Transcript

Voiceover [00:00:00]:

Welcome to Retirement Unlocked with Larry Heller. Your life, your way, unlimited possibilities. Join us as we explore how tailored financial planning and investments can help you navigate life transitions with confidence. Let’s dive into this week’s episode.

Matt Halloran [00:00:20]:

Hello and welcome to another Retirement Unlocked with your host Larry Heller. Today, Larry and I are going to dive into the five tax gotchas for the high net worth clients in retirement. Larry, we’re covering a lot of ground today, brother. So where do you want to begin, brother?

Larry Heller [00:00:35]:

Yeah, so let’s start with number one, and that’s required minimum distributions are kind of now a lifetime, a lifetime burden and could really now get you as you get older.

So recently with the last change to the tax laws, the they’ve gone through delaying the RMDs used to be, remember, used to be 70 and a half Mac that it got pushed back to 72 and now the last version of the Secure act moved it either to 73 or if you are born in 1960 or later, it’s not until 75. So what does that really mean? What does that really do? Because everyone’s like, oh, deferred taxes, deferred taxes, deferred taxes. Well, now you’re been putting away in your retirement accounts for years and years and years and this account has grown so much and now we’re pushing about five more years and it can grow even more.

So now when you’re 73 or 75, you go to take out your quite a minimum distribution and it kicks you up into a much higher tax bracket. And now you’re getting Social Security, you’re probably getting income on your investments. So that now becomes a big, big challenge and a lot of people wait and now they’re like, oh, what do I do now? And that’s really not the strategy that you should be taking. So we call this kind of a golden window before you take your acquired minimum distribution, but after you retire and possibly before you’re collecting Social Security, you may be in a much lower tax bracket.

Some people may be in a 0% tax bracket. So now you want to kind of look and maybe you want to take some of your distributions from your retirement accounts, your IRA accounts in that year to use up a lot of the lower brackets down there. So challenging with the required minimum distributions while you’re working. We had a client come in who was already in their 70s and now is has to pay a lot of money in taxes and they weren’t working with anybody. And we looked and there were like five years that they could have done.

There are a lot of these distributions or a, or they could have converted it over into a Roth. So don’t miss that opportunity because the required minimum distributions will stay with you for the rest of your life.

Matt Halloran [00:03:09]:

So part of the golden window is part of the golden window Roth conversion. Is that one of the things that we’re going to talk about or is that part of that system?

Larry Heller [00:03:16]:

Yes, a part of that golden window is to either look at just taking money out and spending it, or if you don’t need it and you have enough money from whatever, you could then convert that over into Roths, which also not only may help you, but it could really be a great benefit for your children because later on they have to take it out when they’re taking, when you pass away, after both spouses pass away, they have to take it out over 10 years and it could be when they’re in the really high income bracket.

So there’s a, a lot of planning that has to be done in that particular window.

Matt Halloran [00:03:56]:

All right, the second gotcha is the expiration of the 2017 tax cuts in Job Act. So what do we do with that?

Larry Heller [00:04:04]:

Yeah. So.

Well, right now probably nothing, only because of the new administration that’s in here, which is controlled, which the Republicans control, both the House and the Senate. So there’s probably going to be changes that come in. Just to go back what we’re talking about, the expiration. So the expiration in 2017, there are a lot of tax cuts that came into play and those tax cuts were set to automatically expire at the end of 2025. So next year they’re automatically going to come into place.

However, now that we’ve got a new president and a Republic controlled House and Senate, probably going to make some changes to that, either extend extended or completely change it. But let’s just talk about some of these so you can be aware of them. So the first One is the salt cap, the state local tax cap of $10,000, which anyone in a high tax state really did not like this. Well, they’re due to expire at the end of 2025. Will they be expired?

Will be extended, will be modified? Yet to know. But something to keep in mind, standard deduction. The standard deduction doubled back in the 2017 tax cuts. So now it’s going to go back to where it was originally.

So you’ll have a lower standard deduction, which means that you may have more itemized deductions that you didn’t need before and you aren’t tracking them. So you need to keep that in place the qualified business income that disappears. A lot of businesses were able to deduct 20% if they were qualified business that disappears. And there’s others as well, child care, there’s numerous ones in there that are all set to change. So want to stay tuned, see what’s going on because this is really planning for next year, but it may have some impact before the end of the year whether you want to take more income this year or you want to defer defer more income, whether you want to take more deductions this year or next year.

So it’s going to be a really interesting time frame to see how that, to see how that goes. Couple that with the tax brackets are going to would increase. So if you’re married and you’re making $300,000, your bracket is going to increase from 24% to 33% on the top bracket. So again, something to keep in mind when planning for, for that, there’s a lot of things to be be aware and we don’t want any of those to be a gotcha and come back to bite you in 2026 or 2025 when you can maybe do something in this year. So that’s kind of the tax cuts, but there’s also some other tax cuts in there.

