2021 EP0227 - PLANNING MATTERS - TAX PLANNING TO OPTIMIZE RETIREMENT

We want you to plan for success. Welcome to Planning Matters Radio. Well, hey folks.

Welcome in. My name is Peter Rochon. I am the founder and CEO of Rochon Planning.

This is Planning Matters Radio. Today we're going to be talking about everybody's favorite topic, taxes. It is after all that time of year again. Tax season is kind of in a frenzied whirlwind. With all the changes to taxes due to the pandemic stimulus efforts last year and some accountants even are looking for clarity in filing questions. Here's the bottom line. You've got your W-2s, your 1099s, your K-1s, your 1098s. That's so last year, right? That's actually stuff that has already happened.

It's history. And just for clarity, at Rochon Planning, we don't file the taxes. It's called tax preparation. You're preparing to file the taxes. You're preparing the forms.

We do not actually do the filing of taxes for our clients. We plan for taxes in years to come. We have a forward-looking, proactive planning approach when making financial recommendations. And looking forward, tax planning probably presents us with the greatest opportunity to get in front of that future expense, our future tax liability, tax planning. And so it's splitting hairs with the verbiage, but tax preparation is much different than tax planning. And understanding and planning for taxes can help us have a more stable and prosperous retirement.

We actually get to keep more of our money. I remember an old Brothers Grimm fairy tale about three billy goats gruff that tried to cross a troll bridge. And underneath the bridge lived the troll, and as the billy goats passed over the bridge, the troll would say, I'm going to eat you, and the billy goats would say, don't eat me now.

Let me go eat and come back. Eat me later when I'm fatter. And that is the same approach that most of us are taking with our taxes. Uncle Sam is that troll under the troll bridge, and when we go to save money for our retirement, for our future, Uncle Sam says, well, I'm going to take a bite out of that dollar bill now. And the deal we're making with Uncle Sam, we say, don't eat it now, eat it later when it's fatter.

Your goal with your account is growth. Well, if you are making the arrangement to defer and delay paying taxes, Uncle Sam is with you, lockstep in that goal. They want your dollar to grow as well, because when they eat their bite of it later, it's going to be more money for them. And so we have come to a place where it is status quo, it is taught, it is accepted, that we want to defer and delay paying that tax bill until later in retirement, because we've been told that we will pay lower taxes in retirement. Well, nowhere is that written in stone, nor is that written in the tax code that retirees automatically pay lower taxes. And in fact, many people are surprised that when they make the transition to retirement, they are paying about the same amount in taxes, maybe even more. The tax brackets are pretty wide, after all, and so you have to have a pretty significant swing to cross a bracket threshold, a drop in income, in order to have a drop in taxes. Now, Social Security, that income, the equation for how that's figured into your total income, it is slightly taxed advantaged, and so if that is your only income, you may be having tax-free income. But if you've got any other sources of income, say distributions, especially from those tax-deferred accounts, your 401k or your IRA, it's likely that that income is going to push you into a higher tax bracket, as well as compound and make your Social Security become taxable. And it also may cause you to qualify with ERMA income-related means assessment for your Medicare premiums to also increase.

And so, it's kind of a triple whammy. We have been taught and told and we have followed the advice to defer and delay paying our taxes. Now, Uncle Sam ever, rarely, if ever, makes arrangements that are in our best interest. Typically, if he is giving us something on one hand, the ability to defer and delay paying taxes, he is taking something on the other. And Albert Einstein said the most powerful force on the planet was the power of compounding interest. I believe that when the IRS made the arrangement and said let's let people defer and delay paying that tax bill, they were paying attention to that. They understood that compound interest was going to be working in their favor. And so, maybe back in the early to mid 80s, when many of today's retirees or soon to be retired were beginning saving for their retirement, the taxes were higher and they have come down significantly. Back in the early 80s, if you made $68,000, you were in the 38% tax bracket. Today, in order to land yourself in the 38% tax bracket, you have to be making over $600,000. So, tax rates and brackets have come down substantially.

But again, that's historical. That's looking back. If we are planning for our future, we need to look forward. And so, you have to ask yourself, what is your opinion of the direction that taxes may go into the future? Is there a possibility that taxes could increase?

