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Tax Brackets Matter Less Than People Realize · How to Retire on Time

• 0:00
  Mike: Hey, thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. And by the way, that was that Kipling article I wrote recently about cash flow versus income, which is the taxable amount, which is spending. Because if you incorporate, let's say you're again 500,000 or a million dollars.
• 0:17
  And let's say 200,000 of that is in your brokerage. You've got your basis. So that's the amount that you've invested into something that's not gonna get taxed. So your your taxable you bought some Apple stock years ago Yeah. Half of it is gains, half of it is basis.
• 0:33
  So if you sold it, half of it would get taxed under long term capital gains in this situation. The other half would be basis. That's going to manipulate your tax planning as well. Mhmm. Gets you more out of your money.
• 0:46
  I'll I'll talk about that. Let's just go there right now. Why not? Okay. Yeah.
• 0:50
  I'm game. Okay. Here's a fun scenario. Okay. David.
• 0:53
  Yeah. You're 62 years old and you just retired. Congratulations.
• 0:58
  David: I feel great.
• 0:59
  Mike: You've got 200,000 in your typical brokerage account, and you did the most cliche portfolio. Oh, it was a it was John Bogle of Vanguard. It was his masterpiece.
• 1:10
  David: Okay.
• 1:10
  Mike: Like, you know, buy low cost index funds and you held them forever. Congratulations. Alright. You did Common Sense Investing. You thought you read the book, you followed it, and it helped you grow your money.
• 1:20
  Great. Now, you've also got 300,000 in an IRA. Gotta get it out. You know, you gotta take it out some point. Yeah.
• 1:28
  And then a 100,000 in Roth. Alright. Okay. So 600,000 in total.
• 1:32
  David: This is great news for me. Yeah. I like this.
• 1:35
  Mike: Two social securities, you're gonna file those at 67 years old. You're concerned though, you're trying to you were thinking about delaying retirement for a couple of years because why? Affordable Care Act insurance. Well, are still subsidies. So let's say you only needed $4,050,000 dollars a year.
• 1:51
  Well, 200,000, that's gonna get you at least four years. Maybe five, if markets grow a little bit, if we line things in. So what if, just what if?
• 2:00
  David: Alright.
• 2:02
  Mike: What if we took 25 what's the standard? 25 to 30,000, let's say, from your IRA. Okay. Tax free. Standard deduction for you and your bride.
• 2:12
  Congratulations. You're treating your IRA as a Roth. But you need to bridge the gap a little bit and you haven't filed for social security yet. Yeah. So now what you do is you say, hey, that Apple stock, I'm gonna start taking some out of it.
• 2:25
  Because in that situation, you have a massive threshold of the 0% long term capital gains bracket. So you can sell that Apple stock and pay zero in taxes.
• 2:35
  David: Because of tell me again.
• 2:37
  Mike: Long term capital gains. Okay. So roughly, you have $99,000, which is more income than you're gonna take anyway. Mhmm. $99,000 of gains you can realize.
• 2:50
  That's a good deal. And this is where planning falls short in the industry. This is what really gets my goat, Is not only could you take income that year, you know, short up $50,000, pay no taxes on it, but you also have other assets that you could realize, that means sell it, rebalance your portfolio, pay no taxes on it, and prepare for the following years. Okay. This is multi layered planning and it's most often not done based on what I see here.
• 3:24
  In over a decade of doing this, it's always this is a true story. I met met this guy. So how do you do planning? Well, we sell them an annuity. Oh, that's not right or wrong, but they're gonna turn on annuity.
• 3:36
  They're gonna take lifetime income, and that income's gonna pay their taxes, and we'll take care of their spending. That's not tax planning. That's selling a product, and hoping that product can fulfill some sort of arbitrary plan that rationalizes whatever suitability they did, which is very little. Mhmm. It's ridiculous.
• 3:54
  Now I'm not saying the annuity is wrong. A lot of people want that guaranteed lifetime income. Some don't, some do. I don't care which path you're on, you know. But maybe you wanna file for that lifetime income when you file for social security, bridge a gap a little bit from very efficient tax withdrawals.
• 4:10
  Maybe you don't. I'm just saying, maybe you limited the annuity exposure, so that the annuity was always in the standard deduction for the single person, and I'm going down a little bit rabbit hole because when the spouse passes, you have the single bracket. Alright. Anyway, I'm digressing here. The point I'm trying to make, tax planning is critical.
