups without substantial means.
Kevin Pho: So tell us, in practical terms, what that means. Give us an example that really shows the effects of the act in a typical scenario.
Freddie Rappina: The SECURE Act raised the required minimum distribution age, and it raised it again from SECURE Act 1.0 to SECURE Act 2.0. That’s the good news. The bad news is that the SECURE Act sped up the distributions for the heir—for practical purposes, let’s say the child of the deceased parent.
So, let’s say you have a million dollars in your qualified account—your 401(k), 403(b), whatever you have—and you’ve done a good job of not taking a lot of money out. You want to leave a lot of this for the next generation. Now, let’s say you pass away with that million-dollar account. Let’s say your only child is also a physician because they followed in your footsteps. They’re 50 years old at this point, and they’re making, let’s say, $400,000 in today’s dollars.
Now they inherit this million-dollar account, but they have to distribute it over 10 years. So, for easy math, they take out $100,000 a year for 10 years. That’s an extra $100,000 of income on their taxes. Instead of making $400,000, they’re now making $500,000 for that year. What that does is raise their income through the progressive tax brackets.
In this scenario, the child ends up paying more in taxes than the parent believed they were saving over the course of their working years. So, it’s a way for—I call it a hidden estate tax because it’s not overt. The estate taxes, which are generally very high, don’t kick in until around $11 million (and it may go down to $5 million in the next couple of years), but people are going to be impacted more in this scenario than they realize.
Kevin Pho: So, tell us the specific retirement accounts that would be subject to the required minimum distributions.
Freddie Rappina: All qualified plans. So, your 401(k)s, 403(b)s, 457s (which physicians won’t likely be a part of unless they’re in some kind of government capacity), and IRAs—money that hasn’t been taxed yet. The Roth IRA creates a different set of circumstances, but we’ll leave that out for now. Basically, it’s retirement-oriented, pre-tax plans. Those are the ones that generally have the required minimum distribution and are subject to these types of tax rules.
Kevin Pho: So, knowing this new scenario with the SECURE Act 2.0, what are some tax strategies that we can use to help mitigate some of the effects of this?
Freddie Rappina: Let’s say you’re retired and have a bad year for whatever reason—maybe you have a lot of losses. Taking distributions during that time could be beneficial because your income is lower, and you’re taking that money out of the retirement account to offset your losses. That could be good.
If you’re an accredited investor—which means you have a million dollars or more of net worth (not including your primary residence) and you make a good salary—you can invest in oil and gas investments. This is a very advanced tax strategy. Let’s say, hypothetically, you have that million dollars in your account and you take out $200,000 of it and invest it in a qualified oil and gas investment. You get to deduct $200,000 of income in that first year by investing in that. That could wash out the taxes. There’s some risk involved, but making those types of investments can help you wash out those taxes.
It’s not for everybody. You have to know what you’re doing or hire somebody like me who knows what to do and has a good CPA as well.
There’s also the idea of… this isn’t my favorite, but… if you don’t want to do those things and you really want that money to be inherited and you’re not looking to use it, you can take the distribution, pay the taxes, and use the distribution to buy life insurance on yourself. The idea is that the death benefit after you die will repay you for a good amount (or even all) of the taxes that you paid to Uncle Sam while you were still alive.
That’s only for those who are really not intending to use the money at all because, you know, you have to die to get it back—not as much fun.
And, you know, converting at the right times. If you’re a little more risk-averse and want to convert a little bit of those accounts over to a Roth IRA over the years, that could work as well. It depends on the individual.
It’s my job to make sure people know these circumstances. I don’t like to call them problems, but these circumstances are out there, and people should be aware so they can do something, because the alternative may not be great.
Kevin Pho: And to be clear, with Roth IRAs, the reason you would convert is because they are not subject to required minimum distributions. What’s the reason for that?
Freddie Rappina: It’s because you’ve already paid the tax on it. So, the required distributions are very different. You get to convert a little bit at a time, so you’re not having this big dump on your income all at once. You’re taking in drips and drabs over the years.
That’s for somebody who maybe doesn’t want to get into all the other stuff that may have a bigger tax advantage and is sort of throwing their hands up to Uncle Sam a little bit. But at least it’s not as drastic if they’re going to die with a lot of money. Or, you can just spend it all too—that’s another strategy.
But we work with a lot of people who want to create generational wealth. Legacy for our clients is very important. It doesn’t have to be important to everyone, but people generally don’t like to see any more dollars of their money going to Uncle Sam than they have to.
Kevin Pho: It sounds like a lot of these strategies are relatively nuanced. A typical clinician may not be aware or able to do some of these strategies and would hire a professional like yourself.
Tell us the type of questions they should ask their financial advisor if they want to avoid some of the ramifications of the SECURE Act. What specific things should they ask to make sure they’re guided in the right path?
Freddie Rappina: There are a few questions that I would ask if I were on the other side of the table. Number one is: Are you a fiduciary? A fiduciary financial advisor has to work in the best interest of the client—not themselves, not the firm. They have to work in the best interest of the client. Not all people who claim to be financial advisors are fiduciaries, so that is the first question. If they say no, or if they sidestep the question in some form or fashion, just get up and walk out of the office or hang up the Zoom call.
The second question I would ask is: Are you wealthy? If I walked into a gym and there was a personal trainer who was completely out of shape—just a big slob—I don’t think I would want to take personal training advice from that person. That person doesn’t have to be Mr. Olympia to be a good personal trainer, but you just don’t want someone to be completely out of shape.
You don’t have to get into specifics with the advisor, but ask: Are you an accredited investor yourself? How many properties do you own? If they say, “Just one or none,” that’s not going to be a good chess advisor. If you’re going to play checkers, that could be fine. There are a lot of good checkers advisors out there if that’s the game you want to play. But if you want to switch over to chess, having somebody who plays chess as well is going to be a better partner in that relationship.
Kevin Pho: We’re talking to Freddie Rappina. He’s a wealth advisor. Today’s KevinMD article is titled, The Hidden Estate Tax: How the SECURE Act Could Impact Your Heirs. Freddie, I understand you have a book. Talk a little bit about that, and then we’ll end off with some take-home messages for the clinician audience.
Freddie Rappina: Yeah, I recently wrote a book called Playing the Wealth Game. It looks like this (holds up book), and it goes over a lot of the checkers and chess mentalities and strategies. It’s a very different personal finance book. It’s a self-discovery book. By the end of the book, my goal is for people to know whether they are a checkers player or a chess player—and if they want to switch. But they shouldn’t be screaming at the moon anymore, asking, “Why do the rich keep getting richer?” Those questions should be answered for people in the book.
Kevin Pho: And finally, what are some take-home messages regarding the SECURE Act specifically, and how can physicians benefit from hearing some advice about it?
Freddie Rappina: Know what’s out there. Know whether or not it’s important to you. That’s the biggest thing. Don’t just throw your hands up and surrender. You can take steps to make sure that the money you’ve worked for over many years, helping a lot of people, stays in your family in some form or fashion.
Tax avoidance is good and legal. Tax evasion is bad and illegal. Don’t do that. The tax code is there to help you retain your wealth, not to pay a lot in taxes. So, a mentality shift is necessary—build a good team. Build a team with a wealth advisor, a good tax professional, and, if you’re going to start investing in businesses and real estate, good lenders and people who do this work every day.
Kevin Pho: Freddie, thank you so much for sharing your perspective and insight. And thanks again for coming on the show.
Freddie Rappina: Thank you.
