Ah, Portugal. There's so much to do, but so little I feel like I have to do when we are here.
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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. Finishing Well is a general discussion and education of the issues facing retirees.
CardinalGuide.com, Cardinal Advisors, and Hans Scheil CFP sell insurance. This show does not offer investment products or investment advice. Welcome to Finishing Well, with certified financial planner, Hans Scheil. Today's show is Tax Planning, with the emphasis on planning, for 2022. Honestly, as I looked over the material and saw the video that had already been done there on YouTube, Hans, I thought about the idea there's this big opportunity knocking for 2022. And, you know, are you going to answer the door, so to speak? So as I thought about that, of course, it led right to Revelations 3 20, where Jesus said, you know, behold, I stand. That means pay attention. I stand at the door and knock, right?
That's opportunity knocking, if ever there was one. He says two things after that. He says, for he who opens, right, I'll come in and sup or eat with him and then him with me.
And so actually, as I was reflecting about that, thinking about the show today, I thought, well, what's the second part of that about? Because obviously he doesn't say anything. He doesn't waste words. Jesus doesn't do that. And so if he says, I'm going to come in and eat with you, but really the invitation is, man, you're going to eat at his table, which is going to be like, talk about opportunity knocking. Like that's the big table.
That's, that's the wedding supper of the lamb. And what, what in the world will that be like? I mean, it's so amazing if we make that simple step to open the door to the opportunity. And so we do, I have an opportunity for tax planning in 2022, Hans.
And so what's knocking? Well, I mean, the only survey that I have to go by of people and the money they have saved is by the flow of clients coming in to do business with me. And I get the opportunity to look into their stuff and I have to see how much money they have and where it's invested. And then whether it's in an IRA or some 401k or some pretax account, or whether it's in a savings account where they've already paid the taxes on the money. And I just got to tell you that most of America has most of their savings in still an IRA money, because I'm talking about people in their sixties and then some in their seventies, some in their fifties. And to the extent that they have money, you know, 80, 90% of it or more is in pretax money. And it just, it just floors me how many people that are in their sixties, they know that there's, they know that there's a minimum distribution coming on that thing in their seventies. A lot of them still think it's 70 and a half, but it's actually 72. So they think it's somewhere out in the future.
I know I got to take something. And if they've done a little research at 72, it's under 4% of the amount in the IRA that they've got to take out. So that isn't going to put that big of a dent in it. And so this is just a problem that people have kicked down the road. And I think that, you know, my experience when I sit down with these people is they think they're doing right. I mean, they, they're doing good because intuitively they know that they, they wouldn't have this much money if they hadn't saved it in an IRA or taken it out of their paycheck or gotten the tax deduction for it. I mean, this, for most of America, these are people where their parents and their grandparents maybe didn't have this much money as they do, because if they had it at all, they had a pension and they really just became of age and retired before 401ks and IRAs kind of grew.
So regardless, we just got a group of people and whether this is $150,000 in a 401k or $750,000 in a 401k, or $750,000 or $3 million or $4 million, it generally is a good-sized percentage of people's wealth or their financial wealth. Okay. And I'm thinking that these people, my experience is they really feel like they're doing right. Oh, I don't want to touch that.
I don't want to pay taxes. I just, if that keeps on going, it'll keep on growing. And, you know, so they really feel like they're doing right. They're savers and they're, you know, when I started asking them, what's it for? And I really push them on that. They, they usually end up leaving to my kids or just in case I need it when I get old.
I mean, they, they really don't even have a purpose for it. And so if they told the truth, my purpose is not to pay taxes on it. Okay.
Right. So what today's show is about is becoming familiar with the tax brackets. And I said this on the video on YouTube, and I'll say it here that most people, as they're coming into me, have no idea of the break points in the tax bracket. I mean, in other words, you know, where at what point do you pay 32% taxes? And most people really don't even have any idea of the percentages that they pay in each of the brackets or, or even the percentage they paid of tax on their last tax return. Most folks don't. I mean, they just, they just wait till the end of the year, gather all their stuff, plug it all in the computer and decide whether they owe money or they're going to get money back.