Or even if they just remain where they are and they're stable, will that mean that I'm actually paying less in taxes on dollars that I am investing for growth today? And so, we take all of this into perspective as we design our optimized retirement plan for our clients and prospective clients, workers and savers, investors who are taking their planning and their financial future seriously. The optimized retirement plan is a snapshot of where you are currently. We discuss your dreams, your hopes, your goals, we write those down, we document them so that we can, in fact, say they are written goals and give you a more likely chance of turning them into future realities.

And then, we write out step-by-step instructions, a timeline of executable action items, things that you can do in order to improve the likelihood and the odds that those dreams, hopes, and goals do become your reality. Things that you can do to be more efficient with your money, to grow it better, to keep more of it, that is what the optimized retirement plan is all about. If you would like to go through that process, if you would like an optimized retirement plan in your hands, pick up the phone, give us a call, we'd love to hear from you, talk over your questions, your concerns, your goals, and then discuss with you how we can help or what you should be doing in order to improve the likelihood, improve the odds that you do achieve those goals. The number to call to take us up on that offer and to get your optimized retirement plan is 919-300-5886.

But again, with investment in the market, we don't know what the future holds, the market could be up, it could be down. But I believe that this year, 2021, looking forward, our greatest opportunity to improve our financial future is probably with tax planning and tax management. And by the way, if you already have a large tax-deferred account built up, if you've got $250,000 in IRAs or 401Ks, $500,000, a million dollars, there's plenty of people that do, but you also need to be aware that the larger your balance in that account, the more costly ignoring this issue will ultimately be. We have a progressive tax system, that means the more income you have, the higher percentage rate you pay in taxes.

Well, so it's more than just a proportional mistake, it's more than the same percentage of just a larger number, it's a higher percentage of that larger number. So again, if you have done a good job, if you have already built up a large tax-deferred account, like you've been told, and rightfully so, like you should have done up till this point, fantastic congratulations. But it makes it all that much more important that you take a forward-looking, proactive approach to managing now the tax liability that you have built up in that account. And again, that's part of that optimized retirement plan. Feel free to give us a call, 919-300-5886, if you would like to take a look at that.

919-300-5886, 919-300-5886, or you can go online, richonplanning.com, richonplanning.com, it's my last name, Rashan, rashanplanning.com. So again, obviously, taxes are on everyone's mind this time of year, it's a good time to ask ourselves, how well have we planned for what could happen with taxes over the next 10 to 15 to 25 years? How does our view of future taxation impact how we should be planning today? There are several opportunities to get better control over that tax liability.

Investment management, growth on those accounts, that was key to get us to where we are now. Into the future, looking forward, I think that the most important step with those accounts is tax management. Most people are not aware that our current tax laws, the rates and brackets that we are in today, actually have a sunset provision. Already in law, taxes are slated to go up in just a few short years. Many are not aware of the provisions of the SECURE Act, how that changed, how tax-deferred accounts are handled.

So, what does that mean for planners? Well, it means that we need to take a hard look at those accounts and make sure that our plans are reflected, that we have a plan of action that is in our best interest, that we're not simply defaulting to the IRS's plan for those dollars. So today, we'll talk about how tax planning can make a big difference in our financial outcome and maybe some change in direction, some decisions that we should be making now.

Again, if you'd like that retirement plan, the optimized retirement plan, which does take a proactive look at managing your taxes and helping you be efficient with them, reducing what is likely our largest known expense in retirement, pick up the phone, give a call, 919-300-5886. I believe that taxes will be higher in the future. Again, as I just stated, it's already set in law that taxes will be increasing into the future, just a few short years, in 2025.

However, that could be pushed forward and the increase that's already on the books, it could be changed. When it comes to retirement, the tax code is written in pencil and the IRS and Congress get to create the rules. Yes, it's your money in that account, but you have a business partner if you have deferred and delayed paying taxes. That business partner is the IRS.

They own part of that account. In fact, if you've got a tax-deferred balance that you're looking at on the statement, you actually have a debt to the IRS and a lot of people don't think about it that way. I meet a lot of people making the transition to retirement and rightfully so, they are very proud of being debt-free. They've paid off vehicles, they don't have medical bills, student loans, no credit card debt, and maybe their house is even paid off and they're very, very proud of that. Again, pat on the back, you should be. However, you look at that 401k or that IRA balance and you say, hey, I've got $500,000 in my account here.

