Tax Planning: No Pain, No Gain

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You're listening to the Truth Network and truthnetwork.com. Welcome to Finishing Wealth 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 Wealth, we'll examine both biblical and practical knowledge to assist families in finishing wealth, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Wealth. Welcome to Finishing Wealth with certified financial planner, Hans Scheil.

Today's show, kind of a humorous title in my book, taxes, in tax planning specifically, tax planning, no pain, no gain. And it's just, it's a shame, you know, Hans, that there's so much a life that has to do with, you know, delayed gratification and taxes are no different. Well, yeah, and the walk in the faith. There's a lot about delayed gratification. Yeah, yeah, I've been thinking really over the last few weeks, John Eldredge challenged me with this, you know, our people ambivalent about the return of Jesus and really, you know, talk about delayed gratification. You know, Jesus is coming, that's the good news. And if I begin with the end in mind, knowing that I, that Jesus is coming back, if I really want to look at the moment that that happens, oh, wait a minute, I got a few things I need to attend to. You know, I have these friends that I really haven't witnessed to.

I have my kids that I've been praying for and, and all these things that I'm not absolutely certain about. So it's interesting with massive change, you know, comes some fear of loss. Well, it comes with a lot of fear of loss. I mean, that's why people don't change. And, you know, when you relate that to my work, doing financial planning, it takes a big person to say, you know what, I'm going to incur some pain right now, which is just sitting down and doing this stuff, making myself vulnerable to a financial planner, and to the whole system and, you know, making some changes in how I'm doing things.

That's going to come with gains. And unfortunately, we, as financial planners, we, we want to tell you all the wonderful things that are going to happen to you when you do financial planning. And what you're thinking about down in your heart is, oh, man, I got to go meet with the lawyer, I got to, he's going to ask me all these tough questions, I got to show him how poorly I've managed my stuff overall, I got to tell him about all my mistakes.

I mean, that doesn't sound like a lot of fun, and it's not. And that's what's stopping people from doing the things that they need to do to get ready for retirement, is the pain involved in just engaging in the process, making themselves subordinate to the, really to the process, and incurring some short term pain, or medium term pain, short, medium, for long term gain. Right. And then the beauty, like we talked about, is Jesus is coming, and it's going to be absolutely unbelievable. But there's going to be tears that have to come get wiped out of our eyes as a result of something. And when we really begin to process that, it's a huge, a huge change that's coming. And really, it's like that change is coming to our life, as I've discovered just this week with Medicare.

Two weeks ago, I discovered that with Medicare all on my own. Wow, there's a big change coming in my life. And whether I want it to or not, there it is.

You're turning 65 in October. Well, it's there. And so when we get to tax planning, I mean, the first thing I want to do is I want to just define that.

And many times, the best definitions come out of the opposite. So you got tax preparation, which is what most CPAs do. H&R Block will do it for you. Many people are preparing their tax returns themselves now, just using the online programs. But tax preparation is a history lesson. I mean, so you're, you're preparing your taxes. And it has, it involves a lot of certainty. I mean, you just, it's real clear, you made this much income in this particular year, and you had this much in deductions.

And this is what your taxes and this is how much you had withheld. And so it's all about certainty. And so when we talk about tax planning, we're not talking about 2020 and 2019 and 2018. We're talking about 2021 through 2030. And it's, it's a little late to be planning out 2021, we can still do some things.

We could actually do some things about 2020 if you came in to see us. But by and large, we're talking about the future and the future years, which is your retirement. And then when we get down, and we finish the process of financial planning and the tax planning section, it's probably going to involve some short term pain. Yeah, that doesn't sound good. So what are my cons?

What are my short term pains that are that are coming? Well, I mean, we could start with, like your social security check, all retirement planning starts with that. It doesn't end with that. But it starts with that is the first thing we got to do with any client coming in is say, are you on social security yet? Yes or no? And is your spouse on social security yet?

Yes or no? Okay, so if it's yes, then we're going to deal with what we got is you've already filed your taxes, I mean, filed your social security, and you're receiving a check. And, you know, we could possibly look at undoing that.

