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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 retirement questions. My name is Mike Decker. I'm a licensed financial adviser and fiduciary. And joining me here, Mr. David Franson.
Mike:David, thanks for being here.
David:Yep. Happy to be here.
Mike:As always, we're gonna answer your questions. Text them to (913) 363-1234. And remember, this is just a show, not financial advice, so make sure to do your research and follow-up with whatever we talk about. David, let's begin.
David:Hey, Mike. I'm 60 years old with 1,200,000.0 in a traditional IRA. Should I convert 120,000 each year so I don't have to worry about RMDs? David, I have
Mike:a confession to make. Oh, okay. Alright. This might get heavy. I submitted this question.
David:That is a revelation.
Mike:The reason why I submitted this question is because I've seen this advertisement over and over again online.
David:I know what
Mike:you're And it's talking so deceptive. Yeah. So here's what they're trying to do, and I'm gonna give them the benefit of the doubt. They're trying to hedge against the conversation of should you act and do something like IRA Roth conversions, or should you not do anything? That's a well positioned offer.
Mike:Okay? The reason why I hate this question, how it was structured, is because it gives you this idea that, okay, I've got absolute certainty for the most part. Ten years, you take the total amount of the IRA, you just divide it by ten years, You do your conversions. You're maybe maxing out in your situation, whoever's listening. Maybe it's you're maxing out the 24% tax bracket.
Mike:All is well. You're gonna get to a tax free retirement. Here's the problem. That structure, that rigidity could hurt you more than help you.
David:Why? Why is that?
Mike:What is the purpose of your money? Do you want these assets to be geared towards legacy? That's one of the first questions you wanna ask what is the purpose of your money? What do you want your money to do for you? K?
Mike:You're 60 years old. Okay. So that's what you need to understand. What's your longevity look like? Great.
Mike:Let's say you wanna do legacy. Is the legacy intended to go to your kids? Do your kids make a lot of money? If they do, IRA to Roth conversions may make sense. If your kids don't make a lot of money, then you would be able to basically keep your assets in your IRA, not pay taxes on it, and grow it as much as possible.
Mike:Yeah. You're gonna have some RMDs in the future. Right now, it's it just got pushed back to 75 years old, but it's easier to grow a higher balance, a higher dollar amount than it is a lesser dollar amount. And so because of the compounding interest or that compounding growth of growing more money, you may actually end up passing more to your kids who then would receive the benefit in their tax bracket. And maybe it'll be boosted, but no one knows the future of the tax brackets.
Mike:Okay? So that's one thing to argue. I recently did a plan where I said, okay. In this person's situation and there's so much variability, so please don't say, oh, this is what mine's gonna be as well. It's not.
Mike:But in this person, I said, okay. Well, this plan, we have you have 2,900,000.0 being passed to the kids, but it's all pretax. This one right here is gonna go about 2,200,000.0 going to your kids, but this is all or for the most part, Roth. What do you want? What are you okay with?
Mike:Which one would you prefer? And we had a conversation about the kids, about what they expected for taxes in the future, Even though Trump's tax plan, the one big beautiful bill says tax code's permanent, it's always changing. Right. Just wait for the next administrator, the next president Mhmm. To to pop into office.
Mike:K? So we don't know the future of taxes, but here's what we do now. Maintaining a targeted conversion schedule based on an effective tax rate, which is a simpler way of saying that is slowly converting over assets each year, not with the goal to hit zero, but to get your pretax accounts, your retirement accounts, your IRA accounts, to a certain threshold that your required minimum distribution, for the most part, matches up with your standard deduction, makes the rest of your IRA assets tax
David:free. That's interesting.
Mike:Because if you let's say you take out 30,000 as your RMB this year, your required minimum distribution. K? That's when it comes up. And you have $30,000 in the standard deduction. K.
Mike:What's 30,000 of taxable income? Then you take 30,000 and you deduct it, you're at zero. That's wild. That's that's better than paying, what, 20 some percent in converting it and then spending it in Roth later on. So this question, this advertisement, this conversation of, well, let's just take my total amount of money divided by ten years, max out the 24% tax bracket.
