Subscribe
Share
Share
Embed
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 questions about all things retirement, including income taxes, Social Security, health care, and more. My name is Mike Decker. I'm a licensed financial advisor who can even file your taxes. All that said, please remember this is just a show, not financial advice. Everything you hear should be considered informational.
Mike:Joining me in the studio today is Mr. David Franson. David, thanks for being here.
David:Hello. Thank you.
Mike:David's gonna read your questions, and I will do my best to answer them. You can text your questions anytime during the week. Save this number on your phone, (913) 363-1234. That is the number to text. (913) 363-1234.
Mike:Let's jump in. Hey, Mike. Can you break down how the big beautiful bill will affect those in retirement? Yeah. Yeah.
Mike:I'm surprised we haven't gotten this question until now. Yeah. But I guess maybe because it passed the house. Now it's in the senate. People are it's like, oh, this actually could be a thing.
Mike:Could happen. So I'm only gonna talk about the financial aspects as it affects the individual. Okay? K. I'm not gonna get political.
Mike:Not gonna talk about how it addresses businesses. There are several aspects that would affect businesses, the 100% deduction on on commercial real estate and all that. We're just gonna keep it simple and talk about the individual. So first off, seniors are gonna potentially get, as according to the bill right now, the last I read it at the time of this recording, a bonus deduction of $4,000. That's kinda nice.
Mike:K? So what what does that mean? Got your standard deduction, then you have an additional deduction on top of that.
David:Oh, okay, Roger.
Mike:K. Just trying to help out seniors. That's wonderful. That could be a number of things. It just means you pay less in taxes.
Mike:Maybe it helps you with your Social Security. I mean, whatever it is, that's kinda nice to have. Social Security, though, speaking of that, is not tax free anymore in its current iteration. Now that was a campaign promise. It did not make it through the house.
Mike:So maybe it goes back in the senate, but it would have to go back and forth. It'd be like a game of ping pong to try and get that in there. I'm not sure that will actually make it. There are some very fiscally staunch Republicans that I don't think will ever allow that to happen.
David:I don't know.
Mike:I'm not a politician.
David:So Is that and you want me to be counting your lucky stars or not.
Mike:Yeah. But I understand why they wouldn't want it. I understand why they would want it. This is a whole theory about supply chain economics. If you got rid of tax based on Social Security, in theory, you'd have more income going to the retirees who could then spend more, and that's one way to potentially stimulate the economy, but you also are then having less funding with Social Security.
Mike:So it's kind of a you're debating economic theory at that point. So I understand both sides of the aisle. It's just not in the bill anymore, which is interesting because we've had past episodes where we talked about if Social Security gets tax free, then your IRA to Roth conversions to get to a tax free Social Security would be irrelevant. Well, if it's not passed, then you may wanna pursue that. So we're kind of in limbo on how do you plan your Social Security taxation.
Mike:So to be determined on that, but right now it doesn't seem like it's gonna happen. Medicare may get a 4% reduction in funding starting in 2026, and that will be periodically it's an ongoing reduction, but that is more with the insurance companies. Your plan specifically and how it will affect you, Medicare is not going away. Plans are always changing. Every year, they've been changing.
Mike:This is why you've got open enrollment, and why I believe you should reconsider your plan, shop plans, and make adjustments every single year. K?
David:And that may sound like a kind of a big annoying deal, but you're saying it's worth it to do that.
Mike:Yeah. Yeah. I personally believe, and a lot of people hate me for saying this, but it's true, that if you work with someone that's only paid on Medicare commissions, there may be a conflict of interest. Because the unfortunate secret about Medicare and shopping plans, whether it's your well, I mean, traditional Medicare is just it is what it is. You've got your gap, your supplemental plan, or your advantage plans.
Mike:Sometimes they'll get rid of commissions of certain plans that the insurance companies want to go away, because they're not competitive, or they're not good for the insurance company anymore. And if they get rid of commissions, there's a high probability that things will naturally work themselves out. You picking up what I'm putting down?
