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Don't Let Taxes Eat at Your Retirement Savings · The Wealth Cafe

• 0:16
  SPEAKER_00: Most people think that their retirement accounts are safe.
• 0:18
  SPEAKER_00: They're sitting there saying, hey, we have$5 million,$7 million,$10 million going into retirement.
• 0:24
  SPEAKER_00: But what they don't realize is a lot of that could be pre-tax money, which means that after taxes, what they're sitting on is really different because they are sitting on a six or seven figure tax bomb that is just waiting to go off.
• 0:36
  SPEAKER_00: And what can we do to diffuse it?
• 0:38
  SPEAKER_00: I'll have so many people that will come into my office and say, Caroline, we have all this retirement money.
• 0:43
  SPEAKER_00: We're so excited.
• 0:43
  SPEAKER_00: We want to understand strategies for withdrawals, preparing for this great time in our life.
• 0:48
  SPEAKER_00: And I sit there and I open up their portfolios and I see that they spend so much of their life saving so well, preparing for this day to come, except they did what so many of us were told to do and they avoided paying taxes every year because they wanted to just minimize their tax bill.
• 1:02
  SPEAKER_00: But now, as they enter those golden and exciting years, they're actually sitting on a huge tax retirement savings bomb that is just a ticking time bomb waiting to go off.
• 1:13
  SPEAKER_00: Now, this retirement tax savings bomb is a term that is commonly used, but a lot of people don't know what it means or how we can actually diffuse this or take care of it.
• 1:22
  SPEAKER_00: So that way you can see the money you have on paper is what you actually have for retirement rather than this inflated number where a third of it could really actually be the governments.
• 1:32
  SPEAKER_00: I'm gonna break down a real life case for you and show you actionably what does it look like if you are to strategically take money from your portfolio, do Roth conversions, and prepare to help diffuse a lot of this bomb.
• 1:44
  SPEAKER_00: We're gonna look at a case.
• 1:46
  SPEAKER_00: It is based off of a lot of other cases I've worked off with clients, but to protect people's identities, I've changed some facts, changed some numbers, but these are situations that I see happen all the time.
• 1:56
  SPEAKER_00: I want to introduce you to our friends Mike and Sarah.
• 1:58
  SPEAKER_00: Mike and Sarah are based off of some loosely related cases that I've had, but to protect people's identities and their personal financial information, I've changed the scenarios, changed a couple things up, but time and time again, this is what I see happening.
• 2:10
  SPEAKER_00: Now, Mike in this situation is 60 years old and Sarah is 58.
• 2:14
  SPEAKER_00: They each plan to retire at their age, 67, so they'll have a little bit of a gap.
• 2:19
  SPEAKER_00: And I'm going to show you what their retirement savings look like right now if they were to do nothing.
• 2:23
  SPEAKER_00: So as we head over into this, this is actually going to show us the year 2035 is when Mike and Sarah will both be retired.
• 2:31
  SPEAKER_00: In 2035, they will have$8.3 million projected if things keep growing the way we expect them to.
• 2:36
  SPEAKER_00: Now, when we actually dive into this case, we can see that Mike has around$1.5 million in his pre-tax or traditional IRA.
• 2:44
  SPEAKER_00: Sarah's$401K that she hasn't paid any taxes on is$2.6 million.
• 2:48
  SPEAKER_00: And then they have a joint taxable account of$800,000.
• 2:52
  SPEAKER_00: So this is not a retirement account, but still is going to have tax implications that we need to be mindful of.
• 2:57
  SPEAKER_00: So they are sitting on quite a hefty amount of pre-tax money, which is fantastic.
• 3:03
  SPEAKER_00: They have done a great job saving for retirement.
• 3:06
  SPEAKER_00: And the other nuance I want to give is that as we are doing this analysis today, we aren't looking at their primary home.
• 3:12
  SPEAKER_00: We are just taking a look at their investment accounts, more specifically, what it looks like in factoring in their ordinary income, even investment gains from this taxable account in here.
• 3:21
  SPEAKER_00: And the assumption that I have inside is that they will never be moving from their primary home, at least not during the years of the Roth conversion.
• 3:29
  SPEAKER_00: Now, the other thing to note is our friends Mike and Sarah live in California.
• 3:33
  SPEAKER_00: I did this to show you what it looks like to live in a high taxation state.
• 3:37
  SPEAKER_00: They are also currently high earners and earning multiple six figures right now as they are still working.
• 3:42
  SPEAKER_00: And so doing Roth conversions is going to show you, okay, can this be done as somebody who is a high earner and to diffuse this bomb before things like RMDs hit, before this impacts Social Security.
• 3:54
  SPEAKER_00: So let's dive in and take a look at what things look like if they aren't to make any changes.
