Year-end tax planning, tax moves in 2026, Roth conversions & more: Cody Garrett, CFP® & Sean Mullaney, CPA; Jon Luskin, CFP® hosts

Episode Transcript
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And they happen to be at the top of the well with a rope, and they're like, I'm the only one who can save you. 3 00:00:17,968.619164114 --> 00:00:22,888.619164113 Let's talk a little bit more about some of these maybe overblown tax considerations. 4 00:00:23,98.619164113 --> 00:00:32,328.619164113 I really like in the book how you frame Irma, for example, as a nuisance tax, right? This is a small percent of attacks on your wealth when you look at the numbers, when you break it down. 5 00:00:32,588.619164113 --> 00:00:36,8.619164113 The widow will have a less tax efficient situation. 6 00:00:36,58.619164113 --> 00:00:37,258.619164113 You gotta look at the numbers. 7 00:00:37,648.619164113 --> 00:00:39,808.619164113 And there are other tools in the toolbox. 8 00:00:39,808.619164113 --> 00:00:42,838.619164113 Qualified charitable distributions can attack the problem. 9 00:00:43,18.619164113 --> 00:00:50,18.619164113 Something called asset location where we hold all our taxable bonds in our 401k or IRA that can help attack the problem. 10 00:00:50,328.619164113 --> 00:01:05,507.306002239 Your own living expenses, right? One thing to keep in mind for all the worry about RMDs, Welcome to the 89th Vocal Heads on Investing podcast. 11 00:01:06,62.306002239 --> 00:01:11,72.306002239 My guests are Sean Mullaney and Cody Garrett will be talking tax planning in this episode. 12 00:01:11,192.306002239 --> 00:01:22,22.306002239 If you haven't already, be sure to subscribe to this podcast on your platform of choice, and if you're not already, be sure to check us out on YouTube where you can see the whole conversation on video. 13 00:01:22,988.463090347 --> 00:01:26,228.463090347 let's talk about some zero hour tax planning for 2025. 14 00:01:26,408.463090347 --> 00:01:32,528.463090347 Making a big one-time contribution to a donor-advised fund before we have some tax law changes next year. 15 00:01:32,597.114442634 --> 00:01:38,357.114442634 And for folks who do want a nerd out on that a little bit more, we did talk about this with Ed slot on episode 85. 16 00:01:38,357.114442634 --> 00:01:39,407.114442634 I'll link to that in the show notes. 17 00:01:39,737.114442634 --> 00:01:46,701.24400804 Uh, Cody and Sean, what are your thoughts? Uh, is this something that folks need to be thinking about and, and acting on, you know, this late in the game? Yeah. 18 00:01:46,701.24400804 --> 00:01:47,481.24400804 I'll mention that. 19 00:01:47,511.24400804 --> 00:01:55,641.24400804 Um, a lot of people are on social media right now saying, Hey, giving money to charity, even if you get a deduction, you still end up with less money at the end of the day. 20 00:01:55,881.24400804 --> 00:02:02,826.32381621 So I first wanted to like clarify that like, you're only gonna do these tax optimized charitable tactics if you're already planning to give to charity anyway. 21 00:02:03,276.32381621 --> 00:02:08,976.32381621 Right? So this is the idea of next year, there's a little haircut on itemized deductions when given to charity. 22 00:02:09,187.93935616 --> 00:02:13,858.56750209 and there's also a next year there's a non itemizes deduction, for charitable gifts. 23 00:02:13,858.56750209 --> 00:02:14,398.56750209 It's limited. 24 00:02:14,398.56750209 --> 00:02:18,928.56750209 But, um, yeah, it's the idea that, hey, since you're not limited, there's no haircut in 2025. 25 00:02:18,928.56750209 --> 00:02:28,348.56750209 If you're listening to this at the very end of the year, then you have an opportunity to potentially stack those, you know, multiple years of contributions, for example, that you're gonna give to your church, other charities. 26 00:02:29,278.56750209 --> 00:02:32,818.56750209 Those, maybe give appreciated securities from a taxable brokerage account. 27 00:02:33,88.56750209 --> 00:02:34,948.56750209 Maybe put those in a donor-advised fund. 28 00:02:34,948.56750209 --> 00:02:44,278.56750209 That way you can put, let's say, multiple years worth of giving and a donor-advised fund, and then give to your church or charity over time rather than giving up a gift all at once. 29 00:02:44,518.56750209 --> 00:02:53,548.56750209 So, I mean, you can, you can still give your gift over time, but why not add some tax optimization to it by getting maybe the full deduction this year for that, uh, being able to itemize those deductions. 30 00:02:53,668.56750209 --> 00:02:58,498.56750209 The next year, possibly take advantage of the non itemizes charitable contributions. 31 00:02:58,706.58894085 --> 00:03:02,966.58894085 We love donating the appreciated securities because essentially you get two big tax breaks. 32 00:03:02,996.58894085 --> 00:03:05,216.58894085 One, you get the upfront tax deduction. 33 00:03:05,576.58894085 --> 00:03:12,56.58894085 And two, the capital gain in those appreciate securities gets washed away by a donor advised fund contribution. 34 00:03:12,926.58894085 --> 00:03:26,486.58894085 Probably not gonna be likely, although check the relevant, uh, deadlines, is going from institution a's mutual fund or ETF or other, you know, brokerage account into institution B's donor-advised fund. 35 00:03:26,726.58894085 --> 00:03:36,416.58894085 When we're crossing the streams in terms of institutions, oftentimes, at least what I've seen in the past is they want that done by November to be counted for the end of the year. 36 00:03:36,866.58894085 --> 00:03:40,916.58894085 The other thing you could think about is cash, right? It's not illegal. 37 00:03:40,946.58894085 --> 00:03:54,986.58894085 And it might still be a very good idea to donate a bunch of cash this year, get the higher deduction this year, and then you have that donor-advised fund out of which to donate in the future and combine that with the high standard deduction. 38 00:03:55,144.88674965 --> 00:04:00,304.88674965 I'll just throw in, uh, one thing as we think about year end, which is actually executing. 39 00:04:00,754.88674965 --> 00:04:09,454.88674965 So if you're listening to this in early December, uh, you want to go to the particular donor-advised funds, uh, website. 40 00:04:09,454.88674965 --> 00:04:13,354.88674965 They usually have a list of deadlines it's sort of very interesting. 41 00:04:13,804.88674965 --> 00:04:21,4.88674965 If you're going same institution to their donor-advised fund, you tend to have more time if you're thinking about the appreciated securities. 42 00:04:21,4.88674965 --> 00:04:32,936.42151559 donor revised fund planning can be very impactful and 25 vis-a-vis 26 25 could be very impactful because of this upcoming starting in 20 26, 0 0.5% 43 00:04:33,296.42151559 --> 00:04:37,351.42151559 of income haircut, that itemized charitable deductions are gonna start getting. 44 00:04:37,992.78324598 --> 00:04:38,592.78324598 Yeah, that's right. 45 00:04:38,592.78324598 --> 00:04:46,182.78324598 I'm gonna quickly add here that most American taxpayers will still take the significant standard deductions in 2025 and 2026. 46 00:04:46,512.78324598 --> 00:04:54,342.78324598 With that said, there's a new, instead of $10,000 cap on state and local taxes as an itemized deduction, that's capped now at 40,000. 47 00:04:54,702.78324598 --> 00:04:58,92.78324598 So especially if you're doing these charitable contributions, it might go even further. 48 00:04:58,362.78324598 --> 00:05:00,912.78324598 Let's say you have some really high property taxes, et cetera. 49 00:05:01,152.78324598 --> 00:05:02,922.78324598 You might be able to go above that. 50 00:05:03,132.78324598 --> 00:05:06,852.78324598 What was a $10,000 cap? You know, in between, you know, 10 to 40,000. 51 00:05:06,930.26517117 --> 00:05:10,710.26517117 There is a threshold on income, but it's very high, around 500,000. 52 00:05:11,100.26517117 --> 00:05:14,280.44723883 Reducing that 40,000 potentially all the way back down to 10,000. 