← ChooseFI | Financial Independence Podcast
ChooseFI | Financial Independence Podcast
Tax Planning To and Through Early Retirement | Cody Garrett & Sean Mullaney | Ep 565
01:06:30
Brad Barrett hosts Cody Garrett and Sean Mullaney, co-authors of Tax Planning To and Through Early Retirement, exploring essential tax strategies for the FI community. They address misconceptions about retirement taxes, the drawdown process, and...
Loading summary
Transcript66 lines
- [00:00]
A
Hello and welcome to Choose It Fi. Today on the show, we have Cody Garrett and Sean Mulaney. They just published a book called Tax to and Through Early Retirement. And this, to me, is one of the most important books written for the FI community in many years. It's something that provides a significant amount of detail and information and dispels fears. So many fears are just thrown around in terms of, hey, what is my effective tax rate going to be in retirement? Is this something significant? Are there things that I don't know? Are there unknowns? Are there these boogeymen that I keep hearing about in the traditional mainstream financial media? And I think what you're going to find out from both this episode and from this book is that we are so well placed in the FI community to take advantage of all of these amazing benefits that have really been showered upon us in terms of available options to really benefit and pay a very low tax liability and effective tax rate. And I think reading this book gave me knowledge that I didn't have before. And I've been in the FI community for over a dozen years. And for me to come across multiple things in one source that just really opened my eyes to something remarkable. It just blew me away. I think you, the listener, you, the reader are going to get some real certainty on this potential fear. I don't know what else to say other than this is a really important episode. This is a really important book. And with that, welcome to Choose a Fi. Sean and Cody, thank you guys for coming back. You two are two of maybe. Maybe our two most frequent contributors here on Choose a vi. So if you. It's really neat to have you both at the same time and really to celebrate and to talk about in great depth this really marvelous book that you guys put together. So the book is Tax Planning to and Through Early Retirement. And I've obviously read it. You guys honored me incredibly and asked me to write the forward for the book. And yeah, it's really something special. This is a book truly geared towards tax planning strategies and tactics for retirement, but clearly for the FI community for early retirement. And it is incredibly detailed as nobody who knows you would be surprised. And it really fills a void that I think needed to be filled. But I'd love to hear why you guys created this book. I mean, this was a labor of love, and I know focus on the word labor. I know how much time you guys spent on this. So, Sean, well, first off, welcome. Welcome back as always.
- [02:44]
B
Thanks for having me, Brad.
- [02:45]
A
Yeah, of course. And let's talk about why does this book exist?
- [02:50]
B
So, Brad, I sort of go back to a handful of reasons, right. The first one is we were talking offline before we started recording. You go in the choose a five Facebook group, and it feels like one out of four. One out of five, one out of three questions is essentially a drawdown question question. In the world of personal finance, financial independence, there's all sorts of content out there, and the three of us have put plenty of it out there. The one area I think that has not gotten enough because it is so complicated is drawdown. And we wanted to take a systematic approach. Wait a minute. What are the. The guardrails, the favored tactics? How do we approach this? And how do we do that with less fear and more massive. So we try to do that in the book. And I will say, too, we started planning for this book at the end of 2024, the early part of 2025. And from there, it was pretty obvious that there was going to be a significant tax law change this year. So that had two implications for writing a book like this. First, it meant that folks would be focused on this topic. So it was a good time to. All right, if folks are going to be focused on tax planning for retirement, let's strike while the iron's hot. And two, it was going to provide some new rules that we were going to have to critically analyze and assess from a planning perspective. And this book has rules in it, and there's plenty of rules. We could talk about that, but it's really focused on planning tactics, not so much mastering the rules. Although, like I said, there's plenty on that. So for me, those were the two big reasons to write this book. Now, Cody, you know, why did you want to get involved in. In this project?
- [04:28]
C
Sure. So, so grateful to be involved. One of them is, you know, we talk about these forums, like the Facebook group. It's amazing. But there's a lot of this, like, especially in terms of drawdown. Right. You mentioned that when somebody asks, like, a personalized question, you know, keep finance personal, and the answer is maybe appropriately, it depends. Or there's like these kind of like, general rules of thumb for, like, hey, here are like, the general order of operations for accumulation and distribution. What we decided to do is really provide readers with the knowledge to develop the judgment needed to navigate their own situation. Right. So taking generally what we know, the rules concepts, but also, you know, our expertise and experience in this area, serving DIY investors on the path to and through early retirement, that we really want to go beyond Those rules of thumb. And we also included in the book, you know, of course, I wanted to count here that we have over 120 step by step examples with calculations. So this is not a, here's what we think, here's our personal, like subjective bias about this topic. We back it up with real math and really avoid as much as possible, you know, basing our not, you know, there's no personalized advice in the book, but even our preferences and favored strategies and tactics, we have avoided really complexity, anxiety and fear. Because we do see, especially in retirement planning, whether it's to sell products or to really feed off, fear drives a lot of sales or even just sales and opinion. We decided to eliminate fear from this book and say taxes in retirement are not something to fear emotionally, but they're something to understand and plan for rationally. So we try to take off our subjective thoughts as much as possible and be very objective with real examples step by step how people get to and through early retirement.
- [06:04]
A
Yeah, fear is such an interesting thing because I think for so many of us, our natural tendency as savers is to, hey, we're saving for a rainy day, we're saving for retirement. And I think there's something alluring in an unfortunate way about the fear because it lends credibility to the, oh, I just need a little more, oh, maybe one more year, maybe two more years, whatever it may be. Or when I plan out my retirement calculations, oh, you know, my life actually only costs $60,000 a year, but you know, for my phi number, I'm going to make it 80,000. What, what's the harm? Right? And when you keep layering a lot of these either conservative or fear based projections into your FI number, it winds up extending the time to FI by many, many, many years. These things sound innocuous individually, but I just see so many of it. It's the Social Security, let's count that as zero. Our expected returns. Yeah, probably 8 or 9%. But you know what, I'm just going to plug 6% into mine and, and you layer each of these on top and it's just, it truly becomes material. And I think that's why I love that you guys are focusing on, hey, let's actually talk about this fear and let's try to dispel these with real numbers.
- [07:23]
C
Yeah, and I'll add to that too that one of these conservative assumptions, you know, a lot of the fear is around the tax part of it that, you know, you hear these things like the government's going to take half of your Retirement in taxes and things like that. So, you know, what's nice about this book, I mean, from our perspective is we didn't try to reinvent a general retirement planning book, but this is really focused on really, you know, getting behind the curtain and dispelling some of the boogeymen around. Taxes are too complicated and taxes will crush me in retirement. And that idea of, let's say I'm using the 4% rule, you know, even going beyond that, people say, oh, but that doesn't include taxes. Oh, no, I'm going to, you know, if half of my money is going to go toward taxes, I need a 2% rule, et cetera. So, so we're actually focusing specifically on the tax part and I think that readers will be kind of blown away by actually how friendly the tax code is specifically for retirees.
