Retirement Tax Savings

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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. Welcome to Finishing Well, certified financial planner, Hans Scheil.

Today's show is retirement tax savings, which I know you're just going, man, I can hardly wait for this. Actually, I want you to think about something with me as sort of a parallel concept. Now, you might remember when you went to church, at least for me, when I went to church as a kid, you know, 9, 10, 11 years old, at this point in time, I would much rather have been out playing with my buddies than being dragged to church. And it seemed to me just like an endless cycle of having to step up and step down and, you know, having to listen to what I thought was a boring, you know, kind of thing. And then, you know, a little later on, as I got to, you know, have a relationship with Christ, all of a sudden, you know, I was interested, you know, I was reading the Bible myself. So, when the pastor was talking about things that I had already been studying, then oh my goodness, it became tremendously interesting. And so, you know, the whole thing is I began to get the Bible in context, became phenomenally more important to me and became fun to learn.

It became something I wanted to do, which was to go to church. Well, taxes in its own way for you, Hans, right? Once you're paying them, they take on a whole different light. Well, as you begin, you've studied it now for how many years? 40 years.

Yeah, 40 years. And so, it's become fun when you can save somebody a bunch of money, right? Absolutely. It also becomes interesting, maybe not fun. I first learned about tax when I was studying this stuff.

I first learned about it in CLU courses, Chartered Life Underwriter courses, and I was really looking at my own taxes that I was paying, and it was interesting to me. Yeah. So, all of a sudden, you know, your viewpoint changes like the Bible does. The more you learn, right, the more you can read a passage the third or fourth time. You were telling me as you're going through the Bible, you read, you know, Matthew, Mark, Luke, John, now you're up into what? Are you in Peter? I'm past Peter.

I'm into John, the Epistle of John. And you've seen things, right, that you've never seen? Well, yeah, just doing it in order, just whole bodies of knowledge. The Word of God becomes revealed to me, just things that I kind of knew they were there, but not really. They're just kind of there.

I certainly wasn't knowledgeable about them and aware of them, and just going through the thing and not missing a section and doing it section by section or book by book, day by day, it's just been revealing. And I drew that parallel about taxes for a lot of people are kind of where you were when you were a little boy going to church. I mean, it just, it's kind of like, do we have to talk about that? I get that completely. Yeah. So the good news is we got some new stuff.

Well, yeah. I mean, so every year from Ed's Lawton Company, I get several charts that are sent to me and I print them out and I put them up on my wall right where I work so I can refer to them all the time. And the one we're talking about today are the tax rates and the tax brackets.

And you say, boy, that sounds really interesting. And they're for ordinary income tax rates and then they're for long-term capital gains and dividends tax rates. And then it has a place on there for the standard deduction. And so I thought for today's shows when we talk about taxes is what we're not really talking about are the rates. We're talking about how do we apply this stuff and how do we apply it to the benefit of our retiree clients? I mean, that's what we're really talking about today.

And when you really get through this, it's simple for me. And I'm thinking that the people on the other side of the table or the listeners, they're not hearing many times the same thing I'm putting out. They're thinking taxes. Well, you know, so what I did those last year and I did them the year before and I certainly when I'm going to do financial planning for you, I want to look at two years of tax returns because that's going to reveal everything that I want to know. But I can't do anything about those. I mean, maybe we could, if we found a mistake or something, we could go back to your accountant and we could file a amended return or something.

But that's not really why I'm looking for them. I'm thinking right now about your 2021 tax return. And then I'm thinking about 2022, 2023, 2024, and then 2025, especially, because that's the sunset year for the current tax brackets. Did you know that?

Only because I've done this show with you. I mean, taxes before, but yeah, I did. So tax rates historically are at an all-time low. These tax brackets and the rate that you pay like the 10% and the 12% and the 20% and the 22% and the 24%, you know, I started throwing all these numbers at people and the levels of income that you can earn and still pay at those rates, they're historically at an all-time low. And that's due to the tax cuts that we had about three years ago, four years ago. And within that tax cut, they have a sunset provision that says that 2025, unless they change the law, they're going to revert back to the old rates and the old brackets. So you sit and you wonder, well, why did they do that?

