20 Planning Matters Radio - TAXES

If you fail to plan, plan to fail.

How do you want your future to look? We want you to plan for success. Welcome to Planning Matters Radio.

And welcome into the program. This is Rich on Planning. Planning Matters Radio. I am Peter Rishon, President and Founder of Rishon Planning, along with my lovely wife Amber Rishon here again this week, this Saturday morning, for your listening pleasures.

Always a pleasure being here and sharing some guidance, some insight on what we need to be doing, thinking about, and acting in our financial strategies in order to achieve and accomplish more certainty, more stability, and more confidence moving into our financial future. At Rishon Planning, we help protect your paycheck through all walks of life. And as we are talking about paychecks, Amber, it's that time of year, the 1099s, the W-2s. I know we talked a little bit about it last week, but it is, after all, tax season. Oh, the dreadful tax season. You know that's my favorite time of year, Peter.

Yeah, mine as well. Just kidding. A lot of paperwork, finding receipts, filing things in the right order, organization. A lot of people scramble and sort of, I mean, it's human nature, procrastinate on taxes. But one thing is certain, that we are all going to have to pay taxes at some point in time. That's right. Although taxes are a certainty, the questions of how to handle them are anything but. Looking back and saving as much as possible this year may mean we end up paying more later, right, Peter? That is correct. And unfortunately, that is the way that the majority of Americans have been taught to save for retirement, is that they delay paying taxes, and therefore the bills bigger later.

But one of the most famous American judges, never to have served on the Supreme Court, is a judge by the name of Learned Hand. And he said that anyone may so arrange their affairs that his taxes shall be as low as possible. And we are not bound to choose the pattern which will best pay the Treasury.

It's not even a patriotic duty to increase our taxes. So we're going to be talking about options that you have available, strategies, and in fact windows of opportunity to control and minimize the taxes and the tax liability that we have. Yes, there's lots of different ways that you can save money, but let's start off by talking about the different types of tax statuses.

Great, yeah. Wonderful way to get started is the recognition that there are different ways that you can save your money. Now when we earn money, we generally bring it home after Uncle Sam has already taken a piece of it, right? And then we have the opportunity to save some of those dollars. That is called non-qualified savings. Okay, it's after tax and when those dollars grow, the growth will be taxed. Many people choose to proactively save taxes before Uncle Sam gets to see a piece of it. And that's tax deferral. That's like your 401Ks, your IRAs, any kind of tax qualified plan that allows you to defer and delay paying taxes. I hear a lot of people saying, I'm saving on taxes. However, you're not truly saving on taxes. You're just delaying paying the bill. And then the third and final is we bring the money home and then after paying some tax, we get it in qualified retirement accounts.

These are like Roth 401Ks, Roth IRAs, and that is tax free. But bottom line is that each and every dollar at some point in time is going to have to cross that toll bridge from where it's earned to where we get to spend it. And Uncle Sam stands in the middle.

Yeah, if Uncle Sam is standing in the middle, does that make it a troll bridge? Well, a little bit. Sorry. Yeah.

I know I'm not supposed to cut out. We're talking about a super serious tech topic here. Well, indeed. It's kind of like a riddle in crossing that bridge and how to get as much of your money across without paying Uncle Sam as... A troll fee. Yeah, as little as possible. Sorry, Uncle Sam. Well, we want to try to keep as much of we can as of what we earn. There's what you make and what you get to keep.

And Uncle Sam is the biggest thing that stands in the middle. So we commonly suggest people try to pay taxes at the lowest rates possible. Stay in the lowest tax bracket possible. However, deferring and delaying paying your taxes might not necessarily be the way to pay your taxes when you are in the lowest tax bracket possible.

Think about this. There's kind of a new blood in Congress and it is being talked about right now that they are suggesting tax rates should be as high as 70 or even 90 percent. We have $21 trillion in debt in this country. We've got even more trillions in unfunded liabilities. Taxes easily could go up into the future. Put taxes that high than 90 percent whenever Ronald Reagan was making movies.

That's right. In fact, the reason why Ronald Reagan got into politics is because after he made two movies a year, he only got to keep 10 percent of what he would have earned for that third movie. And he didn't think that was right. And that's one of the reasons he got into politics and believed so much in the trickle down economics. But this this idea of high taxation is back.

