2021 EP0410 PLANNING MATTERS RADIO - TAX PLANNING

We want you to plan for success. Welcome to Planning Matters Radio.

And welcome into the program. I am Peter Rochon. This is Planning Matters Radio brought to you by Rochon Planning. You can visit us online at richonplanning.com if you've got any questions, if you'd like to take advantage of the optimized retirement plan, if you'd like to download or have access to any of the resources that we will talk about on today's program. They all can be found there at that website richonplanning.com. It is my last name, but it looks like it's spelled richonplanning.com. Or you can follow us online on your favorite social media platform at Rochon Planning is our handle on most all the social media platforms that are out there.

So you can find us easy online a number of different ways. And again, if you would like an optimized retirement plan, we'll talk about exactly what that consists of on the program today. If you would like any of the resources that we will discuss, you can find us online. You can go to our website richonplanning.com, including if you would like a copy of my book, Understanding Your Investment Options. Now this book breaks down just about all of the different options that you may be presented or that are widely discussed when it comes to how to use your money, how to save your money, how to grow your money, how to preserve your money, how to create income for your money. There's a number of different goals that we all have with each and every dollar, and there are a lot of different options out there.

We've got to know which option is best suited to achieve which goal in order to make an informed decision. And so we'll talk a little bit more about that on today's program. We will also talk about some questions that we did not get to last week on our report of Are You Ready to Retire?

And these are 12 questions that you really need to have answers to in order to know if you are prepared for retirement. And we will be talking about some Roth opportunities. These are opportunities to better control your ultimate lifetime tax liability. And right now opportunity is knocking. We are not 1985 folks.

We are not in 1995. It is 2021 and we need a different way to think about taxes. We'll talk about why that is and how you may be able to take advantage of some real efficient tax planning opportunities to leverage your money, to be more efficient with taxation, to get to keep more of your money throughout the course of the program. But again, anytime you have questions, if you would like to take advantage of anything that we talk about or offer on the program, you're also always welcome to be in touch by calling 919-300-5886. And we are willing to help anyone who is looking for financial direction. If you are looking for specific answers to specific questions, if you're looking for guidance, if you're looking for a partner to help walk with you and give recommendations on how to handle your financial progress, we are a resource here for you and look forward to speaking with you.

919-300-5886. So again, over the course of this program discussing controlling and minimizing your tax liability over your lifetime, specifically through retirement, because the way that we've been taught to save for our financial future is by deferring and delaying paying that tax bill. Is that really the best way? Do we need to rethink that paradigm? Back in 1984, when the majority of today's retirees, those that are making that transition or perhaps already retired, began their savings progress, the 401k was a relatively new vehicle. It was not incepted until 1974 under the ERISA laws, and it wasn't really being widely utilized until about a decade later. That's when companies began to go away from their pensions and incept more of the 401k structure for their employees, offering them a way to save for retirement, effectively shifting the burden of planning and preparing for retirement onto our own individual shoulders, rather than have the company offer us the plan to support us through retirement.

Companies figured out that this was a deal that they could not quantify the liability. They were having trouble figuring out how much they were going to have to need to dedicate to retired employees' lifestyle and income and support. And so they began to make the shift to 401ks. And the way this was sold to us is save now in these retirement accounts, because you will be paying lower taxes into the future in retirement.

We'll flash forward 10 years, 20 years, 30 years, 1994, 2004, 2014, and now we're in 2021. This is 37 years later. Is the paradigm, is the way of thinking that we will be paying lower taxes in retirement still relevant?

Think about this for a moment. Back in 1984, in order to be in the upper 30% tax bracket, you had to be making $68,000. Today, in order to be in the upper 38% tax bracket, you need to be making in the $600,000 plus range. So tax rates and tax brackets have really come down significantly, or another way maybe to look at that is that you can make much more money today and pay less in taxes. But there's a lot of talk about tax laws changing. And when it comes to retirement, the tax rules are written in pencil.

They can change at any time. And all of those dollars that we've worked so hard to build up in those tax-deferred retirement accounts, they are subject to those changes. The tax rates, the tax laws, we know them today, but when we go to use those dollars in retirement, those are the rules that will apply to those dollars. And so is it easier to pay a bill out of our paycheck while we're saving? Or maybe is it time, if we've already got a large tax-deferred balance, to consider how we can effectively and proactively begin paying that tax bill. And I can run a tax report and analysis. This will show kind of side-by-side comparison of the cost benefit of considering Roth conversion strategies versus defaulting to the IRS's plan. And many times, it's a pretty astounding difference. It's pretty staggering what that bill will be projected out over the course of an average lifetime or to a specific age in the future.