David:Uh-huh. I am. So
Mike:if you work with a shop like us at Kedric Wealth, where we don't care about Medicare commissions, we're shopping all of the plans regardless of the commission, because that's not really our wheelhouse. People pay a flat membership fee. A capped rate, it's the fixed rate every single month to become a client. It's not this 1% garbage. It's a flat fixed membership rate, basically, where you're paying for our time that covers all things retirement, including your taxes, including your Medicare shopping.
Mike:So we don't need the Medicare commissions. So we're able to just click the button that says, we wanna also include the Medicare plans that don't pay a commission anymore, because they may be better in the client's interest, and we wanna do what's right for the client. I mean, it's clear as day in our disclosure that we are fiduciaries, that supersedes any and all other possibilities or agendas. But anyway, that's the quick bit on Medicare. If it changes, expect a lot of changes in plans, and the benefits that are in there, and the benefits that are being taken away or adjusted, it's going to be imperative, in my opinion, to be looking at that every single year.
Mike:It's not going away. It's just a renegotiation, and the insurance companies have to restructure what risks they're willing to take, and what risks they're gonna try and get rid of. K? There's the SALT state and local tax deduction. So it was capped at 10,000.
Mike:It's gonna go up allegedly to 40,000, which is great. That's only if you're itemizing your deductions. If you're doing the standard deduction, doesn't really matter. And very few people actually itemize their deductions.
David:Because the standard deduction since 2017 or '18 It's About 30,000. It's big now.
Mike:Married married filing jointly. So that's something to consider. Required minimum distributions may be pushed out to 75 years old. It's funny. Like, five years ago, it was 70 and a half, but then they changed it to 72 with 73 as a caveat.
Mike:Now it's basically 73, and now it's potentially 75. This is good news for tax planning. The reason is you've got more years you can do IRA to Roth conversions. What's a required minimum distribution? A required minimum distribution is where the IRS has said you've deferred taxes in your pretax retirement accounts, so think of your IRA.
Mike:You have to take out a distribution each year because the the IRS wants to be paid. They want the taxation. They're pushing it out further. An IRA to Roth conversion doesn't count, doesn't work for an RMD. You have to spend it or donate it.
Mike:So if you push it out a couple more years, that gives you more breathing room or more time to do your IRA to Roth conversions so that you can lower it. Why does this matter? Ideally, in my opinion, you want to have your RMD basically be at or just slightly under your standard deduction, so your RMD is kind of a tax free income source. Because if your RMD, let's say, is 30,000, everything else is coming from your Roth, then you're not I mean, it's free. Right?
Mike:It's tax free because you use the standard deduction to your advantage. You don't want to pay 22% or whatever your effective tax rate is all the way to the zero tax bracket. You want to lower your IRA balance low enough so that the rest of your life, ideally, you're you're operating within the standard deduction.
David:Okay.
Mike:So there's just, I guess, a little bit of tax planning there. Yeah. But the important takeaway here is none of this is actually permanent. Tax codes, you say? Tax codes written in pencil.
Mike:Right. Legislations written in pencil. None of this is the constitution. These are all just laws that could be changed at any time. And here's my point.
Mike:Social Security wasn't taxed until Reagan got into office and then started taxing it, and then Clinton added an additional tax to it. Medicare started in 1966, so it's kind of a newer thing, all things considered. I mean, Social Security is older. Medicare started in '66, and when it first started, you just enrolled, and it was free. Part a was free.
Mike:Part b was $3 a
David:month. Wow.
Mike:Now that wasn't just inflation. The cost of insurance has increased. Our longevity has increased, and the sad part is we're getting sicker earlier and being sicker longer than before, which has an exponential increase on medical costs, which is why it's all increasing. Originally, it didn't cover drugs, long term care, dental, and hearing, and all these other things, but then they slowly added on to it. And the paradox of politics is that many times we are promised entitlements and benefits that we can't actually afford down the road.