- [08:09]
A
I love that, Cody. And yeah, obviously I was remiss for not mentioning the tax, which I would have gotten to eventually. But yeah, that is why this exists, right? Because this is a big fear, I think, the three of us here. But you know, we have CFP, a couple CPAs, right? And we understand the tax code, but a lot of people, a lot of people don't even get the rudimentary aspects. And that's, that's no knock on the general population, obviously. It's just all we hear is, oh, taxes are the boogeyman, right? And oh, like even just specific terminology, like I can remember my parents talking about capital gains as if it was a boogeyman. And it's like, no, like the government is showering favors on you to give you preferential rates. But when you don't know that and you just hear these terms thrown around, they become scary. So I guess, John, why don't we start there? So what do you see as the biggest misconceptions for early retirees when it comes to tax planning for early retirement?
- [09:08]
B
So I think the biggest one is frankly, the effective rate that folks are going to pay in retirement. And you've covered this on the podcast several times when you get to an early retirement, particularly in early retirement, where the odds are, and this isn't universally true, but the odds are you're going to have significant brokerage accounts going into the first part of your early retirement. And those create an incredible opportunity. And that's because of the 0% long term capital gains rate. You know, people worry about, oh, capital gains. Well, wait a minute, let's think about that from the lens of an early retiree who, other than those capital gains, has relatively Low income, right. They're not working. And the world has taken a turn from like the 1980s when we were kids. When we were kids, you know, bonds were paying 10 plus percent and even dividend yields were 5 plus percent. So even an early retiree might show a lot of taxable income today. Think about where an investment like VTS X. No investment advice, but just think about VTS X. If you got 2% from that thing, that's a high yield year. So it's very hard to show a lot of income in retirement. And oh, by the way, they passed a 0% long term capital gains bracket which applies both for singles, married, filing, joint. You can have a lot of gains that you pay zero tax on. And in fact, it might be so many gains that you pay zero tax for the year, even with maybe some Roth conversions. We could talk about that a little bit later. People think they're going to get crushed by taxes in early retirement. But the dirty little secret is it's so much better to be living off taxable assets than it is to live off W2 income. Right? W2 income fills brackets real quick. And oh, by the way, you have FICA tax. Well, you get to early retirement, there's no more FICA tax. And now you go from being in those ordinary tax brackets. And oh, by the way, in December you get a bonus. Well, that's just income, right? There's nothing you could do. Maybe you could defer a little bit, but that's it. And now in retirement we get the 0% long term capital gains bracket. And oh, by the way, we, we get to get basis recovery. We live off $100,000 that's on our income. It's going to be 100,000 less our basis. So that's the first big misconception that's out there and we can unpack that a little bit. The second one is just how bad RMDs are. I think we can get that to a little later because that's a little later in the planning, I would say. You know, the first part of early retirement has a big misconception in terms of just how much tax people pay. And then especially the ending with RMDs, which I think probably will make a little more sense later on in the conversation.
- [11:44]
A
Yeah, let's really slow down on this biggest fear, this effective tax rate or just really how much tax people are going to pay. So, Cody, I know we've talked about this in depth on prior episodes, but let's just pretend we never recorded this and we're just giving a high level overview of. Okay. Why can we expect the effective tax rate to be so low for early retirees? I know Sean mentioned in passing a bunch of these things, but there is some complexity again, for people who don't really understand this. Right. Like even just simple something like basis recovery that Sean said, I mean, that's something that's important. I'd love for you to talk about. The low income, high standard deduction is another one. Right. There's a lot of these things. The potential then for additional benefits like the Roth conversion and tax gain harvesting, you can do a lot of these things, but these are all buzzwords to people who are new to fi and this is a little confusing. So let's really break it down.
- [12:40]
C
Yeah, I think kind of the big switch, you know, like the light switch from accumulation to drawdown is that when you're working and contributing to these investment accounts. Let's maybe think about traditional 401k. When you're contributing while you're working, that exclusion deduction from income is taken off the top of your income. Right. So we talk about the marginal tax rates and most people listening might be in like the 12%, 22, 24, 32, those marginal tax rates. And when you contribute to a traditional 401, that's reducing your gross income and it's cutting it off the top. Right. Which is fabulous because you're cutting it from the highest taxed money, what we call your marginal tax rate. And I think what's difficult to understand is that when you're in retirement, you have to start thinking bottom up rather than top down. You're saying, okay, like I'm not starting at the 22, 24, 32. I'm actually starting even below the 10% marginal tax rate at the standard deduction, which is, I mean, it even got increased this year in 2025 from the new bill. You know, single filer, $15,750. And for married filing jointly. Right. It's now 31,500. So that's been increased as well. So you have to think about when you retire, that much income is just tax free federally. And then you start adding ordinary taxable income in the 10%, the 12%, the 22, 24. And in the book, we, we share that, you know, especially when you get up and then you like 22, 24% exclusions while you're working that it's very difficult, actually. It's almost like you have to try to get an effective average tax rate of 20 to 24% in retirement, especially in early retirement where you might not have pension income, you're not claiming Social Security. So we just find that that marginal versus effective tax rate conversation needs real math behind it. So we share again, step by step, examples of comparing the marginal and effective with the fundamental education, but also kind of going beyond the basics of with some more detailed analysis that your readers might want to see.
- [14:29]
A
Sean, the marginal tax bracket. I think this really gets to the heart of our graduated income tax system, and a lot of people don't necessarily understand this. Right. So it's the marginal dollar, which is usually the next dollar, but it could be you could look at it as the last dollar also. And basically I think it's important that people realize, like once you get into the quote, unquote, next tax bracket, it's not like every prior dollar is then reassessed at this higher tax bracket. I think that's another one of these fears and misconceptions is that, oh man, I'm in that next tax bracket. All my other dollars just got a significantly higher tax rate. And that just simply isn't how it works. I think that's just a really important thing to slow down on.
- [15:10]
B
Yeah, let's slow down. Let's put it in the frame. We're starting football season, NFL quarterback. Okay, so you're making 40, $56 million a year. Okay. Now you're going to be doing very sophisticated tax planning. But let's just think about the 401k that the Kansas City Chiefs offer their employees, including their quarterback. All right, so Patrick Mahomes puts his $23,500 in there. It's basically excluded from income, the equivalent of a deduction at 37%. Well, okay, what's it going to be like for Patrick Mahomes in retirement? Well, in theory. Now, look, in practice, he's probably going to have advertising income or some other income, and he's just going to be always at the 37% for most of his inc. But maybe he decides this five thing is the greatest thing since sliced bread after his NFL career. So even a Patrick Mahomes would benefit from taking a tax deduction in his working years because that's 37%. Because what's going to happen is when he starts taking the money from the 401k, he has the progressive tax brackets, and let's just assume he doesn't have advertising or book royalties or anything like that. So in theory, he has access to the standard deduction. He has access to the 10% bracket. 12% bracket, 22%, 24%, 32%, 35%. Even for someone like him, it might make sense to take a deduction today because he's got at least some chance that some of the recovery, some of the distributions in retirement will get taxed below 37%. And we go through several examples in the book around this phenomenon, that when you're making a decision that in your working career, it's at the highest bracket, generally speaking, maybe it would be the, the highest two brackets because you might be able to get below into the next lowest bracket. So for many of the listeners, that's 24% or 32%. So that's the question on the table today. But in retirement, particularly in early retirement, they might take that money back out against the standard deduction. That's 0%. Everybody likes paying no tax. And then 10% and then 12% and so on and so forth. And, and that's part of the reason, you know, people worry about the uncertainty here. There's like, oh, no, you know, taxes are going up in the future. Well, even if they do, say 10% goes to 15%, that's a 50% tax hike, by the way. Not likely to happen. But say it did well, you're still better off deducting today at 24% and including tomorrow at 15%.
