Ep. 133 – Steven Jarvis – Tax Planning for Retirement
Did you know that you might end up spending more on taxes after retirement due to a lack of proper tax preparing and planning strategy?
It is important that you proactively do tax preparation outside of the tax deadline and plan your taxes as part of your retirement planning.
In this episode of the Secure Your Retirement podcast, we have Steven Jarvis, a CPA, owner of Retirement Tax Services, host of the Retirement Tax Podcast, and is very knowledgeable in tax planning. We cover the topics of Roth conversions and tax rates going up in 2022 and how you can navigate that with the help of a financial advisor.
In this episode, find out:
● The disadvantages of using tax software when it comes to complex tax planning.
● What a lot of people think about taxes and how tax preparation and planning can help you get tax benefits.
● Things to look into outside of the tax deadline to proactively and impactfully plan tax.
● Steven explains how he approaches the topic of Roth conversions and tax rates going up.
● The value of proactively finding ways to take away the IRS’s ability to change the rate on your tax-deferred money.
● Understanding the proposed tax changes that might happen come 2022.
● Steven on how he partners with financial advisors to help taxpayers do tax preparing and planning.
● “If tax rates don’t change, it doesn’t matter if you do tax-deferred or Roth, the math works the same.”– Steven Jarvis
● “The tax code is written in pencil; congress can change it any time they want.”– Steven Jarvis
Get in Touch with Steven:
● Website: https://retirementtaxservices.com/
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the Full Transcript:
|Radon:||Welcome everyone to our Monday podcast. Our goal each and every Monday is that we look to bring an expert, somebody that can add value. Murs and I talk to them, and not only do we learn, but we hope that you are able to get benefit as well. And I will tell you, one of the things that Murs and I are always dealing with when it comes to somebody getting ready for, or living throughout, retirement is this idea of how to deal with taxes. And I will say in the last year or two, it has become a bigger and bigger and bigger topic, and I can only imagine it will become more and more of a concern as we see what’s going on with the economy and dealing with all kinds of things. So today we have brought to you an expert, a CPA, somebody who understands in particularly tax planning around retirement, and his name is Steven Jarvis. Steven, thank you so much for coming on and talking with us and sharing what you know about taxes with all of our listeners.|
|Steven Jarvis:||Yeah, I’m really excited to be here. I’ve been a nerd my whole life, but as I’ve gotten more into podcasting, it certainly comes to the forefront when people see just how excited I get it to talk about taxes. Really the excitement for me is that it’s something we can talk about and help people actually do something about. I’m not going to get lost in the tax code. I don’t have a tax code in front of me I’m going to read to your audience from. I like talking about how do we make a difference here?|
|Radon:||Fantastic. Well, let’s just, I guess, get this started. I think for the listener, we’ve got different options out there that a person can do. You can do it yourself. And by the way, this is probably in financial advisory as well, all these things still apply, but let’s just talk about taxes. You can do it yourself. There’s some really good software out there that can help you file a tax return, I’m sure. We know about some of those. Everybody probably knows those. You’ve then got some what we call just really, I don’t know, I’ve seen them in Walmart and I’ve seen them in other places, where you can go up and do something like an H&R Block where you walk up, you bring your stuff, they’ll just do the thing for you, so you don’t have to do the software. Then you’ve got this thing of an accountant, then you got a CPA. Can you just help all of us understand, what’s your perception of the differences within the tax world and what a person needs to know about those things?|
|Steven Jarvis:||Yeah. Like so many things, there are a lot of options available. In all those different options you talked about, there’s good options there. It just depends on your situation. Like you mentioned, I’m a CPA. I’m pretty heavily involved in this, so of course I am a little bit biased to the full service tax planning that can come along with tax preparation. But for people who are really interested in their own taxes or have a simpler tax situation, there are great software out there, whether it’s TurboTax or H&R Block. There’s a lot of DIY software that can do a great job.|
