Transcript

[00:00:00] Intro: 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.

[00:00:20] Bill Tucker: Transitions to, and welcome back to Retirement Unlocked with Larry Heller. Let’s

dive into this week’s episode.

Episode. How many people in a retirement expecting their taxes to naturally decline? But for many retirees, the opposite turns out to be true. Retirement introduces multiple income sources that are taxed in different ways, and when those pieces aren’t coordinated properly, taxes can quietly erode income, increase healthcare costs.

Create unnecessary stress. Today, Larry explains why tax planning becomes more important in retirement, how retirement changes the way income is taxed, and the most common mistakes that retirees make when taxes are treated as an afterthought. He also shares how proactive planning can help retirees stay in [00:01:00] control, reduce surprises.

Make more confident financial decisions over time. All right, Larry, this is an interesting topic because I think when most people think about retirement, they think, this is great, man. I’m gonna be in a lower tax bracket. Things are beautiful. I’m on like. I’m on coast now. So why do you think tax planning or why is in fact tax planning so important in retirement?

[00:01:27] Larry Heller: Yeah, I mean this is, you know, so crucial and something we spend a lot of times with, with clients. A lot of people, like, you know, when they talk to the financial advisor, they focus in on what the returns are, but you really much more important is what the net amount that you keep and that’s net after taxes.

So like I mentioned. In the intro that a lot of people think, or maybe a long time ago, you worked in a higher tax bracket, you retired, you’re in a lower tax bracket. Yeah, that’s not necessarily the case. We’re gonna go through a few different reasons why from all the different income [00:02:00] out there, and there’s many different sources that are tax differently, which we’ll talk about.

So you may be actually in a higher tax bracket late later on now. You know, what does that mean? Well, that means the with withdrawal strategies that you’re putting together are so crucial. That means which accounts do you draw from first in retirement? How much do you take from each account? And it can be very complicated.

Um, and also a lot of people don’t realize this until they, they’re, they’re taking their, their on Medicare, that it could impact their healthcare costs by, by, um. How much taxes you pay and how much income you have, so it’s such a central part of your retirement. It’s not an afterthought.

[00:02:45] Bill Tucker: Yeah, no kidding.

So let’s go through those unique challenges that people in retirement, uh, that, uh, face. I mean,

[00:02:54] Larry Heller: well talk about the unique challenges, but just just to give everyone a little bit reasons why some of this is, [00:03:00] is happened. The biggest one is that you’re acquired minimum distributions. Have been pushed back.

Used to be, remember it was 70 and a half. Yeah. That you had to do that. Mm-hmm. Um, and you also were able to, um, take that, your requirement and distribution over a, a lifetime. So a much longer timeframe. Now, um, if you’re born in 1960 or later. You don’t, you don’t have to take your required minimum distribution to your 75.

Everybody still has to take it at 73, so that gives more time for your accounts to grow tax deferred, which means when you have to take the money out, it could be higher, which is ordinary income, thus forcing you into a higher tax bracket. And there’s another tax planning aspect, which is, could be a whole nother podcast bell.

And that’s the inherited IRAs. That go to the children, because now they have to take it out in 10 years. Oh, so you wanna kind of plan this out because if you die and your child is in an extremely high tax bracket, [00:04:00] they’re gonna have to pay this over, you know, 10 years and pay more in taxes. So there’s a lot of different, lot of different reasons why this is happening.

[00:04:08] Bill Tucker: Yeah, this is actually fascinating and a little bit disturbing, which is, which is probably a good thing we’re discussing about this. And, and if people are listening to this, this might be a reason for you to reach out to Larry as a matter of fact. So let’s start walking through these unique tax challenges and, and how you can help us.

Navigate them and, and get through them.

[00:04:29] Larry Heller: Yep. So these large balances that I was talking about in your retirement accounts means that you can be in a much higher tax bracket. Yeah. And when you’re in a much higher tax bracket, obviously you’re paying more taxes. So what can you do about that? We’ll get into some of the things that you could do, but a lot of times people come to us, you know, later and it’s too late.

They’re already taking the require minimum distributions, and now they’re paying all these taxes and there’s some things you could do, but really not a lot at that time. So just going back and looking at the all [00:05:00] the different sources. Mm-hmm. At retirement. That, you know, high net worth individuals can have, you have your taxable accounts.

That means that’s not your IRA 401k plans, right? Those have, um, income potential and if your taxable accounts, a lot of you have had the pleasure of your accounts going. Up in value. So now if you wanna sell some of those to use that, you have to pay capital gain taxes. So that’s another reason there. Um, and then you have the pre-retirement balances, what we’re talking about, the retirement accounts, the 401k mm-hmm.

