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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.
Income's gonna come from somewhere. Do you wanna come from these sources because that's just what you decided, or do you want to tax efficiently figure out where is the right source for that year? Welcome to the Retire On Time q and a podcast. My name is Michael Decker. I'm here with David Franson.
Mike:This show is all about answering your questions, but not the oversimplified advice you've heard hundreds of times. We wanna get into the nitty gritty. That said, remember, it's just a show. This is not financial advice. Keep doing some research.
Mike:Text your questions to (913) 363-1234, and we will feature them on the show. David, what have we got today?
David:Hey, Mike. What's one tax minimization strategy that often gets overlooked in retirement?
Mike:I think the structuring of income year by year is one of the most missed opportunities, and here's why. So a lot people think tax planning is IRA Roth conversions. And though that is an important and effective strategy, it's not the only one.
David:Alright.
Mike:K? A simpler one in my mind is to say, okay. I'm gonna retire next year. K? I've got IRA assets.
Mike:Got it. Got some Roth. Got it. And I've got some brokerage funds. Got it.
Mike:Okay? Retire at 62 years old. Okay. So I've got a couple of years before I'm gonna hit Medicare. No problem.
Mike:Well, what if I had enough in the brokerage funds that I could fund two years of my retirement? And what if in the brokerage funds, they were highly appreciated assets? You might say, well, gosh, the basis is so low. Right? The basis being, like, let's say you bought a stock at $5 a share, now it's worth $500 a share.
Mike:I'm being facetious. You know, it's you bought it, and it just grew like crazy. Now if you sell it, you're paying taxes. Right?
Mike:Well, this is the part that's often missed, is capital gains taxes start at the end of ordinary income tax. Oh. So when you're not working, let's say you're married filing jointly, you've got like 90 some like, almost a $100,000 of gains that you can realize. What if you needed, I don't know, a $120,000. K?
Mike:And in the brokerage account, you could sell, you know, 90,000 of gains and the rest of it is basis, you just sold a little bit, you're paying 0% in taxes. So that not only helps maintain the principal, so you you don't need to spend money and pay taxes. That lowers your portfolio overall. You're keeping more money in your accounts, and if you have more money in your accounts, they're gonna grow better. What's 7% of a million dollars versus 7% of $800,000?
Mike:You know, the million dollars is gonna have more dollars in it because of the compounding interest. It's an incredible thing. The other part is your healthcare. And if you know how to structure this right, and you know your income is basically gonna be zero taxes, you may qualify for the Affordable Care Act benefits that there are the do
David:call that? The subsidies?
Mike:The subsidies. Thank you. Yeah. That people thought went away. They didn't go away.
Mike:It's just the the the subsidies on steroids went away.
David:Yeah. Like the premium subsidies are gone, but the regular subsidies are still there.
Mike:You can still qualify for those. If you know how to report and say, hey, these are my taxes this year. Like, look, I I think I qualify for these subsidies. You can manipulate your taxes so that you're efficient on the income, you leave more near accounts to grow, and you qualify for more health care just by doing that one thing. Now, think of your Apple stock that you've been holding since, I don't know, the nineties or February, whatever they incorporated.
Mike:Yeah. Think of your Microsoft stock that you bought years ago. Think of I'm going back to my Seattle days. Right? Microsoft, Amazon, Boeing, highly appreciated assets that were hard to get out of.
Mike:Right. This is how you get out of it. Think of your Nvidia stock that you bought during the pandemic because you spent too much time on Reddit. And you heard about this company, and AI was a thing, and you got in early. We had clients that got in at, like, $3.04, $5 a share or something crazy like that.
Mike:This year, they're not paying any taxes federally. Their state had capital gains tax. They couldn't get out of that. But it'd be like $23,000 for taxes for the entire year. That's not a bad deal.
Mike:It's really not a bad deal. So structuring your income by years, not just by, I'm gonna turn on the income, and whatever happens happens, and that pays for the taxes. That's so oversimplified, generic, waste money. So that's that's, I think, one of the most easy to implement tax minimization strategies that are often overlooked because people associate that, well, here's my income. Here's my Social Security.
