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Pre-Tax vs Roth: Where Your Money Should Go · Retire and Thrive

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  How do you help your clients with knowing where their money
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  should go? Be intentional with how you are
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  investing your money from the tax type versus simply just
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  haphazardly saying, well, I'm just going to put it all pre
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  tax, I'm going to put it all in the raw, but be intentional
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  based on your actual tax bracket.
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  The government at some point is going to say, Cammy, you've
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  deferred this money long enough, you're now 73.
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  We want to start getting revenue off of that.
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  So we're going to start taxing you on it.
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  So we're going to force you to pull that out.
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  Social Security at the federal level starts getting taxed at
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  50%. Welcome back to another edition
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  of Retire and Thrive, where we help you build your retirement
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  and your lifestyle with wealth, purpose, and confidence.
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  I'm Cami, This is Dan. Happy New Year to everyone.
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  Thanks for joining us and hope everyone had a great holiday
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  season. It's January and we are talking
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  taxes. But before we get into that, I
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  don't really want to call a sabbatical, but you were off for
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  a. Few weeks I was you.
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  You had to handle it all by yourself.
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  How did that go? Let's just say this, the
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  viewership wanted you back, so. I don't know about that.
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  I don't know about that. But yes, I was on a baby moon.
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  I guess that's what they call it now.
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  So enjoying some nice warm weather in Arizona, had
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  beautiful weather, played some golf, had a good time.
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  How did your golf game look it? Actually I was impressed because
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  I was a little worried, a little hard to bend over and swing.
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  But once you got, once I figured it out, it was good.
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  It was good. Weather was beautiful.
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  Can't complain. I think you were there, if I
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  remember, when it was really, really cold back here.
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  Was it? Yes, it was like 10 below here
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  and it was like 70 to 80 there. So it was.
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  Perfect, you don't have plans to pack up and leave permanently.
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  There. No.
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  Not yet. No, not yet.
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  Too big of a Twins fan to move down South like my Minnesota
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  Twins, so keep it up here. And that was apparent with your
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  Christmas card that I got. And I have to be honest with
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  you, you know, I get all these Christmas cards and I kind of
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  put them all together. And last night I was just kind
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  of going through all the cars that I got and your Christmas
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  card with you and your husband, it took a couple times to even
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  notice that he was holding a cat.
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  And I didn't even see the cat until after the fact because he
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  was wearing a black jacket. Yes.
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  And I thought that picture was. I was like, oh, my gosh, this
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  cat's eyes. Kirby is the cat's name.
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  And his eyes were just so big. And Ryder was like, no, it's
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  awesome. So yeah, that's what we rolled
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  with. We have two kitties and baby on
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  the way. There you go.
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  And you had your Santa Twins hat on.
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  I did that. What made me think of you saying
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  you know a Twins fan so. Yes, yes, today we are talking
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  all things taxes. Hope you had a great holiday as
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  well and took some great holiday pictures too.
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  But we have to talk about going into tax season as a retiree.
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  And today we have 3 and three things you can do so that you're
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  not paying more come tax season. And there are a lot of mistakes
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  that folks make, I assume, especially as they do head into
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  that retirement age and they're a little unsure of what's
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  happening now. Right.
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  And I think, you know, just to kind of clarify for the
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  audience, we, you know, the 1st 20 some episodes were all about
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  the book retire and thrive. And we, we looked at each of
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  those seven lessons, kind of dove into them.
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  And I think kind of this is a bigger part for us.
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  I think now we're actually going to get into some practical uses
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  of a lot of this stuff. So we'll talk specifics about if
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  you're retired or approaching retirement, specific strategies
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  and tactics unrelated necessarily or not directly
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  correlated to the book. So I'm actually kind of looking
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  forward to. This, yes, and as we head into
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  filing our taxes, saving money is ideal for many or at least
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  understanding how it best fits your portfolio.
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  So Dan, let's get right into it. Why are so many folks,
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  especially retirees, blindsided by taxes?
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  What are some issues that you see?
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  Yeah. I think one of the things that I
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  look at over my 30 plus years in this business is I believe that
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  this generation kind of the baby boom generation, if you will,
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  maybe the late stages, that baby boom generation.
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  You know, that's really when the four O 1 KS became really
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  popular and the mindset was really safe, safe, safe, safe,
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  safe. And so that's really, and I'm,
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  I'm not quite at the baby boom generation, but I'm very close
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  within a year or two. But I remember when I first
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  started in my career back in the early 90's, the four O 1K was
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  the was the greatest thing ever. You're going to save taxes.
