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- [00:01]
Hannah Fry
I'm Hannah Fry and I'm on a mission to find out about a mysterious.
- [00:05]
Stephanie Flanders
Day called Q Day, which experts think.
- [00:07]
Hannah Fry
Could be the moment our most precious encrypted data is suddenly at risk. Learn more later in the podcast.
- [00:15]
Ryan Reynolds
Hey, Ryan Reynolds here for Mint Mobile. One of the perks about having four kids that you know about is actually getting a direct line to the big man up north. And this year he wants you to know the best gift that you can give someone is the gift of Mint Mobile's Unlimited Wireless for $15 a month. Now you don't give it a try@mintmobile.com.
- [00:34]
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- [00:44]
Stephanie Flanders
See mintmobile.com Donald Trump is rewriting the Washington Rulebook and reshaping the global economy if you're trying to connect the dots behind the headlines, Bloomberg's trumponomics Podcast is here to help. I'm Stephanie Flanders, Head of Government and Economics at Bloomberg. Every week I'll bring you a smart, focused conversation with reporters and experts from Washington, Wall street and beyond. Listen to new episodes every Wednesday and follow Trumponomics wherever you listen.
- [01:16]
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- [01:29]
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- [02:45]
Barry Ritholtz
Hey, it's early to be thinking about taxes. April is only a few months away. But you have questions and we have answers. Let's discuss how you can reduce or defer your taxes over the long haul. I'm Barry Ritholtz, and on today's edition of at the Money, we're going to discuss important issues for all investors about understanding how to lower their tax bill. To help us unpack all of this and what it means for your money, let's bring in Bill Arts Aronian, full disclosure. Bill is the director of tax services at Ritholtz Wealth Management, where I also happen to coincidentally work and have my name on the door. So, Bill, let's start with the basics. Where does tax management sit in the hierarchy of priorities for investors? How does this look relative to things like asset allocation or security selection or even asset location and their own behavior?
- [03:44]
Bill Aronian
Well, thanks for having me back, Barry. I'm biased. I'm a cpa. I run the tax practice here. I think about taxes all day. But both in life and in working with clients, I'm a proponent of control. What you can control. We can't control the market. Asset allocation gives us, you know, we can run back tests, we can look at historical data that's very useful, even security selection, that's, you know, individual stocks are more volatile than, say, an index fund. But taxes, we have a set of rules and we can, we can, we can define our behavior based on those rules, at least in the short term. We don't know what tax law will look like 20 years from now, but we have a set of rules. For the foreseeable future. We have to act within those rules, but it gives us guidelines. And that's where we can actually make a difference because we don't know what the market's going to do tomorrow, next week, next month, next year. But we do know what the tax code will look like, at least until probably 2028.
- [04:36]
Barry Ritholtz
So let's talk about tax aware portfolios. What are the core issues that investors can pull the right levers on? What moves the needle the most?
- [04:47]
Bill Aronian
It's very basics. We have different buckets of tax assets. We have pre tax money like a traditional 401k. We have after tax money, which is say, a brokerage account. And then we have tax free money, which is your, which is your Roth account. Asset location can be huge. And we're, we're Big fans of asset diversification. And we come, clients come to us, they're well versed in, in, sorry, asset diversification, but not necessarily tax diversification. Tax diversification to me means you have different levels of assets in each of these buckets and that gives you a lot of flexibility when you need it. A lot of times this comes up in retirement. We have folks come to us and they stocked away money in a 401k their whole career. They have a couple million bucks, they feel great about it. And then we have to break the news like, hey, you're going to pay tax on every single dollar here. And there's no flexibility in their plan. Every dollar that they distribute, every dollar that they need for the rest of their lives is going to be taxable. Whereas if you plan ahead and you can diversify those different buckets of tax money, that's where, that's where you provide a lot of flexibility for yourself in the future.
- [05:45]
Barry Ritholtz
So let's talk about planning ahead. And perhaps the thing that I find most fascinating, and I've been reading the most about and I still feel like I don't have a solid handle on it, is the Super Roth backdoor conversion. Tell us what that is. What are the advantages of it? How do you make sure you're doing that both correctly and legally according to the irs?
