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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
It's not a little bit from each bucket.
David:Okay.
Mike:It's which bucket are you gonna focus on and which tax which tax equation on your ten forty are we gonna account for? Welcome to How to Retire On Time, a show that answers your retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we do want to dive into the nitty gritty because well, it matters. There's no such thing as a perfect investment product or strategy.
Mike:Heck, there's no such thing as a perfect or riskless retirement. That's why these details matter. Text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey, Mike. How do you plan income between your different tax buckets?
Mike:Yeah. This is a great question because a lot of people will just take a little bit from each bucket, and that's inefficient.
David:So when they're taking income out, like, oh, I'll take some from my Roth, some from IRA, some from my brokerage.
Mike:Well, it's like they've got, let's say, some money in a brokerage account, non qualified Uh-huh. And they're just taking the dividends out as income. That's taxes income. So what's your what's your adjusted gross income look like? What's your ordinary income tax look like?
Mike:That's kind of what it's gonna look like. Is that efficient? And then you've got your IRA. So anytime you take a distribution out of it, your taxes ordinary income as well. And then maybe you have your RMDs to worry about, so maybe use some IRA to Roth conversions and maybe that disrupts your your ordinary income as well.
Mike:And you might think, well Mike, we need income. Yeah, that's that's fine. Mhmm. But you could structure it in different ways to where your brokerage account is set up to more of a growth vehicle with less dividends, for example. And maybe you've got the your IRA to Roth and IRA to Roth conversions happening in a different season or a couple of years, you're converting over, maybe use the non qualified later on and optimize the zero to 15% long term capital gains brackets
David:Mhmm.
Mike:Which is often way more tax efficient than, you know, paying the 25%, whatever the effective tax rate is for you. And some people, it's maybe ten, twelve. Everyone's different, but you have to understand what's your income level look like? What's your net income really expected to be? Mhmm.
Mike:What is your account values for all of your pre tax IRA accounts? All of your brokerage accounts, so they're subject to capital gains, and all of your Roth accounts. And then how do you take advantage of the various tax codes without tripping a lot up along the way? So here's an example. We have we have a client that that I've been working on a plan.
Mike:Young guy, retiring, you know, early sixties, got plenty of time for his RMDs. We want to grow his IRA account with how much income he wants. A lot of his income we can work within mostly the standard deduction, which is a great deal. Okay? So what do we want to do?
Mike:Well, we don't want to take income from the retirement account, at least not at first, because we don't have to. Okay? So we want to grow the account as best we can, so we're not even gonna touch it for the first couple of years, and we're gonna utilize his brokerage account for the first couple of years. Why is this important? Whenever you pay taxes, that's that that's a distribution.
Mike:You're you're lowering your overall amount of money in your portfolio. It's harder to grow less money.
David:Okay. Yeah.
Mike:So if you're taking income out and you're paying taxes and it's on the ordinary income tax and you're doing conversions, you're kinda getting hit from a couple of different angles. However, if if in this situation he takes, like, maybe his first four years from non qualified, a lot of his income then comes from the 0% long term capital gains, and then if you cross the threshold, some of it will be at the 15% level. That's a pretty good tax situation to where he's getting more out of his assets because he's paying less in taxes. And so we've delayed the Social Security a little bit because we don't want Social Security is ordinary income. Long term capital gain starts at the end of your ordinary income.
Mike:So we're kicking out the ordinary income for a season, optimizing his long or his long term capital gains for the first couple of years, making his money stretch further because the 0% long term capital gains brackets very nice if you can tap into that, while his other accounts grow. And then we turn on social security, we're also turning on other things, and then we're manipulating the ordinary income tax.
David:Okay.
Mike:There's a reason why they put long term capital gains on top of ordinary income tax. They don't want you I shouldn't say they don't want you. The IRS isn't conspiring against you. These are politicians that wrote rules that seemed reasonable. But it's our job to take advantage of the inefficiencies that they put together.
Mike:Our efficiencies are their inefficiencies.
David:Okay.
Mike:So, yeah, the debt might be a problem, but it's not our job to fix their debt. Our job is to get the most out of our money based on the tax code as it's currently written. Sure. And so when you start to section off what you're gonna take and where you're gonna take it and what time, what your income needs are, you can find a lot of efficiencies. Mhmm.
Mike:That's why I don't like the alright. Here's your and I I kicking this dead horse over and over again. But, you know, hey. Alright. So here this is actual tax planning, quote unquote tax planning I've heard other advisers do.
Mike:Alright. Well, here's the income you need. Here's the annuities that you need. It's gonna guarantee the income you want, and this will pay the taxes, and it'll give you the income you want, and you're good to go. That's not tax planning.
Mike:Tax planning is getting more out of your money by paying less than taxes.
David:Yes. So it sounds like what you're saying is where you draw your income from, like which accounts you draw your income from matters. Yeah. Because the
Mike:And it's not a little bit from each bucket.
David:Okay.
Mike:It's which bucket are you gonna focus on and which tax which tax equation on your $10.40 are we gonna account for? Uh-huh.
David:And that could be different during various ages of your life or seasons or
Mike:Yeah. And it's if you have a pension, that's gonna change things. If you've already filed for Social Security, that's gonna change things. If you haven't, that's gonna change things. How much you have in each bucket is gonna change things.
Mike:The purpose of your money is gonna change things. Mhmm. Maybe you don't want to ever touch your non qualified assets because that's growing for legacy purposes, or maybe you're you're doing that in a way for because that's what you want to tap for. The plan together first Mhmm. Then you find the risks you are willing to take and the risks you're not willing to take, and then you're diving into the portfolio and the details that would allow you to fulfill that plan and find those efficiencies.
Mike:Those details really do matter, and I don't think they're paid attention to enough. It's not just about growing your wealth. It's not just about having more money. It's about creating more and also finding additional efficiencies. That's all the time we've got for today's show.
Mike:If you enjoyed the show, consider telling a friend, leaving a rating, and most importantly, that you are subscribed to it so that you don't miss a thing. For more resources, including a copy of my book, on demand courses, and so much more, just go to www.retireontime.com. If you want help putting your retirement plan together, go to retireontime.com and click the button that says get started. But seriously, from all of us here at Kedrick Wealth, we wanna thank you for spending your time, your most precious asset with us today. We'll see you in the next episode.