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. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon, or you can go 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 whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for being here today.
David:Happy to be here. Thank you.
Mike:David's gonna be reading your questions that you've submitted, and I'll do my best to answer them. You can send those questions in right now or anytime during the week to, and save this number, 913-363-1234. That's 913363 1234, or email them at hey mike at how to retire on time. That's hey mike at how to retire on time. Let's begin.
David:Hey, Mike. Everyone says they do tax planning, but very few people talk about anything beyond IRA to Roth conversions. Is that really all tax planning is?
Mike:No. It's it's a funny situation, really. I I'm not an attorney, so I'm gonna give you my opinion on why I think this is. K. So when it comes to the IRS and tax planning and and doing all sorts of things within this world, anyone can really technically do it.
Mike:I mean, if you get a securities license, there are tax questions on there to prove your competence of how tax works. If you're an insurance agent, there are tax questions that prove your competence that you understand the basics of what tax is. But a financial adviser on its own or an insurance agent on their own cannot legally represent you in front of the IRS in a legal matter. The only 3 credentials that could do that are the CPAs, enrolled agents, or tax attorneys. So that's why I think many practices have this disclosure that we don't offer tax advice is because they can't legally represent you in front of the IRS.
Mike:That that's my trying to be nice to the industry. But even then, let's say that that wasn't the case. I I do believe there's a significant discrepancy even within the world of what financial professionals could be doing, but just are not doing. You know, it's kinda like, when you want food, do you wanna go to a vegetable farmer? And then you go over and you go to the butcher, and then you go over and to the mill and you get your grains, and you don't wanna take all these stops.
Mike:You kinda wanna go to a grocery store.
David:Convenient. You
Mike:go in and you get everything you need. Well, the problem is, we're treating a butcher as a grocery store. It's just not the situation. So here's just a few questions to consider. Is the current professional asking for your tax returns?
Mike:Now many actually ask for tax returns. They glance at it, and they don't do anything with it. So that's the follow-up question. What do they do with your tax returns? Yeah.
Mike:Do they help you review the tax implications of the investment and income strategies? This one's interesting. So if you're a dividend investor and you have a bunch of positions, let's just say, in a nonqualified account, so it's subject to capital gains, and you're creating a lot of dividend income, how's that going to affect your taxes? I mean, you're you're not sheltered. You're paying taxes on it.
Mike:Even if you reinvest the dividends, you're paying taxes on it. Look at lines I think it's 23 on your 10 40, and you'll probably see there if you're paying taxes on this inefficiency. Does that make sense? Does it not make sense? Could you sell those positions and then rebuy them in maybe a qualified account to where you could reinvest them without paying the taxes.
Mike:So all of these different efficiencies matter, and you're just you're not gonna find them really until you look at the scorecard, which is your 10:40. That's your tax return, and then, in my opinion, all the different schedules underneath it. But are they having those conversations? For me, I remember that a couple of the times this last spring, after we did taxes, and I actually file some of my clients' taxes. Not all of them.
Mike:Many of them go to TurboTax because it's a very cost effective and efficient way to do it. But for the complicated stuff, I all file their taxes. And we were noticing certain trends within certain portfolios, which then caused us to make adjustments in their investment strategies so that they didn't end up creating tax problems in the near and far future. So that's why I asked, do they ask for your tax returns? Because how can you do tax planning if you have no scorecard to keep track of or any sort of analysis or baseline?
Mike:And then what do they do with it? Do they can they actually read it? Do they understand what's going on? And then are they reviewing it and adjusting your strategies, income strategies, your growth strategies, your investment strategies, or not. I mean, this is a it's a very dynamic thing.
Mike:There I don't believe it's possible to pick one strategy and just follow that for the rest of life. If you wanna be smart about your money, you're constantly making micro adjustments along the way to maximize efficiency. And then let's keep going. Do they help you find the right balance between which investments go where based on their tax qualification? So let's say you want some positions to just sit.
