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Will the Tax Cuts and Jobs Act Be Extended? - 524
00:47:27
Will your taxes go up? Stay the same? Go down, even? Jeffrey Levine is Chief Planning Officer at Focus Partners, Professor of Practice in Taxation at the American College of Financial Services, and the Lead Financial Planning Nerd at Kitces.com. In...
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- [00:00]
Andi Last
Will your taxes go up, stay the same, go down even? Jeffrey Levine is chief Planning Officer at Focus Partners, professor of Practice in Taxation at the American College of Financial Services and the lead financial planning nerd@kitsis.com in other words, he's one of the savviest tax minds in the country. Jeff returns to the show today on youn Money, you, wealth podcast number 524 with his thoughts on what will happen to taxes under the new administration. Saving for retirement in a Roth IRA versus a traditional ira, managing inherited retire accounts and the future viability of Social Security. Plus, how do you go about calculating the maximum amount you should convert from your retirement account to a tax free Roth account? Joe and Big Al spitball for YMYW listener Joe. Also, how can Joel in California reduce the distributions he's required to take from his retirement accounts? And how can Esther and San Francisco's minor beneficiaries avoid probate? I'm executive producer Andi Last with the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Clopine, cpa and our special guest today, Jeffrey Levine.
- [01:06]
Joe Anderson
You're one of the smartest guys I know when it comes to taxes and general financial planning. And you've got, you're a CFP or cpa. Indeed, you got five more designations.
- [01:17]
Jeffrey Levine
Can never stop learning, Right?
- [01:19]
Joe Anderson
Good for you. Well, I want to talk taxes. I know that's near and dear to your heart.
- [01:24]
Jeffrey Levine
Indeed.
- [01:26]
Joe Anderson
We've got the Tax Cut and jobs act of 2017 set to expire at the end of this year, 2025. What do you think? Will it be extended or what? How should we be thinking about that?
- [01:39]
Jeffrey Levine
Well, I have to start by saying any time you talk about taxes and tax policy, it inevitably flows into a little bit of politics. So we've got to try to separate the two.
- [01:49]
Joe Anderson
I hear you.
- [01:50]
Jeffrey Levine
And what I would say is whether you're really happy with the election results, you're sort of indifferent or you're really unhappy. Yeah, the, the end result from a tax policy perspective is probably the simplest possible outcome we could have hoped for because the rules that are in place today were largely put in place by Republicans back in 2017. And so it stands to reason that their primary goal is to extend many of these same rules into next year. Now, certainly there will be some changes. Exactly what we don't know yet, but some likely candidates are the salt cap, the state and local deduction that currently is capped at $10,000 for itemized deductions. We'll probably see that lifted Somewhat to a higher total may be some changes to the child tax credit. There's been talk about that. Along with the President has campaigned for tax free Social Security, tax free overtime, tax free tips. How much of that ultimately makes it into the final bill? Still very much up in the air. But the point is, most of the rules that exist today are probably going to be the same or very similar to the rules that exist next year into the foreseeable future. Which from a planning perspective, again, whether you're happy, sad or indifferent, it's easier. And we deserve easy. After the last five or 10 years, there's been a lot of legislation thrown at us. We deserve a little bit of a break.
- [03:06]
Joe Anderson
You know, I like the way you say that. That would be nice to kind of have it calm down just. Just a little bit.
- [03:12]
Big Al Clopine
Yeah.
- [03:12]
Jeffrey Levine
I mean, if you think about the alternative, had there been a divided Congress, you know, one of the things that everybody agreed on was that they didn't want the Tax Cut and Jobs act changes to just expire wholesale. The problem was everybody wanted different things to be extended. And people Forget back in 2012, Congress was in a similar situation where tax cuts were set to expire, things were scheduled to sunset, and it took Congress until January 2 of 2013 to pass the 2012 Tax act, which meant as we got to the end of the year, people were very unsure of what to do. Makes it very difficult to plan again. Thankfully, we probably don't have to worry about that tax.
- [03:50]
Joe Anderson
I do remember that. I remember sometimes things passed after the year already ended and then they're retroactive. It's like, how do you plan for that?
- [03:57]
Jeffrey Levine
Yeah, you change the rules of the game after the game is over. That's not very fair.
- [04:01]
Joe Anderson
It makes it more difficult. So we talk a lot about Roth conversions as a strategy on this podcast and. Well, that's certainly one thing that would be a little bit easier if we know the tax rates are going to stay the same because they're obviously lower than they would be if the tax cuts expire.
- [04:17]
Jeffrey Levine
That's right. We don't have to rush to do any last minute Roth conversions. We don't have to rush to do gifting towards the end of the year to take advantage of what would be a potentially lower exemption because it's likely to stay the same, if not higher. So all those, like last minute rush around try to get these things in situations we can, you know, no guarantees because the law hasn't been passed yet, but it seems very likely that we'll get that sometime in the near future.
- [04:40]
Joe Anderson
And estate planning, estate tax exemption, you see that probably staying the same, if.
- [04:46]
Jeffrey Levine
Not higher, if not higher. There's some discussion of eliminating altogether. The question is, is it politically worth it to do that? You know, that becomes a clear quote, unquote talking point for the other side of it's a gift to the wealthy, because it clearly is just really for that. I mean, at this point, it would only affect families with more than, you know, $28 million.
- [05:08]
Joe Anderson
That's right.
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Jeffrey Levine
So very few people already have to deal with it.
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Joe Anderson
Right, right. So at this conference, you've talked about the death of the traditional ira, and what do you mean by that?