The estate tax exemption will be cut in half. So right now it’s, if you’re married, you can get about $24 million on federal. You don’t have to worry about it. In New York State you do. It’s $7 million.

You do have to do some planning on that. But the federal one’s going to be cut in half. So to go back to the original ones, plus an inflation number. So we’ll see what happens with that. Again, this could be changed by the administration.

So really you need to monitor all these changes and decide whether it makes sense to accelerate income, defer income and see what, see what’s going on in 2020. In 2025.

Matt Halloran [00:07:37]:

Well, gotchas keep coming. What is the widow penalty?

Larry Heller [00:07:43]:

Yeah, the widow penalty.

So, so when you die, okay, now you can no longer file marry filing joint. So now you have to file single. So you can be making the same amount of money. But now one of the spouses died. Now you pay more taxes.

You’re like, huh, there’s only one of me, not two of me. But now I got to pay more taxes on the same income. Yep, gotcha. So again, not much you can really do about that. But just to be aware of that and how that’s going to play out.

And sometimes you may want to take some income when you’re married at a lower rate, knowing that eventually someone is going to be in a single rate, especially if there is a big age difference between the two spouses. Of course, we don’t know which one will eventually go earlier, but you may want to plan for the, you know, for the younger ones. And the required minimum distribution. And Social Security will remain, keeping the taxable income higher and may push you, the widow, into a higher bracket. Obviously, Social Security will down a little bit because you might have had two.

Now you’re only going to have one, but you’ll still have the same requirement distribution, assuming you’re of the age. Whether you are. If you are both over the requirement of this age, the money is just going to go to the surviving spouse. The requirement of distribution is going to stay the stay the same. So that’s one of the gotchas, the widow penalty.

Again, some of the things that you can do earlier on is possibly the Roth conversions to reduce your taxable income later when you’re single. There’s also some planning around what’s called the Medicare surcharges. This could be some extra taxes based upon the income that you earn from total income and then what you pay for your Medicare. So a couple things there on the widow penalty.

Matt Halloran [00:09:46]:

What about, what about gifting strategies there?

I know that we’re going to talk about estate planning here as the, the fifth gotcha. But from a widow perspective, if the widow wants to help their grandkids out or whatever, is that a viable strategy to help reduce any of this from.

Larry Heller [00:10:03]:

An est, from an estate tax point? It could be. So, yeah, so there is definitely some things whether you want to do the annual deduction, which I believe now is not is 19,000, might be 20,000 for 20, 25 annually for each child sort of things.

You can do that. So there’s a ton of estate tax planning you could do. Obviously, if you think the brackets, the estate tax is going to go down in 2024 and you’re in the $25 million range. Plus you may want to do some things that you can’t lose. So there’s a lot of things that you can look at on the gifting side in the possibility of the tax going up on the estate taxes.

Matt Halloran [00:10:49]:

Okay, well, so this is something. So we’ve actually talked about this next one just a little bit on previous episodes, which is leaving a large IRA to children. This is another trap that I like how you’re couching this so let’s explore that.

Larry Heller [00:11:05]:

Yeah, so we talked about a little bit earlier. So just going into a little bit more detail.

So the Secure act of 2019, money that goes to a non spouse, to mostly a child. And now before those rules, you can extend it over your lifetime. Now you have to withdraw that money over 10 years. There’s also a required minimum distribution you have to do. So like I said earlier, if you happen to inherit money from your parents or from anyone else in that manner and you’re in your peak earning years, you now have to take this money out and pay high taxes on that.

So again, we love Roths when you could do this. And a lot of times people just looking how is the Roth benefiting me? How is the Roth benefiting my spouse? But they’re not looking how the Roth can really benefit their children. So by converting IRAs in a low tax bracket.

Now when your children get it, they still have to take the money out of the Roth in 10 years, but they’re not paying any taxes on it. So it’s a great tax tool, a great planning tool that I find that most people don’t even think about this when we start talking about it. And a lot of people, they’re like, well, I don’t need all this money in my ira. I can afford to pay a little taxes now to really set up my children or grandchildren with a lot of tax free money later on.

Matt Halloran [00:12:43]:

All right, so the last one, the.

Larry Heller [00:12:46]:

Last one, and again we, we kind of mentioned this is the estate planning is getting kind of trickier and we’re not exactly sure what the exemption is going to be. So there is a ton of strategies in here that you can discuss with U.S. estate attorneys. There is, like you said, gifting, there is grants, there’s family partnerships, there is so many different strategies used to try to minimize the estate taxes, trying to guess what it’s going to be. This happened, I forget, maybe 10 years ago and a lot of people were trying to do this and then they ended up not lowering the exemptions, but we could have that again.