But for the most part, it's done, what's done is done. And then it may be that both spouses aren't in the same place, and they're not the same age. Maybe one of them is getting the check, the other one's not. So the pain is going to be the very first thing we might suggest to you is to delay taking your social security. I mean, I don't know whether we're going to suggest that or not. But if you thought you were going to start getting $2,000 a month, next month, or three months from now or whatever, and then we're going to sit down after we've done the plan, I'm going to say, you know, it might make more sense to wait until you're 70 or wait until you're 68 or so there's your there's your short term pain is that $2,000 a month that you were planning on, by your choice, you're going to not receive that.

I mean, so it's really like a loss. Most of the time people that we recommend delaying their social security, they've got other money like in a retirement account. So what are some of the short term pains with the retirement account? Well, it might be just making withdrawals to live off of. So you're going to watch that balance start going down, because you're going to live off that till you start taking social security.

I don't know, I could give you a whole list of them. We might sit down and we might start looking at you may still be working, planning retirement. And so we're going to delay social security, but we may delay social security even further than you thought, and push it out to 70.

There's some pain, you know, there's some loss. Then secondly, we may start talking about a Roth IRA or a Roth 401k conversion. So we may talk about paying the taxes now that you've been postponing all your life, so that we can enjoy tax free income later in retirement.

There's a loss for you, and some pain and some tears we got to shed. So a lot of people just or in a lot of cases, their beneficiaries would receive the tax free benefits of a Roth IRA. Because, you know, when the kids get the money, it's it's a difficult situation with it. Oh, yeah. I mean, a lot of people that do these Roth conversions, they end up not taking the money because they don't need it. They're living off their social security check and their other savings or whatever other income. And so it just sits there.

And then it's a wonderful inheritance for the spouse or their children and grandchildren, because it's, you know, now it's going to be a tax free inheritance. So here we go, you see how quickly we want to move over to the gains? I mean, I think, you know, we want to talk about the benefits of doing financial planning and your initial questions to me, let's talk about the pain here. And I think that's a good, a good topic to get on, because it's the pain of doing the whole process. It takes time. Well, it takes time, but it also takes a big person to willingly take on some pain, because what we most of the time, what people do is we avoid pain. I mean, we just, we put it off till another day.

We don't even think about it. And so what I want to be talking to the listeners about, to you about, if you're out there listening is doing financial planning is painful in and of itself. It just, I mean, you gotta, you gotta sit down and you gotta say, we need to do this.

You gotta gather a whole bunch of records. You need to come in and see us, or we need to do this over the phone, but we're going to get to know each other. And you're basically going to lay your whole financial life bare in front of us because we can't really make recommendations till we see where you are, what your tax situation is, and just everything, how you're invested, what you got preparing for the future.

And we're going to lay out your next 20, 30 years, 15 years, and then for you and your spouse, we're going to plan that out. And so that is painful. I mean, for most people, especially you're going to need to bare your sins in front of us. I mean, most people come in the door and they just say, you know, gee, I withdrew money out of my IRA because when I was 62, I got downsized and I went in the real estate business and I spent all my money that I had on that. So now I'm in my late 60s and 70s and I have a lot less savings.

I mean, people just need to help my son out, help my daughter out. My first husband passed away and I received these settlements. And then, you know, when I got remarried to my current husband, it brought on things that he had done and just we spent money on this, that, or the other thing. I mean, that's the stuff that's painful, even not just to tell us because we're in effect strangers, just that you're getting to know, but just for you to look at yourself and talk about it amongst each other, the whole financial planning process is painful, you know, for most people and even just thinking about doing it. And then what I will tell you is when people come in and they're finally doing it, I can just sense it.

They feel great. Yeah. It's like when you get sin confessed, right? You're bringing it out into the light where obviously you can begin to mourn that situation and Jesus can come in and comfort you. But if you're not going to mourn it, you don't get the comfort. Well, yeah.

And it's usually not as bad as you're thinking it is. I mean, just, so I have people giving me these, Oh man. And then, you know, I'm sitting there looking at it. I say, well, you know, this is what we got.

This looked fine to me. And so what we're going to come back talking about after the break is we're going to get a little more specific about tax planning. So, so what is it that we're going to plan and how is this going to be beneficial? So we're going to spend the second part of the show talking about what can you gain from this? Understanding that that maybe isn't going to draw you to it. It's really dealing with the pain that's going to draw you to the process. So it's not painful to go to cardinalguide.com.

