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When Maxing Out a Bracket Misses the Point · How to Retire on Time

• 0:05
  Mike: Welcome everyone to the Retire On Time q and a. I'm Michael Decker here with David Franson, your host. This is all about answering your questions. We don't wanna give you oversimplified answer. This show is about kinda taking a step back, going a little slower, and asking and diving into the details here.
• 0:22
  There's no such thing as a perfect investment product or strategy. It just doesn't exist. So let's have some fun. Let's open up the conversation, and maybe have some context and clarity instead of the oversimplified pitch that's really intended to pitch a product. Alright.
• 0:37
  I'm Michael Decker as you all know. If you haven't read the book yet, I encourage you to read the book, How to Retire On Time. You can get it for free at retireontime.com. The book, the audiobook, and the retirement planning kit. If you're on here, you probably already have the kit.
• 0:51
  Just go to retireontime.com and log in. If you're joining us live, make sure you attend our workshops. They're Tuesday nights at 06:30 Central Time, where we actually go through the planning process and we solve the first version of your plan. This is an implementation workshop. Because I don't know, David, what do you think?
• 1:11
  Are you tired of the lecture and the the fancy information that has no application to your situation or you don't have to... It's just kind of annoying.
• 1:19
  David: Yeah. Yeah. We wanna hear something that we can actually take and use and understand in terms that we understand.
• 1:25
  Mike: Ma'am, so knowledge is not power. It's the application of knowledge that's power. So things to look forward to among a number of other things. Just remember this is a show. Q and a, we're having a conversation.
• 1:37
  This is not financial advice. If you want financial advice, go to retireontime.com/call and schedule an introduction call with us or your first planning session at no cost. Alright. So as promised, you put the questions in here. The chat is open, and we're gonna be answering your questions one at a time.
• 1:53
  I always start though with a kind of an introduction kind of conversation. When I say introduction conversation, this is the thing that you may not know to ask. Oh. So it's October. Halloween season's here.
• 2:06
  Yeah. You know what all of this really means?
• 2:08
  David: What? Candy? Taxes. Oh, yeah.
• 2:10
  Mike: Let's talk taxes. Well, candy's a tax on your health.
• 2:13
  David: That's true. Yeah. Yeah. I never thought about that way. I mean, I'll eat less.
• 2:17
  Mike: Yeah. So I'll
• 2:18
  David: eat I'll eat the same.
• 2:19
  Mike: Yeah. It's okay. I won't judge you too much.
• 2:22
  David: Thank you.
• 2:22
  Mike: But when... Once we start getting to the Halloween season, things get... Happen very quickly. You got Halloween, you got Thanksgiving, you got Christmas, Hanukkah, you know, all the holiday seasons.
• 2:34
  David: Right.
• 2:35
  Mike: And we almost kinda kick back this, oh, I don't need to do tax planning. Well, there's tax planning and there's health care planning, actually. October 15 is when
• 2:45
  David: October 15 through December 7 is the annual enrollment period for Medicare.
• 2:49
  Mike: And that's gonna affect your health care for the next year. This is the time when you assess not just how you wanna shore up the end of this year, and this is the missed opportunity, but how you want to handle next year. How many times have you gone to your CPA and said, alright. So what happened? And what could I do better next time?
• 3:07
  And it's like, well, that's what happened. Just spend less money. Like, that's not really an answer. Or we'll earn less money or, you know, it is what it is. Yeah.
• 3:17
  Maybe trade less in your portfolio like that. That's not really planning. What that is is a reactive position on what keeps showing up on your ten forty, which is your tax bill. That's your tax summary, your tax return. Ten forty is the the one that summarizes it all.
• 3:32
  So I wanna take a moment and give you a bunch of information on what to consider before the year's over, preferably before Halloween. Why? Because once Halloween hits, we just don't care as much anymore. I shouldn't say we don't care. That's a very general statement.
• 3:48
  But I mean, come on.
• 3:49
  David: There's a lot of other things pressing. Right? I'm traveling at the airport, the security Family. To the family, eating Yeah. A lot of food.
• 3:56
  Mike: So here's here's my list. Here's what I wanna talk about. Okay? The first thing I want you to to understand is what in the world's happened this year. Not globally, not politically, but on your statements.
• 4:09
  David: Like, okay.