• 3:58
  SPEAKER_00: For the year 2026, Mike and Sarah have an income of$342,000.
• 4:03
  SPEAKER_00: You will see that is coming right now just from each of their individual incomes.
• 4:07
  SPEAKER_00: They also have a rental property that is generating$18,000 a year.
• 4:12
  SPEAKER_00: Now, from their savings, they are doing$24,500 because we have contributions that are happening here from an IRA.
• 4:20
  SPEAKER_00: And also Sarah is putting in$12,000 into her 401k in order to get the match that she has from her employer.
• 4:28
  SPEAKER_00: And in addition to that, they're adding in about$6,000 to their taxable account.
• 4:32
  SPEAKER_00: Now, this is what their life looks like pre-retirement.
• 4:35
  SPEAKER_00: I want to fast forward and show you what Mike and Sarah's later retirement life looks like without taking any Roth conversions right now.
• 4:42
  SPEAKER_00: And in those later years where they're being forced to take RMDs.
• 4:46
  SPEAKER_00: Now, I show you one of these specific years.
• 4:48
  SPEAKER_00: This is 2046.
• 4:49
  SPEAKER_00: So both RMDs have started for them.
• 4:51
  SPEAKER_00: You can see it in this section right here that they've already started these RMDs in previous years.
• 4:56
  SPEAKER_00: And I point this out to show you that they are being forced to take RMDs of$382,000.
• 5:02
  SPEAKER_00: Social Security for both of them has started at$60,000 and they still have this rental income and a small pension, which is breaking down to these different income sources.
• 5:11
  SPEAKER_00: The key thing to note here is that they are reinvesting dividends and reinvesting those portfolio withdrawals of$38,400.
• 5:19
  SPEAKER_00: What does that mean to us?
• 5:21
  SPEAKER_00: That means that they actually are having to pull out more money from their portfolio than they truly need to live off of and live for their expenses.
• 5:29
  SPEAKER_00: Why is this an issue?
• 5:31
  SPEAKER_00: Well, it's an issue because they're pulling money out of tax-advantaged accounts because of RMDs and because the government is telling them to do so, having to pay taxes on it, pushing them into higher tax brackets potentially between Social Security, Irma, and Medicare.
• 5:45
  SPEAKER_00: And they're not even having to use that money and they're just reinvesting it into taxable accounts where they don't have any tax advantages.
• 5:52
  SPEAKER_00: And there's really no need for it.
• 5:54
  SPEAKER_00: If they didn't have to take these RMDs, the money could stay inside that account and grow tax-free into the future.
• 6:00
  SPEAKER_00: So let's actually take a look at what it would look like for them to strategically take Roth Convergence.
• 6:05
  SPEAKER_00: Now, before we dive into these numbers, I want to give you the disclosure that everyone's situation is going to be different.
• 6:10
  SPEAKER_00: Everyone has nuances of what their income is, their tax status, their state, how they plan to live into the future, what they want to spend in retirement.
• 6:19
  SPEAKER_00: So if this is something you are interested in seeing how it applies to your specific situation in portfolio, you can reach out to us or your financial team to run the analysis and see what the strategy looks like for your specific situation.
• 6:30
  SPEAKER_00: This is when personal finance becomes personal.
• 6:33
  SPEAKER_00: Because as we're going to pull up, I loved using this heat strategy map.
• 6:36
  SPEAKER_00: And what's really cool here is that I can show you, okay, they could do a maximum Roth conversion in one year, which means that they would convert all of their money.
• 6:44
  SPEAKER_00: And the thing to keep in mind is that they can't touch any of this Roth conversion money for five years.
• 6:50
  SPEAKER_00: And once again, personal finance becomes personal because do they have places where they can pull from?
• 6:55
  SPEAKER_00: And in this case, they do with a taxable account, but do you, if you're to do this strategy, have places where you can pull money from where you wouldn't have to touch this money for five years and can just let it grow and not take a penalty.
• 7:07
  SPEAKER_00: For a lot of people, that's scary to lock up money for five years and say, okay, we're gonna do Roth conversions, knowing we can't touch the money for five years, what does that look like for us?
• 7:16
  SPEAKER_00: And a lot of times it's also really difficult to swallow the pill of we're gonna pay a massive tax bill in one year, knowing that it'll allow the account to rebound and grow into the future.
• 7:26
  SPEAKER_00: That's why a lot of times when I'm having conversations with clients, we'll look at things like filling to a certain bucket, like the 35% or the 32%, or a certain IRMA bracket.
• 7:36
  SPEAKER_00: Now, for this client in particular, I'm gonna show you what it looks like to fill to the 35% bucket.