I mean, why didn't they just make them forever? Well, they've got to pay for this stuff. And so, you know, in other words, people that were against the tax cut in there are going to say, well, you're just going to create a whole bunch of deficits out of these taxes because the government's going to make less money. And the people that were for the tax cut were saying, no, we're actually going to collect more money because we're going to spur the economy on in such a way that even at lower rates, we're going to collect more taxes amount. And so that's all in the negotiation.

It doesn't really matter about all that. It's just, they got to put an end on this because they got to pay for every year in their projection and they didn't choose to pay beyond 2025. So no barring any action that in 2025, tax rates are going up. And that also would have been the end of the second term for our last president. So that's part of the negotiation as well is that he covered the tax cut for the whole time he was going to be in office.

And then little did he know about the 2020 election. And then he's not, but the tax rates that we have right now are good for the rest of this year and for four more years. And barring any changes, they're going up in 2026. So what we want to talk about on the show, what do we do with that information? And what do we do with the information that you could get if you just went to my website, you can see these tax brackets under the tax code, the same thing I'm looking at and Robbie's looking at. You can see that and you can also just put tax rates, tax brackets, you just Google that and this stuff will come right up in a Google search. So if we know what the tax rates are and the tax brackets are and what the standard deduction is for this year, and then we can estimate four or five years into the future and have some reasonable assurity of that, then we can put together a plan where we can make these things work for us instead of against us.

Right. And you have sort of a, in order to put flesh on all this so that people can see better, you have a kind of a story of how this applies with somebody in retirement. So I've got a 69 year old client who was working until the end of last year. His job ended.

It's kind of a forced retirement or a termination, whatever you want to call it. And he came to us right after that and just talk a little bit about what we did for him tax wise. So before he came to us, he had already started his social security check. He had received a very nice severance. So that made his income for last year very high or for 2020 cause he got this during 2020. And he was really coming to us cause he was just worried about paying that tax on all that. And he really wanted to do some planning and he got a whole lot more than he bargained for. And the first thing that we went to is how much is your social security check?

How much is that? And in his case is about $2,300 a month. This is a single guy, doesn't have a lot of debt, doesn't have a high lifestyle. And where we got to is he can pretty much live off of that 2,300 bucks.

So that's kind of a cool place to be in. And then he's got $250,000 of retirement accounts and he's got about $100,000 in the bank. Part of which was just this really nice severance that he got. And he's worried about spending any of that cause he thinks he's gonna owe a bunch of taxes and he might owe a little bit more than he normally would have paid out of as opposed to a refund.

But that's still not where his problem really lies or the solution to his problems over time. It's buried in the tax. So I set about and made him aware that if he has no other income in 2021 other than his social security and he collects 2,200 bucks a month, his taxes are gonna be zero.

That was news to him. I mean, he was like, so you're not really gonna get this off the chart at the website, but the tax on social security if you pay any is calculated by the amount of your other income, taxable income in a given year. However much extra money you make or other money you make, that's gonna determine whether you pay any tax on your social security. So for him, if that's zero, he pays no tax on his social security, just collects the checks.

Okay. And he's 69, so he's three years away from minimum distributions. So he doesn't have to take any money out of his IRA or 401k or any other accounts.

So he could keep his income at zero. And so he was pretty happy with just that. He thought, wow. And I said, well, wait a minute, you know, it gets better.

And he says, well, what's the, wait a minute. Well, and I said, you had said that you may go back to work part time. And if you go back to work part time, guess what's going to happen. You're going to have other income. And then when you have other income, let's say he makes 25 grand a year working part time.

They bring him back. Well, now he's got the social security for 2300 a month, and he's got now 25 grand of other income. So when you plug all that in, now he's going to pay some taxes on his social security and he's going to pay some taxes on the 25 grand. Not a lot, but he's going to pay taxes. You said this was going to get better and we've got to go to a break. So hold on. We got to tell you that this show is brought to you by cardinalguide.com, cardinalguide.com, which if you go to Cardinal guide, you're going to see there's Hans's book, The Complete Cardinal Guide to Planning for and Living in Retirement, which one of those chapters is on taxes, which you can get that download free at the website, or you can get the whole book just by emailing Hans. When we come back, we're going to see how paying these taxes is even better. I can hardly wait.

