Ep. 184 – Tax Planning Should Be a Part of Your Retirement Plan

Who wants to pay taxes? It’s impossible to avoid paying taxes altogether; what we can do is be more efficient with them.

Tax planning is an essential part of your retirement plan. To plan tax efficiently in your retirement, you have to understand all the different investments you’ve accumulated and the different types of tax structures to them.

In this episode of the Secure Your Retirement podcast, we discuss why tax planning should be a part of your retirement plan. Listen in to learn why the Roth IRA account is powerful when it comes to tax planning compared to the traditional IRA account.

In this episode, find out:

  • The importance of understanding your different types of accounts to help make tax planning efficient.
  • Understanding how much of your social security income is taxable annually.
  • If possible, ensure no other income coming in is taxable when taking social security income.
  • The difference between how the traditional IRA and Roth IRA are taxed.
  • The Roth conversion strategy and the tax planning that goes into making it a success.
  • Understanding how the cash in the bank and brokerage accounts are taxed. 

Tweetable Quotes:

  • “Understanding the accounts is the first major part of it and where and how can you be taxed in retirement.”– Murs Tariq
  • “What’s really an important thing when it comes to tax planning is that we do it in advance.”– Radon Stancil 


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 Stancil:Welcome, everyone, to Secure Your Retirement Podcast. We are certainly happy to be talking to you today on a topic that we think is extremely important, maybe not the funnest one to talk about, but it’s extremely important, and that’s taxes. Really, what we’re trying to talk about today is why should we have tax planning be a part of our retirement plan. We believe that it is huge. We believe it’s so huge. We’ve actually partnered with CPA firms so that we can do offer good tax planning, tax advice for our clients, and for all of our clients, we offer tax planning, tax advice, tax strategy as a part of the overall plan. But you might be thinking, “I thought the taxes were one thing and then the retirement plan was another,” but they’re super connected, and we’re just going to walk you through a couple of examples. This is not to be an exhaustive discussion, it is to give you a high level. Murs, can you walk us through the one aspect that we’re going to talk about in the big scope here of this idea of tax planning?  
Murs Tariq:Yeah, so the big thing about tax planning for retirement is you got to understand all the different vehicles that you’ve accumulated over the years. You’ve got different types of accounts that have different types of tax structures to them, and so understanding them is very important, and then that helps us see what opportunities there may be as far as things that we can do to make our tax situation a little bit more efficient, or strategies that we can put in place year over year that can make things move a little bit from a tax perspective that ultimately, nobody likes paying taxes, but it makes us a little bit happier knowing that we may have done something to save a little bit on taxes in a given year, so understanding the accounts is the first major part of it, and where and how could I be taxed in retirement?  
 It was pretty easy when you’re working in one sense. For most of us, we’re getting a W-2 or a 1099, and that’s the money that you got to pay taxes on, and a lot of times, you’re withholding that already and you may be just barely breaking even come tax time, or getting a refund, or owing some money every year, and that’s about it. But then when you get to retirement, you don’t have that regular salary paycheck that’s coming in the door, and now, you’re in control in a lot of ways of what your tax situation is going to be. Those accounts that can generate taxes for you, a lot of them a US have saved into pre-tax type of accounts like a 401(k) or a traditional IRA. We want to talk through those and how those are taxed. Some of us have Roth accounts that are taxed differently, a Roth IRA, or maybe even a Roth 401(k) as you’re contributing to it.  
 Then another category of taxation is in brokerage accounts and we’ll talk about how those are. They’re a little bit different than an IRA and also different than a Roth and they can be very handy when it comes to income planning. Then you’ve got cash in the bank and you’ve got Social Security, and Social Security we’re going to talk through because a lot of times people don’t realize that that is something that can be taxed as well. You think that you’ve paid into it for so long and once you finally start drawing on it, you feel like you shouldn’t be taxed on that, but it’s possible, so we want to help you understand that, and ultimately, help you understand what we think through in this whole idea of tax strategy and tax planning when it comes to retirement income plan. But right now, I’ll let you start off with the major one that is a misconception about Social Security and how can that be taxed.  
