Income Tax: 2025 Sunset

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This is the Truth Network. Welcome to Finishing Well, brought to you by CardinalGuide.com, with certified financial planner Hans Scheil, best-selling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing Social Security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now, let's get started with Finishing Well.

Well, this will be an interesting show for you today on Finishing Well. I can assure you we have something a little unique. You know, when Jesus was trying to describe what the kingdom of heaven was in Matthew 13, he was trying to give his disciples a little taste, a something-for-nothing mentality. And so the name of this show today is Tax-Free Does Cost You Something in 2021. Well, Jesus is trying to explain to his followers in Matthew 13 that the kingdom of heaven does cost you something, and the way that he put it was the kingdom of heaven is like a treasure that's hidden in a field. And this man, he found it, and you know what he did? He hid it again, and then his joy, he went and sold all he had so he could buy that field. What he's talking about is when we realize that, oh my goodness, the kingdom of heaven is worth all that.

The beautiful thing about it is that Jesus paid all he had so that we could give up what we have in our life and give it to him. It's an amazing thing, but it relates completely to this concept of finishing well in so many different ways. And so today's show really started with kind of a video that you guys did. I'm with my certified financial planner, Hans Scheil.

Welcome, Hans. And so tell us about your video. Yeah, so we shoot a video every week or really a few weeks before we do the radio show. We shoot like three of them at once on the upcoming topics. And before we do the video, we've got to prepare a whiteboard and just really just some notes on the topic. And we began several episodes ago, about a year ago, using those videos as prep for the show. And then I send them to you each week, about a week before the show, and we record and then you are able to view those and you can kind of get the content of really the nuts and bolts.

They're shorter than the show. They don't go into a lot of detail, but people find them very useful to really just learn the material. And so I get a lot of clients that just only listen to the show and then they're always asking me, well, how do you come up with this stuff for every week's show?

And that's kind of it is that it applies to a lot of different areas. So we fix this video and then then we do the show. And then after we do the show, we send an email out to our whole email list of about 20,000 people that follow us by email. And then there's a link in there to that short video and the radio show, which we have recorded a few weeks prior. And then we also put it up on our website, cardinalguide.com. So all this stuff is interconnected, really just getting the message out and the word out and the education. So and I just want to make people aware of that. And then what's happened of late is we've used YouTube for really a few years as just a hosting site. We never really have spent a lot of time or money on YouTube because it's really hard to control who you're sending your message to on YouTube. It's just kind of there. And so I just it's something I hadn't gotten to. And all of a sudden, some of my videos just took off. They took on a life of their own. And so you can go on to YouTube and you can just search for cardinal advisors.

And that's ORS. Click on that or put that into the search thing. And up comes probably one hundred and fifty videos done by me with a whiteboard behind me. And there most of them were prepped for the show. So there's a whole lot of ways to find this stuff and to get to learning it. So if you want more or perhaps after you're listening to today's show, you'd really were throwing a few numbers around and you'd really like to see those numbers up on a screen.

You're going to find them on YouTube or at our website. So does that help? Yeah, absolutely. And it's on YouTube.

Cardinal Advisors, just like the show is brought to by cardinal guide dot com. You know, that's really helpful. But today's show, so tax free is going to cost you nothing or it's going to cost you something in twenty twenty one. Tax free is always going to cost you something and what it's going to cost you is some tax sounds a little bit like an opposite.

So the way I get tax free savings account or a tax free savings account or tax free income later is by paying the taxes now. And that's one of the themes of the show. And when you asked me for a story and we were preparing for this and what story I was going to tell, I said, I don't really have any exciting stories because when somebody becomes convinced, when a client becomes convinced to sacrifice the taxes now that they could put off till later, that's really a sacrifice. And it's hard to get people excited about sacrifices. I mean, I guess in doing that, you're talking about the price, which you do in, you know, Matthew, was that Matthew 13, right? You know, so so I mean, people are going to sacrifice. With the understanding that they possibly are going to get something that's going to be the opposite of the sacrifice, and that's really the deal here with paying taxes is nobody really likes to pay taxes. And nobody enjoys it, and especially paying taxes now when you could delay them. And with an IRA or a 401k, you've delayed them for several years and you've really benefited by that. So this is real counterintuitive what we're talking about today.

And we've talked about this on several shows before. And specifically in today's message, we're actually getting the tax brackets back out for single people or single filers and then married filing jointly. And we're looking at the tax rates that you pay, you know, either 10 percent, 12 percent, 22 percent, 24 percent. And then, you know, on up higher than that, which are really the rates right now corresponding with the brackets are really at historical lows. And what I think a lot of people don't realize is these rates are going to go back up in 2026. Which is five years from now or a little less than five years by law. OK, so when they passed a law to lower taxes four years ago and it started three years ago, it baked into that law was a end or a sunset.