• 4:09
  Mike: So when you look at finances, income is what shows up on your tax return. Okay? Income. Not what you're gonna spend income. So is your income high?
• 4:21
  Is it low? Or is there gonna be bonus at the end of the year? Like, just kind of shoring up the expectation for the end of the year sets a precedent for everything else. The precedent is, should you do IRA to Roth conversions? Should you not?
• 4:33
  Is there an opportunity to do IRA to Roth conversions? Is there not? And I'm not talking about maxing out tax brackets by the way. This is a commonly misunderstood concept. If you max out brackets, you've missed the point.
• 4:46
  It's not just about every dollar that moves over, but it's about the whole system. Let me explain.
• 4:53
  David: Okay.
• 4:55
  Mike: What if next year, we have some tax changes? Alright. Now next year, the... There's a bracket. The the first 5,000 of income that you get is five...
• 5:10
  Or is 10% tax bracket. So not a bad deal. You still have the standard deduction, and then it goes from the 10% bracket to a 20% bracket.
• 5:19
  David: Oh, and that's different from 2026?
• 5:22
  Mike: Yeah. Because we got the 10, the 12, and then 22% bracket.
• 5:25
  David: Oh, just 10 to 20.
• 5:27
  Mike: So I just drastically changed it. But if you're concerned about the next dollar, you might say, well, hey, 20¢ on the dollar is better to move over. It's like, well, hold a pump the brakes for a second. Your effective tax rate fundamentally changed. What is the fundamental tax rate?
• 5:43
  That's your total income that's showing up in your tax return and the total tax statement like how the the bill that the IRS wants.
• 5:52
  David: Mhmm.
• 5:53
  Mike: If you have $5,000 of taxable income at 10%, and then the rest is at 20%, your effective tax rate will probably be a lot higher than if you're maxing out the 22% bracket right now. So it's... What I'm trying to get at is people focus on the brackets and they miss the effective tax rate. The effective tax rate utilizes lower brackets.
• 6:17
  David: Okay.
• 6:18
  Mike: Another way of saying that is every year you have coupons. These are tax coupons. So every year, you can move money out of your IRA. You can take income from your employer and get some of it at 10%, some of it at 12%, some of it at 22%. But if you blend it all together, there's like a 12, 15%.
• 6:40
  There's an effective tax rate. That's the magic number.
• 6:42
  David: Mhmm.
• 6:43
  Mike: That's what you wanna track, not the next dollar. Am I explaining this okay? I mean, taxes are a lot. I get this.
• 6:51
  David: Yeah. And so do we all understand? Are we on the same page that we have a, like, progressive tax system. Right?
• 6:56
  Mike: Very progressive tax system. And if you're too aggressive on IRA to Roth conversions, you're giving up future coupons. Remember Bed Bath and Beyond when that was a thing?
• 7:05
  David: We used to get so many things in the mail all the time from them.
• 7:09
  Mike: Yeah. You know how like they never actually cared when their coupons expired?
• 7:12
  David: You could just take them in anytime. They're like, oh, We'll take that.
• 7:16
  Mike: Yeah. They're... They were just begging for business.
• 7:18
  David: Yeah.
• 7:19
  Mike: Well, look. There's a good chance that every year in your life, there's going to be a standard deduction.
• 7:25
  David: Mhmm.
• 7:26
  Mike: Do you wanna just give up that coupon?
• 7:29
  David: Oh, the standard deduction coupon? Like that's your coupon that you bring to the table.
• 7:33
  Mike: I mean, what if in, let's say ten years, Let let's say let's say you did aggressive IRA to Roth conversions. Alright. And and then the next year, all you get is Social Security and Roth funds. Well, that's like 20,000 of taxable income that you could have gotten tax free or 30,000. And I'm using 20,000 as an arbitrary number.
• 7:51
  Let's say this introduction lowered. That's a coupon you can't redeem anymore. It's like you took the Bed Bath and Beyond coupons and throw them away.
• 7:59
  David: Mhmm.
• 7:59
  Mike: Some of you might say, well Bed Bath and Beyond's out of business. Okay. Well, the government's probably not going out of business if they do this other things to be concerned about. Right. But do you see where it's important to have an IRA to Roth conversion conversation.
• 8:12
  Should you do it or should you not? Mhmm. But the only way you can do that is if you have a long term perspective of your plan, which are the projections
• 8:21
  David: Mhmm.
