Retiree Tax Bracket Planning

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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, bestselling author and financial planner helping families finish well for over 40 years. On Finishing Well, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments and taxes. Now, let's get started with Finishing Well. Finishing Well is a general discussion and education of the issues facing retirees. cardinalguide.com, Cardinal Advisors and Hans Scheil CFP sell insurance.

This show does not offer investment products or investment advice. Well, welcome to Finishing Well with certified financial planner, Hans Scheil. And today's show is retiree tax bracket planning.

That may not sound like a lot of fun to you, but it actually, it's our job today to make that as much fun as possible. And it's really, really neat that when you think about Moses wrote the 90th Psalm, and here's this guy, he's certainly at this point in time, a little bit older. And so, you know, because he didn't even start getting them out of Egypt until he was 80. So at the point in time, he wrote the 90th Psalm, he wrote verse 12, which says, So teach us to number our days, that we may apply our hearts unto wisdom. And so, like, that's exactly what we're talking about today, planning, as we turn our hearts to say, Okay, let's slow down, we've been doing this, putting this money in an IRA, or we've been setting up these savings account and just accumulating money since we were kids. But now let's apply our hearts to wisdom.

And wisdom, from a Hebrew standpoint, is a really neat word, because it has to do with, like, that aha. And it has to do with God, actually, the Father, kind of showing you insight into what really is going on. Like, here's why you put that money aside.

Here was the plans that really he had to where all of a sudden you go, Oh, now I aha, you know, that's it. And if we apply our hearts to that, it's it's a beautiful, wonderful thing. So we're going to ask Hans today to help us apply our hearts to wisdom as far as these tax brackets, because there's no time like right now to do that, because it's just a window of opportunity, right, Hans?

Well, it is. And every year you let pass where you didn't take the full advantage of these low tax rates. So 2022 is almost half over.

And there are some things you can do during 2022, and then 23 and 24, and so on and so forth. And the whole point of this thing is the very top for a married couple of the 24% tax bracket, federal tax bracket is $340,000. So that sounds like a lot of money to a lot of people. And it's probably well more than a lot of people make in a given year.

But let's say between you and your wife, or your you and your husband, or as a married couple, maybe you make $150,000 a year between the two of you, and you're still working, and you're going right along. And so my point is, if you have substantial IRA money, or 401k money, and it's all in the traditional pre-tax side, and you were interested in Roth conversions, and I'm going to probably make you interested in Roth conversions if you come in to see me or you listen to me. And if you had an income of $150,000, so you're leaving on the table at the end of the year $190,000 of income or Roth conversion that you could have done at the 24% bracket. And once the year expires, that opportunity is lost forever.

Okay? Now, if you're single, and you make, let's say $80,000 a year, and it's the same scenario, but the numbers are $80,000 is what your income is, and the top of the 24% bracket is $170,000 a year. So if you have the single person, which is you, you don't have a spouse, and you have a substantial IRA or 401k, and you've got $90,000 of additional income in 2022, or that you could do a Roth conversion with that and pay taxes at the 24% federal rate, you're going to pay taxes on this money sooner or later.

And later is really tough because you're going to be older. And like a lot of people just stow it up and harbor it, and they pass it on to their kids. And when they pass it on to their kids, their kids cash it all out at once and pay, you know, 40, 50% taxes on the money because it's all done in one year. So this is an opportunity through Roth conversions to still hold on to the money, but get the taxes paid on it, and then make any future earnings tax free.

And to do that, it's a pretty low rate. It's kind of like you can pay me now or pay me later, like the old Fram oil filter guy. You know, if you pay later, it's substantially more and it gets back to just that original question.

What's the money for? Right, Hans? Well, it does. But let's go with that.

It is painful. Why should I pay taxes now when I could wait to pay taxes? Well, that's how you got the money there in the first place is you postpone taxes on it. You thought you're avoiding taxes. You weren't really avoiding them.

You were postponing them. And what you did is you've had this silent partner. And your silent partner's name is Uncle Sam. And he's with the division of the federal government called the IRS. And he's a silent partner, because he doesn't remind you that he's there all the time.