|And really, regardless of whether you’re doing your taxes yourself or you’re using an accountant or a CPA, one of these shops that you see in Walmart, I want to throw out right now that people can get lost in this trap where they feel that since it went through a nice looking software, it must be right. Those software are really powerful, but they will allow you to do all sorts of things wrong. And so, especially as we get beyond, hey, I just have a W-2 or I just have a W-2 and one 1099, if we get into a little bit more complexity or we’re committed to forward-looking tax planning, just using the software isn’t enough. That’s no guarantee you’re getting it all right.|
|Murs Tariq:||Yeah, I think the that’s a good point, Steven, because I think I had a conversation, maybe it was a couple months ago, with someone who used one of those software, and he’s been using that software for years and years and just doing it on his own. And maybe there was a slight tweak in his situation, but the return still came out. It still got filed. But then of course, six months, eight months later, whatever it is, he gets this letter in the mail from the IRS. Nobody ever wants to get that letter in the mail from the IRS, even as simple as they can be. Basically said that he forgot to do this. And then he says, “Well, the software didn’t tell me to do this.” But ultimately it’s the individual’s responsibility. So I agree, it’s about how much you want to do.|
|My father, he owns a construction company, but he’s also an engineer by background, so he loves, he sees the tax code really as a game. He loves doing that himself, but he does go and get it all reviewed, because it is a business and all that, by a CPA, himself. So it’s to each his own. I don’t like doing my own taxes, and I live in the financial world, so I agree.|
|There’s filing the tax return, and then there’s tax strategy. There’s things that we need to be thinking about. Maybe for the younger person, the tax strategy is picking a concept as far as how you want to start growing your money. But then what we deal with, what we see all the time and what you work with all the time, is when we hit certain points, certain benchmarks, all of a sudden we can start doing some different things. So can you talk to us about, there’s the tax return, but also talk to us a little bit about the importance and things that we start seeing when we’re talking about retirement tax strategies?|
|Steven Jarvis:||Yeah. I’m going to do my best to answer your question. I might get a little sidetracked here, so you just bring me back around if I don’t quite get it all the way there, because the first thought that comes to mind for me is that for a lot of taxpayers, most people don’t really think about taxes having different aspects like you’re talking about, that there’s tax preparation and tax planning and those are different things. Because for a lot of people, taxes feel like this really mysterious black box that we have no control over, that you earn money throughout the year, the IRS takes their portion, and we all move on. A lot of people really don’t even get this sense that there’s something they can do about their taxes, that there’s proactive choices they can make.|
|A lot of times when we talk about taxes, most taxpayers are just hearing that as, yep, that’s that thing I file every year. Let’s just move on. It’s painful. I don’t want to talk about it. But what I like to spend my time doing is helping to pull back the curtain a little bit and make taxes just a little bit less mysterious, because there are so many things we can proactively be doing that will allow us, the way I like to refer to it is not leave the IRS a tip. I am all for tax compliance. You need to pay every dollar you owe, but there’s no patriotic awards for leaving a tip. And there are lots of ways that we inadvertently leave tips.|
|We’ll tie this back to the software not always getting it 100% right. I was recently reviewing a tax return for 2020 where the taxpayer took the standard deduction, which 90% of taxpayers take the standard deduction, so that’s most of us. And when you take the standard deduction, you aren’t getting a tax benefit for your charitable contributions, because you haven’t gotten above that dollar amount. But in 2020, and now again in 2021, Congress has said, oh wait, let’s give you an extra little chance, even if you take the standard deduction. In 2020, you could deduct up to $300 in cash charitable contributions if you were married filing jointly. And for 2021, it’s actually $600.|
|These are small numbers, but I was reviewing a tax return recently, and this was just, it was zero, it was left out. And in some of the schedules, I could see that the taxpayer had made charitable contributions, but the software didn’t automatically do it, and the person preparing it wasn’t looking for those kinds of things, because they just wanted to check the boxes and move on. That’s the more compliance, the tax preparation side of it.|