53 00:05:14,580.44723883 --> 00:05:22,579.01168244 But most, people listening to this thinking about itemizing their deductions will want to take advantage of that cap that's been increased in 2025 and moving forward. 54 00:05:22,741.99640419 --> 00:05:27,451.99640419 So more provisions of the one big beautiful bill act are gonna be enforced for 2026. 55 00:05:27,811.99640419 --> 00:05:33,20.64452663 What should folks be thinking about for tax planning in the years ahead? I'll give you two. 56 00:05:33,80.64452663 --> 00:05:35,420.64452663 One for the retirees in the audience. 57 00:05:35,420.64452663 --> 00:05:40,250.64452663 And two is for the higher income accumulators in the audience. 58 00:05:40,610.64452663 --> 00:05:44,990.64452663 So for the retirees, there's this new senior deduction. 59 00:05:44,990.64452663 --> 00:05:56,720.64452663 If you're 65 or older, by year end, it's a $6,000 or up to, I should say, $6,000 per person deduction against your income on your tax return. 60 00:05:57,20.64452663 --> 00:06:00,80.64452663 It can be very powerful from a planning perspective. 61 00:06:00,290.64452663 --> 00:06:02,690.64452663 Now it is subject to some phase outs. 62 00:06:02,690.64452663 --> 00:06:05,330.64452663 The phase outs are very generous for married couples. 63 00:06:05,660.64452663 --> 00:06:11,0.64452663 It phases out between 150,000 of income and 250,000 of income. 64 00:06:11,330.64452663 --> 00:06:13,430.64452663 For singles, it's less generous. 65 00:06:13,430.64452663 --> 00:06:18,680.64452663 It phases out between 75,000 of income and 175,000 of income. 66 00:06:19,790.64452663 --> 00:06:26,30.64452663 Controlling income when we're in or 65 or older, is going to become more and more important. 67 00:06:26,840.64452663 --> 00:06:29,630.64452663 things I like to think about in that regard. 68 00:06:29,630.64452663 --> 00:06:32,870.64452663 One is delaying, claiming social security. 69 00:06:33,320.64452663 --> 00:06:42,80.64452663 I think this new deduction, this new senior deduction of 6,000 per person, I think that's something to really strongly consider delaying your social security. 70 00:06:42,440.64452663 --> 00:06:53,630.64452663 Also, think about where do I hold my bonds? Do I really want to do a non-qualified annuity? There are other things on the table where folks can control their income on their tax return when they're in retirement. 71 00:06:53,630.64452663 --> 00:06:55,580.64452663 So that's one thing to be thinking about. 72 00:06:55,580.64452663 --> 00:06:57,560.64452663 Now, that is quote unquote temporary. 73 00:06:57,860.64452663 --> 00:06:59,90.64452663 It's only for four years. 74 00:06:59,90.64452663 --> 00:07:01,340.64452663 But I suspect that may get extended in the future. 75 00:07:01,340.64452663 --> 00:07:02,420.64452663 Different conversation. 76 00:07:03,230.64452663 --> 00:07:07,220.64452663 In terms of our accumulators, this is not a one big beautiful bill change. 77 00:07:07,220.64452663 --> 00:07:08,960.64452663 This is a secure 2.0 78 00:07:08,960.64452663 --> 00:07:09,470.64452663 change. 79 00:07:09,860.64452663 --> 00:07:27,515.64452663 Starting in 2026, those who had W2 income, I believe the number is 145,000 in the previous year from that employer, are not gonna be able to deduct their catchup contributions to their 401k or other qualified plan. 80 00:07:27,905.64452663 --> 00:07:34,985.64452663 It's gonna be the case that many 50 and older accumulators are in their highest earning years at work. 81 00:07:35,405.64452663 --> 00:07:39,875.64452663 And, so losing the deduction for that catch up contribution is not good news. 82 00:07:40,115.64452663 --> 00:07:49,955.64452663 But one you could still deduct, even if your income's a billion dollars from the W2 job, you could still deduct the regular contribution to the 401k or other qualified plan. 83 00:07:50,105.64452663 --> 00:07:53,499.24220129 And two, all right, you still can make that catch up contribution. 84 00:07:53,499.24220129 --> 00:07:57,759.24220129 It just needs to be in the Roth version of the account, not the worst outcome, far from it. 85 00:07:57,759.24220129 --> 00:08:08,199.24220129 So something to keep in mind for those who are on, on the border, you might want to think about lowering income a little bit, but it can be tough and it's based on your W2 income. 86 00:08:08,619.24220129 --> 00:08:11,769.24220129 So it's not like, oh, I'll make, I'll have some deductions on the side. 87 00:08:11,769.24220129 --> 00:08:15,219.24220129 I mean, things you could think about as one traditional 401k contributions each year. 88 00:08:15,219.24220129 --> 00:08:18,189.24220129 Two is the HSA contribution that could lower income. 89 00:08:18,489.24220129 --> 00:08:22,359.24220129 But a lot of folks are just not gonna be able to do much planning around that particular issue. 90 00:08:23,359.24220129 --> 00:08:29,329.24220129 I've always been a huge fan of delaying social security until age 70 for the longevity management reason. 91 00:08:29,629.24220129 --> 00:08:31,849.24220129 You get that bigger benefit for as long as you live. 92 00:08:31,849.24220129 --> 00:08:34,819.24220129 That can be a helpful way to manage the risk of running outta money. 93 00:08:35,89.24220129 --> 00:08:39,829.24220129 What's nice is there's a little bit of a tax planning bonus with that strategy as well. 94 00:08:39,899.24220129 --> 00:08:46,711.63386856 Cody thoughts on 2026 Tax planning I will say that a lot of people are saying, well, health insurance is gonna be too expensive. 95 00:08:46,711.63386856 --> 00:08:49,891.63386856 There's no way I can possibly retire, especially retire early. 96 00:08:50,111.63386856 --> 00:08:54,491.63386856 in 2025, there's still a nice cushion even if you go above that 400% level. 97 00:08:54,671.63386856 --> 00:08:56,711.63386856 But in 2026, this is a big concern. 98 00:08:56,971.63386856 --> 00:09:03,271.63386856 One thing to keep in mind is that health insurance, including through the marketplace, those premiums change depending on age. 99 00:09:03,621.63386856 --> 00:09:12,501.63386856 Let's say you're retiring at age 50, right? That, that would be, you know, depending on where you live, between 6,000 and $9,000 per year per adult. 100 00:09:13,251.63386856 --> 00:09:17,991.63386856 So if you're a married couple, that might be 12,000 to 18,000 a year in, in premiums. 101 00:09:17,991.63386856 --> 00:09:19,791.63386856 If you're not receiving a premium tax credit. 102 00:09:19,911.63386856 --> 00:09:26,871.63386856 You might add another 3000 to $4,000 per per year, per child 55, that number goes from 6,000 to 8,000. 103 00:09:27,171.63386856 --> 00:09:33,261.63386856 So 8,000 to 11,000 per year, and then 10,000 to $13,000 per year per adult at age 60. 104 00:09:33,532.20244441 --> 00:09:37,12.20244441 Going into 2026, like Sean mentioned, there's some opportunities potentially. 105 00:09:37,312.20244441 --> 00:09:39,652.20244441 To reduce your modified adjuster gross income. 106 00:09:39,922.20244441 --> 00:09:45,612.11912939 One of those is in 2026, all bronze plans through the a CA will be HSA eligible. 107 00:09:45,702.11912939 --> 00:09:55,522.11424698 So making those health savings accounts, contributions, not only save for future qualified health expenses for qualified medical expenses, but those are also deductible above the line. 108 00:09:55,522.11424698 --> 00:09:59,482.11424698 So they, they will count toward that eligibility for those premium tax credits. 109 00:09:59,722.11424698 --> 00:10:02,332.11424698 So a lot of the planning in 2026 is really roundabout. 110 00:10:02,542.11424698 --> 00:10:10,892.11424698 It's saying how can you maintain your desired lifestyle with as little income as possible if you're trying to gain eligibility for those tax credits. 111 00:10:11,132.11424698 --> 00:10:20,612.11424698 But once, once you've met your lifestyle, there might be some additional strategies to increase the tax credit or avoid from going up above that 400% cliff that's likely to continue. 112 00:10:20,826.78532642 --> 00:10:22,206.78532642 I'm gonna throw in one little thing. 113 00:10:22,206.78532642 --> 00:10:26,827.39144141 Here we are up against the uh, limitation of the podcast format. 