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Motley Fool Hidden Gems Investing
Tax-Smart Retirement Planning and the Long-Term Return of Gold
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- [00:00]
Sean Mullaney
Foreign.
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Robert Brokamp
Choosing the Right Retirement Account and the Long Term Return of Gold.
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Host/Interviewer
That and more on this Saturday personal.
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Robert Brokamp
Finance edition of Motley Fool Money. I'm Robert Brokamp and this week I.
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Host/Interviewer
Speak with financial planner and CPA Sean.
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Robert Brokamp
Mullaney about why some investors should favor pre tax traditional retirement accounts despite all the benefits of Roth accounts.
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Host/Interviewer
But first, here are a few items.
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Robert Brokamp
From the news last week. First up, we turn to the latest weekly asset allocation review from Yurian Timmer, Director of Global Macro at Fidelity Investments, who writes that quote, at least for now, the US Stock market is rebalancing in one of the best ways possible. The mega cap seem to be taking a rest while the rest of the market breaks out with the bag 7.
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Host/Interviewer
Now stuck in a range.
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Robert Brokamp
Since November, the broader market has gone from narrow to broad, from 32% of stocks trading above their 50 day moving average to now 73%. Indeed, since Halloween, the S&P 500 has returned 0.5% and the Nasdaq 100 has lost 2%. Meanwhile, small caps value stocks and international stocks are up 10%, 7% and 5% respectively, as of this taping on the morning of January 22nd. Fidelity's Timmer has labeled this quote a bullish broadening. But those returns are nothing compared to what we've seen from gold. Which brings us to our second news item of the week. The Spider Gold Shares ETF Ticker GLD was up 64% last year and is up 12% so far this year. This past week was the anniversary of gold hitting a then record price of $850 in 1980, which was then followed by a slump that lasted more than two decades. If you had bought at the 1980 peak and held to today's price of 4800, your average annualized return would be less than 4%. Meanwhile, if you invested $850 in the S&P 500 back in 1980 and held to today, you would have earned a total average annualized return of 12% and your investment would have been worth more than $161,000, according to the S&P 500 calculator on the of Dollars and Data blog. And now the number of the week which is 96%. That's how much of the cost of tariffs that has been absorbed by consumers and importers. According to a recent study from the Keel Institute for the World Economy and highlighted in a Wall Street Journal article from this past week, foreign exporters absorbed only about 4% by lowering their prices. That said, US inflation has remained moderate so far, with Harvard research indicating that only about 20% of the tariffs have fed into higher consumer prices within six months of implementation, as US Importers and retailers have absorbed much of the costs. We shall see if that continues in 2026.
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Host/Interviewer
Next up, choosing the Right Retirement Account.
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Robert Brokamp
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Host/Interviewer
Before you start socking away money for retirement, you'll need to pick an account type. But choose wisely because it'll shape your tax bill today and potentially decades from now. Here to discuss how to choose the right account is financial planner and CPA Sean Mullaney, who writes the FI Tax Guy blog and is the co author, along with Cody Garrett, of the book Tax Planning to and Through Early Retirement. Sean, welcome to Motley Fool Money.
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Sean Mullaney
Robert thanks so much for having me.
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Host/Interviewer
So the title of your book highlights early retirement. So in your mind, what makes someone an early retiree and what, if anything, should they be doing differently?
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Sean Mullaney
To my mind, an early retiree is simply anyone who retires prior to being eligible to enroll in Medicare. That is, generally speaking, the first of the month you turn age 65. And indications are a majority of Americans do early retire. And there's plenty of reasons for that. Sometimes it's choice. Sometimes it's we've got enough money saved up, so why are we still working? And sometimes it's a layoff or my job got obsoleted or whatever it might be. Early retirement tends to have advantages when it comes to tax planning. I say that because early retirement offers an opportunity to spread out income over a longer window of time. And in today's tax planning environment, the tax rules are telling you, they're yelling at you, spread out income, Spread out income, Spread out income. So what I mean by that is we live in an era of a very high standard deduction. We live in an era of the 10% tax bracket and the 12% tax bracket. A married couple, especially in their 60s or 70s, could have, well, well over $100,000 of income subject to only a 0% tax bracket, which is essentially what the standard deduction is, the 10% bracket and the 12% bracket. So that's sort of yelling and screaming, please spread out income over time. And that's part of the reason the early retiree has a tax advantage. He or she is going to have to live off their income over a longer window of time, which generally speaking, helps from a tax planning perspective.