That you haven’t paid any taxes on. So you take that out, that’s ordinary income. And social security, um, that adds another source in there. Are you working part-time? Um, do you have any real estate or business income is in there? Did you deferred some compensation from a younger age? Some people have these annuities and annuities are not very tax friendly when you want to take money out of retirement.

So when you add all that up. There could be a lot [00:06:00] of income that’s taxable. So the proactive planning is more critical as ever, and the earlier that you start thinking about it, which accounts had to do to how to minimize this could save you hundreds and sometimes millions of dollars.

[00:06:15] Bill Tucker: Wow. So how do I decide, or how does a person decide which accounts you draw down first?

I mean. Do you do that or,

[00:06:24] Larry Heller: yeah, so I mean, it, it’s a big puzzle and not everyone’s a little bit different and really depends upon what your income is when you’re retiring. If you are ti, if you’re retiring at 65 and you, we just said your requirement distribution may not be to 75, you may not be taking your social security age 67.

Um, you may be in a low, very low tax bracket in those years. So you may actually want to take some money out of your retirement accounts in early years, you may not. You may wanna do some Roth conversions. A lot of different things that you can do. So, [00:07:00] but you really wanna kinda look at projecting your income year by year.

And most accountants aren’t doing that. They’re looking at the one year, but what you wanna look at your projected income from the day you’re gonna retire. All the way through your acquired minimum distributions, and you wanna start planning on that before you retire.

[00:07:17] Bill Tucker: Wow. So. Oh man, this is bad. So you made a lot of money.

You got a lot of money. Let’s, let’s talk about 4 0 1 Ks for a moment. Um, you mentioned that you could maybe do a Roth Roth conversion when you’re at 65, but what if you’re like 70, 72 and you’re on, you’re not yet taking the required minimum, but can you do a Roth at that point?

[00:07:40] Larry Heller: You could. You could absolutely do that.

And a lot of times we, we, we do do that, but at, at that particular time. You wanna look at your, how is that gonna impact, um, your health, you know, health insurance. So we’ll get into some of those different things that it can, can do that. But yeah, there are different times that you, you can do that. So, you know, how do you do that at, [00:08:00] at that point you’re taking social security that can have an impact on it.

Still make, make, make sense? Yeah. So, you know, there’s a lot of different mistakes that people make and you know, one of them is also assuming that. Tax rates are gonna be the same later on. I mean, we, believe it or not, we still have historically low tax rates. Mm-hmm. Um, who knows where the next, um, you, the, the next congress and if, if it’s democratic owed, do tax rates go up, um, to make up for some, make up for some of the shortfalls in social security of some other item.

Um, so that’s one of the biggest mistakes that people make, and they think they’re gonna be in a lower bracket, and they’re not assuming that maybe rates can be higher.

[00:08:43] Bill Tucker: You know, I’ve also heard Larry and I have a friend of mine who helps, uh, people with their taxes. It’s a volunteer position. These are, these are people typically with, with not great amounts of income, but he will occasionally run across people who have taken withdrawals from their [00:09:00] accounts.

Have not taken any taxes. They’ve given it no consideration at all, uh, when they do that. And, and, and it seems, I was shocked, but that seems to be a fairly common kind of mistake people make.

[00:09:13] Larry Heller: Yeah. You know that, that’s a great point, that when you start taking your money out. From some of these retirement accounts, the government’s gonna want their piece,

[00:09:20] Bill Tucker: don’t

[00:09:21] Larry Heller: they?

So I’ll, I’ll

[00:09:22] Bill Tucker: always,

[00:09:22] Larry Heller: yep. So a lot of times what we do is we withhold the taxes right out of the requirement and distribution, send that to the government, get outta the way, but you don’t always have to do that as long as you pay an estimate. So there’s two different ways of doing it, but planning for it is kind of one of the, like you just said, is one of the biggest mistakes that people pay.

They don’t understand the withdrawal impact, uh, from that.

[00:09:44] Bill Tucker: What are, I mean, this does raise an interesting conundrum because you were right. You mentioned up at the top. Most of us when we look at our portfolios, are thinking about what’s my rate of return? How am I doing, where am I going on all of this?

But it’s, it, it seems to be a double-edged sword if I’m doing really [00:10:00] well and I’d say that pre-tax account that, that, that seems like it could really hurt me when it comes to tax time, as it were.

[00:10:08] Larry Heller: Yeah. I mean, it, it could, but it could also help because it’s growing tax deferred. Yeah. So, uh, so you could be making much more money then realizing you are gonna have to do that.

But that’s where, you know, some of these mistakes have that you’re waiting too long to address the required minimum distribution. Maybe you should have pulled some of that money out when you are on a lower bracket. So now when you’re making more of that, now you, it may be subject to capital gain tax rather than ordinary income tax.

