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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.
Welcome to how to retire on time, a show that answers your retirement questions. Say goodbye to the oversimplified advice. This show is all about the nitty gritty so you can determine what is right for you. My name is Mike Decker. I'm a financial adviser and fiduciary alongside David Fransen here, my colleague.
Mike:As always, text your questions to (913) 363-1234, and we'll feature them on the show. Just remember, this is a show, not financial advice. David, what have we got today?
David:Hey, Mike. Most of my investments are in a brokerage account. How do I set up my retirement plan without creating a huge tax bill? So the truth of
Mike:the matter is if you want to use those funds in retirement, you're going to pay taxes. No way around it.
David:Yeah. And maybe that's okay.
Mike:Yeah. It's okay. Yeah. If you're paying taxes, you did well. Okay.
Mike:Yeah. These are first world problems, as
David:I said. Yeah.
Mike:So the avoidance of taxes is the wrong way to look at it. K? Maybe reframe it for us then. Your portfolio value today is not your actual portfolio value. What do you mean by that?
Mike:Yeah. Isn't that elusive? Yeah. Your portfolio value is, let's say, 15% less of the gains. Just look at it from the net of 15% long term capital gains amount.
David:Okay.
Mike:Okay. That's really your portfolio value. People have a hard time with this. Yes. We wanna see the higher number.
Mike:That's not the number to look at. So let's say you bought a bunch of stocks at $5 a share. They're now valued at $10 a share. So you're just looking at the $5 basis, how much you paid for it, plus 15% less of the $5 gain per share. That's really what your portfolio is valued.
David:Okay.
Mike:Now you could say, oh, well, you know, Mike, but 0% capital gains, that's a nice deal. Yeah. If you live below those beans, and you either have to do a significant amount of IRA to Roth conversions to then tap into those assets later on in life, which maybe you could do, but your Social Security might get in the way too.
David:How will it get in the way?
Mike:Your taxable income is gonna dictate which capital gains bracket you're in.
David:Okay.
Mike:Most people in retirement are in the 15% capital gains bracket. Whether they wanna sell it now or later, that's gonna be up to them. So this idea of, well, I want to let's say they got everything in Apple. Apple, great company. He kept it all in there.
David:I don't think it's the end
Mike:of the world, but should you? That would be considered risky because it's all in one company. K? Even the greats can fall.
David:Mhmm. So you're saying that it was great to have it all in that one company while you were accumulating, but once you hit retirement, maybe you shouldn't have all your
Mike:It's all at risk.
David:Apples in one basket.
Mike:Yeah. That was great.
David:Thank you.
Mike:So the point is, oh, well, I wanna phase out of this slowly. Why? You're not paying more or less taxes necessarily. You need to look at the other parts of your tax return. But, I mean, all things considered, you're paying 15% effective tax rate on those assets.
Mike:So if you can stabilize the other part of your income that year or maybe all of your income comes from this one source, you're selling Apple. Some of it's gonna take care of your income this year. Some of it's gonna just go to other assets. Forget about the IRA. Assuming you don't have a requirement on distribution, maybe that's your path or your income source that year, and you're just focused on the 15% tax rate because that's the long term capital gains, and the 15% rate is very wide.
Mike:A lot of room in there to do something with. But the reason is when you're retired, you want to stay rich, not get rich. Having all your apples in one basket, not eggs. Apples in one basket. You gotta be careful about these things.
Mike:Some people say, well, I don't wanna pay the dollar amount. It's not about the dollar amount. It's about the percentage amount. And a faster exit to a more suitable portfolio may make more sense. Now let me counter that.
Mike:There's always two sides to a coin.
David:Alright. Thank you.
Mike:If you don't need the money, then don't sell. If you like the positions, you like what they're doing, don't sell. But you have to like the positions and like what they're doing. I've had too many conversations of individuals that just had a lot of assets in their brokerage account. So it's subject to capital gains, and it's creating a dividend tax problem.