And so what this video is about is planning that a bit and planning your distributions from your qualified money and planning them according to how much tax you can stand, because I want to get people as a general rule to start pulling some of that money out and paying taxes on it. Right. And that opportunity is knocking this year, right? And it closes December 31st on this year and 2025 at even bigger close, right?
Yeah. So let me give you an example. I mean, so we have a lot of clients that fit in the 12%, married couples, they fit in the 12% tax bracket, you know, which goes up to $83,000. You know, in other words, you put their income together, you put part of their social security thrown in there, just depending on the percentages, and they come up less than $83,000. And so they're paying 12% income tax on some of their money. And the reality is that they could have an income of $100,000, $110,000. And by the time they take the standard deduction, they're down under 83 when they're actually paying the tax and, you know, in this bracket. And they're not even aware that they're paying 12% federal tax, which is historically just an extremely low rate.
Oh, yeah. So at the very least, it probably makes sense if these people's income was $60,000 combined taxable income after deductions, for them to take $20,000 or $23,000 to go right up to the 12% bracket and just either do a Roth conversion, or just pull it out, pay the 12% tax, and you'll have to pay the state wherever you are if you're in a state with taxes. So you have to pull out, pay them a little bit. But you get to keep most of the money. And so that's what goes away is the chance in 2022 to take full advantage of the 12% bracket is gone come December 31st. Because if you realize this after you do your taxes, you say, oh, well, we left $23,000 on the table. You can't go withdraw money out of your IRA in April because that'll be a 2023 distribution.
So you really need to look at this before the end of the year or before December because it takes a little while to get money out of these things. And so let's jump to the next bracket. Now I'm on married couples here, but we'll get to single people in a second. For married couples, the next bracket of the 22% bracket is $178,000. And this is where a lot of people do Roth conversions.
So we've got a couple. They could be where that other couple was or they could be further along. And a lot of these people that live off of a relatively, well, just average sort of money like 60 grand a year, like the example I gave before, a lot of them have big IRA balance. But they just don't need to draw it out in their 60s. And what I would propose is perhaps they can stand the 22% bracket because that may look high to people, but 22% is like a bargain. And so you go to $178,000, and if we use that same couple before, so instead of doing a Roth conversion or a distribution of $23,000, we do a withdrawal or Roth conversion of $128,000 or somewhere in that department. And then we pay 22% federal tax on that amount up to $178,000. So we might leave a little fudge room. Some people don't mind going over a little bit. But the whole point of this is now you can take money that was over and they're going to be taxed, and it's going to grow some before you pull it out, and we're moving it over into the column of already been taxed. And you can do that in a Roth IRA, or you can do it in a savings account, or you could spend the money, you can enjoy it.
I mean, my whole point is we want to start whittling away at that IRA balance so that by the time you get to minimum distributions, the government isn't going to force you, and the minimum distribution thing is not going to force you into a higher tax bracket. Wow. Well, we've got a break coming up. So we've got a lot more of this planning to do, and we've got some stories along those lines when we come back. So stay tuned.
Much more on this opportunity knocking of tax planning for 2022. Don't forget in the meantime that you can find all this information at Hans's website. It's cardinalguide.com as well as show notes with these charts and all sorts of information. Even the video on the same subject are there on the seven worries tabs, the one named tax on the website there, cardinalguide.com.
We'll be right back. Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic room. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans expertise in qualified charitable contributions, veterans aid and attendance, IRAs, social security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian, or civic group. Contact Hans at cardinalguide.com.
That's cardinalguide.com. Welcome back to Finishing Well with certified financial planner, Hans Scheil. And today's show is tax planning for 2022 and opportunities knocking. Hans, we've got to move on to the single people. Well, yeah, and I'm sure that some of you that were listening in the first part of the show are thinking, oh, you keep talking about married people. Why do you always talk about married people?
You know, my spouse died, my husband died, my wife died, you know, I'm single. And how do these things apply to me? Well, first of all, you got smaller tax brackets. So the government decides that because you're just one person instead of two, you got to pay taxes at a higher percentage. And so the, you know, where the married couple was the top of the 12% tax bracket was 83 grand. For a single person, that's 41 grand.
