20 Planning Matters Radio - RichOnPlanning - 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 Rochon, President and Founder of Rochon Planning. And I'm Amber Rochon. My beautiful wife. We appreciate you tuning into the program, always providing you the important information that you need to know in order to achieve and accomplish your top financial goals, moving you to and through retirement and protecting your paycheck through all walks of life. And Amber, it is that wonderful time of year again.

My favorite. Right around the corner. Tax time. Getting all those forms in the mail, those W-2s, those 1099s, 1098s, the K-1s.

Oh, the joy. The joy of tax season, Peter. Well, this year we do have our first year that we will be filing under the new tax reform laws.

It actually presents us with some opportunities. And it also is a time that might be a little confusing as returns will be a little different. How are you going to claim those deductions? Do you just take the standard deduction?

Do you itemize? Most people really have a lot of questions about the tax reform. Also, I do want to note that this tax reform actually has a sunset provision. So while we might be paying a little lower taxes this year, if nothing is done to extend this tax reform bill, taxes will automatically go up in 10 years. So we've got a little bit of a window of opportunity here that we need to be paying attention to to maybe do some proactive tax moves.

And today on the program, we're going to be talking a little bit about fact fiction misunderstood. How will we take advantage of being in this lower tax bracket? And before we get into a lot of that, I do want to remind you that here at Rashan Planning, we always do make the offer for a complimentary review of your situation, of your portfolio, your investments, your retirement plan, or the way that you are structuring protecting your paycheck during your working career.

And if you'd like to sit down and look at making sure that you've got the income to cover your needs, whether you are still working to cover your family's needs, if you couldn't work, or if you plan on no longer working and want to retire, making sure that you've got the income to do that as well. And that consultation, that review, that strategy session is always free of charge. All you need to do is give us a call. 800-338-5944. That's 800-338-5944.

You can also visit us on the web, richonplanning.com. And Amber got the new book out. Understanding Your Investment Options is your new book. It's a great read. I think you title it the most boring book. No, important. The most important book that you'll read in 2019.

Yes, it is crossed out. That's right. The most important book. But it is important to take a look at your financial needs in all regards. And understand the options that you have to invest your money in. And actually the last chapter of that book has to do specifically with how your money will be taxed, the tax status under which you save your money.

And this book goes over a brief summary of what many of your different investment options are, their pros and cons, advantages and disadvantages, and then a general gauge of the amount of risk that you're taking when you invest in any of these particular options, as well as the risk that you're taking when you choose a specific tax status. And a lot of people, Amber, are overexposing themselves to tax risk. And what I mean by that is we have choices.

We have options. Right now, a lot of people are choosing not to pay taxes on dollars they earn today and are kicking that tax bill down the road for when they retire. And what I'm talking about is IRAs and 401Ks. Any place that you are saving money without paying your tax on that, you are setting yourself up to have a bigger bill into the future.

And what did we just talk about? The sunset provision on this current tax reform. We know automatically that in nine more years now, taxes are going to go back up.

And I have my feelings that they might go up pretty sharply. There are a lot of advisers out there that say that we're going to be in a lower tax bracket or you'll be in a lower tax bracket whenever you get older. But the truth of the matter is, is that may not be the case, right? Well, that's I mean, conventional wisdom. That's why people began saving in their 401K. And maybe that was true in nineteen eighty five. But in 2019, I don't think that's necessarily going to be true.

I know about myself personally. I do not want to be in a contractual business agreement with Uncle Sam, with Uncle Sam at my retirement. I want to be done with it. I want to be done paying taxes. So what are my best options if I want to avoid being in that business agreement or in business with Uncle Sam when I retire?

Well, I'll tell you what. The IRS figured this thing out a long time ago. Albert Einstein, one of the smartest people to walk the planet, somebody who helped to develop nuclear weapons. And the theory of relativity said that the most powerful force on the planet is the power of compounding interest. And I swear the IRS was the only one that listened and paid attention and therefore allowed us to defer and delay paying taxes inside of that 401K. Because you know what happens to your tax bill when you defer and delay paying it?

It compounds. Compounding interest works in the IRS's favor. And not many people have ever sat down and done the math. But I'm going to take it at face value that that conventional wisdom that we will be in a lower tax bracket in retirement is true. Now nowhere is that written in the tax code. Nowhere is that written in stone. What is written in stone, and in fact in a blood agreement with the IRS, is that you will pay taxes on those tax-deferred dollars in retirement.