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Host/Interviewer
These days. We read a lot about the benefits of Roth accounts which result in higher taxes today, but qualified withdrawals are tax free in retirement. However, in your book you make the case that many workers really should first turn to that pre tax traditional work based retirement account.
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Robert Brokamp
Why is that?
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Sean Mullaney
Well, for the simple reason that we ought to pay tax when we pay less tax. And it turns out that for the vast, vast, vast majority of Americans, I would contend even for the vast majority of affluent Americans, it turns out you pay more tax when you're working and you're getting up in the morning to generate taxable income than when you're retired. And so let's think about that for a second. You've got that Roth 401 or a traditional deductible 401 at work. You get to deduct into that thing at your highest marginal rate. Maybe it's 22%, maybe it's 24%, maybe it's 32%. So that's an immediate tax benefit of 22 cents on the dollar, 24 cents on the dollar, 32 cents on the dollar. Okay, well what's that going to look like when it comes back into income later on in your retirement? Well, you have that run back up the progressive tax brackets. Now, particular early retiree. The 60s could be a great time to maybe get some of that money and either Roth convert it in your 60s or just live off of it in your 60s. And some of it will be sheltered by the standard deduction. I refer to that as the hidden Roth ira. We took money from a retirement account and we didn't pay federal income tax. Isn't that a Roth ira? Well, not in this case. That's what I refer to as a hidden Roth IRA. It's a Roth IRA that lurks, that hides inside your 401. And I think a lot of Americans have to think long and hard before sacrificing the upfront tax deduction. Now I will say it's usually beneficial to invest that tax savings in a Roth IRA or a taxable brokerage, but boy, that is a upfront benefit. And it turns out that the progressive nature of taxation going back up through the brackets means that it's very likely that on the way out, the marginal rate on that is going to be less than the rate that you enjoyed on the way into the traditional 401k. Now, Robert, I will say one thing though. I'm not anti Roth, particularly for those in the audience that have access to either the so called BackDoor Roth IRA or the Mega BackDoor Roth IRA. So these are transactions that allow higher income earners to get money into a Roth account. I tend to really like those once we've maxed out our traditional 401 say at work for many workers.
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Robert Brokamp
Why do I say that?
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Sean Mullaney
Trade offs, traditional 401k, that 24,500 in the year 2026? Well, the trade off there is I either deduct at my highest marginal rate today or I put into the Roth 401K. The problem with that trade off is I'm giving up a tax deduction at my highest marginal rate today. But the backdoor, whether it's the so called BackDoor Roth IRA or the Mega BackDoor Roth IRA, if you have that through your 401k or other plan at work, the trade off profile is so much better because there's no sacrifice tax deduction. The money that goes into these backdoor Roths is money that would have otherwise gone into a taxable brokerage account. Now that's not a terrible outcome to invest in a taxable brokerage account, particularly in a low yield world with qualified dividend income rates. But there's still tax on the dividends, interest, future capital gains on that versus if we can take advantage of one or both of these backdoor techniques. Well, guess what? We've moved money that would have gone into a taxable brokerage account, would have spit out a 1099 div every year and instead it's parked inside a Roth account, growing tax free for the rest of our lives, potentially the rest of our spouse's lives, potentially 10 more years, you know, assuming it goes to our adult child beneficiaries. So I'm certainly not anti Roth, but I think you have to step back when you're in your accumulation years and think about the trade offs. And are you really going to pay high taxes on most of that money in retirement if it's in a traditional retirement account?
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Host/Interviewer
You have some great illustrations in the book of how folks who are retired, particularly over age 65, because they get the higher standard deduction, they got the new senior deduction from the one big beautiful bill, how you could have a surprisingly high amount of income and pay a surprisingly low tax rate. You have particular illustrations of couples who are making, say $250,000 and that puts them in while they're working, say the 24% tax bracket. You contribute to that pre tax account, you're getting that deduction on 24%. But then in retirement, their effective tax rate is 12% to 15%. So of course, in that situation, it makes total sense to take the deduction sooner and then pay taxes at that lower rate in retirement.
