2022 EP0226 Planning Matters Radio - Tax Planning

Welcome once again to Planning Matters Radio, the show where we evaluate all the financial, personal finance issues of the day and hopefully put a smile on your face at the same time. Today we're going to be talking about tax season.

It's that most wonderful time of the year. Have I paid enough? Will I get a refund?

Have all my forms arrived? How can I keep more of my own money? And the person who's going to answer those questions for us today is a Dave Ramsey, smart investor pro who serves his clients throughout the great state of North Carolina.

Peter Ashawn, help us out. You hit the questions, man. You know, people are worried about taxes this time of year. That's the number one financial concern that I hear on people's minds.

It's funny that it is seasonal. And I get it because that's when the bill is due, the returns are completed and filed, we've got to make the payment. But taxes really should be a proactive process.

I mean, it's not even like we only have one or two different types. There are literally pages and pages of different types of taxes that we pay along the way. And we should be thinking about all of these proactively. What are we paying? How can we control what we pay? How can we keep more of our money? Because I believe most people feel like I do that I tend to know better what I can do with my money than the government does or put it to better use. And I know that there are certain things that we all need to pay for. Roads, schools, bridges, infrastructure, defense, military.

But it just seems like once the money goes up to Washington, they find a million ways to waste it. And I want to pay only the legal, moral, ethical minimum amount that I have to. Right. And to that end, you can ask your own tax question to Peter Rishon. His phone number is 919-300-5886. You can also visit his website, www.rishonplanning.com.

That's richonplanning.com. Peter, let's start with the basics. What forms do I need to do my taxes in the best way?

Let's talk about literal wood pulp on my desk. Well, is there a scenario that involves money? Yes. Then the IRS has a form for it. Like anything that you can think of, there is a specific tax form involved with that.

From wages to investments to withdrawals from retirement accounts to the sale of a home to gambling winnings to long-term care if you are funding that yourself. I mean, there are literally, I've got a list here of 13 pages that just list the form and then a brief description of the different tax forms. Sticking with a few that we use most commonly, everybody, most folks are very used to seeing the W-2. That is the one that says, you have been paid wages and oh, by the way, the IRS has already taken a bite out of those wages by the time you even saw them. Here's how much you were paid.

Here's how much we already collected along the way before you saw it. 1099s are also very common and again, there are a number of different types of 1099 forms, but the ones that we see most often are 1099 INT, that's interest, and 1099R, that's retirement accounts. The 1099R specifically, we deal with a lot because that means any money that came out of any retirement account will issue a 1099R. Now, does that mean that it's an actual taxable event?

Maybe, maybe not. If you received the money and kept it in a non-qualified location or you spent the money, if in other words, you didn't get it back into a retirement account, then yes, a 1099R can indicate a taxable liability, but it does not necessarily mean that because anytime any money comes out of a retirement account, that 1099R must be issued. There's another form that people aren't quite as familiar with. It's a 5498 form and the 5498 form gives a retirement account balance at the end of the year. It is used to help the IRS know what your RMD from a retirement account should be. It also helps them know when money was received or rolled over or transferred into a retirement account or contributed.

Well, here's the thing, is that you can technically make contributions to retirement accounts up until the tax filing deadline. So, that 5498 form is not issued until after the tax filing deadline and it's sent directly to the IRS. So, a lot of people have questions of, hey, I rolled over my 401k or my IRA, I got this 1099, now it looks like I owe tax on this. Simply state, qualify that as a rollover on your tax return and then the 5498 form shows up at the IRS to confirm that money was received over to another retirement account and confirms the rollover status and essentially cancels out the taxability of the 1099.

But because they're not issued until after the tax filing deadline, a lot of people sort of scramble and wonder where is my form, what do I need to prove to the IRS that I did a rollover. Just qualify it as such on your return if your accountant, if your CPA wants some proof of that, show them a statement from where the money landed within 60 days, it got over to another retirement account or it made its way directly there, I didn't even touch it and it will not be a taxable event. But if that money stayed out of a retirement account for 60 days or more, you probably owe tax on it. What if you're not sure about the answer to some of these questions is that is this money in this type of account in terms of that type of account, who do you talk to, how do you figure that things out if maybe you weren't as prepared or as knowledgeable as you if we wish you were at this time of year?