I'm just telling you, just click on it and go right there. And there you can find Cons's book, The Complete Cardinal Guide to Planning for and Living in Retirement, which we can get you the PDF, the segment we're talking about today on taxes, all sorts of information there. And as Hans mentioned, we'll be right back with so much more on tax planning, no pain. No gain. 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. Today's show, tax planning, no pain, no gain. And we've been grimacing through the first segment. You know, it's kind of like this show, you got to go through the pain in order to enjoy the gain. And we're not quite done with all the pain, right? Because there's this whole thing on taking advantage of low tax rates.

Well, yeah. And so what we're talking about today is tax planning. So and it's part of a financial planning for us and with us, that we're going to sit down and we're going to try to make decisions. We're going to make decisions now that are going to reduce your tax bill. Or another way to put it is increase your spendable income throughout your retirement. And there is a way, I mean, my personal plan is to pay zero taxes when I'm in my 70s. Or if I'm not here anymore, for my wife to pay zero taxes in her 70s.

Okay. And the way I'm going to do that, I'm going to have a very large social security check. And she is as well. And then normally somebody like me would pay half my social security check in taxes or 40% of it just because social security is taxed. And it's taxed by your other income. So if I have a large other income in retirement that I plan on, and I've saved for, but the difference with me is that's all coming from Roth IRA income and life insurance loans on money that I've been saving for years. And I haven't paid taxes on the life insurance part. I've already paid tax on the contributions, but I haven't paid taxes on the gains. And the Roth IRA is the same way. I paid taxes on the contributions or I even did a conversion. But the point being, I'm going to have a big social security check and then a big other check.

And big is relative. And if I die, then my wife's going to have a big social security check as a survivor. And she's going to make withdrawals from those same Roth IRAs. And she's actually going to get the life insurance. So that'll be tax free. And so you can have this too. And it doesn't necessarily need to be large numbers, like I've spoken of.

I don't want to sound egotistical or bragging. By the same token, you endured the pain of paying the tax on the income in order to show that, put that money in a Roth IRA versus a traditional IRA, which you wouldn't have to pay the tax on. And so your balance in your Roth IRAs were not as high as people that didn't choose the Roth IRA.

However, clearly, you know, for anybody, if they had that situation, there was some short term loss of some kind in making the conversion. And you even went through that with a recent client. I had two clients, husband and wife, but they live in different towns, and they're on the way in as clients. And we had a meeting over in our Durham office. We're going to have another meeting, the second meeting. And so just, they were really just, Oh, man, we got this. And we haven't done this.

And we haven't done this. And just, you know, we did this. And it's just, you kind of get the whole thing. And so I don't take paper notes while I'm meeting with people, because I'm really focused on listening.

And then we've got Tom over here, taking all the notes, and he's taking notes extensively, and just probably 45 minutes, an hour into it. You know, I was just telling them, you know, you folks can do anything you want, because I just, I was making mental notes of their social security, their pension, really those two things. And both of them have social security and a pension. And by the time I added up those four things, I mean, it was quite a bit of money. And so I just gave that back to them.

And I could see them just sitting back. I said, we can't do anything about those other than maybe delay social security. So, but that was fine for them, because they're both still working, and they're both in their early 60s. So, but we don't have control over your pension. I mean, that's going to come in every month, and it's going to come in as long as you're alive. And then I went over the survivor benefits, just quickly.

I'm not giving them financial planning, but I'm just giving them a sense to really make them feel a little bit better. We haven't even talked about your savings yet. And then we get over to the savings, and they've got, you know, X amount and IRAs that are taxable. And I said, this is where it gets tricky, is you're going to have that pension income coming in, and then you're going to be making withdrawals from the IRA, or not. You may not withdraw from the IRA, because you really won't need it, because you've got all this income coming in between social security and your pension. So you'll probably wait until you're 72 when the minimum distributions hit. Then you'll start taking money, and you're 10 years older than you are now, and that thing is compounded. And then you're going to be making big withdrawals at 72, and that's just, you probably won't need them, because you've got this other income.

But you're going to be paying a lot of taxes. And I really just kind of explained that. Now, we're going to put all that in numbers when we do the financial planning, and we're going to put all that in numbers when we do the financial plan for them. But I was just giving them a little preview of the planning we can do. And I said, so what seems pretty obvious to me is that Roth conversions now is to take the money that's in your IRA, or it's actually a 401k, where the money is for both of them, and to take that and make a withdrawal, because you can probably do non-service withdrawal.