So really planning for that, deciding what investments go in what vehicle. So maybe in the. You know, we have clients that have some re pre um, deferral tax accounts. Some may have some Roth, so we could be more aggressive in maybe the Roth account. ’cause if you pull that out, you don’t have to pay any taxes and you can be less aggressive with your safer part in your pre deferral.

So how you invest [00:11:00] each one of these accounts is also kind of another impact than here and what to do.

[00:11:04] Bill Tucker: So basically before we move on here, what I’m getting the, the early message I’m getting from you, Larry, is that tax planning is not a once a year kind of thing. It sounds like an ongoing thing throughout the year.

[00:11:18] Larry Heller: And it’s not really something that almost all accounts really focus in on. So it’s really a good wealth planner, a good wealth manager, not just one who just does the investments, but who’s managing and looking at your holistic, whole, entire plan and seeing how you can minimize your taxes is so critical.

If you have a large account, a larger. Retirement account as you get up there and start to think about your retirement years.

[00:11:44] Bill Tucker: Yeah. And listen, before we go any further, I just wanna mention for those of you who are listening, that there will be a takeaway, a summary on tax planning and retirement. And you can find in the download link in the episode description below.

So don’t, don’t feel like, don’t feel anxious, don’t feel like you’ve gotta [00:12:00] remember all of this stuff. There is a summary, a takeaway that you can access after the podcast so that, that said. What do we do here? A, a tax, retirement tax planning, it seems you’re saying is about. Control. I would think that it should be about minimization as well, but I, I don’t know.

You know, taxes don’t ever seem to be, don’t ever really, ever seem to be minimized too much,

[00:12:29] Larry Heller: right? So what I’m, what, what that really means is, you know, controlling all the different levers, controlling which accounts you were drawing, were drawing fund, knowing how much money you need to live on, making sure that you, you know, pay your taxes.

So there are things, those are the things that you can control now, you’re not gonna be able to. Eliminate taxes. Right. We wanna minimize taxes. Yeah. But you know what, but if you don’t do it right, or at least poor planning can cause unnecessary income spikes. Mm. In one year to the next. So, [00:13:00] and people always, this is, this is one that happens all the time when I talk to people.

They have a, you know, a, a bigger year they have to pay more taxes so their income is higher, and now they’re. Medicare supplement surcharges go up and they could be a lot. So, and that’s based upon your income from two years ago. So now all of a sudden they get a bill for their new supplemental insurance and it’s, you know, it’s, it’s up a couple hundred dollars a month and it can be up almost $850 a month.

So that’s one thing, not, again, you don’t wanna let that drive your decisions. But it’s something that you should know and you can trigger, because if you could adjust your income to take a little bit over different years and keep you below some of those thresholds, you’re gonna save money on your, on your Medicare assurance.

So again, that’s another factor that has to be put in this big puzzle with everything else.

[00:13:55] Bill Tucker: Okay.

[00:13:55] Larry Heller: So

[00:13:57] Bill Tucker: see, these are, these are problems, Larry. [00:14:00] These

[00:14:00] Larry Heller: are problems. Yeah, they, these, I mean, they’re good problems to have that Oh yeah. Means you have a good, you know, good amount of money, but. It also means that you, you really wanna have somebody that.

Knows what they’re doing to guide you through this situation, to, you know, to minimize that. I mean, we had a client, we had a new client come in to us and he was 74 years old and so he was already taking his required minimum distributions. Yeah. Um, and when I started talking to him, you know, when did you retire?

Oh, I retired, you know, 12 years ago. And I’m thinking, Hmm. You know, he was managing his own money. Yep. Um, he had one financial person that was just helping him with investments, but he had years and years, or a very low tax bracket and he made some great investments in his IRA and his IRA now is multimillions of dollars, and now we’re.

Stuck with that.

[00:14:52] Bill Tucker: Yeah,

[00:14:52] Larry Heller: it’s too late. We can’t go back in time to figure out some of these strategies. Um, so you feel bad that, hey, if he would’ve [00:15:00] had some better advice, he could have saved hundreds of thousands of dollars and now we’re stuck with higher withdrawals, higher Medicare, uh, PA payments. Um, if he passes away, he’s, he’s already a widow.

So now when he passes his away. His kids account are gonna get it over 10 years. If we could have done some planning early on, we could have definitely minimized a lot of this taxes.

[00:15:22] Bill Tucker: Is there any planning you could do with the, the required minimum distributions? Is there any any way you can take that income and, and, and help that in terms of, of retirement planning?

In managing.

[00:15:31] Larry Heller: Yeah, I mean, there are a few things you could do if you’re, you know, if you’re charitable, charitable inclined,

[00:15:36] Bill Tucker: yeah.

[00:15:36] Larry Heller: You can do what, what’s called A-A-Q-C-D called charitable deduction and take it, you know, out of there to lower your, you know, to lower your income along those lines. So that’s one thing that you can do along, but it’s very difficult to really lower the, the, the taxable income.