If we simply default to the IRS's plan and, under current laws, look at what that tax bill will be versus if we're just a little bit proactive, we do some number crunching, we do some analysis, and we begin to proactively implement our own plan for how to pay that bill. I'm reminded of this old childhood nursery rhyme, fairy tale, that I read. It was a brother's grim about the three billy goats gruff, and there was a troll living under the bridge. And each of three brother goats wants to cross over the bridge to get to the greener grass on the other side, and one by one, they try to cross the bridge, the troll comes up, says, who's that knocking across my bridge?

I'm going to eat you. Each goat basically makes the argument, don't eat me now, wait till I cross the bridge, I get fat and full, and when I come back and I'm fatter, eat me then. Well, the IRS is essentially that troll living under the bridge, and we have made the argument, hey, don't eat me now, eat me later when I'm fatter. That's our 401k account, that's our IRA, that's our tax deferred balance, except we don't have that last billy goat to knock the troll off the bridge. The IRS is going to be there, and they're planning on taking their bite out of that 401k account sooner or later, and they can make the rules.

They are the managing partner, determining how much of that account they get to eat, and when they get to eat it. Just for an example of how they can control and set the rules, January 1st, 2020, the SECURE Act was put into law. This was a discussion throughout 2019 that wasn't widely publicized, but the law was actually passed the final week of 2019 between Christmas and New Year, and then it went into effect less than a week later.

The SECURE Act made a couple, actually several changes, but two pretty big ones that are pertinent to this discussion and should be considered pretty carefully. One is that they moved back the age for required minimum distributions, RMDs. It used to be that the IRS, again, managing partner, setting the rules on your account, could require you to pull money out of your IRA starting at age 70 and a half. Why could they require you? Well, because you have a debt to them.

Inside of the balance of your 401k or IRA, you look at that as a positive number, but it actually includes a debt to the IRS, a yet-to-be-paid bill. And if you don't feel like that's the case, wait until RMD age, and they start requiring minimum payments just like you would have on a credit card or a mortgage or any other bill that you have due. You have an obligation to pay that bill. They've allowed you to defer and delay it. It's like those credit card offers where you get five years, no interest. Well, if you pay it off during that period of time, maybe that's the case, but if you let the five years go by, you've got this big bill waiting for you there. We've all let that time go by, and we've got this big bill waiting for us in our retirement accounts. They moved that back anyway. The SECURE Act moved that date back from 70 and a half to 72.

So it's a bit of a reprieve, right? The IRS gave us an extra year and a half. Well, where the government gives you something on one hand, they're usually taking it away on the other hand.

And we do have debt and deficit in this country and expenses and obligations and things that need to be paid for. So they've got to get that tax money from somewhere. On the other side of that year and a half extra bit of time that they gave us to defer and delay paying that tax, they actually did away with generational tax deferral. Before the SECURE Act passed, you could actually do what's called a stretch IRA. I could pass my IRA, tax deferred, to my spouse, my wife, no problem. And, in fact, I could pass it to the next generation, to my children, and they could continue deferring the taxes. And they could pass it to their children. Up to three generations could continue stretching an IRA and not pay tax on the full amount, but only pay tax on a small minimum required withdrawal each year. Well, they did away with that. Now, your IRA, if it passes to next generation beneficiaries, must be liquidated within ten years.

There's very few exceptions to this for special needs beneficiaries, but generally if you pass your IRA to your children, if they inherit any amount in those tax deferred accounts, 401Ks, 403Bs, IRAs, that must be liquidated within ten years. And that's in addition to the income that they are already earning now all taxable to them. So the net effect is that it probably bumped up and accelerated a lot of the payments of these deferred dollars to the IRS.

Don't be mistaken. This is in the IRS's favor. And there have also been conversations about raising corporate taxes and changing estate law taxes and raising certain income tax brackets. So there's a lot of discussion right now about what changes will be made into the future. And we already know that certain tax laws have been changed, not all of them favorable for us. So my question, is now the time to plan proactively for taxes into the future?

