This is the Truth Network. Um 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, IRAID, long-term care, life insurance, investments, and taxes.
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Well, welcome to Finishing Well as certified financial planner Hans Scheil. And today's, we have an interesting show, Income Tax Planning Dilemma. I love dilemmas. When you have big questions, you can get bigger answers. And this has to do with at age 68.
And when you think about it, I was thinking about this, that when Zacchaeus encountered Jesus, it was an immediate transformation of his finances. You remember the story that Zacchaeus saw Jesus? He was a tax collector. He was the head tax collector. And as a result, he started refunding money that he had extorted.
Interestingly, he became more generous and he created a cleaner legacy from a standpoint of, I'd hate to think what his heirs were going to inherit in the way of. uh bad s you know fruit but but based on what he did um Man, I bet his kids were proud to be that he was their father. And that's kind of what we're trying to do as we finish well right on. And part of, you know, solving some bigger questions when you've got them on your plate, like this tax dilemma you guys ran into. Yeah, so our example.
Today's show is a uh gentleman and his wife Um that um are They've become very well to do. They started with very well really was nothing. He came from a foreign country and started up a physical therapist and did his job, saved his money. Got into his 401k and he started this. these family care homes.
And his wife was really the the person behind that and then him being a physical therapist and He he he kinda made the money and then she ran this business you know, day to day, which is Just like the modern day family care homes where there's uh three or four or five people get receiving long-term care. in what was previously a residence. Yeah, and they owned four or five of 'em. that they've sold the business a few years ago.
So the business has new owners, but they still own the real estate. Again, this this gentleman and his wife have accumulated quite quite a large fortune. Um And they've done a lot of the right things. and how they've invested it in real estate and tax. preferences and depreciating it and then of course have accumulated a lot of money in his 401k.
And then also outside of the 401k. has just invested very well.
So he he's got plenty of money and they They live off of About five grand a month. I mean, these are not. They they they they could. They could spend much more, but they really don't have any desire to. Um So As I do with a lot of clients, I'm asking them, well, what's the money for?
Meanwhile You know, wh what's the purpose behind all this money? besides just having it and You know, we worked and worked and worked and worked. First of all, his wife is 10 years younger than him. She's just fifty-eight, so Really both of them and they're in good health. Potentially she's got another you know, another 40 years or so.
Um him thirty or some more years.
So obviously to take care of them. But there's Social Security checks. are going to be enough. Over time to just support them, and it's almost like what's the purpose behind all of this?
Well, And it's it's to leave to their kids and to leave a legacy and I've met their kids and Um so that's that's the purpose is you know, estate planning and Uh leaving behind and putting their kids in a good situation. Um So With that being said, We've done a lot of things for him. Yeah. One of those is Roth conversions. 'Cause he he he he decided that he's gonna be Better off.
converting this very large IRA Uh pre-tax IRA And a raw over time before he gets to minimum distributions. And then there'll just be a hunk of money that'll grow. that'll eventually go tax-free to his kids. to his wife if she survives him, and then to the kids. then nobody's ever really going to touch that Roth money.
Um unless they had to, which I don't really foresee that.
So am I making sense so far? Yeah, absolutely. And, you know, again, the idea that he's got either a 401k or a traditional IRA is money that. essentially he's gonna have to pay tax And apparently, it's an extremely large one. And so he's been doing these conversions into an Roth IRA so that.
He's going to be in a lower tax bracket. Right now, or in other words, what he's going to pay in tax with tax rates now is a better strategy than. Leaving that money sit there till the end?
Well, yeah, and where he's a little different is a lot of people doing these Roth conversions. are planning on pulling this money out when they're Like 80 or 85. and having tax-free income He's probably not going to do that. And his wife is probably not either. After he dies, the So this is really to get the money in a Roth.
So that it can grow tax-free, because this guy's been very good at growing the money. I mean We don't help him pick his investments. He does that all on his own. He has us look at it and say, ask us what we think. But The real reason for the Roth conversion is to get that money away from the tax man.
And it's also to reduce the size. of his taxable estate. Because, you know, th this guy is in such a position there You know, the the They've got so many millions. that estate taxes or consideration especially if one of them lives another thirty or forty years. Um They could be way up there in wealth.
