October 10, 2025 • 17 mins
Hey Mike, how much does tax planning really play a role in a retirement plan? Discover why the marriage of investment advice and tax planning could be crucial for achieving one’s lifestyle and legacy goals.
Text your questions to 913-363-1234.
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Episode Transcript
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Mike (00:05):
Welcome to How to Retire On Time, a show that answers
your retirement questions. We'rehere to move past that
oversimplified advice you'veheard hundreds of times.
Instead, we want to dive intothe nitty gritty because, well,
frankly, there there's no suchthing as a perfect investment
product or strategy. There arecertain things you just need to
know, so we wanna dive intothat. As always, text your
questions to (913) 363-1234.
And remember, this is notfinancial advice. This is just a
(00:27):
show, so do research. David,what do we got today?
David (00:31):
Hey, Mike. How much does tax planning really play a role
in a retirement plan?
Mike (00:37):
More than you realize. That's my quick answer.
David (00:40):
Well, because I was just thinking about this, like, right
now as a working person, I dovery little tax planning. Yeah.
Maybe others do more, but so howis that gonna change?
Mike (00:49):
Well, I don't wanna share your specific financials. Sure.
But let's talk about thatgenerally speaking, just So for
a you make an income. I do.That's why you're here.
David (00:59):
Yeah. Yeah. I like it. I like my income.
Mike (01:01):
So your income is rather structured to where any tax
planning you're really doing is,how much do you wanna contribute
to a four zero one k or not? Isthere company matches? They're
not a company match? Does itmake sense to put funds there or
not. And then if not in a fourzero one k, or maybe max out
your four zero one k, you've gotextra money, maybe you put it
into something else, anotherinvestment.
David (01:19):
Okay.
Mike (01:19):
That's kind of the simplest version of it, but it
actually gets more complicated.And you know these things, so
thank you for setting me up onthe question. Yeah. But what do
you invest in? So let's say youinvested in Verizon.
So you've paid income, taxes.It's now in your savings
account. You're like, I got alittle extra savings here. I I
don't want this much emergencycash. Let's put it in the
market.
And you bought Verizon stock. K.Verizon's a great dividend
(01:42):
stock, but what's it doing?Every time it pays a dividend,
you're paying income tax on it.Whereas if you're just trying to
grow your money, you mightthink, well, you know, it's a
brokerage account.
I really don't want maybe youbuy Berkshire Hathaway. They
don't pay a dividend. So you'renow focused on growth without
creating a tax inefficientissue. See, if you buy a bunch
of Verizon stock, and I'm notdogging Verizon. I'm just using
(02:04):
it as an example.
Everyone knows who Verizon is.Then if you reinvest that
dividend every single year, yourVerizon position gets bigger and
bigger and bigger, and you'repaying income tax on every time
it's reinvested. How is thatefficient?
David (02:18):
And that's a capital gain. Right? Is that what we're
saying?
Mike (02:21):
No. It's yeah. Thank you for clarifying. It's ordinary
income.
David (02:24):
Oh, wow. Yes.
Mike (02:25):
Yep. Okay. This is important. So what if you did
Berkshire Hathaway? Maybe youdid put it in the S and P 500,
which historically has a loweroverall dividend.
Maybe you were more deliberateabout your research, and you
found an ETF that's specificallylike PKW, for example, that
specifically buys largecompanies that have a historical
(02:46):
pattern of buying back theirshares as opposed to paying a
dividend. Now you've gotsomething that can grow, but is
not paying your dividend becauseyou don't need it. You've got an
income. So tax planning, evenwhen you're 20 years old and
starting to work or 24, whateveryou end up college or or
technical school, whatever. Whenyou start investing, tax
(03:08):
planning starts, because you'reeither creating tax issues or
you're not creating tax issues.
David (03:13):
I see.
Mike (03:14):
And then there's other things too, like, if you are
gonna have tax issues, how doyou get out of it? You could
just pay the taxes. Could youseparate certain things like
here's a quick example. Let's goto retirement. So let's say
you're 60 years old and youwanna retire.
Great. What are you gonna do?Well, you know, take a little
bit from my IRA. I've got thesestocks. I need to kind of slowly
lower the positions.
