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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.
If you're trying to find the right balance and then you adjust slightly every year along the way, you could be in a really good spot. Welcome to the Retire On Time q and a podcast. I'm Michael Decker with David Franson here from Kedric Wealth. As always, this podcast is about answering your questions with context. We don't wanna give you that oversimplified advice you've heard hundreds of times.
Michael:Let's bring context, the nitty gritty, into the conversation. That said, remember, this is just a show. This is not individual financial advice. Text your questions to (913) 363-1234, and we'll feature them on the show and have a good conversation. Alright.
Michael:David, what do we got today?
David:Hey, Mike. How do you how can you do tax planning when the rules keep changing?
Michael:Because you just have to do the best you can. I mean, you you don't wanna throw a caution to wind and say, well, because I can't control the future, I'm not gonna do anything. You can control what you do today. But there's a very important distinction between I I can't control the future, so I won't do anything, and I can't control the future, but I'm gonna find the right balance. So here's an example.
Michael:Many people for several years said taxes are going up, which was a true statement.
David:Mhmm.
Michael:So let's max out your 24% tax bracket. Let's do everything we can because, man, it's this is Armageddon. It's sunsetting, and nothing's gonna stop this thing. And why would any politician stop it? Because they need the revenue because debt's all time high.
Michael:And so people paid a pretty penny converting IRA assets to Roth, some of them even going all the way to zero. And I saw I I've heard of I didn't do any of these, but, like, million, $2,000,000 IRA to Roth conversions.
David:In one year?
Michael:Yeah. Oh. That's that's tough.
David:Because that counts as income. Right? And so it seems like a lot of taxes. Yeah. Just off the top my head here.
Michael:Just putting it lightly. Yeah. So so then you pay out the nose in taxes, your account balances go down, but it's tax free, they would say.
David:Yeah. Going forward, their gains are tax free.
Michael:And then this guy, you may have heard of him, Donald J. Trump. Oh, yeah. That guy. Got elected again.
David:Mhmm.
Michael:Kind of shooting the moon. He he he somehow got back in.
David:Yeah.
Michael:And then he does the impossible again and passes this thing called the one big beautiful bill. I mean, his how he names stuff is just it's like he's a wannabe stand up comedian or something. I don't know. The things that come out of his head. Mhmm.
Michael:But the One Big Beautiful Bill comes, makes the tax brackets, the tax efficient brackets permanent. There's no sunset on it now. And so all the people that were too aggressive that got to the zero tax bracket too quickly paid a pretty penny, and they're gonna pay for it for the rest of their life. Not literally paying it in taxes, but they lowered their balance, and if you have less money, it's harder to grow.
David:Yeah. If you have more money in there, there's the compounding is just
Michael:10% of a million dollars gives you more money than 10% of $800,000.
David:Right.
Michael:And that's a compounding effect for the rest of your life.
David:Yeah.
Michael:And so and then you need to consider too that for your entire life, you've got this thing called the standard deduction, which a lot of people don't really understand that if your RMD is roughly the standard deduction, guess what? That's tax free.
David:Right.
Michael:If tax if the standard deduction decreased and you paid a little bit in taxes, well, they don't typically tax the poor an arm and a leg. Yeah. Maybe it's 10%. Maybe it's 12%. Maybe they changed it to 15%.
Michael:But that's still better than 20 to 24% or whatever the rate is in the future as well.
David:Right. Right.
Michael:So it's not about getting to the tax free environment as quickly as possible. Most people, that's not prudent. Very very few times does that make sense that I've seen. Because you've got the standard deduction, as long as it's still there. So it's the it's like going to the gym and trying to lose weight the healthy way.
Michael:It might be slow. It might be painful. But it's the healthiest way to go about it.
David:Mhmm.
Michael:To slowly do controlled IRA to Roth conversions so that your IRA assets are at a certain point that then your income is the RMD that you already need to pay for, but you're maintaining it within a lower effective tax rate or lower brackets, and you're utilizing the standard deduction every single year, you're in a really good spot. And then the other part you need to complement with all of this is the Social Security provisional income tax calculation, which a lot of people don't understand. The provisional income tax basically takes your income, half of Social Security, and then runs a calculation to see how much of your Social Security is subject to
David:tax. Okay.
Michael:And it's not as simple as half or 85%. It's a it's a a blended tier. They call it the tax torpedo, but that's the negative version of it. I think there's a huge benefit to this as
David:well. Uh-huh.
Michael:So it all goes to saying, when you when you plan based on fear and extremes, you're probably going to be taken advantage of. If you're trying to find the right balance, and then you adjust slightly every year along the way, you could be in a really good spot. It's balance. It's it's the slow and thoughtful direction of the plan while acknowledging the strategies you wanna implement and putting it under the right time frame. This year and last year, you know, after the one big bill beautiful bill passed in our year end tax planning last year and and even this year, we're slowing down a lot of the IRAD ROTH conversions
David:Mhmm.