We're hearing more about it. And again, rates are being talked about at 70 or 90 percent. Right now, however, we are in a historically low tax environment with the Tax Reform Act that passed in 2017. This will be the first year that we file under the new tax laws.

And it has created some opportunity to harvest some dollars at a very low tax rate. Tax brackets have changed. Tax rates have changed a little bit. So we have truly a window of opportunity to do some strategizing on how to pay the lowest tax possible today. By the way, that window of opportunity closes automatically in 10 years if nothing else is done, because the Tax Reform Act had a sunset provision. Taxes in in 10 years from its passing will automatically go back to what they were in 2017. So it will be an automatic tax increase in nine more years now if nothing further is done. So if I'm understanding you correctly, if I have my money in a place now where I'm paying taxes on it now and not deferring those taxes, then I potentially could have safe income for the rest of my life without having to worry about paying Uncle Sam those high tax fees later in life. Right. Well, taxes themselves are a risk.

Okay. And we expose ourselves to greater risk of taxes changing if we choose not to pay the bill today. So we could pay the bill today and be done with Uncle Sam in a Roth 401k or a Roth IRA. Or what most people are doing is deferring and waiting to pay that bill till later. First off, you have to pay it out of your retirement nest egg rather than out of the paycheck.

Things to me seem easier to account for and to handle out of a paycheck. So if I deferred those taxes and I had one hundred thousand dollars, let's just think, you know, something small to retire off of and the tax laws change, would I have only ten thousand dollars? Well, here's the assumption.

Yes, if tax rates went up to 90 percent. Correct. But here's the assumption that most people are making. And what we've been taught is that we will be in a lower tax bracket or paying a lower tax rate in retirement. All plans have some assumptions that every plan has some assumption that it's built upon. But question to you, what if you're wrong about that assumption? You have less money than you thought.

Right. So my assumption when I'm putting a plan together or choosing to pay my taxes today is that tax rates will be higher in the future or maybe just stay the same. Well, what if I'm wrong about that assumption? Then I have more money than I thought I was going to have.

That's the kind of assumption that I like plans to be based upon. So, again, there are strategies available to us right now to better control that tax liability. And that's part of the process and the review and the strategy session that we offer at Rishon planning is we sit down with you. We map out the different accounts that you have, how they're invested, how much risk you're taking, how much fees you're paying. They can call for a free copy of the book.

Absolutely. A lot of a lot of different investment options are explained pros and cons and the level of risk that you're taking in each in my new book, understanding your investment options. But we absolutely take a proactive tax forward planning approach to looking at your retirement income and map out a written retirement income plan for you, trying to help you save as much as you can on taxes. If you'd like to sit down with the team, we do offer this at no cost with no charge for radio show listeners. If you're willing to invest a little bit of your time, we will donate some of ours to make sure that you're on the right track.

Pick up the phone, give a call. Eight hundred three three eight five nine four four. That's eight hundred three three eight five nine four four. Where do you most commonly suggest investors put their dollars? Well, if if they can budget and save them, get them get them invested first and foremost.

But then we have to look at that tax status. And I really like the idea of tax free growth and tax free retirement income. So where possible, the Roth IRA, the Roth 401K and not a lot of people really understand the Roth 401K. The Roth IRA has been around for a while. The Roth 401K is kind of been a secret. Roth IRAs are are very limited in how much we can get into them. Roth 401K is, on the other hand, have much higher limits. And in fact, in 2019, you can put away up to nineteen thousand dollars and have it grow forever tax free and tax free income.

And if you're over the age of 50, there's an extra ketchup. You can get up to twenty five thousand dollars per year in 2019, put away after you've paid your tax and then never have it taxed again in that Roth 401K. So it's a great opportunity. And we have another window of opportunity here with the fact that right now you could technically make contributions for two tax years.

So let's say that you had maybe twenty five thousand dollars sitting in a bank, not really earning a whole lot. You've already paid your tax on that money. But you actually now could take that and put it into 2018 contribution plus 2019 Roth IRA contribution.

And you can do that if you're married for husband and wife. You could theoretically get up to twenty five thousand to twenty seven thousand dollars put away into your Roth IRAs for both 2018, 2019 and for husband and wife between now and the time that you file your taxes. So a couple, again, proactive tax planning strategies that we we look at. But changes have occurred to the tax laws. Tax brackets have changed. The estate and the gift tax has changed. The corporate tax has changed. Charitable gifting has changed.