You don't get any tax reporting, nothing. He's just there. And he's very patient, Uncle Sam. You know, he's going to wait all the way till you're 72. And then when you get to be 72, and you get to minimum distributions, he's only going to make you take a little bit and pay him off. And then who he's really going to get his big payment out of is when you die, he's going to get paid off by your kids big time.

Because he, you got to deal with. And so what what this is, is buying your silent partner out or just getting rid of them in your life, little bits of the time at the most favorable rates that you can. There's different aspects for different ages. And so the neat thing about this show will give you an idea if you're 40, or if you're 75, there's there's plans on all angles of that, because really, for all of us, and boy, I wish I had when I was 30, you know, had the wisdom to number my days and realize some things back then, you know, but here we are. Well, yeah, so 59 and a half to 72. If you're that age, and you have money in a 401k or an IRA, substantial money, you're in the sweet spot for Roth conversions. And the reason you're in the sweet spot for Roth conversions is because you're over 59 and a half, you can actually pay the taxes out of the money that you're converting. So if we go back to our example, you're the single person, you make $80,000 a year, you're 61, and you're going to convert 90,000 out of your 401k into a Roth IRA, and you're going to pay the taxes on an extra 90 grand at the rate of 24%.

And like I said, that doesn't sound very appealing. But if you're 61, you can actually pay the taxes out of the 90 grand that you convert. Now the downside of that is you're only going to have 70 grand in your Roth IRA, so you're going to have less in there because you sent some of it to the government. But you can do that between the ages of 59 and a half and 72.

When you get over 72, and now you're starting to wake up to this problem, you can still do these conversions, but you can't convert your minimum distribution. You've got to just pay the taxes and take that money. And it's now out of the IRA, but then you can do amounts above that.

So you can still do these at any age. And if you're younger than 59 and a half, you can still do Roth conversions. But we got to pay the taxes out of other money.

So that's going to further limit you. Meaning that if you were this single person that made 80,000, you had this IRA, you wanted to get into the Roth thing, and you converted that $90,000, you couldn't pay the extra income tax out of the IRA money because you'd face a 10% penalty, and that would kill the whole joy. So if you're going to do this younger than 59 and a half, you're going to have to have the taxes sitting on the sideline to pay them out of some separate money. Or you're just going to need to limit your conversion amount until to an amount that you can afford to pay the tax out of other money.

Right. So if you've got a big refund coming or whatever, it might be a good year to look at, oh, I can convert this over, right? Because you've got the refund to help you offset the taxes that you paid that year. I know you're still paying it, but it looks like it's just reducing money that you didn't necessarily have to have. Well, listen, we've had some clients, like a number of clients now, that want to really accelerate this and go above the 24% bracket.

They're married couples, most of them that are doing this. And I can think of one particular guy that we brought him all the way up to $431,900. He's a physician, and his salary is about $250,000 a year, or the income that he's paying taxes on. So we converted like $180,000-some grand this year, we just did it for him, to bring him right up to the top of the 32% bracket. Because once he really studied this, is that a 32% federal income tax now, given what his income is going to be later, it's worth doing it.

That's a very competitive rate. And for a single person, the top of the 32% bracket is $215,000. So I'm not going to sit down and try to say this makes sense for everybody and start giving financial planning advice over the radio, one size fits all.

This isn't necessarily for everybody, but it's just what I want people thinking about. And if they come in to me and hire me to do financial planning or consultation, I'm just going to point out that we've got to deal with the IRA money. We've got to get a plan together, the 401k money, which is a lot of people, that's most of their money. We've got to get a plan to get it out of there and pay the taxes.

The earlier we started that, the better. And when we pull it out of there, it doesn't mean we need to spend it. If you don't need or want to spend it now, we do a conversion and it's still there. It's just that the taxes are paid on it. And then we're not going to have any more taxes on the growth or any more taxes on any of it for the rest of your life.