And I would say that yes, it is. Now, my assumption is that taxes will probably be higher in the future. However, your plan is only as good as your assumptions and you have to question on every assumption, well, what happens if I'm wrong? For instance, a lot of financial plans for retirement assume some positive rate of return into the future. Oh, you're going to average 8% returns. You're going to average 9% returns.

There's no promise of that. That's an assumption. What happens if I don't? Is a question we all need to ask ourselves about every assumption. The plan assumes 8%. What if I only get 5?

Does it still work? Well, in this case, we've saved in that IRA and the assumption is we'll pay lower taxes in retirement. What if we don't?

That's an assumption. What if taxes are the same? What if taxes are higher? Even if taxes are the same, if your goal is growth on your account, the IRS has the same goal as you. I'd rather have $200,000, but I'd rather pay tax on $100,000. The IRS would rather me pay tax on $200,000.

That's the way it works. The higher the balance, the more money that you're withdrawing, the more tax dollars, ultimately, they get. Albert Einstein, pretty smart guy, said the most powerful force on the planet is the power of compounding interest. And the IRS, I feel, was one of the few that were listening, and that's why they allowed us to defer and delay paying taxes. Again, your optimized retirement plan includes a tax report and analysis. Looking at those tax-deferred assets, looking at the various retirement accounts, how can we be as efficient as possible? How can we keep as much money as possible? How can we pay as little as possible in taxes? Because I feel most people believe they could be making better decisions themselves on how to spend their money than the government.

Now, I'm all for paying my moral, legal, ethical obligation, but it's no man's responsibility to pay more than the minimum required tax. And so if you'd like to see a tax report and analysis, it's part of the optimized retirement plan, pick up the phone, give us a call at Rashan Planning. We'll run those numbers for you, help you crunch them, help you understand them, help you identify strategies to be more efficient with your money, with your accounts, with your planning into the future.

919-300-5886, 919-300-5886. And that was actually one of the questions that we did not have the time to get to last week on our discussion of the 12 questions to know if you are ready to retire. It's question number 11 on the list of the Are You Ready to Retire resource. You are welcome to get in touch with that and request that. It's great to go over on your own time just to think about your answers to these questions, to go over your answers with your spouse.

If one of the two of you or both of you are thinking of retiring any time in the near future, 5 to 10 years. If you've got family members that are thinking of retiring, coworkers, give us a call, download this resource, get a copy of it and hand it to them. They will appreciate it. It will be valuable for them to see these questions and think about their answers to them. So if you'd like that report, the Are You Ready to Retire report, give us a call.

919-300-5886 or visit richonplanning.com and you can request a copy of that there as well as a copy of my book, Understanding Your Investment Options. But question number 11 on this report. Do you understand how much you will be paying in taxes in retirement and how much of your retirement account withdrawals you will get to keep? Most people have not really crunched the numbers on this. Don't understand how all the components of creating income in retirement work together. Don't understand that withdrawals from your IRAs and 401Ks can actually cause your social security to become taxable. Now that's a taxable stream of income.

You don't get to keep all of it. That means you have to pull even more out of your 401Ks, your IRAs, draining them down quicker than you anticipated. You've got to plan these things ahead of time. You've got to look forward with your approach to retirement. That's why it's planning, not reacting. You do want to be proactive with your planning. And this is an essential question to answer. If you'd like to look that over, give us a call.

919-300-5886. The optimized retirement plan is simple, easy to understand language. It's not a thousand pages of financial jargon and lingo that you won't understand, that you read and have no idea what it says. It's simple, concise, consolidated. It is a snapshot of where you are currently, and then it addresses investments, income, taxes, health care, and legacy, and gives some recommendations on how to improve each one of those areas. It will address the fees that you're paying, the risks that you're taking, the taxes that you may be liable for, and help you to identify any areas that have been left unaddressed in your planning. Again, if you'd like a copy of your individualized, this is a custom thing. This is not generic.

This same document doesn't go out to everyone. This is specific for your situation. If you would like your optimized retirement plan, give us a call now.

919-300-5886. My name is Peter Rochon. I'm a Dave Ramsey SmartVestor Pro. I am a fiduciary advisor.

I'm independent. I'm not beholden to any specific financial institution. I can give you unbiased fiduciary advice, guidance, and recommendations that are in your best interest, and look forward really to helping anyone further their financial progress. Does it make sense for everyone to become a client?

