2022 EP0219 - Planning Matters Radio - Tax Season

We want you to plan for success. Welcome to Planning Matters Radio. Welcome once again to Planning Matters Radio, the show where we try to make some sense of the personal financial issues of the day and hopefully maybe get a smile or two along the way. My guest today is a Ramsey trusted smart investor pro. He's the author of Understanding Your Investment Options, and he is a fiduciary financial investment and retirement planner serving his clients throughout the great state of North Carolina. Peter Rishon, welcome to the program.

Money and smiles at the same time. Yeah, only on days when the market is up, right? Our mood gets dictated by whether it's red or green on the screen way too often, I think. Crazy. It's crazy. And if you want to talk to Peter Rishon, you can go to his website.

It's www.richonplanning.com or call him up. 9-1-9-3-0-0-5-8-8-6. That's 9-1-9-3-0-0-5-8-8-6. Well, it's happened. It's tax time once again, Peter. And W-2s, 1099s, K-1s, all that stuff is kind of hay in the barn at this point, right? Well, all the assorted reasons why there are not smiles about our money, right? Nobody's happy tax time, it seems like. Well, there are people out there that expect a big return, but unfortunately for a lot of those folks, it's going to be significantly less than they expect or anticipate. Especially with the way that the child care tax credit was structured in last year.

A lot of people were getting surprised by that. That, oh, I didn't actually get free money. It was just a credit that I normally would have received when I went and filed my taxes. Yeah, you know, there's a lot of noise that goes around tax season, but to be honest, we don't need a tax season. We need to be proactive with our thinking about and approach to taxes year round, Scott.

I know that tax prep season, when we are actually preparing the documents, does have a deadline and therefore the first four months, three and a half months of the year, people are really engulfed in that. But we need to do a lot better job about planning proactively for taxes, not just preparing historical data to file the taxes. There's a whole lot of opportunity to save a whole lot of money. And by the way, keeping more of your money is as effective as shooting for higher returns, typically with a lot less risk involved.

Yeah, that makes a lot of sense. I mean, yeah, people are splitting hairs trying to get just a tiny bit more return and good, good on them to try to do so. And perhaps ignoring easier returns or easier lack of losses and things like that on a kind of on the way in. Well, I mean, if you could if you can shoot for higher returns to to maybe target two or three percent more in returns. You're taking on the possibility that in downturns you might lose five, 10, 15 percent more or you don't take any risk of loss, but you get to keep 10 or 15 percent more of your money, which is going to be more effective. Proper tax planning, really looking with a proactive lens at the future of taxation and what your liability is, what liability you're building for yourself into the future is really important and effective when creating and structuring an ideal plan for financial confidence.

Keeping as much of our money as possible, because I believe that I can spend my money better than the government. And I think most people I talk to believe so as well. Yeah, it's interesting the it's an ongoing process, too, right? Because you can make a great plan right now, but those kind of rules or the landscape changes as we go. So it's a forward looking process that's kind of just ongoing. That wheel keeps turning, which is why it's important to have a great relationship with a great financial planner like Peter Rashan.

You can talk to him yourself. Nine one nine three zero zero five eight eight six. Speaking of looking into the future, one of the big questions is taxes in the span of your retirement. Yeah. And for many people, obviously, obviously that's in the future and some people it's closer than others. What is the tax situation someone can expect in their retirement? What should they be planning for?

Well, let's let's look at where we are today and what we anticipate the future to be. We're thirty trillion dollars in debt. The government has already hinted at the fact that they're targeting certain types of accounts. Retirement accounts, by and large, are tax deferred.

And oh, coincidentally, there's right around thirty trillion dollars there. Now, I do see a lot of marketing saying, hey, the government's coming after your retirement and it's it's fire and brimstone. And, you know, the sky is going to fall because the government is going to confiscate your wealth.

That seems to be the scare tactic around the marketing. I don't think they're going to shutter the doors of your IRA and say, sorry, no money there. If they did that, they would have real, real problems. Their number one job is to be likable enough to get reelected.

Right. And if they stole the money of the hardworking Americans who have been disciplined enough to save and accumulate that money, they would see a whole different side of America. And that hope for reelection probably would be out the window. That's not what they're going to do. They're not just going to say, sorry, you saved a million, but you can only have five hundred thousand.