Well, that's that's one of the things that we're here for. Right. A financial advisor, a retirement planner, a qualified, experienced professional can absolutely answer questions in this area. And a lot of people think that if they take money out of a 401K and roll it over to an IRA, oh, no, I'm going to tax on all that money. That's absolutely not the case. You do not have to pay tax on your money to take personal control of it. And it's very highly suggested that you should take personal control of it. You have far more choices of what to invest in. You have far more options for beginning to manage and control that tax liability on an ongoing basis. It's not hard to do, but it is something that you don't want to mess up. You want to make sure that your T's are crossed, your I's are dotted, everything happened in the correct order, things went to the correct place.

Oftentimes it is it is absolutely my suggestion is that you should set up the destination for where that money is going to go to before you initiate the withdrawal from the previous retirement account, just to make sure it's as seamless a process as possible. But if you've got questions about that, you talk to a financial professional, you talk with a tax professional. Sometimes you may be able to get just very high level guidance from like your H.R.

professional at your employer. Or if you call into the institution that actually holds the assets within your plan, they're happy to to sort of help you in answering high level questions. But folks, that's not individual to your situation. Those folks don't take on the liability of giving recommendations. They will act on your orders, but they don't know your situation well enough to say if this is a good idea or a bad idea or you thought about doing this, but you actually should do something else. They don't take that liability on because they don't know your situation. That's why seeking the help of a professional to provide guidance ahead of time is always recommended.

So if you have those questions, you can talk to Peter Rishon himself, nine one nine three zero zero five eight eight six. Peter, if I may make a psychological analysis, I think people are just really afraid, like you said, to make a mistake. But as you pointed out, the mistake might be not taking control in the first place.

So by not doing anything, that could be the biggest mistake you could make. You know, I've heard this a lot here recently, but I'm going to put it in a little bit of a different context. The market has been pretty volatile recently, and I've talked to a number of people that said that they were going to put their plans for retirement on hold or delay them or not make any financial moves here that they had previously been intending to make because the market was volatile. And they were worried. They were afraid. They actually said it's we are afraid of what the market might do.

So we're going to delay doing X, Y and Z, right out the storm and then figure it out later. Fear should never be driving the car. Fear should never be a stop sign. You should always have caution. But but fear is a terrible thing to dictate decisions.

And so, yes, people are, back to your specific question, often afraid of messing things up or doing something wrong and then paying taxes or penalties unnecessarily. That's reasonable to concern yourself with. But use caution. Do things with prudence because there are many advantages oftentimes to making those moves. And so fear should not be in the driver's seat. Fear should not be a stop sign to making moves that otherwise make sense or that you intended or hoped to do. You just should do them with caution, understanding the circumstances. So, yeah, whether it's big financial decisions, whether it's tax moves, whether it's something in your personal life, you know, caution is reasonable.

Fear is often unreasonable. 9-1-9-3-0-0-5-8-8-6. That's some smart things coming from this financial expert, Peter Rochon, who you can talk to yourself. Once again, that number is 9-1-9-3-0-0-5-8-8-6.

So back to the basics. The date that we always hear for filing that's kind of out there in the zeitgeist is April 15th. Yeah. Yet I don't believe that's actually been the date for some time now.

Yeah. What is the date? What is going on with this date? And why is even what's seemingly the most simple part, when do we have to file our taxes?

Not so simple. So it seemed like as I was in my younger earning years, it was always April 15th. Right. And then they put some kind of holiday on that Friday, or it fell on a weekend, and so they continued to move that date around. And you're right, I don't remember it actually being April 15th, at least in the past several years.

This year, it is not April 15th. The filing deadline is April 18th, which is a Monday. So you've got that whole weekend, procrastinators of the world, to get all your documents ready, right? I know a lot of proactive people who are kind of chomping at the bit, wanting to get those taxes done. I would actually say just have a little patience and make sure all your forms show up.