So in other words, it's through 2025. We're all going to enjoy these lower tax brackets. And so what today's show is about is just taking a look at those those tax brackets and getting you to take a look after the show, like where you fall in the tax bracket. And then considering perhaps some Roth conversions or some recognition of income where you're going to actually voluntarily pay the tax through distribution, where it's going to be less now is better than more later.

Yeah, absolutely. And, you know, the cool thing is that as we've learned through the show in the past, Hans, is that people, you know, when you're 45 or whatever, taking money out of your IRA is you're going to pay all sorts of penalties. But once in my right, once you reach the age of 60, you begin to have other options. Well, yeah, you can make withdrawals from your IRA. And after fifty nine and a half, you don't have to pay any penalty, you just have to pay the tax. So and we're not proposing just pulling money out of your IRA and going and spending it because first you got to pay the tax and then once you spend it, the difference, you know, then it's gone. I mean, this is retirement savings. This is something that's there for your retirement unless you retire. But the important thing is once you turn 60, you're through with penalties for making withdrawals from your IRA or 401k.

And so we're taking it to the next level. We're saying it may be your benefit to start to make some withdrawals and paying these really low tax rates is, in fact, that is your tax situation. I mean, I'm not giving any recommendations on the show and never do. I'm just generally painting a broad brush that you may want to take a look at this.

Right. And so what we're talking about is possibly well, there's there's two or three different options that you're going to hone in on. But one of the main ones is still using an IRA, but rather than a traditional IRA that you haven't paid tax on the income yet, you're converting that money. If you're over age 60 into a Roth IRA, which would mean that you would pay tax on the income, however, now you've got a tax free savings account, right? Yeah, so we just take an example, like we were talking about in the show, if we had a person that had an income around 80 thousand dollars or a married couple, they're retired or maybe not retired. And one of them or two of them is working. But in any case, they're they're right around 80 thousand dollars put together. And you're saying, you know, they're they're pretty much in the 12 percent tax bracket, which is which is actually pretty sweet. And they're not paying 12 percent taxes on all their 80 thousand because you get deduction. And people can take the standard deduction now for a married couple of twenty five thousand or it's even a little more for people over sixty five. So, you know, they're actually going to pay that 12 percent less. And then the example that we came up with, let's just say these people had one hundred thousand dollar IRA. Or 401k, they just had that amount and they they were just sitting on it.

Well, I won't pull anything out of there. I got to pay tax. I can, you know, I'm making eighty thousand dollars a year. I can live on that just fine. In fact, I want to add to the hundred thousand.

So that's for later. And so my point is, is you could first of all, you might want to consider paying some tax and distributing it. Let's just let's get to that point, because if you're a married couple, you're you could go all the way to one hundred and seventy two thousand seven hundred and fifty of taxable income and your rate would still stay twenty two percent. So. And you say, well, twenty two percent, that's a lot.

Well, it sure is a lot. But when you compare that to the rates of 20 years ago or so, they were like 40 percent at these income levels or these tax rates are at historical lows. So I didn't say do it. I just said consider that you might want to take some of your money that's in this hundred thousand dollar account and distribute it to yourself and actually pay the taxes. Now, as opposed to.

Having it stay in a tax deferred thing and paying more tax later. So before we get into, oh, it makes perfect sense if you know what's on the other end of the rainbow. And so in order to get to the other end of the rainbow, you're going to have to stay tuned because we're going to be right back again. Remember, this is finishing. Well, a certified financial planner, Han Shyle. Today's show is tax free.

Cost you something in twenty twenty one. And so we're going to have more of that and why we're going to do this plan when we come back. So stay tuned. Hans and I would love to take our show on the road to your church Sunday school, Christian or civic group. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans expertise and qualified charitable contributions.

Veterans aid and attendance, IRA, Social Security, Medicare and long term care. Just go to Cardinal guide dot com and contact Tom to schedule a live recording of Finishing Well at your church Sunday school, Christian or civic group. Contact Hans at Cardinal guide dot com.

That's Cardinal guide dot com. Welcome back to Finishing Well, and today's show is tax free. Does cost you something in twenty twenty one. And when we left our hero, the person that was essentially selling everything they had so they could buy the field because it was going to be really, really good. In this case, we're just going to pay some extra taxes so that we could get the field.