- [06:09]
Bill Aronian
Sure, we can call it Super Roth, we can call it Mega Roth. It's just a juiced up Roth option in your employer retirement plan. Let's just use, let's just use 401ks as an example. There are other employer retirement vehicles, but let's use 401ks. The limit in 2025 for total 401k contributions is 70 grand. Now that can be employee, myself contributing to a, contributing to a 401k or that can come from the employer. Normally for a lot of plans it's a combination of the two. So let's say I'm 50 years old, I'm contributing 30k to my pre tax for a 1k in 2025. Next year that's going to change slightly. We talked about that last time. But then my employer is going to kick in let's say 10 grand. That's their match. So total we're at 40k. The remaining 30. If the, if the 401k plan allows it, that remaining 30 70k maximum minus 40k already contributed, that can be made on an after tax basis. And then you have money that's already been taxed in the 401k, you convert that to Roth. So now we have, we have 40k that went in pre tax between employer and employee and now we have 30k that's now in a tax free Roth bucket. So we started our discussion talking about tax diversification. This is a great way to do it. Now you have pre tax money growing and you have tax free money growing. And again that's going to give you a ton of flexibility down the line. And even inside of those plans, you might want to structure the Roth money a little bit more aggressively because you know Roth money in perfect financial theory is going to be the last money you touch. So you might want to be more aggressive in the Roth. You might, if you have a bond allocation, you might want that in the, in the traditional or the pre tax sleeve. But the mega backdoor Roth allows for these higher contributions. It's a kind of an unlock for a lot of folks who are earning a lot of money. They want tax efficiency. A lot of plans are starting to pick this up. So if you're listening and you're a high earner and you have some sway at your company, go ask your cfo, go ask HR and see if you can implement the mega backdoor Roth strategy.
- [08:07]
Barry Ritholtz
And then what about the full on mega Roth conversion? Do you take a traditional 401k? What does that look like when you convert that to a roth?
- [08:17]
Bill Aronian
The extra 30k that I alluded to, that goes in as an after tax contribution. When you convert after tax money, you don't pay tax on it, you don't pay tax twice. That's kind of a foundation of the US tax code. You don't pay tax twice. Now if you're talking about taking money you took a deduction on, that's considered pre tax money. So if that 40k of pre tax money, if I wanted to convert that to Roth, that's going to be a Roth conversion. And that one, that one's going to be taxable. That may make sense if you're as an investor, maybe you're in your 20s and 30s and you have a long Runway to retirement and you want full Roth money. That's, that's a great case to convert pre tax money to Roth now and benefit from long term tax free growth in the Roth for four decades to come.
- [09:03]
Barry Ritholtz
What are some of the more common tax traps that you see around equity comp? Walk us through RSU's, ISOs, NSOs, employee stock purchase plans, etc.
- [09:15]
Bill Aronian
We call that equity comp Alphabet soup. Barry? Yes, it's really confusing a lot of folks out in the Bay Area or in other tech companies. They get employed by these companies. They're like, here's your package. And they have no idea what it means. So I think the first thing is just an understanding of what you own and then an understanding of how it's taxed. RSUs are a little simple. These are restricted stock. Restricted stock is going to be paid on a stated vesting schedule and it's almost like a cash bonus. You're just receiving stock instead of cash. Once you receive it, it's yours to do what you want with. Options are a little bit more tricky. There's two types of options, non qualified and incentive stock options. The tax treatment is different, but the way to think about it is you don't get anything for free. The IRS says, no, you don't. You don't get anything for free. So if there's a difference in your option between what you pay for the share or your strike price and what the share is worth, there's going to be a tax component on that difference. We call it a spread or a bargain element. But that's the, that's the big difference. I think what at the very basics, what folks that are paid in equity need to do is be proactive with a tax planner. I've seen far too often folks with RSUs or they exercise options and they have a big tax bill in April and they have no idea where it came from. Because in my experience, folks don't feel stock, they feel cash. They know when they're paid in cash, they don't know when they're paid in stock. So if you're paid in stock and you recognize that as income, you're not thinking about it. And then you're left with a big tax bill down the road. And you're like, where I didn't make $1 million, I made 500k. But then you realize, oh, that extra 500k was stock, not cash, therefore I didn't feel it.