114 00:10:26,917.39144141 --> 00:10:29,797.39144141 We are currently recording this in early November. 115 00:10:30,7.39144141 --> 00:10:34,417.39144141 You're likely listening to this in sometime in December of 2025 or later. 116 00:10:34,867.39144141 --> 00:10:36,997.39144141 And this is an area of flux. 117 00:10:37,44.98888818 --> 00:10:43,62.80058087 So very much stay tuned in terms of what the exact contours of the 2026 premium tax credits are. 118 00:10:43,544.5277835 --> 00:10:54,854.5277835 Just quickly on that, the HSA reimbursements and also Roth IRA distributions, HSAs and Roth IRAs, people get so excited about this long term tax free growth, like it's gonna keep growing tax free forever. 119 00:10:55,239.5277835 --> 00:11:13,899.5277835 But keep in mind, even though HSAs and Roth IRAs are often last spend assets, we actually have a kinda a provocative take on that, that HSA reimbursement's tax free and Roth IRA distributions maybe taking back some of your basis, maybe if you're over age 59 and a half, you've had the Roth IRA open for five years plus maybe even tap into earnings. 120 00:11:13,899.5277835 --> 00:11:16,419.5277835 Most people won't end up tapping into that for this purpose. 121 00:11:16,479.5277835 --> 00:11:28,9.5277835 But keep in mind that those tax free HSA reimbursements and Roth IRA withdrawals, they can really help you manage your, your gross income, especially in early retirement where you're focusing on these credits. 122 00:11:28,309.5277835 --> 00:11:40,429.5277835 Keep in mind that a credit and then a deduction are different, right? These tax credits, even though yes, healthcare is an expense and retirement, these are credits, not deductions, which mean that they're a dollar for dollar reduction of your tax liability. 123 00:11:41,373.38110031 --> 00:11:49,708.38110031 I, I think that what, what, what will become more popular in 2026 are private plans, especially private PPO plans and also health, health sharing plans. 124 00:11:50,488.38110031 --> 00:11:55,78.38110031 So I think a lot of people will be more maybe creative about how they think about health insurance moving forward. 125 00:11:55,78.38110031 --> 00:12:01,948.38110031 And the only kind of quote unquote advice I would give you is just ensure that, you know, maybe pun intended, just ensure that you have an out-of-pocket max. 126 00:12:02,28.38110031 --> 00:12:07,998.38110031 There's like seven different ways to get health insurance in early retirement or if you're self-employed, but really think outside the box if possible. 127 00:12:07,998.38110031 --> 00:12:08,28.38110031 I. 128 00:12:08,512.91851733 --> 00:12:08,802.91851733 Yeah. 129 00:12:08,827.91851733 --> 00:12:10,327.91851733 A couple thoughts on that. 130 00:12:10,327.91851733 --> 00:12:16,117.91851733 With respect to the health sharing ministry, folks know that this is not health insurance. 131 00:12:16,297.91851733 --> 00:12:23,284.97051733 There certainly has been anecdotal evidence that the providers can just deny coverage on a whim. 132 00:12:23,284.97051733 --> 00:12:24,694.97051733 So I'd say be careful there. 133 00:12:24,994.97051733 --> 00:12:34,214.97051733 And then with respect to the private insurance, I know preexisting conditions can be a thing unlike an a, CA plan, a CA plan you don't have to worry about those things. 134 00:12:34,214.97051733 --> 00:12:40,364.97051733 Now, it might not necessarily be the least expensive option, but certainly here's a scenario where you get what you pay for. 135 00:12:40,953.47051733 --> 00:12:41,373.47051733 That's right. 136 00:12:41,373.47051733 --> 00:12:48,993.47051733 So let's say you're retiring early or you're self-employed and you're young and healthy, at least for this year, you might consider some private coverage with underwriting. 137 00:12:49,23.47051733 --> 00:12:54,913.47051733 It might actually be cheaper than going through an a CA plan that, cannot consider those preexisting conditions. 138 00:12:55,659.87895512 --> 00:13:01,749.87895512 let's jump to do yourself tools for tax planning for 2026 and the year ahead. 139 00:13:01,779.87895512 --> 00:13:04,29.87895512 This is a question we got from the community beforehand. 140 00:13:04,359.87895512 --> 00:13:14,239.87895512 What are some tools that folks should be using or you've looked at that are reasonable for doing their own tax planning? I, I'll take that one at least initially. 141 00:13:14,689.87895512 --> 00:13:16,549.87895512 I don't have an answer for that one, John. 142 00:13:16,549.87895512 --> 00:13:20,259.87895512 So I generally use Google Sheets. 143 00:13:20,489.87895512 --> 00:13:25,259.87895512 You know, I look up the tax tables and manually compute an estimate of taxes. 144 00:13:25,559.87895512 --> 00:13:32,969.87895512 Now, I do think there are good tools out there in terms of current year tax liabilities. 145 00:13:32,969.87895512 --> 00:13:33,839.87895512 I think that exists. 146 00:13:33,839.87895512 --> 00:13:37,559.87895512 I think folding premium tax credit into that could be very difficult. 147 00:13:37,559.87895512 --> 00:13:47,309.87895512 But you know, I think there are really good tools out there that can estimate current year federal income tax liability and are all right, I do this Roth conversion, right? Don't do this Roth conversion. 148 00:13:47,309.87895512 --> 00:13:52,499.87895512 Or I do a 10,000 versus 20,000, or I do tax gain harvesting instead of a Roth conversion. 149 00:13:52,499.87895512 --> 00:13:54,869.87895512 Right? There are tools out there that I think are good. 150 00:13:55,109.87895512 --> 00:13:56,729.87895512 I'm just not your resource on those. 151 00:13:57,159.87895512 --> 00:14:00,69.87895512 Same thing with the longer term tools, the planning tools. 152 00:14:00,279.87895512 --> 00:14:07,509.87895512 I myself there, they're sort of not my cup of tea, meaning it's somebody else's prediction about the future that I'm not all that interested in, frankly. 153 00:14:07,509.87895512 --> 00:14:09,9.87895512 But that's my perspective. 154 00:14:09,249.87895512 --> 00:14:11,289.87895512 Cody, I'm curious your take on this question. 155 00:14:12,244.37895512 --> 00:14:15,274.37895512 Yeah, so I like thinking about it like tax prep versus tax planning. 156 00:14:15,274.37895512 --> 00:14:19,354.37895512 You know, one's about this year and last year, one's about, you know, maybe decades moving forward. 157 00:14:19,594.37895512 --> 00:14:21,124.37895512 I'll start with the kind of the current year. 158 00:14:21,124.37895512 --> 00:14:29,574.37895512 I build out my own 10 40 calculator in Excel, which isn't to like, you know, try to be super smart and I don't try to, you know, put everything in there that could possibly it be in there. 159 00:14:29,754.37895512 --> 00:14:36,504.37895512 But I really care about the customization of kind of thinking about, you know, normal IRA distributions differently than Roth conversions. 160 00:14:36,654.37895512 --> 00:14:47,484.37895512 I also like putting my own things in my calculator, like, you know, what is modified adjusted gross income for different purposes such as the premium tax credit versus Irma, because those are different definitions of, of magi. 161 00:14:47,934.37895512 --> 00:14:53,954.37895512 But I think for the average DIY investor or you know, tax planner I think for current year it's called dinky town.net. 162 00:14:54,569.37895512 --> 00:14:57,179.37895512 As I'm speaking right now in November, 2025. 163 00:14:57,389.37895512 --> 00:15:02,839.37895512 They have updated it for the, you know, the new senior deduction those additional standard deductions and those increases. 164 00:15:03,109.37895512 --> 00:15:07,729.37895512 But in 2026, I'm not sure how long it'll take them to you to, to kind of update the new version. 165 00:15:08,89.37895512 --> 00:15:13,939.37895512 Also keep in mind if you're self-employed, be very thoughtful about things like QBI like qualified business income deduction. 166 00:15:14,209.37895512 --> 00:15:17,809.37895512 A lot of these free tools don't include some of that more advanced analysis. 