(03:34):
Too much concentration there, soI'll take a little bit over
there and, you know, a littlebit from everywhere. That's so
inefficient. Mhmm. And thereason is when you take income
from your IRA, that's ordinaryincome.
David (03:44):
Alright.
Mike (03:45):
Ordinary income, adjusted gross income, that's taxed
first. So all of your long termstock positions that you're
selling, that starts at the endof your ordinary income. So if
you have a 100,000 in ordinaryincome from your IRA, let's say,
and then you start selling outsome shares, you're paying 15%
in taxes. Because that startsabove the efficiency of long
(04:08):
term capital gains. Or what ifyou just pushed out your IRA
distributions from 60 maybe youdidn't touch it until 63 or 64
years old.
And the first couple of years,you only took income from your
brokerage account because youjust had extra money there. It
was growing tax efficiently. Itwas great. Uh-huh. But you're on
affordable care act, insurance.
(04:29):
So health care, you want thepremiums. Right? Yeah. You've
also got these positions youwanna get rid of. Right?
So that you maybe sell some ofthose as well. So you can enjoy
if you're married filingjointly. I think it's, like,
around 96,000, if I rememberright, as of today's recording.
So the first 96,000 of gainsgains. Okay.
Right? Not the basis. Not whatyou put into the market.
David (04:51):
Okay.
Mike (04:51):
But the profits. 96,000, not taxed. Because? Because of
long term capital gains.
David (04:58):
Oh, alright.
Mike (04:59):
So when you understand that you can separate and
diversify based on tax strategy,you've got seasons of where
you're gonna take income fromhere, then income over there,
and you were deliberate aboutwhat you were investing in to
then get to that point, you'resaving yourself thousands of
dollars. Thousands. So it's nottens of thousands. For some
(05:21):
people over the lifetime, it'shundreds. I mean, sometimes
there's a lot of money,potentially even a million.
I mean, it depends how muchmoney you have. It's all
perspective. A lot of savings,not based on the investments,
the tax planning and theinvestments. They go hand in
hand. You cannot separate onewithout the other.
David (05:39):
So you should really start early then thinking about
your future self taking incomeand how to take income
efficiently, what age should youstart, like, thinking about 16.
16.
Mike (05:50):
Yeah. No one's gonna do that. But 16 years old when you
start, here's why.
David (05:53):
Yes.
Mike (05:53):
Don't get the nice car. And if your parents give you the
nice car, sell it and buywhatever equivalent to they have
the Geometro, because I don'tthink they make Geometros
anymore.
David (06:01):
No. But what a great car. Oh, the Geometro. I loved it.
Mike (06:04):
Yeah. I drove a Chevy Auveo for a long time. Oh. And
and it was ugly yellow. Then Ihad a Mazda that like lasted two
years.
Then there was a Taurus I had.Wow. Just garbage cars. They all
lasted two years, but it wascheap and it got me where I
needed to go. Yeah.
No one expects you to besuccessful at the age of 16. So
why are you trying to drive anice car? Yeah.
David (06:23):
Agreed. Don't need to give up appearances. Just have
it get you to where you need togo.
Mike (06:27):
Yeah. And as long as it plays music, that's good enough.
Yes. If it plays music and itdrives. But the point being is
if you're 16 years old and youmax out so you have to have
income.
Mhmm. You have to generateincome, but then you max out
your Roth 16, 17, 18 years old,there's a good chance that half
of your retirement is now paidfor.
David (06:45):
That's a sobering, like, woah.
Mike (06:46):
Now there's a lot of variability there with market
patterns and growth and what'sgonna happen there. But based on
thirty year historical averagesand expectations, you put it all
in equities. This is notfinancial advice. Remember, this
is just a show. This is anexample.
Yeah. Put it all in equities.Maybe you blend it with the S
and P 500 and the Nasdaq 100.That's it. And you it's in the
(07:09):
Roth, and it grows.
Yeah. There's a good chancemaybe around half of your
retirement is now paid for, andyou didn't even start college.
So when I say, yeah, startearly, as soon as you can. Stop
going to get the fancy coffee inthe morning, and just drink the
crap that's at the office. Maybeyou got a fancy machine.