• 4:32
  Critical. If you're 50 years old, your tax planning is fundamentally different than if you're If you're 50 years old, it's very different than if you're 60 years old. If you're 60 years old, it's very different than if you're 70 years old. And then if you have 500,000 or less, you might be able to retire. I know that goes against every social media post that tries to manipulate you with all sorts of fear mongering and crap, because they just wanna work with high net worth people.
• 4:54
  I love working with a person with five, six hundred thousand that's just salt of the earth kind of person, and they just wanna figure out how to get to where they wanna go. Yeah. And I love working with the person that has 500,000 to a million dollars. You know, they're just trying to be efficient. They wanna leave a little to the kids.
• 5:08
  That's a wonderful situation. I also love working with a person that's got a million to 7,000,000. Because they're just different conversations. But everyone needs tax planning. Yeah.
• 5:21
  Everyone needs it. And the moment you say you don't, is the moment you're giving the government more of your money at a faster rate, at a less effective rate, and you're keeping less of your money which gives you less flexibility, which gives you more risk, and you gotta stretch those dollars a little bit more. So when someone says, oh, I can't give tax advice. Humbug. Yeah.
• 5:44
  I mean, what are
• 5:44
  David: they doing then? There's a lot of hope I guess, we used that word earlier.
• 5:48
  Mike: Well, it's The industry is based on sell a product, talk about the strategy that is that coincides with that product, and then rationalize whatever plan that would be. It's ridiculous. That's like saying you're gonna buy a bunch of tools, and then based on those tools, that's the home you're gonna build. Mhmm. Well, what if you don't want a log cabin in the middle of a city?
• 6:11
  Mhmm. Like Mhmm. And your plan should be different than your neighbor's plan. You could have the same money, have the same income requests, but want something totally different. See if I missed anything here.
• 6:25
  Is there anything I told you to tell me? No. Count this time. If you've got more money, some of the things to consider, you're doing more R and D planning. You don't want your required minimum distributions to push you into higher brackets if you can help it.
• 6:42
  Yeah. If if you have legacy purposes, here's a fun conversation I had recently. Guy says, I live off my pension. Oh. I've got a million dollars in IRA.
• 6:52
  I don't need any of it. What should I do? I said, what do you mean? What should you do? Like what do want the money to do?
• 6:57
  I want it to grow. Everyone says I should hire the Roth conversions. What do you think? We did a simple analysis. And what we found was his kids were lower income earners.
• 7:08
  Okay. So keeping and he was a high income with the pension that just pushed him into a higher tax bracket. No way around it. So what we realized was, if we just let it ride, no IRA to Roth conversions. Mhmm.
• 7:24
  And he will just pay the taxes of the RMD whenever it was, and then he'd stick it into his brokerage account, we were able to actually get him more money to the legacy. Why? The reason is we kept more money into the account, and it was easier to grow more money. Mhmm. When we had to pay the RMD, we did.
• 7:41
  We couldn't get around that, but he didn't know how long he was gonna live, and he didn't expect to live past 83 or so. So when we moved the money from the IRA, paid the taxes to the brokerage account Mhmm. Because you can't, the RMD doesn't work for IRA to Roth conversions. You have to take it out and put it somewhere. Yeah.
• 7:57
  He just put it, bought index funds, and then when he passes, his kids will get the step up in basis. That means they're not gonna pay the gains on those assets. Yeah. And it was clear as day when we run the that he could give more to his kids who would do better in their tax situation to inherit pre tax dollars than had he done aggressive IRA to Roth conversions.
• 8:20
  David: Yeah. This is great. Mean,
• 8:23
  Mike: Context is king.
• 8:24
  David: Yes. Yeah. And and so you have to I guess the trick is finding an adviser can help walk you through all this, but the you know, they all have these disclosures that say, well, we don't do tax planning.
• 8:37
  Mike: Yeah. So now what? Which I don't even know where that came from, honestly. Yeah. Like we don't give tax advice.
• 8:43
  I get that they don't give tax advice as in they cannot legally represent you into the IRS. You have to be a tax attorney, an enrolled agent, or a CPA to do that. So that I get. Sure. But I think the disclosure got out of hand.
• 8:57
  David: Yeah. Maybe they're just trying to be too safe. I don't know. I don't know.