167 00:15:17,859.37895512 --> 00:15:21,606.04562178 I don't know if Sean does any tax, preparation with clients, but I certainly don't. 168 00:15:21,936.04562178 --> 00:15:32,346.04562178 And at this point, I would say if you need help with that one-on-one, certainly there's some hourly project based and ongoing access to financial planners who happen to also be experts in tax planning. 169 00:15:32,406.04562178 --> 00:15:39,36.04562178 They might even have the CPA, the EA designations show you that they have the basic fundamentals of tax prep and tax planning behind their belt. 170 00:15:39,364.85187078 --> 00:15:44,782.90187078 While you're certainly giving me an exception to what I'm saying next 'cause he's a professional and this is what he does all day long. 171 00:15:44,992.90187078 --> 00:15:46,942.90187078 I'm gonna paraphrase Mike Piper here. 172 00:15:46,972.90187078 --> 00:15:49,882.90187078 His answer to this question, don't use a spreadsheet. 173 00:15:49,912.90187078 --> 00:15:50,962.90187078 You're gonna miss something. 174 00:15:51,172.90187078 --> 00:15:53,692.90187078 You want to use tax planning software. 175 00:15:54,127.32765314 --> 00:15:54,390.32267811 Right. 176 00:15:54,420.32267811 --> 00:16:04,342.837223 I'll, I'll just kind of a little plug in our recent book, tax Planning too, and through Early Retirement, it's so important that before you use any tool, chapter one of that book is the Federal Income tax formula. 177 00:16:04,642.837223 --> 00:16:12,352.837223 So you truly need to understand step by step, line by line, how to review a tax return before you considers trying to build your own tools along the way. 178 00:16:12,945.85676526 --> 00:16:15,465.85676526 Going back to your book, which again, I just absolutely loved. 179 00:16:15,465.85676526 --> 00:16:17,445.85676526 Great job on this one. 180 00:16:18,555.85676526 --> 00:16:20,115.85676526 There's so many important points in here. 181 00:16:20,115.85676526 --> 00:16:47,325.8567653 I'm not even sure where to start first, but I think one theme of the book, which I love and have had these thoughts for quite some time, is that, and to paraphrase the way you say it a lot of tax planning is fear based, right? I would argue a lot of tax planning is oversold, right? Maybe you don't necessarily need to do all these things, but it's a way for someone to say, Hey, you know, you've gotta do this thing, or the world is gonna end and you're gonna be an IRS jail and and die of taxes. 182 00:16:47,835.8567653 --> 00:16:53,440.8567653 Tell me a little bit about your frame of reference when it comes to tax planning and putting this book together. 183 00:16:53,962.4696548 --> 00:17:11,572.4696548 I think what's happening with tax planning or really the fear-based marketing commentary around tax planning is this, is this idea of somebody who provides a service or a product to consumers, and a lot of their content in terms of fear around taxes is trying to convince you that you've fallen down and you're stuck down in a well. 184 00:17:11,872.4696548 --> 00:17:15,892.4696548 And they happen to be at the top of the well with a rope, and they're like, I'm the only one who can save you. 185 00:17:16,222.4696548 --> 00:17:18,112.4696548 So I think first there's kinda two parts of that. 186 00:17:18,112.4696548 --> 00:17:28,252.4696548 One is that you're being convinced that you have a problem that you might not have just because they don't know anything about the unique, unique financial situation before, you know, providing, you know, fear-based messaging. 187 00:17:28,562.4696548 --> 00:17:30,932.4696548 What bleeds leads in all forms of marketing. 188 00:17:30,932.4696548 --> 00:17:38,747.4696548 So, you know, when you tell somebody you're not gonna get crushed in taxes, like that's not gonna get as many views as telling you that 50% of your money is gonna go to the government. 189 00:17:38,747.4696548 --> 00:17:42,257.4696548 Act now and call me to help you do that as soon as possible. 190 00:17:42,488.069777 --> 00:17:56,468.069777 So we kind of stepped back with this book and said, Hey, like how can we write something that's as fundamentally, fundamentally educational as possible? Also objective and not just its rules and concepts, but the practical application of how these rules play out in real life. 191 00:17:56,708.069777 --> 00:18:00,338.069777 So we, you know, we have over 120 step by step calculations in the book. 192 00:18:00,548.069777 --> 00:18:10,478.069777 Not just saying we think it's gonna be this way, but we actually say, what would happen if this happened? I think a lot of the rules and concepts are objective, but then the fear-based commentary is subjective. 193 00:18:10,478.069777 --> 00:18:16,28.069777 But there's not a, it's not a clear delineation between when they go from, you know, from facts to opinions. 194 00:18:16,208.069777 --> 00:18:17,138.069777 And that commentary. 195 00:18:17,638.069777 --> 00:18:23,278.069777 let me read a line for your book that I love calling Roth conversions a need, often overstate things. 196 00:18:23,608.069777 --> 00:18:25,648.069777 Now, I'm worst case scenario guy. 197 00:18:25,768.069777 --> 00:18:40,648.069777 I always think about, Hey, I don't know what the future is gonna hold, but even in your book, you do this exercise where you show that if tax rates go up by 50% right, then you're still gonna be in a relatively fine spot with conventional strategy. 198 00:18:40,648.069777 --> 00:18:47,888.069777 So I really appreciate how you not only, you know, gave your take on hey, you know, here's why we think this is gonna happen. 199 00:18:48,38.069777 --> 00:18:57,478.069777 But even if we're wrong, even in this extreme scenario it still shows that your approach, a conventional approach can be quite reasonable when it comes to managing lifetime taxes. 200 00:18:58,407.8698442 --> 00:19:16,307.8698442 The book goes into depth about what taxation in retirement could look like with actual numbers, right? How bad is it? And one of the things we find, you know, in our analysis is there'll be some widows who are moderately financially successful. 201 00:19:17,192.8698442 --> 00:19:25,262.8698442 the good news with that is if you're moderately financially successful, your taxes tend to be very low in retirement and even the later part of retirement. 202 00:19:25,262.8698442 --> 00:19:26,432.8698442 So that's some good news. 203 00:19:26,792.8698442 --> 00:19:35,462.8698442 Well, what about those who were wildly successful financially? Well, there you are at risk for tax inefficiencies. 204 00:19:35,912.8698442 --> 00:19:43,617.8698442 Now there are tax inefficiencies that hit on the ending part of the required minimum distribution that you have to take every year. 205 00:19:44,397.8698442 --> 00:19:57,67.8698442 You're gonna find that you may incur say, a 32% tax rate on that, or, you know, I mean, you have to be wildly financially successful, like very wildly financially successful to even get to 35%. 206 00:19:58,357.8698442 --> 00:20:09,547.8698442 But the interesting thing about it is, one, it's just an inefficiency, right? Some of that money comes out against maybe the 10 or the 12% bracket, the 22% bracket, 24% bracket. 207 00:20:10,497.8698442 --> 00:20:18,747.8698442 two, this incurring this tax inefficiency in one's widowhood comes with a very good upside. 208 00:20:18,747.8698442 --> 00:20:25,197.8698442 And that is wild financial success, right? It's a trap that most Americans would gladly sign up for. 209 00:20:25,587.8698442 --> 00:20:30,837.8698442 Some of my RMDs are gonna be inefficiently taxed, and so that will be a negative on the tax spreadsheet. 210 00:20:31,107.8698442 --> 00:20:34,317.8698442 But the positive is I'm wildly financially successful. 211 00:20:34,317.8698442 --> 00:20:37,167.8698442 And oh, by the way, I'm so old I probably can't spend it all anyway. 212 00:20:37,377.8698442 --> 00:20:44,574.5365109 think we have to step back 'cause instinctively we ought to know that when we're not working for income, the income tax is gonna hit us less. 213 00:20:44,664.5365109 --> 00:20:47,184.5365109 And that's what our analysis tends to bear out. 214 00:20:47,554.0365109 --> 00:20:50,164.0365109 So I wanna share a quick math example of this. 215 00:20:50,164.0365109 --> 00:20:54,64.0365109 We've been talking about this, the difference between a marginal and effective tax rates. 