I don't know about you. Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic group. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise 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. Well, welcome back to Finishing Well with certified financial planner, Hans Scheil. And today's show is retirement tax savings, which again, when we left our hero, he was going to make additional income. And so now it was going to affect the taxing on his social security, but somehow or another, this was going to be better. So the first good news that he got from us was that he's going to be able to live just fine off his $2,300 a month into the foreseeable future of social security. Doesn't have a lot of debt, single guy, doesn't have a high lifestyle, car's paid for, nice new car and very, very small mortgage on his place.

And he's in good shape. And he wasn't aware that he's going to owe no taxes on his social security unless he messes something up. What he could mess up would be making a big withdrawal out of his IRA or any significant withdrawal in any year. Not only will he have to pay taxes on the withdrawal, but he'll also then have to pay taxes on his social security because his other income was too high. So that was right off the bat, good news to him.

I got 2,300 bucks a month free and clear. And I said, well, now just wait a minute. Okay. So he's talking about a part-time job. And I'm thinking, is they're going to invite him back or another school doing the same kind of thing. And they need him.

I think he wants to go back. And I said, so if you go back and let's just say you make 25 grand a year, well, now you're going to pay a little bit of taxes on the 25 grand or a lot of social security tax, all those taxes. But then you're also going to pay some taxes on your social security.

Not a lot, but you're going to pay taxes. And you sure don't want to take any money out of your IRA in that year, or if it's this year that you do this, you don't want to take any money out of your IRA because that'll make that problem even worse. And in three years, he won't have that option because then he's going to face minimum distributions, required minimum distributions at 72.

And then he's going to have to take something and he may want to take the minimum or he may want to take a lot of something and a lot of that's going to be dependent on whether he's still working at that point. Okay. Mm-hmm. So this is where tax planning, so he's ready to just walk out of my office, say, I'll just live off my social security check. And then if I go to work, fine, I'll have a little extra money. If I don't, fine.

I say, no, no, wait a minute. We still have this problem that we got 230 grand in the IRAs that you don't need. And then it's just building, it's going to grow. And then when you get to be 72, we got to start taking it out. And then at some point you're going to pass away. And if you have a whole bunch of money in your IRA, then you're heirs.

He has a niece that he's quite fond of, and then he's going to leave this too. And she's going to have a big tax problem. So how would it be if we waited till October each year and this year, so that's what, nine months from now, eight months from now.

And then I say October because if you want to do some year-end tax planning, you better get started in October because it takes a couple of months to get this stuff done. And what we're going to do in October if he doesn't go back to work is we put it through the calculator. We're going to withdraw about $14,000 out of his IRA. We're not going to spend it. We're just going to move it out of the IRA, take a distribution, and we're going to deposit it over there in the bank where he's got $100,000 anyhow. Now he'll have $114,000.

You say, well, why are you doing that? You got to pay taxes on money coming out of the IRA. Now we're going to go to these tax rates and we're going to go to the tax, the standard deduction. The standard deduction for a single person over 65 is about 14 grand. So we can take 14 grand out of his IRA and there's no other income here and pay no tax because it's all through the standard deduction. And then we can handle 14 grand of other income for the social security formula.

There's still no tax on the social security. So as far as I've seen it, all we're going to accomplish with this thing is we're just going to move $14,000 from a taxable account, a future taxable account, to an already paid tax account. I mean, that's it.

That's how it gets better. I mean, I'm just thinking based on all you've taught me, if he took some of that $14,000 every year or whatever it is that you guys select in October and bought life insurance with that money as an ongoing basis so his heir would automatically not have a tax problem because, you know, and she'd get the remaining whatever's in the IRA. Sure.

Sure it would. But I'm just trying to... Right. You're talking taxes.

Yeah, I'm talking taxes. And the thing is with him, this gentleman is not that easy to move through a point. He's very, very intelligent, okay? And he does a lot of research and then he comes to a lot of conclusions that I... So it's kind of one thing at a time with him.