Mike:Here's my pension, or here's my annuity for lifetime income, or whatever it is. Yeah. That's my ordinary income. I'm at, like, 80,000 already right there, maybe a $100,000. So they're stuck paying 15% anytime they sell their their long their held positions.
Mike:Oh. If they just pushed out Social Security a little bit, if they just pushed out turning on that annuity, they just pushed out some of these IRA distributions or IRA to Roth conversions just a year Mhmm. How much more would they have to spend? And there's a ripple effect. I mean, I do a plan, and I see these operations or these these opportunities, I go, okay, well there's $30,000 there that we can get you right away.
Mike:How would you like to spend $30,000 less on taxes? It took me thirty seconds to see it.
Mike:That's how that strategy works. Not everyone's gonna be able to execute on it. Some people have to put everything into retirement accounts and so on. That's fine. Some people are gonna have a a larger concern with required minimum distributions.
Mike:They just save too much. Oh. And they're gonna be forced into higher tax brackets. So everyone's gonna be different, but that's an easy one. I'll give you a second one.
Mike:Just reading your tax form. Your ten forty, that's the tax summary, basically. You get back after you file your taxes. Mhmm. And just understand kind of what is in there, why are those numbers showing up there, and what could you do in your portfolio to shift that around?
Mike:Just an idea. That's all I'm saying.
David:So your guy and your or your gal, whoever, the the person in the example, they had some brokerage funds that could sort of bridge the gap to when they were gonna start turning on Social Security and things. So what why shouldn't that person take from their IRA instead instead of touching the brokerage funds and paying capital gains?
Mike:Yeah. If you took out $5,060,000 of IRA assets let's say let's say you did an IRA to Roth conversion or you just took that money out Yeah. Then you've got $5,060,000 less of capital gains in the 0% bracket. So if you take out 60,000 of ordinary income, is what this is, then let's say it's just for easy math, a 100,000 is the basis, you could only realize 40,000 of basis before you start paying 15% on the gains that you're or 40,000, I'm sorry, of gains that you're gonna pay, and then you start paying 15% on the gains. Why would you pay 15% on taxes that you don't have to?
Mike:You're gonna pay ordinary income tax on these other ones.
Mike:Not you don't have to on the gains. You just need to kind of understand the differences. Mhmm. So that's that's that's the main thought with this. And and you can get more technical by saying, alright.
Mike:We're gonna take 20 or 30,000 of the IRA, which is fine, but that cancels out with the standard deduction, and then you go with the capital gains route. Like, so I I'm not trying to be an absolutist here. What I'm saying is just understanding each year, how are you going to take your income?
Mike:Do you really care where your income comes from?
David:Just give it to me. I need it. It just yeah. I got pickleball to play. Yeah.
David:Alright?
Mike:You're a tennis player.
David:Oh, I do. I do like You
Mike:can't fake it. But but the idea is your income's gonna come from somewhere. Do you want it come from these sources because that's just what you decided, or do you want to tax efficiently figure out where is the right source for that year? Mhmm. That's the ongoing conversation that needs to be had.
Mike:And you really need to have it, in my opinion, every year at the end of the year. So when you're when someone's talking about, oh, well, you know, this is kind of what happened, and we'll do some IRA to Roth conversions and see what happens next year. The question should be, how am I gonna take income next year? What's the taxes? What are the taxes gonna look like?
Mike:Yeah. And why is that the case? You know, some some foresight? Might might might be helpful. I don't know.
Mike:Might be helpful. Right. But I I think that's that's the one to look at is don't just line up income streams. Line up year by year the income that you wanna take and how you wanna take it. I think that's about all the time we got for today's show and this question.
Mike:Make sure to text your questions to (913) 363-1234. And don't forget to go to retireontime.com. We've got tax calculators. We've got planning calculators. We've got so many calculators and planning tools that you can use, all free, publicly available.
Mike:You don't even need to enter your name and email address to access them. I hate that. Maybe you do too. Up to you. Retireontime.com.
Mike:You can even join me for a workshop where I build a retirement plan live. If you wanna work with a professional, you can also click talk to a planner, schedule a free thirty minute call, and learn we'll learn more about you and what you got going on and and decide on the best way to proceed in preparing for you to be able to retire on time. Thanks for joining the show. We'll see you in the next episode.