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Retirement Tax Traps Explained: RMDs, Roth Conversions, and the Widow’s Penalty · Retire and Thrive

• 0:00
  Welcome back to another edition of Retire and Thrive, where we
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  help you build your life with purpose, wealth, and confidence.
• 0:07
  Welcome back, Cody. Thank you, glad to be back.
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  Yeah, I know we had talked a little earlier about the the
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  episode around the sports and the tax and everything else.
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  I thought today we would talk maybe a little bit more about
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  your experiences and, and I would say, you know, to the
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  viewers that Cody is our most senior advisor, not a senior's
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  me of course, but Cody spends the majority of time helping
• 0:34
  people plan for retirement. Very familiar with the software,
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  the analysis, everything from the tax.
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  Like you said, you've got quite a passion for the tax, but I
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  thought it might be kind of fun today to maybe share some
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  stories specifically. And before I dive into that,
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  anything in particular you want to chat about?
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  I'm going to just kind of kind of rapid fire here and maybe
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  give us some some examples that maybe some of the viewers could
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  relate to, you know? I think it's it's unique because
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  again, you mentioned that I like to focus on the taxes.
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  At the end of the day, when we talk with clients, a lot of
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  clients will come in here or prospects or whatever the case
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  may be, we'll come in and be like, hey, I need a financial
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  advisor, can you help me with investments?
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  We can certainly do that. But in my opinion, I think 80%
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  of retirement planning or just financial planning in general is
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  really surrounding the tax conversation.
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  It's how much money can I keep? I've saved a bunch of money, but
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  now how do I make sure I retain the most and I get to enjoy it
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  and spend it the way I can? And so a lot of our
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  conversations and stories, you'll probably hear me talk
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  about, you're gonna hear the word tax a lot because again,
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  nobody likes it. But I enjoy finding ways to
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  ultimately avoid it or minimize it if possible.
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  Within the lines of the IRS guidelines, of course.
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  You know, it's a a very valid comment And, and you're right, a
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  lot of it does tie into taxes. You know, my mindset has always
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  been, you know, we want to do everything we can to make sure
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  these retirees don't run out of money.
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  I mean, that's our number one goal.
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  But taxes play into that so heavily.
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  And you know, we do spend in a majority of our time with people
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  that are approaching retirement or people that are actually
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  retired. And it was kind of interesting.
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  Just yesterday I talked to someone who had reached out to
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  us looking for kind of putting together a retirement plan.
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  And both he and his wife were senior executives at A at a very
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  successful company making very large incomes.
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  And he's 46 and she's 44. And so I mentioned to him, I
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  said, you know, you're still in that accumulation phase.
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  And he says, we don't even know. We're just maxing out our four O
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  1 KS and we're put away. And I said, Oh, by the way, are
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  you how much of that are you putting in Roth versus pre tax?
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  And he said, what do you mean? And I said, well, you know, are
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  you putting some into the Roth component?
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  And he, he was like, I don't even know if we can do that.
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  And I said, of course you can do that because you work for a big
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  company. And so it's interesting for me
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  and I just touched on it. I'm not going to go into detail
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  with the conversation, but I just touched on it with him that
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  you might have three 4,000,000 bucks when you're 60 years old.
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  But again, taxes are massive implications on that.
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  So again, I don't want to go down that path, but it does
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  matter. And I told him, I said, you
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  know, you're young enough where we can make adjustments to your
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  contributions to your 4-O1K, your wife's four O 3B and it
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  will make a difference. So you do have some choices in
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  retirement. But today I, I don't want to get
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  too heavy into that accumulators stage.
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  I want to focus kind of more on the retirement side.
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  And so again, I feel like when I look at you and I think a
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  fortress financial, you meet with more new people and yeah,
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  we've got associates that build out the financial plans, but you
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  obviously read review them and go through and everything.
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  And I know you've got tons and tons and tons of stories about
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  success where people have come to us.
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  But is there anything in particular, if you can think of
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  a client, Obviously we're not going to use names here, but
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  people that come to us that maybe had no idea what they were
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  doing and they didn't even know where to begin.
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  Any any stories or any experiences you can share with
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  with the viewers? Well, it's the, the, the list is
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  endless, right? And, and, and it's not a knock
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  on any of the, the clients or any of the people who come to
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  us. It's, it's a complex world out
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  there from financial standpoint. You talk about taxes, that's
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  super complex, but then you throw the different taxability
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  of all these different accounts and how much you can contribute.
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  And if there's phase outs and all these different strategies.
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  And then all of a sudden you get to retirement and say, now I got
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  to take it out. How do I do that?