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Sean Mullaney
That's exactly right, Robert. And we live in sort of a golden age right now where you have the high standard deduction plus the senior deduction. Now that is temporary, to be fair, although I think the politics are likely to play out that some form of that thing is likely, but certainly not guaranteed to be extended in the future. But you see, we have examples of what we call tactical taxable Roth conversions, where we have a married couple in their mid to late 60s. They have $101,000 of income before any Roth conversion. And that's mostly capital gains income. It's spending down the taxable accounts first and then we add a $40,700 Roth conversion. And I've done this at a conference, so I say, oh no, this couple's got $141,700 of adjusted gross income. They're going to be taxed. Right. And I asked the audience, just mentally in your mind, picture, what's their tax rate going? How much federal income tax are they going to pay? And of course, the surprise is they pay zero federal income tax. Well, how can that be? Well, the Roth conversion is essentially wiped out by the standard deduction and the senior deduction. You structure your affairs so that you have low yield equities in the taxable account, maybe a small bank account generating some interest income, but essentially the ordinary income, the Roth conversion, the non qualified dividends, the interest income can be kept at the senior deduction plus the standard deduction. So that wipes away the tax on that. And then you can have significant capital gains that you're essentially you're in your brokerage account. You sell those brokerage account mutual funds or ETFs and trigger capital gains. But recall, we have the 0% long term capital gains tax bracket. I believe for a married couple in the year 2026, that thing goes up to 98,900 of taxable income. So that's after we put in the senior deduction. If we're 60 or older, we're married, that's $12,000. If we're both 65 or older this year, that's fantastic. Plus the high standard deduction. So that goes back to my point that retirement is a time that if we structure our drawdown and our Roth conversion strategy in the first part of our retirement we might be paying very low taxes. And then yes maybe later on in retirement as we spend down those brokerage accounts we then get into our traditional IRA. We eventually get to RMDs. Although by the way, if you're born in 1960 or later that RMD doesn't start till age 75 later in life anyway. So yeah Robert, there are so many good little planning opportunities out there and I think we have to step back and say fear of taxation and retirement is not justified in today's environment based on the rules, based on the incentives of the politicians based on what the recent history. In the book we have a little table and it goes through a decade's worth of tax cut after tax cut after tax cut for retirees. Even though many come commentators are saying you know, they're going to be increasing taxes on retirees. The problem with those predictions is the future keeps happening and those tax increases don't materialize. And what has materialized are tax cuts after tax cuts for retirees. Now I'm not here to say that that's going to continue meaning I do think there's some risk that maybe small incremental minor tax increases and I'm certainly not going to bet on continued tax cuts on retirees. But, but I think the history, the politicians motivations, today's rates sort of come out with this message of taxation in the future for retirees is likely to be relatively modest. That's certainly not guaranteed. And look, I'm not here to say you shouldn't think about some tactics like some smaller Roth conversions, maybe doing the backdoor Roth while you're working. There are different things you can do to help mitigate that risk. But I just don't think that fear of taxation and retirement is that justified in today's environment. And looking into the future you highlight.
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Host/Interviewer
A couple of things that people often will bring up as a reason to have more Roth assets. One is RMD's required minimum distributions. The other is IRMAA income related monthly adjustment amount for Medicare. But as you point out at the book, when you actually calculate those amounts as a percentage of the overall portfolio and the withdrawal, they're probably more of a nuisance than anything else. Yes.