They'll collect minimum payments to make sure of that. But let's take it at face value that we will be in a lower tax bracket in retirement. I have crunched the numbers.

I have done the math. And I can show you where it's still a larger bill. You are still paying more dollars out of your retirement nest egg rather than the smaller amount of dollars, the smaller bill that you could have paid during your working career. So we are not saving on taxes. And I think that is one of the top fictions or misconceptions is that I hear the term all the time, I am saving on taxes. Big air quotes there around saving. No you are not.

No you're not. You're delaying paying your taxes. You are saving today to compound to a bigger bill in the future. And a lot of people right now have the option to make Roth contributions or Roth conversions. If you are looking at how to save and accumulate as much money as possible, I really strongly believe that the Roth IRA or 401k is our most valuable asset tax wise to be saving into. And you need to explore how to get as much money, new dollars, into that Roth IRA or Roth 401k through your employer. If you've got that Roth 401k, you can save a sizable amount in there.

Your 2019 limits, if you're under the age of 50, you can get up to $19,000 put away in 2019. Pay your taxes now and never have to worry about taxes again into the future. And that's because the account is set up after tax, correct Peter?

Right. You will pay your taxes on it now. So it's going to feel, if you move from a tax deferred 401k to a post tax Roth 401k, even if you're putting the same number of dollars in and you make the same amount, it will feel like a bit of a pay cut. Because instead of putting your money in the account before uncle Sam takes his bite, you're going to bring the money past uncle Sam.

He's going to take his bite out of it and then you put it in that account. But once you do that, you're done with taxes forever. And if taxes go up into the future, you don't have to worry about that.

You've already paid the bill and compounding interest that's working for that growth, it's all working in your favor. And again, I don't necessarily believe that we'll be in a lower tax bracket in retirement. Think about those people who believed that to be true and probably rightfully so, back in 1985 or the early 1980s, when 401k started, they might've been making $50,000 a year at that point, right? Well today, as those same people are now looking at retirement, because they did that in their 20s and 30s and they've been saving their whole career. Today, as those people are looking at retirement, do you think their cost of living is $50,000? No, the cost of living has gone up.

So the person who was satisfied making $50,000 in 1980, 1985, is probably now living off of $100,000, $120,000, $150,000. They are in a higher tax bracket. And unless their plan is to go back down to living off of $50,000, then they are probably going to remain in a higher tax bracket all throughout retirement. And they have left themselves exposed to taxes going up. So even if their situation were not to change, the tax rates around us could go up, it could cost them more. If tax rates stayed the same, then they still are going to end up paying a bigger bill.

And so this is kind of the proactive planning. We talked about those new contributions where, whereas maybe 20, 30 years ago, it made sense to make those tax-deductible deferred contributions to a traditional 401k or IRA, I highly suggest that our clients take a look at taking advantage of the Roth IRA or 401k. And you can do that one of two ways. You can make new contributions, or if you already have a large account built up that you have not yet paid tax on in a traditional IRA or 401k, you can do conversions. There are ways to move those dollars over the tax toll bridge and get them in a tax-free account over on the Roth side. It does take paying that bill, but there are strategies to do that. And I've actually helped to enact a few of these strategies with my own situation and with my mother's situation to get as many of those dollars over in that Roth side tax-free as possible. And again, there's a bill along the way, but there are ways to minimize that bill. And a lot of advisors, Amber, are giving no kind of guidance on tax management or tax forward planning approach. It's not what you make, it's what you keep, right? That's the saying. Well, taxes are the largest thing that stands between what you make and what you keep.

So if your financial advisor isn't giving you advice on how to keep as much as possible, it's a pretty strong indicator to me that you need to get a review and a second opinion. If you want to do tax planning here at Rashawn Planning, if you want to get a copy of my husband's book, or if you would like advice on tax planning, please pick up the phone and give us a call at 800-338-5944. Again, that's 800-338-5944. And we kind of have another window of opportunity.

I keep saying that term here. I think it's window of opportunity day. But right now, between January 1st and whatever day you file your taxes, you can actually also double up your contributions. So in 2018, the limit to make an IRA contribution if you're under 50 was $5,500. If you're over the age of 50, it's $6,500. In 2019, those limits have gone up a little bit. You could make a contribution of up to $7,000 if you're over the age of 50.

Well, think about this. If you go to your accountant and you say, hey, I want to put as much as I can inside of my Roth IRA, they're going to tell you, well, for 2018, your limit was $6,500. That's as much as you can put in. You know that there's a way right now that you can potentially put in $27,000 a way into that Roth IRA?