- [17:33]
C
Right.
- [17:34]
B
So one of the things we try to do in the book is really break down how retirement distributions are taxed. So, so people don't have this opaque fear of just, oh, taxes are going higher, debts and deficits. We just try to say, well, wait a minute, this is how these distributions are actually taxed. So the odds are in your favor. Even in a world where there might be future tax hikes.
- [17:54]
A
Yeah, that odds are in your favor. This is just the key to making decisions in life is that you make the decision with the best information you have available. Yes, there is some bizarre scenario where tax rates go up so much that, that this would have been a bad decision. But I would rate that as less than, I don't know, a one in a hundred thousand chance. I mean, it's essentially zero because like you said, our tax rate's going to go up 50%. Even if they did, in your example, you'd still come out to the good because you're putting it in at a 24% deduction and maybe pulling it out at 15%. So even that would be an absolute slam dunk. And the likelihood of tax rates going up 50% seems, I mean, essentially zero. I would, I would bet My life on that, essentially.
- [18:38]
B
Well, and Brad, one of the features of the book is our chapter 20, which goes into chapter and verse. And let me say this. It's not dependent on which political party wins the elections. The odds are that retirees in the future are going to face a tax climate that looks a lot like the tax climate we have today. And there's even a chance it will get even more favorable for retirees. But yeah, the tax rules really love retirees. They love early retirees. And just there's so many structural things that like you're saying, how do you stack the deck in terms of getting the odds in your favor? And the odds are going to be that retirees are going to still show low income or at least lower income than they had in their working careers. That's something we've sort of lost in this discussion is people worried about all these taxes in retirement. Well, how are you going to have all this income in retirement when you're no longer working for income? Right. This has sort of gotten lost in the conversation. Congress can increase tax rates, but the odds are retirees are not going to have as much income as they had during their working careers simply because they don't get up to be at a job at 9am Right. We sort of lost this common sense thing like, oh, wait a minute, if I'm not working for an income, my income is probably going down. We lost that. And our book tries to revive that common sense notion. Wait a minute. Or are you really going to have all this high income in retirement?
- [20:03]
C
Yeah, and I'll add to that that there's a difference between, you know, when Sean says income, right. He's talking about income that shows up on the tax return. We need to understand too and reiterate that spending is different from your income. For example, we talked about basis recovery. We mentioned that term earlier. Let's say that I contribute $100,000 over some years to a taxable brokerage account and that hundred thousand to turns into 150,000 with $50,000 of unrealized capital gains. If I sell that whole entire investment, I have access to cash of $150,000. But my income that shows up on my tax return is only $50,000. So I think it's, it's two to think about. Hey, the amount you spend is not the same amount that's going to show up and be taxed on your tax return.
- [20:46]
A
Yeah, that is absolutely critical. And yeah, this is another one of those that tax the long term capital gains at a 0% tax rate. Now, of course, we can only talk about 2025 now, and I'd love to hear what that amount goes up to because we talked about this before, Cody. I think for 2024 was in the $94,000 range. But yeah, let's just really slow down on this so people understand this is a scenario where your example, you bought mutual funds or whatever over a period of years for $100,000 in cash in sum, and the value now went up to 150,000. We're saying this is long term capital gains, which means you've held each of the individual items for more than one year. And in that case you get access to preferential rates. Right. So for most people, in broad terms, we think long term capital gains tax rates are 15%. So even in that scenario, that's not too shabby. Right? So you have a $50,000 gain, that would be $7,500 in tax on, you know, you're pulling out for the early retiree. And this is so critical, Cody. Like you just said, it's the cash you have access to versus what is technically a gain or income on your tax return. So in this scenario, you're getting access to $150,000 in cash to pay for your life expenses, which might be two or three years for many early retirees. And even at the 15% bracket, long term caps gains bracket, you'd only be paying $7,500 in tax. But, but I think the three of us know there's a very high probability this is going to be more like 0% tax on those actual gains. So let's stop on this because people need to understand this.
- [22:26]
B
All right? So for 2025, Brad, if you're a married couple and you're under age 65, both of you, at the end of the year, you start with the 0% long term capital gains tax bracket, which is 96, 700. Right. So you can have 96,700 of income and still be in that bracket. But it gets better from there. Well, how do you define income? You got to add up all your income. Okay, that is what it is. And maybe it's capital gains, maybe it's not. But okay, just add up all that income and then add at least the standard deduction. So it's an at least. Right, because maybe you're going to itemize, but most people don't. So let's just be conservative. Let's use the standard deduction that is now 31,500 coming into the year on new Year's day, that was 30,000. The 2025 tax bill increased that by $1500. Now you say $1500. That's not that big of an increase. And it's not. But it's something. And it compounds because that will be in effect next year and the following year and it'll get inflation adjusted. So this is all compounding to the early retirees favor. So let's do some quick math, which is always dangerous on a podcast. If I add 96,700 dol $41,500 and I'm literally doing this the way we did it in third grade, I am getting one 28,200. And I think that's right, actually. Yeah, that is $128,200. So in theory, you could be an early retiree. You could live say on $200,000. All right, and let's just say again, not investment advice. It's literally sales of ETS X. And let's just ignore the dividend for just a second. So you live on $200,000 as a married couple in early retirement on VTS X. So $200,000, that's pretty good. But you only have whatever that is, 71,000 a basis or thereabouts. So your gain on your tax return is $128,200. If that was literally your only taxable income for the year 2025, you pay zero federal income tax on living on $200,000. Now that's a bit of an extreme example. That's certainly not like, you know, obviously your mileage might vary. But consider that retired married couple compared to when they were working for $200,000 W2 income, right? Just in FICA taxes alone, they're going to pay $15,000. So the tax rules, whether you like them or you dislike them, write your congressman, write the president, really want you to be early retired. As you can see in that example where forgetting income tax, just working for $200,000 a year as a married couple means you're paying 15,000 in FICA taxes. It's actually a little more versus our retired couple might be able to live on $200,000 and pay zero federal income tax and zero FICA tax.
- [25:23]
C
And I'll add on top of that that while you're working and earning 200,000 as a married couple, you're actually paying about $27,000 in federal income tax on that ordinary income versus that example we just shared because it's those realized capital gains tax at 0%, like 27,000 while working, plus the FICA taxes versus $0 in retirement.
