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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to How to Retire On Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice. This show is all about getting into the details so so you can determine what is right for you. As always, text your questions to (913) 363-1234. And remember, this show is not financial advice.
Mike:It's information to continue your exploration. With me in the studio today, mister David Fransen. David, thanks for being here.
David:Yes. Hello. Thank you. David's gonna read your questions,
Mike:and I'll answer them. Let's jump in.
David:Hey, Mike. A lot of the big beautiful bill tax changes revolve around the MAGI. What is it, and what do we do about it?
Mike:Yeah. MAGI, not to be confused with MAGA, is an old school tax term. It means modified adjusted gross income. K. Is that not a mouthful?
David:It is. It is. And so I'm wondering what's the difference between the MAGI, m a g I n, and just regular old AGI? The AGI. Yeah.
David:AGI. So
Mike:let's add one more in there because you need to have it for context, and that's the provisional income calculation.
David:Okay.
Mike:So when you're doing your tax returns, there's an order or a sequence that must be done to figure out what you qualify for and what you don't qualify for. The provisional income, just by quick definition, is for Social Security. The adjusted gross income is really about how much you're gonna pay in taxes. The MAGI is the qualifier on which benefits or deductions you may qualify for and which penalties you might pay.
David:Okay.
Mike:K? When I say penalties, the easiest one is IRMAA. So if you are 65 or older and you're on Medicare and you go above a certain threshold, not according to your adjusted gross income, you know, the amount you pay on taxes, but your modified adjusted gross income, you may pay additional premiums in Medicare. Uh-huh. That's what Irma was intended to do is say, well, the ultra wealthy can pay more for this, so let's have them pay for it.
Mike:So the one big beautiful bill, which is the proper name, whether you believe it's big, whether you believe it's beautiful or not. It's 900 pages. I went through it personally. It was big. Mhmm.
Mike:Whether it's beautiful or not, that's up for you to decide. But many of the tax breaks and changes are only for certain people, and that is so important. And so that's why right now, a lot people are saying, well, what's the magic? What's the modified adjusted gross income? How does that qualify?
Mike:How does that quantify? How do how do you run this calculation? Now they're starting to pay more attention to tax planning. And what a wonderful thing. I'm not saying that we all should become accountants.
Mike:I'm not saying that anyone's gonna enjoy diving into their taxes, but you have thousands, if not tens of thousands of potential savings if you understand how to do tax planning.
David:Yeah. And so the people who would save are, like, retired folks? Is that really when we Anyone. Oh, anyone.
Mike:Yeah. Good clarification. Understanding your adjusted gross income and your modified adjusted gross income as you're working, you need to understand where are you going so that once you get there, you understand how to then maintain your retirement. Many times people will spend their working life saving in a certain way and not realize that they're creating problems for themselves later on in life. So you wanna pay attention to these things as you're working and once you retire.
Mike:It's a coordinated effort.
David:That's good. Super.
Mike:Great clarification. So just real quick, going back to provisional income, the purpose of it is to figure out, is your Social Security gonna be taxed at 0%, 50%, or 85%? And the reason why I'm starting here is it's kind of a simpler version of the modified adjusted gross income. So here's how the provisional income calculation works. You're gonna take half of your Social Security.
Mike:K? So whatever that amount is, divide it by two, plus all of your taxable income. So think of w two ten ninety nine, your IRA distributions. That's pretty easy to get that part of it. And then you have to put back in your tax exempt, if you will, income, not your Roth, but think of, like, your municipal bond interest, Things like that.
Mike:K?
David:K. Got
Mike:it. You put that back in there. You add it all up, and that will determine your Social Security calculation. Now that's the first thing that's done. When you get to the modified adjusted gross income, what you're doing is you're taking your total taxable amount, your adjusted gross income, and I apologize for all the the semantics here.
Mike:I know it's it's dense, but you need to know this. There are thousands of dollars on the line every year if you don't get this and don't plan accordingly. So you've got your adjusted gross income, and then what you do is you then add back in the amount that you put into your IRA that you've deferred. So let's say you took a $160,000 income as a salary, but you put $20,000 in as in your IRA, so you're not paying taxes on that. You've deferred that for a period of time.