Right. So once we get the $14,000 out of the IRA, now we do that in October or November, now we're going to show an income of 14 grand and he's free to go spend it if he wants. For now, I'm just going to stick it where he's got his other 100 grand in an account. But yes, it would be smart for him to invest that in something which is tax-free again or tax-deferred or... So we can get into what we're going to do with the already been taxed account. Taxed account. What I want people to get clear on is when you're in retirement and your primary sources of income are social security and withdrawals from your savings, and then you have the luxury like this man does where you have a nice IRA, which hasn't been taxed yet, and then you have an account which you've already paid tax on, like a savings account, you have the choice of whether you make any withdrawals from either account and you can split it. So you're effectively in control of your taxable income, your income other than social... You're not in control of your social security income, but you are in control of whether you pay taxes on your social security.

Right. And if you're married, filing jointly, am I right that the standard deduction is like 26? Yeah, if you're over 65, yeah. You know, there you've got a whole lot of other IRA money that you can move out or, you know, change what you're doing based on the same structure. Yeah, the example is another client, they got $40,000 a year in social security.

So that's a couple. So it's two social security checks, and then they have about $30,000 of other income, part of a pension, and then he's got some kind of an annuity that's already kicking out an income. So he's not really in control of the 30 grand, but they just get it. So they got 70 grand, which provides a nice retirement form, and they're thinking they're going to pay taxes on the 70 grand just like they paid on their joint income when they retired, and it's not so because the $40,000 of social security by itself is not taxable. So if they didn't have the 30, the whole 40 would come to them tax-free. But the 30 is not a huge number that they're bringing over to their return, especially when you've got a $26,000 standard deduction. So they're only going to have about $4,000 of taxable income. And if you go to the married joint, that's 10% tax.

I mean, they're going to pay like 400 bucks. So would they have much tax because now the social security is going to be taxed? So then we different show, but we could get into the social security formula. They're going to have a little bit of tax on their social security when you plug in all that other income formula in the social security. But nowhere near what they would pay if they had a $70,000 income.

Yeah, nowhere near. And then furthermore, what we can do for them and we are doing for them is we're assessing could they stand a little more than 30 grand? What would be the implication if they raised their income from 30 to 40? And they can do that by simply making a $10,000 withdrawal out of either one of their IRAs.

These people are in their 60s, so they don't have to do it yet. And if they do that, now their income, joint income would go to 40. They have the same standard deduction and they'd have like 14 grand of income. I'm not going to pay much tax on 14 grand. And then when you take the 40 and you combine it with their 40 as social security and you go through the formula, still not much tax on the social security. So these people might be making a distribution from their IRA into their, to themselves and not paying much tax on the distribution, even if they just deposit it in the other account that you've already paid tax on. So then we can get into what they do with that later.

I got some great ideas. But it's just, I want people during this show to just get the concept that if your sources of income in retirement are, number one, your social security, that's the primary thing. If there's two of you, then you got two social security checks, not taxable in and of itself, then you're making withdrawals from your an IRA or maybe a couple of IRAs or, you know, and then you also have a savings account or a CD or an investment account of money you've already paid taxes on. Well then you can make withdrawals from that. And if that's where you're making your other income, you're in control of your taxable other income. And so that's where in the beginning of the show where I talked about 2021, 2022, 2023, 2024, 2025, I mean, some of these people might want to convert this stuff to a Roth IRA. This guy might want to do that besides life insurance.

I mean, he could do a $14,000 or $10,000. I mean, we can get into all that, what you do with it later. My point is I just want to draw down that taxable, the IRA and the taxable account. I especially want to draw it down year by year, string under these thresholds of either zero tax or low tax. Until the sunset in 2025, if possible.

Yeah. And then I want to avoid a year where all of a sudden we have to take 50 grand out of the IRA, and then we got to take out enough taxes to pay on that 50 grand. So now we've got to take out 80 or 90, and then all of a sudden our income in that year is 150 or 160. Now we've got all kinds of tax sirens going off and the amount of tax that we're going to have to pay. So if your primary savings account is your IRA, that's another tax planning issue. Okay. And social security tax planning issue.

So there's really a lot of intricacies of this, but the basics is you may want to be taking out more money out of your IRA in your 60s, maybe even your 70s, depending on where you fit on the other income category. That's what I want to teach people. There you go. Retirement tax savings today on finishing well. Again, you can find out all this at cardinalguide.com. It's cardinalguide.com. And there you can, again, order Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement.

Has a lot of fun. Thanks Hans. Thank you. 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.

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