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. Oh, what another great show God has lined up for you today on Finishing Well with certified financial planner Hans Scheil. We're talking about retirement savings, taxable, tax-deferred or tax-free, and that may seem to be too good to be true, but you know, when you really think about it, heaven does too.
And I was thinking, that sounds a little too good to be true, but I'm so glad it's real, and I'm so glad that tax-free is real, as you'll find out today. But as I was thinking about this, you know, these three items is not unlike, you know, taxes, or the taxable idea is not unlike hell. Like, you know, we just, no freedom there, you know, no hope for much, but that's, you know, the one place where you are. If you don't have Jesus, you know, you've got nothing really all to look forward to but death. However, if you are in Christ and you've accepted him as your Lord and Savior and, you know, have him in your heart and you're walking with him, then you're still, you got some stuff, but it's heaven-deferred, right?
It's kind of like the tax-deferred idea. It's heaven-deferred because, you know, unfortunately there's still sickness, there's still pain, divorce, oh, you know, horrible things that go on. So it's not, you're not quite there, but then, oh my goodness, right? There is a point when there is heaven. And in heaven, you know, no more tears, no more hate.
Walking with Jesus and your family and those that God has brought into your new family, it's going to be amazing for eternity. And even though it sounds too good to be true, there is such a thing as tax-free savings. Like, you will never, ever, ever pay tax, right Hans? It's amazing that people who don't believe that when I tell them that on the front end until I explain it, or people who will challenge that, well, you paid tax before you put the money in that Roth, so it's not really tax-free. It's, you know, and I would say, well, okay, so it's now tax-free. It wasn't tax-free before, but once you put it in the Roth or convert it into a Roth, it's now tax-free, okay? And same with life insurance cash value is, you know, somebody could say, oh, that's not tax-free because you had paid tax on that money before you paid it into the insurance policy. And then, you know, it is, I guess, tax-free after it grows inside the life insurance, and so people start picking up points.
You know, when anything sounds too good to be true, there's going to be people trying to push it down, and there's conditions on all this. So I don't want to just start harping about tax-free in the beginning of the show here. Why don't we start at taxable?
Why don't we start at the bottom of the heap? And it's not saying that taxable money is bad. I have money in a savings account and a money market account, which is cash. I'm not getting paid real good interest on it, but it's liquid.
It's available. I can buy things with it. I can loan it to my kids to buy a house. And so I keep a sizable amount of money in a taxable account, and I just earn interest, which isn't a lot, but it's a lot of money in there, and then I pay taxes on it. Nothing's wrong with that. It's just so you understand, interest earned on a taxable account, the taxes are due right now, whether you spend the money or not.
They're due for this year, 2025. That make sense? Oh, yeah. I know. I get those statements every year from your bank or whatever, you know, investment company you got.
It's coming. But again, I love what my boss, Royce Reynolds, used to say. He owned a crown organization at one point in time where this dealership was losing all kinds of money, and he goes, oh, I long for the days where I pay taxes again. Because if you're not paying any taxes, well, you know, in that case, it was you're losing money. So your money in a taxable account, the money in my taxable account, I've already paid taxes on that money, so I can draw it out and spend it, use it, save it, invest it. So why this is important is we got to understand how and where all your money's positioned.
And so we can look at that. And then secondly, we can reposition some of your money. And when we put together a financial plan, you know, the goal is to reduce your taxes over your lifetime or the rest of your retirement. So the taxable money is yours, free to use it. The interest you earn on it or the gains that you earn if it's stock, you know, you've got short-term capital gains, which is you buy a stock, you sell it five months later for more than you paid for it, that would be a short-term capital gain, and it's going to be taxed at ordinary rates.
If you buy a stock and you hold it for 10 years, well, then and then sell it, that's going to be a long-term capital gain, and it's going to be at a lower tax rate. So we don't want to get too technical on taxes. It's just money in a taxable account is going to be taxed either when you sell it, if it's a capital asset like a piece of property or stocks or bonds, or if it's interest on an account, it's going to be taxable as you're earning it.
And, you know, don't need a lot of explanation. Most people think all money is like that, but that's taxable. So let's move and let's define tax-deferred. And with tax-deferred money, that's an IRA, a 401K, a SEP IRA, you know, where you're putting money in, and it's pre-tax.