Not quite. You have a debt to the IRS that you have yet to settle and that debt is growing and compounding along with your dollars. And so we need to address that debt. That is part of the planning process is that we need to figure out how to pay Uncle Sam off, get the IRS's hand out of your cookie jar with as minimal impact and harm to your account as possible.

And so there are a few opportunities for that. We can do Roth conversions, we can do Roth contributions, we can look at proactive planning to help you minimize and control that tax bill. We can run reports that can show you, given different scenarios, assumptions, variables that we can control within the report, how much the tax bill will be on your account. And we can show you if you default to the IRS's plan and just follow their guidelines, here's how much you will pay in taxes over the next 25 or 30 years.

A lot of people are really shocked by that report. They see that the tax bill they will pay is almost as much as the account value is today. Whereas we could, again, control that tax bill, make a few proactive moves, maybe consider some Roth conversions.

You generally don't do that all at once. It's a series of steps to move money from that tax deferred bucket over to a tax free bucket. And generally we can do that for a fraction of the cost. A fraction of the price tag for that tax liability. But oftentimes this makes sense.

It's on a case-by-case basis. We'll sit down, we'll crunch the numbers, we'll help you better understand them. What will the cost be to make these proactive moves today or next year or for the next three or four years into the future? And you can get a handle on that. And then you can decide whether or not it makes sense to start paying off the IRS and making sure you get to keep more of your money.

We'll show you some strategies to maximize how much you can convert and minimize the cost of doing so. Again, that's part of the optimized retirement plan. If you would like to get that, if you would like to look at those numbers, certainly just food for thought that you should be aware of. Give us a call at 919-300-5886. taxes are likely our largest known expense in retirement. The largest potential expense could be health care. The largest expense that we know about is taxes.

For most people that's going to be our largest known expense in retirement. Here's a little math problem. I know numbers are difficult to follow on the radio, but if you are not driving or anything, feel free to follow along. What is 2 x 3 x 7 x 10 x 52 x 20? It is 436,800.

Now what does that represent? Well, for a couple, two people, eating three meals a day, seven days a week, at $10 a meal, 52 weeks a year, for 20 years, the cost of food alone in retirement is $436,800. Again, for a married couple, two people, eating three meals a day, seven days a week, at $10 a meal, 52 weeks a year, for 20 years, the cost of food alone is $436,800. It's a pretty scary number when you think about it. Now a lot of that, of course, we're going to be receiving income over time. We count on Social Security being there. Hopefully the growth on our accounts is capable of generating even more income for us. But part of that income is also going to be Uncle Sam's. So when we look at that number, $436,800, that's not how much it actually costs us once we factor in taxation.

It's going to maybe be 15, 20% more than that cost. And we have to understand that as we are preparing for retirement, as we are planning out retirement, as we are creating the spending plan and the optimized retirement plan. We've got to factor these things in. And if you have not looked at that, if this is a different way of considering costs and expenses in retirement and how to handle them, you need to see that optimized retirement plan. We'd be happy to put that together with you, for you, so you can take it, consider all the aspects, the angles, the fees that you're paying, the risks that you're taking, the taxes that you'll be liable for, how to maximize Social Security, how to minimize taxation, how to provide as much protection from the things that we cannot control as possible. These are all parts of the optimized retirement plan. We take a look at many different angles from legacy to healthcare to market risk to growth on accounts to income that you need to create. Again, letting people know when they can retire, how much they need to retire, how much income they can generate from those retirement accounts. Those are some of the main questions and issues that the optimized retirement plan will help you address.

If you'd like to get that in your hands, pick up the phone now, give us a call, 919-300-5886. The order of operations on how we handle taxes when we retire surprises a lot of people. There are typically four things that we do with our income. We pay taxes, we pay bills, we spend it, we save it. And a lot of times, as we're trading our time for money, working for an income, paying taxes happens automatically before we even see our money.