IRA recharacterization rules have been repealed. All that to say that the help of a qualified professional can really be of benefit. If you don't understand any of those things, it can help to sit down with somebody who does to have a qualified professional's eyes and perspective, help you spot and identify where you may have some opportunities. So, again, if you'd like to sit down with the team at Rashan Planning, just reach out. Eight hundred three three eight five nine four four. You can also, by the way, go online. Rich on planning dot com is the way that it looks. It's our last name, Rashan. But rich on planning dot com has lots of great additional resources and calculators and all the old podcasts, as well as a place where you can just schedule a time for a consultation. It's convenient for you. Give us a call, though.

Eight hundred three three eight five nine four four. If you have any questions and we're happy to answer this for you. So you mentioned Roth 401Ks. If I contribute to a 401K, will I still get my match? If you contribute to a company plan, a 401K or a Roth 401K where your company offers you a match.

Yes, you will still get your match. You're making a decision about your dollars. Right. And I hear the term free money with 401Ks. Well, I make a contribution and I get free money.

Nothing in life is free, especially not money. That's part of your compensation. That's part of your salary. You only get it if you put some skin in the game for your retirement. That's the caveat.

That's the catch. You only get that part of the dollars that you worked for if you put a few of your dollars away for retirement. Now, your company is nice enough to match those contributions. They are not nice enough to pay the tax on those dollars for you.

Right. So what your company is essentially doing is transferring their tax liability on to you by matching your 401K. They're dollars that if the company had kept them, they would have to pay tax on by matching your 401K contributions. They shift that liability on to you and you get to pay the tax on those dollars. Once you retire.

Very kind of them. Right. But you heard that clear, business owners. If you want to save a little bit of money and you want to start a 401K for your business, give us a shout here at Rashawn Planning at 800-338-5944. And that is by no means a slight on companies that offer that 401K match. That is a huge benefit to their employees. However, as a worker saver trying to reach retirement, capturing that match is also of huge importance.

We need to make sure we're capturing that match. So if you decide instead of to defer and delay paying the tax on your own dollars and instead pay the tax now and get them into a Roth 401K. Yes. Bottom line, the company still matches. You still get to capture that. It's just that your dollars will go into one side, the Roth 401K. The company's match will go into the traditional tax deferred 401K. When you retire, turn 59, roll that money out, you will have two pots of money. One that's your dollars that is tax free. One is the company's dollars that is yet to be taxed and we'll have to cross that tax troll bridge when we retire. But still beneficial to capture any match.

Absolutely. There's no other place where you get a guaranteed return on your money with a match. You know, whether it's a hundred percent dollar per dollar, that's a hundred percent immediate return on the dollar that you contributed.

You put in one, it turns into two immediately. If there's a 50% match, I don't know anywhere else where you can get a 50% guaranteed return on your investment. You put in $1, your company puts in 50 cents.

Really, I don't even care if it's a 10% match. If your company is offering a match on the dollars that you contribute, you should absolutely be taking advantage of that at least up to the limit of what they match. Now I'm a Dave Ramsey smart investor pro. Dave has his baby step process and order of operations, but once you get to step four, absolutely. If you are on a step where you are saving and investing for retirement, the first place that you should put those dollars is inside a company plan.

If there is any match on the table. Once again, if you're just tuning into the show, I am Amber Rashawn here with my wonderful husband, Peter Rashawn here at Rashawn planning in the studio this wonderful Saturday morning. If you were interested in a copy of my husband's new book, understanding your investment options, pick up the phone and give us a call at 800-338-5944. Again, that's 800-338-5944. And today we're talking about the timely and exciting topic of taxes. There is a difference between tax preparation.

That's what everybody is scrambling around to do right now. Tax prep versus tax planning. Tax preparation is historical in nature. It looks back at what already happened. It looks at 2018 and prepares the documents to tell the federal government whether we paid just enough, underpaid or overpaid.

Not a whole lot that we can do to change what's already happened. A few moves and strategies that you may consider in order to save a dollar or two here or there, but tax planning is a whole different story that looks forward into future years and strategically looks at what we're doing today and what will be the effects and the consequences into the future when we use those dollars that we save or invest. And that's the approach that we take at Rishon Planning is looking forward doing a tax forward planning approach. And with proper planning, it can save you thousands, tens of thousands, hundreds of thousands of dollars over your lifetime in unnecessary and excessive taxes. We're not talking about loopholes.