- [05:20]
Jeffrey Levine
Well, the whole premise behind the traditional IRA was you put some money in now you'll get a little bit of a tax break, and then down the road you'll pay taxes at a lower rate when you retire. And that's all well and good if that's what actually happens. But for, you know, for many individuals, especially those who are really good savers, who have been high earners over the course of their career, they may be in some sense victims of their own success where they've done such a good job saving and in some cases have sacrificed things that they could have enjoyed in their younger years for, you know, for these benefits when they're older, that they have as much income, if not more, when they're older and taking out money from their IRAs, their 401ks, they have Social Security, and in some cases, they may even have inheritances from a prior generation that also generate income. So the question really becomes, is it better to forego that tax break now and instead just bite the bullet, so to speak, pay the taxes today, be done with it, and have everything grow tax free forever? Obviously, that depends a lot on whether someone's future tax rate is going to be higher or lower than it is today. But the point is, a lot of people end up with a lot more income in the future than they expect. And I mean, at some point you have to imagine that we're going to have to pay for the deficit and debt that we're running up as a country. And it's really hard to figure out how that could be done without at some point raising taxes for at least those who are more, you know, more fortunate. And so if that's the case, when you combine a higher income than you might expect in retirement plus potential for future higher taxes, again, it just lends itself to wondering, should I just pay the tax now and be done and not have to worry about it in the future.
- [07:00]
Joe Anderson
You know, I think that's well said. Now for people that haven't saved or don't have the discipline to save, they, they very likely will be in a lower bracket, probably in most cases.
- [07:09]
Jeffrey Levine
Sure.
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Joe Anderson
But as you say, those have done the right thing. They've ended up saving and they end up with a lot of money in their IRA, their 401k compound growth over decades. Right. And then all of a sudden they've been assuming, they've been told, they've been assuming they'll be in a lower tax bracket.
- [07:24]
Jeffrey Levine
That's right.
- [07:25]
Joe Anderson
Retirement comes around and they're not.
- [07:27]
Jeffrey Levine
I mean, it is a very bourgeois problem to have. Right. I have so much income that I have more, you know, more tax rate than I expect. But it is a problem for those who have accumulated. The whole point is to try and preserve as much of your wealth as possible. And the more that's eroded via taxes, the less that's available for you and your heirs of money that you' worked hard and saved and sacrificed all your life for.
- [07:47]
Joe Anderson
So the solution then is to try to get as much money in a Roth IRA, whether it's a Roth provision in a 401 or Roth IRA contribution or Roth conversion from your prior IRAs.
- [07:58]
Jeffrey Levine
Yeah. Ultimately to me, it's about timing that income and figuring out when are you going to be at your lowest tax rate. And that's a function of not only your own personal income and your own personal deductions, but obviously also what happens externally. And we don't know either of those things. Right. Things can change over time. So it does involve a little bit of guesswork, but ultimately it's pay your taxes when your rate is lowest. So if you have the opportunity today to defer, let's say you're approaching retirement now, you're four or five years away, you've got some high income today, but you expect to have a few years off between when you retire and when you start taking Social Security. And maybe when you start your RMDs, those may be very low income years and it might feel great to go, I didn't have any tax liability this year. But from a tax planning perspective, that's actually really bad. You know, I always say low income years are a terrible thing to waste. And you know, the Roth conversion is effectively like a magic wand that creates income in exactly the year that you want it. And so if this is an otherwise low income year, you wave the magic Roth conversion wand and poof, you create income. It's shifted into the current year, and now you pay tax on that income at a rate that is lower than you otherwise would have either in the past when you were working, or in the future when you may have more retirement distributions that you have to take.
- [09:13]
Joe Anderson
I think that's one of the biggest mistakes early retirees make is they don't think about getting money into a Roth IRA when they're in a low bracket and their accountant, you've done great job. Look at this. You don't have to pay any taxes. And then all of a sudden they hit 73 or 75 RMDs kick in and they're in a gigantic tax bracket. They've missed that opportunity. And in some cases it could be as many as 10 years where they could do a little bit of Roth convers.
- [09:42]
Jeffrey Levine
Yeah, it really, it really does come back to bite you if you don't act in a proactive manner. And I'm always trying to encourage people, don't look at this year's tax bill. This year's tax bill, I don't want to say it's irrelevant because it matters, but it only matters a fraction because it's one of a set of lifetime tax bills. And ultimately what your goal should be as an individual, and certainly our goals as planners is to try and help individuals to create the lowest lifetime tax bill. And actually, when we're talking about retirement accounts, sometimes thinking about the lowest lifetime tax bill is actually not long enough because we may do such a good job that we're not going to spend all our money and we're going to leave it over to our heirs.
- [10:23]
Joe Anderson
Good point.
- [10:23]
Jeffrey Levine
And there's no step up on an ira. In other words, children, grandchildren, et cetera, will still have to pay the tax liability when they take out the money. So sometimes it's about thinking about how do we create the lowest multi generational tax bill. And so looking at one year is too myopic. It's just too, it's just not looking broad enough. We've got to try and look at the big picture.
- [10:46]
Joe Anderson
I like to say if you did tax planning over the next 20 years, you'd make a different decision this year than you would if you just focused on the current year.
- [10:54]
Jeffrey Levine
That's exactly right.
- [10:55]
Joe Anderson
Yeah. So let's talk about the Secure Act. Secure Act 2.0, the death of the Stretch IRA for most people. There's a few people can still take it, but most people can't do the stretch anymore. They need to get the money out within 10 years after, after receiving the IRA for a non spousal IRA beneficiary. What are strategies that could help alleviate that or are there things that people can be thinking about?
