Hello, and 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 dotcom 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 adviser, insurance agent, and tax professional. Which means, when it comes to financial topics, we can pretty much discuss it all, whatever's on your mind.

Now that said, please remember this is just a show. Everything you hear should be considered informational, as in not specific advice. This is not financial advice. If you want personal 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 esteemed colleague, mister David Fransen.

David, thanks for joining us today.

Hello. Thank you.

Now for all those listening, David's gonna be reading your questions. That's right. Your questions. And I'm gonna do my best to answer them. You can send your questions in by either texting them to 913-363-1234.

That number again, 913-363-1234, or email them to hey mike at how to retire on time.com. Let's begin.

Hey, Mike. I'm 67 years old, and I'm concerned about required minimum distributions. I don't wanna be forced into paying too much in taxes. Most of my assets are in my traditional IRA, but I don't need them. I live off my pension and Social Security.

What should I do?

Alright. Yeah. This is a a tricky one because qualified accounts, specifically pretax qualified accounts, have kind of this ticking time bomb with them. What I mean by that is uncle Sam, aka the IRS, wants to get paid. Think about it from their side for a second, and this will be a nice baseline for our conversation.

Okay?

Alright. Ready.

They've allowed you to put assets into something, a 401 k, a 403 b, a traditional IRA, or whatever it is, and not pay capital gains for your entire life, basically. You can grow this thing and not have that tax hindrance. That means you can grow it faster, potentially more effectively, but at some at some point, they wanna get their money. So it is a nice benefit. It is a nice trade, but uncle Sam wants to get paid, and that's fair.

I I think that's a fair trade. A lot of things I might be upset with when it comes to the government and how they do certain things. This one, I get the trade. It makes sense to me. So what do you do?

If you don't need the money, it's kind of a catch 22. I don't need it. I don't wanna pay it. But they wanna get paid, and and they don't wanna wait for you to die to get their money, and then so on and so forth. And so you've got your lifetime.

That's the first thing to look at. Your lifetime, your income, your tax bracket. And then, I believe in the question, they said they wanted to pass the assets. Is this a this is a legacy concern?

No. They they don't,

Do they mention that?

No. They just they're just required about the RMD, the required minimum distributions.

Okay. So let's assume that they're gonna pass it to their kid. Yeah. So if you're passing it to your kids, then you'd compare your tax bracket while you were alive to your kids' tax brackets when they receive it. Because as current law states, if you pass pretax assets to your kids, they have to take it out each a little bit each year for 10 years, and by 10th year, it's all gone.

Mhmm.

Right? So that's that's one factor of it all. But if you're not passing it to your kids, if you're passing it to charities, this might be all totally different conversation. You could just donate your RMD each year, not pay any taxes, and the charity gets a 100% of it.

That's nice.

Yeah. Really nice. It's like the IRS is waiting to get their money, and then, oh, it went to a charity. Next next year, they're waiting for their money. Oh, it goes to a charity.

I mean, that's kind of a disappointing way to yeah. To to circumvent it all, but, it's legal. They wrote the the rules. The IRS didn't write the rules. The government wrote the rules.

Right. But that's the kind of the the crux of it all is, okay, where is it going? And once you understand that and the tax ramifications of where it's going, then you can start to understand what you could do with it while you're still alive. And in that sense, you've got really 2 options here. You've got one option to where and this is kind of funny for me to say, but just let it be.

Do nothing. Yes. If you are a passive investor, as in you are just buying and holding the indexes, maybe you're buying a a a few stocks for sentimental purposes, and then whenever you pass, you don't really care, it it just it goes somewhere, then just let the RMD be. Because at some point, you're gonna pass. We're all human.

Right? We haven't figured out how to live forever. At some point, you're gonna pass, and and so maybe you have 3 years of RMDs that you're gonna work through. Maybe you've got 20 years. You don't really know, but you can just let it happen.

Once you take the RMD, you sell a position, you take the RMD, you pay the taxes, and then you just put those assets into another nonqualified investment. You know, your after tax funds, you put it into the market, and then it's not a tax issue. Right? It's a very reactive way, but if you're a passive investor, you're not trying to actively grow these assets, you're just letting it be, then that might be a way to to approach this. Now if you wanna be more proactive, if you wanna increase your income, let's say you want more income potential maybe later on in life.

Maybe you're concerned about inflation later on. Maybe you're concerned about tax rates. Maybe you're concerned about life events. For example, it's a bit painful if you have a let's say you have a heart attack or or a stroke or something that that costs you a lot of money. K?

And there's a long expensive recovery. It's a lot easier to take that out of tax free accounts than it is pretax accounts because you have to pay the bills and the taxes on how to take the funds out to then pay the bills.

Yeah.

So its kind of a double whammy there. So if you wanna be more proactive about it, or if you also like to just actively have your assets managed, you wanna be actively trading, you wanna be proactive about the growth, then you may consider converting a little bit each year, even though you may not need it, but you're maintaining a lower effective tax rate over the long term period of time. Here's why I think that's so important. If I've said this once, I've said it a 1000000 times. In a hypothetical situation, let's say that the IRS simplified the tax code.

K? And you can either convert everything over at 20% today, or you can pay 15% for life. What would you do? If you have a $1,000,000 in your IRA account, and you convert it all a day at 20%, then you'd have 800,000 in a Roth account at that point, and that can grow, pay tax free, you know, it's it's free from taxes. But the person who paid 15% for life, all things being equal, the same growth, the same net income, all things being equal, they paid around 412,000 in this example.

So retired at 60 years old, lived to about 90 years old. 412,000 in taxes over that period of time. They paid double in taxes from a dollar standpoint. Okay. Yeah.