I don't know. But Right. Theselittle differences alleviate
(07:33):
significant financial stressesalong the way. I can't tell you
how many 40 year olds are barelymaking ends meet and have no
idea at this point. I was on thephone with one yesterday.
He says, we're having a hardtime saving. In fact, they're
struggling. They're having tosell the little they have saved
just to take care of some kidsthings that were unexpected.
(07:53):
Yeah. And he's like, how am Isupposed to catch up with this?
It's a lot easier if you give upa couple of fancy meals. You
don't need $80 appetizers at theage of 18 years old. No. But
that 80, I don't know. Layton,would you just look up the
compounding interest?
Let's say, 9% compoundinginterest from the age of 18 to
60 years old. So you didn't buythe $80 appetizer. You put it in
(08:17):
the market, and it's average,let's say, 9%. Just just do a
quick calculation because that'snot what I can do in my head at
the age of 60 years old. 9%compounding interest because
we're doing the equities.
We're hoping it's 9%. You'regoing more risk, but you don't
need the money till 60 yearsold. What's the value at 60
years old? Need a drum rollhere. That $80 appetizer's now
(08:37):
around $3,000.
So now at that point later on,that might seem insignificant,
but that's now buying 37appetizers when you retired at
$80. The point is, that's justone little bit, Wasn't a big
sacrifice. Yeah. Now how manytimes could you do that in the
year? Do it 10 times in theyear.
(08:57):
Wait. Got 30,000? Yeah. Do it a100 times in the year? Got
300,000?
Oh. I mean, these are thingsthat matter. You've got to
create the system to whereyou're saving. Now the question
was about tax planning as well.
David (09:10):
Let's Tax planning.
Mike (09:11):
Let's dive into that a little bit deeper. So when it
comes to tax planning, k, you'vegot to keep in mind your ten
forty. What do I mean by that?When I say the ten forty, the
1040 is the scorecard. Let megive you an idea, and I can tell
you right now, I would bewilling to bet most financial
(09:33):
advisers don't have a clue whatI'm about to say or even look at
this on an annual basis.
Okay? So on lines two and three,let me break that down for you
real quick. Line two a, that'syour tax free interest. That's
where it's gonna be recordedthere. It doesn't affect your
adjusted gross income Oh.
But it affects your modifiedadjusted gross income. So think
of your municipal bonds. That'sgonna affect your Social
(09:53):
Security planning. That's gonnaaffect if you qualify for
Trump's new senior standarddeduction planning and so on.
Did you really do yourself afavor for all these municipal
bonds to, quote, unquote, notpay income tax when it could be
affecting other parts of yourplan?
Also, keep in mind that yourmunicipal bond interest, you
need to account for thecomparable difference of taking
(10:16):
the municipal bond interestversus some other fixed income.
That's what they call bonds.Fixed income offer and pay taxes
because the fixed income that'snot a municipal bond might pay
you more than the municipalbond. Municipal bonds give you
less because they know it's taxfree.
David (10:33):
Oh, I see.
Mike (10:34):
So you have to do a after tax calculation. And do you need
or want the Social Security taxefficiency or not? Do you want
the extra 6,000 per persondeduction that's gonna be from
2025 to 2030 or not? You'vegotta keep in mind that there's
no get out of jail free card ifyou're getting money in one way
or the other. It's showing up onyour tax return, typically
speaking.
(10:54):
So two way, tax exempt interest.Be aware of that. Now it affects
other parts of your plan. Also,adjusted gross income, that tax
free interest, that's gonnaaffect your Medicare. So IRMA
and surcharges there.
So be mindful of these things.What if you don't need this tax
free interest? You're justtrying to grow your assets. Pick
something else that doesn't paya dividend or an interest rate.
(11:16):
It's just growing.
You could create unintentionalinefficiencies because you
didn't pay attention to the taxfree bank because it's not on
your adjusted gross income, butit shows up elsewhere. You gotta
pay attention to these things.Look at two b. K? Two b is the
taxable interest.
So this is kind of a surprisefor some people as it bumps up
their bits. You know you gotyour high yield savings or other
(11:36):
things that are paying youinterest. Be aware of that.