I've had them checking that between now and the next meeting. And we could move that into an IRA, not pay the taxes yet, and then we could start a Roth conversion plan, where slowly we're going to turn a little piece of that IRA or that 401k into Roth, so that when retirement, when we want to supplement our income, we can do it tax-free. And that'll keep the taxes on the Social Security check lower. Or if they never need that money, then their beneficiaries get it tax-free, or including the church or however that goes about doing it.

Oh, it's wonderful. And so, you know, what the guy said to me was, you mean I could do that? I could just do that all in one year? Aren't I limited by that, you know, so much a year that I can put into a Roth IRA? I said, well, you've been reading that limit, but that doesn't apply to conversions. The money that's already in an IRA or a 401k, you can convert as much of that as you want. And I mean, the whole $450,000, you could just convert it all at once.

I said, I don't think you'd want to do that. And he said, well, why not? And I said, so then Tom got tax rates up on the thing and said, take all your income now that you have, and then pile $450,000 on top of that, because that's what you'd be doing, and look at what your tax bill would be. Pretty simple for us to calculate that. He sat and thought about it, but what's left would be tax-free. And I said, yeah.

Tax-free compounding forever. So that didn't look too bad to him, even though that tax bill was pretty stiff. Then I said to him, I said, well, what if you just spread this out over several, I mean, we could straddle a year. So we could take 450 grand and do half of it in 2020 and the other half in January 3rd, 2021, and then it would make it 225.

So he liked that. And I said, we could break it into thirds. We could do part this year, part next year, and then on January 3rd of the next year, we could do the other third. So that starts bringing these numbers down.

He really just got a sense of the kind of stuff that we can do for him. And what we were doing is tax planning. And then we're going to show the effect of that on the Social Security. And this actually works better for somebody that has 150,000 in an IRA and they got a smaller Social Security check. The reason I say it works better is we can really create a tax-free stream of income for them in retirement much easier than we can for this guy. And somebody that's got, you know, a million dollars in IRA money, and they've got a 4,000 a month Social Security check. And then they've got, you know, a high income now, and they've got other assets. It gets a little more tricky, but it's still the payoff for doing it is even greater for that well-to-do person.

This applies at all levels. Yeah. So the concept again is this idea of, A, there's pain involved in just sitting down to do it in the delayed gratification idea of here we go. And so in the idea, and I do love this because, you know, I get a chance to do the show prep with Hans. And as he sat down with me this morning, he said, you know, my main strategy in this, this is the number one thing that I just hope the outcome will be, is that our listeners will make better decisions.

And I could see his hearts all over that. And wow, you know, that part of making better decisions often comes with delayed gratification. And so, you know, I hope you're hearing his heart and that you realize that the number one thing is you've got to crack open the egg if you're going to begin to make an omelet. Really to connect back to the beginning of the show, no pain, no gain.

You've got to crack that egg if you're going to make an omelet. So again, you know, cardinalguide.com, don't forget the guide after Cardinal and Hans would love to hear from you, ideas you might have for a show, the podcast, or all there are all sorts of previous shows, we've done lots of shows on taxes, lots of shows on IRAs, all those things are all there at cardinalguide.com. Or you can just tell Siri, I want to listen to Finishing Well, which is the whole idea is to finish well. And so, you know, I get a lot of people emailing me these days that are listening. They've been listeners for a while.

And they just want to stick their toy. Some of these people don't even tell me who they are right away. And it's great. I mean, it just Hans at cardinalguide.com is my email. And I get people, you can get that off the website. And if you got a question, or you just want to ask me something, you can just do that. And I get people that text me, you know, they figure out, you know, 919-714- 3397 is my cell number, it's right there on my signature on my email, I get people that somebody has given that to them, and they'll send me a text.

And they'll say, hey, I've got this, that or the other thing, or a lot of them will say, they just say a number of things. That's a way to reach out to me. And any way you want to do it, I'm here. I've walked with Hans now for a couple years. And let me tell you, you'll be glad you did.

It might incur some short term pain. But I can assure you, you'll be glad you did. Thank you for listening. 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.