Right. And so we got to go to a break, I'm afraid. So when we come back, we're going to give you more on these retiree tax brackets. We want to remind you always that the show is brought to you by cardinalguide.com, where you'll find Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement. It's all there at cardinalguide.com.

We'll be right back. ... Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic 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. Welcome back to Finishing Well with certified financial planner Hans Scheil and today's show we're talking about retiree tax bracket planning and that taking the time to plan to say what, you know, what are we really hoping this money will do and what's the best way that we can give it the most leverage for the kingdom. And so, you know, there's so many aspects to this that are really helpful, you know, just besides the tax brackets, right Hans? Well they are and the gist of this lesson is that to consider a multi-year Roth conversion strategy that you're going to do some of this over a number of years and to start with in our plan the very top of the next tax bracket or the top of the 24% federal tax bracket because I think the 24% is a bargain so which happens to be $170,000 of annual income for a single person, $340,000 for a married couple filing jointly. So that's a good number to start with and to consider converting an amount of your IRA that's over your regular income that will bring your whole income to that amount. And then what we were talking about then the next question comes up is do you have the money sitting on the sidelines in an account that's not an IRA where you've already paid taxes can you pay taxes out of a savings account or a brokerage account or do you have to pay the taxes out of the IRA money that you're converting and for a lot of people that's true and then you're going to want to be older than 59 and a half to start this strategy if that's the case because if you pull money out of the equation to pay taxes you're going to have to pay a penalty and you know penalties make this they throw the whole thing lopsided it doesn't really work well with penalty. So and then we want to look at the top end of the age is once you get to RMDs and by the way there are no RMDs or required minimum distributions at 72 on Roth so that's an advantage to converting your Roth is you don't you're not required to make distributions at any age I mean your heirs will be but you're not on any of the Roth money but once you get to 72 and you still have money in the traditional IRA you're going to have to do RMDs and you can't convert your RMDs I mean the only way you can avoid taxes on RMDs is to turn them into a qualified charitable distribution and you can give the money to the Lord and I can help you do that but back to what we're talking about you can still do Roth conversions 72 and over you just can't convert the RMD amount. Yeah and you know something that to me is just one of the real benefits of having a Roth is is that not only you know are you know obviously you're not going to have to pay tax if you take the money out but you're not going to have to pay tax on the income so the the fact that you're not having to make you know required minimum distributions right means that you can leave that money in there and and actually you're leaving in in in a lot of people's cases right all the money that they've made over the years in this thing and so it's all growing the whole time rather than to begin to take the money out which kind of takes the growth potential away right. Well sure it does and you know people the whole reason you're doing this is this is paying now for a better future or it's delayed gratification or there's all kinds of words that you can come up with but this is doing something in the present that might have some pain so that you can have a better future and so the whole one of the whole reasons we're converting to a Roth is so we won't to a Roth is so we won't have to pay taxes or much taxes or any taxes on that on money we pull out of the Roth and furthermore the way Medicare and Social Security or the IRS calculates taxes on Medicare and taxes on Social Security is through an equation with your other income and if your other income comes out of a Roth it doesn't count as other income so a little bit complicated to explain but essentially you could have a retirement future where you're paying no taxes on your Social Security you're paying the minimum amounts for Medicare and then you have a supplemental income coming out of a Roth that has no taxes on that and you basically just pay hardly any taxes at all it's nothing anything and that's pretty sweet in retirement oh yeah yeah and and you know there's ways that obviously in doing this and taking advantage of the 24 percent that really aren't all that painful and and still setting yourself up for a bigger future or your family or whatever you know if you're given the money however you were working what you were going to do with the money you know obviously it helps that that you're not having to give so much of it back you consider the taxes in i mean i referred earlier in the session to buying out your silent partner uncle sam but you could take that a step further you could say it's just another way to save money i mean the people that have the money in the 401ks and the iras they're savers you did the right thing years ago when a number of people that were your that were your competitors they didn't they spent the money they didn't contribute as much they withdrew it they they've spent it they don't have it you do okay and you've done the right thing and that was painful when you did that i mean it was you you did without so that you could save for