You've got then three a. Threea, these are qualified
dividends.
These don't show up as muchbased on my experience, but
you've got your qualifieddividend, which is paid as a
long term capital gains rate,but it's like for foreign
companies or corporate payouts,things like that. Very specific
they they qualify veryspecifically. Like, it's not as
(11:58):
easy. Then you've got two orthree b, which is your ordinary
income. This is where people gethurt.
Because they've got so muchordinary income coming from
because they're dividendinvestors, and it's in their
brokerage accounts, and theykeep reinvesting it. So then the
issue gets bigger and bigger andbigger. This is when they
typically come to me and say,how do we fix this? See, only
the way to get out of it is toeither do nothing and keep
paying the taxes, do nothing andspend this money, or sell with
(12:23):
long term capital gains rates tocoordinate that usually over a
couple of years to then movemoney into something that's not
paying as much dividends so theproblem doesn't get bigger and
bigger and bigger. Anyone thatactively avoids paying taxes
oftentimes pays more in taxes.
Oh. They create tax efficienciesthey have to deal with later on
because they're not beingproactive, And the specific
scorecard for brokerage accountsI have found is to be on lines
(12:46):
two and three. So two a, two b,three a, three b. And then also
keep in mind line seven. Lineseven is where you're keeping
the scorecard of your capitalgains.
Are you or your adviser activelytrading in your portfolio to try
and beat the market? Let's putthat into context. For easy
math, let's say that themarket's averaging 10%, because
(13:08):
ten's an easy number. Mhmm. K?
And let's say your effective taxrate is 20%. If the market's
doing 10% and you're activelytrading and you got 10%
performance, you have to accountfor taxes. That's 20% you're
paying in taxes. So really, youdidn't get 10%. You got 8%.
Because you had to pay taxes.It's a headwind against your
performance.
David (13:28):
Okay.
Mike (13:29):
And for what? I love active trading, but I think it
should be done moreappropriately in a qualified
account like an IRA or Roth
David (13:36):
Yeah.
Mike (13:36):
Not a brokerage account.
David (13:38):
Yeah. Because the brokerage account for, like,
just sort of buy and hold or
Mike (13:42):
In my opinion. Yeah. Yeah. Yeah. Now, I mean, you can get
fancy and do holding companiesand c corps and things like
that.
There's double taxation, whichis an argument. But if you're
looking for long term growthMhmm. You're gonna get taxed at
a different rate than incometax, but most people don't do
that kind of thing. But thenthink, okay. Well, I need to get
12% just to match the 10% growthnet of taxes.
(14:04):
So now that's really hard to do,but it doesn't stop there. You
have to then rationalize thefees. Let's say you're paying
1%. So you've gotta do 13%average annual returns to match
roughly net of tax performance,the 10%, and just ignore how it
affects all the other parts ofyour plan.
David (14:23):
So how do we put a bow on this whole we we started off
with how does tax planningreally play a role in my
retirement plan? We've talked alot about lines two and three
and two a and three a.
Mike (14:33):
When I got started in the industry, I was taught to tell
people, if you're paying taxes,you should be thanking me
because I'm making you money.And how ignorant is that?
David (14:43):
Yes. It fails to consider all the scorecards as you call
it.
Mike (14:47):
Yeah. Another way of looking at it is I don't think
you can give proper investmentadvice unless you also can give
tax advice. So if you asksomeone, can you give me tax
advice? No. That's a red flag.
Mhmm. Because the way you builda portfolio must acknowledge how
it's going to affect your taxreturn and the performance and
(15:07):
the other parts of your SocialSecurity taxes, your modified
adjusted gross income, how thataffects the standard deductions
that you may or may not qualify,how that affects your IRMA if
you're 65 years older. It allplays a role. And so many people
miss it because they putblinders on and say, okay. What
was my performance?
They look at a percent, and theyforget how it affects the taxes.
Or they might realize it, butthey don't fully connect the
(15:30):
dots. It's not about how manytimes your adviser trades. If
you hire an adviser, the purposeis to help guide you through the
complexities of your ability tocreate and sustain your wealth.
The growth of your assets thatthey're used for your lifestyle
and legacy goals.