- [11:19]
Jeffrey Levine
Well, I think the first thing we have to consider is who we're talking to. Because there could be really two different types of individuals you and I might sit down with. One is it's the beneficiary they've just inherited and they're trying to figure out, what do I do with mom or dad's ira. The other one is mom or dad sitting down and saying, you know what, we've done a really good job and we're enjoying ourselves and we just can't spend our money fast enough. Again, another nice problem to have, right? But like, we know we're gonna leave over money and we thought our kids would have 30, 40 years to take out these dollars, and instead they're only gonna have 10 years. It's gonna compress that income into a shorter period of time, which means more income coming out in any one year, which means higher tax rates in all likelihood. So, you know, we think about that. We start with the first of those groups, the beneficiaries. You know, there's a couple of options. One is you can just kind of kick the can down the road and wait. Now, for most people, that's probably not a great idea because if you inherit, let's say, $500,000 today and you leave it alone and you didn't take anything, in some cases that's okay. If you wait until the end of the 10th year, it's very possible the account could double over 10 years. Just a 7% rate of return over 10 years. Your half million turned into a million, and now you're taking that all out in one tax year. That's not very efficient for most people, right? So, you know, you say, well, nobody should do it. Well, that's not true. There's different circumstances for everyone. Someone who's in the highest tax bracket today might look and say, if I have to pay the top rate today, I might as well get 10 years of tax deferral and pay the same top rate down the road if it's.
- [12:47]
Joe Anderson
The same rate the whole time.
- [12:48]
Jeffrey Levine
Yeah. Or even a Roth beneficiary, Right. Like, why would you touch money growing tax free until you have to?
- [12:53]
Joe Anderson
Good point.
- [12:53]
Jeffrey Levine
So some people should just let it go for as long as possible. In other circumstances, it would be spread it out as much as possible. You know, someone may be working now and they expect to have relatively similar income over 10 years. They may Want to spread it out, sort of sprinkle in almost the IRA.
- [13:08]
Joe Anderson
Income, kind of fill up their current bracket without going into the next one.
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Jeffrey Levine
Yeah, you know, those sorts of situations. And there we sometimes can get actually 11 years, even though it's called the 10 year rule, because year one of the 10 year rule isn't until the year after death. And so if a beneficiary is motivated, we can actually act in the calendar year of death to get some money out and now spread it out over 11 years. And then for others, it's just a matter of strategically timing it. So someone might be 60 and working for the next five years, but plans to retire at 65. Well, maybe we spread it out over the last five years of the 10 year rule, or maybe someone's 65 and they just retired. But at 70 they have Social Security and at 72 they have 73. Now they have RMDs. And so we front load it. But the whole concept is you look at all your other income, you look at all your other deductions and figure out how do we just layer this other income that we have to take on and make everything kind of as level as possible.
- [14:01]
Joe Anderson
Yeah. Another perfect example of tax planning over a decade or more instead of just focusing on one year at a time.
- [14:08]
Jeffrey Levine
That's right.
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Joe Anderson
And a lot of CPAs. I'm a CPA. You're a CPA. I had my own tax practice. And you do find yourself just trying to say, well, it's, see what you can save, you know, this year. That's right. And then I sort of switched industries a little bit and I realized, no, that's not the best way to do this. But a lot of the CPA community is very focused on the one year.
- [14:28]
Jeffrey Levine
Yeah, well, I mean, I understand that from their perspective, because if you go to the CPA and the CPA says, hey, your tax bill is, you know, $10,000 this year, but you're going to save money in the future. But then you show it to someone else, like, oh, this is wild. You could have done this and saved 2000. You go, what? I could have saved 2000 without any context behind it. So it become difficult sometimes, just even from a, you know, a communication and education perspective. And, you know, you said, you know, your cpa, you've prepared tax returns for many years. I also did, like in the height of tax season. You don't have the same time to educate clients about all of these things because you're just trying to get, I mean, the forms come out between, like, January and February. Ish. And you're trying to get everything done in, like, eight weeks.
- [15:10]
Joe Anderson
You are. Right.
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Jeffrey Levine
It's very difficult.
- [15:11]
Joe Anderson
Well, and the other thing, as a CPA preparing taxes, you don't have all the information that you need to make the right decision. So that's why you rely on the financial planner. But if a financial planner doesn't know about taxes, they'll say, go to your cpa. And it's a tough thing.
- [15:26]
Jeffrey Levine
It is.
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Big Al Clopine
It is.
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Jeffrey Levine
That's why we have. You know, I always say I never worry about job security. The government makes things complicated enough.
- [15:32]
Joe Anderson
Good point.
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Jeffrey Levine
We'll be here for the foreseeable future.
- [15:34]
Joe Anderson
I'm in the same boat. All right, let's talk about Social Security.
- [15:38]
Jeffrey Levine
Okay.
- [15:39]
Joe Anderson
Because a lot of people are concerned about its future viability and even more so now, given the political climate going on. What are your thoughts?