• 7:41
  SPEAKER_00: Now, as we break this down, it shows that they are going to save an average tax rate of 5%, and they will save during their lifetime, this number is$2.3 million in taxes because they are choosing to fill to that bucket every single year rather than just take out their RMDs.
• 7:57
  SPEAKER_00: The reason this total net income bucket shows no difference is because I solved for the amount of income they want to have in every year, hence there would be no difference.
• 8:06
  SPEAKER_00: That's not what we're trying to solve for, is maximizing their income.
• 8:09
  SPEAKER_00: And this would also increase the amount of legacy that they are able to leave behind.
• 8:13
  SPEAKER_00: So what does that mean?
• 8:15
  SPEAKER_00: When we are taking a look at the total taxes, you can see that they are going to pay and increase their taxes for a period of time.
• 8:23
  SPEAKER_00: However, the goal is once again to pay the lowest amount of taxes in their lifetime.
• 8:28
  SPEAKER_00: However, we are looking at this blue line here, which shows Roth conversions for the 35% bucket, but you will see that they significantly drop off as we finish doing those Roth conversions, and their tax bracket is going to significantly increase because when they start pulling money from those Roth buckets and from those Roth accounts, it's not going to show that they have ordinary income.
• 8:48
  SPEAKER_00: So they could pull 200,000, 300,000, 400,000 from a Roth account, but on their IRS and tax forms come April 15th of every year, it's not going to show that they have any income once they've done all of the Roth conversions, which is where the big difference comes in.
• 9:02
  SPEAKER_00: Now let's take a look at 2026 and what this means for their finances if we are even going to do Roth conversions.
• 9:08
  SPEAKER_00: And I show this simulation to you on purpose.
• 9:11
  SPEAKER_00: Everyone thinks that the strategy is going to be, all right, let's start Roth converting right away.
• 9:15
  SPEAKER_00: Spoiler alert, in this conversion, we actually aren't going to.
• 9:18
  SPEAKER_00: We have two very high earners this year.
• 9:21
  SPEAKER_00: And so we want to wait in their specific situation for the income to drop off.
• 9:25
  SPEAKER_00: So you'll see in this situation in 2026, you'll see the year right here, they will just continue doing as they are.
• 9:31
  SPEAKER_00: They have a couple big life events that are coming up here.
• 9:34
  SPEAKER_00: So they actually won't start their Roth conversions until the year 2035, the first year in which they are retired.
• 9:42
  SPEAKER_00: Now they're going to have to pull from different places, like their taxable account and be able to use that money.
• 9:48
  SPEAKER_00: And so you will see that the first year for them that they are doing Roth conversions is 2035, in which they will be pulling$713,000.
• 9:58
  SPEAKER_00: And I love seeing this breakdown here because it shows you exactly where they are going to be doing Roth conversions from.
• 10:05
  SPEAKER_00: And then also that they are going to be using this account over here in order to cover their life expenses.
• 10:10
  SPEAKER_00: That's a key thing to know.
• 10:12
  SPEAKER_00: The other thing is taxes are also going to be on the rise.
• 10:15
  SPEAKER_00: So are you accounting in those years for the higher tax bill?
• 10:18
  SPEAKER_00: You'll see here that yes, in certain years, we are going to pay more in Medicare taxes, state taxes, and any ordinary income tax.
• 10:27
  SPEAKER_00: That is a key thing to know and long-term capital gains because they are pulling from those taxable accounts.
• 10:33
  SPEAKER_00: Doing a Roth conversion is going to affect several different other areas of your life, like your ordinary income rate.
• 10:39
  SPEAKER_00: If you are having to raise and pay money on that for capital gains purposes, you could go from the 15 to the 20%.
• 10:46
  SPEAKER_00: Something to be mindful of if you are raising and having to pull money from your taxable account and take capital gains on that side of things.
• 10:54
  SPEAKER_00: However, is it worth it for them?
• 10:55
  SPEAKER_00: Well, going back for them, it would save them on an estimate, right?
• 10:59
  SPEAKER_00: We need to bring in an accountant and have them overview things here as well.
• 11:02
  SPEAKER_00: Given today's current tax rates, it could save them potentially$2.3 million throughout their lifetime.
• 11:08
  SPEAKER_00: That's a pretty good chunk of change.
• 11:10
  SPEAKER_00: And if that were me, I'd be pretty happy to have that back in my pocket.
• 11:13
  SPEAKER_00: Some things that we aren't accounting for in here are what would it look like if taxes were to rise in the future?
• 11:18
  SPEAKER_00: That would make this even more valuable to be paying the taxes now and allow this money to grow and not pay taxes on it in the future.
• 11:25
  SPEAKER_00: However, because we don't know what those taxes could rise to in the future, that's something we can't model out in this time.