(15:51):
Don't get upset if adviserdoesn't trade frequently. Are
they keeping my best interest atheart? Are they a fiduciary that
can also do taxes? By the way,fiduciary doesn't mean they can
give you tax advice. Fiduciarymeans that they have a
securities license, and they'resupposed to put your interest
ahead of their own.
And it
David (16:08):
seems like everybody should follow that what you just
described.
Mike (16:11):
Well, the insurance companies have their own word.
It's called best interest.That's their version of a
fiduciary. They couldn't use thesame word though for No. I don't
know, probably legal reasons.
Yeah. But they're also supposedto put your interest ahead of
their own in their own way ofwording it. It is confusing, but
unless you have someone that cando both, tax and investment
advice, you may be creatingunnecessary resistance towards
(16:36):
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(16:58):
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to learn more and get started.
Welcome to How to Retire On Time, a show that answers
your retirement questions. We'rehere to move past that
oversimplified advice you'veheard hundreds of times.
Instead, we want to dive intothe nitty gritty because, well,
frankly, there there's no suchthing as a perfect investment
product or strategy. There arecertain things you just need to
know, so we wanna dive intothat. As always, text your
questions to (913) 363-1234.
And remember, this is notfinancial advice. This is just a
(00:27):
show, so do research. David,what do we got today?
David (00:31):
Hey, Mike. How much does tax planning really play a role
in a retirement plan?
Mike (00:37):
More than you realize. That's my quick answer.
David (00:40):
Well, because I was just thinking about this, like, right
now as a working person, I dovery little tax planning. Yeah.
Maybe others do more, but so howis that gonna change?
Mike (00:49):
Well, I don't wanna share your specific financials. Sure.
But let's talk about thatgenerally speaking, just So for
a you make an income. I do.That's why you're here.
David (00:59):
Yeah. Yeah. I like it. I like my income.
Mike (01:01):
So your income is rather structured to where any tax
planning you're really doing is,how much do you wanna contribute
to a four zero one k or not? Isthere company matches? They're
not a company match? Does itmake sense to put funds there or
not. And then if not in a fourzero one k, or maybe max out
your four zero one k, you've gotextra money, maybe you put it
into something else, anotherinvestment.
David (01:19):
Okay.
Mike (01:19):
That's kind of the simplest version of it, but it
actually gets more complicated.And you know these things, so
thank you for setting me up onthe question. Yeah. But what do
you invest in? So let's say youinvested in Verizon.
So you've paid income, taxes.It's now in your savings
account. You're like, I got alittle extra savings here. I I
don't want this much emergencycash. Let's put it in the
market.
And you bought Verizon stock. K.Verizon's a great dividend
(01:42):
stock, but what's it doing?Every time it pays a dividend,
you're paying income tax on it.Whereas if you're just trying to
grow your money, you mightthink, well, you know, it's a
brokerage account.
I really don't want maybe youbuy Berkshire Hathaway. They
don't pay a dividend. So you'renow focused on growth without
creating a tax inefficientissue. See, if you buy a bunch
of Verizon stock, and I'm notdogging Verizon. I'm just using
(02:04):
it as an example.
Everyone knows who Verizon is.Then if you reinvest that
dividend every single year, yourVerizon position gets bigger and
bigger and bigger, and you'repaying income tax on every time
it's reinvested. How is thatefficient?
David (02:18):
And that's a capital gain. Right? Is that what we're
saying?
Mike (02:21):
No. It's yeah. Thank you for clarifying. It's ordinary
income.
David (02:24):
Oh, wow. Yes.
Mike (02:25):
Yep. Okay. This is important. So what if you did
Berkshire Hathaway? Maybe youdid put it in the S and P 500,
which historically has a loweroverall dividend.
Maybe you were more deliberateabout your research, and you
found an ETF that's specificallylike PKW, for example, that
specifically buys largecompanies that have a historical
(02:46):
pattern of buying back theirshares as opposed to paying a
dividend. Now you've gotsomething that can grow, but is
not paying your dividend becauseyou don't need it. You've got an
income. So tax planning, evenwhen you're 20 years old and
starting to work or 24, whateveryou end up college or or
technical school, whatever. Whenyou start investing, tax
(03:08):
planning starts, because you'reeither creating tax issues or
you're not creating tax issues.