We receive a paycheck and it's a net paycheck. The taxes have already been taken out. Well, in retirement, all we have left is number four, what we have saved or invested. When we pay taxes, pay bills, or spend it, that dollar is gone to you forever. Only what you save is left and with what you have saved, you need to recreate your ability to pay bills, spend it, and pay taxes because those things probably don't go away in retirement. So with what we've saved, we need to pay bills, spend, and pay taxes. And now in retirement, taxes are not typically automatically taken out before we see our money. So we either have to write a check for the money that we've already spent in the previous year when it comes time to file taxes, or we need to decide how much is reasonable to withhold from each paycheck that we pay ourselves from those retirement accounts. It's a major pain point for retirees.

Absolutely. And a lot of times, retirees are surprised. Retirees are probably more aware of taxes and the amount that they pay in taxes than those still working as a result. And that's why proactive planning for tax reduction may be particularly noticeable, measurable benefit to retirees. W-2s generally show record of taxes that we have already paid, while 1099s generally show record of income that we have received that has not yet been taxed. In retirement, it's more about those 1099s than it is those W-2s.

And that's why, again, filing taxes, preparing taxes is historical in nature, whereas to be effective, you need to be proactive and plan for taxes into the future. Pay me now or pay me later. That's the arrangement that Uncle Sam gives you. Those are the choices that you have when you save a dollar. You can pay Uncle Sam now and take that money and make an after-tax investment, or even if you meet certain qualifications, put that money into a Roth 401k or Roth IRA. Or you can say, I'd rather not have that pain of paying that tax bill today while I'm earning a paycheck, while I'm making new money. I'd rather save that money, put it in my nest egg before taxes are taken out and then grow that money tax deferred. The catch is, in retirement, tax deferral when you're working equals tax payments in retirement. And it is a double or triple whammy, because withdrawals from your IRAs, your 401ks, those are taxable, so you don't get to keep all you thought. And those withdrawals can cause your social security to become taxable, so you don't get as much of that as you thought. And now, in order to meet the same costs to generate the income that you did think you were going to get, you have to withdraw more from your account. Not understanding this, not planning proactively for that tax liability causes people to draw down their accounts quicker than they expected, increasing the worry and the concern of running out of money.

And then what happens is people start living more conservatively. They don't do the things that they envisioned retirement to be about. They don't do all that activity that they always dreamed about doing. They don't take the trips, the vacations. They don't go and visit the family and buy presents as often.

They don't go out to eat with their spouse and loved ones. And we don't want to have this just-in-case retirement and this limiting retirement, especially not because of taxes. So plan ahead, plan proactively, plan for it now. Again, it's part of the optimized retirement plan. If you'd like to get that in your hands, if you would like your optimized retirement plan customized for your situation, pick up the phone, give us a call. 919-300-5886.

919-300-5886. The business partner that you have in those accounts, Uncle Sam, he's there waiting with his hand out. And if you don't believe that that's a debt to the IRS, just wait.

At a certain point in time, right now, the law is 72. If you wait till 72, Uncle Sam, the IRS actually requires that you begin making minimum payments. That sounds an awful lot like a debt. When you have a credit card bill, when you have a car payment, when you have a mortgage, you've taken on those debts. Those institutions, they require minimum payments. They want you to pay back that debt. Well, at 72, the IRS starts requiring minimum payments be made. They want you to pay off that debt.

Here's one of the big kickers with the recent changes under the SECURE Act. That tax deferral used to be able to be spread out over multiple generations. My tax deferred account could have passed to my son, could have passed to his children, and continued the tax deferral. Now, under the new provisions of the SECURE Act, it must be withdrawn and drained within 10 years after I pass and pass the account on to that next generation. Well, if we take an account that we used to could have pulled out the money over three lifetimes and now compress those required withdrawals into 10 years, what happens? The amount that we are being forced to take out goes up, and so does the taxability of each withdrawal, on top of the income that that beneficiary was already earning.

And so, again, the IRS rarely, if ever, makes arrangements that are in our best interest. They gave us something on one hand. They pushed back that required minimum distribution age a year and a half.