- [15:48]
Jeffrey Levine
Well, once again, I think we've got to kind of separate groups of individuals. I think those who are close to Social Security age or already receiving Social Security, I think they're likely fine. And I'm not saying that nothing could happen, but I think it's very unlikely that their benefits will change much, if at all. Now, for younger individuals, I think there likely are going to be changes. I mean, if we just. We have to have changes, whether it's delaying the age at which Social Security may begin or increasing the Social Security tax, some combination of all of those things. But ultimately, for those who are in or approaching retirement right now, I don't think too much will change. And there's a lot of reasons behind that. One of them is simply the, you know, the political climate. I mean, you don't take away things from people who vote for you. And the greatest voting block is seniors. I mean, the AARP is one of the most powerful lobbies in Washington. So it seems unlikely from a political perspective that you'd be on. You want to be the one on record saying, yes, I reduced your benefits, you know, so that's one thing. But going beyond that, like Congress historically has given people a pretty good Runway for when they made changes, and they're pretty good about estimating the changes and how well they will do. For instance, right now, a lot of people probably are familiar with the fact that if you have fairly modest income, none of your Social Security is taxable. If you have some more income, up to 50% of your Social Security is taxable. In some cases, for higher earners in retirement, up to 85% is taxable. Those changes, along with the Fact that right now there's a transition period where full retirement age is going from 66 to 67. Those changes all were made in the year I was born, 1983. So it has literally been 40 plus years since those changes were enacted. And, and at the time, well first off, the full retirement age thing, 66 is only starting to impact people now. They gave people 40 years to plan and when they made those changes they said we think Social Security by doing this will remain solvent for another 50 years. That was their projection. Well, right now Social Security is projected to run out of money in about 2031, 2033, depending upon what study you believe that's 50 years. They were really good when you were right. Large numbers of people, you can make pretty accurate projections. So I think there'll be some tough decisions in Washington as to where to draw those lines and who to make changes for and who not to. But I think if you're in your 40s, you're probably not looking at the system being exactly what it is today. But if you're in your, you know, mid to late 60s, I think you can count on whatever you're getting today or projected to get today to be there for you.
- [18:31]
Joe Anderson
You know, a little historical context. So my dad who lived into his early 90s, I remember him telling me when he was in his 50s, maybe mid-50s, I'm never going to receive a benefit of Social Security. I'm paying in for my mother in law and yet he received it for year after year after year after year. And now my mom is still taking his benefit.
- [18:54]
Jeffrey Levine
Oh my goodness. Amazing.
- [18:55]
Joe Anderson
So it, yeah, I feel like that's one thing that can be fixed and solved and yeah, maybe tough decisions. And I feel like politicians don't want to make those decisions because they're unpopular. But we have in the past and it seems like we will moving forward, we'll get there.
- [19:09]
Jeffrey Levine
Unfortunately, the further we get towards 2033, the more drastic those changes need to be.
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Joe Anderson
Good point.
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Jeffrey Levine
And so, you know, there may have to be larger changes than necessary because our politicians may not have the courage to act sooner rather than later, but eventually they're going to. I mean it is an important component of so many individuals retirements that they're going to have to find a way to fix it again. It's probably some combination of changing the full retirement age, changing the tax rates, maybe changing the amount of income that is subject to the tax rates. I mean there's lots of levers that they can pull and then ultimately it's probably going to be a combination of several of them.
- [19:46]
Joe Anderson
Yeah, I would tend to agree with you. Well, Jeff, what a pleasure chatting with you and your insights. I really appreciate it.
- [19:52]
Jeffrey Levine
Thanks so much for having me.
- [19:53]
Joe Anderson
All right, man, thanks.
- [19:54]
Andi Last
We also want to thank the American College of Financial Services for making it possible for us to bring you insights from their thought leaders. Watch or listen next week as retirement planning experts and author Jamie Hopkins returns to YMYW with ways to manage risks in retirement. Check out the previous episodes to learn the three investments that make for a happy retirement with Dr. Michael Finka and choosing your style of Retirement Income with Dr. Wade Pfau. Watch on YouTube or Spotify or listen on your favorite podcast app and don't miss the youe Money, you, Wealth TV show. Reading the daily headlines, you may feel less in control of your finances. What will happen to your money in the long term? You are not alone in those feelings. That fear of the unknown can lead to stress and anxiety. In a recent survey, more people reported fearing retirement than death. This week on youn Money, you, Wealth tv, Joe and Big Al show you how to lower that stress level and learn to take control of your retirement plan. Find links in the episode description to subscribe to both the youe Money, you, Wealth podcast and the youe Money, you, Wealth TV show and keep listening. Later in the episode, I'll tell you about this week's limited time special offer free download. It's a YMYW audience favorite. You definitely do not want to skip it. First, let's get to more of your questions.
- [21:07]
Big Al Clopine
Okay, we got Judy calling in or writing in from San Diego. He goes, hi Andy, Joe, Big Al. There is a group of eight of us that swim at the Y every morning. The current discussion is about RMDs when you don't need the money to live on. Three people say take the money out in start of year and put it in the brokerage account. Three people say take it out at the end of the year so it grows tax deferred for the year. One person says take it out monthly and dollar cost average into a brokerage account. And one person says it doesn't make a difference. You guys get to decide the deciding vote. Lunch is riding on the answer.
- [21:49]
Joe Anderson
We better not blow it. This is a lot of pressure.
- [21:52]
Big Al Clopine
Okay, Judy, we got eight people at the Y. So every morning they get around and they talk about RMDs while they're swimming.
- [22:00]
Andi Last
So they're in the pool having this conversation.
- [22:03]
Big Al Clopine
All right, so first let's define what an RMD is for Those of you that are taking score, an RMD is a required minimum distribution. It's the dollars that need to come out of a retirement account once you reach a certain age. And that dollar amount is based on life expectancy.
- [22:19]
Joe Anderson
Yeah. And that age currently is 73 years old. It will be 75 for those born 1960 and later. Currently it's 73.
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Big Al Clopine
So 1973. So Judy and the gang, they're all taking their RMDs, so they're swimming laps every morning in their 70s and they.
- [22:36]
Joe Anderson
Don'T need their money. So congrats. That's good for them.
- [22:38]
Big Al Clopine
That's impressive.
- [22:39]
Joe Anderson
Yeah, it is.
- [22:41]
Big Al Clopine
Okay, so do you take it out in the beginning of the year? Do you take it out at the end of the year or do you dollar cost average or you could care less what stay you Big Al?