|The tax planning, which unfortunately most tax preparers are not doing anything around, is saying, okay, if we look a year ahead, if we look five years, 10 years ahead, and we look at how much we’re going to owe the IRS in that period, what are some of the decisions we can make to start sanding off the rough edges on that tax bill?|
|Radon:||Yeah. Could you give us some examples? I know that in talking with you and thinking things through, could you lay out for us what that would look like in a practice like yours, and you’re thinking about this idea of tax planning, and then this might trigger us to be able to go a little deeper, but could you lay out for us what that would look like? It’s hard for, I think, my brain, until I saw your planning process. What does that even look like to do tax planning? Because I feel like what I thought was so nice is that you have it laid out on a schedule, on a thought process, so the person could go, oh, that’s tax planning, that’s not tax preparing in February, March, this is a year-round event. Could you walk us through what that looks like?|
|Steven Jarvis:||Yeah, definitely. Retirement Tax Services is the name of the firm that I created to really address this issue of tax preparation and tax planning not always going together, and how do we bring these all together so that ultimately the taxpayer is the one who wins? You just mentioned it there, and I think it got brought up a little bit earlier, that tax preparation often, even if someone’s working with a tax preparer, it’s coming in February or March. Bring a whole stack of documents, let’s turn out a tax return and let’s move on, and we’ll do the same thing next year.|
|The reason this isn’t ideal from a tax planning standpoint is that there are a lot of decisions and a lot of actions we have to take by December 31st to actually get the benefit from them. As we work with clients, we take an approach of this is a year-round relationship. So yes, we’re absolutely going to get the tax return filed and we’re going to do our best to get it filed by the deadline or get it extended and file it by the extended deadline, but that’s not when we start the conversation. It’s November as we record this. We’re having conversations now to say, okay, are we on track for the end of the year so we don’t have underpayment penalties, because the IRS will charge you penalties and interest if you don’t pay your taxes as you go.|
|And then when we get done preparing the tax return, we’re turning around and looking at the next year and saying, okay, were there any life events? Are we expecting any life events this year? Are we changing jobs? Are we retiring? Did we have a kid? Did we have a kid move out, so we no longer have that dependent? What are these changes that are going on, so that we can adjust accordingly, so that we can look at different types of tax-qualified accounts, whether that’s 401(k)s or IRAs or HSAs? You’ll have to help me with how many of these acronyms I need to define, because as a CPA, of course, I love acronyms.|
|But there’s all these different things available to us that if we think about them and if we talk about them, or if we have a professional in our lives like you guys who are helping us to talk about these things, if we’re doing that outside of tax season, outside of the tax deadline, we have a real chance to do something proactive and impactful to, like I said, sand those rough edges off the tax bill we owe the IRS.|
|Murs Tariq:||Yeah. I know there’s two major things that we’ve done podcasts on, and we’re seeing it right now. As we get closer to December 31st, it becomes more and more of a stressor, and I think if we have a plan going into, say, the middle of the year, then it makes everyone’s life a lot simpler. What I’m talking about there right now, what we’re seeing day in and day out is the conversation around QCDs, these qualified charitable distributions. That’s a huge tax advantage.|
|And then also, Roth conversions are also very big. We had a conversation with a client the other day, really just to explain what their total impact is right now. We had a really, really good way of saying, all of your money right now is tax deferred, and that’s always the idea when you’re growing up, let’s just defer the taxes, get the immediate benefit of deferring taxes. And then we forget that 30 years from now, we’re going to have to start drawing on that, and that’s fully taxable and it’s a little nerve wracking.|
|So we had a big Roth conversation type of meeting with that client, and ultimately we came up with this whole plan to really do a five-year or maybe even a 10-year Roth conversion plan. While the bite hurts, every single year you’re taking this tax bite, but you said something at the beginning of we’re talking long term here. Taxes need to be looked at long term rather than can I get that immediate benefit, especially when you’re talking about tax planning.|
