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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. My name is Mike Decker along with David Franson over here, and we're gonna be taking your questions. Just text them right now to (913) 363-1234, and we'll take them one at a time. Again, that number, (913) 363-1234. Let's begin.
David:Hey, Mike. Is it true that Roth income affects your Social Security tax bracket?
Mike:Now this is a common misconception I hear, and it's in the article worksheet, whatever you call, nine fifteen from the Social Security Administration that shows you how to calculate Social Security. So let me define really quickly how this works. Yeah. Okay? Social Security, contrary to most people's belief, is not calculated based on your adjusted gross income.
Mike:It's not calculated with your standard deduction. Like, it's earlier on in the tax calculation process, and it's called your provisional income. What is your provisional income? Your provisional income takes into account all of your taxable income without the standard deduction. So all of the taxable income coming in, all the income from your pension, from your IRA distributions, so pretax, traditional IRA, not Roth, but all the taxable income takes into account capital gains.
Mike:K? So all of that is is lumped together. It also includes half of your Social Security benefit. Okay. So all of your taxable income Yes.
Mike:Half of your Social Security benefit, and all of your exempt interest, not exempt income. Social Security is deferred or exempt growth that comes out tax free. Municipal bonds have interest that's tax exempt depending on your state and which municipal bond you purchased.
David:Okay.
Mike:And many people will say, well, that's the same thing. It's not. So your Social Security income, as long as you do your plan correctly, if it's within striking distance, should not, based on current tax law, affect your Social Security benefits. It doesn't show up on your provisional income. Now the IRS does track your Roth assets because it needs to hold you accountable for when it goes to a beneficiary and how long they have in there, and did they clear it out within like, they still need to keep tabs of your Roth.
Mike:Many people are speculating that they'll eventually tax Roth. I highly doubt that would happen. Many people are speculating they're gonna change the Social Security bit. Tax law is written in pencil, so anything could happen. But based on right now, Social Security is not affected by your Roth income.
Mike:It is not tax exempt interest. It is that that's a municipal bond that they're talking about specifically. And there might be some other things too in weird situations, but that's what you need to understand about Social Security income.
David:So you can still, for now, you can still just keep taking those Roth distributions, and you don't have to worry about paying any income tax on that because it's
Mike:Yeah. You could do capital gains too as long as you keep it within the zero tax bracket. Mean, there's there are ways to get zero Social Security tax. That's that's basically 0% of your Social Security is subject to taxes. But many times, people unintentionally will try to get there, not realizing that they've accentuated their losses by pulling too much out of their accounts, too much out of their principal by trying to convert everything to Roth quickly.
Mike:It's like the old expression, did you jump over dimes to pick up pennies? I actually just recently did Wednesday webinars every single week, and it rotates through income, Social Security, taxes. They're free to everyone, whoever wants. If you're on our newsletter, which you can go to retireontime.com and sign up for our newsletter, you'll get the invites to these open q and a webinars. They're every Wednesday at noon.
Mike:I just teach a principle or a strategy. You don't be a client. Like, anyone can tap into these, and then there's open q and a. And the last one, we we broke down real real simply RMDs, IRA to Roth conversions, and how do you handle all that. It was very telling that there's multiple ways you could do it based on how much you have saved, how much you have in your pretax accounts, like your IRA, how much you have in your brokerage account, and the rolling over taxes on your dividends and so on, and if that's an issue.
Mike:And then also, how close are you to tax free Social Security? Most people I work with should not aim for tax free Social Security because they will, in my opinion, jump over diamonds to pick up pennies.
David:It almost seems like it's like a bragging ride just so you can say, I got this for free. Right?
Mike:Yeah. I mean, I've found that if you have a million dollars or less, typically, you might be within striking distance of eventually getting to tax free social security based on current tax law. But you have to have less money to even wanna get there. It's not worth the hit to principal to pay the taxes, to quickly convert assets, and so on. And a lot of people are making very emotional decisions just so you know the genesis of all this, because they're hearing that they might tax Roth in the future, or they might do this, they might do that.
Mike:Just understand anything you hear from a marketing perspective is probably fueled by a product or service that is trying to be sold. I mean, yeah, this radio show, technically speaking, is intended to sell people on the idea of considering us to be their wealth adviser, either to put them into a one time plan where we teach them how to fish, or they could become a private client member, and then they're paying us a flat monthly rate of, I don't know, somewhere between 4 to $600 a month. Like, yeah, that's kind of why we do this show. Now the other part of it is I do like to publicly define things as they are, whether the people work with us or not, but I don't really mind what people end up doing as long as it's right for them. I'm not pushing everyone does this or everyone does that, which is why I think we have a little bit more flexibility and a little bit credibility in doing this show compared to other shows that you might find.
Mike:It's because we believe there's more than 10 ways to solve incoming retirement. We're not paid more by keeping more of your assets at risk. We're not paid more by any one agenda. I mean, it's just it's like you pay your CPA to file your taxes, and there's a fixed rate for that. We're charging a fixed rate on how to get the job done regardless of how much money you've saved.
Mike:So it allows us to have a more open and honest conversation, in my opinion. That's why we structure the company this way, is because of things like this. We don't wanna sound smart, quote, unquote, to do tax planning when the real agenda is to push some large index universal life insurance policy, or we don't wanna sound tax smart because we're creating fear into doing one thing or the other. It's like, no. Every strategy has benefits and detriments.
Mike:We gotta figure out which one's right for you. And for this situation, which one's right for you? It depends on a number of factors. But hopefully, have comfort in us acknowledging that it depends and breaking down the, well, over here, it might be right for you, but over there, it might be right for them. We like simple.
Mike:It's easy to go to the grocery store and say, I like these vegetables, and I'm gonna buy these these foods. It's easy to compare two options. Right? Finance, there are so many variations to it. I think that's why it overwhelms a lot of people, and why they kind of push it down the road.
Mike:And I get that. But it depends is the correct answer. If everyone should do one thing, I would question that advice. What do you think, David? Your your thoughts?
David:Yeah. My thoughts. I I think I'm glad that there's somebody out there, and this is gonna sound like a brown noser, but to explain this stuff to us sort of with no, you know, outsized agenda behind it. Right? Yeah.
David:Yeah. I mean, this is an honest question, and we're gonna answer it honestly. And so the ultimate answer is
Mike:Your retirement's not ruined if you pay taxes for Social Security. Yes. Your retirement's not ruined if you file for Social Security at 62 or 70 years old. It's just these decisions affect your plans in different ways. What's the purpose of your money?
Mike:How about we define that first? How about we slow down on the suitability and really explore these things?
David:Yeah. Right.
Mike:Who's doing that? I mean, really. Who's trying to convince you not to do things, even though it just yeah. Anyway, it's easy to ask someone to come in and say, hey, what do you want? Great.
Mike:Let's just do that so we can gain you as a client. Who's gonna sit down and say, are you sure? Here are the things you may not know. That's a true planning process, is to push back anything you say, to push back, and to explore the benefits and detriments of that just to make sure. I mean, for goodness sake, how much time do we take to buy a car?
Mike:That's a pretty simple purchase. It's a big purchase. How much time do we take really checking ourselves on the decisions we're making for our financial plan, for our retirement plan? That's a thirty year decision that just is gonna affect every bit of our overall quality of life. So finding someone that agrees with us may or may not be in our best interest.
Mike:Finding someone who's able to agree, but is willing to push back. That's the person I believe you may want to talk with. Agreed. 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.
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