Radon Stancil:Yeah, and this has been a topic. I would say be prepared. I think it’s going to even get more aggressive than what it is today. But ultimately, based on income of our Social Security, 85% of my Social Security can become taxable income. Well, how does that math work? Well, if I’m an individual and my combined income exceeds $25,000 a year, so that’s an individual filing as an individual $25,000, or more or on my joint return if I have a spouse, then if we make more than $32,000 combined of all income structures, then up to 85% of my Social Security will go down and you’ll see it on your tax return converts so that part of that Social Security, 85% of it goes over into the taxable income bucket.  
 When you think about that, what we would walk through when it comes, this is one example of tax planning coupled with the retirement plan. If it were possible, and I’m not saying it is all the time, but if we have a scenario where maybe for a couple of years, maybe we can’t do it for long, where we make sure that no other income that’s coming in while we take Social Security is taxable income, and we’re going to talk about those categories that can be used as we go through this podcast today, but if I’m able to take cash from someplace that’s not going to show up on my tax return as taxable income, that could be a significant savings on what gets taxed in my Social Security. That’s really important that we understand that.  
 Now, again, for us are and our client base are made up of people that are very good savers and they’ve done a great job of saving in vehicles that that’s not possible, but it may be possible for a year or two or a couple of years if we think it through. What’s a really important thing when it comes to tax planning, not tax filing, is that we do it in advance. Today it’s the end of the year. We’ve got a little bit of period of time if you’re listening to this podcast as it just comes out, we’ve got a little bit more time left in 2022. Some of these strategies that we’re going to talk about have nothing that we can do. We cannot do it after January 1st. We have to do it by December 31st if we’re going to be able to take care of some of these things. Then maybe what we’re doing is we’re looking to Jan 2023 and we’re saying, “What can we do in 2023? Maybe we messed up and couldn’t do it in 2022, what can we do in 2023?” Just keep that in mind, Social Security, 85% of it will show up as taxable income, but there may be ways to lower that other part of our income that’s taxable.  
 All right, that just is one example. Let’s go to another thing that we need to think about and that is the Roth IRA and the traditional. Murs, we’re gonna combine that into one big discussion, but we got Roth IRA and traditional. Can you walk us through how the Roth is taxed and then how a traditional IRA is taxed?  
Murs Tariq:Yeah, I’ll start with the traditional IRA because I think a lot of us have saved into that type of bucket. When you get your first job, you’re told to save into your 401(k), right? Usually, for a long time, your traditional pre-tax 401(k) was the only option. These Roth 401(k)s become available much later, but for most people, they only have the option for the traditional or the pretax 401(k), which then can be rolled into a traditional IRA or a rollover IRA once you retire or reach the age of 59 and a half. But those dollars, in all essence, have never been paid taxes on, so every dollar in there, if it’s a hundred thousand, a 500,000, a million dollars in a traditional IRA, you have not paid any taxes on that.  
 I think sometimes we forget that I’ve amassed so much into this account, but it’s not all yours. I tell that to people all the time, it’s not all yours. Some of that is reserved or allocated to go to the IRS as you start taking withdrawals. The deal there is you made a deal with the government when you said, “Hey, I want to put money into a 401(k) or an IRA,” and the benefit of this is I get a tax deduction immediately in that calendar year, I’m going to get a tax break for saving for retirement. That was the big draw. That’s the reason that now as we enter into retirement, or you’re thinking about that retirement phase, these dollars have not been taxed, so every withdrawal that you would take is going to add to your income for the year. That’s something that we want to be thinking about heavily as we approach those years where we’re going to start drawing on the accounts.  
 Conversely, the Roth IRA is a beautiful planning tool when it comes to retirement. The main difference there is that the Roth IRA is all tax-free money and it grows tax-free as well. The traditional IRA pre-tax, you’ve never paid taxes on these dollars, and then the Roth IRA is already taxes paid money that’s now in a tax-free growth environment, and so the Roth account is very, very powerful when it comes to tax planning and also for leaving money behind to a next generation. We don’t have to worry about taxes that need to be paid on those dollars.  
