Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, 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.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial advisor, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss it all. Now that said, please remember this is just a show.

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. David, thanks for being here.

Yes. Happy to be here. Thank you.

So David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting us to 913-363-1234. That's 913-363-1234, or email them to hey mike@howtoretyme.com. Let's begin.

Hey, Mike. How would you plan differently if you had someone with $2,000,000 in their IRA versus someone with $2,000,000 in a brokerage account?

Tricky question.

Yeah. And for some, you might need to to differentiate the 2. What's an IRA? What's a brokerage account?

Yeah. So for starters, IRA, it's pretax. So you've made a bet that when you retire, taxes will be lower or you'll just have less income. It was an event to defer taxes to a later date. So that $2,000,000, you really don't have $2,000,000 to work with.

You've got because

you haven't paid the taxes yet.

You haven't paid the taxes. So if you if you were to take it out as a distribution, you're paying taxes. So is that 20%, 25%, 30% less than your brokerage account? A brokerage account, you've already paid the taxes, so it's invested in the market. K?

It's not tax free, as in if it grows and you sell it, you're gonna pay capital gains tax. So you might pay, you know, 15% or so on the gains, not all of it, but on the gains. So you've got 2 completely different situations, that you have to navigate. So let's just take them 1 at a time.

Alright.

Sound good?

Yeah. Let's do this.

Let's do the IRA. This is probably the more common one. People really focus on their 41 k. They put a lot of money in their IRA, and they've deferred their taxes. So the question really at hand is, how old are you?

How much time do we have until Medicare starts at age 65? And then when when do your RMD start, which is 73, unless they change it again? Mhmm. K. RMDs are when the government starts to require you to take distributions from your account.

They say, hey. We've let you deferred it. Well, we wanna get paid, and we don't wait until you die. So we're gonna force you to do this. So the reason why those are two important bits is because a $2,000,000 portfolio, in my mind, they've also got Social Security, and maybe they have a pension.

So if we're too aggressive on the income or we're too aggressive on IRA to Roth conversions, we may actually hit an issue at 65 for what's called IRMAA. IRMAA is a Medicare surcharge. So in from 60 to 64 years old, we're gonna treat retirement a little bit differently in how we're growing the IRA assets, how we're drawing down the IRA assets, and maybe we're a little bit more aggressive on the IRA to Roth conversions. And so we you know, I'll talk about, kind of, where the products and investments would be in that situation. But you need to understand the timeline of this.

Then at 65 to 73, you might continue to draw down your income. K? Because you wanna drain it. Not, you know, just drain it drain it. But, you know, you wanna spend it down while you're preserving the other assets, like your IRA to Roth conversions.

You would touch the Roth later on. I just said a lot. Are you with me so far?

Yeah. Yeah. I think so. And so I don't know if everybody listening knows what a Roth is either.

A Roth that grows tax free. There's no capital gains. You can buy and sell and be active with it. And then you when you take a distribution out, you don't pay taxes either.

So it's a it's a retirement account, but you've already paid the taxes on it. And because it's a retirement account, it can grow

Without capital gains taxes. Yes. Huge benefit.

Oh, yeah. Yeah.

Huge benefit.

Yeah.

It is hard to get money into a Roth. Mhmm. They restrict that. They restrict all retirement accounts, but they they restrict Roth almost a little bit more because it's so advantageous from a tax standpoint, and the government needs revenue. Yeah.

So they need taxes. Right. So my point being is you don't convert everything to Roth in a year. You wanna slowly do it. And I believe that you should have a target effective tax rate or basically how much you're paying in taxes during a more aggressive season of your life.

So 60 to 64, maybe a more aggressive IRA to Roth conversion and income season when it comes to your tax planning. Then you lower it down once Medicare starts, because you don't wanna pay unnecessary surcharges if you can help it. And then you do that until 73. And then at 73, the ideal situation is you've baked in your RMD into the income. So let's say at 73 years old, you've got half your income coming from your RMD, and the other half is coming from your Roth.

Now you've got a very low tax situation. You've you've strategically planned it in such a way that you've balanced it. You didn't go all extreme on one or the other. What most people don't realize that I found at least is that the zero tax bracket is actually not good for you. It's the lowest two tax brackets is where you wanna be because you have the standard deduction for life.

Yeah. As long as they don't get rid of the standard deduction, that's a tax advantage that you can incorporate in.

And the standard deduction, since what, 2017 or so?

It's been pretty high. It's been high. It's expected to stay pretty high if Trump gets it through the tax plan. Yeah. So that's that's what the IRA one.