Between me and you, we're married. I can make a contribution. You can make a contribution. So that's $11,000.

And then we also can make our contribution right now for 2018 and 2019. So because the limit's gone up in 2019, that's another $12,000. And if you're over the age of 50, that's an extra $1,000 per person per year, so up to $27,000 into tax-free accounts. So if you've got some cash sitting in a bank account, you've already paid your tax on that once. Why not get into a Roth IRA?

There's no additional cost there. It's already come home. Uncle Sam has already taken his bite out of it. Get that money working for you to where you're not getting that 1099 each year. Because if it sits in the bank and it earns 1% interest, guess what? At the end of the year, Uncle Sam sends you a 1099 and says, sorry, you owe us some tax on that interest. So you didn't get your 1%. You got the 1% minus the tax. But if you get that into a Roth IRA, whatever the growth is on that money, it's yours to keep. You're not paying tax on it each and every year. It's tax-free, which most people get confused with tax-deferred, which is what a lot of people are in, a tax-deferred account.

What exactly does that mean? And that tax, it might not seem like it makes a huge difference in one year, but I heard an analogy once that if a plane takes off from LAX and it's heading toward the East Coast and its final destination is New York, if it's one degree off of its flight path, flying over Nevada and Arizona, not too far astray, but by the time it gets to the East Coast, they're ending up in Washington, DC, not in New York. So it made a big difference in the final destination. And taxes is the same way. If we can reduce that tax rate, if we can keep a little bit more of our money, it will make a big difference in the final outcome, maybe not after one year, but if you add up the cost of that tax over 10, over 15, over 20 years, it can be substantial. So rather than defer and delay paying tax, which is I'm going to make a conscious decision not to pay Uncle Sam today. I'm going to put it under a little shelter, under an umbrella where I can't take it out of until 59 and a half. I have to take it out starting at 70 and a half, but underneath that umbrella, it's going to grow and I'll never pay tax except when I take it out of that umbrella to go and use it and spend it.

So for example, then I have to pay the tax, right? So today we're focusing on people with 401ks with IRAs. Let's say I retire, right? I'm ready to retire.

I'm going down the road of retirement. I wanted $40,000. I needed to pull out $40,000. That's what I was used to.

That's what I was accustomed to living on. How much money would I need to pull out in order to have $40,000, Peter? Well, let's say you're in the 20% tax bracket. That means you actually have to pull $50,000 out of that 401k in order to net the $40,000 that you need to live off of. And people forget about that.

I call it the gross planning mistake. People look at their 401k balance. I've got $200,000. I've got $500,000. I've got a million dollars.

No, you don't. That 401k is partly yours, but part of it belongs to Uncle Sam. So let's say you are in a 20% tax bracket creating that $40,000 a year of income. Well, over your retirement, that million dollars, $800,000 is what you actually have to keep. Remember, it's the difference between what you make and what you keep. You've taken the million dollars out, but Uncle Sam has taken 200.

It's not compensation because you made that deal, but he has taken his bite out of it. And you have to account for that. And a lot of people look at their balance and forget that right there in that positive balance that's telling them it's okay to retire.

You can do it. You've got this much money. Right inside of that balance is a debt to Uncle Sam that they're going to have to account for. And I see a lot of people who have already transitioned to retirement. They had the big lump sum built up in the 401k or the IRA, and many of them come back to me and say, I don't know why I ever took that deal.

I'm kicking myself for deferring and delaying paying my taxes all the way to retirement. We, again, can show you ways to transition some of that money. I call it maximizing your tax bracket, taking advantage of the opportunity to convert as much as possible at the lowest tax rate possible.

And we do it all the time. If you've got a $200,000, a $500,000 IRA, a million dollar IRA, you don't convert that all at once and pay the largest tax bill possible. You do it strategically. You do it systematically over the course of a number of years, and you get that money moved over paying the least amount of tax that you're morally, legally, or ethically required to pay.

One of the most famous American judges never to make the Supreme Court was a judge by the name of Learned Hand. And he said that it's no man's obligation to pay any more in taxes than he is legally required. And in fact, the wise person structures their plan in such a way where they pay the least amount of tax possible. And that's the approach of the wealthy.

That's what they do. You know, secrets of the rich, that's one of them. Pay the least amount in tax possible. And unfortunately, most Main Street, everyday Americans who are saving as much as they can, working hard to get as many dollars as they can ready for retirement in that 401k are doing exactly the opposite.