|So how do you handle the Roth conversion type of conversation, because it’s so big right now and the threat and the worry of taxes going up in the future, it’s so big right now that it’s in every conversation that we’re having. So what’s the process as far as just thinking through, how do you arrive at a number and how do you talk to someone about that?|
|Steven Jarvis:||Yeah, that’s a great question, because there are headlines for days on the topic of Roth. Double-edged sword of the internet, there is lots of information out there. It can be hard to tell, not even just what’s accurate but what’s applicable to a certain person’s situation, because especially as we talk about tax planning, we do have to take these big ideas and then apply them very specifically, because it depends on an individual client’s situation.|
|The things I’m looking for to say, okay, should we have a conversation with a specific client about Roth conversions, obviously they have to have tax deferred money. That’s what we’re trying to convert, is that they’ve deferred money in a retirement account, and we want to look for the opportunity to say, is there a chance that tax rates go up for that individual in the future? Because something that gets missed a lot is that if tax rates don’t change, it doesn’t actually matter if you do tax deferred or Roth. The math works out the same. We can have a whole separate podcast going through the math, but the math works out the same if tax rates don’t change.|
|So really when we’re converting to Roth, we’re hedging against future tax rate increases. So part of the conversation I have with clients is, I put it to them first to say, do you have any concern that tax rates might go up? And that’s whether because of their personal situation, the income might go up and so their marginal tax rate is higher, or if they’re at all worried that Congress might raise taxes. I haven’t recently met anyone who thinks that tax rates are going down, with the different headlines about what Congress might do. And honestly, the tax code is written in pencil. Congress can change it any time they want.|
|And so that’s where I always start, so that we’re on the same page with the why of why are we doing this? And one of the ways I help try to illustrate that to clients is to say, if you have tax deferred money, that’s essentially like having a variable rate mortgage with the IRS that they get to pick the rate, and at some point it’s going to come due. Anything we can do to take away the IRS’s ability to change that rate on us is something I’m going to proactively look to try to accomplish.|
|As far as the amount that gets converted, this is definitely going to be very specific to each client situation. Conventional wisdom is, hey, let’s fill up the next tax bracket, but the more we can do to understand a client’s situation and especially their future potential tax liability, the better we can decide, are we only doing Roth conversions if we can fill up the 12% bracket? Are we getting up to the 22 or 24% bracket? This is going to depend on what required minimum distributions look like.|
|A lot of people are actually surprised to find out that their tax rate goes up in retirement. In their minds, they’ve always thought, hey, I’m going to work real hard throughout my career. This is going to be my peak earning years. And then I’m going to retire and I’m going to have very little income. But between Social Security or any defined benefit plans, required minimum distributions from IRAs, those tax rates actually can start sneaking up on you, that they’re going to be higher in retirement. That’s really the framework of the conversation I’m having with clients around this.|
|Radon:||All right, so I’ve got a little bit of a tricky question for you. I know there’s been a lot of different conversations around this, but we are, like you said, recording this in November. From what you’re seeing from just a pure need to be ready from some of the things that we’re hearing about changes in the tax code, are there any that you feel like… Let’s just say that, a client or a person listening who’s close to or in retirement, they make a decent amount of income, but they’re not in retirement making $2 million a year, they’re just a good lifestyle. Are there things that we need to be aware of from what you’re seeing that probably is going to come about with some of the tax changes that we know are coming?|
|Murs Tariq:||Make sure you do your little disclosure here first too.|
|Steven Jarvis:||Oh, no need for a reminder on that. I’m pretty good at disclaimers. And part of the reason there’s a disclaimer on anything forward looking is because I can’t promise you what’s going to happen, and no one can. Anyone who tries to guarantee the outcome is selling you something you probably shouldn’t be buying. Because like I said before, the tax code is written in pencil. Whatever comes out of these changes, Congress could change it again in a year.|