• 8:22
  Mike: And then the appropriate calculations on those strategies.
• 8:26
  David: Because an IRA... A Roth conversion is basically income. Right?
• 8:30
  Mike: It's income. It shows up.
• 8:32
  David: On that ten forty as we mentioned previously.
• 8:35
  Mike: So some people should be doing IRA to Roth conversions. They are headed towards a terrible path. Other people, I I don't think it makes sense.
• 8:46
  David: It could it could... There could be some unforeseen repercussions, right, from doing too many Roth conversions.
• 8:53
  Mike: Yeah. We we did a... We do a case study sometimes, when it comes up at the workshops where we'll say, alright, two plans, the same amount of money in the IRA and brokerage accounts. Let's say there's no Roth.
• 9:05
  David: Okay.
• 9:05
  Mike: K? One just takes income and that's it. And the other maxes out that I think 22 or 24% bracket. Alright. The one that maxed out the IRA Roth conversions, even though they got to a tax free retirement environment, still ran out of money quicker.
• 9:21
  Because if you're being too aggressive too fast, more money is leaving your account going to the government. So even though you're going to a tax free environment, it's still harder to grow less money. There's always two ends to the trade. And so I I wanted to start with this by saying, yes, it is a good strategy for some people, not for everyone. Okay.
• 9:42
  And the common consensus online is everyone should be doing it because taxes are expected to go up. Well, they might for some people. Yeah. But not for everyone. And historical tax brackets, whether it's the dollar thresholds that you cross or the percentages, there's a certain group of people that's very favorable.
• 10:01
  And when you understand the provisional income tax calculation, that's the taxable amount on your Social Security, and you blend that together, everyone has a different story. Mhmm. K?
• 10:13
  David: And so just to touch on effective tax rates again. So even if you have this big pile of income and sections of your income are taxed at different levels, is it sort of the average of all those levels? Is that effective tax rate? Or
• 10:26
  Mike: Yeah. So let's say your taxable income is a 100,000 Uh-huh. And you had a tax bill of $15,000. Your effective tax rate is 15%.
• 10:34
  David: Oh, right. Okay.
• 10:35
  Mike: If you had a 100,000 of taxable income and your tax bill was 20,000, let's say you're in a state where there's more taxes. Your effective tax rate is 20%.
• 10:45
  David: Oh, I see.
• 10:46
  Mike: At the end of the day, how much showed up on your tax bill? How much did you pay? That's kind of... That's the idea.
• 10:55
  David: Okay.
• 10:56
  Mike: You want long term calculations. And I see questions coming in, I'm gonna answer all of those here. Let me just kinda finish this this idea. Okay? So the next question is, okay.
• 11:07
  Are there any anomalies this year that you need be aware of? If there's an anomaly, we need to be prepared for that. How are we prepared for that? Anomaly might be a large sale of something. Anomaly might be a large bonus of something.
• 11:23
  An anomaly might be you just took out more from your IRA to pay for something or whatever it might be. Alright. A one off event. And those do happen. Mhmm.
• 11:30
  K. There's a couple of ways you could you could lower that tax bill. They all require more risk. Sometimes it might make sense just to pay the tax bill and move on. Some people might want to enter into limited partnerships.
• 11:47
  What's a limited partnership? Yeah. A limited partnership for accredited investors only, that means you have more money and you qualify, is where you're in a situation where you're gonna put it in something that's illiquid. They're gonna spend a ton of money, offset the income losses to the partnership, so that kind of balances your income on your tax statements. You've got income and you've got losses.
• 12:09
  So you're you're neutralizing your statement. You don't have as much to spend. You're you're just trying to offset your your gains with your losses through the income calculations. And then hopefully you get it back. But it's illiquid.
• 12:26
  There's risk. There's a lot of different partnerships and opportunities out there. But that is something that's not talked about a lot that is possible. And the common one people talk about are oil and gas partnerships. Other ones that are not common are like investing in a temporary housing.
• 12:42
  Like, you know how they're doing all these data centers? Oh, yeah. Well, you can invest in the temporary housing of the people that are gonna be transit and live there as they build the data center out. And then those certain things would qualify to offset your losses. This is advanced tax planning.
• 12:55
  It's almost never talked about in your typical advisory office because why? Oh, we don't give tax advice.