David (03:13):
I see.
Mike (03:14):
And then there's other things too, like, if you are
gonna have tax issues, how doyou get out of it? You could
just pay the taxes. Could youseparate certain things like
here's a quick example. Let's goto retirement. So let's say
you're 60 years old and youwanna retire.
Great. What are you gonna do?Well, you know, take a little
bit from my IRA. I've got thesestocks. I need to kind of slowly
lower the positions.
(03:34):
Too much concentration there, soI'll take a little bit over
there and, you know, a littlebit from everywhere. That's so
inefficient. Mhmm. And thereason is when you take income
from your IRA, that's ordinaryincome.
David (03:44):
Alright.
Mike (03:45):
Ordinary income, adjusted gross income, that's taxed
first. So all of your long termstock positions that you're
selling, that starts at the endof your ordinary income. So if
you have a 100,000 in ordinaryincome from your IRA, let's say,
and then you start selling outsome shares, you're paying 15%
in taxes. Because that startsabove the efficiency of long
(04:08):
term capital gains. Or what ifyou just pushed out your IRA
distributions from 60 maybe youdidn't touch it until 63 or 64
years old.
And the first couple of years,you only took income from your
brokerage account because youjust had extra money there. It
was growing tax efficiently. Itwas great. Uh-huh. But you're on
affordable care act, insurance.
(04:29):
So health care, you want thepremiums. Right? Yeah. You've
also got these positions youwanna get rid of. Right?
So that you maybe sell some ofthose as well. So you can enjoy
if you're married filingjointly. I think it's, like,
around 96,000, if I rememberright, as of today's recording.
So the first 96,000 of gainsgains. Okay.
Right? Not the basis. Not whatyou put into the market.
David (04:51):
Okay.
Mike (04:51):
But the profits. 96,000, not taxed. Because? Because of
long term capital gains.
David (04:58):
Oh, alright.
Mike (04:59):
So when you understand that you can separate and
diversify based on tax strategy,you've got seasons of where
you're gonna take income fromhere, then income over there,
and you were deliberate aboutwhat you were investing in to
then get to that point, you'resaving yourself thousands of
dollars. Thousands. So it's nottens of thousands. For some
(05:21):
people over the lifetime, it'shundreds. I mean, sometimes
there's a lot of money,potentially even a million.
I mean, it depends how muchmoney you have. It's all
perspective. A lot of savings,not based on the investments,
the tax planning and theinvestments. They go hand in
hand. You cannot separate onewithout the other.
David (05:39):
So you should really start early then thinking about
your future self taking incomeand how to take income
efficiently, what age should youstart, like, thinking about 16.
16.
Mike (05:50):
Yeah. No one's gonna do that. But 16 years old when you
start, here's why.
David (05:53):
Yes.
Mike (05:53):
Don't get the nice car. And if your parents give you the
nice car, sell it and buywhatever equivalent to they have
the Geometro, because I don'tthink they make Geometros
anymore.
David (06:01):
No. But what a great car. Oh, the Geometro. I loved it.
Mike (06:04):
Yeah. I drove a Chevy Auveo for a long time. Oh. And
and it was ugly yellow. Then Ihad a Mazda that like lasted two
years.
Then there was a Taurus I had.Wow. Just garbage cars. They all
lasted two years, but it wascheap and it got me where I
needed to go. Yeah.
No one expects you to besuccessful at the age of 16. So
why are you trying to drive anice car? Yeah.
David (06:23):
Agreed. Don't need to give up appearances. Just have
it get you to where you need togo.
Mike (06:27):
Yeah. And as long as it plays music, that's good enough.
Yes. If it plays music and itdrives. But the point being is
if you're 16 years old and youmax out so you have to have
income.
Mhmm. You have to generateincome, but then you max out
your Roth 16, 17, 18 years old,there's a good chance that half
of your retirement is now paidfor.
David (06:45):
That's a sobering, like, woah.