So people think this is wonderful, is that I contributed $10,000 last year to my 401K, my company matched part of it, and I got another $4,000 from them. So I got $14,000 that was put in there, and I didn't have to pay any taxes on that money. I had to pay Social Security taxes, actually. They take those out, but no income taxes. And so the money is sitting there, pre-tax, and then as it grows, you don't pay any tax on it then either. It's tax-deferred. And so most people that come to us in their 60s, this is where most of their money is. It's kind of like a forced savings plan through their organization, through their employer. And we have people that have balances, you know, over a million dollars now. These balances and these things was $400,000 ten years ago, and it's, you know, now $1.2 million because of what the stock market's done and their later working years.
So it doesn't matter the size of it. It's the whole thing is yet to be taxed. That's kind of what the tax-deferred, meaning it's not taxed now, but they're going to get you later, or they're going to get your heirs when you pass away. I mean, if you're able to keep a lot of money in one of those accounts and avoid the taxes just by doing required minimum distributions, you hand over what could be a tax bomb to your beneficiaries. So talk to me a little bit, Robbie, about tax-deferred. Yeah, you know, tax-deferred, when you're thinking about like an IRA, you're taking money off of your income, and so you're lowering your tax bill for that particular year on top of the fact that it's going into an account where the income that it makes on interest or whatever, you know, it may be invested in, that income is also tax-deferred. So you got, you know, sort of an IOU going on that you still, I owe the government for what I made in that previous year, plus I owe money on whatever income I made on the account during the period of time I made it. That's the way I look at an IRA, although, you know, it's a wonderful investment tool from a standpoint, a lot of people have certainly used it well and acquired a massive amounts of wealth in it, but it still amounts to an IOU when it comes to the tax side, right?
Well, it does. And it doesn't matter whether it's good, bad, right, wrong, whatever it is, most people coming to us, if we took their financial assets, you know, it's 80, 90% of it is in this pretax or tax-deferred IRA 401k. That's where they have the bulk of their wealth. And so our job is to help them live off of that plus social security plus any other money and assets they have over a 20, 30-year retirement. And it's just amazing if this isn't real well planned out, how much of that bulk of that money that's in tax-deferred is going to end up in the hands of the government. Darrell Bock Yeah, that's part of why we want to get to the third category, I suppose, right?
Robert Hagstrom Yeah. So the tax-free is, like I said in the beginning, is a lot of people don't even know that this exists, but it's called a Roth IRA. I mean, it says you've already paid the tax on the money, on the contribution, and then so you can draw out the contribution, no taxes, and the earnings on this thing over time, that's also tax-free. So it's like a tax-free savings account. Now, there's some limits on that. And I guess in the second part of the show, we'll get into that, some of the limits, how much you can put in there and what the rules are and when you can take it out, that sort of thing. So there is a category, and there's also life insurance cash value, where you can buy cash value life insurance and put substantial money into this. It grows inside of it, and you can actually access this tax-free during your lifetime.
Yeah. We got some really good stuff to share with you coming up. So we want to remind you at this point that this show is brought to you by CardinalGuide, cardinalguide.com. And if you go to cardinalguide.com, you're going to find the seven worries tabs, and one of those is retirement savings. And so we got a beautiful video there at cardinalguide.com under that particular worry tab, and there you're going to find show notes and all sorts of detailed information, as well as a beautiful board to see how all these things work. And again, that's under the retirement savings tab at cardinalguide.com, as well as Hans' book of tremendous resource, The Complete Cardinal Guide to Planning for and Living in Retirement, and the all famous Contact Hans and Tom page, where you can just find out about these things and how you may want to use these different types of savings accounts to your benefit. And so when we come back, we've got a whole lot more taxable, tax-deferred and tax-free retirement savings.
We'll be right back. Investment advisory services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM, but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. Welcome back to Finishing Well with Certified Financial Planner, Hans Scheil.
And this was where it gets really fun in the show. Hans, you've got some real life examples of how people moved these tax-deferred monies and this IOU money into a tax-free, where it not only would be tax-free for them, but for their beneficiaries over a period of time as well, right? Yeah. I mean, it's just the emphasis with the tax-free bucket is to have you be able to draw an income in your retirement and not have to pay any income taxes on it. I don't find too many people that that doesn't make them happy. I mean, it's just when you kind of look at your paycheck that you get every month while you're working or twice a month and you look at what happens to that from taxes. And a lot of people think that that has to continue in retirement. And so they think they need a lot more money than they really do in retirement because they're thinking that they're going to get taxed in retirement the same way they're taxed as a worker. And some of those taxes on your paycheck are just not going to be there, like your 401K contribution.