• 13:02
  David: Right.
• 13:03
  Mike: But I wanna emphasize, it's illiquid. Like, you you have to hope to get your money back. It could go away. And this is why the wealthy when they put $500,000 in this. If a $500,000 were lost, it doesn't destroy their lifestyle.
• 13:18
  David: Oh. Whereas others that maybe all they have.
• 13:21
  Mike: Others, it might be devastating to them. Yeah. So you have to understand the risk. You don't wanna do just what the ultra wealthy are doing arbitrarily. There are a lot of circumstantial questions that have to be asked before you go down what the wealthy do.
• 13:36
  Anyone that ever leads with, well, this is what the wealthy doing. Why aren't you? It's a very manipulative in the most negative sense that I can say that word. Mhmm. Marketing strategy.
• 13:48
  K?
• 13:49
  David: Yeah. And where do we find these partnerships? These partnership opportunities or
• 13:53
  Mike: Usually, you have to go through an adviser that has a network that does it or some sort of advisory practice that offers them. They're not just readily available. You're not, you know, opening an app and saying, oh, hey, let me buy this partnerships. It's not like a stock. Like it's...
• 14:08
  They're harder to find. Yeah. So... And then also you've got other things like in your brokerage account. Did you harvest some losses?
• 14:17
  I think right now is a great time to harvest losses. And then when I say harvest losses, you sell the things that have lost money this year. And about 30 to 40% of the S and P by the way, is down year to date. There are a lot of... Our stock market is very unhealthy right now.
• 14:33
  At least that's our opinion. Yeah. So harvest some losses so you can lock in some of the gains. So if the AI bubble does pop, you're able to equalize your portfolio, diversify a little bit better, strategically adjust it a little bit better, so that you're more prepared for if the AI keep keeps going up. Well, like, what Trump call it now?
• 14:55
  Super intelligence?
• 14:56
  David: Yeah. SI. Super intelligence. Right?
• 14:58
  Mike: So the AISI I don't know if that's gonna catch on. I e I o. Yeah. He's trying. That keeps going up Yeah.
• 15:05
  Then great. You've got some there, but you've locked in some of the wins.
• 15:08
  David: Mhmm.
• 15:09
  Mike: And that you don't wanna arbitrarily do this by the way. You want the plan first, then you want the strategy second, then you can figure out how to structure, restructure, or adjust the portfolio third. Mhmm. Very important. I've got more to talk about this, but let me read some questions in the chat here.
• 15:24
  Good. Why is maxing out a bracket missing the point? So you're saying not to max them out or not to convert as much as possible, just as much to miss the coupon. Please explain those for whom converting makes sense and those for whom it doesn't.
• 15:42
  David: This is a good question.
• 15:43
  Mike: Yeah. So thank you, Caroline. Oh, she's got a follow-up. So given our history, the 1% or 5%, etcetera, essentially is the highest income group. The group for whom taxes will probably go down is the middle class will have it go up.
• 15:58
  Also, basically, here's what's going on. If you have a significant amount of money in your pre tax, you're probably going to wanna max out brackets, but you don't wanna just max out max out the brackets. You want a long term strategy that can calculate the effective tax rate and the brackets, and then navigate through that. Here's what I mean. Brackets are gonna adjust with inflation.
• 16:22
  But in the near future, let's say in three or five years, if they were to adjust tax brackets, you also need a baseline of your effective tax rate. The reason why is you might be more aggressive right now just slightly. Maybe you don't do the 22% bracket. Maybe you go halfway through the 24% bracket, but your effective tax rate is x. So that in the future, if they adjust tax rates, you can match up the same effective tax rate to kinda be consistent.
• 16:50
  David: Okay.
• 16:51
  Mike: So that you can make a decision to be more aggressive, less aggressive, or maintain your current system. And here's another way of looking at that. Do you spend your money in January taken out from your IRA saying, I'm only gonna withhold 10%. Or no, I'm not gonna withhold anything. This is all tax free standard deduction.
• 17:10
  And then in February, I'm just gonna withhold 10%. And then in February, or not, in March, we'll do 12%.
• 17:17
  David: Mhmm.
• 17:18
  Mike: And then maybe early spring, okay, I'm gonna start withholding 22%. That's not really how we handle our money.
• 17:25
  David: Right.