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  And what's, what's my downfall? What are the good things that
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  can happen and what's the best way to do it?
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  So, yeah, there's a lot of clients that come to mind that
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  says, you know, there's a great success story saying, I had no
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  idea and I'm so glad I found out that I can retire kind of thing.
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  So we, we, we met with these clients a couple of years ago
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  and now clients, they were not at that point in time, but they
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  came in and they worked here in town for a couple different
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  organizations and just worked really hard their entire life
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  and, and stacked money away and put more and more away and made
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  sure they saved and worked really hard for it.
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  And they're getting to the point saying, Hey, we should probably
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  start kicking tires and saying who can help us now make the
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  decision to retire? And they both came in and we
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  spent a lot of time just understanding who they are and
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  what they want retirement to look like first.
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  And then we kind of, we, we unravel some of the numbers and
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  say, well, what do we have to make that dream come true?
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  And so we built them out of financial plan and showed them
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  where they're at right now and what this now may look like long
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  term. And to their surprise, they were
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  far better than what they thought, 'cause really they,
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  they focused on how much do we have in retirement?
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  And that was their their, their, their benchmark saying, can I do
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  it? Can I not?
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  Not to interrupt you, but I think that's a common thing with
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  people is that they look to retirement for the number.
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  Like I've got X amount on set and, and just just touch on that
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  a little bit more because obviously I get involved in that
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  too, but it isn't really the number they're looking for.
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  And so maybe you want to continue on that conversation
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  100. Percent, it's very misleading
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  and and a lot of people will always just fundamentally have
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  that number. I want to be a millionaire.
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  I want to have 5 million bucks in my 4 O 1K, which is fair and,
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  and it's fine to use that as kind of a, a leading indicator,
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  but it's not the answer. It doesn't matter how much you
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  have. It's how much you spend and how
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  much is going to be taxed and how often you take it out.
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  What's your, your, your filing status when it comes to taxes?
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  It does all these different areas.
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  And so it's a very misleading number, although it's a very
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  common benchmark for people. But anyways, this, this couple,
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  they had a fair amount of money in their retirement accounts and
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  they said, I think we're finally to the point we can do it.
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  Well, we aren't, we, we look under the hood and they've got
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  hundreds of thousands of dollars in their bank accounts, which
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  they, they really haven't been utilizing to build the financial
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  plan, but didn't realize was a huge, huge benefit to strategies
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  in unwinding some of this tax deferred money in retirement
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  accounts. And so they came in thinking
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  retirement was for her very short and you know, or around
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  the corner, maybe a couple of months for him, couple years.
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  But we build out this plan and he has a better understanding of
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  how this all kind of piles together and realizes it might
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  make more sense to actually retire earlier from a tax
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  standpoint, the longevity opportunity standpoint.
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  He ends up retiring in in three or four months after we had that
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  conversation. And they've been enjoying
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  retirement ever since. And they come back and and they
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  have all these success stories of where they've gone, the
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  traveling, they've done that, the things they do with family.
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  And so that's the power of it is not just saying how much money
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  do I have, but how does this all work together with Social
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  Security and pensions and so forth.
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  So. So you're saying in this
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  instance you built out a financial plan and he was going
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  to the number he was planning to retire at least in his head in a
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  couple years and you said within a few months he retired?
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  Yep. He came back and said, well,
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  what what happens if I pull it forward a little bit?
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  And so we can maneuver some of the the planning software we
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  have and showcase that in a in a snap of finger.
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  He says, wow, I had no idea. And that's where the light bulb
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  went off. And he said, honey, I think I
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  might go to. Wow, you know, I've, I've had
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  situations that clients have retired sooner than anticipated,
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  but that particular story where it's going from, I don't know
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  what their ages were, but if he's going to retire 62 and now
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  he retires at 60, that's to be like life changing.
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  Seriously. I mean, it's like if you're
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  planning to retire and all sudden you just now retire two
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  years earlier. And you know, my thing is that,
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  you know, life is meant to be lived.
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  And so when you get older, you only have so many years, right.
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  And so for him, he just bought himself two years in retirement.
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  I can't even imagine how you know the feeling.
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  And again, I don't you can touch on that a little bit, but I
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  can't even imagine if he was retiring at two years later and
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  all sudden you put together numbers and he's like, wow, this
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  is unbelievable. And, and it is, it's powerful
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  for us too, because we get to see that, that that light bulb
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  go off and, and quite frankly, tears shed in some of these
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  conversations, which it's, it's huge, it's gratifying, doesn't
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  mean there's not the other side of the coin.
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  Right. I was just going to ask you not,
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  not, not do we have to go gloom and doom here?