- [22:54]
Joe Anderson
Well, I'm not that of that age yet. But my plan, Joe, is to take it out at the beginning of the year. And the reason is because, you know, if you leave it in all year, it guarantees whatever that growth is. It's going to be taxed at ordinary income. If you take it out at the beginning of the year and you invest it in an asset that goes up in value, you hold it for at least a year. Well, that's going to be capital gain treatment, which is a better tax treatment than ordinary income. So being that the market goes up more often than it goes down, no guarantees, two out of three years it goes up. I would rather have the money out earlier and try to take advantage of capital gain rates.
- [23:30]
Big Al Clopine
I would agree 100% because the money's forced out anyway. You have to pay the tax. So the longer that money stays in that account, it's growing tax deferred, which is great that you don't have to pay the tax on. But let's say that dollar continues to grow, you're still going to have to pay tax on a certain percentage. So the longer it stays in that account, more tax potentially you're going to pay because of the compounding effect on the force out. So if it's $100,000 and going down, you're going to pay less tax because less dollars are coming. If I can get that money out sooner. Now that dollar sits in a capital gains environment, a brokerage account where it's taxed at capital gains rate. If the market goes down, then I can tax last harvest and tax manage it. If the market goes down in the overall retirement account, there's no tax benefit there.
- [24:15]
Joe Anderson
Right, Right.
- [24:16]
Big Al Clopine
So yeah, I wonder who won? Who got lunch? Who got brunch?
- [24:21]
Joe Anderson
Well, if Judy's listening to our show, maybe she heard us say that already. I don't know.
- [24:29]
Big Al Clopine
What are you talking about?
- [24:31]
Joe Anderson
Well, if she wrote in and she's a listener, we have said. We have talked about that before on other shows.
- [24:37]
Big Al Clopine
Oh, I see what you're saying there, but we haven't. Okay, got it.
- [24:40]
Joe Anderson
Yeah. Yeah.
- [24:40]
Big Al Clopine
All right, moving on. We got. Hey, Joe, Andy, Big Al. Hope you're having a great day. This is DH from SoCal. He's 63 in single. Honestly, I listen and watch a show for the comedy. I know of no other places to get a laugh and learn about money on a weekly basis. My favorite show is 469.
- [25:04]
Joe Anderson
You remember that one?
- [25:05]
Big Al Clopine
Now to trigger your memory. This show was dominated by divorce talk. K dog. Dr. Bernie checks to his ex wife at 11 grand a month. But what grabbed my attention was the scenario from Laura on the Olympic Peninsula. Peninsula.
- [25:26]
Joe Anderson
Well done. Yep.
- [25:27]
Big Al Clopine
All right. Per Joe, she has everything. Her husband, he has nothing. And then Al, Mr. Perse says, I like when you said, she has a buck 62. Joe Be tired for every show.
- [25:47]
Joe Anderson
I guess you retired that.
- [25:48]
Big Al Clopine
You're funny as hell. All right.
- [25:51]
Joe Anderson
Stay tired, my friend.
- [25:52]
Big Al Clopine
Yeah, but when we take this, it's like a full day.
- [25:55]
Joe Anderson
I know.
- [25:55]
Big Al Clopine
It's. It's like the last thing I kind of want to do, to be honest with you.
- [26:00]
Joe Anderson
Yeah, but when we're done, you. You're so pumped up with energy.
- [26:03]
Big Al Clopine
Oh, yeah. It's like once we get going, we're good.
- [26:06]
Joe Anderson
Yeah, right.
- [26:08]
Big Al Clopine
But I do have a day job.
- [26:10]
Joe Anderson
I know you do.
- [26:11]
Big Al Clopine
Some people are like, yeah, you hang it up, but you mailed it in. What was that one? Oh, Joe mailed it in. Dude, it's like 8 o'clock at night. We're grinding. Still funny as hell. Thank you for that compliment. That's what I'm here for. I like the little comic relief.
- [26:34]
Joe Anderson
Yes.
- [26:35]
Big Al Clopine
We're trying to make finance fun.
- [26:37]
Joe Anderson
Yeah, we do our best. I mean, there's only so much you can do with it.
- [26:44]
Big Al Clopine
Oh, man. Okay, let's get back on track here. All right. Please spit on this scenario. All right. I've been converting my 401 to a Roth IRA since 2016. Honestly, I'm tired of converting, but I can't stop now. As you review my data, I'm trying to determine a range. How many 401 IRA dollars to leave on the table not to convert in order to keep those darn RMDs under control. I've been converting from the bottom to the top of the 24% tax bracket, but now this woman Irma has shown up. You know what Irma stands for again, Al?
- [27:24]
Joe Anderson
Yeah. Income related Monthly adjustment amount.
- [27:27]
Big Al Clopine
Wow. Big brain on Big Al.
- [27:29]
Andi Last
Didn't even have to look it up.
- [27:31]
Big Al Clopine
I will not let her get in my way of converting. But I must watch her at all times. Taxes on conversions are being paid from my taxable account. Thank you in advance for looking into this. Vehicles 2013 Audi A7. 2019 on a ridgeline. Favorite drink, Captain Morgan Coconut Rum. When's the last time you had a little Captain Morgan?
- [27:53]
Joe Anderson
High school, probably. Probably in Hawaii a few months ago.
- [27:57]
Big Al Clopine
Wow. Yeah, I don't know when's the last time I've had a little Captain.
- [28:02]
Joe Anderson
And the coconut rum is particularly good.
- [28:04]
Big Al Clopine
Oh, okay.
- [28:05]
Joe Anderson
I'm just saying.
- [28:06]
Big Al Clopine
We got Jack Daniel's, Tennessee Honey Whiskey shots to get a buzz in all caps. That's a big ass buzz.