• 17:25
  Mike: We're look... There's a withholding that we're typically targeting for the systematic draining of IRA assets. That percentage is your silver lining. And as long as you have a silver lining in your plan, then you can make one off adjustments. So let's say let's say your your silver lining is, you know, some sort of effective tax rate, and you're maxing out the 22% bracket.
• 17:57
  It just happened to be that way. But you grew a little bit more this year in your portfolio than expected. Maybe then you just go a little bit above in the 24% bracket because you're just trying to get ahead of it.
• 18:09
  David: Okay.
• 18:10
  Mike: Maybe you invested everything Netflix, and it's it's down. Maybe you take some opportunities. I... So, Carolyn, what I'm getting at is you want a silver lining or a system long term that gives you the guidelines, and then you can make adjustments along the way. I hope that helps.
• 18:30
  Because we don't know what future tax rates are gonna be. We don't know if your IRA is gonna grow more than expected or less than expected. But we don't wanna just arbitrarily throw our hands in the air and say, I'm just gonna max out this bracket or that bracket and call it good. Mhmm. We want a mathematical system that gives us the long term trajectory, and then we make smaller optimizations along the way as opposed to just kind of winging it.
• 18:52
  David: And so when we say we're gonna max out the bracket, we're saying, this is how much income I'm gonna take. I'm gonna go right up to the edge of of this bracket with... I'm gonna control the amount of income that I'm receiving Yeah. To get to the top of that and then stop.
• 19:05
  Mike: Yeah. Yeah. And let me give you another scenario. Because this is important. This...
• 19:09
  I think this is fascinating stuff by the way. Because when I when I tell people this, they typically go, I never thought of it that way. Mhmm. Let's say we're being a little more aggressive right now because we've delayed social security, and we're just trying to lower the IRA assets. K?
• 19:22
  Alright. It's either going to Roth or you're spending it. Great. K? We're cashing in those coupons.
• 19:27
  Then in five years, you file for Social Security. All is well. We're now taking less from the IRA assets. And then in the seventh year, they change taxes on you. And it's like nasty.
• 19:40
  David: Mhmm.
• 19:41
  Mike: Well, we got ahead of it at the beginning of the plan. And so instead of just maintaining aggressive IRA to Roth conversions, what if we pulled back on how much we take out of the IRA? It still satisfies the required minimum distribution.
• 19:53
  David: Mhmm.
• 19:56
  Mike: But in the next ten to fifteen years, if you just maintain the RMD schedule with a little bit more income, but not too much more, just a little bit more, it still runs out about 86 years old, and the Roth and your brokerage account is what's left at that point.
• 20:11
  David: Okay.
• 20:11
  Mike: That slow drain, you're maximizing those coupons. The math just suggests it's more efficient. So, yes, Carolyn, you got it right. Figure out your long term. I think LT long term planned effective tax rate is the silver lining, and then you make intuitive adjustments along the way.
• 20:31
  David: I see.
• 20:32
  Mike: And if you think about this way, what you have is a plan, which is the purpose of your money. What's the mission? That was the article I just wrote for Kiplinger. Just came out on Sunday. What's the mission?
• 20:42
  Great. More legacy. More spending. Whatever it is. More travel here.
• 20:46
  Less travel there. You you're the author of the missions. Then you execute kind of high level strategies, more macro, more the the long term strategies, and then you have your micro adjustments, or those those smaller strategies along the way.
• 21:01
  David: Okay.
• 21:03
  Mike: This is more complicated, but this... If you wanna try and get more out of your money, this is what's required.
• 21:07
  David: Yeah. And then I mean, how many people are actually doing this? Like...
• 21:12
  Mike: I've been doing this for over a decade. I can't think of one financial advisory practice that actually goes to this I... I'm sure they're out there. Yeah. But usually, it's something to the effect of here's your assets.
• 21:23
  We're gonna charge you 1% or so, and we're just gonna do 50,000 arbitrarily here, a 100,000 here, and, you know, it all works out and see next year. Yeah. That's kind of the experience that's common. And this is why I think many people are frustrated with advisers today because they're paying, you know, $10,000 for every million dollars that's invested, and they're not getting these kinds of calculations. They're not getting this depth of planning.
• 21:46
  Mhmm. That's my biased opinion. Mhmm. Of course, we structured Kedric Wealth to go against the norm on how planning is done. My opinion is the plan is the hard part.