Mike:But it sounds good. We get excited about it, and we forget that someday we have to pay the piper. Well, we're having to pay the piper now. In one way or the other way, you like it or not, and this isn't political. I've got a bone to pick with both sides of the aisle for what it's worth, but you just need to understand these things are happening.
Mike:I mean, just consider for a moment, 1983 is when Social Security started getting taxed. 1986, we had a significant decrease in taxes, and then '93 taxes went up. 02/2010, Medicare, we introduced IRMA, the Medicare surcharge. So if you make enough money or taxable income, you're going to pay extra for Medicare. That was a way to say, well, the wealthy should pay more because they can afford it.
Mike:Whether you grew with that sentiment or not, it happened. They also include a sneaky tax called the net investment income tax or gosh. What was it called? Anyway, it's an extra 3.8%. So if you think long term capital gains, oh, the most you pay is 20%?
Mike:Nope. There's an additional 3.8% on top of that that just sneaks right in. A lot of people miss that. So long term capital gains after a certain point is really 23.8%. These are little things that they keep putting into the tax code just to get a little bit more out.
Mike:In 2017, yeah, sure taxes were decreased, and maybe we continue that decrease, which really is just maintaining the current tax code, but the point is this will change. Operate with your tax planning with what you know is today, and what you expect will be next year, and just find balance. Don't be fear based and go always zero tax bracket quickly. That hurts your principal, which makes it more difficult to grow your assets. So if you pay too much in taxes, you have to pay taxes.
Mike:You know, you're converting IRA to Roth too fast. You're paying too much in taxes. Your overall value, your investable assets goes down. It's harder to grow less money.
David:You're moving money out of the market, and if it's not in the market, it can't grow. Right?
Mike:Yeah. You you want to target, in my opinion, a tax minimization effective tax rate, and operate within that threshold, and then transition into a low income effective tax rate, as in something you can maintain for many, many years, and that you find balance. And that each year, you can shift with how much you're taking from pretax and tax free sources so that you can maintain that overall effective tax rate, maintain your principal, maintain your assets, and grow, grow, grow. This is the nuance that those who only talk with financial advisers who, quote, unquote, can't give tax advice, in my opinion, often miss. This is also one of those nuances that if you work with a CPA who only files your taxes, they're not really giving you tax advice.
Mike:They're just putting in to their machine, their computer program, what happened, and I'll see you next year. Many people don't pay their CPA what they need to be paid to do future tax projections. When your CPA files your taxes, you're paying them just to say what happened. You've gotta have the foresight. You've gotta be working with a team, in my opinion, that can navigate the tax law because it will change.
Mike:Change is the is the constant here. But overall, I don't see anything earth shattering in the big beautiful bill. For today's retirees as we are. No. I don't.
Mike:No. I don't see anything that's going to have a significant life changing benefit, and I don't see anything that's gonna have a significant detriment based on the current proposal that I've read.
David:And do we have any timeline on when this might go into effect? How long will the senate keep it?
Mike:Trump says he wants to get it through by July. Who knows? Sure. Anything can happen. But this is a bit cynical.
Mike:I hope I don't get in trouble by saying it. This is my opinion. Okay. I'm allowed to have an opinion. Yeah.
Mike:But it is sad to see the polarization for the sake of clicks and attention. On both sides of the aisle, many things have been taken out of context without referencing the other side so that people can get you angry, and you can spend more attention, you can get more clicks on whatever your political persuasion is. It's been very unfair to the average person, because I read through this stuff, and I'm going, wait, but they were saying this on TV, it's not at all. They missed this and this, or this side claimed it was really this amazing. Not really.
Mike:So for everyone listening, just understand it may not be life changing what's going on here. Yeah. It it would be helpful to maintain our current lower tax rates overall. That would be the most beneficial thing is just maintaining the current tax brackets. Everything else I really think is more political and hyped up kind of what do you call it?
Mike:Taglines or one liners or catchphrases or whatever it is.
David:Is this being sensational? Or
Mike:Yes, a lot of it's being sensationalized. 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
David: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.