- [28:17]
Joe Anderson
That would be.
- [28:18]
Big Al Clopine
All right. Income, living expenses, $100,000, broken out as follows. Currently working part time, W2 income, approximately $60,000. $15,000 annuity. No COLA. $25,000 from my 401. Most likely we'll take Social Security at 70,000. We'll reconsider if I get tired of working. I'm planning to implement QCDs at 70 and a half. Approximately $10,000. Current assets, $2.6 million. $1,300,000 in deferred money. $950,000 in Roth. $350,000. Taxable, projected to spend at $75,000. Approximately $120,000. In closing, you have made my personal conversion from full time to part time employment. A lot of fun. Thank you. Stay safe. Dh from SoCal. Okay, cool. Dh how old is Dh 63 years old and he's single. All right, so $1,300,000. All right. And he's converting in the 24% tax bracket. The top of the 24% tax bracket, roughly, is single taxpayer.
- [29:25]
Joe Anderson
Single taxpayer. That would be $197,000. Yeah. $200,000 $200,000. Yep.
- [29:32]
Big Al Clopine
Okay, so he's going up to $200,000. He's got 1,300,000. He's got 10 years. $1,300,000 could be, I don't know, 2.5. Four times 2.5 is 80. So that's putting him in the 24%. I mean, I'm just trying to calculate what his RMDs potentially will be in 10 years.
- [29:56]
Joe Anderson
Sure.
- [29:57]
Big Al Clopine
So at $1,300,000. So he's converting. He doesn't need a ton of money from here. So if it grows at 4% or 5%, he's still going to have growth in the overall account. He's got taxable account. He's still working part time.
- [30:07]
Joe Anderson
He's pulling out about $25,000 a year. So that's. So there's some drain on it. And then I guess.
- [30:13]
Big Al Clopine
So he's pulling 2.5% out of the account.
- [30:16]
Joe Anderson
Yeah. If he stops working, he'll be pulling a lot more.
- [30:19]
Big Al Clopine
Sure, sure.
- [30:22]
Joe Anderson
I guess. Yeah. If he's spending $100,000 and he's pulling out $25,000, but if he stops working, he'll pull out about $85,000. And on the total liquid assets, that's about a 3.3% distribution rate. But the question is, do you keep going on Roth conversions? Right.
- [30:40]
Big Al Clopine
If he retires, I don't think so, because he could pull a lot of that money out in the at least 22% tax bracket for life.
- [30:46]
Joe Anderson
Yeah, that's what I'm thinking, too. And I'm thinking I was.
- [30:50]
Big Al Clopine
Because if he's paying 24 from the conversion, then you just got to run the math to say, all right, over how much can I. Can I. Is the RMD going to be spike where it's going to push me in the 24 or higher?
- [31:03]
Joe Anderson
Right. Yeah. And I'm thinking one of the things that you don't want to do is have your RMD be greater than your need because now you're paying taxes on money you don't need. So I guess maybe a way to think about this in retirement is how much you're spending and subtract out your Social Security fixed income to get your shortfall. I'll just give you a super simple example. So let's say you're spending $120,000. Your Social Security is 40, so you need $80,000 from your portfolio. The RMD starts at about 4%. Right. So you can take that $80,000 divided by 4% or if it's easier, multiply it by 25. You get the same number. That would be a couple million dollars. If your IRAs are lower than that, then you're not being taxed on more income than you need. So that could be one way to think of it. Plus, if you're doing QCDs, qualified charitable distributions, those will not count as income, so you can actually have more in an ira. Furthermore, if you have medical needs later on, you can pull that out and get a tax deduct that's why you don't have to completely drain that IRA 401k account. So just, just consider some of those things.
- [32:13]
Big Al Clopine
Yeah, it wasn't even listening to a word you said.
- [32:18]
Joe Anderson
I know you tune out. That's how much you trust my answers.
- [32:23]
Big Al Clopine
Sounded really good. Sounded really good.
- [32:27]
Andi Last
All right, here it is. Your chance is here. Once again, hit that link in the episode description right now to download the DIY Retirement Guide. It's our special offer this week, but it's only available until this Friday. Learn the steps to understand and plan for your retirement income, sophisticated strategies for choosing a tax efficient distribution method, guidance on developing an investing strategy that meets your needs, tips on preparing for the unexpected, and other actionable information that's normally only available in our retirement classes or one on one meetings. Nearly all our other white papers and guides and handbooks are always freely available in the Financial resources section of YourMoneyYourWealth.com, but the 40 plus pages of this guide are so packed with practical do it yourself information that we only make it available on a very limited basis and after this week, it won't be offered again for another few months. Click the link in the episode description and claim the DIY Retirement Guide before the special offer changes sometime this Friday, April 11, 2025. Go get yours now. If you've got money questions or want a retirement spitball analysis of your own, click or tap Ask Joe and Big Al in the episode description and send us an email or a voice message like this one.
- [33:40]
Listener Joe
Hey Joe, Big Al and Andy, My name is also Joe and I've got yet another Roth conversion question for you, but with a little bit of a twist. I have an old traditional 401k that I never rolled over into my current one and really didn't do anything with except leave it as is in my Fidelity account. I have a current Roth ira, also with Fidelity, and I'd like to start converting some of that old 401k into the Roth IRA while my tax bracket is still in the 24% bracket. I'd like to know exactly how to calculate how much room in the 24 bracket I have to fill up so I know how much I can convert in order to stay in the 24% bracket. I have my current 401k that I contribute to the max allowed, but I split that contribution 5050 in traditional and Roth within my 401k. Okay, I have an HSA that I also max out. I'm single and I use either the standard DEDUCTION or itemize deductions, depending on the year and whichever amount is greater. I'm not sure if I'm missing anything other than possible deductions that I can use in order to estimate my AGI, but perhaps you can give all your listeners a breakdown of how to think about it and how to figure out how much to calculate of your income space we have in order to fill our current brackets market with Roth conversions. Thanks in advance. I currently drive a 2022 Tesla Model Y, and my drink of choice is a locale, Little Hazy IPA locale.