Mike:So your adjusted gross income would be a 140,000. So a 160,000, take it down by 20,000 because that's what went in your 04/2001 k. Now you're at a 140 Are you with me? Yep. I follow that.
Mike:K. The modified adjusted gross income would say, well, you gotta take that back in for this calculation, and now you're it's a 160,000. Oh. So it's a way to prevent wealthier individuals who are deferring taxes to say, well, how much really is at stake here? And would you qualify for certain benefits or not?
Mike:So for right now, you've got one of the new things. It's the 65 plus additional standard deduction that's gonna be happening for the next five years. Okay? So this is new, what you're saying? New for one big beautiful bill.
David:Okay.
Mike:And if you're 65 years or older for the next couple of years, about five years till 2031, I believe, you can deduct 6,000 if you are single or 12,000 if you are married in addition to your standard deduction. They did this really to try and help more people not pay taxes on their Social Security because they couldn't make Social Security tax free. I know people have said, well, Trump said, or so and so said they made Social Security tax free. They didn't. They made Social Security tax free for more people, but not for all people.
David:Okay.
Mike:And so because they're doing this based on your modified adjusted gross income, many people that are wealthier just are still gonna pay tax on their Social Security. Does that make sense? Yeah. Kind of how this works out?
David:Yeah. It's just it's expanding the amount of people. They're casting a wider net of who can get Social Security tax free.
Mike:So Yeah. It's more technical to qualify for these benefits. Mhmm. So for a married couple, if your modified adjusted gross income is a 150,000 or less, k, Modified adjusted gross income, not your adjusted gross income. You're modified.
Mike:So you've got to include the municipal bond interest and all the other things that could be added back in there.
David:Okay.
Mike:Are you deducting by contributing to an IRA because you're still working, whatever it is? You gotta add that all back in there. It's a $150,000 or less, then, yeah, you get to take your 30 some thousand dollar standard deduction, and then add another $12,000 in the standard deduction. Plus there's the other addition bonus of, like, a couple thousand dollars. There's a lot of additional deductions that are standard.
Mike:It's very difficult for people to itemize their deductions right now, but you need to qualify for it based on that modified adjusted gross income. Now what happens if your modified adjusted gross income's like a 160,000 or a 170,000? It phases out. So you might not get all of this new senior deduction that's for the next five years, but maybe you get part of it. The rule of thumb is, if I remember right in the calculations, a 195,000 or less for your modified adjusted gross income, you should be able to deduct something from this new benefit.
David:Okay. What if you're somebody who doesn't have a bunch of income from other sources? What if you're just solely relying on Social Security as your income right now? Yeah. This probably doesn't change much for you?
David:Doesn't change a thing. Okay.
Mike:Yeah. It's for people that typically are wealthier, that have more moving parts in their plan, they are the ones they have to pay attention to. But if you're married and your total income is, let's say, 120,000 or less, so 10,000 net a month, somewhere around there, there's a good chance that you can be in this threshold and maximize the full benefit. It's gonna depend on your IRA to Roth conversions. It's gonna depend on your income sources, and is it all from your IRA, or is it not?
Mike:Did you take the pension? Do you have Social Security? And so these things are gonna matter. This is one of the main reasons why I have shouted from the rooftops, so to speak, of saying don't lock yourself up into a fixed income retirement plan.
David:Yeah. Tell us why.
Mike:You want flexibility.
David:Okay.
Mike:So for all the people that have their Social Security, maybe they have a pension, maybe they have an annuity, but it's underneath, you know, let's say, 70,000 in total. They have enough flexibility to manipulate their situation to potentially take advantage of these different new opportunities, because the tax code is written in pencil unless you can adjust your income, your plan, your income sources, your conversions, I mean, all of the above. Unless you can really adjust that, you could have ended up opting out and making it impossible for you to really enjoy these benefits. Rigidity and fixed income, that's all you're doing and you're a higher net worth individual, you could be really missing out on these opportunities, because you just looked for that oversimplified set it and forget it retirement plan. There's a cost.