Mike:Financially, I don't think it's in anyone's best interest, and it's very few times that I'll say in anyone as in the absolute. There may be exceptions to the rule, but if you can minimize a certain amount and then maintain the remaining income or distributions from your accounts planned around your standard deduction, or maybe you plan it around the 10 to 12% tax bracket, that's incredibly efficient to preserve your portfolio and to look at the conversation about taxes. I mean, the question is, how do you get more out of your money? If you wanna pay the government the least amount of money possible, just convert everything over this year. The dollar amount will be less, but you'll also have less in the market, less in your accounts.
Mike:Yeah. Because the longer you grow your assets, the greater the tax bill will be to the government, but the more money you'll also have. So this idea of, well, I hate the government. And I know there's people listening in right now or watching this on YouTube. They're thinking, oh, no.
Mike:This guy's wrong, and and they'll put their dollar for dollar compared about it. You're doing the wrong equations. I've seen the sales pitches on index universal life insurance, which I'm licensed to sell, which, by the way, I do sell in the situations where they want a death benefit. But the manipulation of, well, here's how much your current tax bill is, and if you don't do anything, here's what it could be. But if you buy this life insurance policy, which insurance is not an investment, then your tax bill is gonna go down this much.
Mike:It is so manipulative. But people get caught up in this idea that, well, this is what the wealthy do, or well, this is what smart investors do, or this is how you screw the IRS. It is not.
David:It's kinda hard to screw them. Right? They're gonna find there's ways.
Mike:It's like playing chess. You don't magically decide that your pawn is a queen and can move all over the table. The IRS is simple. There are rules. The investment industry, the market has rules.
Mike:The insurance industry has rules. Everyone's based on rules. The insurance companies aren't operating off of a special market. They're investing in the same market that you are elsewhere. So so these ideas of, I'm gonna get to the zero tax bracket quickly.
Mike:I'm gonna structure it. It's bait and switch sales pitch advice. Be very, very careful of the oversimplified advice of the, admittedly, of the things that we as humans want to gravitate towards. For even simple minded individuals who don't have a background in finance, that's okay. That's why we offer analyses.
Mike:That's why we offer consultations. That's why some people will just pay us for the one time analysis, second opinion that's little bit more in-depth. There's options out there. Our job is to explain to you in a way that you understand it. But the important thing is simplicity typically has a cost.
Mike:Are you okay paying that cost? Whether opportunity cost, whether it's just less money overall, whether it's less growth potential, whatever it might be. Be weary of oversimplified, well, should you just do this? Because isolated strategies, like, let's just convert everything over for the next ten years, and it'll be done. Check it off the list.
Mike:That's the kind of stuff that you kind of have to put on blinders and not look at any other consequences, any other ways that strategy would affect your other parts of your plan. Is that making sense?
David:Yeah. I think so. You don't wanna do things just to sort of, I'll spite you, government. I'll pay as little as possible, even though you may not realize that it's actually hurting.
Mike:One of my favorite podcasts of all time is no longer available, but it was LSAT in everyday life. So, originally, I was gonna become an attorney. Maybe it's that that part of me that says I wanna protect the the person that's disadvantaged. But the the reality is, and this was their introduction, is many of the conclusions we make aren't based on the evidence given. Many of the financial strategies that people are implementing today are well intended, but the result they seek isn't supported by the strategy they're implementing because there are other unintended consequences that they are blind to because they're not looking.
Mike:We had to create our own planning software to be able to get more surgical and detailed for these types of questions, to open up the conversation, to balance your amount between pretax, after tax, and tax free, as in your IRA, your Roth, and your brokerage account. We had to get more surgical in, okay, for these five years, we're taking your income in this way, and then the five years after, have to take it in that way because of the tax planning, because of the IRA to Roth conversion schedules, because of where the assets were and the risks associated with that plan, because of fill in the blank. We had to be able to build our own software to do these kinds of things because the oversimplified, the set and forget kind of strategies may be actually causing you to get less out of your money than you may realize. 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.
Mike: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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.