And a lot of times I have seen forms get corrected and then show up a couple weeks later, like you get one set, you think you're all ready to go, and then all of a sudden up here's a corrected 1099 form that comes around the corner. So just have a little patience. Don't be so gung-ho that you file before a couple forms actually make it to you, and then you've got to amend and refile and cause further complications and probably a little extra expense. Have a reasonable time frame. I would say generally buy the latter part of February, so it is where we are now.

It's probably pretty prudent. But I caution people to wait on all the forms. That being said, most people procrastinate on taxes.

We hate it so much that we just put it off, don't want to do it, don't want to think about it, until literally the night before. It's the number one procrastinator's holiday is tax filing day. So don't wait till the last minute either. Get a little bit of a jump on it, get prepared, get your documents in order. If you are going to use a tax professional, probably consult them ahead of time, talk over your situation. You know, a lot of value can be had in those conversations with a qualified, experienced tax professional, not just on last year, although there is still some opportunity for last year, but also on all of the years ahead. Hey, I see that you've been doing this, X, Y, or Z for the past couple of years.

Have you thought about doing A, B, or C instead? It may cost you a few extra dollars this year, but in all of the years into the future it will cost you less. Like, those conversations can be of significant value and impact. So even if you have to pay your tax professional a few extra bucks to say, hey, I know you spend time filing my returns, but can we talk about tax planning and a forward-looking approach into the future?

It may be prudent and well worth the investment to pay them a couple extra dollars for their time to have those conversations. What do you think about Roth 401k contributions versus the traditional 401k contributions I'm doing? They may tell you, well, you're earning a whole, whole lot right now. You won't be needing as much income in retirement.

I'd stick with the traditional. Defer taxes while you're earning so much money. Or they may say, well, in all likelihood you're going to need about the same kind of income that you do today in retirement, and you're not earning substantially more, and we know tax brackets are going to be going up in a few years in 2026.

That's on the books already. So why not pay taxes at a lower rate today, right? Those are the conversations that can be had with someone like me or a qualified tax professional. And where there is very specific guidance on those kind of moves, I will in turn consult a qualified tax professional to make sure that we are not making mistakes and we're crossing T's and dotting I's. But we also want to keep as much of that money as possible for our clients and for ourselves. And so proactive tax moves make a lot of sense. Don't be a procrastinator on that.

And yet some will. And so you can extend, right? You can file a tax extension and then not have to technically file the paperwork until October 15th. Word of warning, that is an extension of the paperwork, not the payment. You still owe the payment.

Break that down. What's the difference between those two things? So if I thought that I was going to have a $5,000 tax bill and I waited till April 17th and then I said I don't have things ready yet, let's file an extension. It does not mean that I don't need to write that $5,000 check. I need to write and submit that $5,000 check, otherwise there will be penalties and interest for non-payment or late payment.

What the extension does, and it's automatically accepted, it's easy to do, I don't promote it, but it is easy and it is automatically accepted. What the extension says is if you have a rough figure for what you owe or you don't think that you owe, we can extend the deadline for filing the tax return forms. The 1040 forms, the 1040 easy forms, the actual tax return, the document with all of the numbers in the boxes, that can be delayed. But you still have to make the payment by April 15th or you will incur penalties and interest. How do you know how much to send in that initial payment if you don't have all your boxes filled out and your eyes dotted?

You should have a rough estimate and if you are still unsure, possibly an overestimate. You know, I don't like giving an interest-free loan to the government. It is not my goal to get a large return. It's my goal to try to break even. But if I am filing an extension, I would rather overestimate than underestimate.

And if I end up when I file the correct paperwork and eventually get it in, if that paperwork says that I actually owe a little less than the payment that I made, I'll get that money back. That's really the only time that I personally want to give the government more money than what my moral, legal, and ethical minimum responsibility and requirement is. 9-1-9-3-0-0-5-8-8-6, you can talk to the man himself about your tax planning needs, active, and passive income. We hear a lot about buckets, envelopes, different ways to store your money, and philosophical ways to think about your money. Can you explain some of those things to us and the different statuses that your own money can have? Sure, sure. Well, famously a few years ago, Warren Buffett, who is one of the richest men on the planet, said that I pay less in taxes than my secretary. And there was a big hubbub and uproar about that. Ooh, is that a metaphor?