But that’s one thing that comes from, you know, but again. You’re lowering taxes, but you’re giving away the mon, you’re giving away the money to charity. [00:16:00] But if you’re doing charity outside, so that, I mean, when we get new clients, we’re looking at the tax returns and if we see, hey, you’re giving cash outside.

There may be, besides the qualified child deductions through your, um, IRA distributions mm-hmm. Or other ways of doing charity that can help the charities, but also minimize your taxes. That’s another whole podcast that will

[00:16:24] Bill Tucker: Oh yeah. No, that’s a good one. I like that one. I schedule that next Larry, as a matter of fact, so, so the goal here is you wanna better be able to manage your income on a yearly basis, right?

You wanna. Yep. Fewer tax surprises.

[00:16:41] Larry Heller: Absolutely. Yeah. You want to be, you know, you want to, you know, look at this each year so you can, you know, maximize what you’re getting and minimize the taxes. So, um, so, you know, planning, you know, your expenses from year to year, or if you’re planning on doing [00:17:00] a big trip or a big party and you want to know, trying to, instead of waiting for that one year and taking it all out at once, you may wanna.

Take it a little bit out each year. So, you know, so, so planning, coordinating that, trying to think ahead and doing that. Um, it, it, it can help. And those are some of the proactive, you know, the proactive things that you can, you know, that you can do in do in retirement. Um, you know, the, the Roth conversions that we, you know, that, that we.

You know, just briefly mention right, that, um, you know, that, that you may want to do or taking out. People always think I’m gonna take out my taxable accounts first, leave my retirement accounts later ’cause I don’t have to take my minimum distributions. And that may not be the case. You may wanna take some outta your retirement accounts first.

So, uh, you know, so all those different things and, and, and how to plan for that are all different strategies. And you know, like I said before. The, the, the most effective planning starts [00:18:00] before retirement. Um, yeah. So, but looking ahead, your pre-tax income, you know, the, the great thing now. Computers. I mean, I’m gonna age myself a little bit, but you know, a long time ago you had to do this manually.

Right now with computers, we can figure out based upon your year by year expenses, a year by year income, the taxes required, what tax bracket you’re gonna be in now. Project a, a little growth and look at the tax brackets every year of your life going forward. Wow. So when you start to do that, now you can say, huh, like these two years I’m in really low bracket.

Um, how much you know else can I take out? Or how much of a Roth conversion should I do? So by looking at that and planning for that really helps and how to make these decisions in, in retirement.

[00:18:49] Bill Tucker: Yeah. Wow. You know? This is, this is pretty, pretty good stuff. And again, for those of you listening, the takeaway, the summary is going to be [00:19:00] in the show notes.

So if any of this, you wanna go back and look, check against it or make sure you’re in good shape, go check the notes and go check it later. Yeah. Roth Roth Retirement. I, I’m not gonna ask you any more questions about Roth accounts because that is an entire pro podcast, and I know if you’ve done other podcasts talking about Roth retirement accounts.

So let’s, let’s go on into giving. Our listeners today, your verbal takeaways in terms of what they need to be thinking about and being aware of.

[00:19:32] Larry Heller: Yeah, so for most people, retirement is not gonna be a low tax phase of life. So, uh, so plan ahead. Um, and like I mentioned before, taxes influence income. They influence healthcare costs, and the portfolio could influence the longevity of your assets because a lot of people think in their retirement accounts, they may have.

$4 million, but they don’t really have $4 million because they haven’t paid taxes on it yet.

[00:19:58] Bill Tucker: Yeah.

[00:19:58] Larry Heller: So, uh, [00:20:00] so how much that and how long that’s gonna last and, you know, thoughtfully, tax planning helps you stay in control. It’s when you have a plan, you just feel so much, feel so much better. Most clients or prospects, when they come in and we start doing this, they’re spending less than they can because they’re worried about.

Running outta money, right? Or they’re running about spending too much, and in, in theory, they can spend more. So once you know what your taxes are, what your expenses are, you can actually feel a little bit more comfortable, less anxiety, and really enjoy your retirement more so the most successful retirements are well-planned retirement plans and well-planned retirement plans from a tax perspective.

[00:20:46] Bill Tucker: Absolutely. And that seems like a good place we could end it today. And listeners, thank you for listening to Retirement Unlocked. If today’s episode helped you think differently about taxes and retirement, and I hope they did instead, and [00:21:00] think about why proactive planning matters, please like, subscribe and share this with someone who could benefit one, help understanding how taxes affect your retirement income, healthcare cost, and long-term goals.

Check the episode description for resources and a link to schedule a complimentary 20 minute call with the team at Heller Wealth Management. Better tax planning leads to better control. We’ll see you next time on Retirement Unlocked.