So sit down with us. Let's look at some strategies to minimize that tax liability wherever it is morally, legally, ethically possible. Let's strategize now while we are in this low tax environment and maybe before you file your taxes for 2018 because there can be, you know, some opportunities to save on what happened last year. But more importantly in our strategy session, we look to next year. How can you save as much next year and all of the years thereafter to minimize the lifetime tax liability?

And that's an approach that I just, I don't see many financial advisors, agents, planners, CPAs, accountants taking. Everybody's looking back at what's already happened. That's history. That's history.

It's already happened. Let's look forward and make sure to minimize your bill into the future. I know we do a good job of that at Rashawn planning because our clients continue to send us referrals from people that they know that need our assistance. If you would like a free complimentary review, pick up the phone and give us a call at 800-338-5944 or a copy of my husband Peter Rashawn's book. Pick up the phone, give us a call.

800-338-5944. And again, that books, the title is understanding your investment options. The most important book you'll read in 2019 is the subtitle. It says, it says boring, but it's crossed out and, and granted it's some dry material and information. But I really do think that if, if you've got money that you've worked hard for and you've been disciplined enough not to spend every penny and you're looking for where can I have my money make money, then you need to understand your options.

And this goes over the pros and cons and really what you need to know about each option as well as some tax planning considerations that you should make. So to break it down though, you say cross out the boring part. It's the most important, important or informative book. But you know, you say a lot of the times too, oh, I have the, you know, if you have this grandiose idea of I want a vacation all the time or you know, I want a Ferrari or you know what, I just want a nice little small house and a boat whenever I retire. You can call it boring all day if you want to, but you better know the nuts and bolts on how to get there.

And if you don't want to read the book, that's fine too. You need an advisor, someone to advise you on how to get there. There could be options inside of your plan that you have no idea are available to you. And that's why it's important to pick up the phone and give us a call at 800-338-5944. I remember a day pretty early on in my career and it was a day that I was excited about. So I've been on the radio for almost 18 years now doing financial radio programs.

Oh, man. Yeah, it's starting to get gray in the beard and in the hair, definitely. But I'm still young. A lot of my clients say they like the fact that I'm younger.

I'm 39, about to be 39 this year. And you know, a lot of clients that I get, their advisors were older than them. So how is that advisor who is 65 now going to help you at 50 plan for your retirement?

Where are they going to be by the time you actually retire? So I do have, you know, yes, gray hairs, gray hairs, but it's some experience helping people plan for retirement. But I remember when I didn't have as much experience. It was one of my first days that I was really excited about meeting with a specific individual that called in from a radio show. He was an oncologist, a cancer doctor from one of the major hospitals in the area. And just from our brief conversation on the phone, I knew he had some assets. And the same day I was actually meeting with a deli produce manager at a grocery store and was not quite as excited to meet with that individual.

By the end of the day, it had completely flip flopped because I went to see the oncologist and he had ideas. He had big plans for his retirement. He and his wife actually took separate vacations every time they went on vacation.

He went fishing in Canada. She went scuba diving in the Caribbean and they had an expensive lifestyle. He had more than half a million dollars saved for himself, but his burn rate, what he was spending per year was about 250,000. So I looked at his situation and he wanted to retire in five years and he only had about two years worth of income saved for himself. And his paycheck was, was sizable. He was used to making good money, but his swing in income once he retired and left that paycheck behind was going to be very, very noticeable. And he was going to burn through that savings pretty quick. And, and I talked that over with him in that meeting and, and he, he wasn't really convinced that that was the case, which, which was fine.

I moved on to my next appointment and I was a little disappointed because I didn't feel like his goals were going to be a reality. The deli manager on the other hand was used to living very humbly. He had never made more than $30,000 a year in his life, yet he had been able to manage to live off of less than half of what he earned and his social security was going to replace majority of his work and career income. So he had multiple times his annual need for income.

He could have made his savings last well beyond the duration of the rest of his life. And it's all about understanding what your expectations are, understanding the tools and options that you have available to help your dollars achieve those expectations. Because when it comes down to it, we only do four things with our money.

That's right. Pay taxes, pay bills, spend it and save it. Those four things, everything you do with money falls into those four categories. And the bottom line is when you do those first three, you pay tax, you pay bills, you spend it, that dollar is gone to you forever. All that you have left when you retire is number four, what you have saved. And you have to use that to replace your ability to do those first three things because you're still going to have to pay taxes in retirement.