Sorry, you saved a million, but poof, it's gone. Not going to happen. And there is a lot of scare tactic marketing around that and using that kind of language. But here's the reality of it, is that they don't have to. They can just incrementally raise taxes into the future. And effectively, they have confiscated more of your retirement dollars. And if you choose or chose to defer and delay paying your taxes, that's the deal you made. You got to save taxes when you made those contributions to your 401K or your IRA and not pay the tax rate then. The government lets you do that.

They let you grow that account and they get to determine the tax rate later when you pull that money out. Now, we know what that is year to year. We know what it is now. We know the rates.

We know the brackets. We also know that in 2026, the current rates and brackets expire and they revert back to the rates and brackets that they were previously. So taxes are going up. This is not just speculation unless this administration turns around and says, oh, no, that last guy was right. We need to continue his policies, which I don't care who's in office.

That just never happens. Unless that does miraculously happen, we are going to see taxes increase. The 12 percent bracket will become the 15. The 22 will become the 25.

The 24 will become the 28. So taxes are going up. And by the way, they could go up further because those rates and brackets are always subject to change based on the government's needs and wants and desires to collect more money. And we've seen changes already, such as the SECURE Act, and still not a lot of people know about the SECURE Act. Not a lot of people know that taxes are going up in 2026.

So right now, an important window of opportunity. Not a lot of people know about the SECURE Act, which effectively ended the stretch IRA. It used to be that if I had an IRA, I could hand it off to my son.

He could hand it off to his son and we could have three generations of tax deferral. In 2020, the IRS and the government ended that. And they said, now, when an IRA passes generationally, it must be liquidated within 10 years.

Well, what is that? That's a de facto tax increase. Because if I could take an account and stretch out the taxes over three lifetimes, I'm paying minimal amounts. But if I have to liquidate the entire thing within 10 years, that's pushing it up basically to higher tax rates and brackets.

Why did they do this? Well, because people receiving a large inheritance typically don't complain if they've got to lose a portion of it in tax. And the people who worked hard to build up those IRA accounts aren't here anymore to complain.

So it made for a pretty easy target for, well, where are we going to collect more tax dollars? Let's get it when these tax deferred accounts pass generationally. Someone's entire retirement plan that they were doing for decades and decades may have been based on the promise that they'd be able to pass this this account and others like it down for something to have been changed so radically. How can that happen? Why did that happen? Is this type of thing happening all the time?

You are right there. I mean, for decades, people were planning on this and basing their plans upon this. And then in the blink of an eye, it seemed to have changed. Now, there was language around this and proposals around this for many years, but they seemed to never go anywhere. So in 2019, the week between Christmas and New Year's, a bill passed and went into law the following week. They snuck it through between the holidays of Christmas and New Year's and made it go into effect January 1st. They called it something nice and shiny and warm and fuzzy, the SECURE Act, and they did a lot of advertising about the fact that they pushed RMDs, required minimum distributions, back a year and a half. So if you worked and saved your whole life, and if you were lucky enough not to actually need that money because you had enough income coming in from elsewhere, you didn't have to take money out of your IRA until another year and a half. They gave us an extra year and a half of available tax deferral time, but they took away two generations of available additional tax deferral.

They didn't mention that part so much, right? They wanted us to focus on the nice name, the SECURE Act, the setting every community up for retirement enhancement. They wanted to focus on the fact that they pushed RMDs back a year and a half. Oh, but don't pay attention to the man behind the curtain where we stole two generations of available tax deferral from you, and a lot of people had set up their plans based around that. A lot of people said, hey, I don't really love paying taxes during my lifetime, so instead of using my IRA, I'm actually going to use other sources where available and save my IRA for an inheritance because that tax deferral can continue. Well, what they've done effectively is said that retirement accounts are for your retirement, not for generational wealth transfer. That's what that law essentially set up, and so we've really now got to reassess and retool a lot of people's plans because if that's the case anyway, we may be better served by using some IRA money earlier on and letting those other assets, non-qualified investments, Roth accounts, life insurance, those kind of things be the tools for passing wealth generationally. Now, a Roth is still under the same rules and regulations, requirements to be liquidated within ten years, but at least they're not going to push your next generation beneficiaries into any kind of higher tax situation.