So He he he wants to avoid the estate tax. He also wants to reduce the size of his estate now. Um And then to the extent with the IRA, he wants already the taxes paid. on that money so when it goes to his kids and they have to distribute it to themselves over ten years that they're not going to have to pay any taxes doing that. Is that making sense?
Yes. Absolutely. Yeah. Okay, and this is just one of many strategies that we have going on with this guy. And he also has a CPA that he's dealt with for more years than he's dealt with us.
And the CPA is right there. Where he lives in California. And he also has an attorney. that he's had for a number of years. The um They have the privilege of being right there, and he goes over with his CPA.
Just about everything we advise him to do. And his CPA on Roth Conversion just said I wouldn't do it. The CPA is against Roth conversion. And that didn't stop him because The CPA doesn't really look at his whole picture and look down the road and look 30 years. They're just looking at right now, and to them it makes no sense.
to pay 150 grand in taxes. that you can put off till later. And so It's just interesting that he's going to talk to all these professionals, including us. And then when he's all said and done, He's ended up doing what we advised him to do. Because we're looking at the big picture.
Okay. Absolutely. Now So, and just immediately here, there's this Roth conversion last year. He took about three hundred grand in his IRA and just converted it to a Roth. which is just an entry.
It's just a I mean, you just do something and you he didn't withhold any taxes. See, when most people do a Roth conversion, they don't have the money sitting on the sidelines. to pay the taxes. they pay the income taxes on the conversion. right out of the money that's in the IRA.
So it never makes it to the raw.
So like in his situation He could have taken the $300,000. that he converted and he could have withheld like $100,000 of it for taxes. and only 200,000 would have made it over to the Roth and a hundred thousand of it would be gone. 'Cause it would have gone to the government. For taxes.
Okay. He didn't do that. He got the whole 300,000 over there and now Just about a month ago. When we did this show, he's calling me up and he's saying, Okay, Well now I got a raise. a hundred and fifty grand.
to pay the income taxes. on stuff I did last year. How much tax am I going to have to pay? on the 150 grand He had just come back from the accountant who probably told him you shouldn't have done that Roth conversion.
Okay. I mean, whatever. Because you're going to owe. 150,000 and in taxes, okay? I'm not sure all of that was Due to the Roth conversion, but nonetheless.
So now he's wanting to ask me how much tax am I going to owe on the 150 grand? Yeah, and I didn't put all this in the video Because Uh th this video could be four hours, you know, so I'm just trying to go through this quickly. And this is where the dilemma comes in. is now He's got to sell stocks. in his money that's outside of his IRA that's just been growing.
He hadn't been paying taxes because you don't pay a capital gains until you actually sell the stock. And so he's going to have another type of tax bill come and do. It's called capital gains.
So I told him I'd said I'd make a video about it and I'm going to send it to him. I haven't sent it to him yet. But All of you, if you're interested in really learning a lot about this, go find the video on YouTube. and you can get all the facts in a little more detailed explanation. But the gist of it is Now he's got to sell enough stock to raise maybe like $200,000.
to pay fifty thousand dollars in withholding tax to net $150,000. to send it To both. the federal income tax people, the IRS, and the California state income tax people.
So Um And he just wanted me to give him a little projection of how much stock he should sell.
So Yeah, that's about it. Does it make it sound so far? Oh, absolutely. And since you mentioned the video, this would be a great place to remind you that this show was brought to you by Cardinal Guide, CardinalGuide.com. And if you go to CardinalGuide.com, you can see that video.
And this show, it's under the Tax section, I would imagine, right? Income tax? It is. Yeah, so you would go to the income tax under the seven worries tabs. And when you look at the tax section, you're going to see this video with a beautiful board that goes into great detail on how they arrived at the way that they were going to plan for these different kinds of taxes.
We're going to talk about in the next segment. Apparently, there's four different kinds of taxes that kind of interact with each other. And you can kind of see the advantage. And I really think the enjoyment of doing good planning good stewardship for the future. And we've got all that coming.
But again, you can find it at cardinalguide.com as well as Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, Since I know I don't want to try all this stuff at home, how to contact Aunt Tom to get this kind of planning? It's all there at CardinalGuide.com. We'll be right back with a whole lot more. Income tax planning dilemma at age 68.