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  And that's just kind of been the mindset for my generation and
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  the older generation is you just continue to save and save and
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  save and save taxes. But the challenge is, is that
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  when you're focused so much on saving taxes, you don't ever
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  think about, I'm going to get to the light at the end of the
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  tunnel. I'm not going to get there 3035
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  years from now and all of a sudden you built up this
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  beautiful retirement, but you haven't paid tax on any of that.
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  So I think to answer your question, and, and I've shared
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  this before in other episodes that I would say our firm today
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  with our advisors, we probably spend more time on tax
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  strategies than we do investment management.
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  Don't get me wrong, investment management is important, but
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  some decisions we can make to minimize taxes can have
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  significant impact on the retirees once they do in fact
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  retire. So I think what's happened is,
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  is that we've been conditioned to save and save and save and
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  not really think forward out 2030 years from now what the tax
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  implication may be. And something with that is tax
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  flexibility. I'm sure you speak with many of
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  your retirees about tax flexibility.
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  Why is that something that's so important?
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  Well, I think ultimately the tax flexibility really means your
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  ability to control taxes. And, and I know the flexibility
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  is, is you know, kind of a common word.
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  But at the end of the day, you know, I look at things and
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  you've got three different types of tax status.
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  You've got pre tax, which is basically money you've never
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  paid tax on. It could be in a 401K, it could
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  be in A-403-B, could be in a Sep account, but any money that you
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  pull out of that is 100% taxable to you.
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  So that's one type and that's the one I was referring to is
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  most common because that's what we've been condition is just
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  save and, and, and invest and save a bunch of taxes.
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  Then the next is what we call non retirement, which is
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  basically non qualified accounts.
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  And those accounts are basically after tax.
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  So it could be that you take $10,000 and you invested in in
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  investment. It could be an individual stock,
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  it could be an index, it could be a mutual fund, but that every
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  year potentially can kick out capital gains.
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  If it's a mutual fund, usually indexes don't kick out capital
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  gains, but it also can kick out interest or dividends.
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  So that's really, you know, it kicks out and you get a 1099 on
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  it, but there you've already paid tax on that initial $10,000
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  investment. So as that continues to grow,
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  the main difference though, is the actual how the tax treatment
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  is so that if you put money, let's say you invest $10,000
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  into a mutual fund and five years later it's $30,000.
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  Let's say it was in a tech sector, something that grew
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  really rapid. The gain that you recognize
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  there is treated as a capital gain, which is a lot different
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  than ordinary income. The top tax bracket as of the
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  sitting 2026 ordinary income is 37%.
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  The top tax bracket for capital gains is 20.
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  So my point is, as you've got pre tax, which is regular
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  income, depending on income could be up to 37% at the
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  federal level or could be capital gain, which is that
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  after tax money, which would be treated as a capital gain and
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  much, much lower tax rates. And then the third type would be
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  your Roth accounts. And I know we hear Roth this,
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  Roth that, but at the end of the day, what Roth really means is
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  it's completely tax free. And think of it this way.
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  Do you want to pay taxes now, IE Roth or do you want to pay it
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  later? 4 O1, K4O3B.
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  So having control over some of those and having the flexibility
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  to control your tax bracket once you retire.
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  In other words, if I retire and I'm 65 years old and I've done a
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  great job at saving Cammy and I've got $2,000,000 in a
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  retirement account, let's call it a four O 1K and that
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  represents 90% of my investment portfolio.
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  Guess what? Now you are 100% dependent on
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  what tax rates are at that time, especially someone young like
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  you. I mean, I, I wouldn't even care
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  to guess what tax rates will be, you know, once you hit 60 or 65
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  and it could be really anybody's guess, but having money in those
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  different 3 tax types definitely gives you the flexibility.
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  How do you work with your clients and help them know where
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  they should be putting their money throughout the year?
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  Because obviously you're thinking about taxes all year
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  long, not just right now in January.
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  Are you saying how we invest in the different types or how do we
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  pull out? There's just.
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  When you're looking at your taxes, I mean, even me, when I
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  look at my taxes in January or February or March, whatever it
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  may be, I'm looking at, oh, maybe I should have put, you
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  know, a little extra money in this account as opposed to this
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  account. How can you help?
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  How do you help your clients with knowing where their money
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  should go? Yeah, that's that's actually a
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  really good question. It doesn't matter if you're in
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  your 30s or if you're in your 50s, but most of the time,
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  Cammy, that's driven by taxes. In other words, your tax
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  bracket. So if you are in a lower tax
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  bracket, we always encourage people to put money in the Roth
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  component cuz you don't need the income deduction or reduction.
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  But if you're in a higher bracket, let's say that you're,
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  you're making a high income and you want to reduce your income,
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  put money into that pre tax retirement account will
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  certainly reduce your overall income.