- [10:48]
Barry Ritholtz
What about some of the clients we have at some really high growth companies? Apple, Google, Palantir, Nvidia. They're seeing their stock holdings go through the roof. What are best practices for those folks? How soon do they need to start thinking about managing capital gains?
- [11:08]
Bill Aronian
Well, that depends. It depends how comfortable they are with the stock both in the short term and long term. And there's a, there's a bias here, right? If, if you work for a company, in theory, you're bought into what that company is doing, therefore you don't really want to sell the shares. But then you Create some concentration risk. When you're, when you're paid in equity, it accumulates. And if that accumulates to a point where a small move in the stock is keeping you up at night, because on paper you're worth X and then the next day you're worth X minus whatever, you might want to diversify a little bit. And that's where effective tax planning is going to be crucial because you don't just want to rip a band aid off, you want to strategically plan for capital gains based on certain limits. It could be, it could be capital gain brackets, it could be. We talked about salt limits last time on deductions, Barry. So there's a, there's a very structured way to do this, but ultimately it's going to depend on how comfortable you are with concentrated positions in your portfolio and how much are you willing to pay tax to get rid of that concentration.
- [12:06]
Barry Ritholtz
What happens with someone who not only is getting their income from a company, but they just have so much concentrated risk in that equity? What sort of advice do we give folks like that?
- [12:18]
Bill Aronian
There's a couple options. Number one, you could just pay tax on it. That's a win, you know, especially at long term gain rates. You know, our clients are, a lot of our clients are pushing 35, 37% on their ordinary income, but their long term capital gain rate is going to be 20%. They'll probably pay 3.8%, which is net investment income tax, but that's a reasonable rate to pay for all this growth. You've, you've won. Now create some tax. Sell, sell the capital gain and help yourself sleep at night because again, if that stock moves 10%, it's going to be material to your overall net worth. There are some other mechanisms. We are, we're heavy with direct indexing here at Reithults, we've had a lot of success with the o' Shaughnessy team on direct indexing and creating tax losses to use against concentrated positions or maybe use tax losses against real estate holdings or other stuff. There are some newer things Bill Sweet calls this late stage capitalism where there's this, there's this slew of new products to either avoid or defer taxes. 351exchanges come come into mind where you take a, you take a concentrated position, you find a group of investors, you bundle it into an ETF and you have a diversified basket now rather than a concentrated position. It doesn't necessarily solve the tax problem because your basis is your basis. You can't change that. So if I have $1 million of stock with a $5,000 basis. Even if I exchange that for a diversified ETF, my basis is still five grand. So whenever I, whenever I want to sell some shares of that new etf, I'm still going to have a pretty big capital gains bill. But it does solve the diversification issue.
- [13:50]
Barry Ritholtz
I know there was an exchange act recently. We, this traces back to real estate. If you sold an investment property and rolled into another one, you got to roll over the tax obligation. So it sounds like the SEC is finally caught up with real estate investors. Tell us more about how that operates. If you're sitting in highly appreciated stock, and let's be blunt, this is late stage of the bull market. People are sitting on giant low cost basis positions. How do these exchange works? Is it work? Is it just ETFs? What else can you do this with?
- [14:26]
Bill Aronian
Yeah, there's again, there's a slew of products on the market to solve these quote unquote problems. They're not problems at all. They're, they're, these are, these are champagne problems. But just like in real estate, where a 1031 exchange looks like you have a piece of property, real estate, for example, you find a bigger piece of real estate, you have a capital gain in the existing property and you roll it into the new property again. This is tax deferral. It is not tax avoidance. Your basis stays low and so what you end up with is you push the capital gain down the line. Now in real estate and what you could do with liquid assets and securities is if you exchange and exchange and exchange your whole life, then you, let's say, let's say you die. My favorite thing to say is nothing solves tax problems like death. But if you die, if you die, you pass on the assets to your kids. And what you've effectively done is you've deferred capital gains until you die and then your heirs get a step up in basis. So there are more mechanisms now to replicate what's happened in real estate with liquid securities and other assets. And that's, that's allowed folks to defer, defer, defer. And then, you know, eventually we'll inevitably, we'll see a bear market and this will solve itself. But right now we're seeing a lot of folks explore these options because we've had a hell of a run for 15 years now and a lot of folks are sitting on big capital gains.