Now what assets would I include in here? Well, I would probably use or recommend our models, assuming that that's appropriate. We have different models for different people, but they're actively traded. But the active trading is not an issue because they're in retirement accounts. You're not dealing with capital gains.

I have found when when you when you just want to grow your money, absolute return models, fundamental models, we need the momentum models, trend following models, they do rather well in up markets. They help preserve assets in the down. They're not protected, but, you know, they help in the down markets, and they give you a fighting chance, in my opinion, during flat markets. You know, David, whether you knew this well, you know this because we do this at the show, but many listeners might not realize Yeah. That markets can go flat.

The equities market go flat for 10 years. That's suffocating for retiree.

Right.

So we use models that also give people a fighting chance to make money in a flat market. Now in contrast, if we were to have a 2,000,000 back to the, the pretax, I would fund the appropriate amount of the assets into our reservoir. So reservoir is anything that offers protection and growth. It lacks liquidity, but you can't have your cake and eat it too. And so the idea is a part of your portfolio is protected, has reasonable growth potential so that if the markets were to crash, you can take income from your reservoir and allow your other accounts time to recover.

Mhmm. If the markets crash, you have your safety net with the reservoir. You know, why does the city have a reservoir of water? In case of drought. Yeah.

They don't use it or have to use it all the time. It's just when they need it. Right.

That's

the point of having a part of your money in a portfolio. I don't understand why people still have a part of their money in a bond fund. Bond funds aren't safe. Bond funds can lose money. Debt's a continuing issue.

We've seen that maybe the Fed doesn't control bond rates as much as we would normally assume. There's a divergence within market sentiment and how bond funds or bonds specifically are being received. So we need to understand these newer dynamics and adopt to a more modern portfolio. Yeah. Now when you look at a nonqualified portfolio, I still would fund the reservoir because everyone needs to have some protected accounts for whatever the markets crash next.

Because the markets will crash over the next 30 years. I'd be willing to bet the markets crash at least once or twice. Mhmm. Because never in the history of markets have they ever done 30 years of pure growth. And you need income.

You've got bills

Right.

Every year, so be ready for that. But in addition to that, I would probably move the growth to be more focused on things like special ETFs or institutional ETFs that kind of were more active, but they didn't give you a bunch of capital gains issues. So I'll as much as I love my models for growth

Oh, yeah.

They're really better, in my opinion, for retirement accounts that don't deal with capital gains. Because if you if you actively trade non qualified assets, brokerage accounts, the the money you've already paid taxes on that subject to capital gains, if you're actively trading on them, you can create all sorts of tax issues that bump into Medicare issues. Because you're getting taxed at the income rate, not at the, capital gains long term capital gains rate. So there's there's nuance. There's complexity.

How if you have most of your assets in nonqualified brokerage accounts, that's going to change the recommendation if you have most of your assets in retirement accounts. So we need to we need to stop oversimplifying. Oh, well, I just bought a 60 40 portfolio. Okay. Well, why why did you put that there?

What's in there? What's not in there? I hate, personally, dividends being reinvested in a non qualified portfolio. Mhmm. Because the dividend is being reinvested.

That's really where your growth is coming from, and you're getting taxed on the growth every time it goes. I mean, that's it's an issue. There's there's all these little issues here that really and hopefully, I'm doing a good job illustrating this. But when you have more assets, nonqualified brokerage accounts, your plan's gonna be different than if you have it mostly in retirement accounts. Mhmm.

That's why we say, let's put the plan together first. Can you afford to retire? Does it look okay? Then let's explore efficiencies. So how do you or where do you put nonqualified money in something that's not gonna create a tax issue?

What's available? What financial investments, instruments, products are available to help you do that so you're not creating issues? If you have retirement money, what's available that makes it efficient for growth and protection and all the different things that you would want your money to do for you? Is this making sense, David?

It is. Yeah. There there's so much sort

of nuance. Complicated question. Yeah. We could spend hours on this.

Yeah. I

mean, I'm I'm answering questions as best I can, slightly shooting from the hip here. It would be fun. Maybe you would do a case study at some point to break down what both would look like just so people have more context with it. Yeah. You know, this is like a nonqualified portfolio.

We include more REITs. Anyway, I I digress here, but there's a lot that could be done. The strategies would be fundamentally different based on my interpretation of the differences between the two and then how you get your money out when markets are up versus when markets are down. Very different situations. It might not seem like it's different.

Oh, you saved $2,000,000. Taxes. Everything is affected by taxes. Mhmm. So your tax situation is going to affect the recommendations.

Unless you can speak in a detailed manner about taxes, you might miss a few potential efficiencies. 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 podcast. 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 exist.

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.