That's not going to be there. And your state income tax, excuse me, your Social Security tax, which is pretty substantial, and Medicare tax, and that your employer matches, that's not going to be there. The only thing you're going to have to pay is you're going to have to pay federal income tax and state income tax on the amount of income that you draw in addition to your Social Security. And if you put money over into this tax-free bucket and then draw from that later in retirement, you're not even going to have to pay federal income tax or state income tax. So the ideal situation is what we do in financial planning is to try to get you to have the right amount in taxable. If the taxable is kind of there and you can use it and spend it, you need an amount of that. Then the right amount in the tax deferred, it's not saying it's bad that there's tax deferred, it's just going to be taxed later. And then we need a plan for when we're going to make withdrawals and how much out of the tax deferred. And if we can get some money over into the tax free, then we've got two buckets to pull from every year. We can say, well, how much do we want our tax return to show? Well, we're going to pull that amount out of the tax deferred. And then if we need more than that to live, we're going to pull the money out of the tax free.
And you can pick your tax in retirement if you have the right amount of money distributed in both of these buckets. Now, we don't recommend the tax free to everyone. So don't get that idea that we're just showing that the tax free is something you got to have.
I mean, I'll give you an example of somebody that we would not recommend that to. Let's say that somebody has $50,000 in taxable, they've got $300,000 in tax deferred. And maybe they have nothing in tax free. But boy, they want it once they've listened to this because they're paying a lot of taxes.
And then they're retired or they're fixing to retire. And they've got a plan to draw their Social Security. And then they want to know from us how much can they withdraw out of the tax deferred and be safe that they're not going to run out of money. Because 300,000 when we got to stretch that over a 20 to 30 year retirement, it's not a lot.
Okay. And it sounds like a lot. But when you got to stretch it and a lot of folks don't want to risk being broke at 80 because they drew out too much out of their tax deferred account. Well, somebody like that isn't going to pay a lot of taxes, period, because they're going to have their Social Security. And then they're going to have some tax on that money they're pulling out of the IRA. But it's not going to be a lot of tax, if that's all they have. Okay.
Right. Now, let's take another example. Let's say that somebody has, you know, tax deferred. And then they've also got Social Security and they have a pension. And so they're sitting here saying, well, we don't really need to take anything out of that tax deferred.
We're just going to let that grow. You know, and we see this a lot where people are able to take their Social Security checks. They got some money in taxable.
So we're just kind of live off of that if we need to buy something or whatever. And we're just going to let that tax deferred just roll. And you can do that at 65. And you're going to pay the piper when you're 73. Because when those minimum distributions, RMDs hit you, and that $1.2 million has grown to maybe 1.7 million by the time you're 73, you're going to have a RMD of 68 grand or thereabout in your 73rd year. And they're going to send the money to you whether you need it or not.
And boy, you should hear those people gripe. You know, I have to pay taxes on this money. Well, the government has a plan to tax your money. And they're just fine with you if you just leave it there in the tax deferred because they're going to get you later. And those RMDs just add up and add up and add up and add up.
And then by the time you get into your 80s, then they're going to be much more substantial than that as the money keeps growing. And so this is a problem that people haven't really thought through. And then one of them dies.
We got a couple. And now we got the survivor paying taxes at single rates. And boy, when I show this to people, that's when they really wake up and they say, you know, now your spouse or you when the other one has passed away could live on for many years paying a high tax rate on these required minimum distributions that go down. And by the time we pass this on to the kids, whatever gets passed on to the kids has got a big tax problem as well. So this is the kind of person that we're going to get together a strategy to get as much of that money we moved over year by year into the tax free so that when they get later retirement, if they want the money, they can pull it out and use it.
If they leave their spouse behind, and they can pull it out and use it, or they can pass it on to the kids, it's going to be tax free to the kids as well. That makes sense? Darrell Bock Oh, absolutely. And I even, you know, I love what you did with your son where you convinced him to start out earlier. And a lot of folks that are younger that are listening or even I myself, right, I converted my 401k over to a Roth 401k so that, you know, I don't have to make that transfer, you know, later on, it's just an ongoing thing with the way that my savings is going, right?
