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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.
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 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 talk about it all.
Mike:Now that said, please remember this is just a show. 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 today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Frandsen. David, thanks for joining me today.
David:Yes. Thank you for having me.
Mike:David's job here is he'll be reading your questions that you've submitted in, and I'm gonna do my best to answer them. Now you can send your questions in right now or really anytime during the week to 913-363-1234. Save that number in your phone. So when you think of it, you can remember and submit the question then. That number again is 913-363-1234.
Mike:Or you can email them to hey mike@howtoreontime.com. Let's begin.
David:Hey, Mike. How do you do year end tax planning?
Mike:Year end tax planning. Well, that's the season we're in.
David:This is great. Yeah.
Mike:In my mind, year end tax planning traditionally is one question. How much I convert from my IRA assets to my Roth assets? Assuming that you're 59a half or older, or you have some after tax funds that you could pay the taxes for a conversion if you're younger. Most people don't know that one. Mhmm.
Mike:If you're younger than 59 and a half, you could do IRA to Roth conversions. You just need to pay the taxes out of pocket. Okay. But I digress. So that's the typical conversation.
Mike:It's very surface level, because I believe there's a lot more tax plan that could be done. Let's start from the basics. IRA to Roth conversions, how much? You don't wanna have a necessarily major conversion in any given year because of fear of tax brackets. Let me open that up a little bit.
Mike:If I've said this once, I've said it a 1000000 times, but this is my favorite case study. If you have a $1,000,000 and let's say the IRS simplified everything, and they they say you could convert everything over today at 20%, or you can basically just take income out at a fixed 15% for life, which would you do? Well, if you convert everything over today, 20%, you would pay 200,000 in taxes, have 800,000 now in Roth, which can grow tax free and pay income tax free, and you're done. Right? If you do the 15% route, all things being equal, so the same time frame, 60 to 95 years old in this example, you've also got the same net income in the same portfolio growth.
Mike:All things equal, you would pay around 412,000 in taxes. So on the surface, it seems like, well, gosh. Yeah. Taxes are lower now. Let's just convert it all over and give the government less money.
Mike:But giving the government less money and keeping more of your money are actually 2 different objectives. And the reason why I say that is the person that took the 15% route and just a little bit of taxes each year did not accentuate their account losses. They didn't dip their account far down. Okay? They just paid a little bit in tax each year for a long period of time.
Mike:So even though they paid more in taxes in this example, they actually had 690,000 more dollars left over for income or for legacy. And the reason why people kind of follow the wrong path is they get tied up in tax brackets and not your effective tax rate. Your effective tax rate is at the end of the day, how much did you pay in taxes in comparison to how much of taxable income was relevant to the conversation? And in my opinion, you have a max tax bracket or a max tax rate. Basically, an effective tax rate that you target during your conversion years and then an effective tax rate you target during your maintaining years.
Mike:This is higher level stuff than than what you usually hear about. But this is how you can maintain more of your assets. It's how you're able to preserve your assets a little bit better, in my opinion. You're able to have more flexibility in the future. And you're able to kind of hedge against these adjustable tax brackets.
Mike:When I say adjustable tax brackets, you know, political risk. They can increase tax rates. K? You wanna have control of that. You wanna be proactive about this before you turn 72 or whenever your RMDs would start.
Mike:And then there you wanna kinda manage it as such. But the point being is soon the tax brackets may go up. We don't know what will happen with the election. We don't know what will happen with congress.
David:Your crystal ball is not working.
Mike:It's not it never has worked. Yeah. The the only thing that works is that sun will come up tomorrow. I've gotten that one right consistently. Okay.
Mike:Yeah.
David:Nice work.
Mike:Even in Seattle. The sun still came up through the clouds. But my point being is you don't wanna panic and say, gosh. I'm concerned about this. Let's do a higher conversion.
Mike:You wanna have a system, a multi year system that takes you from your age now until RMDH and then RMDH kind of when you're maintaining things. And all of this, by the way, is in coordination with your social security optimization planning and with your health care optimization planning as well. Now that's again the surface level. I also believe that you might wanna consider gifting. So you can gift up to a certain I believe it's up to a $100,000 if I remember right.
Mike:The maximum amount you can give for qualified distributions or charitable gifting, but you have to be of RMD age 72 years or older. So if you are of that category, you can gift your pretax assets to charities without paying taxes. Maybe you just wanna give a charitable donation. You can do that too with your after tax funds. Right?