216 00:20:54,64.0365109 --> 00:20:57,884.0365109 And I'm gonna kind of go from an accumulator to a retiree example here. 217 00:20:57,884.0365109 --> 00:21:00,44.0365109 This kind of blew my mind when I really looked at the numbers. 218 00:21:00,234.0365109 --> 00:21:07,609.052354 Let's say that there's a, single worker and they're making over, their income goes over 67,000 in 2026. 219 00:21:08,9.052354 --> 00:21:11,159.052354 That means that they're now going into the 22% marginal tax rate. 220 00:21:11,159.052354 --> 00:21:17,999.052354 So all the income they, they earn of over about 67,000 is gonna be taxed at 22% or higher. 221 00:21:18,369.052354 --> 00:21:26,679.052354 What's fascinating though is let's say that the next year that single taxpayer, you know, is retired and only distributing income from that retirement account. 222 00:21:26,979.052354 --> 00:21:29,229.052354 So they're distributing income all as ordinary income. 223 00:21:29,499.052354 --> 00:21:44,484.052354 How much would they have to distribute from that 401k that traditional IRA to reach an effective average tax rate of 22%? So again hit the marginal tax rate of 22% when their income hit around 66 500. 224 00:21:44,784.052354 --> 00:21:47,484.052354 But in retirement, this is using 2026 numbers. 225 00:21:47,874.052354 --> 00:21:55,704.052354 They don't hit the 22% average effective tax rate unless they have ordinary income over $286,000. 226 00:21:56,184.052354 --> 00:22:07,524.052354 Right? So that's kind of the idea that when you are contributing to a traditional retirement account, you're deferring, you're excluding, you're deducting those contributions top down at your highest marginal tax rates. 227 00:22:07,644.052354 --> 00:22:14,94.052354 And when you're retired, when you're taking those distributions or converting to Roth, you're going bottom up through some of those lower brackets. 228 00:22:14,94.052354 --> 00:22:23,784.052354 And if you're wondering if you're married, finally jointly you hit the 22% marginal tax bracket when your ordinary income gets over 133,000 in 2026. 229 00:22:23,784.052354 --> 00:22:33,324.052354 So 133,000 to have a 22% average effective tax rate with all ordinary income in 2026, you need income of 500. 230 00:22:33,759.052354 --> 00:22:49,179.052354 $67,000, right? So you kinda ask yourself if you're earning around, you know, 150, 200,000 as a married couple, like what are the chances of you distributing over $560,000 in retirement, all as ordinary income, which is kinda like the most inefficient way of doing things. 231 00:22:49,179.052354 --> 00:23:01,449.052354 So I think that's one of those fundamental things in the book that we, we really hit on is I think a lot of people, their marginal tax rates, let's say 32%, and what they, what they're telling others is, oh, all my income's being taxed at 32%. 232 00:23:01,839.052354 --> 00:23:12,339.052354 Right? In reality, it's being taxed at the significant 0%, you know, the standard deduction, maybe the additional standard deduction, senior deduction, 10, 12, 22, 24, then 32. 233 00:23:12,579.052354 --> 00:23:22,869.052354 And Sean has some fantastic examples in the book that he created where somebody might say they're in the 32% bracket, but maybe only a couple thousand dollars is actually being taxed at that highest marginal rate. 234 00:23:23,869.052354 --> 00:23:24,639.052354 Yeah, absolutely. 235 00:23:24,639.052354 --> 00:23:45,809.052354 And I think the extreme values in that example also speak to, what I was really thinking about when I was reading the book is, you know, what if rates go up? Right? And so even if rates do go up in your hypothetical scenario, still making those traditional contributions can still be a very valuable strategy where you can certainly have that tax arbitrage over your lifetime. 236 00:23:46,759.3460483 --> 00:23:51,679.3460483 Let's talk a little bit more about some of these maybe overblown tax considerations. 237 00:23:51,889.3460483 --> 00:24:02,469.3460483 I really like in the book how you frame Irma, for example, as a nuisance tax, right? This is a small percent of attacks on your wealth when you look at the numbers, when you break it down in your book left. 238 00:24:02,469.3460483 --> 00:24:08,689.3460483 Jump to a question from Andrew t that we got beforehand about the widow tax trap for surviving spouses. 239 00:24:08,929.3460483 --> 00:24:23,999.3460483 He says, how do you think about planning for the widow tax when there's gonna be a long survivor period when one spouse has health issues? For example, imagine a scenario where the couple's in the 12% bracket and then the survivor is in the 22% bracket and might even be subject to Irma. 240 00:24:24,574.5634154 --> 00:24:47,94.5634154 So I'd start with, if I really thought one spouse was going to die much sooner than the other spouse, would prioritize lived experience while they're both alive far over tax planning, right? If you're prioritizing tax planning living your life and enjoying it while you're both alive, you're missing the boat, right? So that's one thing. 241 00:24:47,844.5634154 --> 00:24:55,814.5634154 Now, the second thing is there are legitimate concerns around, okay the widow will have a less tax efficient situation. 242 00:24:55,904.5634154 --> 00:24:59,654.5634154 And yes, there may be some good Roth conversions to consider. 243 00:25:00,434.5634154 --> 00:25:04,934.5634154 Would argue that it's best considered after they're off the premium tax credit. 244 00:25:04,934.5634154 --> 00:25:08,984.5634154 Now maybe they're off the premium tax credit 'cause they have employer provided retiree healthcare. 245 00:25:09,144.5634154 --> 00:25:11,454.5634154 There are different reasons why they may not be on it. 246 00:25:11,754.5634154 --> 00:25:15,894.5634154 But for many Americans, that's only gonna happen the month we turn age 65. 247 00:25:16,224.5634154 --> 00:25:20,204.5634154 So once we're off that we might want to do more Roth conversions. 248 00:25:20,534.5634154 --> 00:25:21,584.5634154 But I'll say this. 249 00:25:22,514.5634154 --> 00:25:33,114.5634154 It may be the case that those Roth conversions aren't as impactful as one thinks, because even the widow may not suffer that high attacks incidents in their widowhood. 250 00:25:33,114.5634154 --> 00:25:34,314.5634154 You gotta look at the numbers. 251 00:25:34,704.5634154 --> 00:25:36,864.5634154 And there are other tools in the toolbox. 252 00:25:36,864.5634154 --> 00:25:39,894.5634154 Qualified charitable distributions can attack the problem. 253 00:25:40,74.5634154 --> 00:25:47,74.5634154 Something called asset location where we hold all our taxable bonds in our 401k or IRA that can help attack the problem. 254 00:25:47,384.5634154 --> 00:26:04,394.5634154 Your own living expenses, right? One thing to keep in mind for all the worry about RMDs, for those listeners in the audience who are born in the year 1960 or later, that means you're 65 in the year 2025 or younger. 255 00:26:04,664.5634154 --> 00:26:07,484.5634154 Your RMDs don't start till you turn age 75. 256 00:26:07,744.5634154 --> 00:26:08,914.5634154 It used to be RMDs. 257 00:26:08,914.5634154 --> 00:26:13,484.5634154 If we go eight years ago, RMDs started the year you turn 70 and a half. 258 00:26:13,904.5634154 --> 00:26:21,374.5634154 But now RMDs cover a relatively narrow slice of one's life because they only start at age 75. 259 00:26:21,374.5634154 --> 00:26:34,110.2722427 So we've had this sort of overfocus in American personal finance on this RMD issue, and now it's time to step back and say, wait a minute, Are we, are we putting the cart before the horse? Yes, RMDs are an issue. 260 00:26:34,110.2722427 --> 00:26:37,50.2722427 They're at least something worth considering and potentially mitigating. 