So it's just about half as high. So you have a lot of people that are single that live off their Social Security and some other money, and they're into the 22% bracket because the top of that is 89,000. So for a single person filing a loan. But there's still room for, you know, we're going to whittle down an IRA, and there's lots of ways to whittle it down. I mean, Roth conversions are one way.
You can buy life insurance over several years, pay for it over several years of creating a bucket of already paid the tax money or tax-free money. And so the top of that for a single person to the 22% bracket is 89,000. And the top of the 24% bracket is 170 grand. And so we have a lot of single people get on the same strategy using 170,000 as the number that they're going to work up again. So whatever they are paying taxes on after they take deductions, you know, let's just say that for a single person, let's say that's 70 grand.
And then they've got up to 170 in the 24% bracket. They can do $100,000 a year conversion over several years, and they can get a lot of their money to the after tax department. And you say, well, maybe I want to pay the taxes later. Well, look, there's a lot of advantages to doing this. One, if the money just sits there, and you don't use it, and then you pass away, and it goes on to your heirs, your heirs are going to inherit this tax-free.
And beneficiaries never complain about receiving tax-free money. I mean, I guess I could just tell you that from experience. And a lot of decision-making processes when you go, oh, I can just take this, right?
Yeah. And enjoy it. Or spend it on your kids. Spend it on education. Spend it on your retirement. Do whatever.
It's unencumbered. But then what are the advantages for you? Well, if later on you need that money, you can make any withdrawals that you need to out of either a raw IRA that you made these conversions to, or life insurance cash value, which has a lot of the same features as a raw, you can just pull money out of there. And not only do you not have to pay taxes on it, but it doesn't drive up taxes on your Social Security. Because by this point, you may have only, Social Security is your only income, and so you're not paying any taxes. And so all of a sudden, having a big IRA distribution when you're older drives you into a tax bracket. We see this all the time.
So there's all kinds of advantages of getting your IRA money moved over into something where you're not going to have to pay taxes, or your heirs are not going to have to pay taxes in the future. And then it brings up another point. Like I have a lady that I'm just dealing with right now. She's 68 years old. Her husband passed away in March. He was 67. And things are a little bit of a mess. He didn't have a will.
He died with no will. And so he's going to be a real interesting example. And I guess we're going to learn something. She's certainly going to learn a lot about dying without a will, and doing intestate, probate, and just a number of things.
And then you can add that with owning property in two states, Virginia and North Carolina. So we just learned a lot about that last night, but my point is that she was sitting here looking at this. She said, should I do a conversion this year?
And I said, with all this craziness going on, my initial reaction is don't even think about it. But I said, we have to think about it, because this is going to be your last year of married filing jointly. And I read these brackets to her.
And I said, you can do a Roth conversion, or moving money from that IRA up to $340,000 and only pay 24% federal tax. And so, and next year, when she's filing single, she can only go up to 189, excuse me, no, up to 170 for the same rate. So once I threw those numbers at her, we said, well, she's probably going to convert some of the some of the IRA money that was both his and hers. It's complicated. But my point being is, in all our planning, we point this out to people is that one of you dies significantly before the other and the other lives on as a single person, then these are the brackets that we're dealing with.
And so the taxes are actually going to go up for the single person, if we've got, you know, the same amount of income or close. That's usually quite shocking to people. Yeah, but that's something that is going to happen more often than not, right? Well, yeah, I mean, it's just, you know, most people I'm talking to are in their early to mid 60s. And sure, I mean, that could be one of them dying in their 70s and the other one living to their 90s. You know, it could be one of them dying at 80 or low 80s and the other one living into the 90s. It could be all kinds of scenarios.
But it's very common. I mean, my mom lived 14 years longer than my dad. So and she was even a little older than my dad, but so she was a single taxpayer for 14 years. And so we got to put that into our planning. And I'm thinking that if you put off this problem of reducing the size of the IRA, because you just want to kind of leave it for protection, then you're going to have a compounded problem where later on, it's grown to a bigger amount.