your retirement well now you're there and you got this big balance and you've sort of fallen in love with it i mean you've just got it you've just and you've probably been having some tough times over the last few months as the stock market has been going the wrong direction so that's been bothering you but that aside when we start talking now is paying the income taxes on the money in a very smart way now is just another form of savings for the future exactly and so and then you've already demonstrated you're a saver and some people really look at me kind of weird when i tell them you're not going to spend all this money because if you were going to spend all this money you wouldn't have this money i mean you're a saver and you're a thinker and you're a planner and so now i'm just opening you up to a little different area of thinking you're effectively going to spend some of that money to have a better future and a tax-free future or a tax-free inheritance so when it gets down a good bit of this money is for your kids and grandkids and they're going to inherit as beneficiaries and it's a whole lot better to inherit already paid tax money than it is taxes due money it just it just is and you know if you really want to do something for your kids do these conversions and then what you're giving them they can have the option to either take some of it now none of it now they got to empty it over 10 years but they can leave it there for another 10 years of tax-free and then pull it all out in the 10th year and or they could take it all in the first year tax-free if they really need it so there there's some good reasons and the numbers anybody that wants to have a numbers discussion with this i'll be more than happy to have that with you i can i can show this with hard numbers that for a lot of folks this this makes sense and you've had some clients that really have taken advantage of it right oh yeah yeah and i haven't been doing it long enough to have people really getting the benefits out of it which is the withdrawals later on or the people passing and they're getting the inheritance but i certainly have seen the opposite of that you know i think about my own mother-in-law i mean when when she passed away she left a substantial amount of money to the church which was god bless her i mean and just and that church meant a lot to her and she gave that out of just regular money and then she she gave you know my wife and the grandkids money that's beneficiaries on the ira and so we had to pay tax and it was we we just we didn't spread it out we just took it paid the tax and enjoyed it but if she would have reversed that if she would have left the ira money to the church and given the regular money to us or to my wife um then we would have had no tax on that money so we would have gotten more money and easier access and the church doesn't pay any taxes anyhow the church doesn't care what kind of money it is so you want to leave taxable ira money to the church and pre-tax money or post-tax money like ross like life insurance like land like money in a savings account or a cd you want to give that to your kids and grandkids yeah that's you know that's part of the the idea of having a strategy then you know to do the you know charitable charitable distributions now as part of you know reducing that tax charitable distributions now as part of you know reducing that ira you know you have all those strategies that all work and some are life insurance right oh sure so a whole nother way than the Roth is to take or or or an alternative or if you want to spread it around a little bit is to take some of the money that you would be converting into the Roth and putting into the Roth you could take it pay the taxes and then pay a premium into a life insurance policy which has to be spread out over a minimum of seven years to make all the tax stuff work but a lot of people right in the sweet spot for that and then creating first of all a pretty sizable cash value account that's accessible to you if you need it but what ends up happening with that and i was with my own money the same way you don't end up drawing it out it just sits there and then you've got this much larger life insurance benefit payment after you die which hadn't happened yet for me but i mean it just it and that's what your kids are going to get and that's just totally tax free it's beautiful yeah absolutely well unfortunately again we've run out of time before we ran out of show but you know obviously there's there's a lot of good stuff here and you know it's complicated so you know pretty easy go to cardinalguide.com and just get a hold of Hans and talk about you know not the cookie cutter approach but actually what it would be with your IRA or with with your individual situation you know just like honestly i just this this a little earlier today my brother needs some help and i was just wonderful to know hey hon i have i know a guy i know a guy so you know a guy because you listen to finishing well and it's all there at cardinalguide.com as well as hans's book the complete cardinal guide to planning for and living in retirement thanks hans thank you finishing well is a general discussion and education of the issues facing retirees cardinalguide.com cardinal advisors and han han shile cfp sell insurance this show does not offer investment products or investment advice we hope you enjoyed finishing well brought to you by cardinalguide.com visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security medicare iras long-term care life insurance investments and taxes as well as han's best-selling book the complete cardinal guide to planning for and living in retirement and the workbook once again 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