• 21:57
  Maintaining it's the easy part. Once you have a plan, once you've run these calculations, once you've determined that long term strategy, and then how to manage it along the way, the question is, do you wanna manage it or do want someone like us to manage it? It works either way because the hard stuff was done first. I don't know if you've ever seen these videos, but I love showing my son this. He's six.
• 22:20
  Six years old like take the easy way out. So we have this constant little like animation of where the the person is... One person walks up a hill and the other person walks down the hill. The person that walks up the hill enters this beautiful like pasture. It's it's beautiful.
• 22:35
  It's fun. They're having a good time. But they had to walk up the hill first. That was the hard path.
• 22:39
  David: Okay.
• 22:40
  Mike: The person that walked down the path got stuck in a cave. Oh. And we're trying to teach them that lesson that when you put the work up front, you do the hard stuff up front, it's easier later on.
• 22:50
  David: Alright.
• 22:51
  Mike: With tax planning, it could not be more true. When you run these calculations and you really are proactive on the options and the strategies you may or may not implement, then you have context as to what to do. And here's a fun one. Most people haven't really considered the fact that when markets go down, I mean, let's say let's say you've got assets in the S and P 500.
• 23:17
  David: Alright.
• 23:17
  Mike: The common ETF. Let's say the S and P 500 is down 50%.
• 23:22
  David: Five zero fifty?
• 23:24
  Mike: 50 half.
• 23:25
  David: Okay.
• 23:26
  Mike: What a great tax opportunity. First off, that's not appropriate to consider the S and P 500 as your income source because it can lose money. Mhmm. And you don't want to accentuate losses. That's called sequence of returns risk.
• 23:37
  So you should have some assets and reserves. If you've read my book, you understand this concept in the essential part of a place. The markets go down, you have to take income from a place that hasn't lost money. Now what if you have extra liquidity in your reserves? You've got S and P 500 that's down 50%.
• 23:56
  In theory, you could just move that ETF from your IRA to your Roth, move twice as many of the shares over, pay the same tax bill. You just did twice the IRA to Roth conversion with the same tax bill and the same plan bracket because there was a 50% coupon, and the recovery would happen in the Roth.
• 24:18
  David: So you're getting like twice as many shares. Is that what we're saying?
• 24:21
  Mike: Yeah. You just have to pay out of a protected account. Some sort of reserves for the tax bill because you can't pay it from assets that have lost money.
• 24:29
  David: Oh, right. Right.
• 24:29
  Mike: Right. And this is just the tip of the iceberg of in-depth tax planning for a retiree.
• 24:34
  David: And so you mentioned the... This is the season for doing this. So you're saying that here at the... In the last quarter of twenty twenty six, we wanna have these conversations to prepare for 2027?
• 24:45
  Mike: Yeah. I mean, I'm personally basically booked for the next month and a half Mhmm. Where I'm gonna be seeing client after client after client going through this. These are our private clients. Now some people will will schedule...
• 24:56
  Some people we've done a plan for will schedule a one time planning fee. Right? Just to come in and and get updates to their plan. That's fine too. So we'll see those.
• 25:04
  And then those who are starting the planning process, now is a much easier time to take your time to get the plan done, and then have November, December to implement. There's still time to implement those strategies.
• 25:18
  David: You
• 25:19
  Mike: just don't wanna start this in December, or even around Thanksgiving. Like, it's just really hard. You don't wanna rush these kinds of things.
• 25:24
  David: Right. Like scrambling to get in your your Roth conversion if if one's called for, like...
• 25:30
  Mike: There's always that conversion that's like after Christmas, before before New Year's. It's like, hey, can we just... It's like... Yeah. Have we done the calculations?
• 25:39
  Are we winging this? Like, is it an emotional decision? You just don't wanna get caught in that trap. Sure. So couple of other things too.
• 25:47
  And I I hinted at this earlier on. Where is your income going to come from next year? Hear me
• 25:54
  David: out. Okay.
• 25:55
  Mike: Let's say you got $500,000 in brokerage, a million dollars in your IRA, 200,000 in Roth.
• 26:01
  David: Okay.
• 26:02
  Mike: Where's your income gonna come from?