- [25:45]
A
And this gets into, I think, one of the most underreported things about early retirement that people just don't seem to grasp. But it's so, it's like once you hear it, you can unhear it. And, and okay, Sean just said, and of course this was an extreme example, right? These people are living off of $200,000. That means their expenses are 200,000. But then he shifted and said in their earning years, they were earning 200,000. Well, these are obviously two totally separate things. And of course Sean knows that he was setting up a crazy example. But really think about your current income, okay? And this guys, this ties into what you were saying a couple of minutes ago, which is people vastly overestimate the amount of income they're going to need or the amount of cash they're going to need and therefore the amount of tax they're going to pay in early retirement. And it's because of this fundamental misunderstanding, which is, let's say you made $200,000 as a married couple, which is a great income. Well, in that you're going to have that 20 odd thousand of tax that Cody just mentioned. And by definition to get to fi, you have a significant savings amount, right? So if you got to fi in 15 years, you probably had a 50% savings rate. Okay, well, you take your $200,000 of income, you subtract out even just say $20,000 of tax. Even though we think it's going to be significantly higher than that with the fica, which Sean mentioned, which is just the payroll taxes and then additional tax, but you're down to 180. You probably have 50% savings rate on that. So your actual living expense, your life costs $90,000. That's what you need to replace people. This is the most important thing. It's not relevant what your income was. It's what does my life cost? That's what I need to replace in early retirement. And that's where this book comes in, which is basically saying we have all of these strategies, Congress, many Congresses and the presidents have showered us with benefits of we get this massive standard deduction, we get this massive long term capital gains. There are premium tax credits which we can talk about also. Like when your anticipated needs and therefore your income is low enough, you are just simply not going to pay that much tax, which is wonderful.
- [27:56]
B
And this gets to an issue we tackle in the book. And we have a little saying in the book. Pay tax when you pay less Tax. What we have just demonstrated in this conversation, and none of this is about the exact dollars and cents, but what we have demonstrated is workers tend to pay a lot of tax. Retirees tend to pay relatively modest taxes on average. So when do you want to pay your tax? Do you want to pay your tax when you're working and you're paying a lot of it, or do you want to pay your tax when you're retired and you pay a lot less of it? So we say pay tax when you pay less tax, and for the vast majority of Americans and the vast majority of listeners, you're going to pay less tax in retirement. So doesn't it make sense to push off the tax burden into retirement? And doesn't that have a lot of relevance for the whole traditional versus Roth conversation? And Cody and I are not anti Roth, let's be clear about that. But what we are for is assessing known trade offs. And when we work and we put money In a Roth 401k at work, we are sacrificing a tax deduction at what might be our highest marginal rate. What we're essentially doing by electing a Roth 401K instead of a traditional 401K is we are electing to accelerate and increase taxes in most cases by paying them when we pay the most tax. When we do a traditional 401k, what we're saying is we're going to defer that tax. And by deferring it, almost certainly not 100% guaranteed, but very, very likely, we are decreasing that tax. And we see commentators, and they're very influential commentators who just love Roth 401K. Roth for one K, you got to do the Roth 401K. Well, wait a minute. Isn't that in most cases, even for very affluent people, an invitation to both accelerate tax and increase tax by paying tax when you pay the most tax? So that's a lot of what the book is trying to get at, is these marginal decisions and, and trying to pay tax when we pay less tax.
- [30:02]
C
And the reason, by the way, that most retirees will pay less tax in retirement is that even if the tax rates go up, their sources of taxable income go down. So I think the focus on the Roth versus Traditional, you know, again, that the ongoing kind of debate about Roth versus Traditional has been focused on the tax rates rather than focusing on your future sources of taxable income, which is certainly something that requires those step by step calculations. And one thing I'll add to this is you might be saying, well, I might not retire early. I might retire later. I might retire once a pension starts, I might retire after Social Security, et cetera. And one thing that we make sure to cover in the book is that we call these the five phases of retirement, if we want to go into more detail here. But there are unique strategies and tactics in each of those phases. There are both challenges, but also opportunities in each of those phases that we certainly want to talk about because we know that every listener, every reader is going to be in a different path to and through early retirement. And we didn't want to just focus on, like, one situation throughout the book.
- [31:02]
A
Yeah, I love those five phases, and I would like to dive into those here in a minute. But let's just take one more second. Just be explicitly clear. Right. So we're talking about the potential option for Roth versus traditional accounts. And as Sean has said repeatedly, there's nothing in this episode that is investment advice or financial advice to you specifically. The three of us are just talking here, obviously. But how I've always looked at this. And again, to be clear, Sean, you are, have always been a massive proponent of the Roth. I know we've had you on, and you've helped open my eyes to some things, like, hey, when you put money into a Roth, when you contribute to a Roth, you can pull that contribution out tax and penalty free at any time. That was really. I, I knew it in the back of my mind, but that was a revelation in terms of, okay, if you're having money parked somewhere and you have the option to put into a Roth, and it's either a 0 or 1, in essence, there's no reason not to put it in a Roth in that account, absent everything else. We're not talking about any other circumstance. I'm just saying if you had the option. And your question is, oh, but I don't want it tied up. It's not tied up. You can pull those out tax and penalty free at any time. So, Sean, you're bonafides in terms of you're a Roth fan, but what we've always said here, and I think what you guys are talking about in the book very explicitly with numbers and examples, is I've always called it control what you can control, which is, I know what my, my marginal tax bracket is now on these contributions. And I think there is a very high probability if I was a betting person, which I think is how you have to look at these type of scenarios. If I was a betting person, and there is a very high probability that I personally will be Able to pull this money out at a lower, a lower tax rate, just hard stop, end of story. So therefore, I try to max out my traditional accounts, anything that gives me a tax deduction in the current year. Now, because that I can control, and I think because I follow the path to fi and my life doesn't cost that much in the cosmic scheme of things, and the government showers these benefits on me, I think there's a very reasonable chance I'm going to pay $0 in federal tax in my particular situation. Now, if I had to pay a couple grand, if I have to pay a 10% effective tax rate, am I going to cry about it? No, of course not. I'm still winning by miles. So that, guys, is how I look at this. I know that's kind of like an encapsulation of, I think I'm looking at myself as a reader of your book and saying, like, okay, this is helping me get clarity on this. And I think that's really, really important. And I think that people can read this book and look at their own situation and say, oh, I think I will fit into that. That is clear to me now.
- [33:36]
C
And I want to add there that I think a lot of this comes from this urgency of my only opportunity is to do Roth right now or never. You're going, I love Roth. And the only opportunity is to choose it now or never. And I think that this book certainly, or just this conversation as well, helps us slow down and understand it's not now or never with Roth, it's now with later or never. And a lot of our book actually focuses on, hey, like maybe not Roth upfront through your workplace plan, but maybe Roth later again when you're, when your income tax profile is much, much lower. And I know Sean even talks about maybe even doing some, what he calls the hidden Roth IRA distributions or Roth conversions, maybe even paying 0% tax on those conversions. Not now, but later.