Is each setting actually true or is he just trying to make a point? No, he, I am certain, has a larger bill than his secretary, although he has said that taxes aren't high enough on the rich. There is nothing that stops Bill Gates or Warren Buffett from voluntarily writing an extra check as a donation to the IRS. If they wanted to pay more in taxes, if they really, really thought that they were paying an unjust, unfair, low amount, they could absolutely write more.

There's nothing against that. However, that's not what they do. He can talk about that, and those like him can talk about that, but they hire literal CPA firms. They have accountants working for them on payroll to make sure that they pay the lowest in tax possible.

So, it's a little bit of the smokescreen there, in my opinion. However, what he said technically also has some merits, because his secretary is receiving W-2 wage-style income, meaning it's the first time that it's been paid to her, and that active income, that wage income, is actually really taxed at our highest possible rate. There are other types of income that we can generate, and what we want to try to do is not spend all of our wages and then deploy what we've been able to save to go out and create more money for us, and that's passive income. See, most of Warren Buffett's income is probably passive income, and I've heard that the middle class and the rich and the ultra wealthy think very differently. There are a lot of middle class millionaires out there, and that's a fantastic thing because that money represents a lot of financial security for the middle class and the upper middle class and those prudent savers and investors who have built up the largest piggy bank of money that they possibly can in order to support themselves in retirement. But that's not the way the rich think.

The rich want to send as much of their money out into the world as possible because every time they send it out, it goes and reproduces and brings back little baby dollar bills with it. And so their goal isn't to build up the biggest stack of money. Their goal is to put their money to work, to create passive income, because passive income is generally taxed more advantageously.

It should be. It's already been taxed once. So if I earn money, wage income, active income, I pay the initial highest tax rates. If I save some of that money and then invest it and put it to work and it goes out and creates more money, I don't get taxed on all of it as though it's brand new money. That is now passive income.

Now, here's an important distinction. When we earn money and put it away into retirement accounts and then it grows tax deferred, that is not passive income. That is simply delaying the taxes on active income. You will still be taxed on that money in retirement down the road at the highest possible rates at whatever the prevailing rates are at that time.

And so there is a difference. The buckets are tax deferred, tax free, and then after tax. You create the passive income most commonly in the after tax account. This is one where we haven't qualified it as retirement dollars. We haven't really received any specific IRS code advantage for putting it in a specified account. We are using it as investment capital. And there are a lot of ways that you can deploy that money that's going to create income and return at a lower tax rate than brand new active income. That's very interesting. 919-300-5886 is the number to talk to Peter Rishon.

919-300-5886. What are some things that people can do to, in the realm of tax preparation, as you were saying, kind of looking forward, what are some strategic opportunities that people can take advantage of looking forward in their taxable life? Well, you should take advantage as much as possible of those opportunities to get tax advantages. So your 401Ks, max those out as much as possible.

Certainly as much as is matched. And probably you need to do more than just the match to really build toward a confident retirement. So take advantage of IRAs. If there are opportunities for Roth 401Ks or Roth IRAs, take advantage of those. Here's another misnomer, sometimes too frequently misunderstood in the financial world. People think that if they put their money in the Roth 401K that their company will not match it.

That is not the case. The company doesn't care whether you choose to pay your taxes now or later. They match everybody else's dollars. They have to match yours regardless of the side of the tax fence you choose to put yours on. So put your money in the Roth 401K. They will still match it. Here's the thing. They're nice enough to offer that match there as an incentive for your continued labor, but they're not nice enough to pay the taxes on that for you. I was just going to ask that question. What's the tax status of that money? And I had a feeling it was going to be too good to be true.

Take us through it. The company gets a write off for the contributions that they make to their employees' retirement accounts. They are literally shifting some of their profits into your retirement piggy bank and shifting some of the tax liability along with it.

So they're nice enough to offer. I hate the term free money. And I know hate is a strong word, but I dislike strongly the term free money because it does not exist.

Nothing in life is free, especially not money. The match on a 401K is part of your compensation plan. It's just part that you don't get unless you put some skin in the game. You work just as hard. You work the same number of hours doing the same thing and that additional piece of compensation is out there for you.