- [15:46]
Barry Ritholtz
Yeah. To say the very least. So, so there's been a whole new set of rules passed last year in 2025, tell us what the most significant tax law changes were. What should investors be aware of?
- [15:58]
Bill Aronian
The biggest change is what didn't change at all. And that was actually tax rates. If, if the tax bill that was signed into law, we call it OB3. One big beautiful, one big beautiful act. If that was not signed into law by December 31, or if there were no tax changes, tax rates were set to increase by about 3 to 5% across the board. And for folks earning the highest incomes, that would have gone from 37 to 39.6%. And that 2.6% difference, that is unlimited in theory, that could be up to 6, 6 figures, 7 figures, 8 figures, 9 figures. And that 2.6% is now kicked into every dollar that exceeds that amount. And so the biggest thing that changed is what didn't change, and that's tax rates. The other changes that we're seeing come into effect are a lot on the deduction side, there's more strategy around tax deductions. Charitable giving, state and local taxes had a bump from 10k up to 40k for certain taxpayers. For most taxpayers, we talk about charitable giving quite a bit. And those are, what we're focused on is controlling the timing of deductions to time with income. Right. Your deductions are worth more when your tax rate is at its highest than when your tax rate is lower. So we're trying to time charitable gifts, we're trying to time salt deductions to coincide with our clients highest income years.
- [17:16]
Barry Ritholtz
You mentioned earlier, death solves a lot of tax problems. Turns out it solves a lot of problems. But how do you integrate tax planning into estate planning? Are they really one in the same? Tell us what the thought process is.
- [17:30]
Bill Aronian
There they are, they are one in the same with totally different rules. Estate tax as a whole doesn't come up outside of the most wealthy individuals. Right. Because right now the estate exemption is going to be like 30 million bucks for a joint family. But income tax plays a role throughout life, right? And so if we can, if we can integrate income tax planning with estate planning, it's a, it's a win for these families because at those levels of wealth, those are going to be the folks that are most sensitive to big, you know, big tax bills. Now one thing we like to do that combines the two is strategic Roth conversions. A lot of folks that we meet with, they have enough assets to live on. They're thinking about generationally, how do we take care of our kids within the bounds of the tax code. And so Roth conversions will allow let's say parents to pay tax now rather than leave pre tax money to their kids. So under Biden's Secure Act 2.0, there's now a 10 year rule for Inherited IRAs. These are both pre tax IRAs and Roth IRAs. And so if I have a kid, let's pretend I'm 80 years old, I have a 50 year old daughter who's a doctor in New York, right? Her tax rate is going to be very, very high when I pass away. She's going to have 10 years to deplete my retirement account. If that's in pre tax money, she's going to pay tax at the highest possible rate on that money. Whereas if I convert my assets, my pre tax assets to Roth, maybe I pay tax at 24% instead of her 37% rate. I do that on her behalf and now she has a lot more tax efficiency when she inherits my money.
- [19:07]
Barry Ritholtz
So last question, what should people be thinking about as they start to organize their taxes not just for 2026, but looking ahead to 2027?
- [19:19]
Bill Aronian
It's about timing income, right? It's again, think about this over the course of your lifetime or if you have kids over, over the course of their lifetime, when can we pay tax at a lower rate than we might pay in the future? Right? That's, that's a lot of our work is just timing income, timing deductions to take advantage of fluctuations in, in tax rates and in, in lifetime income. And that's where, that's where you have to look forward again, look forward rather than backwards is if you can time these things, these are going to be marginal differences over the course of your lifetime, but marginal differences that can then compound, they're really going to add up over decades.
- [19:55]
Barry Ritholtz
So to wrap up, there are a lot of steps investors can take to minimize what they pay in taxes, not only on capital gains, but what they're doing with their qualified accounts, where they locate their assets and changes they can make to make sure their kids aren't saddled with the tax burden. Speak to your financial planner, speak to your tax professional, make sure they're working together so that you check every box that's available to you to legitimately reduce and defer your taxes by as much as possible. I'm Barry Ritholtz. You're listening to Bloomberg's at the Money.
- [20:40]
Ryan Reynolds
Foreign.
- [20:45]
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Barry Ritholtz
Nice.
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