- [34:17]
B
Yeah, and taking some commentators arguments on Roth 401ks to their extreme. If the only thing someone ever did at work was a Roth 401K, which is a theoretical possibility, today you get to retirement whether it's early or conventional. And the one option not on the table is Roth conversions. So sometimes you'll see some of these commentators, they're all for Roth conversions, but then they're also all for Roth 401 contributions at work. And it's like, well, wait a minute. If you only do Roth 401 contributions at work, you can never do a tax advantage Roth conversion. So look, I'M not here to say that a Roth 401k can never make sense, but boy, traditional 401ks have a lot of advantages. One of them is a potential low or no tax Roth conversion in the early to mid part of one's retirement.
- [35:09]
A
Thanks for listening to Choose a VI and for all your support of our mission here. The absolute best way to support Choose AY is when you sign up for your next rewards credit card to use our cards page at choose a buy.com cards. I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support. Well, let's talk about that, Sean. So give some detail on how that might work for somebody. And I assume this is the intersection of the significant standard deduction and lower income needs. Maybe some living off either taxable brokerage or cash accounts or long term cap gains or. But why don't you paint the picture of how that would work specifically for someone?
- [35:50]
B
Yeah, so let me paint you the picture of what in the book we call the golden years. So this is the 66th through 69th birthday years. And if you have a married couple that both are in that range, boy, you can do some really good tax planning. So say that couple is retired and they're still living off taxable brokerage accounts.
- [36:11]
C
All right?
- [36:12]
B
They have so much green space for good Roth conversions, good tax planning because they don't have to be claiming Social Security at this point. They're not subject to RMDs and they don't even have to worry about the premium tax credit. So what that couple could do is they could live off these capital gains and because of basis recovery, their income is really low. Well, that couple now has the standard deduction of 31,500 in 2025. They have an additional standard deduction as long as they're both 65 of 3200. And they now have a senior deduction of up to $12,000. So some quick math on that is $46,000. Okay, let's say their only income is a little bit of long term capital gains, just a little bit of qualified dividends and $1,000 of interest income. Okay, what that couple could do before the end of 2025 is a $45,700 Roth conversion. So go into the old traditional IRA, traditional 401, move $45,700 to a Roth account that's taxable. Okay? But what they've just done, in my example, they only had $1,000 of interest income. So the 45,7 of taxable income we just created with that Roth conversion that gets sheltered by the combination of the standard deduction, the additional standard deduction and a $12,000 senior deduction. Okay. And the capital gain is likely not guaranteed. You got to measure twice on this. But you can see that the capital gain might not get to the top of that 96,700. So that would be a $45,700 tax free Roth conversion. In the book, we call that a tailored taxable Roth conversion or a ttrc. And the idea there is that's free money. You literally just moved 45, 7 in my example from a tax deferred account to a tax free account, totally tax free. Fantastic planning. And this exists out there in the world. And so folks should be attuned to it, especially in what we call the golden years 66 through 69, whether you're single, you're married, you got to be attentive to this could be a really good opportunity to get some money into a Roth account through a quote unquote taxable Roth conversion. You pay zero federal income tax on.
- [38:33]
A
Yeah, that's incredible. And for people who are not in that age bracket, and we're talking somebody who's maybe early retired, in their 40s, let's say all is not lost. It's just you don't get those additional benefits. Right. You get the $31,500 of if you're married filing join, of course you would get that standard deduction. So that would be entirely tax free on this Roth conversion. And then even quote, unquote worst case scenario, the 10% tax bracket goes up to 23,000. 8:50 it looks like for 20, 25. So you're talking you could pull the 31,500 plus 23, 8:50. So what is that? 5,450 for only 2385 in tax, which is a tiny, tiny, tiny little effective tax rate that's somewhere, somewhere in the vicinity of what, a 4 and change percent. So I mean, this is, this is why this book exists, guys, right? Like, this is why everybody needs to understand there's nothing to fear, especially for those of us in the FI community in terms of some crazy tax bomb that I think people are somehow have in the back of their mind is going to befall them in some bizarre way. And like, it's hard to come up with a scenario. Anyway, Cody, we did this on a recent episode. Like you came up. It was the putting the middle class trap to bed was our Article like you came up with the most extreme examples of like worst case tax scenario. And it was still something a crazy low effective tax rate. And I think that's just such an important takeaway for everybody is like there is nothing to fear. And these guys have explained it in great painstaking detail with a hundred plus examples of why there's nothing to fear. So Cody, I know that's a big mouthful, but I think you had a follow up on that.
- [40:14]
C
Yeah. And what Sean described earlier, those golden years, that's what we call phase two of the five phases. And a lot of you might say, well, I mean, what do I do before that? So if I do retire early, before my, you know, before Medicare, I know a big consideration. Certainly Sean mentioned the premium tax credits. Right. Those health insurance subsidies, if you're covered through the aca, you know, there are some changes coming, but also some opportunities coming. So if you'd like, Brad, you want to talk through some of those phase one opportunities?
- [40:40]
A
Yeah, let's do it.
- [40:41]
C
Sure, sure. So maybe we can hand these back and forth between me and Sean here. So phase one is that early retirement. And we call early retirement really anytime before Medicare eligibility. So that'd be anybody retiring before 65. And we actually found some crazy stat out there that said about 70% of retirees retire before age 65, which kind of mind blowing. So this, we thought this book would be for like a niche community, like, oh wait, this book might be appropriate for, you know, 70 plus percent of Americans retiring before 65. So, you know, we talk about this order of operations for accumulation. Right. You hear about this all the time. In terms of when you're working, what should you contribute to? Maybe you should, you know, get the employer match right through your 401k. At least contribute enough to get the match. Maybe you do HSA contributions, maybe do Roth IRA backdoor, et cetera, but we don't talk much about again, the drawdown. You can actually create a distribution order of operations. Right. So Sean and I have laid out what, again, not advice for you, but kind of our favorite or preferred approaches for that order of operations for the early retiree, you know, starting in phase one. And a lot of people in phase one, you know, they might have money in a checking account, savings account, taxable brokerage, maybe a traditional ira, maybe a Roth ira, hsa. But for the most part, again, kind of across these phases, it's almost like how can we reduce the amount of ordinary income? One of our lessons of the book is actually keep ordinary income low in retirement. So how would you do that? How would you retire early and keep ordinary income low? The first thing is to say, how can I live off of money without any income, ordinary or capital gains? And that might be simply living off of checking accounts, savings accounts. And then you go, what's the next step after that? Without ordinary income, it's maybe selling some appreciated securities, maybe selling some of that vtsax we keep coming back to, right, with that basis recovery that we mentioned that you're not taxed on what you sell, you're taxed on what the realized capital gain was, the difference between the amount you bought it for and the amount you sold it for. So checking, savings, taxable brokerage, you might actually have enough money right there to live on that you actually don't need any more. And again, you could have a very, very low tax rate. We also talk about, it's really important in phase one, before Medicare, if you are covered by the aca, the health insurance coverage that you know that premium tax credit eligibility is based on your modified adjusted gross income. And for simplicity, today we can just say your total sources of gross income, or some people call it taxable income. But your goal is to control income and keep your investment earnings low. Right. Also keep really all income sources as low as possible, but without going too low. And maybe, Sean, I'll let you take over for this. Like, you know, there's this idea that you actually want gross income in early retirement if you're covered by the aca.