 Very quickly, a strategy could be, for one, it could be, well, let me take some from my traditional IRA and some from my Roth and have a nice blend of pre-tax money and tax-free money, so if this is a goal of someone’s, I can keep my tax bracket at a certain level, these two accounts together can really work together to do that and help accomplish that. But the Roth IRA is very powerful because it is tax-free and it grows tax-free as well. You don’t get a tax break on that one, you’re basically using dollars that you’ve already paid taxes on in that year, so there is no immediate advantage to funding a Roth IRA. The advantage is that it gets to grow tax-free and when you take withdrawals, it’s tax-free withdrawals, unlike in the IRA where it is taxable income that goes on your tax return for that year.  
 Someone could say, “Well, I have a lot of money in traditional IRAs and I want to get it over into a Roth IRA. Maybe I wasn’t able to fund a Roth IRA because of how much I earned while I was working, so how can I do that now?” This is a very popular topic right now and it’s all around this idea of Roth conversions. We actually had a conversation with a client over Zoom just the other day about him wanting to do some Roth conversions over the next couple of years, so a very common strategy that we’re talking about now, and Radon, I’ll let you discuss what is the difference and how does a Roth conversion work and what are some things that we want to be thinking about there?  
Radon Stancil:Yeah, so a Roth conversion, if you conceptually understand, with a Roth contribution, there is a limit as to how much I can put into that Roth based on the IRA contribution limits for that year. There’s some income limitations as well on a contribution. On a conversion, there is no limit, there is no income requirements. I’m just converting from the traditional IRA over to a Roth, so if you’re a person who says, “I make too much money,” or, “I’m not able to do it,” none of those things apply in this particular case. What this is all about is, do I want to now pay the taxes on what I’m going to convert to get it over into the Roth? Because when I do it is not a distribution coming out of my traditional, I am converting it, but on my tax return, the money I take out of the traditional is going to show up as income, but I got it to put it over in that Roth.  
 Let’s just walk through a simple one here. Let’s say I’ve got $300,000 in a traditional IRA and I say I’m going to convert $50,000 of my IRA. I’m going to then take it, from a logistic, just the way it would flow is it’s going to go from that traditional over to the Roth. I’m never receiving it, but that $50,000, I’m going to get a 1099 for it and it’s going to have to put it on my tax return as income, so if I made $0 of income that year, all of a sudden, now I’m going to have $50,000 of income. If I made $125,000 that year, now I’m going to have another 50, so I have 175,000. Now, that leads us to some real tax planning and tax strategy at this point because now what we need to do is to understand all of the different things that could be affected by this Roth conversion.  
 We have a very special software program where we can actually do those numbers, we can run those numbers so you’re able to see, and it shows us very clearly the levels and the potential problems or potential things we’ve got to think about to get that. Also, what we could do is have a scenario where maybe because of something that occurred, it’s the prime opportunity to do a conversion. You’re actually missing out on doing it at a very low tax rate.  
 Let me give you an example. Let’s say that I retire this year, 2022 if you’re listening to this again quickly after we recorded, it’s 2022. Let’s say my end date of work is December of 2022, and in 2023, I know I’m not going to have any earned income because I retired, I am under 72, so I’m not required to take anything from my traditional IRA, and I’ve got some cash in some place that I could use for my spending money for the year. That’s important because I don’t have to call that income, I can take that cash out cause it’s after tax. Now, imagine if that were my case and I’m going to have no taxable income for 2023, I could convert some of my so of my traditional IRA at a zero tax rate. Now, you might say, “Why?” Well, because I get a standard deduction already that the government gives me. I don’t even get any benefit from that, by the way, if I have no income, so if I got a standard deduction, I can take that much money from my traditional IRA and go put it in a Roth tax-free.  
 Now, above that, I could look at my tax brackets and say, “I only want to pay 10%, I only want to pay 15%,” and we can pick what we’re going to do on that. You might think about doing that conversion in that case, as really, doing it at a sale, like we go to a closeout sale, and we think, “Oh, I’m going to get that money at a very low rate over there.” Now, obviously, if I got a lot of income, then I still may do the conversion, but I need to understand the ramifications. Again, another example of why tax planning, tax strategy needs to be tied right to the retirement plan.  