But when we were right in the middle of that, Hans, if you want to take back up on it. Yeah. So so the situation we've got a couple of people either retired or about to retire and they're right around that eighty thousand ninety thousand dollar joint income level there at that bracket. And they're paying pretty much 12 percent federal income tax, which is just really, really low compared to what rates used to be.

All I'm saying is, is that they're not yet to minimum distribution, so they're not anywhere near 72 or they're not at it. So they don't have to take any money out of that IRA. And a lot of them, they don't you know, they're just saying, man, that thing's tax deferred. If I got to pull something out, I got to pay taxes. What we're saying is let's consider taking some of it out and perhaps converting it to a Roth IRA, which is going to be tax free. You know, what I'm saying is, is that if they took the whole hundred thousand and converted it, they're going to have a tax bill due of twenty two thousand dollars. Then they also are going to if they're in North Carolina, they're going to pay a state tax of like five percent. So they got another five grand plus a little bit.

So it's pretty hefty tax bill. So I wouldn't necessarily recommend it. Most people are not going to do that unless they have the twenty seven thousand dollars sitting over in the sidelines somewhere at a CD or a savings account or a brokerage account.

Some people have done that where it's just makes sense. They want to they want to take the mortgage off their IRA is essentially what they're doing. The government doesn't own part of their IRA anymore. So that would be one option is just pay all the tax. Another option would be to do that whole hundred thousand, but actually pay the taxes out of the Roth IRA or out of the distribution. Then they're only going to end up with seventy some thousand in the Roth where they had one hundred before in the traditional.

They're still going to be better off because there's no mortgage or lean on. And then another scenario, another scenario would be to draw out just a plan over five years. And so the reason I bring up five years is these tax rates in twenty twenty one are going away at the start of twenty twenty six.

So we have many clients that are coming to us now and they're saying, how can I best take advantage of these low tax brackets? And the way to do that, depending upon where you fall in the income thing, is to convert pieces of your IRA or 401k into a Roth IRA a little bit at a time. Like this case of these people with one hundred grand, they could do twenty thousand a year for five years. And then obviously the money on both sides is going to earn a little bit during the next five years.

So but in any case, that's like biting off a little bit at a time. And then the tax bill would be much smaller on an additional twenty thousand dollars. And perhaps people could stomach that out of their other savings so that they could envision in over five years getting the whole hundred thousand moved over to the Roth. And now they got a tax free savings account for life. Yeah. And what do you think of that?

Yeah, I mean, it's absolutely beautiful. And when we say tax free, the Roth has this beautiful part to it. You know, you've already paid the taxes on the money that you put in. But now this money is sitting in the Roth IRA and, you know, it's being invested or however it is that you're using that money in that new IRA like you did in your old 401k or whatever. But the income now on that money is now tax free. Right. And so it is if you had left that same hundred thousand dollars over in your traditional IRA for that period of time, whatever it was, the income on that money is still liable to be taxed. Am I right?

Oh, yeah. Every dollar coming out of a traditional IRA or 401k is going to be taxed, whether it was initial deposits or earnings inside of there. And a lot of people have these things ballooning to large amounts. Then they take out the minimum when they have to. And then they die. It goes to their kids and their kids want to get the money out. And they they end up paying like 40 percent of it or 45 percent of it in tax, only leaving a little more than half. And then they because they got to get the money.

And so the taxes, the taxes. The reason you're paying taxes now and considering strategies is to avoid you or your heirs paying a huge tax bill later. I mean, it's just it's just that simple in a Roth conversion or going to a Roth IRA is just one strategy. Another strategy that a lot of people use is they buy a life insurance policy.

And you know that the proceeds of life insurance go tax free to the beneficiaries, you know, in most cases. So so, you know, if we took the same hundred thousand dollar people and they really said, you know, that money is really the inheritance that we're going to leave to our kids. So we we just have it over there. And if we don't need it, that's where we want it to go.

Well, what you can look at is you can say, well, what do you think it's going to grow to maybe one hundred and fifty thousand or two hundred thousand before you pass away? We could look at a two hundred thousand dollar life insurance policy with a very small premium relative to the two hundred thousand. And we can pull just enough money out of the IRA every year. To pay the premium on the life insurance, and that way, when you pass away, your kids are going to get the two hundred thousand or whatever amount you buy completely tax free and you can have free use of the money. So and the actually insurance comes to them is sweeter than even getting an IRA, you know, getting a Roth IRA. Yeah, because the other money that wasn't in other words, they used whatever money for the premiums. But if the person dies sooner, right, then they use up the money. You have all that money, too, right? Oh, sure.

Well, yeah. And then the money is still in the Roth. There's something left in the Roth.