- [35:01]
Andi Last
And he said a little Hazy ipa. And I actually searched for that to see if that is the name of a particular brand. And. No, I think he got that from you, Joe, because you always say that. A little something, you know, a little. Little Hazy ipa, a little craft beer or whatever.
- [35:15]
Joe Anderson
Typically, Hazy IPA is not necessarily low calorie, but maybe there's some for little ones, maybe. Yeah, yeah. Small portion, half portion.
- [35:25]
Big Al Clopine
Okay.
- [35:26]
Joe Anderson
Filling up the 24% bracket.
- [35:28]
Big Al Clopine
Single.
- [35:29]
Joe Anderson
Yep.
- [35:30]
Big Al Clopine
All right. Top of $24,000 is $200,000.
- [35:32]
Joe Anderson
Yep.
- [35:33]
Big Al Clopine
$191,000.
- [35:35]
Joe Anderson
$197,000. So here's how you think about it. So pull out your tax return from 2024 or 2023, if that's the one. You have 2024's return. The taxable income line is line 15. Right. Find that same line on 2023. If that's the return that you have and that's your starting point, that was your taxable income for whatever tax year you're looking at. Then think about your current year. Is it going to be about the same? Did your salary go up? Right. Or did something change where you have less income? So factor that in, maybe you make $20,000 more than you or 2024. So add that to your taxable income, see what number you have, and you want to get to $197,000 if you're single. If you're married, it's double that. It's almost $400,000. That's how you fill up that 24% bracket.
- [36:27]
Big Al Clopine
Yeah. Look at taxable income and then just guesstimate. So if you have a lot of interest or dividends or other type of income, it gets a little bit more challenging. But if you're a W2 wage earner, that you can easily predict or forecast what your income's going to be. Just look at line 14 on the tax return, taxable income, and then whatever dollar that you fill up. So let's say that's $100,000. If you do $100,000 conversion, that's going to get your taxable income to $200,000. So most of that is going to be taxed at the 24% tax bracket up to 97, $197,000. So 3,000 of the $100,000 conversion would be taxed at the higher rate. So if you want to get it perfect, you could wait until you absolutely know what your income is. But if you go a little bit over or go a little bit under, it's not that big of a deal. Just because those added dollars are going to be taxed at the higher rate, not everything on your taxable income.
- [37:31]
Joe Anderson
I think that's such a good point, because a lot of people, they don't want to go a dollar over that next tax bracket. And the point is, it doesn't really matter that dollar or the $3,000 or $5,000, however much you went over. Yeah, that's taxed, in this case, the 32% bracket. But everything else is taxed in the 24%. Going to the next bracket doesn't mean all of your income is taxed in that bracket. It's just that little extra that went into it.
- [37:57]
Big Al Clopine
Yeah. So then each year you just kind of take a look at line 10. What are line 15? Line 15.
- [38:06]
Joe Anderson
It changes every year. Remember when it was line 37?
- [38:11]
Big Al Clopine
Yes, but. All right, well, no, very cool question, Joe, but yeah, that's how you want to just max out the bracket. If you don't know what the brackets are, you can just go online and just look at, well, what are the top of, you know, the marginal US Tax brackets, and it will give you the chart.
- [38:28]
Joe Anderson
That is true.
- [38:29]
Big Al Clopine
Or, Andy, we have the.
- [38:31]
Andi Last
The Key Financial Data Guide. You can get the key. You've got it in your hand. Joe, hold it up to the camera. Show the people. We will send you one of those. It's got the tax brackets on it.
- [38:41]
Joe Anderson
That's true.
- [38:43]
Big Al Clopine
Okay, let's go to Joel from California. He goes, hey, I'll be 73 next year and I have to start taking my RMDs from my traditional IRA. I've been doing annual Roth conversions in December every year to maximize my 12% tax and avoid larger quarterly tax payments early in the year. Should I do my RMD the same way? Anything else I can do relative to the tax burden of my RMDs?
- [39:07]
Joe Anderson
So this is kind of an estimated payment question, and yeah, I'll take that one. So I guess how you need to think about this is estimated payments. When you don't have a job and you don't have enough withheld, let's say from pension or Social Security, you have to make estimated payments quarterly to cover the income that you have at each point during the year. Now generally people just figure out what the estimated payments should be and they make the equal amount over four quarters. But if you have uneven income, like for example you do acquired minimum distribution in December, then you only have to make that extra estimated payment on the fourth quarter which is due January 15th. So if you're trying to minimize your estimated payments, at least the timing of them, then you would make it in December. On the other hand, there is arguments for making that RMD in January because you get it out of the retirement account and 2 out of 3 years the market goes up. Wouldn't you rather have the money outside of retirement account growing at capital gain rates anyway? You can look at it a couple ways, but when it comes to estimated payments, you'd rather wait till the end.
- [40:14]
Big Al Clopine
Yeah, I agree. I would want to get that money out sooner than later. Let's go to Esther San Francisco. Love your podcast. I especially love listening to it before I go to bed. Best way to unwind at the end.
- [40:28]
Joe Anderson
Of the day, puts her to sleep. There you go.
- [40:32]
Big Al Clopine
I have a very specific nuanced question I'm hoping your experts can help answer. Experts?
- [40:38]
Joe Anderson
Yeah. Wrong show.