Michael:Because it's permanent, and we might be able to do enough that then they can maintain their effective tax rate, their standard deductions, and so on within a certain level, and still accomplish their goals, but it's it's boosting or keeping more money in their accounts, which gives them a larger projected account balance throughout the rest of their retirement.
David:Mhmm.
Michael:Balance in all things. Yeah. Did that make sense, by the way?
David:Yeah. I think so. So it's just there's a lot to consider. There's nuances. Right?
David:And we wanna we wanna be in a position where we can stay flexible and not rigid and not just do things for the sake of it. Is that
Michael:Yeah. I mean, here's just a fun thought to consider.
David:Alright.
Michael:If your r and d is a thousand dollars more than the income you already want, big whoop.
David:Just
Michael:spend a thousand bucks extra that year. It probably won't destroy your plan. And if it if you're concerned about the taxes for whatever reason, then gift it. Qualified charitable you know, you you just send it to a charity, not pay taxes. You're good to go.
David:Right.
Michael:Qualified charitable distribution. Can only do it with the RMDs. Mhmm. But it's like, okay. I was already planning to give money to the church anyway or a charity.
David:Yeah.
Michael:Here's the money. There you go. Your RMD is now within the tax bracket you want. It's the income you already want. It doesn't disrupt things.
Michael:It's only a major issue if your RMD is twice the income you need. Then there might be some issues. Mhmm. Then you might want to be more aggressive on some IRA to Roth conversions for the time being, but rarely is that the case. Mhmm.
Michael:There's this interesting balance I've noticed over the last decade of doing this, where the income people want is kind of around four or 5%, generally speaking, of the portfolio they've already saved.
David:Okay.
Michael:It's like they've they've organically saved the amount to get the life that they want. And then you include Social Security in there and optimize all that, and it just it's like a self fulfilling prophecy. I I can't explain it any more than that. But the point being is you've got income that you want. What does the taxes look like?
Michael:What does the RMD projected to be? If it's already baked in there, why would you rush it?
David:Mhmm.
Michael:Maybe there's some health issues. I mean, and you wanna do some more IRA to Roth conversions for your beneficiary's sake because they're higher income earners. But maybe you don't. Consider this.
David:Alright.
Michael:Let's say your kids don't make much. That's okay. Yeah. And your your retirement is in the higher income brackets. What if you didn't do a lot of IRA to Roth conversions so that they could enjoy your wealth?
Michael:Right?
David:Right.
Michael:Your IRA assets, they got ten years to pull it out, it's under their brackets, not your brackets. I mean, there there's multiple layers to consider for this, but tax laws will always change. If you find the balance, then you can make subtle adjustments along the way. If you can make subtle adjustments along the way, then you'd be more mindful about the balanced approach from now until the end of your time.
David:Mhmm. I mean, how much did the how much of the tax laws actually change year over year? Is it is it really dramatic, or is it are there only some years where there's a lot of big changes? Is it mostly kind of level? It's Or can we even say?
David:Can we quantify that?
Michael:It's political risk. Legislative risk.
David:Right. Depending on who has the majority in Congress Who we vote for. Yeah. So, I mean and that and it kinda that kinda goes back and forth. Right?
David:It's a pendulum. It swings.
Michael:But even, like, most of the tax cuts, based on my memory, usually had, a sunset, so it wasn't anyone's fault when taxes go up. Oh, right. And then Trump comes and makes them permanent. And I'm not a tax historian
David:Mhmm.
Michael:On all of the different brackets. I mean, I have the data. I just don't know it off the top my head.
David:That's a different podcast.
Michael:Every single Yeah. You know, shift for the last hundred and twenty years, not my specialty. But generally speaking, it's unfavorable to increase taxes significantly. So there might be a subtle adjustment to one group or another. But I don't generally speaking, if you are lower to middle class, I don't see a drastic change in the near future.
David:Oh, right.
Michael:We just don't. Yeah. It's it's more popular to want to tax the rich, which is a very misunderstood concept, by the way. Yeah. But yeah.
David:That's a whole other episode.
Michael:That's whole another episode. We got a lot of other episodes here.
David:Yeah, do.
Michael:But I mean, does that yeah. Politicians don't stay in power when you tax the poor. Mhmm. So who's gonna say, oh, you know, 12%? Let's make them all 20%.
David:Mhmm.
Michael:That's so I wouldn't make a fear based decision and go to the 0% bracket. That actually can accentuate your losses or your or it would accentuate the distributions from your portfolio, lowering your overall balance, and that's harder to recover, harder to sustain. Be mindful. Find balance. You kinda wanna get closer to the zero tax threshold about 85, 86 years old or so, and then just know your portfolio is gonna grow more or less than your projections so you also adjust along the way.
Michael:That's all the time we've got for this this, this question. If you enjoyed it, don't forget to subscribe wherever you get your podcasts or on YouTube. And as always, go to retireontime.com for the book, the workbook, workshops, and so much more. That's www.retireontime.com. We'll see you in the next show.