And you have to pull it out through minimum distributions. And then one of you has passed away. The other one is a single filer, and they're going to be paying even higher rates. And these rates are going up in 2026. So this is a problem you want to address now.
Wow, that is, you know, that's an angle to it, John, or excuse me, Hans, that I never. And I mean, you made the point, but it just just struck home, like, Oh, absolutely. When you when you go to the single filing, you know that you don't have near the deduction. And I would imagine that that almost always happens.
We sure does. And so if you're putting off the minimum distribution still later, this isn't pretty. And this is most of your money. And then this is going to happen at the same time that your social security check to the household has gone down, because one of the social security checks goes away when the, you know, the first spouse dies.
So there's all kinds of things that we got to prepare for, if there's going to be a single person living in the household for several years. Yeah, that's the beauty of the word planning, because that's definitely the case. I was looking, actually, the Social Security just came out with a new statement. I don't know if you knew that. No, they did, they sent me a letter, they changed the formatting of a little bit just to show me. And as I was looking at it, they had a new line on there that showed, you know, what your, what your spouse would expect to receive if you were passed away. And absolutely, you would have two Social Security checks, and now you're down to one Social Security check. And, of course, it's obviously less income. But, you know, I hadn't even thought about the fact that more taxes. I mean, it does seem messed up, doesn't it?
But it's the way it is. More taxes on the distributions of the IRA that you should have started taking in your 60s to plan this stuff well. And also the standard deduction cuts down to about half.
You know, it's like from 27,000 for people over 65, for a married couple, down to like 14,000. So this whole thing is slanted against single people, unfortunately. And, you know, I know we're talking to a lot of married people, so then you could say, well, it favors married people, and if it favors marriage, well, great. I mean, you take advantage of it where you can, but when you have a single person and a widow, that's kind of like who we're looking out for. You know, I'm trying to do that in the planning, and I want to do that. Yeah, and the other challenge for many widows is, you know, my best friend passed away, and we both, we've been working with Edith, my friend.
And she just feels so unsure about every move that we suggest, because, you know, and that's part of what you leave your legacy with your wife, if you're the one doing the planning, is once you're gone, a lot of times the wife doesn't feel all that secure and making decisions, right? Yeah, I mean, I have a friend of mine who's just turning 65, and he has that concern. I mean, because we're kind of talking about everything. He's buying Medicare, and this guy's got no financial problems at all. I mean, he's just, he's got millions. Yeah, and both in an IRA, and then outside of there. But, you know, and he kind of told me it's all taken care of, but could just deal with the Medicare, but it's really hard to deal with Medicare with a well-to-do person, because by the time we're just talking about everything in Social Security, pretty soon I'm into his IRA, and then, you know, I'm just showing him how much taxes he's going to pay. But he's not the one I'm worried about.
Well, I kind of am, because I'm his advisor, but I, you know, he's going to be fine. But then his father, who's single, and been single for a long time, is like 90, and his father has a pretty big IRA, because he'd just taken the minimum, and that's kind of all the money he has. And he was telling me, this friend of mine, that he's going to inherit this at some point, or half of it, and split it with his sister. And then I was just pointing out, is your dad is probably in the 10% or 12% tax bracket, because he's not taking much out of that IRA. And he's going to give you all this money that he saved up after his death by beneficiary, and then you're in the 37% tax bracket. And wouldn't it make sense for you to go to your dad, and have him start pulling some of that money out, if he just pays the taxes at those low rate, and throws it into a savings account, and then leave that to you? You leave after tax money. So this applies to wealthy people.
It applies to not so wealthy people. We want to mention that you can go to cardinaladvisors.com, and there, look under the Seven Worries tab, under Taxes, you'll see the video that, the YouTube videos there, as well as the show notes, and those brackets that Hans is talking about, and of course, as always, it's cardinalguide.com. I'm sorry, did I say Cardinal Advisors? Yeah, that's all right. No problem. I'm glad you corrected it. It's cardinalguide.com.
And then the YouTube is Cardinal Advisors. All right. Well, thanks again, Hans.
Great show. Thank you. Finishing well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors, and Hans Shile, CFP, sell insurance.
This show does not offer investment products or investment advice. 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' bestselling 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.
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