Jennifer and Mike explore how careful tax planning during retirement can save you money. Learn about the benefits of Roth conversions and taking capital gains during low-income years, and how to avoid costly Medicare premiums. Don’t miss out on these essential tax planning opportunities!
MORE HELPFUL LINKS
Summit Webinar – How Tax Planning Changes Through the Four Stages of Retirement
Jennifer’s recent article on Navigating Taxes in Retirement
Want to chat more? We’re always here!
VIDEO TRANSCRIPT: Maximizing Your Retirement Income: Tax Planning Strategies You Need to Know!
MIKE
Hello, hello! Welcome back to another video with Mike and Jennifer talking about –
JENNIFER
Sounds like a morning show.
MIKE
I know. Yeah. Talking about different financial topics, and we’ve got one today that I personally really like talking about.
JENNIFER
You do.
MIKE
Because it takes a lot of strategy and kind of thinking through and just being smart with what’s already in place, you know? It’s not necessarily forcing action on a client’s part. It’s something that we can do to potentially make some savings here
JENNIFER
Using tool two very cool tools.
MIKE
Yes.
JENNIFER
To come to the right answer. Yeah.
MIKE
Yeah. So, the idea, kind of today’s topic is navigating taxes in retirement. And that alone is a very broad topic.
JENNIFER
Yes.
MIKE
There’s lots of different ways that you can go about that. What we want to talk about and focus on today is specifically two different strategies that can really have a very big impact from a tax perspective and oftentimes very specific years. So, there’s this period that retirees will retire and they’ll stop their employment income so they don’t have income from their career or their job anymore, and maybe haven’t quite tripped into filing for Social Security or needing to take money out of an IRA. So, we reached that that required minimum distribution age, which right now is different for different people depending on their age. But depending on when that starts, there’s potentially a window where you’re not forced to recognize any income or at least very low income. So, there’s a couple of strategies that kind of pop out in that opportunity.
Retirement Strategies – Roth Conversions
The first one we want to talk about is Roth conversions. This is one where you’re essentially taking money from a traditional IRA and converting it over to a Roth IRA. A lot of people probably heard of a Roth account or at least heard the term “IRA.” The traditional side is where you’re putting money in and it’s tax deferred. You’re not paying taxes on it today, you potentially get a tax deduction if it’s coming directly from your paycheck into a 401k. That works very similar to an IRA. You’re not paying income taxes on that money that you earned when you put that money in to start saving. You can invest. It’s going to grow. That whole treatment is called tax deferred. The contributions to an IRA are tax-deductible so you can deduct that from your taxes. A really great tool and vehicle to be able to save money. A Roth is similarly — and this can potentially add some confusion, but it’s similarly tax deferred, meaning as that money’s growing, you’re not paying taxes. But one really big difference with that is when you do pay the income taxes on it, it’s up front in a Roth. You pay it when the money goes in and then you don’t later when you go to take it out, on the money that you put in or the growth on all of that. The Roth is completely tax-free in the future if you pay it today. So, this conversion strategy is taking money from the IRA or potentially the 401K and converting it to a Roth. Now, what that’s kind of forcing is this what we just got through saying is, you have this opportunity where you’re not claiming income, your taxes can be very low, and now we’re giving you a strategy that’s kind of forcing that income, but it’s for that exact reason. if we’re in this place where we’ve got low taxes, you’re in a low tax bracket, you’ve got an opportunity to move money from a taxable vehicle, that when you go to pull that money out of your IRA or your 401k, you’ll have to pay taxes on it, to say, “Hey, you know what? This year, I’m paying very little in taxes. I’m going to be in a low tax bracket, let me go ahead and move a whole bunch of this money over to a Roth account now, pay the taxes at those lower rates” so that later you can pull that money out. It can continue to grow, and it’ll continue to be tax-free.
JENNIFER
Yeah. Because the amount you take out of the traditional IRA or 401K is added to your tax return as income, so that’s how you end up paying taxes on it. But if you’re not in the 22% bracket because you’re not working, you might be in the 12% bracket, so there’s a really nice opportunity to pay much lower taxes than you would later when you’ve got Social Security and maybe pension income and required distributions that push you back into the higher tax brackets. Yeah. But there’s lots of reasons why you would want to do a Roth conversion.