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  So it's a little bit of a balancing act.
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  So this kind of gets back to that whole strategy, you know,
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  sitting down with people and saying this is your income
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  bracket. So based on your income bracket,
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  maybe you should put a little bit more towards the pre tax or
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  maybe you should put more towards the Roth based on your
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  income. So I think it's, it's be be
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  intentional with how you are investing your money from the
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  tax type versus simply just haphazardly saying, well, I'm
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  just going to put it all pre tax or I'm going to put it all in
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  the Roth, but be intentional based on your actual tax
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  bracket. The RMD required minimum
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  distribution. Why are the years leading up to
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  that so important for folks? That is probably one of the
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  biggest things that I see that gets missed by a lot of people.
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  And just to explain to the audience what you're referring
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  to and you're very sharp on this.
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  I'm actually very. I am not.
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  I learned everything from you. Yeah, I'm.
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  I'm very impressed that you're talking about that though.
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  But the current RMD is age 73. And in 2035, it's actually based
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  on current law, it's going to be age 75 S, but for people today,
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  they're required minimum distribution 73.
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  So let's just kind of peel back that onion for just a minute.
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  What does RMD mean? As you alluded to a required
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  minimum distribution and the whole purpose of the required
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  minimum distribution is the government at some point is
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  going to say, Cammy, you've deferred this money long enough,
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  you're now 73, we want to start getting revenue off of that.
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  So we're going to start taxing you on it.
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  So we're going to force you to pull that out.
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  And it varies based on age and account values, but but at the
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  end of the day, they're going to force you to start pulling money
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  out at age 73. And that's great.
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  And what we see often times is people retire at 63 or 65 or
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  whatever their age is that they retire and they just say, I
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  don't really need the money because between my Social
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  Security and maybe they're getting a pension, let's just
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  defer that out till 73. The challenge is at 73, it just
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  let's say they retire it at at 63, they defer that retirement
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  account another 10 years. And again, if you use a 7% rate
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  of return, that account's going to double.
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  So my example is if I got 2,000,000 bucks and I'm 63 years
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  old and I deferred for another 10 years and a double S, now I
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  got $4 million at age 73, and that required minimum
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  distribution is going to hit me pretty hard.
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  So there's certain things that you can control and certain
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  things you can't control. What you can't control is once
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  you turn the income on for Social Security, it's going to
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  continue to come to you. If you're taking a monthly
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  pension that continues to come to you and now all of a sudden
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  you're forced to pull out money out of an RMD at 73, and again,
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  you have no control over that. It's based on the account value
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  and your age. So if you retired 63, you have
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  10 years that you could start pulling money out of that IRA,
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  which in theory is going to reduce the amount of your
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  required minimum distribution at age 73.
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  And so again, it kind of comes back to the tax status or the
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  tax bracket that you're in. We have a lot of retirees that
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  might have seventy, $80,000 worth of adjusted gross income
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  and they could in theory, candy pull out another thirty, $40,000
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  and still stay based on current tax brackets at 12%.
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  And taxes are based on a calendar year.
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  So come December 31st, if you haven't pulled any money out of
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  these retirement accounts and you're 63 or 64 or anytime
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  before 73 and January 1st rolls around, you've now missed that
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  window to pull that money out. So that's why it's critical from
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  retirement age till 73 to take a hard look and potentially start
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  pulling money out of these retirement accounts.
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  And we get comment all the time is they'll say, well then I
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  don't need the money right now. And I'll say it's not about what
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  you need. It's about changing it from the
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  tax type, which is pre tax, which again that's at ordinary
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  income rate over to after tax or to the non retirement.
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  I don't know if that answered your question.
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  It did. A little long winded, but yeah.
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  Well, it's important. It's very important.
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  And you touched on Social Security.
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  Are there some issues that you see with clients with Social
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  Security and maybe some things they didn't expect out of Social
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  Security when it comes to tax time?
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  Yeah, again, I don't want to go too heavy here on the tax side
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  of it, but yeah, Social Security at the federal level starts
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  getting taxed at 50%. Doesn't mean you lose 50%.
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  It means 50% of your Social Security can become taxable as
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  ordinary income. And it doesn't take much.
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  I mean, just to give you kind of an idea, if you've got a
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  combined income, you know, if you're married, you had a
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  combined income of $32,000. Based on current law 5th, up to
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  50% of your Social Security can become taxable.
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  And it's kind of phase between 32,000 and 44,000.
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  And once you're over 44,000, 85% of your Social Security becomes
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  taxable. So you think about that for a
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  minute. I'm taking a monthly income from
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  a pension. I'm getting 85% of my Social
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  Security taxed. Fast forward age 73, tying it
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  back to the earlier question about RMD.