- [43:20]
B
That's right, Cody. So there's an issue about qualifying for a so called premium tax credit, which is a big subsidy against your ACA insurance premiums if you don't have sufficient income based on the way the rules are written, you don't get one of these things. So it could be a disaster to show very low income. Well, what's the easiest way to show at least this modicum of income? Generally Speaking, at least 100 to 138% of the federal poverty level for your household size. The easiest way to just quickly turn that on in early retirement is to do a Roth conversion. That way you get to the requisite threshold in your state just to make sure you turn this thing on. And great, you just did a tax free Roth conversion. And oh, by the way, you now qualify for thousands of dollars of premium tax credits. And Brad, this is actually though an area where we need to be at least somewhat conservative because people love these Roth conversions. And in fact, sometimes you'll see online, oh, I need to do a Roth Conversion, which I generally disagree with that it can be beneficial, but it's rarely a need. Although if we're going to lose out on thousands of dollars of a premium tax credit, we can go ahead and call it a need. But sometimes people say, well, I know I need to be doing big Roth conversions early in retirement, and I generally say, probably not. But one of the things to consider in the first part of retirement with Roth conversions is you're essentially subject to two levels of tax at that time. If you're on an ACA plan because you're subject to the federal income tax, okay, we always know that. But you're now also subject to a reduction in the premium tax credit based on having more income. And that could be anywhere. I mean, really, it could be 2%. It could be, you know, into the teens in terms of a percentage reduction in terms of the effective tax rate on that, even though it's not really a tax, but it behaves like a tax. So we have to plan for it like a tax. So it's a time to be conservative. But like Cody saying, there can be times where you need to turn on the premium tax credit, and why not do a modest Roth conversion to do that?
- [45:18]
A
Sean, two quick questions. So I think you said something like you want to have your income over, I don't know, 138% was the number that I thought I heard of the federal poverty level of income. That's before the standard deduction, I'm assuming.
- [45:31]
B
Yes. That's just income has nothing to do with the standard deduction. And that's to avoid Medicaid eligibility based on income level, based on your state's rules. And so that's a little bit of a rabbit hole we can't get into today, of course. But essentially my understanding is most states are going to say your income eligible for the state's version of Medicaid if your income for the year is below 138%. That's a general rule, just a rule thumb. You got to look at your own state's rules. So we want to avoid that. And the way we avoid that is by just triggering some Roth conversions and rounding up, in that case, not rounding down, just to make sure we don't have too little income, because we don't want to qualify based on income for Medicaid. And now we can't get a big premium tax credit against our ACA medical insurance plan, which is probably what we're going to want to be on. We're not going to want to be on Medicaid. From a planning perspective, we're going to want to be on an ACA plan. And the book, we go through the four tiers, bronze through platinum, and we talk about the computing premium tax credits planning for this. You know, people worry that they can't retire because of health insurance. And I would argue for 95%, maybe more of the audience, if you have financially sufficient assets, you should be able to retire because the ACA plans, while not perfect, are good enough enough to prevent financial ruin in the event of a high medical need. Look, we could all be in car accidents. You know, you always need to have at least some modicum of medical insurance, in my view, to prevent against financial ruin. And I think the ACA plans are good enough in that regard. So that medical insurance for the vast, vast, vast majority of the listeners should not be a gating issue in terms of do I retire or do I not retire?
- [47:23]
C
And I'll add there that there's this concept in 2026 or starting in 2026, that bronze is gold, as Sean calls it, that a lot of people say, well, you know, there's been this big issue actually in 2025, really, that there's fewer and fewer plans that are HSA eligible, high deductible health plans, those ADHPs. And one great thing, even though there's a subsidy cliff that's coming back in 2026, and I will say there's a lot of fear thrown around that the premium tax credit's going away. That's one of those like, oh, just, just go a little bit further in the education to understand what's really going on here. The subsidy cliff is coming back if your income falls above the 400% federal poverty level. But one thing that is happening positively as an opportunity is that starting in 2026, all of the bronze plans through the ACA are going to be HSA eligible, high deductible health plans. And keep in mind too that we've been talking about this income level that you have to keep your income, income a certain level, but not too high, not too low. You know, the Goldilocks just right. One thing about these HSA eligible plans is that HSA contributions, 1, do not require earned income. So even if you're retired and not earning income, you can still contribute. So it's not like an IRA with earned income requirements. But two, your HSA contributions actually reduce your modified adjusted gross income. So again, you can pair these things together for incredible opportunities. Yes, even though the subsidy cliff is returning, you might have an opportunity to control your sources of gross income and maybe even have an HSA eligible plan, if that's right for you.
- [48:54]
A
Yeah. And Sean and I talked about this in great detail on episode 5 57, which is just about two months ago. So if anybody wants to take a look back at that, we talk about the obbb, the one big beautiful bill, and talk about implications for the FI community. That was a really important one. So. Right. It's so interesting this, this health insurance. And of course you guys talk about this in terms of the tax and getting in this Goldilocks. But just kind of taking a step back for the larger FI community, so many people ask this question. Like you guys said, it's like, how am I going to get health insurance in early retirement? It's like, it's as if people have amnesia that the ACA exists. Like it exists. This is really simple. Like, there is a cost to it, obviously, but if your income is low enough in early retirement, you get these premium tax credits and your health insurance premiums are going to cost very, very little. But regardless, there's no surprise here. You can just purchase a plan. I saw one of these clickbaity type articles. I'm going to attribute it, probably maliciously to like Market Watch or something like that. It was like, I'm 62 years old, I have $2.8 million, but I don't think I can retire before 65, because what am I going to do about health insurance? It's like, lunatic. There's the ACA. Just buy the plan. You have $2.8 million. Give me a break. Like, and not for nothing, but like, there's also out of pocket maximums. Right. Like, it's very hard for somebody with financial assets to get ruined by. And this is not to say, obviously, we all know there are major problems in our country. And this, we're not going to adjudicate this now with health insurance and costs and totally separate issue. Right. We could have fun talking about that another time. But if you have financial assets, it's highly unlikely you're going to be ruined by health insurance or health care costs. Does it mean it's palatable? Does it mean it's wonderful? Of course not. I'm not arguing that. But there's a cost for this and that's a really nice thing.
- [50:46]
C
So.
- [50:47]
A
Okay, TED talk over. But Sean, I'm going to ask you one more question. I asked you about how does a standard deduction fit into that federal poverty level similarly, but I suspect it might be a different answer. We're saying that there is the option to basically harvest long term capital gains at potentially a 0% long term cap gains rate. But what's the interplay here with aca? Does that quote, unquote income count against ACA subsidies or is this an entirely separate thing?