 We could talk about that one for a lot longer, but I will say this real quick, if you wanted to see that, all you got to do is let us know. You can go on our website, click on the Schedule Call. We’re glad to be able to show you what that looks like. We need some information to be able to show you that. But just keep that in mind, Roth conversions could be a fantastic tool. Now, Murs, can we hit two other areas as far as the accounts? ‘Cause this is going to tie right into that Roth conversion if I needed money. That is what we call a “brokerage account” or an “investment account” and then cash in the bank.  
Murs Tariq:Yeah. Yeah, so cash in the bank is the easiest one. It’s not going to have any taxes to it. The only time that it is gonna generate any type of taxes if we’re actually getting some good interest off of the amount of money that is sitting in the account. For a very long time, interest rates at banks have been very low, and so even if you do get a 1099 from interest on your dollars that are sitting in the bank, it’s very low to negligible, so it doesn’t even really move the dial, if you will, when it comes to a tax perspective. They’re cut and dry, very simple, and if we have a lot of cash in the bank, that can help with tax strategies, especially when we retire.  
 Now, we have brokerage accounts. They are taxed, some could say, in a complex way because it’s not as cut and dry as none of this money has been taxed before, or this money is tax-free, it’s actually a little bit of a combination of a few different things: one is, are there any investments that are going to generate dividends? Those have a tax structure to them, and then dividends or interest income, and then also the investments that are bought and sold in a calendar year can generate taxes for you.  
 In a very quick explanation, you’ve got short-term capital gains and you’ve got long-term capital gains. Short-term means you held the investment for under a year. Long-term means you held it for over a year, a year and a day. Short-term basically means that it’s going to be coming in at your tax rate for that year, so if you’re in the 22% bracket and you sold something at a short-term capital gain, it’s going to be at your 22% tax rate. Long-term capital gains, it depends on where your tax rates are, but somewhere in that 15-to-20% tax bracket, and that is if you have held an investment for over a year and a day, and then you’re in long-term capital gains.  
 The big thing that helps here is if we have a lot of long-term capital gains in this type of account, that can be an income-planning advantage. If there are losses in the account, we can do certain things like tax loss harvesting to help with a tax situation, or getting out of certain assets that have large gains, we can offset gains with losses in the account, so that’s a big plus in this type of account as well. That’s the high level on brokerage accounts. They help quite a bit. They also don’t have restrictions as far as when you can withdraw on them, like retirement accounts, you typically have to wait till 59 and a half, so that helps, too.  
 Then there’s all these other things that we haven’t had time to talk about and all these other pieces, or knobs, I’ll say. If you turn one dial in retirement planning, if you turn one dial or turn one switch on, it activates another three or four switches, and they’re all working together, and so that’s where tax planning and tax strategies, why we put so much weight onto them because it is very important. Nobody wants to pay taxes, but we can’t avoid them altogether, so can we be a little bit more efficient? What are a few other ones, Radon, that we can’t explain today, but are definitely things that we want to be thinking about as we’re doing these?  
Radon Stancil:Yeah, this one is really important. It’s called IRMAA. That’s the adjustments that can occur on my Medicare that makes my premiums go up. That’s extremely important. By the way, we did an entire episode on that, so go to episode 177. There’s an entire episode on IRMAA and how things get affected there. The others could be our pensions, our rental income, and anywhere else I get income from, maybe I’m a consultant, and I work that way; all of those things need to be considered and looked at when we’re doing any of these other strategies, so keep that in mind.  
 We hope this has been a helpful episode just to get your brain wrapped around, “I need tax planning connected to my retirement plan, so if right now, you’re in a situation where you’re working and maybe you got an advisor who’s just helping you with investments, but you really don’t have somebody that’s tying those two together, you might have a CPA and you might have a financial advisor, but if they’re not connected, and I mean thoroughly connected, then we might be missing out on some opportunities, so keep that in mind. If you’ve got any questions you want to talk to us, go to our website, top right-hand corner, click on our button, Schedule Call. We’re glad to have that occur. It’s a 15-minute complimentary phone call and we’ll be glad to walk you through all of these different concepts or at least get the conversation started. Thank you very much for listening. We’ll talk to you again next Monday.