But you've got to put a little bit of skin in the game in order to receive it. So there's absolutely no reason why you should not be capturing a company match on a 401K unless you've got other high priority financial needs paying off debts, getting out of emergencies, those kind of things. But after those basic fundamental building blocks are in place and you are now on the side of building wealth rather than managing debt or escaping emergencies, you should absolutely be capturing the match on the 401K. Here's the thing. If you're over 50, there's catch up allowances.

You can catch up. You can put an extra $6,500 into that. If you want to save extra above and beyond that, the Roth IRA, well, what's your limit?

How much can I get in there? If you're under 50, it's $6,000. If you're over 50, it's $7,000. But between now and the tax filing deadline, I can make a contribution for both last year and this year. So I could theoretically get $12,000 into my Roth IRA all at once.

And if you're married, it doesn't matter the employment status or the wage earning status of your spouse, you can also make a spousal contribution. So theoretically, I could get four times that annual limit amount into retirement accounts working for me right now. And this is a fantastic opportunity for somebody who may have some idle cash sitting around. I've talked to a lot of people that say, hey, I've got $50,000 in the bank.

I don't know what to do with it. Well, in the bank, it's not going to work for you. You know, it's going to earn less than 1%. So why not get it to work in some of these retirement accounts?

And right now, a fantastic opportunity. Theoretically, if you do two years worth of contributions for you and a spouse, you could get up to four times the amount in there. Conversions, let's say that I've maxed out everything and then I want to do more. Well, if I've got tax-deferred assets over in my right pocket, I could do what is the equivalent of some additional savings by going ahead and prepaying the taxes on it to move it over to my left pocket where it's tax-free, the Roth conversions. That's a big one that there's a lot of confusion about as well because a lot of people say, well, I make too much to make Roth contributions.

You may, but there's no income limitation on conversions. So that's a great opportunity for folks. You know, we've seen markets fluctuate, markets were down in January. I would rather have a high amount in my account, but I'd rather pay taxes on a lower amount. So if we do see some market fluctuation, there's opportunity even in an emergency, right? You've got to seize on those opportunities. If the market's down, it's a great time to make those Roth conversions and let those dollars recover than in a tax-free account rather than a tax-deferred, tax-able account. So all of those things I think are great opportunities right now, but really it's sitting down, planning this out, looking at where taxes are today, where they're going to be in the future, and making sure you're making wise decisions with each dollar on how to keep as much of it as possible. Wise indeed.

919-300-5886. If you want to hash over any of these issues with Peter Rachan here. Peter, anything you want to leave us with as we wrap up this tax preparation episode?

I know we could just tackle questions like these all day if you wanted to. You can do both 401k and IRA contributions. Nothing that says you can't do both. So that's a great opportunity. If you're already to the age where you are being forced to take money out of your retirement accounts, qualified charitable distributions are fantastic if you are charitably minded or inclined. It's a literal opportunity to have truly tax-free money. Go to a charity, you didn't pay taxes when you earned it, it grew tax-free, it goes to the charity tax-free.

Everybody wins. I've talked with a lot of people who are trying to set children and grandchildren up for retirement. Custodial minor Roth IRAs, a fantastic thing. Even if you've got a younger but ambitious working young teenager.

If you can show them the value, even if you've got to put some of the money in there for them, of ceding that Roth IRA for them, but you can do it even younger than that with a custodial minor Roth IRA if you want to set something up for children or grandchildren and get that kind of account going for them. And by the way, Roth IRAs, a little bit more flexible than other retirement accounts because secretly the government would love you to take that money back out and get it back in taxable circulation. So those dollars actually tend to have a little bit more flexibility, at least the ones that you've contributed. Fascinating stuff. Peter, thank you so much for your help.

If you're interested in getting a look at the optimized retirement plan that Peter Rishon offers, you can go to his website, www.richonplanning.com or call him up, 919-300-5886. Once again, it's always a pleasure to be enlightened by you, Peter. Thank you so much for joining us here on Planning Matters Radio. I always have a great time doing it, Scott, and I appreciate your input on the program as well. Thank you so much. Be well. Thanks for listening.

Take care, everybody. 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.