But a lot of those we come up with a plan to clean this thing out, you know, over 20 years. And maybe maybe we don't have to pull it all out. We got to pay some taxes when we're pulling it out. But then the net amount may be much larger than the premium. So we may just those people may just put that in a taxable savings account. But it's not you know, it's not something they're going to have to pay tax on again, just on earnings. So or they may spend it. You know, we may get together a plan to draw down the hundred grand through distributions and paying little bits of taxes over time. But included in there is the premium on a life insurance policy that's going to pay out, you know, maybe just a hundred thousand dollar policy. So they know their son or daughter, their heirs are going to get that amount, which was their wishes in the first place. And you do have a story along those lines that really I mean, although they they certainly lost their father, but the the benefits of their father using this strategy were unbelievable.

Yeah, it's in my book. And, you know, really, this piece of it isn't emphasized as much as the long term care plan that did in the book. But, you know, he just saw this IRA. I mean, he was about 80 years old when he became a client. And he could just see that, you know, this IRA money is just a problem with the minimum distributions, the taxes that his kids were going to have to pay, that his wife was going to live longer than him. And just all of that kind of because he really didn't need the IRA money.

And this this guy was a dentist and retired dentist and he had done real well and he didn't spend a lot of money and his wife. So leaving it to his kids was real important. And so what we were able to set up is a he had about three hundred thousand left in the IRA. And we took well, actually, he had about five or six hundred and we used two or three hundred to buy long term care insurance with IRA money.

And that's another story. But the three hundred thousand that was remaining, what we did is we put that in an annuity that had a guaranteed income to he and his wife of twenty one thousand dollars a year. It was guaranteed to last as long as either one of them's alive and she's still alive and they're going to get that twenty one thousand. She's going to get the twenty one thousand from the annuity as long as she lives.

So she was two hundred. Just keeps coming in one hundred five, even if the annuity is is bankrupt. So we we set up a guarantee to pay the premiums. Now, the premiums on the life insurance policy they bought for three hundred thousand dollars that that life insurance policy doesn't pay off until both of them are gone. So he died about a year after I sold him all this stuff less than a year.

She's 10 years later, still alive and doing well. But at some point when she dies, there's going to be three hundred thousand, one hundred thousand for each son, and that's tax free, one hundred thousand out of the life insurance. And that thing has a annual premium of about ten thousand dollars a year. Now, you know, it's a lot of money to pay for life insurance, but they were like 80 and 76 at the time, both of them. So now they get that 20 grand coming in from the annuity. They pay the taxes, which I'm sure is not 10 grand, you know, it's something.

And then she's got a little something left over for herself after she pays the ten thousand dollar annual premium for the life. It's all set up and it's just going on behind the scenes. And we've effectively made the inheritance to the boys tax free where it would have been taxable. That makes sense to you?

Oh, it's absolutely beautiful. And actually knowing a little bit more to the story as we kind of head in for a landing here, he also did this kind of thing for his charity. And so he was building the kingdom with these strategies of finishing well as well, wasn't he? Oh, he was I mean, it's just his big thing was getting Bibles into China. And so he started on me about that the day I met him. And so what I did is I I donated a significant part of my commission to that charity. He gave me the name and the missions. And, you know, they're somewhere off of mainland China.

And I still get letters from them today with, you know, Chinese or whatever, and then they have it in English. But that was his whole gig. And then he gave his other IRA because he had another IRA. Besides that, the whole thing to this Bible mission of the world, I'm trying to think of the exact name of it, but it was terrific. Yeah, and that went and that went tax free.

So the idea of tax free costs you something, but oh, my goodness, like Jesus with the kingdom, you know, he paid it. And so you can find out all sorts of things about this in Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. Like he talked about, some of these stories are there.

You can get that at the website, cardinalguide.com. And of course, the videos we're talking about are at Cardinal Advisors at YouTube. And so check all that stuff out. We're so grateful you listened today.

And Hans, as always, so much fun. Yeah, thank you. We hope you enjoyed finishing well brought to you by cardinalguide.com. Visit cardinalguide.com for free downloads of this show or previous shows on topics such as Social Security, Medicare, IRAs, long term care, life insurance, investments and taxes, as well as Hans best selling book, The Complete Cardinal Guide to Planning for and Living in Retirement and the workbook. Once again, for dozens of free resources, past shows or to get Hans book, go to cardinalguide.com. If you have a question, comment or suggestion for future shows, click on the Finishing Well radio show on the website and send us a word. Once again, that's cardinalguide.com. Cardinalguide.com. This is the Truth Network.