Mike:You're gonna buy SPY or VOO or whatever. And, really, it's kind of in the back of your mind, that fund, that ETF, is for legacy purposes. K? You plan not to touch it for the rest of your life.
David:Okay. Yeah.
Mike:K? Would you rather have that in a qualified account or a nonqualified account? Well, it could go in both, but if you put it in the nonqualified account, and let's say the dividends are are low on whatever strategy you you've picked, you could just set that thing and and let it go, and you're not worried about taxes because you won't really pay taxes unless you sold it. Right? But maybe you're more active in a different part of your portfolio, so maybe that part goes over to the qualified part because it's actively being traded, and you don't wanna create a bunch of capital gains.
David:Okay.
Mike:Do you see how this kind of divide and conquer?
David:Right.
Mike:And then it's understanding, like, I've had a couple of people come in who had already annuitized their income stream. K? So they bought annuity, and for them, I believe it was one of the the few situations that I come across where it made sense because we wanna live within our economic and emotional limits. For them, it brought them peace of mind that they knew their base needs were being met by an insurance income stream from the annuity. But I'm looking at this going, wait.
Mike:Hold on. So you you've got a small pension. Great. And then you have this massive when I say massive, for the person, it was massive. Pretax annuity income stream that had you just put it in there and then convert it over 1 or 2 years in from IRA to Roth, and then turn on your income, your Social Security tax would be taxed at 0.
Mike:Right now, 85% of it being taxed. So just by making a few adjustments to the portfolio and the income streams for this specific person or the couple of people that have been in this situation, we were able to increase their overall net income for life by doing some tax planning because the allocations weren't acknowledged. The implications on the other income streams or other sources were not acknowledged. No one did the research. And they got, I believe, for the first time I was thinking of specifically, I think it was an extra 2 to $3,000 a year, which was a lot for them.
Mike:Yeah. That was helping them just that that one efficiency. And everyone's different. Right? Some people have less, some people have more.
Mike:But for them, that was helping them offset the increase in taxes here in Johnson County, Kansas. These things matter. And by the way, in that situation, as tax rates were able to go up, this person would not have to increase their tax payments. They got into a lower tax efficiency bracket, effective tax rate, and and just maintained that. So multiple things happened just by one glance at how they were allocating their assets.
David:Makes sense.
Mike:So, David, let's talk about how we do things here.
David:Yeah. Let's do it.
Mike:I mean, because if you don't have a baseline, you really are are almost gaslit into this idea of whatever your experience is, what should be, and you don't even know the right questions to ask or what could be available. I mean, I I like what what was it Steve Jobs said? How can they say yes or no to this thing that they don't even know exists? He was talking about
David:the Ipod.
Mike:Yeah. Man, the Ipod was great. Anyway, now we have the Ipod with
David:a
Mike:phone, but Yeah. Right. Anyway so here's how we do tax planning, because everything is connected, and if you can be efficient on your taxes, there's a good chance that you'll be able to get more out of your hard earned money. Taxes will probably be your number one expense in retirement. Health care costs will probably be number 2.
Mike:So let's let's talk about that. Look at those 2 categories. How often do we we talk about investments and growth and all these things, but those are the 2 biggest expenses. What are we doing to efficiently prepare to offset them or prepare for them? Alright.
Mike:So here we go. In our opinion, with tax planning, the first thing you need to do is focus on the original plan itself because where you place assets, you you don't wanna be touching them all the time. Right? You don't wanna be adjusting them and tweaking them, especially if they're in a nonqualified portfolio, as in you've already paid taxes on it and it's subject to capital gains. The the plan itself is so important.
Mike:You you plan first, then you seek the efficiencies, which are mainly the the tax strategies, among the other efficiencies that could be there. And then you build the portfolio, and you build the portfolio to support the ability to implement the strategies under the direction of the plan. Whereas we like to say plan efficient growth portfolios, You want to be prepared so that if the markets are up, you can implement certain strategies, but if the markets are down, you can implement other strategies that also help you minimize taxes, preserve your assets, grow your assets, and support your quality of life. But one strategy can't do it all. One investment can't do it all.