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 Han Scheil, and today's show: income tax. planning Dilemma. It's amazing when we reach dilemmas sometimes, Hans, how much we can learn.
Well, yeah.
So uh this going back to this gentleman and his wife. We live in California. And they're dealing with Really four. separate tax structures or taxes, the federal ordinary tax the federal capital gains tax. the California state income tax, which is high.
But it's still in most states that have an income tax, it's just kind of a little nuisance over to the side. And then you've got this thing called the net investment income tax. which kind of comes in and rears its ugly head. Um And so this is all brought in by the fact that this guy's calling me up. And he's saying, okay, so you I got involved, I did the Roth conversion.
Yeah. If he hadn't done the Roth conversion, his income for last year. for he and his wife. would have been right at about $200,000. which they were in the 22%.
Tax bracket. Um federal And for the California state bracket, they were up at like 9%.
So still pretty high.
So you put 22 and you put 9 together, they were paying about 31%. on their last dollars, not on their average dollars. But then he chose to do a Roth conversion and he did another three hundred thousand dollars of Roth conversion. last year.
So he, by choice, brought his income From 200,000. to five hundred thousand dollars. And that $500,000 brought Heaney's wife up into the top. of the 32% bracket. Federal.
Um A good bit of that, they went, it was still in the 22, then they went into the 24, and then the last 100,000 went into the. 32% bracket. And then still with California, it's about 9%. that they got on top of that. And so now He's at the accountant in January and meet with the accountant who who didn't think Roth conversions were a good idea for him.
Um And so now he's at the accountant getting ready to do the tax return for 2025. And the accountant looks through there and says, well, you're going to owe taxes of about $150,000. Um I mean, just because he had done quarterlies and all that kind of stuff, but he needed another 150 grand.
So now he's back. Looking at Uh okay, so I got to raise money. And the place he's going to raise money is he's going to sell some stock. And he owns a lot of stock. that he bought very low.
you know, five, ten years ago. And now it's very high. I mean, it's like four or five times kind of.
So if he's going to raise. $200,000. You know, his basis in that stock is probably only 20 or 30,000.
So he's going to pay substantial. federal capital gains taxes, and he already knew that. and the federal capital gains tax Right. is just 15%. Um Is he's not over the threshold for that.
So you go 15%. That doesn't sound too bad. But then You know, he's also got to pay California. State income tax, they don't care whether it's capital gains or not. And that's about another 9-10%.
So you can just put that right on top of it.
So now we're up at 25%. And then I'm not going to try to explain it on the show. You have this thing called the net investment income tax. But she's going to get into that as well. And that's going to be another 3.8% on some of his income.
and all this capital gain counts toward that.
So When we put all that together, You know, he he's going to be up around 30%. Tax. On his capital gain. which is nothing more than raising money to pay for last year's Roth conversion.
Okay. And you'd think this guy would have a bad attitude toward me. this point, but he doesn't. I mean, because he gets the big picture. He he's worth enough money and he's saved so diligently and he's avoided these taxes over the years.
But he's smart enough to know they're coming at some point. And he doesn't want them to be all levied on his kids. when he dies. I mean, because that's really what would happen here. Yes.
He and his wife could get away with postponing a lot of these. for a lot of years given their low need spending money and they could just hold all this stuff. but he would be turning over a huge tax burden. to his kids and he doesn't want to do that.
So All he wants from me is professional uh advice to First of all, decide whether he should do, because we don't have him doing anything and everything. We just have him doing certain things. a certain amount per year. to create a better outcome. 20, 30 years in the future.
Um And then He wants to know if he should do these things or not. And then once he does them. He wants to do it in the most least painful way as far as taxes, and he wants a little estimate from me. of kind of how is this all going to fall out. Make sense?
Oh yeah, and I I love the story in the video where He ran the whole scenario by you. And as I recall, he said, I don't know for sure, but I think it's going to be about 15%. And then. After Tom puts all this stuff in the computer and I listen to all these numbers, I was like, man, there's no way in the world that's gonna come out to 15%. And then when Tom finally gets all done with it, he goes, Oh, and it's about 15%.
Yeah. Yeah. Well And so I've gone over all the bad stuff. There's things working in your favor, and there's some things you want to stagger from year to year.