Mike (06:46):
Now there's a lot of variability there with market
patterns and growth and what'sgonna happen there. But based on
thirty year historical averagesand expectations, you put it all
in equities. This is notfinancial advice. Remember, this
is just a show. This is anexample.
Yeah. Put it all in equities.Maybe you blend it with the S
and P 500 and the Nasdaq 100.That's it. And you it's in the
(07:09):
Roth, and it grows.
Yeah. There's a good chancemaybe around half of your
retirement is now paid for, andyou didn't even start college.
So when I say, yeah, startearly, as soon as you can. Stop
going to get the fancy coffee inthe morning, and just drink the
crap that's at the office. Maybeyou got a fancy machine.
I don't know. But Right. Theselittle differences alleviate
(07:33):
significant financial stressesalong the way. I can't tell you
how many 40 year olds are barelymaking ends meet and have no
idea at this point. I was on thephone with one yesterday.
He says, we're having a hardtime saving. In fact, they're
struggling. They're having tosell the little they have saved
just to take care of some kidsthings that were unexpected.
(07:53):
Yeah. And he's like, how am Isupposed to catch up with this?
It's a lot easier if you give upa couple of fancy meals. You
don't need $80 appetizers at theage of 18 years old. No. But
that 80, I don't know. Layton,would you just look up the
compounding interest?
Let's say, 9% compoundinginterest from the age of 18 to
60 years old. So you didn't buythe $80 appetizer. You put it in
(08:17):
the market, and it's average,let's say, 9%. Just just do a
quick calculation because that'snot what I can do in my head at
the age of 60 years old. 9%compounding interest because
we're doing the equities.
We're hoping it's 9%. You'regoing more risk, but you don't
need the money till 60 yearsold. What's the value at 60
years old? Need a drum rollhere. That $80 appetizer's now
(08:37):
around $3,000.
So now at that point later on,that might seem insignificant,
but that's now buying 37appetizers when you retired at
$80. The point is, that's justone little bit, Wasn't a big
sacrifice. Yeah. Now how manytimes could you do that in the
year? Do it 10 times in theyear.
(08:57):
Wait. Got 30,000? Yeah. Do it a100 times in the year? Got
300,000?
Oh. I mean, these are thingsthat matter. You've got to
create the system to whereyou're saving. Now the question
was about tax planning as well.
David (09:10):
Let's Tax planning.
Mike (09:11):
Let's dive into that a little bit deeper. So when it
comes to tax planning, k, you'vegot to keep in mind your ten
forty. What do I mean by that?When I say the ten forty, the
1040 is the scorecard. Let megive you an idea, and I can tell
you right now, I would bewilling to bet most financial
(09:33):
advisers don't have a clue whatI'm about to say or even look at
this on an annual basis.
Okay? So on lines two and three,let me break that down for you
real quick. Line two a, that'syour tax free interest. That's
where it's gonna be recordedthere. It doesn't affect your
adjusted gross income Oh.
But it affects your modifiedadjusted gross income. So think
of your municipal bonds. That'sgonna affect your Social
(09:53):
Security planning. That's gonnaaffect if you qualify for
Trump's new senior standarddeduction planning and so on.
Did you really do yourself afavor for all these municipal
bonds to, quote, unquote, notpay income tax when it could be
affecting other parts of yourplan?
Also, keep in mind that yourmunicipal bond interest, you
need to account for thecomparable difference of taking
(10:16):
the municipal bond interestversus some other fixed income.
That's what they call bonds.Fixed income offer and pay taxes
because the fixed income that'snot a municipal bond might pay
you more than the municipalbond. Municipal bonds give you
less because they know it's taxfree.
David (10:33):
Oh, I see.
Mike (10:34):
So you have to do a after tax calculation. And do you need
or want the Social Security taxefficiency or not? Do you want
the extra 6,000 per persondeduction that's gonna be from
2025 to 2030 or not? You'vegotta keep in mind that there's
no get out of jail free card ifyou're getting money in one way
or the other. It's showing up onyour tax return, typically
speaking.
(10:54):
So two way, tax exempt interest.Be aware of that. Now it affects
other parts of your plan. Also,adjusted gross income, that tax
free interest, that's gonnaaffect your Medicare. So IRMA
and surcharges there.