Mike:Your non qualified brokerage account if you want to. So gifting, there are some tax benefits, but that's the season you'd you'd really dial that in. But here's where I think the plot thickens. People stop at end of year tax planning. Where do you want money to go?
Mike:And that's fine. But there's almost this blind eye of what are you gonna do next year? I think end of year tax planning should also include your income planning for the following year. How much do you want as income in retirement and where do you want the income to come from? So this assumes you didn't buy an annuity and you turned on an income stream for the rest of your life, that guaranteed income for life.
Mike:And even if you did, maybe the insurance company allows you to convert some of those income streams from IRA to Roth. There's some things you could do there. But the point being is, where are you gonna pull income from? How does that affect your taxes? And how would you draw income if markets were to go up or if they were to go down?
Mike:Now we have a rule here at Kedrick that you never draw income from accounts that have had significant losses. That accentuates the losses, making it more difficult to recover. So let's say we do some year end tax planning, and in December, the markets just tank before you pull out your income. How are you going to maintain your lifestyle, your income, your expected income without accentuating losses? We use a strategy called the reservoir strategy, which you could read about my book, how to retire on time, available on Amazon.
Mike:Or you can implement some other strategy, but you've got to know how you're gonna maintain income in the good years when markets are going up and in the bad years. And how you draw income is also going to affect your taxes. Because how you draw income is gonna affect then potentially your health care planning, your irate or Roth conversion planning, your gifting planning, your legacy intention, how you're gonna move different positions? Are you gonna take your income next year from your brokerage account through a long term capital gains strategy? Just slowly selling down some of the the positions there?
Mike:Are most of your assets in a 4 one k or IRA? And are you gonna take it out from there? You're gonna pay taxes. This is where I I just feel like many times people don't have high enough expectations on how to prepare for the next year's tax implications. And that maybe there should be a little more conversation in in how this all works.
Mike:And if you've never had this, by the way, don't go to your financial professional and say, hey, let's start doing this. Yeah. If they're not already doing it, they might not specialize in this. They might not have sufficient experience to really do this correctly. And you might get some half truths or some throwaway advice and just to try and keep you retain you as a client.
Mike:And it's like, yeah, this is close enough and then kinda kick you out. If they're not doing it, they probably don't wanna do it. So if you wanna see what this really could look like, if you wanna see what your current plan could look like and your next year tax plan or this year's tax planning for next year's income and all of that, if you wanna get a taste of that, it's quite phenomenal. It's quite eye opening on how many strategies could be implemented to help you get more out of your hard earned money. Request your wealth analysis right now.
Mike:Won't cost you a dime, but it really could open your eyes to the potential of certain strategies that really could make a difference in your overall life. Go to w w w dot your wealth analysis.com. Remember that domain? Your wealth analysis.com. Or you can text the keyword analysis to 913-363-1234 right now.
Mike:That's keyword analysis to 913-363-1234. This analysis, it starts with a 30 minute conversation with me to understand what you want when it comes to your lifestyle and legacy goals. Then we go into a 60 minute analysis, which we'll schedule another time, a 60 minute Zoom call or in person here at Corporate Woods to where I'll show you the first version of the plan and expose certain problems you may not know even exist. We want to identify problems so that we can solve them. And then usually there's a second 60 minute analysis that, again, doesn't cost you anything to where we dive into how to solve these problems, how to get more out of your hard earned money through strategy, how to structure a portfolio that is focused on growth, but can help also provide you the income that you want when markets are up or down without locking things up, without having income streams from insurance companies that aren't flexible for inflation or tax adjustments or whatever it might be.
Mike:I mean, really, this is many people have told us that our analysis has given them more context than their current financial plan, which says something. It doesn't cost you a dime, but go to www.yourwealthanalysis.com today and request your analysis or text us the keyword analysis to 913-363-1234 to request your analysis. We'll send you a link. You fill out some basic information, and you can schedule that 30 minute call and kinda get started talking with me. You'll talk with me for that 30 minute call.
David:And only. Yours truly.
Mike:Yeah. For a limited time Yeah. Right. I won't be taking on clients in perpetuity. You'll be working with a different advisor at that point.
Mike:But but yeah. It's quite remarkable when people realize how they can get more out of their hard earned money and how it could elevate their overall quality of life in retirement. 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.
Mike: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.