Yes, the money needs to come back out of that Roth, the government wants it to because they want that money back in taxable circulation, but at least it's not taxable income that's going to push them up to higher and higher tax brackets. Non-qualified assets are fantastic to be left behind because right now, this is another area where the government has hinted at they could be targeting, but right now, there's a stepped up cost basis for long-term capital gains on non-qualified equities. Real estate, a fantastic asset class to be passed on generationally, also has the ability to have that stepped up cost basis. So if I bought my house at $100,000 and it's worth $500,000 on the day that I pass away, my beneficiaries don't have to pay tax on that $400,000 gain. By the way, if I gift the house to them, then they may have to pay tax on that gain. So it's something that you really need to look at because I hear a lot of people saying, well, I'm going to put the kids on the deed of my house.

You may want to rethink that. But if I have an investment portfolio that I've bought my positions in and paid $100,000 and now it's worth a million dollars, if I pass away and those pass on in a non-qualified investment account where I've held them for the entirety of that growth, my beneficiaries, as tax laws stand, don't have to pay tax on all of that gain. Life insurance. Even if I have an IRA where I'm taking money out and required to pay the tax on it, I may take the net proceeds from that and buy some life insurance because that can leverage to pass along tax-free and especially for family businesses, family-owned farms, large tracts of land.

If you've got a net worth where you are in the estate tax range, another area that the government has hinted that they will probably adjust and focus on, but right now it's a pretty large amount of money, but if you've got assets that would put you into that category, you really need to look at life insurance because I've seen situations where children have had to sell the family business, dismantled the family farm and land holdings just to pay the tax on a substantial amount of money where the parents did not intend that. They clearly did not intend that. They wanted the children to continue with the car dealership empire, but the children ended up not being able to hold on to that because of the tax that was due on it.

The parents wanted the children to own the tracts of land and the farm, but the children were not able to hold on to all of it because of the taxes due on it. So there are a lot of areas here where the government has already hinted, but with IRAs, Scott, that's a big one where they have made their intentions clear. In fact, they've already passed laws that make IRAs less favorable for generational transfer, and a lot of people actually used to put their IRAs in a trust where maybe they didn't want their children to blow through their hard-earned life savings. I want them to have it.

I just don't want to be able to have them blow through it, right? Well, they put them in a trust so that the trust would control it and only distribute the minimum required distribution. Now those need to be completely dismantled and redesigned because there are no required minimum distributions any longer except for one final 100% minimum distribution at the 10-year mark. So that same person that you didn't want to have or blow through all the money and because you wanted to save taxes, you put it in an IRA trust now is going to do exactly the opposite of what you intended.

Yes, there's a lot of planning that was done that now needs to be revisited, Scott. So then when people talk about a trust fund, person with a trust fund, that's what they're referring to. That is one.

That is one. That is specifically one with tax-deferred retirement dollars. There are other ways to structure trusts that can be very effective. Family foundations.

I mean, the Ford Foundation. There are other ways that you can pass assets generationally, but a lot of those are actually structured off of life insurance chassis. The foundation or the trust itself actually buys life insurance on the next generation's life to fund the even next generation's amount of trust fund funding. I feel like a lot more education needs to go into the life insurance because we hear that term.

Some people don't even want to talk about it. It sounds a little too finite, scary, but it's really just one tool of the many that are in a financial person's tool belt. Now, I am a Dave Ramsey SmartVestor Pro, right? And Dave has a very specific approach to life insurance by term and invest the rest. And by all means, that is the right approach for the vast, vast, vast majority of insurance needs.

We need to protect our family. We need to replace our income. We need to cover debts, right? Term insurance is the best way to do that. We're talking about pretty advanced tax planning is a little bit of a different concept and a little different structure and requirements for the tools that could potentially be used. There is no financial tool that is always evil and always wrong. Likewise, there is no financial tool that is always the right solution. But we need to examine on a case by case basis, and I would say the vast majority of life insurance that gets sold, if it's not term, is probably mis-sold and being misused. There are cases, however, where we want to achieve specific goals where other forms of life insurance can help to fund generational wealth transfers, can help to offset the potential for long-term care expenses, can pass a tax-free death benefit, can take a taxable asset such as an IRA and leverage it and then turn it into a tax-free inheritance.