They gave us a year and a half. But they took away two generations of lifetimes of available tax deferral. If you had a plan to pass on any assets, or you've got a plan to make your money last throughout your lifetime, if you have a spending plan that provides for your lifetime income, then the likelihood is that you will leave some money behind, and you want to do that tax-efficiently. Now, I know a lot of people say, well, I'm leaving money behind, so I'll let my kids worry about that problem. But nobody likes to pay more than they have to. So if we could control that tax bill, if we could reduce or minimize it during the course of your own lifetime, and with anything that may be left behind, why wouldn't we explore that? These are the options that we show you. The cost, down to a dollar, if you default to the IRS's plan, versus the potential cost of being proactive and taking those steps. And oftentimes, there is a substantial cost savings.

If you'd like to see that optimized retirement plan, pick up the phone, give a call, 919-300-5886. We are in a red zone window of opportunity here. The red zone in football is the last 20 yards of the field before you score. And it's the most critical time to keep control of the ball, to not have a turnover.

Because you're about to cross that goal line, you're about to score, you're about to cross the finish line. Well, in our financial life, we've got a red zone here. We are crossing the threshold, we are getting near to a real finish line here. That is when taxes will be going up into the future. And right now, we know what taxes are.

We've got to control them as much as possible. That is what strategic opportunities are all about. That's what the retirement plan that we generate for our clients is all about, to calculate that out, to figure out what strategies. Whether it's with ongoing contributions, whether it's doubling up your contributions. If you are married, you can make a contribution for yourself and your spouse. But now, between now and tax filing deadline, April 15th, you can make a contribution for last year and this year. So, people ask me, well, how much can I get into a Roth IRA?

If you're over age 50, the IRS limit is $7,000. Doesn't seem like saving $7,000 a year is going to fund a well-funded retirement. Well, what if you could get more than that? Would you be interested?

Absolutely, most people would say. Well, you can contribute for yourself and your spouse. Now, that's $14,000.

You can contribute for last year and this year. Now, that's $28,000. If you've got a workplace plan, you can contribute to a workplace, Roth 401k.

Those are becoming more and more common. Again, if you're over age 50, that's up to $26,000. For husband and wife, that's $52,000. Plus, the 28 that we already figured out, we could contribute for last year and this year for husband and wife. That's up to $80,000 in a single year that you could potentially get into Roth accounts where all future growth, all future income happens tax-free.

These are some of the strategic opportunities that we help our clients identify in that optimized retirement plan. Spousal contributions, doubling up two years' worth of contributions, ongoing contributions to your personal Roth IRA or your workplace plan, a 401k that offers a Roth opportunity. Don't miss out on the match on the 401k ever, but if it offers a Roth 401k, even better.

Maybe now you want to go over that match. Typically, you may not want to. It all depends on your situation, what your savings goal is, but the general order of operations. Capture the match, save in your personal retirement accounts. If you can contribute more than that, go back to the 401k as an opportunity. Life insurance is another opportunity to build some tax-free money. Not everybody is a big advocate of that system and that way of doing it, but there is use for your money one way or another, and a lot of times it can offer safety of principle, indexed growth linked to the market, upside potential. You can't lose that money once it is credited to your account.

Downturns in the market can't wipe away gains from previous years. It can offer that same kind of tax deferral while in growth and tax-free income if taken as a loan from the policy. If there is a residual amount left, it passes as a tax-free death benefit and often can provide long-term care. Life insurance is not always exclusively about dying and leaving behind a lump sum, although that is always the primary purpose of life insurance. And if you are looking for a way to make a tax-free withdrawal from your IRA, if you are charitably inclined, there may be ways to do that as well.

If you hit that age where you are required to take distributions, you may want to look at a qualified charitable distribution and contribution. Always strategies available to better control your taxes. Taxes are a pain.

They are a thorn in our side. Paying taxes does mean you made money, so I've heard it's a good problem to have, but I still hear the word problem. However, not planning ahead for taxes and not understanding fully how taxes work in retirement, that can make that pain much more significant. So, as always, we make one big offer at Rashan Planning. We will put together for savers and investors a plan, an optimized retirement plan, to better determine your outcome and make your goals your reality. Specifically, if you'd like to learn how to retire, when you can retire, how much income you can generate in retirement, how you can keep as much of your accounts as possible and pay less in taxes, call now or click the link around the video and request the optimized retirement plan. We'd love to hear from you. 919-300-5886. Get the plan in your hands to help improve your outlook into 2021 and beyond. We'll talk to you soon. Thanks for watching.