• 26:03
  David: Three options. One's tax free, one I'll pay income taxes, and the other one, you know, subject to capital gains, right, if I sell.
• 26:11
  Mike: Yeah. So so the idea here is how old are you, and what other cliffs do you need to be aware of? So are you 67 years old, and is there going to be a pending RMD, required minimum distribution issue in the near future? Is there not? Are you 60 years old?
• 26:31
  And are there opportunities to take advantage of affordable care act subsidies? They're still there. The accelerated subsidies are gone. Mhmm. But there are still subsidies available that if you do their planning right, might might be a good idea.
• 26:46
  Let's say now in your brokerage account, half of it is AI stocks. Nvidia, AMD, ScanDisk, you know, etcetera etcetera. Yeah. That have incredibly high gains. Well, okay.
• 27:01
  What if you need a $100,000? Let's sell a $100,000 of those AI stocks that are incredibly high. You've got about a $100,000 roughly of capital gains to realize at the 0% bracket. Oh, and by the way, you have a 30 some thousand dollars of IRA distributions that you could take out tax free. So let's let's move the IRA assets to Roth within the standard deduction.
• 27:25
  That was a tax free conversion. The rest of it for long term capital gains, and now you qualify potentially for some affordable care act subsidies.
• 27:32
  David: Mhmm.
• 27:33
  Mike: But you have to do this planning now so that next year you have proper execution, and then don't make the mistake of then bumping yourself over a cliff that then triggers a massive tax bill.
• 27:44
  David: Mhmm.
• 27:45
  Mike: Too often people are just winging it through the year, then they come to the end of the year and say, well, hey, shoot. Like, how how do we fix this? No. Right now was the planning for next year. I'm gonna retire this date.
• 27:57
  Okay. What does that mean? What are the different advantages? What are the different disadvantages? How's that work on the overall plan?
• 28:03
  So I talk about where's income can they come from next year? What are your tax withdrawal strategies next year? Do you need to incorporate Irma planning? Do you not need to incorporate Irma plan? Affordable Care Act insurance?
• 28:14
  Do you have it from your employer until '65 or or, you know, the government or whatever it might be? These are the questions that need to be answered now, not next year.
• 28:22
  David: Mhmm.
• 28:23
  Mike: Because December 31, a lot of these coupons are gone. Yep. And if you're even proactive, it's pretty cool with the idea that you can do your IRA to Roth conversions in January. Ideally, your balance is higher in December than January. Most years, that would be a true statement.
• 28:50
  David: The balance of what is higher?
• 28:52
  Mike: Your your your assets, your investments.
• 28:53
  David: Okay. Okay.
• 28:54
  Mike: Yeah. So why won't you do them in January? Get the coupons, get the conversions, and spend the rest of the year growing in the Roth. Well, you can only do that if you do your planning right now.
• 29:05
  David: Right.
• 29:06
  Mike: That you don't do it next year in tax season or after tax season or kick that can down the road.
• 29:12
  David: Just
• 29:15
  Mike: things to think about here. The replays are available. We do put them on YouTube and podcast. We just break them up and kind of make them chunk size. So there you go, Carolyn.
• 29:25
  And great questions. And anyone else that's got questions here Yeah. You know we're here. This is fun. The room keeps getting bigger and bigger.
• 29:32
  So we've got questions that have been submitted here before the show started. So we're gonna we're gonna tackle those now. And if you've got other questions for our live listeners, let me know. Now this is gonna be important. I always ask this, and it's interesting every week.
• 29:47
  Our top concerns for our audience change.
• 29:50
  David: Mhmm.
• 29:50
  Mike: I don't know if that's the new cycle, if it's a new audience, or a combination of the two, but inflation is the number one concern today. Mhmm. The next one's market crash. You know what's interesting? Inflation risk and market crash risk are paradoxical.
• 30:07
  So if Go away. If you wanna get rid of market risk, you increase inflation risk. If you wanna increase inflate... Or decrease inflation risk, you increase market risk.
• 30:15
  David: Oh, I see what you mean.
• 30:18
  Mike: And the problem is we wanna solve this problem, so we look for the perfect investment or product, which doesn't exist. And the way you solve this is by having a plan first, assign the mission, explore the strategy second. What do you do in this situation or that situation? And then third is the portfolio. Like what if you had a section of your portfolio that, yeah, had inflation risk, but not that much because it laddered out your income for the next three years.