No, absolutely not. But if you are serious about your planning and your financial future, we are willing to help, and we'll dedicate some time to helping anyone get answers to their financial questions, addressing issues that are important to you. And that just begins with a phone call. 919-300-5886.

919-300-5886. So getting back to this, issues and opportunities relating to taxes, we've really got to look at our opportunities today, because tax laws can change into the future. Doors that are open today can close on us, and then it takes an awful long way to get back around to the place that we could have gotten to just by taking advantage of that open door and walking through it. You need to know what a Roth is. If you don't understand a Roth and the value of a Roth, whether it's a Roth IRA or a Roth 401k, you do need to educate yourself and understand that. The concept of a Roth basically is this. When we earn money, we pay tax on it. If you take that money and qualify it as a retirement dollar inside of a Roth account, that's the only time that you will ever pay tax on that dollar, when you earn it. When you get that money, it's brand new money, and you stick it in your retirement pocket, you pay tax once, and then from there, all future growth is tax free, all future income is tax free.

When it's passed on as an inheritance, that's tax free as well. Now, as tax laws stand today, you've got that opportunity available to you, and you should consider taking advantage of it. But, as tax laws stand today, that can change into the future, and the Roth has been talked about as being subject to change.

So, you need to understand what a Roth is. You need to understand the advantages of paying taxes now versus kicking that can down the road, letting those accounts grow, and paying tax on more dollars into your future. And the consequences of that taxable income on your retirement.

Again, Social Security might be a source of tax free income, but if you're pulling more money out of tax deferred accounts, that's additional income, and it goes into the equation, and can cause your Social Security to become taxable. Medicare premiums are now means tested. Something called ERMA, Income Related Means Assessment, now determines your Medicare premiums. Your Medicare premiums might be more because of your tax deferred retirement account balances.

If you are saving in retirement accounts, if you are contributing to them, if you've already got a balance, if you've got a dollar labeled for retirement, then you really owe it to yourself to get this information and education and really understand where you can identify strategies to be more efficient with your money. You need to understand the difference of contributions and conversions. A lot of people say, well the limits are very low, I've already met my contribution limit, or maybe I'm earning too much money. There's an echelon where if you're earning a certain amount or above, you are not allowed to make contributions to these Roth accounts.

That does not mean that you are eliminated from taking part. You've got to find a different way to do it, and conversions don't have those same limitations. You could be earning as much as you possibly can, and of course that's always the goal, right? Earn as much as we can, and you can still make Roth conversions of pre-existing tax deferred retirement dollars.

Each one of those contributions and conversions, they're utilized in different places, and I've got a general order of operations that I typically suggest. If there's a match on your 401k, on your employer-sponsored plan, pretty much nowhere else in the financial world can you guarantee yourself that kind of immediate return on your investment. If it's 25% on the dollar, if it's 50% on the dollar, if it's dollar for dollar, you should probably be taking advantage of that first and foremost.

Because if I put a dollar in and immediately it's $1.25, $1.50, or $2, that's a pretty good return on investment. I hate the terminology free money. It's not free money.

There's nothing in life that's free, especially not money. It is part of your compensation for the work that you do. You're going to do the same amount of work whether you get that match or not. The thing is that if you put some skin in the game, if you make a contribution to your retirement account, you get paid more for the same work for the same time for the same effort. I would highly encourage you, if that match is there, it's available, it's on the table, I strongly encourage you to be taking advantage of that first and foremost. From there, oftentimes there's a pivot. I see a lot of people contributing more than the match.

Sometimes that may be appropriate. More often than not, it is appropriate to then pivot and take advantage of your IRA opportunities, specifically in this case talking about Roth IRA opportunities. You have more control, you have more flexibility, you have more choices and options inside of an IRA, your individual retirement account, than you do in your employer-sponsored plan, the 401k. The 401k has a set menu of choices and options. You've got usually about 20 different choices that you can choose to invest in, and that's it.

You can't go off menu in most cases. With an IRA, you've got an almost unlimited, the full spectrum of the financial world set of choices and options. You can invest in far more things, you can begin to be proactive in positioning dollars strategically for retirement purposes.

There are a lot of reasons why, after you capture the match, you may want to consider pivoting out to a Roth IRA, or even an IRA. That's going to depend, and in order to know if you want to defer and delay paying taxes or pay taxes now, that's an analysis of what our current tax situation is, and project out what we believe our tax situation will be into the future, and comparing the two. What's that bill going to look like? I can actually show you the math on this, even if what they have told us is true. Take it with a grain of salt. I will take this at face value, that we will be paying lower taxes in retirement.