|And so I don’t spend a ton of time talking to clients about proposed changes until they become final, because we’ve even seen it in the last couple of months. Each new proposed package that comes out of one of the houses of Congress has different priorities as far as what may or may not change. I like to stay aware of it just so that I’m not surprised by what questions my clients are asking, but I never ask my clients to gamble on what might come out of Congress.|
|Now, the one exception of a topic that I am talking a little bit more about with clients that’s in some of the proposals is the idea that they might get rid of the backdoor Roth contribution. The reason I’m talking to clients about this, even though it’s a proposed change, is that if we go ahead and do something about it, we’re not going to be any worse off if they don’t make the change. For some context for that, individuals will hit an income limit where they no longer can contribute to a Roth. When we get close to the end of the year, I always get fuzzy on whether I’m thinking 2021 numbers or 2022 numbers, since the 2022 numbers just got released. But somewhere just over $200,000 a year in income, you can’t contribute to Roth anymore.|
|But several years ago, Congress accidentally created a backdoor opportunity. It was not intentional, although they have acknowledged it is valid, that you can contribute after-tax dollars to an IRA and then convert it to Roth. This is what the backdoor Roth contribution is. And there’s a lot of talk that this could go away. One of the interesting things that doing these backdoor Roth contributions creates is that we can have after-tax dollars and pre-tax dollars in the same account. There’s some pretty intentional steps we have to take to actually be able to convert the after-tax portion.|
|I won’t go through all the details for your listeners, because we would be here for another hour. That is definitely one of those things where if you have after-tax contributions, which would be Form 8606 if you prepare your own taxes, that’s probably an indication you should be talking to a professional and not just doing taxes on your own through a DIY software, because we do have an opportunity to go ahead and implement that strategy, make that strategy really effective. But that window might be closing, depending on what actually comes out of these proposed changes.|
|Murs Tariq:||Yeah. Yeah, I know that’s a very hot topic as well right now, and hopefully it doesn’t go away, because it is a nice little advantage for someone that does make over that limit and can’t contribute to the Roth, because everyone’s talking about the Roth and how beautiful it is. But if you can’t contribute to it, well then it doesn’t feel fair to a degree. But we’ll see how all that plays out. And I agree, when it comes to the tax code, when it comes to the estate planning side of things too, there’s so many variables out there that it’s next to near impossible to plan for what’s going to be next year.|
|So we agree. When Radon and I were talking to clients, it’s all about, hey, what is it right now? And let’s talk about what it is right now and not off of this hypothetical, because it takes months and months for something to actually get passed, and by the time they’ve chopped it up, it’s completely different than what you thought. You don’t want to make a decision based off of what you thought is going to be happening in the near future.|
|Steven Jarvis:||If I can just make one comment on that, because one of the things that clients will push back and say sometimes is, “Okay, wait, you’re talking about long-term tax planning, and then you’re talking about, well, there’s all these proposals and it can all change.” And so people can just default to well, then I’m not going to do anything, because it could all change. But unfortunately, these things are simultaneously true, that if we want to get ahead on lowering our tax bill, we do have to look long-term, but yes, it can change.|
|So for me, what I tell clients is that we’re going to make the best decision we can, based on the information we have today and the laws that are in place today, because doing nothing, to me just isn’t an option. We need to be intentional, we need to be proactive, but I can only operate based on what’s actually written into law today.|
|Murs Tariq:||Right. And you know, we had a quick conversation with that. It was that Roth conversion conversation that we had with the client. Sometimes you may think that if I’m doing this Roth conversion plan, then I’m locked in and I have to do this. I’m committed to this. While the fact of the matter is, is that no, you’re not. If your life situation changes and all of a sudden this strategy doesn’t make sense, well, you’re still better off for maybe doing it once that one time versus not doing it at all.|