• 30:45
  That's not that much inflation risk because you've got enough assets in the market to grow an offset inflation risk.
• 30:53
  David: Right.
• 30:53
  Mike: It is concerning when when I hear things like Trump may or may not be planning to inflate our debt away. I mean, like him or hate him, he knows how to handle debt and inflation is a very strategic way of doing that. I don't know if he's trying to inflate it away, if it's deliberate, if it's accidental or what. I'm never going to assume I know someone's thought process. Mhmm.
• 31:16
  And I try to give every president the benefit of the doubt regardless of political party. Mhmm. But inflation is sticky. We have concerns in the stock market because of inflation. We see that when the inflation reports come out, and we see issues with people who are buying bonds.
• 31:32
  This is important. The Fed does not set the treasury rates or all rates. The Fed only sets the overnight night rate. That's the rate that affects your high yield savings.
• 31:44
  David: Alright. Okay.
• 31:46
  Mike: K? The ten year treasury is set by Scott Bessant when he issues new debt through the big banks. The big banks have to bid on them. And right now, people don't want to bid on them at the traditional prices. They're having to bid at higher coupon rates.
• 32:03
  What does that mean? That means people aren't willing to take the risk of holding on long term debt for thirty years at a four and a half, 5% coupon rate because they're concerned about long term and sticky inflation, which means they are asking or demanding the government give them a higher coupon rate because they think inflation's gonna stay around for a while. Kinda like in the seventies.
• 32:25
  David: So so these banks that would bid are thinking, no, we we need
• 32:29
  Mike: They want higher higher coupon rates. That's why we see this parabolic increase, a massive increase in the ten year treasury and the thirty year treasury coupon rates. Well, what does that do? That creates an issue with the stock market. Because if you can get more money from a bond, which has a guaranteed payout for ten to thirty years depending on which ones you buy, and you can get that rate, and that rate's getting closer and closer to what the S and P has averaged over the last thirty years, you might start shifting money to bonds.
• 32:55
  David: Right.
• 32:56
  Mike: If you sell stocks and you buy bonds, what happens? More people are selling stocks. If more people sell stocks, that leads into pressure in the market, which means you just need a catalyst or some sort of event to then put a shaky stock market on a fire sale or a crash or a downturn or a recession or whatever it might be. Mhmm. I mean, the canaries are in the coal mine and they are singing pretty loud.
• 33:21
  David: Mhmm.
• 33:22
  Mike: Actually, I don't think that it works that way. Isn't that the canary stops singing? Like they die?
• 33:27
  David: Oh, that's right. Yeah. Because they've they've inhaled too much carbon dioxide or something and they stop.
• 33:31
  Mike: So the canaries seem to be dying right now. Right. And the the response to this is to not panic. It is to know what to do when markets are up, and what to do when markets are down. And then have a portfolio that allows you the privilege of exercising either strategy.
• 33:51
  A risky or prepared reaction is better than a risky prediction, and that's why planning is essential. Not portfolio construction. That's last.
• 34:01
  David: Mhmm.
• 34:02
  Mike: Planning first. Strategy second. How do you get more of your money? Portfolio third, the tools and the toolbox essentially select themselves.
• 34:12
  David: Yeah. Based on the the plan, based on what what choices you wanna make for yourself. Oh, well, this tool will satisfy this part of my plan and Yep. And then you start picking them. You can't go the other way.
• 34:23
  Mike: I mean, hard is... I'm concerned the markets are gonna crash next year. Okay. How do you wanna handle that? We have CDs or money market.
• 34:29
  Mhmm. Both of those work with the timeline. It's a fixed growth rate. It's FDIC insured and protected. Well, I want money in the stock.
• 34:37
  Well, the stock market might go down, then you wouldn't be able to take income from that source. What if we just take this small chunk of your portfolio, and we assign it the specific mission of your income next year? What would that do for you? Great. That's the one product that does that.
• 34:50
  Not good for long term growth, but it solves that issue. It solves that mission. Yeah. That's what planning looks like. That's all the time we've got for today's show.
• 34:57
  If you enjoyed the show, thanks for tuning the podcast. Don't forget to subscribe, leave a rating, and as always tell your friends, the larger the subscribers are, the better the content can be that fuels your preparation for retirement. We'll see you in the next show.