Mike:And then if the markets are relatively flat, there are other strategies that you can implement there as well. Tax last harvest seems a wonderful thing when when markets are going flat or just kind of going nowhere. So you gotta set up first a plan, and you've got to maintain your ability to be flexible. For the person I was talking about earlier that had that income stream, it was lucky that she had an income stream from an insurance company that allowed her to convert it from IRA to Roth.
David:Okay.
Mike:Not all of them allow that. So you wanna set things up first, and we're talking significant amounts of money that could be enjoyed because we were being tax efficient. K. Then once you have the plan, and you've got multiple strategies for multiple situations that you can implement at any given time, regardless of if markets are up or down or have stayed flat for a long period of time, regardless of if tax brackets have increased, or whatever's happened, that you've got the flexibility. You're not being painted into a corner.
Mike:And, yeah, you wanna you wanna project IRA to Roth conversions, but IRA to Roth conversions, if you do them too fast, can hurt. If you do them too slow, can hurt. It's like Goldilocks. You gotta find the right balance there and then adjust only so slightly every single year. And then this is the key.
Mike:We do this in q 3. So in in the holiday season, we're not rushing to get everything done. So we're we're in this right now. But we will do our all of our annual reviews in q 3 so we can do the investment reviews, the tax planning. Basically, what has happened this year?
Mike:We get the 10.40 out. We look at the 10.40. We put into our our software, and we say, what's happened? Are we good? Are we on track?
Mike:Are we meeting the goals? Are we meeting the expectations? Are we ahead of them? Are we behind them? Do we need to make any adjustments?
Mike:We just we have that that full fledged conversation. And then we go into our software, we say, okay. Next year, how much income do you want? Where are we gonna take it? And how are we gonna do it tax efficiently?
Mike:Tax efficiently means that you're not triggering long term capital gains in the wrong bracket. Tax efficiently means that maybe you've got a couple of positions that you're you're too much into Microsoft or Apple or Nvidia or whatever it is, and you want to slowly take that down while also accomplishing other things. I mean, this is you're you're baking a cake here in some sense because there are multiple ingredients or multiple things happening at the same time. And here's a couple of examples. Let's say you're early on your retirement and it makes sense to delay your Social Security so you've got a larger window that you can take income spending down your IRA assets, your pretax assets, while also doing IRA to Roth conversions.
Mike:And you've been able to slowly minimize enough that now you're 60 years old, now you're 65 years old. Now IRMAA could be an issue. Right now, it's 202,000 or so for a couple, a 100000 or so for a single. But you don't wanna go over that to create Medicare or IRMAA tax inefficiencies. So then you adjust your tax minimization threshold.
Mike:And if you needed more income, maybe you're pulling a little bit from your Roth, you're pulling a little bit from your IRA, and you're maxing out that that target effective tax rate that you had planned to take. Then maybe so you're blending these strategies based on the seasonality of your retirement. And then you get to, let's say, 72, and let's say your required minimum distributions are at hand. Now you've baked in to where part of your income is coming from your pretax that's left. So you didn't minimize it to 0.
Mike:You just minimize it to where there's some. Now you've only got a little bit of income from your your pretax source based on the market conditions, and we're gonna now slowly drain down through long term capital gains efficiencies. We're gonna slowly drain down some of the positions that you've held that are just too big. They're too much of your portfolio. We're gonna start slowly taking those down right now.
Mike:I mean, do do you see how everyone is so different? There are so many variables here. And if you if you were to take some income from a long term position in a non qualified account, that can have a tax implication in 5 other places on your 10.40. You can't write this out. There's no Excel sheet that I'm aware of that really can accurately do this.
Mike:You've got to have paid software and say, okay. I wanna take income from these sources. We're gonna take it at these times, and we're gonna take it in these ways. This is the tax implication we're expecting. We're staying within certain thresholds.
Mike:And if we make this adjustment and this adjustment, we can actually maybe even get more tax efficient. I have yet to have someone go through this annual review process with us as a client and say, you know, I've I've been doing this before. It doesn't happen. Uh-huh. It it really doesn't happen.