There are reasons why other tools are out there and available. And everyone's situation is different. Even Dave Ramsey himself, much of the advice he gives on his show is then buttressed at the end by, he's going to talk to a SmartVestor Pro about your specific situation because in a 5-10 minute segment on a show, they can't address all of that. And his audience is generally an audience, no offense and nothing to take away from these people, but his audience, his message is geared toward those who have had some trouble and struggles dealing with debt.

For that audience particularly, that is the right message. They need to cover their family, protect them, pay off their debts, replace income and they need to do it for the cheapest price possible. That is absolutely going to be through term insurance and they need to get investing to begin building wealth. That's investing the rest.

Right? People, this is a tax show and we're getting into life insurance here, but people love to get term insurance because of the cheap cost. But they always forget the rest of the story, which is to invest the rest. The rest would be, what is the price if you wanted to have permanent insurance? Verse, what is the price if that insurance is going to disappear on you or in 10 or 20 years?

Well, guess what? The insurance companies don't issue term insurance to people who they think are likely to die during that term. In fact, a vast majority, 98% or so of term policies never pay out. They just lapse after collecting 10 or 20 years worth of premium payments.

That's why they're cheap. So what the difference is, is that with permanent insurance, the insurance company knows they're on the hook to pay a tax-free debt benefit at some point in time and they price it accordingly. If you want to really fully follow the advice that Dave has, you need to buy term, yes, but you should never forget to invest the rest because in 10 or 20 years when that insurance goes away, the need for insurance hasn't gone away if you have not been saving and investing and building up an amount that can replace it. And as you pointed out, you may not be able to buy a replacement policy at that point, at least in any kind of stratosphere of the number that you were hoping for to begin with. Yeah, young age and good health, your best assets. And guess what? Both of those things tend to go away over time.

9-1-9-3-0-0-5-8-8-6 is the number. What I'm hearing is that you have to take care of yourself because the rules can change, situations are different. And so what are some of the gotchas that are out there? If the government kind of redirecting back to the tax discussion is changing the rules as things go and perhaps sliding things through, they kind of know what they did.

What are some things that we should be looking for, maybe in the future, that type of thing? Well, I think one of the gotchas is tax deferral, right? It's short-term pleasure. You don't have to pay tax on those dollars, but it's long-term pain. And that tax is due in retirement when we're no longer earning a paycheck with which to pay it. On the day we retire, we've got a finite amount of money.

The concern for so many is, well, how do I make this last? And yet we owe what is one of our largest expenses in our lifetime taxes right out of that. So if you look at that balance and you've got a million dollars, fantastic.

You've done a great job, but you don't have a million dollars. You've got a debt hidden right there inside of your retirement account. And being that I don't like debt and Dave doesn't like debt, we would think that, hey, maybe we should rethink this IOU that we have to the IRS.

We want to pay off every other debt. But your debt to the IRS compounds at whatever growth rate your money does. If growth is your goal with your retirement dollars, which it should be, obviously, well, guess what? You and the IRS's goals are in alignment, and that's rarely ever the case, but they want your account to grow, too.

And whatever rate it grows by, say 10%, say 12%, say 15% on average over the course of 30 years of your working career, well, that's the rate of interest that you are now accruing on the debt that you owe to the IRS. I would love to have a million dollars, but I'd rather pay tax on $100,000, right? And so if I can pay tax on $100,000 over the course of my working career and be done with it and then build up $900,000, $800,000, it's still better than having that million dollars there and having to pay 25% of it to Uncle Sam during the course of my retirement while I'm trying to make my money last. So that's a gotcha. That is not to say that people who have deferred their tax up to this point have done things wrong.

And in fact, you've probably done things right. Back in 1986, the highest tax bracket was a 38% tax bracket, and you only had to be making about $68,000 to fall into that tax bracket. Today, the highest tax bracket, you have to be making about $600,000 to get into the upper 30%. So tax rates and brackets have come down. But if we look where we are today and look forward, if we're taking a proactive tax planning approach, then we probably will realize that we have a window of opportunity right now to buy the IRS out of our retirement nest egg, to buy them out of our retirement business, to pay them off so they cannot control the terms of how we distribute our money to ourselves and how much we actually get to keep. That's a big gotcha. Now, here's another gotcha. If I've got a million dollars in my IRA account and I need $50,000 a year to live on, so I think I'm going to pull out just $50,000. No, you're not. You've got to pull out enough to compensate for your tax and then you get to keep the rest.