Now, I've just spent the first 25 minutes of the program saying, I don't believe that to be true, but let's just take it at face value. Even if we are paying lower taxes in retirement, again, if your goal is growth on your money, I can do the math and show you how the bill will be larger. You will be paying more dollars in taxation, in many cases, into and throughout retirement. That's why we need to carefully examine these assumptions, do a little bit of math, crunch some numbers, and figure out how much do you want to pay in taxes. How much control do you have over that tax bill? What's the tax situation look like now versus in the future?

Oftentimes, I find that it's easier to pay a bill out of the paycheck while you're earning an income than it is to try to calculate and take care of that bill out of your retirement nest egg, when you no longer have a paycheck with which to pay it. So, let's be proactive in our thinking. Let's look forward. Let's make sure that we are planning strategically, effectively, efficiently to utilize each and every dollar to its fullest potential. We've worked hard for them.

They need to work hard for us, and we need to make the most of those opportunities. Strategies for how to handle future taxation. Again, conversions, contributions.

We need to understand taxes on the money that we save for the future. The possibility that taxes are currently on sale is real. If you go into a department store and there's two racks and one's full price and one's on sale, and there's the exact same item on both racks, first you're going to wonder, hey, is this a mistake? The cashier assures you no, it's not.

That item is correctly marked down. Which one are you going to buy? The one that's at full price or the one that's on the sales rack?

You might ask, why? Why is it a difference? But if everything else is exactly the same and identical, we wouldn't choose to buy the one that's full price.

Well, here's the thing. That item that we went into the department store for, we probably don't have to buy. We're choosing to buy it. Well, we still would choose to buy the one that's on sale. Taxes are a compulsory purchase.

We have to buy them. At some point in time, we have to pay that tax bill. Why not pay it off the discount rack when it's on sale? That's where we are today. For many people, looking at these numbers, crunching the ultimate impacts of taxation on your retirement account, looking at the IRS's plan, defaulting and basically doing nothing but delaying, deferring and looking the other way to that tax bill versus being proactive.

If you're proactive, you can create your own discount rack. Taxes are on sale. We can run a complementary retirement tax analysis to show you those numbers, to crunch them and compare them so you can identify what's in your best interest, what's right for you and maybe some specific strategies on how to take advantage, how to pay the least amount and keep the most possible. We know that taxes are what they are today. Tax laws are what they are today.

We know that those laws can change into the future. We can run a report showing you how to control your tax bill. Contact us for that complementary tax review and analysis.

We can make managing your taxes easy to manage at Rashaan Planning. Our goal is to help savers and investors better determine their outcome, make their goals their reality, specifically if you'd like to learn how to retire, when you can retire, what will it take to retire, how much do you need, what's that retirement number. We talked last week about how to calculate that retirement number, how to pay less in taxes, how to keep more of your money. Then call now, click the link around this video, request a time to speak with me, Peter Rashaan, get a retirement review analysis done, get your optimized retirement plan in your hands, including that tax report and analysis. It will help you improve your outlook into 2021 and beyond.

We certainly appreciate the time tuning in. And again, we've made a few different resources available on today's program. If you'd like the list of the 12 questions to know if you are ready to retire, a great resource to go over on your own time with your spouse, with your friends, your family, your loved ones, to hand to a coworker who's thinking about retiring in the near future, absolutely will be appreciated.

It will be beneficial for you to know and understand your answers to these 12 questions, or if there's one that you don't have an answer to. We made the book, Understanding Your Investment Options available, made the optimized retirement plan available, and as part of that, or even separate, if you'd like to take a look at your tax situation now and into the future, the tax report analysis is available as well. For any of those, you can give us a call, 919-300-5886, 919-300-5886, or you can go online, richonplanning.com is what it looks like.

It's my last name, Peter Rochon, rochonplanning.com. We certainly appreciate you tuning into Planning Matters Radio today. Follow us on social media.

Be sure to make this a regular part of your financial routine. And always, we are here as a resource. Feel free to contact us with any questions, with any concerns, with anything you'd like someone to take a look at to give you some answers on.

919-300-5886. Look forward to hearing from you soon, helping any way we can. 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 principle. Advisory services offered through Brookstone Capital Management, a registered investment advisor. Produciary 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.