MIKE
Yeah.
JENNIFER
There’s really kind of two main ones. Right?
MIKE
Yeah. One is that kind of growth, that you can grow those assets and you’re not going to pay taxes on any of that money. There’s a couple of small, weird ones. I mean, we won’t get into the details specifically, but the widows penalty, there’s this weird period that often a lot of married couples will experience because, just statistically, somebody’s going to pass away before the other. And in the years that one spouse is left, tax brackets are really crunched because you’re not filing any longer in a married filing status.
JENNIFER
You hit the high brackets a lot faster. A lot faster.
MIKE
Yeah. So, that’s one big reason this Roth treatment continues to heirs as well. So, inheriting these assets –
JENNIFER
It’s very valuable to your heirs.
MIKE
Yeah. I think right now there’s still a required minimum distribution on inherited Roth accounts.
JENNIFER
There is.
MIKE
But even the forced taking that money out, unlike other required minimum distributions, there’s still no tax on that. So, when the when the kids or any kind of heirs inherit those Roth accounts, you’ve got future tax distributions that are tax-free, essentially.
JENNIFER
Yeah. For sure. And it makes the most sense if you are in that lower bracket and that the money can stay in the Roth IRA for several years to grow because, you know, that’s the really big bang for your buck is a tax-free growth.
MIKE
Yeah. I actually I had a conversation with a friend, just two days ago at church, and he had mentioned – he just knows I’m a financial advisor and he works with a separate financial advisor, and he said, “Oh yeah, so my financial advisor just called me and we’ve got to look at reducing the amount of stocks in my Roth account.” And he’s just recently retired. And my first thought was “I don’t know if you want to do that.”
JENNIFER
Yeah. It’s the best place for growth.
MIKE
That’s right. Yeah. Leave that exposure there, maybe be more conservative in other accounts if we can. But you know, full disclosure, I don’t know his full picture so maybe that was the right strategy for him, but —
JENNIFER
Who knows? Yeah.
Retirement Strategies – Capital Gains
JENNIFER
The other main strategy is sometimes when you have years with little or no income, you can take advantage of a capital gain strategy. So, if you have owned a security — often for many years is when this applies. It’s rare to get this big of a growth period in a short period of time, but if you bought a stock or a mutual fund years ago and it’s increased greatly in value, if you sell that under normal circumstances, if the sale proceeds go — well actually, the growth goes into your tax return. So, if you bought something for ten dollars and sold it for a hundred, that ninety dollars goes into your tax return. And normally, capital gains rates are 15%. For most people, they’re 15% which is lower than most people’s income tax rates, so it’s still a better deal than paying income tax on them. However, there is a window where you might pay 0% tax on there. I’ve got to flip over and look at my actual numbers. So, if your income is $89,249 or less in 2023 as a married couple, you would pay zero percent income on that gain. So, looking at that strategy can be super valuable because those are funds you could probably use to support your spending during retirement. The brackets are different depending on if you’re single, which is much lower of course, but it is a really good opportunity. The real key here is, you’ve got to look at both of these strategies together, because if both might apply to you, sometimes one will negate the other. If you push your income high enough with a Roth conversion, you’re not going to get the 0% tax treatment on the capital gain.
MIKE
Or vice versa. Yeah.
JENNIFER
So, you’ve got to look at them together.
MIKE
It’s weird that it’s completely different tax treatment, capital gains versus ordinary income would be taxed as income, but they both kind of push that income number higher.
JENNIFER
They do.
MIKE
So, if you do one, the other doesn’t make sense and vice versa.
JENNIFER
So, it’s measuring the impact on your longer term plans, which one’s the better decision.