- [51:18]
B
So, Brad, capital gains income is income for ACA premium tax credit purposes. So that could be both a feature and a bug. It's mostly a feature because what happens is you get to early retirement if the only assets you had was Roth accounts. I'm just giving some extremes. Well, now you have zero income, you have no way to qualify for a premium tax credit, or if you get to early retirement and the only assets you have are traditional retirement accounts. Now there's planning that can make this work, but it becomes a lot more challenging because every dollar you spend is a dollar that increases your income, that then reduces your premium tax credit. Taxable accounts are a little bit like the Goldilocks. It's right in the middle. Right. You spend the $100,000, but your income isn't $100,000. It's 100,000 less the basis. So maybe the basis was 60,000. Now your income's 40,000. That's a pretty good place to be from a premium tax credit position. And so that's part of the reason. There are many reasons. We really like those taxable accounts, spending those down in the first part of an early retirement. But yeah, that's a great way to help control your income is by spending down the taxable accounts first and only reporting the capital gains income, which is this difference between value and basis.
- [52:31]
C
Yeah. And even the capital gains, those long term capital gains, you know we've been talking about, they're taxed at 0%. Even if they're taxed at 0%, they're still included in that gross income number for ACA. So that's a really important point, that just because you don't pay taxes on a certain type of income doesn't mean it's excluded from that federal poverty level income level.
- [52:51]
A
Right. So this is a constant balancing act. Right. And I think that's what everybody needs to look at their own situation. What's most advantageous for them. But like we've talked about, to get these ACA credits, you need to be above roughly 138% of this federal poverty level. But there's now the 400% cliff where if you're over that, you don't get any ACA subsidies. But then we're talking about, oh, but wait, we have this long term capital gains, that's at 0% up to 96,700. Married filing joint. But if you fully max that out, your taxable income, let's say you did roth conversions for 31,500, which would be the, the standard deduction. So that, that wipes that up, but it's still income. And then you have 96,700 of gains that you harvested. Well, your tax return is going to look like you have $128,200 of taxable income. Yeah, we said before your tax liability is going to be zero, which is marvelous. Right. But I think there's a very high probability your ACA premium tax credits are going to be zero or minimal if you're showing $128,200 of taxable income. In that case. Am I on the right track here, guys?
- [54:05]
B
Yeah, I'd say you are, Brad. I think people worry about do I do Roth conversions or do I optimize for premium tax credit? And I think if you read through our book, you know, and you agree with our logic and our reasoning and conclusions, you're probably gonna say, you know what? I'm gonna optimize for premium tax credit. I think that's where most people would land because they're gonna say, well, wait a minute, the golden years are coming up, so I could probably do some Roth conversions then. And they're gonna find that the taxation of RMDs isn't as bad as people have been made to believe it is. So they're gonna say, you know, I'm gonna take the bird in the hand today and I'm gonna optimize on premium tax credit. So, you know, I think that is a tension we see in the community sometimes is like, oh, you know, I got to get a premium tax credit, but I know I got to do Roth conversions. Like, well, wait a minute, slow down. Premium tax credit matters. Roth conversions can be beneficial, but the odds are you probably don't need to do them. And if it's going to really reduce or eliminate a premium tax credit, that's a good indication. Oh, maybe the Roth conversion doesn't make a whole lot of sense this year.
- [55:07]
C
And to tag on to that, should I do Roth conversions or tax gain harvesting? Which one should I prioritize? You need to keep in mind that diversification is more important than tax optimization. I will say that if your only investment is in an individual company, I would prioritize diversification and doing some tax harvesting or realizing those capital gains over doing some of these optimized strategies and tactics. But as Sean's mentioning, if you have some optionality, you're already well diversified across. We have our preferences. I would say that typically you're focused on the ptc, the premium tax credit. And if you need a fill up at least to get to that 138, you're most likely going to try to do that with Roth conversions because that's ordinary income. And also again, everybody likes a tax free Roth conversion.
- [55:49]
A
Guys, this episode has been chock full of information, but I think those last couple of minutes were maybe the most important takeaway for me and I think for everybody else is there's no need. I think this is. Sean, I'm so glad you've said that repeatedly. Everybody needs to take a breath. Yes, all of these things exist. And again, as people in the FI community, we have been showered with benefits, right? The tax code is so advantageous to us, but just because it exists doesn't mean you have to take advantage of it in its fullest every single year, just in a vacuum. There are other considerations and I think that's what these guys did such a marvelous job explaining. And this is another cool thing that again was not altogether obvious to me is because you have this diversification and because maybe your life is not going to cost as much and we have so many different options before Medicare kicks in and we can get health insurance that way. Maybe we should prioritize premium tax credits before then and we don't have to go all out on Roth conversions and long term cap gains. There's going to be plenty of time to do that. So I know there's, there's that allure, there's that pull for us to like, oh, but I can do this. I can get $128,000 and change. Like this is so great. It is great, let's be clear. But you have to look at what's the best for you in totality across a 30 to 50 year retirement potentially. And I think guys, that is something you've opened my eyes to here of. Okay, it's not a race, right? Like we can take a breath and we can say there's a time and a place. There are seasons for these things. And I think where you allocate your time and energy in terms of this planning can and will change across those seasons of life. And these phases, as you're calling it, the five phases.
- [57:34]
C
That's right. I also mentioned that chapter 29 of the book is called Return on Hassle. That a lot of time we learn all these tactics, we call them tactics in the book. We share the tactics that we know and love. But we also have a chapter called Return on Hassle and we actually mention over a dozen tactics for optimization that might not be worth the hassle. We call this the Return on Hassle roh here that you think about the time, the energy and attention that's required to optimize every little thing, which most times optimization is really a form of procrastination, which is really pushing an avoided fear into the future. So we do mention, even though we have 100 plus examples step by step calculations, we also have an important chapter on Return on Hassle saying, hey, you don't have to do every form of optimization to make it to and through early retirement successfully.
- [58:25]
A
Okay guys, this has been absolutely awesome. I know there's so much in the book. We could spend dozens of hours talking about this here, but I think we've both given a significant amount of value to the listener listening to this episode today and also maybe given them a little appetite to go out and buy this book. And I think it's a really, really important book. Obviously the five phases of retirement, we can't go through all of them, but I think we touched on phase one and two, which phase one is what the vast majority of us are in right now. Retirement through age 65 or really many of us are pre retirement, clearly. But the one thing we did mention in passing that I wanted to double back to before we close the episode out is RMDs. We mentioned that very, very much in passing. Sean, you said we'd come back to it. I love to close these loops, so let's close it.
- [59:12]
B
Yeah. So Brad, I think there are going to be some listeners in the audience today saying, hey, you know, I'm hearing the points about maybe traditional 401ks during my high working years and maybe being a little conservative with my Roth conversions in the early part of my retirement. But doesn't that leave me as a sitting duck? Doesn't that leave me in a place where RMDs are just going to crush me in my 70s, 80s, 90s, right? That's the fear. And it's this incohate. Few people ever put numbers to it, but it's like, oh no, these RMDs are going to crush me. Well, have the rules on RMDs changed, say in the last decade? Think about Brad, you and Jonathan recording the first few episodes of choose a five. I believe that might have been December of 2016, January of 2017.