261 00:26:37,50.2722427 --> 00:26:38,760.2722427 But there are different ways to do that. 262 00:26:38,970.2722427 --> 00:26:48,840.2722427 There are ways that are not all that impactful for many Americans accelerating and potentially increasing taxes through the Roth conversion mechanism may not be the right answer. 263 00:26:49,98.8385196 --> 00:26:54,888.8385196 I think a lot of this concern about the widows tax trap, et cetera, is focused on kinda in that traditional retirement. 264 00:26:54,888.8385196 --> 00:27:07,518.8385196 Like when RMDs are like, really, they're either here, they're coming soon, but I, I wanna mention that, you know, at that age, let's say you do actually at that age or before, let's say you have taxable assets, right? So let's say you're married, one spouse passes away. 265 00:27:07,798.8385196 --> 00:27:13,828.8385196 Those taxable assets, so like your taxable brokerage investments, for example, or, you know, maybe even some rental property examples. 266 00:27:14,68.8385196 --> 00:27:20,938.8385196 Um, they might receive a step up in basis or reset in basis on maybe half or even all of the asset, depending on what, you know, what type of state you're in. 267 00:27:21,208.8385196 --> 00:27:23,608.8385196 Uh, a community versus common law property. 268 00:27:23,968.8385196 --> 00:27:32,428.8385196 And also if the younger spouse is the survivor, that might reduce their RMDs because they're able to use the, those IRS table factors, uh, for the younger spouse. 269 00:27:32,668.8385196 --> 00:27:40,803.8385196 So I think, yeah, certainly you can plan ahead of time if you do believe that it's going to be you know, a surviving spouse living for maybe a, a few more decades. 270 00:27:41,223.8385196 --> 00:27:52,138.9776758 In the book we talk about pay tax when you pay less tax, right? So if you look at your sources of taxable income and you say, Hey, my surviving spouse is still gonna get the a hundred percent, pension, right? Our income's actually not going down that much. 271 00:27:52,138.9776758 --> 00:27:54,178.9776758 If something happens to me or something happens to them. 272 00:27:54,513.9776758 --> 00:28:02,743.9776758 Yeah, maybe it makes sense to do some additional Roth conversions, but but don't assume, don't assume just because there's a surviving spouse, that they're gonna be crushed with taxes. 273 00:28:02,983.9776758 --> 00:28:04,573.9776758 So certainly do the math behind it. 274 00:28:04,673.9776758 --> 00:28:13,913.9776758 Maybe a little bit different from Sean is I think that financial planning software, those long-term softwares, again, I don't like going line by line and like all these assumptions built, built in. 275 00:28:13,913.9776758 --> 00:28:28,103.9776758 But I think directionally sometimes just going into the software just saying, or even without a software, just saying, Hey, how much might my RMD be if my account, you know, grows at, you know, 5% over the next 10 years and then their surviving spouse? You can run these numbers pretty easily. 276 00:28:28,343.9776758 --> 00:28:34,583.9776758 And I don't like to get precise with those numbers, but I like to think directionally, Hey, is there a pretty good chance? Right. 277 00:28:34,613.9776758 --> 00:28:36,893.9776758 And it's, it's not focused on the tax rates. 278 00:28:36,893.9776758 --> 00:28:42,993.9776758 It's focusing on what will our and future surviving spouses sources of taxable income b. 279 00:28:43,368.9776758 --> 00:28:52,168.9776758 I think there's too much focus on the tax rates and not enough focus on what might our gross income look like moving forward from our various income sources in retirement. 280 00:28:52,439.4776758 --> 00:28:53,338.9776758 I will add a I. 281 00:28:53,729.4776758 --> 00:28:58,619.4776758 Though about using a tax planning software because say that's that couple we're thinking about. 282 00:28:58,619.4776758 --> 00:29:02,849.4776758 They're 65 this year they think one of them is gonna have a short lifespan. 283 00:29:03,209.4776758 --> 00:29:14,239.4776758 So they run some numbers and what the computer software is gonna tell them is, well, you could Roth convert this year at 24 to avoid a 32 percent RMD at age 85. 284 00:29:15,79.4776758 --> 00:29:18,49.4776758 The computer software is telling them a lie. 285 00:29:18,289.4776758 --> 00:29:24,739.4776758 So what am I, what do I mean by that, right? Because 32% looks way worse than 24% on a spreadsheet. 286 00:29:25,639.4776758 --> 00:29:30,109.4776758 Think about the incidents of that tax and the ability to bear that tax. 287 00:29:30,829.4776758 --> 00:29:39,259.4776758 In the early part of retirement, that 24%, I would argue, is worth a lot more than the 32% later on in retirement. 288 00:29:39,409.4776758 --> 00:29:50,289.4776758 What's that widow gonna do with those LA last 8 cents on the dollar, right? Either that widow's in long-term care and they just spend it all on long-term care and they get a big tax deduction for that most likely. 289 00:29:51,519.4776758 --> 00:29:54,939.4776758 they're still healthy and affluent and, and living their life. 290 00:29:54,939.4776758 --> 00:30:02,19.4776758 But it's gonna be very hard to run up expenses that would somehow implicate the need for that last 8 cents on the dollar. 291 00:30:02,19.4776758 --> 00:30:11,259.4776758 So I think that's part of the issue with these, these tax planning softwares, is assign the same value to taxes over time when maybe they shouldn't be doing it. 292 00:30:11,289.4776758 --> 00:30:12,519.4776758 It's not a net present value. 293 00:30:12,519.4776758 --> 00:30:17,709.4776758 I'm gonna assume they get the net present value, right? It's not a net present value issue. 294 00:30:17,919.4776758 --> 00:30:23,49.4776758 The issue is the usefulness of that money when you're 65 versus when you're 95. 295 00:30:23,139.4776758 --> 00:30:25,479.4776758 And it's gonna say 24 cents on the dollar one time. 296 00:30:25,479.4776758 --> 00:30:27,9.4776758 24 cents on the dollar the other time. 297 00:30:27,39.4776758 --> 00:30:27,699.4776758 That's equal. 298 00:30:27,759.4776758 --> 00:30:32,949.4776758 No, it's not right, because it's a lot more useful when you're 65 and you still have some living to be done. 299 00:30:33,219.4776758 --> 00:30:42,536.4522094 So look, I'm not here to say never use tax planning software, but even assuming it has accurate judgment, which is a very difficult assumption to make, but let's assume it just for now. 300 00:30:42,789.4667033 --> 00:30:57,493.7713415 I think it's a little odd to assign even considering that present value, the same value to taxes paid when they're 65 and have a living to be done versus when they're 85 or 95 and they just don't have the bandwidth or capacity to enjoy the money as much. 301 00:30:57,692.8268193 --> 00:31:13,682.8268193 and Sean did an absolutely phenomenal presentation at this year's Bullheads conference just on this topic, the Widow's tax trap, making those traditional contributions and more, if you wanna check that out and make sure to subscribe to our YouTube channel where you can find that video. 302 00:31:13,946.4843472 --> 00:31:19,946.4843472 the software is only going to assume very linear things based on your assumptions and your inputs, plus their own assumptions. 303 00:31:20,276.4843472 --> 00:31:25,106.4843472 So I, yeah, I do think that's why I go back to the software being really directional more than precise. 304 00:31:25,496.4843472 --> 00:31:32,276.4843472 Rather than just looking at the impact of RMDs, maybe you have five, 10 years where there's your income is actually below the standard deduction. 305 00:31:32,981.4843472 --> 00:31:34,481.4843472 Those are some of the tactics we talk about. 306 00:31:34,481.4843472 --> 00:31:45,251.4843472 If, if you're gonna do Roth conversions, maybe they're possible to convert at 0%, maybe, you know, maybe 10 or 12, depending on if RMDs are actually going to be, I wouldn't say a problem, but a consideration moving forward. 307 00:31:45,251.4843472 --> 00:31:59,681.4843472 I use, I use tax planning software, but understanding that it's just we should focus on directionally, and then as soon as I get a direction, I step outta that software and then start using just year to year, you know, focus on what's in my control and what's currently known. 