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  But obviously there's times where people come in and say,
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  hey, I'm going to retire in three months and you, you have
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  to be deliver the news that maybe not so much.
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  It's very common and again, hats off to them to say, hey, I'm
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  going to come and double check with somebody before I actually
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  do it because a lot of times that can put them in a situation
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  where it says, well, shoot, now I got to go work part time
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  because I didn't realize what my tax bill would be or how long it
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  would last if I spend X amount like I've been doing lately.
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  So not to dive super in depth in any of those scenarios, but
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  we're going to help you understand where you are based
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  on what your goals are and what your spending habits are.
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  If you're on track, we're going to explain and help you
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  understand how to implement it the best way in our opinion, or
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  whatever the case may be will help you down whatever path.
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  But if the numbers don't look great, we're not going to
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  shelter that that that conversation.
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  We're going to say, hey, it might make sense to either work
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  part time or you may have to work a couple more years or you
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  can't draw as much money because of the tax situation.
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  And those aren't usually the most fun conversations, but
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  they're extremely important because you leave an employer,
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  they're likely not going to ask you to come back a month later
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  when you say I made a mistake. That's actually, it's
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  interesting because you, you brought something up that just
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  popped into my head. And obviously once you leave
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  your employer, it is irrevocable.
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  Typically, like you said, you're not going to go back.
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  But what you said was interesting like you don't tell
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  clients no, you can't retire. You're simply saying, here's the
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  alternatives, which I think is a great approach because I think
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  if somebody plans to retire in six months and you come back and
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  say you can retire in six months, but you may not like it
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  based on the budgets and everything else.
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  So I I think the your approach of saying you can retire when
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  you want, however you're going to have to change one of these
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  dials. And retirements, not just a, a
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  subjective conversation, it's such a, or it is very
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  subjective. It's not objective because it's
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  not just a, how much money do I have and will it get me through
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  retirement? It's do I want to retire and
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  when is that appropriate time and when do I draw Social
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  Security? Because a lot of these things
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  overlap each other. And again, a lot of these things
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  are irrevocable as you're talking about.
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  But it's about making sure you have a purpose after you retire.
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  It's not just financially can I retire?
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  It's when can I retire financially and do the things
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  that I want to do. It's not just cut and dry.
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  I'm, I'm going to retire and I'm going to golf every day or I'm
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  going to volunteer every day because quite frankly, everyone
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  we talked to who retires, they don't actually do that every
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  day. And they have to try to find
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  ways to fill their time. And if that's the case, maybe
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  it's not time to retire and and stay with that community at work
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  that you've continued to harvest over the last 30 years.
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  Maybe. So it's not just a easy math
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  problem. It's it's a very deep discussion
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  to have when retirement makes sense.
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  You know, it's interesting when I, I think about myself and you
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  know, I have friends of mine, I mean good, good friends of mine
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  from high school and so forth, that they are retiring and I'm
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  still working because I love it. I absolutely love working and I
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  don't even know if there is a retirement date for me.
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  I mean, the, the people at Fortress are kind of maybe
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  wishing it would be sooner rather than later.
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  But at the end of the day, I love it and I'm going to
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  continue to do it. But you're right.
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  I, I think that, you know, you had mentioned the complexities
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  and you talked about, you know, different strategies and
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  techniques and everything kind of falls in around these taxes
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  at some point. And I know I can recall many,
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  many, many, many instances where we run into these scenarios, we
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  call them tax traps. And it could just be, you know,
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  somebody's like, Oh my gosh, I didn't realize this or that.
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  And so I, I know there's a few out there.
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  And again, I would like you to elaborate because again, you're,
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  you're kind of in, in in the trenches working with these
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  newly retirees. And so you've seen some of these
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  tax traps. And so if you want to just for
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  the viewership, because I think this is, you know, part, part of
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  the whole purpose of this podcast is to provide valuable
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  information for people. So people that are watching
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  today, I think what you're about to say, I think is important
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  because I'm, I'm not even 100% sure what you're going to say,
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  but there are some tax traps that I do want you to touch on.
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  And for you viewers out there, pay attention to this because it
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  can definitely affect you. Know there's two that come to
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  mind when you say that and, and obviously there's an abundance
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  of tax things that you need to focus on, whether it's capital
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  gain harvesting or capital lost harvesting.
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  There's a lot of different strategies there in brokerage
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  accounts. But the main ones that I think
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  of that that come to fruition most often is the required
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  minimum distribution and when you have to take it.
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  But one that I'll mention at the end is, is the widow's penalty
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  that people don't necessarily think about.