|There’s a lot of flexibility in the whole planning process too, when it comes to the finances, when it comes to the tax strategy. You’re never really locked into anything when it comes to this. It’s just how much you want to do and does it still make sense? That’s why we agree that an annual talking about it throughout the year every single year is the best way to go. I think you’ve got a great setup, Steven. We could obviously talk about this stuff for hours on end, but we’ve only got so much time, so thank you again for your time and your information today.|
|Radon:||And I want to ask this real quick, Steven, in case people are listening to this and then they go, hey, wait a minute, we really liked some of the things that y’all were talking about, and you said you created this practice, the Retirement Tax Services. Could you just tell us how that works, how your practice is set up, just so when people are asking us about it, we can explain how that works?|
|Steven Jarvis:||Yeah. I’m a CPA, and whatever stereotypes you’re thinking about CPAs, as far as what our career looks like, some of them are probably true about me too. I’m going on 12 years in this industry, and I’ve worked for some of the largest firms in the country. I’ve had some great experiences doing some really exciting things in the accounting world. But ultimately the thing I get most passionate about is being able to have an impact on individuals. I love being able to see that the things I’m recommending, the work I’m doing, is having an impact on a specific person or household.|
|I had the opportunity earlier this year to collaborate, actually, with some financial advisors to create a service that really speaks to this, let’s combine tax preparation and tax planning. The reason I bring up that I did this with some financial advisors is for that context of the planning aspect of it, because while I might have leaned towards let’s do planning as well as preparation, advisors like you guys, that’s where you’re focused. People come to you saying, help me plan for the future, whereas people usually come to CPAs saying, hey, help me file last year’s taxes.|
|So we created this service where we collaborate with financial advisors, because you’re already in such a good position to have information about the client’s life and some of the planning that they’re doing. And then we serve the taxpayers, like I said, in collaboration with the advisors to make sure that we are doing an incredible job on the compliance piece. We got to get the tax form filed correctly. But then we immediately turn around and say, okay, what happens next? What are decisions we can make? What are things we can be doing?|
|We also added a third piece in there of ongoing monitoring with the IRS, that as a taxpayer, you can designate someone on your behalf to receive information from the IRS so that you know what to do when you get one of those notices that Murs talked about earlier. We like to call them nastygrams, and I call them that because if you’ve never seen one of these letters, they come, the envelope says Department of Treasury, which nobody’s used to getting and feels scary to begin with, and then they use this font that’s got to be older than I am, that just makes you feel like you’re going to jail.|
|Even though some of these letters are just notifications, sometimes they are, hey, you might owe this penalty. But we went ahead and jumped through the hoops we needed to, to set this monitoring up, so that instead of a taxpayer getting this letter and saying, “Oh no, what do I do?” they’re getting a call from us to say, “Hey, you’re going to be getting this letter in the mail. Here’s what it means and here’s what we’re going to do about it.” We want this to be an ongoing tax resource, not a once a year tax transaction.|
|Radon:||Very nice. Well, we are happy that we were able to meet you, get to know you, and now we’re able to bring this to other folks so that they understand exactly how to do tax planning. And we are all about retirement, so we loved your name to your Retirement Tax Services. It fits really good. Thank you so much, Steven, for coming on and talking with us, for sharing some of these points with us and our listeners. And we certainly hope to be able to have you on again and talk further about this.|
|Steven Jarvis:||Yeah, I loved being here. I appreciate the invite. If any of your listeners are looking for more tax content, the Retirement Tax Podcast is a consumer-facing podcast that I do that’s talking all about these kinds of topics of how do people do more for their tax situation?|
|Radon:||Yeah, and I always remind people that in case you’re listening to this and he just said that really fast, don’t worry about it. On our website, we actually have all of that information listed there, right with the podcast, so all of those links and everything you’ll need to get to know a little bit more about Steven and Retirement Tax Services and their podcast. All that information’s right there, so just go to our website and you can get all that information. Well, thank you very much. We hope you have a great day. Thanks for spending some time with us, Steven.|
|Steven Jarvis:||Yeah, of course. Happy tax planning.|