308 00:31:59,967.9625758 --> 00:32:10,967.9625758 Yeah, I certainly appreciate that take, I think certainly be it advisors or do it yourselfers, like we tend to get focused on these little tiny figures fall into the illusion of precision. 309 00:32:11,117.9625758 --> 00:32:12,977.9625758 I really like how you framed it in the book. 310 00:32:13,77.9625758 --> 00:32:26,37.9625758 Too often in personal finance we focus on the trees and mist, the forest, and I just think folks can do that a lot when it comes to either their own proprietary spreadsheets or when it comes to any sort of tax planning or retirement planning software. 311 00:32:26,137.9625758 --> 00:32:31,987.571221 Let's talk about asset location high level asset location. 312 00:32:32,197.571221 --> 00:32:40,687.571221 We wanna hold stocks and bonds, and we have Roth accounts, traditional retirement accounts, and so-called taxable accounts. 313 00:32:41,257.571221 --> 00:32:51,352.571221 And i, I'm particularly fond of holding, say, the bond holding inside the 401k or the IRA, the traditional, we could even go a little more precise. 314 00:32:51,352.571221 --> 00:32:55,882.571221 Maybe our international equities are a little more Roth or traditional versus taxable. 315 00:32:55,882.571221 --> 00:32:57,112.571221 That's a marginal play. 316 00:32:57,512.571221 --> 00:33:03,902.571221 But the idea is to keep our income tax return as quote unquote clean as possible. 317 00:33:04,202.571221 --> 00:33:07,52.571221 So, you know, you think about bonds, they yield say 4%. 318 00:33:07,52.571221 --> 00:33:10,472.571221 Just throw out a number that's sort of directionally correct in today's world. 319 00:33:10,782.571221 --> 00:33:14,832.571221 There's no qualified dividend income on that versus US equities. 320 00:33:15,42.571221 --> 00:33:23,272.571221 Today, a well diversified US equity index fund is going to yield in the neighborhood of say, 1.2% 321 00:33:23,272.571221 --> 00:33:26,272.571221 could even be lower, but let's just call it 1.2%, 322 00:33:26,272.571221 --> 00:33:30,472.571221 90 plus percent of which is likely to be qualified dividend income. 323 00:33:30,652.571221 --> 00:33:32,782.571221 So it could qualify for 0% rate. 324 00:33:33,667.571221 --> 00:33:49,157.571221 So if we're gonna have some equities and some bonds, boy doesn't it make sense to park the bonds in the traditional 401k or IRA hold those equities on in the taxable account? 'cause you know, presumably we may want to have some there depending on our planning, right? But let's just say we do. 325 00:33:49,337.571221 --> 00:33:52,247.571221 So keep the yield low on the tax return. 326 00:33:52,577.571221 --> 00:33:58,42.571221 And then there's a secondary benefit, which is bonds have a lower expected return. 327 00:33:58,222.571221 --> 00:34:11,32.571221 So those holding the bonds in there instead of equities as a potential substitute, potentially reduces future required minimum distributions because it artificially keeps our balance in those things low. 328 00:34:11,212.571221 --> 00:34:17,212.571221 Recall, RMDs are computed as a percentage of the prior year, year end balance of that account. 329 00:34:17,512.571221 --> 00:34:43,672.571221 So we just like this idea of on the margins, let's use the Roth, traditional, taxable, these different buckets that are available to us to achieve essentially to keep that income low on our tax return, which then opens up more space for the Roth conversion planning, the tax gain, harvesting planning, or simply taking distributions from the traditional IRA off which to live and obtain better tax results on those. 330 00:34:44,6.4545882 --> 00:35:00,26.4545882 I just put a little example in my Excel spreadsheet here that let's say somebody had $500,000 in their taxable brokerage account, 500,000 in their traditional IRA and 500,000 in their Roth IRA, and they wanted a 60 40 total portfolio, 60% stock, 40% bonds. 331 00:35:00,296.4545882 --> 00:35:02,246.4545882 What they could do is have a mirrored portfolio. 332 00:35:02,276.4545882 --> 00:35:06,716.4545882 Keep it simple, right? Have like a balanced 60 40 fund in each of those accounts. 333 00:35:06,806.4545882 --> 00:35:09,326.4545882 And again, that would give you a 60 40 across the board. 334 00:35:09,666.4545882 --> 00:35:16,596.4545882 But again, you'd have, you know, you'd have of course bonds and the taxable brokerage account, which may be increasing your ordinary income from that interest income. 335 00:35:17,346.4545882 --> 00:35:22,446.4545882 If you wanted to kind of take an asset location approach, again, you don't have to change your asset allocation. 336 00:35:22,686.4545882 --> 00:35:27,451.4545882 This person says, I still want to have a, a 60 40 portfolio altogether. 337 00:35:27,601.4545882 --> 00:35:33,511.4545882 What I might do is have my taxable brokerage account and a hundred percent stock, so all 500,000 in stock. 338 00:35:33,621.4545882 --> 00:35:39,771.4545882 I actually have a 0% stock allocation in my traditional IRA, right? So a hundred percent bonds. 339 00:35:39,771.4545882 --> 00:35:43,971.4545882 So shams mentioning that that will, you know, keep that ordinary income off the tax return. 340 00:35:43,971.4545882 --> 00:35:57,681.4545882 And also, right, if we're gonna hold bonds anyway, why not keep our bonds, which are generally gonna have a, a lower growth expectation than stocks, why don't we keep that in the accounts that we don't want to grow as much, right? In terms of those future RMDs or the need for Roth conversions. 341 00:35:57,801.4545882 --> 00:36:06,351.4545882 And then lastly, you know, to be able to get their 60 40 portfolio, they would actually go 80 20 in the Roth IRA, right? So still keeping those bonds off of their tax return. 342 00:36:06,621.4545882 --> 00:36:10,581.4545882 But again, what's funny is the asset allocation of those examples are both 60 40. 343 00:36:10,881.4545882 --> 00:36:21,131.4545882 But in the second example, using tax location, you know, they could potentially be keeping thousands of dollars off of their tax return, rather than it being forced on them by choosing a mirrored allocation. 344 00:36:21,581.4545882 --> 00:36:40,771.4545882 I will just step back again and say, John, I, I'm a huge fan of simplicity, right? And also that this optimization is like, this is like kind of, you know, just doing the final turn of the screw, right? The asset allocation is like 90% get that right And the asset location is like the, is the last 10% if that. 345 00:36:41,101.4545882 --> 00:36:53,890.3432204 So if you can't live with your portfolio using asset location principles or have really a strategy for managing that over time you might want to, you know, focus on simplicity instead and give up some of that tax optimization cody, thanks for bringing that up. 346 00:36:53,950.3432204 --> 00:36:57,430.3432204 I'm a huge fan of simplicity, as you know. 347 00:36:57,680.3432204 --> 00:37:17,924.8552204 My concern is that this complicated approach folks aren't gonna maintain it And let me add, the reason I'm a fan of simplicity is I've worked with hundreds of do yourself investors, and I've seen that they're not even maintaining something like a three fund portfolio, let alone something where they have to maintain that across multiple accounts. 348 00:37:18,164.8552204 --> 00:37:28,279.8552204 What are your thoughts with respect to someone maintaining this sort of complicated approach? Is this something that you guys are seeing your own clients implement successfully? Maybe you guys are working different people than I am. 349 00:37:29,778.3552204 --> 00:37:39,798.3552204 What's funny is these tax optimized approaches like asset location, if I'm working with somebody who's retiring next year, I usually won't even propose that they use more complex tactics To start. 350 00:37:40,128.3552204 --> 00:37:48,18.3552204 I might actually say, Hey, let's start with just a basic mirrored portfolio that's really focused on giving you clarity and confidence to actually start spending money in retirement. 