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  So if we start with the required minimum distribution, which is
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  essentially any money you've saved in a tax deferred
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  retirement account, you have to take a distribution from that
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  account at 75 years old whether you want to or not.
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  Previously it was 70 1/2, kicked back to 72 to 73, which is what
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  it is right now. And then in 2033 it's going to
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  get kicked back to age 75. So it keeps going further and
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  further down the road, which the average consumer is going to
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  say, well, great, that means I don't have to take the
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  distribution and pay taxes on it if I don't actually need the
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  money yet. It's a common trap because by
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  doing that, what you're doing is letting your account grow higher
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  and higher and higher, and then it's a bigger number in the
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  future that you have to take that distribution off of.
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  And who knows what tax rates are going to be at that point in
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  time. You have no control over any of
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  that. And so unless you're going to
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  donate it to a charity, you're going to have to pay taxes on
• 14:37
  that money no matter what. And So what we'd like to frame
• 14:39
  it as is, do you like to pay the least amount of taxes today or
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  the least amount of taxes over your lifetime?
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  And that kind of sets off a little bit of a light bulb.
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  Well then everyone's like, well, I'd rather payless tax long
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  term. Well, sometimes that means
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  biting the bullet and pulling some of these taxes forward and
• 14:54
  we can showcase what that looks like over a long period of time.
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  And it'll show you literally 10s if not hundreds of thousands of
• 15:01
  dollars you'll saving, you're saving just in your tax bill
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  over your lifetime, but kind of front loading some of that.
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  So what you're saying is that if I retire at 65 and I built up
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  this nice retirement plan, don't necessarily automatically defer
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  it until the required minimum distribution, like you said,
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  till 73. So you're saying if I retired
• 15:21
  65, I've got eight years that I could actually reduce that so I
• 15:25
  don't have to be forced to pull it out at a much higher bracket?
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  And you're you're saying that you can save hundreds of
• 15:31
  thousands depending on values. Absolutely.
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  And what we'd love to hear is you take that money out and
• 15:36
  enjoy it if it's within your budget.
• 15:38
  I love that. But what's more common is you
• 15:42
  reposition that money, you take it from the IRA and either move
• 15:44
  it to a Roth account or a brokerage account or your bank
• 15:47
  account, but you get that tax liability off the table right
• 15:51
  away and you'll never have to worry about it again.
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  And so it's just proactively saying, gosh, I don't want to,
• 15:55
  but I'm going to have to pay that tax bill.
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  Let's do it now. We know the tax rates right now.
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  You're probably not prepared for my next question, but that's a
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  great thing of me being kind of flipping here.
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  I get to ask the questions I want to ask.
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  But you talk about Roth conversion.
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  So let's hypothetically say I'm 65 years old, I've got 3 kids.
• 16:15
  Why would I convert AT65I? I feel like that's more of a
• 16:18
  young person's game. So when when does that make
• 16:20
  sense in retirement to convert? It's a great question and it is
• 16:23
  different for everybody. 65 obviously a very common
• 16:26
  retirement age, but you got to you got to think about am I
• 16:29
  taking Social Security? Am I having any other part time
• 16:32
  job? What other income streams do I
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  have and what is my already allocation with Roth dollars and
• 16:39
  after tax deferred dollars? It makes sense if you're not
• 16:44
  drawing Social Security to maybe pull some of those those Roth
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  conversions forward to say, hey, I know I'm going to have to pay
• 16:50
  tax on in the future. Let's go ahead and do it right
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  now because as I mentioned before, there's a widow's
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  penalty out there. Let's say you know, most people
• 16:58
  don't think about it and don't want to think about it, but
• 17:01
  spouses don't typically pass away together.
• 17:04
  Yeah, let's touch on that. I, I, I kind of went off on you
• 17:06
  with the wrong and thank you for that.
• 17:07
  It's OK, but it plays in the. Yeah, let's talk about.
• 17:09
  Let's talk about that. Widow it plays into the same
• 17:12
  point because at the end of the day, a required minimum
• 17:14
  distribution is it has to start when you're 73 or 75, depending
• 17:19
  on when you were born. But if you pass away, you're
• 17:22
  probably leaving that money to your spouse, which then in turn
• 17:24
  will have to do the same thing with the same dollars.
• 17:27
  But your spouse is now a single tax filer.
• 17:29
  And the the the tax brackets get cut in half.