So I mean, so so now he got the big Roth conversion or 300,000, but he's done 300,000 every year for like three years.
So he's already gotten 900,000. But this IRA turned into a raw And then there's probably still over a million of. IRA that he hadn't paid tax on. And that's still growing. And so we're going to do this for many more years.
But I have a feeling this year Okay. He is not. probably going to do as much. because he's going to have the 200,000 that he has every year of income. Plus he's going to have this capital gain.
in 2026.
So we might do less Roth conversion. This year we might not. He might say, no, just let's let's go ahead and do it. Let's leave it at 300,000. I want to stay on track and then we'll be able to show him.
Tom will get out like you watched in the video. I mean That's just a mock-up tax return, which. Tom can do in a flash. Um And we've used that with him on Zooms just. to make decisions.
So Yeah, that's r that was really helpful. And again, to look at all those different angles and the way that Tom put them together because. You know, there's all sorts of different things about those four you know, different kind of taxes. Yeah, and I want to talk about the fourth one for a second because. Just talk about the net investment income tax.
This has only been around since. I think 2012 or 2013. And it was a way to raise money for Medicare and the Affordable Care Act.
So it was a way of taxing the rich. When they weren't watching, okay, I mean, essentially, because it's got a threshold. of two hundred thousand of income for individuals And for married couples filing jointly, 250,000.
So unless you break that. threshold you don't pay any income tax, any net investment income tax. And IRA money doesn't count like a Roth conversion. doesn't count toward it counts toward the 200 or the 250. but you don't actually pay the tax on it.
You only pay the tax on investment income. and this whole list of things.
So it's a complicated thing. I put it on the board. But it absolutely applies here.
So anytime Your income is high, and you make money like I paid it on my taxes. I only had about I had like $9,000 in interest. on a savings account. that I have are a money market account. that pays high interest.
So I paid almo like 380 bucks. in taxes Um let's call it ten thousand. of interest that I had in 2025. Um because I was over all those thresholds.
Now, it was only on $10,000. Thank God it wasn't on the rest of my income because it's all excluded. But in his case, You know, like probably for this year like 300,000 of his income. is going to fall under the net. Investment income tax, so he's going to pay.
$10,000, $11,000, $12,000. just for this one tax nobody's ever heard of? Wow. Yeah. It sounds sort of like the NIV tax.
Yeah. Just a little biblical humor there, sorry. That's funny. That's funny. Well, it's got such high thresholds and You know, who's going to stand up for those people?
Oh, they're rich people. We don't really care. Just let them. You know, and it's uh I mean, I'm not going to get political about this. A tax is a tax, but it's just kind of over there.
and it rears its ugly head. in some situations Yeah. we can sit down in advance of you making a move. and show you what it's going to cost you. Including that.
And so this gave us an opportunity in a video. to talk about the net investment income tax. and show where it's really applying to somebody. Exactly. That's yeah, I'd never heard of it before th this video, so Of course, not exactly in that tax break.
But yeah, and so let's look at another thing real quick: the federal capital gains tax rate. Yes. There's actually a 0% bracket for married couples. If you have $98,000 or less in a capital gain, say you had a $50,000 capital gain. you're married filing jointly.
Your tax rate on that is 0%. But there's only one problem. is they're not going to put you in the The only $50,000. What they're going to do is they're going to calculate your tax bracket. First, by the amount of your income for the year.
Once again, we've run out of time before we ran out of show. But I hope Our listeners can see that You know, these kind of tax planning ideas and the way these things interact is all the more reason that you ought to find out more about CardinalGuy.com. At CardinalGuy.com, you're going to find these seven worries tabs, and you can see from what we were talking about today, How all these different things come into play into your taxes, your income, all the different things that we talk about every week on the show. Again, it's all at cardinalguy.com, as well as Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement. And of course, because I know I don't want to try this kind of thing at home, that's when you contact Hans or Tom with the Contact Them page, all at CardinalGuide.com.
Great show, Hans. Thank you, and God bless you. 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.
Finishing Well is designed to provide accurate and authoritative information with regard to the subject covered. Investment advisory services offered through Brookstrone Capital Management LLC, abbreviated BCM, a registered investment advisor. BCM and Carpenter 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.
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