But guess what? That distribution probably also causes your Social Security to become taxable. It could be tax free if that was your only income, but if you've got other taxable income, you can hit some thresholds when now you actually get taxed on your Social Security income.

Some of it could be 50%. A lot of it is going to be at 85%, meaning that that is included in your tax return as taxable income. And people say, well, I felt like Social Security was a tax all the way along the way.

No, it wasn't. Your government was holding your money in reserve for you. It actually wasn't a tax. When they give it back, that's when they can potentially tax it if your income is too high. Essentially, it's means tested. Also, your Medicare premiums.

Part B is means tested. It's called IRMA, income related means assessment. And if you have income that is over certain thresholds as a single filer, as a married couple filing jointly, it can cause your Medicare premium part B to bump up. Right now, this year, I think the base is $147 a month that's deducted from your Social Security.

But if your income crosses certain thresholds, it can go up to $171 or even as high as $400 plus a month on your Medicare premium. So it's a triple whammy, right? Whammy number one, the gross planning mistake. I've got this lump sum. I didn't think to account for the taxation of that. Number two, every time I take a distribution from it, it actually causes my Social Security to also be taxed. And whammy number three, it's like, press your luck here. Whammy number three is that the Medicare premiums are income related means tested and assessed.

IRMA. And overarching whammy on top of that, these rules most likely won't even be the same by the time you actually go to retire anyway. And will be less favorable for us, right? They're not getting more generous. They are going to be less favorable, become less favorable over time.

Now, that's just my opinion, right? But all plans are based on some level of assumption. So if we assume that they're probably going to get less favorable and then they do, we're ready. If we assume that they're going to stay the same and then they get less favorable, then we have less money than we anticipated. And so I'd rather be on that side of the assumptions that if I am wrong, things are better than I thought, not if I am wrong, things are worse than I thought. Right. If somehow pigs fly in situations got more favorable, you'd be in a better position to take advantage of that somehow if it did, although we will not hold our breath. Right.

919-300-5886. It's so important. The overarching thing that I'm hearing here is that the rules can change. And even the rules that are in place are complex and layered and nuanced depending on what your situation is. That's why it's so important. Even if you're self-taught and let's say you bought a relatively up-to-date investment book from two years ago. All the things that you just talked about, Peter, have shifted in that time.

Yeah. So it's so important to call 919-300-5886. Talk to someone who knows what they're talking about, has experience and knows maybe perhaps can, with wisdom, can know how things may change in the future. Peter, it's been a great show. Do you have anything else to take us out on this tax focused episode today? I want to talk about a couple quick opportunities that we have right now. We'll dive more into these in the coming weeks and months. But right now, until the year 2026, taxes are set. We know that they are going up in 2026. We know we have the opportunity to do Roth conversions throughout that time. Even if you're falling in the 22% bracket today, that's going to become the 25. And there's a 24% bracket right now between those. So Roth conversions, a huge opportunity.

We crunch the numbers on those. If you go to a tax preparer and you say, hey, how can I get more contributions into my retirement accounts? They're probably going to tell you, well, you've got a $6,000 or $7,000 limit on your IRA contributions based on how old you are.

But right now, until April, this year it's April 18th, I think. Right now, until the tax filing deadline, we can actually make contributions for last year and this year. And if you're married, even if you have a stay-at-home spouse, you can make spousal contributions. So we could theoretically get four times that annual limit put away into retirement accounts right now. And by the way, if you've got excess cash sitting around in the bank earning next to nothing, certainly getting it into some kind of retirement account can make that a little bit more fruitful for you. Contributions for kids, those are another big one.

Custodial minor Roth IRAs are a fantastic option where you put some money into your kid's retirement account. There are a couple of different benefits and potential uses for that. So a whole lot of opportunity. We'll touch more on those into coming weeks. Or as you've mentioned, Scott, very, very well, that folks can call me and they can get information on that. And by the way, you'll talk directly to me and I won't talk as fast as I do on the radio. Nine one nine three zero zero five eight eight six is the number to talk to Peter Rashad himself. And thank you so much for joining us for another episode of Planning Matters Radio.

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