So it’s kind of like, what do you do? Do you do it? Do you not do it? A lot of people have already done a lot of the large gifting. So looking at a lot of these popular kind of wealth transfers with an eye on what is possibly going to happen or if it, even if it doesn’t happen, to try to minimize a lot of these gotchas from the estate planning, especially for a lot of our audiences in New York.

So in New York, it’s a cliff tax. So it’s like $7 million. I saw your kind of inquisitive. What’s a cliff tax?

Matt Halloran [00:14:08]:

I don’t know that.

I don’t know what that is.

Larry Heller [00:14:09]:

So a cliff tax is. Once you reach the limit and it’s another 5% on top of that, and you figure, oh, I only have $8 million. I’m only taxed on that $1 million. You’re taxed from $1 because you are over the cliff.

You are over the $7 million. So in New York, and again, there’s no portability. So if you pass away from your federal estate tax, that $12 million exclusion goes to your spouse, or your spouse can use another 12 or 24 million. New York doesn’t let you do that. So you want to make sure that you set up the first $7 million with a credit shelter trust, so you can have 7 million pass into a trust on the first death, which will allow another $7 million on the second death.

So anyone that’s between 7 and $14 million or even just over the $7 million number in New York want to do this planning again. Another one of those areas that we see, a lot of the planning is not done. They have joined accounts, they’re not set, and they’re not putting these credit shelter trusts in place, or even if they’re putting the credit shelter trust in place, they’re not properly having the account set up in place. So the estate planning is getting trickier, but it’s still trickier. And another one of those five gotchas.

So some of the gotchas have to do with taxes, some do with estate planning, some have to do with your brackets. And, and, and, and the gotcha goes to your children. So I love these five gotchas. And I can assure you a lot of people do not prepare for a lot of these things that are happening right now.

Matt Halloran [00:15:58]:

So if you don’t mind, we have a few minutes left here.

I want to ask you a little bit about that process at your company. Right. How, how do you navigate all of these different moving parts through your planning process to at least reduce the impact of these five gotchas?

Larry Heller [00:16:17]:

Yeah. So you, you would think a lot of times we start going through these strategy goes.

The question goes, well, why isn’t my accountant discussing this with me? And, and I’m saying, well, because the accountants are not doing kind of the proactive planning when it comes to some of these strategies. Yes, the estate attorneys are doing some of them when it has the estate side, but the accounts are really not. They’re really looking at from the business standpoint or they’re looking at just doing your tax returns individually. They’re not looking at some of the what are my brackets going to be in future years type of thinking.

So, yes, so in Heller Wealth Management, that’s all part of the process. When we do a retirement plan and we do a cash flow analysis with our system, we can see what tax bracket you’re going to be in in every year from now for the rest of your life. And we’re doing projections. So all of a sudden now we see those golden years and a lot of times it pops up 0,000 or it pops up 10, 10, 10 and then we look at 75 and now you’re in the 30% effective bracket and bingo, we know that there is some planning that has to, that has to get done in there. We’ll know how much money that you’re going to need during your lifetime and how many children you have and where they are.

So now we can start talking about the advantages of doing some of these Roth conversions. So all this is part of our planning process in the first year when we’re starting talking about all this. Well, and beyond just the investment strategies. But these things, if you’re not doing them, literally could cost you millions of dollars. Matt?

Matt Halloran [00:18:03]:

Yeah, Larry, I love asking you questions like that because you get so excited and animated because you love the work so much. And I just wanted to make sure I pulled that out of you today because, you know, this was from a listener perspective, a little bit scary. Right? I mean, these are gotchas that are apparent that, you know, are things that people have to deal with. But I think it makes everybody feel a lot more comfortable that they’ve got you and your team in their corner to be able to make sure that these gotchas aren’t going to get them as bad as you like.

So if somebody wants to reach out and engage you in this process, where do they go?

Larry Heller [00:18:36]:

Yeah. So they go right to our website, hellerwealthmanagement.com and they can click on and schedule an appointment, a 20 minute call with myself or one of the other planners directly. Well, they can feel free to call the office at 631-248-3600 and schedule an appointment with us.

Matt Halloran [00:18:54]:

So listen, for those of you who’ve been listening to the show for a while and for those of you who are brand new, if you haven’t gone through the financial planning process, a real financial planning process like the one that Larry has talked about for years now on this show.

Now’s the time stuff’s changing. You need to be paying attention. Every year you’re closer to retirement. You need to have this plan in place and Larry and his team has got your back to be able to help you make sure that you’re not going to get these gotcha moments, but that you can truly live the retirement that you want and make sure that it gets unlocked. So for Larry Heller, this is Matt Halloran in the Retirement Unlocked podcast.

We’ll see you on the other side of the mic very soon.