Dr. Gerry Breshears My son is, I think he was 25 or 24 then. And we had a little fight, he's an engineer, he's very sharp. And so he checks everything I teach him out on the, you know, he reads and researches, he or somebody else's opinion. And somebody had convinced him that he's better off just taking the money out, not paying taxes, putting it in tax deferred, because he's going to have more money in there. And sure, it's going to get taxed. But he's putting in more money with the tax deferred. I said, Well, why can't you put in the same amount of money into the Roth?
And you just pull the tax money out of somewhere else. And then he sat there looking at that, and I showed him the numbers of that money doubling, and then he changed it back to Roth, you know, to all Roth and he keeps it up. But Tom's in the same situation. I mean, Tom just doesn't talk about himself very much. But everything Tom's doing is in Roth. And Tom started on our 401k here at like 28 or 29. And he's putting large amounts in and just, he's just not he's gonna have this big bowl of tax free money. But telling that to our listeners, I mean, that's great.
Tell that to your kids. But most of you, you've already got your money in tax deferred, and we can't move it all over at once. So that's what we do in our business here, if it's appropriate, is we'll get a strategy where it's not too bad on the taxes to get as much of this money moved over before you hit minimum distributions, so that you can enjoy a, you know, a tax free retirement.
Darrell Bock And another beautiful one that, you know, you introduced me to a couple shows ago. And so I started researching it. And I went, Oh, look, this is really sweet that, you know, my wife had a whole life or a cash value life insurance policy, you know, for $100,000. And, you know, we essentially thought we were an easy street, because we just didn't have to make payments after we made some payments into it for a few years.
And it kept building. And when you started telling me that, man, I could create another tax free savings account over here. And, you know, it has a decent interest rate. And as I just begin to make payments on that thing again, again, I'm creating more savings for her, you know, because likely at some point in time, she's going to need that.
James Woolsey Well, yeah, you both might need it. Or, you know, you could access it pretty quick if you needed to, just like a savings account, but it's in a tax free account, you would just borrow the money out of the life insurance. So I think it's pretty cool that we went through that you applied it to yourself. And now you're going to start stuffing money in there.
And I gave you some parameters on that, based upon some numbers you got. And we can do that for some of you that have life insurance contracts in force. We can show you how you can stuff money in there, and then possibly just get it back if you need it. For those of you that don't have life insurance, you can still buy life insurance in your 60s and 70s and overstuff it with cash value. And there's a way I like the idea of having part Roth IRA, part cash value life insurance, and mixing it up a little bit, and paying those life insurance premiums out of deductions from the IRAs. Deduct from the IRA, pay the taxes, the remainder goes into the life insurance contract. And then doing the same thing with a bulk Roth conversion, paying taxes on that, and building up two kinds of accounts in the tax free area. Darrell Bock Absolutely wonderful stuff.
Really, really cool. This taxable tax deferred, tax free retirement savings, it's all there at cardinalguide.com. If you go to cardinalguide.com, you're going to see retirement savings there. And you click on that, you'll see a video right along the same lines with the board show notes and all those kind of things at cardinalguide.com, as well as of course, Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. And that book is just a wonderful resource to have on all sorts of subjects, to have sort of as a guide whenever you may need to know something. And then again, there's a contact Hans and Tom page, which comes in so handy when it comes to figuring out these kind of things and setting up these kind of investments for your family. Absolutely fun stuff.
It's all there at cardinalguide.com. Great show, Hans. Hans Scheil Thank you and God bless you.
Darrell Bock The opinions expressed by Hans Scheil and guests on this show are their own and do not reflect the opinions of this radio station. All statements and opinions expressed are based upon information considered reliable, although it should not be relied upon as such. Any statements or opinions are subject to change without notice. Investments involve risk and unless otherwise stated are not guaranteed. Past performance cannot be used as an indicator to determine future results. Any strategies mentioned may not be suitable for everyone. Information expressed does not take into account your specific situation or objectives and is not intended as recommendations appropriate for you. Before acting on any information mentioned, please consult with a qualified tax or investment advisor to determine if it's suitable for your specific situation.
Fishing Whale is designed to provide accurate and authoritative information with regard to the subject covered. Investment Advisory Services offered through Brookstone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Cardinal Advisors are independent of each other.
Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Cardinal Advisors is not affiliated with or endorsed by the Social Security Administration or any other government agency. 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.