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Sean Mullaney
So irmaa, let's talk about that one. That is an increase in Medicare Part B and Part D premiums and it's based on your income from the two years previous. Now, when you run the numbers, two things sort of emerge. One is IRMAA tends to be a tax on affluent singles and widows. So if you look at when IRMAA kicks In, it's over $200,000 of income for a married couple. Even very affluent married couples, when they're no longer working, often have a difficult time reporting 200,000 or War of income on a tax return in retirement. That's partly because of basis recovery with capital gains transactions. By the way, in retirement, our spending tends to form a natural ceiling on our taxable income in a way it did not during our accumulation years. That's an important insight. So when we're married, IRMAA tends to barely bite. Now, I will say Irma starts biting when we become single. Either we're single going into retirement or we become a widow. And that's when IRMAA can bite. But like you were saying, Robert, it tends to be more of a nuisance. It tends to be a tax on affluent single retirees. Just the way it functions. That's just how it breaks down. But even then, IRMAA tends to be an indication that things, generally speaking, worked out well in your financial life. And perhaps you had some tax inefficiencies in the later part of your life when they don't impact you as much. This is one of the lessons of the book, is that when we think about taxes, we should think about when are they the most impactful. I would argue that the most impactful when you're 40 years old, you got two kids at home, you got a spouse at home, and you haven't built up sufficient assets to be financially independent or whatever you want to call it, boy, paying taxes, then isn't that great because you got two mouths to feed, you have a spouse, you haven't built up all this financial wealth. And even early retirement, the beginning of retirement isn't the greatest time to pay taxes either, because, look, you might have 30 or 40 years of retirement you have to fund. Paying some money to Uncle Sam at that point, isn't that great? Because now, you know, that's money that could have been invested for your financial future. You know, to the extent people worry about sequence of returns, risk, not something I worry a whole lot about, but it's not a nothing concern. Paying taxes upfront in the early part of retirement is not a great thing to do. So if we're going to have, say, IRMAA in the later years of our retirement, because we did traditional retirement accounts a little too much, say, well, you've essentially picked a really good time to pay tax because at that point it can't be as impactful to your financial future at that point. These inefficiencies, sometimes I refer to these inefficiencies as garbage time touchdowns, right? You use these traditional retirement accounts, you won against the IRS when you were working, you then spent down taxable brokerage accounts. Early in the first part of retirement, you won against the irs. And then maybe later in life you have these inefficiencies that come after decades of defeating the irs. Maybe what you've done is you've picked a pretty good time to pay taxes because at that point, one of two things is true. If you're paying irmaa, you're financially affluent, you're well above most Americans in terms of financial success. So you're paying the surcharge or maybe a little incremental tax on the income tax side at a time where you're already wealthier than most of your cohorts in that age group and overall Americans. So you done really well and you have a few tax inefficiencies. That's an outcome most Americans would gladly sign up for. And these inefficiencies come after decades of defeating the irs. I am a lifelong or almost lifelong New York jets fan and I've seen plenty of garbage time touchdowns. There's scores by the other side that ultimately are not determinative of the ultimate outcome. And that's what we're looking for, is financial success. As much as we're trying to reduce taxes, that's an important priority. But the ultimate priority is financial success. And I've seen my jets score too many touchdowns to not be pretty knowledgeable about this subject. And so I think what happens is if you use these traditional retirement accounts to build up retirement savings, maybe build up some taxable brokerage accounts, you know, maybe build up backdoor Roth IRAs, because you deducted, you saved money, you invested it during your working years. All right, maybe at the end of the game, you know, we have some RMDs that go out of the 32% when we're already affluent and we don't have the energy to be spending that money anyway. Or maybe we're in long term care. Whole other conversation. A lot of times a lot of these long term care expenses can be subject to. It could be medical deductions and we can essentially deduct away most of our taxable income. So it's actually an efficient use for a traditional ira. Not a desired use, but an efficient use. So yeah, that's sort of my approach when I think about this. Not that Roth conversions can't play a good role, can't be beneficial, but rarely are the Roth conversions needed.
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Host/Interviewer
Well, this has been a great conversation. Sean. Thanks so much for joining us.
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Sean Mullaney
Robert, thanks so much for having me.
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Robert Brokamp
It's time to get it done, Fools. And this week I encourage you to do something that I encourage everyone to do every January, and that is to think about what you'll need from your portfolio in the next three to five years and protect that money by moving it to cash or bonds. On average, the stock market drops 20% or more every four years and in the first decade of the century it dropped more than 50%. Twice. Since 1928, the stock market has been profitable over 83% of three year holding periods, 88% of five year holding periods, and 94% of ten year periods. So we think protecting money you need the next three to five years is a reasonable goal, but you should always adjust for your own risk tolerance and circumstances. So if you plan to make a big purchase soon or maybe send a high schooler to college or create or re stuff your retirement income cushion, now is a good time to move that money from stocks to higher yielding cash, CDs, treasury bills or short term bonds. To find higher yielding banking options, visit the other Motley fool money. Not the podcast, but the Motley fool website that rates and reviews credit cards, mortgages, brokers and banks. And that, my friends, is the show.
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Host/Interviewer
Thanks for listening and thanks as always to Bart Shannon, who is a magician.
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Robert Brokamp
And the engineer for this episode. As always, people on the program may.
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Host/Interviewer
Have interest in the stocks they talk about, and the Motley fool may have.
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Robert Brokamp
Formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for the informational purposes only.
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Host/Interviewer
To see our full advertising disclosure, please.
- [22:24]
Robert Brokamp
Check out our show Notes. I'm Robert Brokamp full on, everybody.