But in their portfolio, they had around 690,000 more dollars. When we talk about retirement income, we talk about something called sequence of returns risk. So drawing income when markets are down or taking too much at once, it's hard to recover from losses. The same applies with your taxes. If you convert too much too fast, if you're too aggressive with your conversions, or you just convert if you convert to the zero tax bracket in many situations, that's actually more hurtful for your overall estate than it is helpful.

That may sound counterintuitive, but it's it's the math.

Right.

Many financial advisers miss this. My CPAs, those are my people. My CPAs, they get this. Right? It's all about your lower effective tax rate.

What does that look like? People do their tax planning around brackets. Brackets are important to acknowledge. But at the end of the day, what is your target effective tax rate while you're minimizing your taxes, and what's your target effective tax rate while you're maintaining? Ideally, and this is the the second situation, is you convert a little bit each year, and then you stop the conversion, and you've baked your RMDs into the income that you already want.

Let's say let's say you want, I don't know, $7,000 a month net of tax, or you want $10,000 a month net of tax, whatever the number is. If half that was from RMDs, you're paying a lower effective tax rate, You're blending between pretax, tax free, after tax, all the different tax buckets. You're paying a lower effective tax rate, and it's able to help the portfolio continue to grow to not be hindered as much. I mean, it really it it is complicated, but when it comes to preparing for your RMDs, what you don't wanna do, unless you're just completely passive about everything and you just it's not a big deal, if you wanna be proactive, then you wanna start at least at 59a half, 60 years old, start minimizing slowly and deliberately until your required minimum distributions start. If you can do that effectively, it can help preserve your portfolio.

It can give you more options or more assets, potentially for income, for legacy purposes, for charitable gifting, whatever it might be. It gives you more freedom from possible issues when it comes to increasing tax rates. I mean, the list goes on and on and on. Mhmm. But when it comes down to it, this person, they're they're 60s how old?

67 years old.

67 years old. Currently, RMD is about 72, 73 years old, depending on when you're born. So this person's 73 years old. They do keep changing that date, so stay tuned for whatever happens in the future. But they've got, what, 5 years?

They can slowly be converting their assets very deliberately, very slowly, have a smaller tax burden later on, have more control over their future. Even if you don't need the income, I believe it's better to be proactive and maintain more control than give up control, because they could change the rules on RMDs. They could change the tax brackets. They could change the dates that you're supposed to do all this. I mean, there's so many things they can change.

That's political risk. And so, yeah, you might live off your pension and social security, but how do you want your tax planning to go? And in all fairness, I've had many people ask me this question or a similar question, and the answer was, yeah. Don't do anything. They don't expect to live a long time, in these situations.

They're passive investors, and they just want their assets to go to their kids. Okay. Yeah. You buy a stock, I mean, you're not paying any any taxes on the gains because you're not selling it. You're just buying it to be inherited at some point.

And they would receive the step up in basis, meaning they don't pay capital gains on that.

That sounds good.

Did I miss anything there?

No. I think you covered it all.

And I mean, really, taxes affect everything in retirement. They really do. If we're not careful, taxes can bump us up into higher tax brackets, higher effective tax rates. They can change the tax laws, which is what's expected if depending on who wins the the presidency and and even beyond that. It's expected at some point the tax brackets, the dollar amounts, are gonna be going down, so the thresholds are gonna lower and the percentages are expected to increase.

So they're kind of getting you in a double they're kinda getting you in 2 different ways. That sucks. There's no other way to put it. It is a a difficult situation ahead of us, and we can be more proactive about that to get more out of our hard earned money. Tax planning is complicated.

Retirement planning is complicated and you know what's more complicated tell me that's such a leading segue but when you're trying to work with someone who in their disclosure says they don't give tax advice right yeah so if you read our disclosure, we do offer tax advice. We offer financial advice. I mean, we're the only thing we don't offer is we're not attorneys. We can't offer legal advice. But if you're if you're going, you know, gosh.

More than 60% of my assets are in pretax accounts. You're 55 years old or older, and you you wanna be proactive about this. Yeah. This is here's what I want you to do. I want you to text the keyword tax, t a x, to 913-363-1234.

Again, that's keyword tax, 913-363-1234. We can run our tax strategies analysis for you. It doesn't cost you a dime, but this analysis can really open your eyes to many of the different options, strategies, different ways you can create a plan, lifestyle and legacy plan, so that you're not getting blindsided by these tax roadblocks, the potential issues that are happening, and and and we've just touched the tip of the iceberg with all of this. But if taxes are gonna be your largest expense in retirement, then why wouldn't you focus on taxes? Why wouldn't you get analysis that specifically dials in tax efficiencies, that specifically looks at the long term effects of your strategies throughout your life, not just in 1 or 2 years, that looks at how to preserve your assets so that there's more potentially for the kids and that they can get it more tax efficiently.

I mean, we're we're just getting started on this. We we could talk for hours about taxes. But if you if that's something you want, and I I say 55 or older because most people don't know this, you can start your Roth conversions at any age. You don't have to be 59a half. You could start your irate or Roth conversions at 30, 40, 50 years old.

It's just you have to be careful about how you do it, but there's a lot of options that you can start now while tax brackets, tax rates are lower to be more proactive about that. Now if that's a conversation you wanna have, taxes, it's it's a fun conversation. You don't have to be a tax expert. It's it's easy to understand, but it's a lot of fun. Text tax, t a x, to 913-363-1234, if you wanna talk about these things or other things that you're concerned about when it comes to taxes.

This is a comprehensive tax analysis, text tax, to 913-363-1234, or you can go to www.tax strategies dot report for more information and information about how to get started. 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.