Mike:But if taxes are your biggest expense, and you don't wanna pay more in taxes than you need to, but you wanna also wanna preserve your assets and grow your assets, and you're trying to find the right silver lining balance, it's near impossible to do on your own, unless you're working with a tax professional or someone that has significant tax experience that's working through a tax planning software that can let you run the hypotheticals of if you make this adjustment and that adjustment, you can find more efficiencies. That makes sense?
David:Yeah. Absolutely. There there needs to be some time taken. There needs to be a planning. You have to be deliberate.
David:You can't do that if you don't know taxes.
Mike:Yeah. Well, part of it's too understanding the right questions to ask. Right. That's that's a tough one. I mean, yeah, you can go through your life and just arbitrarily say, alright.
Mike:This year, we're gonna convert 30,000. Next year, we're gonna convert 50,000 or or whatever it is. You could do that, but you're probably leaving money on the table. So are you competitive enough to want to take the time to get more out of your money, or do you wanna live financially, at least, from your your planning strategy standpoint, very laissez faire and, you know, whatever happens, happens. It's fine.
Mike:I'll be fine, so I whatever. Yeah. Some people are competitive and and want to get the most out of their money, whether it's for them to spend, whether it's for their kids, or whether it's they just enjoy growing their money to give to charities. Yeah. But they've got that competitive nature that they don't want to be reactive.
Mike:They wanna be proactive. We do all the hard work. You just gotta show up, but you have to wanna show up.
David:Right. Half the battle sometimes.
Mike:Yeah. It's a nice office, and Zoom's not terrible if you're if you're not in Kansas
David:Right.
Mike:Or Kansas City, I should say.
David:That's right. Yeah.
Mike:If you've never experienced something like this and you wanna truly understand what it could look like, the best first step really is to request an analysis. And the reason is when we run analysis, we start doing the tax planning. It doesn't cost you a dime for these two meetings, but you can get an idea of how much you may be missing in the conversation, how much more you could potentially get from your money. So if you've got assets in your 401 k and you're wondering, you know, hey. I'm gonna retire in a couple of years.
Mike:How much should I put in the pretax? How much should I put in the Roth? This is this is for you. If if you're retired and you can't articulate why you have certain investments in certain accounts, everything just kind of broadly diversified, this is for you. There's probably several tax planning opportunities that could be implemented, or at least an adjustment to these strategies to help you get more out of your hard earned money.
Mike:If you're not experiencing this level of management, I would suggest that you might be working with someone that has limitations or just lack of experience or something. I mean, according to JD Power and Associates, this was a surprising statistic. 14% or so of financial practices that claim to be full service and comprehensive are actually full service and comprehensive. 14% that are out there actually offer the services that are implied when people work with them. Your ability to get more out of your hard earned money is in the details, which we believe require comprehensive conversations.
Mike:We do the hard work for you. If you wanna see what this could look like, request your wealth analysis today. Here's what you're gonna do. Pull up your phone, whether it's now or later, and text the keyword analysis to 913-363-1234. That's keyword analysis to 913-363-1234, or you can just go to the website www.yourwealthanalysis.com.
Mike:Clear as that yourwealthanalysis.com. It's not gonna cost you a dime. You're just gonna fill out about, I think, 10 questions. Pretty simple. We're asking you what you want, what you're looking for, what's going on.
Mike:And then we schedule a 30 minute call with you to get context behind the answers to those questions, so we understand what we're optimizing for. It's about your lifestyle and legacy. And then once we understand that, we run your analysis and spend 60 minutes with you showing you not only on the efficiencies on investments and portfolio design, but taxes and how you could potentially be paying less or preserving your estate overall, getting more out of your your life, getting more of your hard earned money. Text analysis right now to 913-363-1234 or go to www.yourwealthanalysis.com. It won't cost you a dime, but it could significantly enhance your ability to fully experience life.
Mike: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 podcasts. 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.
Mike: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.