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  And next thing you know, you're just paying taxes upon taxes
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  upon taxes. And I hate to say it this way,
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  you're paying all these taxes because you did such a great job
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  at saving in your earlier years. And you know, just a few of
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  those strategies about maybe pulling money out a little bit
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  earlier. And the same thing can be said
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  for clients sometimes will say I don't need the money and it
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  seems kind of weird. But even in retirement prior to
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  the RM DS, you can move money from IRA to Roth, what we call a
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  Roth conversion. It has the same tax implications
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  as pull the money out, but of course if if I'm in the 12%
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  bracket and I can pull out an extra $20,000, I could have just
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  as easily converted that 20,000 to a lower bracket.
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  But whatever that grows to in the future, it's completely tax.
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  Free. Yeah.
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  And it might make you feel a little better too if you say,
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  oh, I don't need this money now. Do you deal with that a lot
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  folks that I mean you've kind of alluded to that you do deal with
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  that a lot of people who are just like, I don't need this
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  money right now. Right.
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  And it kind of goes back to the first lesson in the book living,
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  you know, of the fruits of your labor, enjoying the fruits of
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  your labor. And we're all about encouraging
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  people to enjoy all of the years they've worked hard to save and
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  everything else. So yeah, we often times hear
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  that, that I, I don't need the money.
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  And again, I don't want to go down that path today.
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  But yeah, there's, there's options.
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  If they don't want to spend the money today, then we tend to
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  lean a little bit heavier towards the Roth conversion.
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  Sure, sure. And one final question for you
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  for this episode, Dan, is there one mistake that you see the
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  most out of folks, retirees when it comes to tax time?
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  Just one. You have just one.
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  OK. The top one.
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  The top one? The biggest mistake?
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  I feel like I've said this before, but it really does apply
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  and I would say not taking a hard look at the tax implication
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  of decisions that you make. In other words, not being
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  intentional with your tax type of accounts.
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  So just throwing money into retirement accounts because
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  that's what your manager does at work or your Co worker said I
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  just put everything into pre tax because that works for me.
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  And then you get to be retirement and you realize, Oh
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  my gosh, this wasn't a good decision.
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  So I would say the biggest mistake is sometimes it's
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  important and I would say let taxes make some of your
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  decisions about which of the three types you should be
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  putting money into. And I feel like a good majority
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  of the population doesn't do that.
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  They just haphazardly just, you know what, I'm going to Max up
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  my 4 O 1K, I'm going to Max up my 4 O 3B.
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  And it's interesting because we'll get people in their 50s
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  that have a very high income and we'll ask them, are you putting
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  money into the Roth component of your four O 3B?
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  So I don't really know that I could.
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  What's that mean? And so then we explain it to
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  him, but that's what I'm referring to.
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  That's a mistake of not really understanding or taking
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  advantage of maybe some of the tax types that might make sense.
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  Right. And I think that maybe stems
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  from being intimidated by taxes and being undereducated.
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  I guess. Do you recommend that they go to
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  an advisor or their resources online that are free where
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  people can really tackle the tax code?
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  Yeah, I think we're not tax experts.
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  Just so just so we're clear, we are not CP as we're not
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  accountants. We have software we can analyze
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  this. But but generally speaking, once
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  we analyze tax brackets, we typically say let's run this
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  through your accountant or run it by your accountant and get
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  the accountants blessings on it. But I think you can, you can
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  take a look at your taxable income, you can go online and
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  you can look at different tax brackets and where they fall and
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  then take a look at your tax return.
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  I mean, if you're comfortable enough doing it that route.
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  Otherwise, find an advisor that knows what they're doing.
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  And you know, one of the questions I would ask an advisor
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  is do you do tax planning? Do you have strategies?
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  Not tax preparation, but do you have strategies?
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  And do you do the tax planning? And and if you're all on your
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  own, you're doing it on your own, then run by your
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  accountant. Yeah, so.
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  Good advice, good advice. Anything else that you'd like to
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  add? I think that's enough for today.
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  We'll look forward next week maybe to diving in a little bit
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  more into the tax side. And again, we don't want to
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  necessarily bombard people with tax strategies.
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  But it's important. But as you said, we're coming up
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  kind of, I mean it doesn't, it seems like a long ways away
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  April, but but it is important. Yeah, and this is a free
• 18:43
  resource to learn a little bit more about taxes as you do head
• 18:47
  to file your taxes this year. All right, Dan, thanks so much.
• 18:50
  Thanks to you for joining us. You can follow us wherever you
• 18:52
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• 18:55
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• 18:57
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