351 00:37:48,228.3552204 --> 00:37:52,158.3552204 That flip of the switch from accumulation to draw down is very scary to begin with. 352 00:37:52,158.3552204 --> 00:38:07,368.3552204 So why add a complex topic like right when they're at their most scared moment and then maybe two, three years into retirement where they feel like they've gotten, you know, into the rhythm of re retirement? Maybe then we can practice some tax optimization once they feel more comfortable with the, just the basic idea of even retiring to begin with. 353 00:38:08,135.521887 --> 00:38:09,845.521887 Yeah, I guess I have a bit of a different take on it. 354 00:38:09,845.521887 --> 00:38:12,65.521887 I just don't see it as being all that complicated. 355 00:38:12,114.7289994 --> 00:38:14,99.7289994 let's just assume it's a three fund allocation. 356 00:38:14,934.7289994 --> 00:38:21,74.7289994 you have three funds in three different buckets, right? It's like we're Hollywood squares, right? Nine, you know, three by three is nine. 357 00:38:21,404.7289994 --> 00:38:31,934.7289994 So yeah, I just don't see it as being all that complicated, especially in this era where people could pull out their phone and reallocate and it's just not that big of a deal. 358 00:38:31,964.7289994 --> 00:38:32,714.7289994 That's just my take. 359 00:38:33,714.7289994 --> 00:38:34,969.7289994 I'm gonna kind to agree. 360 00:38:35,59.7289994 --> 00:38:41,299.7289994 I don't think it's that complicated either, and that's why when I first started working with Do Your Sufferers, this is something I would suggest. 361 00:38:41,299.7289994 --> 00:38:48,964.7289994 But, having done this for a few years now and working with hundreds of folks, folks are coming back to me and then they come back and I see they're not maintaining their portfolio. 362 00:38:48,964.7289994 --> 00:39:07,699.2776667 So I guess my question is, if you guys are doing follow up engagements in your own practice, do you see that folks are successfully maintaining this sort of asset location investment approach? When I'm working with clients, I'm not just looking at the potential complexity of their situation financially, but I'm also really gaining an understanding of their financial literacy. 363 00:39:08,89.2776667 --> 00:39:14,569.2776667 Also, you know, not just the time that they're willing to spend on this, the talent that it takes to like click the buttons and make those trades and rebalance. 364 00:39:14,569.2776667 --> 00:39:17,839.2776667 Maybe we have our own calculator for that, but also the temperament. 365 00:39:17,839.2776667 --> 00:39:24,859.2776667 Like sometimes I'll work with one, you know, one spouse is a spreadsheet spouse, and the other one is like, I don't, I don't even understand any of this stuff. 366 00:39:25,99.2776667 --> 00:39:27,289.2776667 Like, I mean, I, I really think about the long-term play. 367 00:39:27,529.2776667 --> 00:39:30,79.2776667 But most clients I work with, they come back annually. 368 00:39:30,169.2776667 --> 00:39:30,349.2776667 Right. 369 00:39:30,349.2776667 --> 00:39:33,979.2776667 The plan, you know, goes from a noun to a verb ongoing, this planning. 370 00:39:34,189.2776667 --> 00:39:34,369.2776667 Yeah. 371 00:39:34,369.2776667 --> 00:39:39,229.2776667 If somebody were only gonna work with me once, and I was like, I knew I, you know, they're never coming back again. 372 00:39:39,499.2776667 --> 00:39:47,959.2776667 I'd be very, I'd be very hesitant to give them complex stuff that they might not be able to keep up with if they're not already doing that in their spreadsheets to begin with. 373 00:39:48,377.5956544 --> 00:39:52,697.5956544 I will also say, I have this little saying that life itself tends to be a rebalance. 374 00:39:52,697.5956544 --> 00:39:57,527.5956544 I think it, it, I think sometimes in the financial planner world, we overemphasize rebalancing. 375 00:39:57,527.5956544 --> 00:40:03,557.5956544 So what I mean by that is, you know, if stocks are up this year and bonds are down, we'll just wait till next year. 376 00:40:03,557.5956544 --> 00:40:04,727.5956544 It'll correct itself. 377 00:40:04,727.5956544 --> 00:40:10,562.5956544 And or, distributions, right? It, it's rare that our portfolio is just sitting there. 378 00:40:10,712.5956544 --> 00:40:13,382.5956544 It's either getting contributed to or being distributed from. 379 00:40:13,592.5956544 --> 00:40:22,322.5956544 So you have, you know what, the tide comes in, the tide goes out, you have contributions being made, and then later in life you have distributions made. 380 00:40:22,502.5956544 --> 00:40:26,522.5956544 You have all these different mechanisms that can help achieve rebalancing. 381 00:40:26,952.5956544 --> 00:40:40,302.5956544 For those investors who want to be 80 20, 70 30, 90 10, 60 40, how often do they go a hundred to zero? It just, I'm just not seeing this as being a, that big of an issue in the financial planning space. 382 00:40:40,362.5956544 --> 00:40:41,172.5956544 That's just my take. 383 00:40:41,742.0956544 --> 00:40:43,687.0956544 And that idea of dynamic rebalancing. 384 00:40:43,687.0956544 --> 00:40:52,50.6159249 So if you're contributing or taking money outta your portfolio, you can naturally get closer to that ideal asset allocation across your total portfolio. 385 00:40:52,200.6159249 --> 00:40:55,350.6159249 And yeah, I think it does take a little bit of time, temperament, and talent. 386 00:40:55,660.6159249 --> 00:40:56,620.6159249 But yeah, just be careful. 387 00:40:56,620.6159249 --> 00:41:00,430.6159249 You'll really have clarity before you can gain confidence with the advanced tactics. 388 00:41:00,769.7448054 --> 00:41:08,929.6434024 Thank you for joining us for the 89th episode of the Bogleheads on Investing podcast, Rick Ferry Returns next year for episode 90. 389 00:41:09,145.4454797 --> 00:41:16,15.4454797 for more from Sean and Cody, make sure to check out our previous episodes of the Bullheads on Investing podcast and Bullheads Live. 390 00:41:16,195.4454797 --> 00:41:23,695.4454797 We've got an episode where Sean talks about the solo 401k, or the individual 401k for solopreneurs. 391 00:41:23,785.4454797 --> 00:41:28,795.4454797 And we've got an episode with Cody where he talks about tax planning for early retirees. 392 00:41:29,5.4454797 --> 00:41:31,310.4454797 I'll link to those in the show notes for folks to check out. 393 00:41:32,91.3444714 --> 00:41:44,631.3444714 This episode of the Bogleheads On Investing Podcast is brought to you by the John c Bogle Center for Financial Literacy, a 5 0 1 C3 nonprofit organization that is building a world of well-informed, capable, and empowered investors. 394 00:41:45,6.3444714 --> 00:41:49,411.3444714 Show your support by making a tax deductible donation@boglecenter.net 395 00:41:49,701.3444714 --> 00:41:50,611.3444714 slash donate. 396 00:41:50,865.7763243 --> 00:41:54,155.7763243 This episode is for educational and entertainment purposes only. 397 00:41:54,730.7763243 --> 00:42:00,475.7763243 It is not to be construed as tax, financial planning, investment, or legal advice. 398 00:42:00,895.7763243 --> 00:42:03,360.7763243 Check with your professionals before making any decisions. 399 00:42:03,470.6737599 --> 00:42:06,870.6737599 Are looking for volunteers to help moderate our bulkheads YouTube channel. 400 00:42:07,605.6737599 --> 00:42:21,845.6737599 If you want to help spread the message of do-it-yourself investing, improving financial literacy, send me a message, Jay Luskin at Bogle Center to help volunteer moderating those comments on our YouTube videos. 401 00:42:22,290.0018639 --> 00:42:24,870.0018639 That's J-L-U-S-K-I-N. 402 00:42:25,440.0018639 --> 00:42:26,985.0018639 At bogle.center. 403 00:42:27,182.1100881 --> 00:42:34,832.1100881 Also, a thank you to Scott Holmes for the corporate presentation music we're using for the intro and outro music of the podcast episode. 404 00:42:35,9.385893 --> 00:42:41,909.385893 If you like this episode, be sure to rate, subscribe on your favorite podcast platform of choice, especially our YouTube channel.

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