- [40:40]
Big Al Clopine
Yeah, I'm reading about IRA and all the intricacies. Thank you. About inherited IRAs and tax implications. One thing that caught my eye was that your minor children as a designated beneficiary fall under the eligibility eligible. Oh my God. Fall under the eligible designated beneficiary category which is not subject to the 10 year rule until they reach majority. However, if they're a minor, it will trigger probate. I read that if your minor child continues their schooling in the. Oh my. This is. What question is this? Is she at cpa?
- [41:26]
Joe Anderson
Keep going.
- [41:28]
Big Al Clopine
However, if they're a minor, it will trigger probate. I read that if your minor children continues their schooling to the age of majority is extended until they finish their education or age 26, does this in essence mean they can still qualify as the EDB and avoid probate if they're in school in between the ages of 18 and 26? I know it's a weird specific question, but I was curious how this works. Thanks so much.
- [41:54]
Joe Anderson
Okay, let me take a stab at that.
- [41:58]
Andi Last
ED being eligible designated beneficiary, right?
- [42:01]
Joe Anderson
Yeah. So what? Well, maybe let's talk about what it is. Eligible let's see, let me make sure I get it right. Eligible designated beneficiary. So here's what happens is when you have, when an IRA owner passes away and that asset, the beneficiary is like a child, for example, and if that child is under age 21, they're eligible designated beneficiary, which means they don't have to take the money out in 10 years until they become of age of majority. Now every state has a different age of majority, but the IRS actually, Joe, in July 2024 decided 21 was the age of majority. So I've read this too. There's different things about 26 and schooling, but I don't think that's available anymore. I think it's age 21. And at that point the minor child of IRA owner then has to start that 10 year payout of IRAs. Right. And they actually have to take a required minimum distribution each year. That was part of the new rule in, in 2024. As far as probate, Joe, that's a legal question. I have no idea.
- [43:13]
Big Al Clopine
Why would a designated beneficiary go to probate?
- [43:18]
Joe Anderson
I would think it would.
- [43:20]
Big Al Clopine
That's a whole beneficiary designation.
- [43:23]
Joe Anderson
It's not part of your state in terms of, of that. In other words, it doesn't transfer to the next person by way of a will or a trust. It's a beneficiary statement, which typically means that it's not subject to probate. I'm not sure where she got this question.
- [43:38]
Big Al Clopine
If you have a designated beneficiary that will avoid probate 100% of the time. The only thing that's thrown me for a little bit of a loop is that with the Secure act, there's been rules that haven't been fully ratified.
- [43:52]
Joe Anderson
Well, they keep. Yeah.
- [43:53]
Big Al Clopine
And they keep changing it.
- [43:55]
Joe Anderson
Right. And so according, according to Ed Slott, they came. They actually did solidify at least what I just said in July of 2024.
- [44:04]
Big Al Clopine
So if it's a minor. So let's say a two year old inherits an IRA if it's two year old.
- [44:11]
Joe Anderson
Child.
- [44:11]
Big Al Clopine
Child.
- [44:12]
Joe Anderson
Right.
- [44:12]
Big Al Clopine
So they don't have to take the 10 year rule until age 21.
- [44:17]
Joe Anderson
Correct. And.
- [44:18]
Big Al Clopine
But if they're two years old, they fall under the old rules, which they have to take out a required minimum distribution based on their life expectancy, don't they?
- [44:28]
Joe Anderson
That's from my latest reading. I don't think that's true, but I will say it's not entirely clear to me.
- [44:34]
Big Al Clopine
Well, then we'll Also have to talk about when was the, what was the required beginning date of the deceased.
- [44:41]
Joe Anderson
Yeah, and apparently that doesn't matter, at least in terms of that 10 year period. According to.
- [44:46]
Big Al Clopine
So if someone dies after they started taking distributions from the ira, it goes to a minor child.
- [44:54]
Joe Anderson
Right.
- [44:55]
Big Al Clopine
So you're saying that the minor child does not have to take a required distribution from that account until that minor child reaches age of majority, but it's also saying that all that money is going to go to probate.
- [45:11]
Joe Anderson
Well, here's what I think I know, okay. From Ed Slott, who is the foremost authority, I think, on IRAs in the country, is just this. If it's a, if it's a benefit, if the beneficiary is your child and they're under age 21, I don't believe you have to do anything until age 21. And then you have a 10 year period. Whether the person that passed away started their required beginning their required minimum distribution or not, they still have to take a distribution every single year. And then in year 10, they have to distribute the balance. So by age 31, it's all out. That's what I understand to be true. The other part is a little bit unclear and here and I sort of get the confusion on the question because when you try to look this stuff up, it's because IRS has changed their mind so many times. It's unless, I don't know, unless you're a tax attorney that really dives in. It's very difficult to figure this stuff out.
- [46:05]
Andi Last
There you have it. It's yous Money, you, Wealth, you, podcast. If you enjoy ymyw, do us a favor and tell your friends that helps us reach more listeners and viewers like you. And don't forget to leave your honest reviews, your comments, and your ratings for your Money, you, Wealth. In Apple Podcasts on YouTube and all the other apps that accept them, your Money, you, Wealth is presented by Pure Financial Advisors. To really learn to make the most of your money and your wealth in retirement, you definitely need more than a retirement spitball with Joan Big Al. Schedule a no cost, no obligation comprehensive financial assessment with one of the experienced professionals on the Fellas team here at Pure. Click or tap the free financial assessment link in the episode description or call 888-994-6257 and book yours now. You can meet in person at any of our locations, nationwide or online right from your couch on Zoom. No matter where you are, the Pure team will work with you to create a detailed plan that's tailored to meet your needs and your goals in retirement. Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.