- [59:56]
A
Right. Exactly right. Good memory.
- [59:59]
B
Back then, if you went to any personal finance source, any FI source, they're going to tell you, oh, these RMDs, they're really bad. Right? There was no debate back then. RMD's bad. Okay, well, has anything happened between Brad and Jonathan recording episode one and us recording episode 600 or whatever this is today? All right, three major developments have occurred since then. The first one is the tax rates significantly cut. Standard deduction significantly increased. TCJA now made permanent by the one big beautiful bill. And so that significantly reduces the taxes on RMDs. So that's one development. Okay, fine. Second development. RMDs are done based on a table factor, which is a life expectancy we talk about in the book. It's going to be a little boring for the show today, but what happened is in 2022, all those life expectancies increased. The IRS and Treasury issued new regulations, and so that had the effect of lowering the annual amount of the rmd. Okay, so that's another development. Big change, but okay. Third development. Politicians of both parties got together at two different points and said, you know what we're going to do? You know how these RMD start? 70 and a half? Nah, forget that. We're going to make it 72. So that's one or two RMDs taken off the table. And then in 2022, they said, Nah, forget that. If you're born in 1960 or later, meaning everybody thinking about an early retirement, today, we're going to start RMDs at age 75. So in the eight years since Brad and Jonathan started Choose a Phi, tax rates on RMDs have gone down. Standard deduction has gone up significantly. So those two reduced taxes on RMDs. The factors have increased, reducing the amount of RMDs. And oh, by the way, those first four or five RMDs you're supposed to have distributed out and pay taxes on, we canceled those. Those happen to be the RMDs that are most likely to happen by definition. So essentially, the world on RMDs has radically changed since Brad and Jonathan started the podcast. Yet few commentators have reassessed RMDs. And in the book, we have a whole chapter literally reassessing RMDs. And our conclusion is essentially this. RMD are rarely harmful from a lived experience perspective and from a financial success perspective. Sometimes if you're very, very, very successful, RMDs will create what we call negative tax arbitrage. It will be A bad outcome in the context of a very, very successful financial person, a rich elderly person. But essentially, if you're only moderately rich or less successful, RMDs are probably going to be later taxed than that rate you got on the way in to go back to the beginning of the show.
- [62:56]
C
And if you aren't convinced that RMDs are more of a nuisance than it's something to fear. I'll also add that qualified charitable distributions, which is a way to give money directly to charity with your IRAs, traditional IRAs in retirement, those QCDs, they originally said, hey, those are going to start at age 70 and a half. They haven't increased that age as they've increased the RMD ages. So, you know, the charitable giving has been even more preferable, including those with rmd. So they can give, include a portion or all of their RMDs in their qualified charitable distributions. And also, I think it's really important in the book, we also cover a lot of these fears around nuisance taxes like irmaa, which is like the Medicare surcharges, which, you know, based on my analysis, you know, we'll never exceed 3% of a household's income. It's like, oh, that's not that bad. And then also we talk about the widow tax trap. There's a lot of fear certainly in the more traditional side of a retirement, that if there's a surviving spouse, suddenly they don't get as much of a standard deduction and they get the compressed tax rate. So we also cover. Again, it's a serious planning topic, but it's seriously not something to fear. I mean, again, I can go talk about these tactics all day long. There's 38 chapters plus the intro. But I'm just really glad to be here to really provide education to your listeners.
- [64:05]
A
Yeah, no, I greatly appreciate it, guys. And yeah, just kind of my last word on the RMD is this. Yeah, I mean, they're more of an seemingly like a nuisance to me than anything just because I don't really want to be required to take anything out of my accounts. I want to do it on my own volition. But is it really that big of a deal? No, it's really not. Like, it's not like there's anything special about the way this is taxed. It's taxable income. I need money to live off of and okay, I have to take some certain amount as a required minimum distribution. And that's just the deal. And if by some freak chance that RMD is higher than the amount of money that I need to live on that year. Well, it's not like something terrible happens, not like the money gets confiscated or something crazy. I just put that money in my taxable brokerage and I move on with my life. It's. This is one of those things that it sounds a lot worse. It sounds like a boogeyman, but really when you dive into it, it's like, okay, this is at best an annoyance just because you have to remember to do it and et cetera, et cetera. But it's not that big a deal. So, yeah, I'm glad we slowed down on that for sure. So, gentlemen, the book is fantastic. It's absolutely fantastic. So Tax Planning to and through Early Retirement. Like I said, the day this publishes, the book comes out officially the following day. So September 23, 2025. Where can people find it? Where do you want people to go? Give me some more information.
- [65:27]
B
Well, Brad, yeah. Thanks so much for having us on. It's going to be available Amazon and Barnes and Noble online. My experience is most people are getting their books on Amazon today. So if you look up on Amazon Tax Planning to and through early retirement, it'll certainly pop up. And by the way, there's a Kindle or ebook version, there's a paperback version. So, you know, buy the one that best suits your preferred style for reading. And yeah, I mean, I think it's going to make a really good contribution or that's the hope is that it's going to make a contribution to education and, you know, dispelling some of the fears that folks have about taxes in retirement.
- [66:06]
A
Yeah. And I can certainly vouch for that. This is, it's a very detailed book in the best possible way. It doesn't read like a textbook. It's not boring, but it's detailed and it has to be and it's important. And I'm glad you guys spent such a significant amount of time, I mean, hard work, effort. I know there's this is, as you said before, a labor of love. And I just wanted to thank you both, really for your contributions to the FI community, to the choose the FI community specifically, and for bringing this book to the world. I think it's really important.
- [66:34]
C
Oh, thanks so much, Brad.
- [66:36]
A
All right, so to everybody listening, you can just search for this on Google, search for it on Amazon. We will have a link in the show notes, but just search Tax Planning two and three, early retirement. You can't miss it. And until next time, thanks for being part of the choose of I community and thanks for listening to the show.
- [66:51]
D
Thank you for listening to today's show and for being part of the choose of I community. If you haven't already, the best ways to get involved are first subscribe to the podcast. So you're listening to this on a podcast player. Just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choosefi.com subscribe and it's really, really easy to get on the the newsletter list right there and I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox.
- [67:27]
A
So that's the way that I keep.
- [67:29]
D
A pulse of the community and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have choose a vi local groups in 300 plus cities all around the world. So head to choose a vi.com local and you'll find a list of all of Those cities in 20 plus countries.
- [67:49]
A
All across the world.
- [67:50]
D
And if you're just getting started with VI or you have a family member or friend who you think would be interested, two easy ways choose a VI episode 100 is kind of our welcome to the FI community and even though.
- [68:03]
A
It'S a couple years old at this.
- [68:04]
D
Point, it still stands up and it's a really great just starting point to get an understanding of what is financial independence. What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life and then choose a VI created a Financial Independence 101 course that's entirely free. Just head to choose a vi.comindependentfi101 and again, thanks for listening.