We're not talking about evasion. We are talking about strategies and options that are morally, legally and ethically possible. Not only possible, but allowed and expressly given to us in the tax code. And we look at how to take advantage of those so that we can control our tax liability. And we help you with that as well when we design and structure that retirement income plan. And if you'd like to get that put together, pick up the phone, give us a call 800-338-5944.

Here at Rishon Planning, we're here to help in any way for folks of all walks of life. So you did a great job of explaining the differences between tax preparation and tax planning. What are the differences between contributions and conversions? Yeah, there's a lot of confusion in the contributions and conversions.

Say that ten times fast. That discussion is two distinctly different things. So a lot of people, specifically higher income earners, think that they are eliminated from the potential and the possibility of getting their dollars growing tax free. Because when you earn over a certain amount, you begin to become eliminated from making brand new contributions to your Roth IRA account or even the deduction on a traditional IRA. However, if you've got that Roth 401k at work, those income limitations don't apply. Another reason why it's so important for so many to find out about that Roth 401k, but a contribution putting new money into one of those accounts is different than a conversion.

If I have already built up an account that is tax deferred dollars, a 401k or an IRA, and I want to move those dollars across that tax troll bridge into a tax free account, that is what is called a conversion, not a contribution. And there are not limits there, but we do implement some strategies to help people control the taxes along the way. Once it's over that toll bridge, those dollars are 100% yours.

They can grow. You can take income from them all tax free. You've already taken care of Uncle Sam. So it does make sense in a low tax environment to maybe consider converting some of those IRA or tax deferred dollars over to a Roth IRA. However, if you've got $400,000, $500,000, a million dollars in an IRA account, you don't want to do it all at once. That's going to mean that you paid the highest amount of tax possible. What you want to do is strategically do what we call maximizing your tax bracket, but minimizing the tax payment. And that is by looking at the tax bracket that you're currently in and converting over an amount that will keep you within that bracket, not bumping any dollars into paying a higher tax rate.

So it is one of the things that we do looking at converting and maximizing the tax bracket. However, I do want to put a caveat on that, that I see a mistake commonly being made or at least considered is that you use the money within your IRA to pay the tax on the conversion. If you do a conversion from a traditional IRA to a Roth IRA, you absolutely want to have some cash outside of the IRA with which to pay the tax with.

Think about this, especially if you're doing this before 59 and a half. If you take money out of the account to pay the tax, that is considered a withdrawal. So that money not only will be taxable to you because you've withdrawn it, so you're paying tax on the money that you're using to pay tax, but also if you're younger than 59 and a half, that is a early distribution subject to the additional 10% penalty.

So say that I did want to convert $20,000 from a traditional IRA to a Roth IRA, I would not want to use the money inside that account to make the conversion. I would need to have about $4,000 sitting in a bank account that has already been taxed to pay the tax on making the conversion. Otherwise, when I convert that $20,000, it will cost about the $4,000 in tax, so we use the money that's in the account to do that. Well, now it's only $16,000, but that $4,000 that we took out is subject to taxation plus the additional 10% penalty. So again, strategic moves, you got to know what you're doing here, but there are strategies available right now to take advantage of or to consider to minimize your lifetime tax liability, and it may cost a few extra dollars this year, but over time, that compounding interest that Albert Einstein said is the most powerful force on the planet is working completely in your favor rather than splitting that power between yourself and Uncle Sam, who would love to take advantage of those compounded dollars. So we want to stay in your tax bracket, we want to move money over within that tax bracket. Another great idea is using your return. If you think you're going to get a $4,000 tax refund and you're, let's say, in the 20% tax bracket, instead of taking that refund and blowing it, maybe you should use that to convert over $20,000 from a tax-deferred IRA to a Roth IRA. It would be a great use of those dollars to get more of your dollars growing tax-free for you.

So a couple strategies there again, and these are the types of strategies that we look at each and every time we help someone analyze their portfolio, their investment, and their retirement accounts and their plan for the future, making sure that we are being proactive to keep as many of our dollars working hard for us. Many people come to an unfortunate realization and end up burning through their tax retirement nest egg quicker than expected because they've planned in gross income numbers. So the biggest tax mistake, Peter, is forgetting about taxes. Yeah, we call that the gross planning mistake.