Mike:So lines two and three on your ten forty, by way, go home and look at them. Lines two and three. Look at your dividends that are being reinvested or spent as income, and is that going to be a problem in the future? Are those dividends gonna create tax problems in the future? And we can help you with that if you want, but that's a conversation that needs to be had because the positions you hold will continue to hopefully pay dividends.
Mike:So this is not gonna go away. Could you make adjustments in your portfolio? Secondly, what's the purpose of your money? If your assets are just to grow, you know, that's why you had the Apple stock, for example, or that's why you have this ETF, the, you know, let's say the S and P 500, and you want to grow, then great. Why is it then for many people, you have all of these other ETFs or mutual funds that really don't grow?
Mike:I mean, I've had a couple of conversations lately where they have had couple of mutual funds for years. They haven't grown for, like, five years. Oh. I mean, they've just been miserable. Miserable.
Mike:And they're like, well, I don't wanna pay the capital gains on it. Well, what you've told me is your purpose of these assets is to grow, and you're gonna leave it in somewhere that's not growing, that's not an effective mutual fund, that's not an effective ETF on how it's being managed or whatever the index is associated with. So it's not doing what the purpose is, but you've locked the door because you don't pay someone taxes. So you've gotta have a more talking in the mirror conversation. Look yourself in the mirror and say, what's the purpose of the money?
Mike:What do you want? Don't let tax avoidance prevent you from getting your money to where you want it to go. Now in certain situations, it may make sense to spread this out over a couple of years. So I'm not saying is, oh, well, you know, just taxes or whatever. Sell it all, put it to where it needs to go.
Mike:A lot of advisers will say that. This is our model. This is how it works. Sell it all, put it in here, and it is what it is. There are times where it makes sense to spread out the sale of a position or positions over a couple of years of time.
David:Okay.
Mike:That's why retirement planning means portfolio planning and tax planning. And if you're not doing both, I would question the legitimacy of the advice that you're being given.
David:Makes sense.
Mike:Do I miss anything on that?
David:I don't think so. I mean, we yeah. We'd how do I set up my retirement plan without creating a huge tax bill? You're gonna have some taxes just sort of get over that. Right?
Mike:Is that what we're saying? If you can get yourself situated before 65, it's typically, I think, a better situation, because after 59, you can move IRA assets around. You can start doing IRA to Roth conversions, and you can go into a higher tax bracket if needed during those periods of time, kind of get things somewhat situated so that there's a system from 65 on, and you're not creating inefficiencies with IRMA, the Medicare surcharge. You're not creating inefficiencies with the senior deduction. So 65 plus, there's an additional $6,000 you can deduct per person.
Mike:There's just there's other benefits that you could be utilizing. So the 59 and a half to 65 years old, that's kind of your, in my mind, best time to not forget about taxes, but just say, I've got this window to really move things around, to get things situated. That assumes, though, that you're not a high income earner. If you're making two, three hundred thousand a year plus, do you see how there's always an exception to the rule? Right.
Mike:There it may make sense to not do higher to wealth conversions. It may make sense to not sell some of your brokerage account there. So hopefully, this helps illustrate the different scenarios to where it may make sense, it may not make sense. Everyone's situation is going to be different, but you don't want to make decisions to avoid taxes. You wanna understand the plan, the portfolio, and the tax implications of the different decisions that you're making and how it can help protect your money, preserve your assets, but maximize your overall quality of life.
Mike:I mean, the goal is how do you get the most out of your money? Mhmm. That's, I think, the most basic question. How do you get the most out of your money? And that's kind of the point of this conversation is what strategies are you gonna do?
Mike:How do you get there? Is one move? Is it a couple of moves? Can it be done one year? Could it be done in a couple of years?
Mike:But there is a right way. The question is which way is right for you? That's all the time we've got for the show today.
David: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 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.
David:Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to ww.yourwealthanalysis.com today to learn more and get started.