• 17:31
  The standard deduction gets cut in half, but you have to still
• 17:34
  take the same amount of money out of that IRA, which is going
• 17:37
  to be taxed exactly the same, if not higher because now you're
• 17:40
  jumping tax brackets faster. So leading into your previous
• 17:43
  question, Roth conversions at 65, if both you are healthy and
• 17:47
  you're in a situation where you're going to lower tax
• 17:49
  bracket, if you don't need the money, reposition the money, pay
• 17:52
  the taxes. If you have it available in the
• 17:54
  bank, pay that out of pocket. Let that money continue to grow
• 17:57
  and accumulate. Gosh, when you're 75, you might
• 18:00
  still have a required minimum distribution from your IRA
• 18:03
  dollars, but it's going to be smaller because you have now
• 18:05
  more money in your Roth, which you don't have to touch, which
• 18:08
  is more favorable on the tax standpoint for beneficiaries to
• 18:11
  inherit as well. Yeah, I never thought about the
• 18:14
  Roth conversion of being beneficial for a surviving
• 18:17
  spouse, but you're exactly right.
• 18:19
  Because if you know one of the spouses passes away and they
• 18:23
  have to being forced to take the required minimum distribution
• 18:25
  plus the Social Security and if there's any pensions and like
• 18:28
  you said, the tax brackets get cut in half.
• 18:30
  So interesting perspective on the Roth conversion because you
• 18:36
  are our most senior advisor here at Fortress and you do work with
• 18:40
  a lot of retirees. I'm going to hold you to one.
• 18:44
  Give us one thing that you would recommend everybody that is
• 18:50
  approaching retirement or is in retirement.
• 18:53
  And I know that we've talked about a lot of things over over
• 18:56
  this over this episode, but is there one thing that jumps out
• 18:59
  that you said, you know, what if I were 60 years old approaching
• 19:02
  retirement, if I'm 65 and I just retired, is there one thing that
• 19:05
  you would tell the viewers that they should should look into?
• 19:09
  It's a great question because there's a lot of things, but I
• 19:13
  would say paint the picture, I mean create that retirement
• 19:17
  picture that that you really want to do.
• 19:18
  Don't, don't think about. Do I have enough money to now
• 19:22
  leave my job? Think about, do I have enough
• 19:25
  money to go do the things I want to do?
• 19:28
  And what is that story? What is that picture you want to
• 19:30
  paint? And I think that's a very
• 19:32
  important question, not for yourself, but for you and your
• 19:34
  spouse and your family, whatever the case may be, because that's
• 19:38
  what's going to drive your ability, your success in
• 19:40
  retirement. And when you're leading up to
• 19:42
  retirement, you need to know if you have enough money for that
• 19:44
  or, or the more common situation is, is the fun one where it's,
• 19:49
  you need to think bigger because all these people, a lot of them
• 19:52
  worked really, really hard their entire life.
• 19:54
  You're probably one of them. And all of a sudden you, you
• 19:57
  change your lifestyle to now, you used to earn an income and
• 20:01
  receive a paycheck every day. Now you're your own paycheck.
• 20:04
  You might get Social Security and a pension, but now you're
• 20:06
  creating your own income stream. And it's important you do the
• 20:09
  things you want to do with that money you intentionally deferred
• 20:12
  for the future. So in my opinion, number one is
• 20:15
  you're leading up to retirement. The numbers matter.
• 20:18
  But the intentionality around what you do with the numbers
• 20:20
  matter much more. And so that's what I would.
• 20:24
  Say great advice and and I think it goes back and I think it's
• 20:26
  kind of a corny phrase, but I think it's very relevant to what
• 20:29
  you just said, which is you want to retire to something, not from
• 20:33
  something. In other words, you know, I
• 20:35
  think that the two most common we see is once I get to X amount
• 20:38
  of dollars, I'm done, done or once I hit a certain age, I'm
• 20:42
  done, done. And you're saying no, no, no,
• 20:43
  no. Paint that picture about what
• 20:46
  retirement looks like. Run the numbers, make sure
• 20:49
  everything fits financially, but paint that picture so that you
• 20:53
  can enjoy those those years in retirement.
• 20:55
  And don't put the paintbrush down and keep adding to it.
• 20:58
  Great advice. Well, that concludes this
• 21:02
  episode of Retire and Thrive. Thank you for tuning in and
• 21:05
  we'll look forward to seeing you next week on another episode.
• 21:08
  Fortress Financial Group, LLC is a registered investment advisor.
• 21:12
  Advisory services are only offered to clients or
• 21:14
  prospective clients where Fortress and its representatives
• 21:17
  are properly licensed or exempt for licensure.
• 21:19
  The opinions voiced in this material are for general
• 21:22
  information only and are not intended to provide specific
• 21:24
  advice or recommendations for any individual.
• 21:26
  All indexes are unmanaged and may not be invested into
• 21:29
  directly. Investing involves risk,
• 21:31
  including loss of principal.