David:Set it and forget it may have worked in times past, but are we beyond that, or has this never been a good idea?
Mike:Set it and forget it really is summed up in the following expression. Okay. It works until it doesn't. Yeah. And if the tax code is written in pencil, it's just a matter of time before there's a missed opportunity.
Mike:It's about balance. It's about understanding. Maybe you want your basis to be covered. You got your Social Security, and maybe I mean, I wrote the whole book, how to retire on time, which you can download it still for free at the time that's recording the the this podcast and on the radio show. You can still download it for free, retireontime.com, but it's an argument against locking all of your assets up into a lifetime income stream and that set it forget it plan.
Mike:And the reason is there's a lot of legacy planning and tax plan that can be done along the way without not necessarily taking more risk. It's just a different path to plan your retirement. There's 10 ways you can take income in retirement. The annuity lifetime income annuity option is one of the 10 different ways. You just need to understand what's rigid, what do you not have negotiating power over, and what can you adjust so that you maximize these efficiencies, so that you maximize the opportunities ahead of us.
Mike:Because I can tell you right now, even though the current law says that these tax brackets are permanent, they're permanent until they're not. It doesn't matter until it matters. That's just how it is. Yeah. So it creates pause for me when someone says, I just wanna buy a bunch of annuities, turn on income, and then that's it.
David:And so we we talked a lot about MAGI, AGI, and other kinds of income. Pro V, provisional income. Pro V. Yeah. Haven't heard that one.
Mike:It's just made that up.
David:You heard it here first. So are are people gonna have to get an accountant to, like, do all this? Will will TurboTax be able to figure this out?
Mike:That's that's actually a really good question. TurboTax and TaxSlayer, by the way, which is an alternative to TurboTax and a number of these other softwares we have, you
David:can buy TaxAct. We could list a lot.
Mike:About $50.60, $70 or so. Do it yourself. They are incredible softwares. I do not wanna diminish anyone from using them. Love them.
Mike:A lot of our clients use them. They will get the calculations perfect. I mean, they're I can't guarantee their services, but they're really, really good. Like, you're gonna get that tax return right. The problem is when do you use it?
Mike:You're using it after your tax year has finished. You're just reporting what happened. Good point. Any change you make in your tax return, if you're doing tax planning and you're being proactive, you make one change, it affects five to seven other parts of your ten forty. And so, yes, you can file your taxes, and it will show you the benefits and things like that of all these things.
Mike:They're not gonna miss that typically. But if you wanna be proactive, then it's the year before you're saying, here's the tax environment. So in November or in September, you're saying, next year, how am I going to take my income? Am How I gonna do my IRA to Roth conversions? How am I gonna maintain my cash flow, plan for the dividends I expect, and so on, so that I can take advantage of the different opportunities proactively, not reactively.
Mike:The problem is people expect their CPAs to fix their and do this tax planning after it's already happened. I'm sorry. It's done. It's set in stone. You're not going back in history.
Mike:The time machine's not been invented to re fix these issues. You've gotta be proactive, and most people aren't paying $2.03, $4,000 a year for tax planning simulation software to be able to do that. That's why people come to us. That's why people will say, well, hey, Mike. I wanna be proactive in this.
Mike:I wanna understand how do I minimize my overall taxes. They realize that maybe their entire strategy is flawed because they're going too fast. Now that they realize that the tax rates are permanent, they've got more breathing room. Now that they realize that the RMDs won't start till 75, maybe they're gonna take a step back and say, hey. Let's take a look at this and be more strategic about how do we keep more of our assets, how do we minimize our tax burdens based on effective tax rates, and how do we weave in the various seasons, so for the next five years, and then five years after that, and then five years after that, to be able to take advantage of the tax legislation, the new tax laws that evolve over time so that you're able to keep more of your money, pay less in taxes, and live a better life.
Mike:That takes proactive effort. And if you expect your CPA, your enrolled agent, or these softwares like TurboTax to do that, you're asking an impossible situation. It can't happen. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts.
Mike:Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.