You're still going to have to pay bills in retirement and hopefully you can spend and do some of the things that you enjoy and that you envision retirement to be about. But not enough people understand their investment options and not enough people have sat down and actually formulated a plan to do it. We've been talking a lot today about 401k and IRAs and I know a lot of people out there are listening going, wait a minute, I don't even have a 401k. I don't have an IRA.

You're scaring me, Peter. What do I do about my retirement? We talk to a lot of people in that situation too, Amber, and we help to get the plan started. We help to set a plan of action and a course for them to get going.

Once they get going, once they have a paycheck, I know that they want to protect their paycheck, protect that income and the security that that provides for their family. So that's where a lot of what your strategic planning and products help them do, protecting against the what ifs and the Murphy's laws and the accidents and the sickness and injuries that can occur. But wherever you are in your process, it's not too late to plan, but you need to know where you are. It's never too early. I mean, if I could talk to 10 year olds and get them excited about saving, I would do it all day because it's going to make for better retirees at 50 and 60. But if you are already 50 or 60 and you're just looking to get that plan put together, you know, it's not too late. Let's have a discussion about where you're at. Get a realistic viewpoint of that. Talk about your goals.

What are your expectations into the future and what are the best moves to make the most of each and every dollar? If you guys are interested, pick up the phone for that free book offering. It is 800-338-5944.

Again that is 800-338-5944. Another thing that people don't understand about deferring and delaying paying all of their taxes is that can actually cause your Social Security to also become taxable. So in my example there of the deli manager and most of his income was actually going to be replaced by Social Security, that Social Security was probably going to be tax free to him. He got to keep everything that was sent back with Social Security.

But if you're pulling large amounts out of your IRAs or 401Ks, that counts as taxable income and when your taxable income, when your AGI gets over certain thresholds, it actually causes your Social Security to also become taxable. So you won't even get to keep as much of the Social Security as was projected or you planned on. So it's these kind of things that people need to know and understand and again we can sit down and do your math for you.

We can break it down for your situation. But a lot of people have never really been taught about this stuff and unfortunately in my viewpoint and perspective, not even a lot of advisors are discussing the implications of what happens after retirement with their clients. We're so concerned and worried about how to build up to the biggest lump sum and what's the rate of return that we forget to talk about some of the important things like Social Security claiming strategies, efficiency with your taxes in retirement, how much risk is truly appropriate or necessary for you to be taking, the amount that you're paying in fees and how do you continue to protect you and your family's independence and financial security throughout retirement.

A lot of people are probably thinking too Peter that they can't afford a financial advisor. What would you say to them? We can eliminate that as being an objection because we make the initial review and evaluation. That conversation is completely free of charge to you and you are under no obligation whatsoever to take it any further than that first conversation and in that first conversation it is completely your time. I will directly in a straightforward manner answer any and all questions that you have and to the best of my ability I will give you my insight as to what potential things, what red flags, what risks I would want to know about if I were in your shoes and then afterwards it's up to you to make a decision on whether you want to do anything about the items that we have discussed and if there are ways that we can be mutually beneficial to each other, if we can help you in your planning and achieving your goals then we can have a conversation separately than this initial review of what becoming a client of Rashaan planning really entails and what our costs are because I'm cost conscious as well. This whole program we've been talking about keeping as much of your money as possible, well costs are a part of that. For the cost of becoming an actual client we're going to talk about what benefits you get from that and we're going to try to keep that as low as possible to you. Again, free of charge for that initial consultation. It does not cost any money to get started, to get that snapshot of where you're at and to have a discussion of what's the best way to achieve the goals of where you want to be into the future. The book is also free for callers to the radio program today understanding your investment options if you'd like to have a better grasp on what you could invest your money into to maybe make it grow and work for you. Again, the consultation, the retirement planning review and strategy session also free of charge. Give us a call 800-338-5944.

That's 800-338-5944. Visit our website richonplanning.com. Important for you to have many items checked off your list, your wills done, your legal documents, your life insurance, disability accidents can derail retirement. My wife handles a lot of that stuff. Amber, always a valuable part of the program here and of course at the team at Richon Planning. We look forward to hearing from you and helping you and welcome you to give us a call to take that first step.

That's right. You've got nothing to lose. Everything to gain here at Richon Planning at Planning Matters Radio. Pick up the phone and give us a call 800-338-5944.

Again, that's 800-338-5944. Have fun. Looking forward to hearing from you real soon or talking with you again next week. Talk to you next week. See you later, bye bye. The commission which may result in a conflict of interest regarding compensation.