Retirement Strategies – IRMAA
JENNIFER
There’s also a third kind of factor in play here when you’re looking at these strategies and you’re forcing income, more through the Roth conversion, but sometimes you’re potentially taking capital gains and paying 15%, and that will matter with this as well. It really only applies to people who are age 65 and older and who are on Medicare. So, Medicare is not free. Everyone pays a monthly premium for it. So, Part B is your doctor coverage, Part A is hospital. There’s no separate premium for that, but for doctor visits, that’s Part B. In 2023, you pay $164.90 a month per person. Then for Part D, which is basic drug coverage, you pay $43 a month, which is, compared to private insurance, quite a deal, actually. It’s not bad. But there can be a potential gotcha here if you push your income too high. And Sometimes you have no control over this, but you’ve got to look at the Roth conversions and the capital gains in light of this, because you need to look at what your modified adjusted gross income is for that for that year. It can trip something what we call IRMAA, which is I-R-M-A-A, income related monthly adjusted amount. And if your income goes high enough, you can pay quite a bit more per month per person. So, for a married couple, if you trip it, you trip it for both of them. So, for example, if your income is $246,000 a year or more, you could pay $330 a month for Part B and an extra – actually, the number is wrong. That Part D number is up a bit more. It’s showing me the wrong number here. So, what happens if you file your 2023 taxes, in 2025, they will increase your Medicare premium. So, you don’t always feel it immediately. But we’ve definitely seen people get surprised by that. So, when we do tax planning, we look at the impact on IRMAA as well. We had this great strategy for this one person one time, doing Roth conversions. It made so much sense from an income tax perspective over the long run, but then when we looked at how it impacted their monthly premiums for Medicare, then it negated almost all the tax savings that would have happened.
MIKE
Yeah.
JENNIFER
So, you’ve got to look at all the moving parts with all this.
MIKE
Yeah. There’s a pretty cool tool that we use in kind of illustrating a Roth conversion, and then it shows what your lifetime savings and taxes is projected to be, sometimes tens of thousands of dollars. However, tens of thousands of dollars is sometimes completely negated by this. Which, at $330, doesn’t seem like a lot, but that’s just the Part B. There’s the additional Part D, which is I think about another $30.
JENNIFER
Yeah, something like that.
MIKE
So, another handful. But that’s per person and per month. Yeah. So, your Medicare premiums are on the tax return between both of you, but that additional premium which comes right out of your Social Security, the Part B, is again per month and for both of you.
JENNIFER
Yeah.
MIKE
So, if this Roth conversion strategy, which oftentimes is, we’re going to do this over the next several years, that premium stays there for several years and can oftentimes easily, you know, get into the thousands, tens of thousands of additional dollars. Now, you do run the possibility that, because we have this same potential, I guess, penalty, this IRMAA that you could possibly trip into when you get to RMD age.
JENNIFER
Yeah.
MIKE
So, we have the possibility that by doing this, accepting this additional premium early, we’re kind of planning against the potential IRMAA hit later in life as well. But that’s a kind of a risk you’re taking.
JENNIFER
It is.
MIKE
You’re accepting the cost early with the hope that it won’t be there later.
JENNIFER
Yeah, exactly. So, that is a complex topic, even though the kind of rules are easy to follow, but it is very individualized and very complex as to what you’ve got to look at, all those factors. But it’s definitely worth looking at closely, because there are those situations where when you look at changes in brackets over time, people do save a significant amount of taxes in their retirement years.
MIKE
I want to just reference, we did a webinar. I actually don’t remember, was that last year? Was that 2022?
JENNIFER
It was 2022.
MIKE
So, strategy-wise, very similar in useful information, but numbers-wise, probably outdated at this point, but good info. We’ll link to that webinar. It was a little bit more in depth on tax planning and retirement. It was called “The Four Stages of Taxes in Retirement,” I think. Something like that. And it kind of talked about how you have these initial Go-Go and the Slow-Go in there. Check that out. That’s got some more detail, and we’ll get into it. At some point, we’ve got to do a video on more detailed Roth strategies. I keep thinking about that. That’s maybe more during working years of getting money into a Roth, if it makes sense, when it makes sense.
JENNIFER
Yeah. Sometimes it makes more sense than others. Yeah. So, thank you for listening. I’m not sure what the next one’s going to be.
MIKE
We’ll see.
JENNIFER
We’ll talk to you soon. Thanks!
MIKE
Thanks!