And I see it, unfortunately, way more often than I should. And it's just a matter of not forgetfulness, but lack of reminding ourselves and proper planning is that we have built up these retirement accounts in tax-deferred tax status. And deferred does not mean forgotten. Right. Uncle Sam never forgets about a dollar. Never.

I promise. Never forgets about a dollar, especially if he has allowed you not to pay your tax on it when you originally earned it. They keep account, they keep tabs on every dollar, not only that you put in, but that grew from the dollars that you put in, and they have a plan for how to tax it.

Unfortunately, I see people forget this fact. And so they've got the nest egg. They've got $500,000, $750,000, $1 million, $2 million in their retirement accounts. And that number gives them the confidence to say, I am set to retire. But what they forget to factor in is that when they take a dollar out of those accounts, that Uncle Sam is going to take a bite out of them.

It's got to cross that troll bridge. So your... He's a number muncher. Your $1 million is not $1 million. It's $650,000, $750,000. That's what you have to spend in retirement. So forgetting about that is one of the biggest mistakes.

And again, I call it the gross planning mistake. Taxes are our largest known expense in retirement. And there are some other potential expenses that could be larger, healthcare, things like that. But as far as known certainties, our largest expense is going to be taxes. It is one third to a quarter at least of your retirement net worth.

You need to plan accordingly. And again, as we are putting these specific written retirement income plans together for our clients, showing them how to translate and transition that lump sum that they've saved into the income that they will need to be able to spend and pay their bills in retirement, we are taking a proactive look at the tax planning for them and with them to show them exactly not only what they'll be able to pull from those accounts, but how much of that they will actually get to keep to cover the bills and expenses and spending and the fun things that they envision retirement to be about. And you know what, Amber, after we run through that practice, a lot of them feel very relieved that I wasn't certain on how much income I could generate or how much I would get to keep. And with that income plan, it removes a lot of that doubt and worry, gives them more peace of mind and confidence, gives them some assurance on what they can spend this year, next year and the year after and not risk running out of money into all their future years. If you'd like to sit down for your complimentary review here at Rashaan Planning, we are here to help pick up the phone and give us a call at 800-338-5944. Again, that's 800-338-5944.

One more tidbit before we go. There are certain ages that you need to earmark that when you reach and attain this age, there are things that you need to do in order to better position yourself for retirement. At age 59 and a half, and a lot of people probably understand that that's the age that you can pull money out of an account without that 10% penalty.

Anyone can do it. However, it's also the age that many companies allow you to take money out of the 401k while still continuing to work for that company and contributing to the existing 401k and still capturing the company match. If that money there has already built up to a sufficient amount that can help you in retirement, you don't want to leave it exposed to the limited options inside the 401k. You want to begin to actually position it for retirement.

That's absolutely an age to pay attention to. Then 70 and a half, another big one, because if you have those tax deferred accounts, by 70 and a half, Uncle Sam has a plan. He is going to force you to begin to take money out.

If you don't believe that you've got a debt inside of your IRA, just wait till 70 and a half and Uncle Sam begins to collect minimum payments just like your mortgage payment or your credit card bill. It's called required minimum distributions. If those are your concerns, once again, here at Rashawn Planning, we are here to help pick up the phone and give us a call at 800-338-5944. And remember, we are not just about comprehensive planning, protection, saving strategies and investment planning. We do offer those group plans for businesses that allow you to pay for policies for your employees.

And you can write that off on your taxes as well. If you are interested, pick up the phone and give us a call at 800-338-5944. We're helping people protect what's important and identify opportunities at Rashawn Planning. We look forward to hearing from you. Again, if you're taking your planning, your financial future seriously, you're willing to invest a little bit of your time, we're willing to donate some of ours. Never any charge for radio show listeners looking to get that plan put together or just review your plan.

Make sure there are no holes left unaddressed. Pick up the phone, give us a call. 800-338-5944. You can also visit us online at richawnplanning.com.

And from our family to yours, we look forward to hearing from you soon or talking to you next week. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal. Advisory services offered through Brookstone Capital Management a registered investment advisor. Annuity guarantees are based solely on the financial strength and claims paying ability of the issuing company. Withdrawals of growth from annuities may be taxable as ordinary income in the year it is taken. Individuals should review contracts for specific details of the product's features and costs. Early withdrawals may subject the owner to penalties, fees or taxes. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.