• 11:32
  SPEAKER_00: It's a shortcoming because we don't have a crystal ball, but just something to know that we would be locking in those tax rates essentially at a lower rate by paying them now, even though we'd be filling to that 35% bucket.
• 11:44
  SPEAKER_00: Now, Roth conversions aren't the only strategy that this couple or any couple could use.
• 11:48
  SPEAKER_00: They could also look at doing things like saying, hey, you know what, we're really charitable.
• 11:53
  SPEAKER_00: And instead of having our RMDs, the required minimum distributions, come into their lives, they could actually say, you know what, we are going to donate those to charity.
• 12:02
  SPEAKER_00: In order to do that in the most tax-efficient way, what they would do is they would say, okay, let's say they're RMDs.
• 12:08
  SPEAKER_00: We can actually go in here and pull it up.
• 12:10
  SPEAKER_00: And so we can see that in year one, some of the RMDs that we have in here, we'll look at Mike specifically because his RMDs will start at this point.
• 12:18
  SPEAKER_00: His RMD is$110,000.
• 12:21
  SPEAKER_00: Now he could sit there and say, you know what, we love to give to charities, specific 501c3s that they want to prioritize during these years if they don't need that income to live off of.
• 12:31
  SPEAKER_00: What they would do is instead of taking that RMD, they would have the money go directly from the retirement account to that 501c3.
• 12:38
  SPEAKER_00: The key thing is that it can never come to their person.
• 12:42
  SPEAKER_00: And let's say they give$50,000.
• 12:44
  SPEAKER_00: $110,000 minus that$50,000 would reduce the amount of taxable income they have, but still count towards their RMD.
• 12:52
  SPEAKER_00: So instead, they would still be fulfilling that$110,000.
• 12:55
  SPEAKER_00: They would only have to take$60,000 more to fulfill that RD, but only$60,000 of that would count towards their taxable income.
• 13:04
  SPEAKER_00: That's a strategy if they don't decide to go through with Roth Conversions, or they may sit here and say, you know what, let's just convert a portion.
• 13:10
  SPEAKER_00: Let's make sure we are building up that taxable, tax-free, and after-tax bucket and saying any money that we do have, we're going to strategically give away.
• 13:18
  SPEAKER_00: The other key thing to note is how are you planning for the next generation?
• 13:22
  SPEAKER_00: Roth Conversions will give you a different strategy in how you are planning for the next generation if you want to leave money behind for them.
• 13:29
  SPEAKER_00: I have an entire episode about this that you can watch, all about the best asset to leave behind for the next generation, the impacts of it.
• 13:36
  SPEAKER_00: So make sure you check that out and it'll help you navigate what makes the most sense.
• 13:40
  SPEAKER_00: The thing I want to leave you with is nothing is one size fits all.
• 13:44
  SPEAKER_00: Everybody is going to have a different situation between their assets, their taxes, their goals for retirement, and the goals of what they want to leave behind.
• 13:52
  SPEAKER_00: And as I mentioned before, this is where personal finance becomes so personal.
• 13:56
  SPEAKER_00: And you need to work with your financial team and figure out where do we want to be strategic and save on taxes?
• 14:01
  SPEAKER_00: Where do we want to plan for the future?
• 14:03
  SPEAKER_00: And how can we really maximize what we have and use this with a strategy that makes the most sense given your financial goals?
• 14:10
  SPEAKER_00: However, I will say that the biggest thing is to start.
• 14:14
  SPEAKER_00: Start having these conversations, even if you think it's too late.
• 14:16
  SPEAKER_00: It's better to ask and have the knowledge and say, what do we have?
• 14:20
  SPEAKER_00: What can we do?
• 14:21
  SPEAKER_00: Even as I mentioned before, even if you are just converting a portion of your money or you're deciding to strategically give during your life, it's going to give you different options in order to diffuse this massive tax retirement savings bomb.
• 14:34
  SPEAKER_00: Keep in mind that if you have a large amount of pre-tax money, when you are looking at the amount of money you have set aside for retirement, that money on paper isn't really what you have.
• 14:43
  SPEAKER_00: So you need to figure out the after-tax amount of money that you will be able to live off of during those retirement years.
• 14:50
  SPEAKER_00: Thank you for joining me on this episode of The Wealth Cafe.
• 14:53
  SPEAKER_00: And I'm sure there are a lot of questions that arose by going through this scenario.
• 14:57
  SPEAKER_00: If you have them, feel free to reach out to us or have us run a strategy for you.
• 15:00
  SPEAKER_00: You can head over to tannisfingroup.comslash contact to discuss further.
• 15:05
  SPEAKER_00: Thanks again.