So be mindful of these things.What if you don't need this tax
free interest? You're justtrying to grow your assets. Pick
something else that doesn't paya dividend or an interest rate.
(11:16):
It's just growing.
You could create unintentionalinefficiencies because you
didn't pay attention to the taxfree bank because it's not on
your adjusted gross income, butit shows up elsewhere. You gotta
pay attention to these things.Look at two b. K? Two b is the
taxable interest.
So this is kind of a surprisefor some people as it bumps up
their bits. You know you gotyour high yield savings or other
(11:36):
things that are paying youinterest. Be aware of that.
You've got then three a. Threea, these are qualified
dividends.
These don't show up as muchbased on my experience, but
you've got your qualifieddividend, which is paid as a
long term capital gains rate,but it's like for foreign
companies or corporate payouts,things like that. Very specific
they they qualify veryspecifically. Like, it's not as
(11:58):
easy. Then you've got two orthree b, which is your ordinary
income. This is where people gethurt.
Because they've got so muchordinary income coming from
because they're dividendinvestors, and it's in their
brokerage accounts, and theykeep reinvesting it. So then the
issue gets bigger and bigger andbigger. This is when they
typically come to me and say,how do we fix this? See, only
the way to get out of it is toeither do nothing and keep
paying the taxes, do nothing andspend this money, or sell with
(12:23):
long term capital gains rates tocoordinate that usually over a
couple of years to then movemoney into something that's not
paying as much dividends so theproblem doesn't get bigger and
bigger and bigger. Anyone thatactively avoids paying taxes
oftentimes pays more in taxes.
Oh. They create tax efficienciesthey have to deal with later on
because they're not beingproactive, And the specific
scorecard for brokerage accountsI have found is to be on lines
(12:46):
two and three. So two a, two b,three a, three b. And then also
keep in mind line seven. Lineseven is where you're keeping
the scorecard of your capitalgains.
Are you or your adviser activelytrading in your portfolio to try
and beat the market? Let's putthat into context. For easy
math, let's say that themarket's averaging 10%, because
(13:08):
ten's an easy number. Mhmm. K?
And let's say your effective taxrate is 20%. If the market's
doing 10% and you're activelytrading and you got 10%
performance, you have to accountfor taxes. That's 20% you're
paying in taxes. So really, youdidn't get 10%. You got 8%.
Because you had to pay taxes.It's a headwind against your
performance.
David (13:28):
Okay.
Mike (13:29):
And for what? I love active trading, but I think it
should be done moreappropriately in a qualified
account like an IRA or Roth
David (13:36):
Yeah.
Mike (13:36):
Not a brokerage account.
David (13:38):
Yeah. Because the brokerage account for, like,
just sort of buy and hold or
Mike (13:42):
In my opinion. Yeah. Yeah. Yeah. Now, I mean, you can get
fancy and do holding companiesand c corps and things like
that.
There's double taxation, whichis an argument. But if you're
looking for long term growthMhmm. You're gonna get taxed at
a different rate than incometax, but most people don't do
that kind of thing. But thenthink, okay. Well, I need to get
12% just to match the 10% growthnet of taxes.
(14:04):
So now that's really hard to do,but it doesn't stop there. You
have to then rationalize thefees. Let's say you're paying
1%. So you've gotta do 13%average annual returns to match
roughly net of tax performance,the 10%, and just ignore how it
affects all the other parts ofyour plan.
David (14:23):
So how do we put a bow on this whole we we started off
with how does tax planningreally play a role in my
retirement plan? We've talked alot about lines two and three
and two a and three a.
Mike (14:33):
When I got started in the industry, I was taught to tell
people, if you're paying taxes,you should be thanking me
because I'm making you money.And how ignorant is that?
David (14:43):
Yes. It fails to consider all the scorecards as you call
it.
Mike (14:47):
Yeah. Another way of looking at it is I don't think
you can give proper investmentadvice unless you also can give
tax advice. So if you asksomeone, can you give me tax
advice? No. That's a red flag.
Mhmm. Because the way you builda portfolio must acknowledge how
it's going to affect your taxreturn and the performance and
(15:07):
the other parts of your SocialSecurity taxes, your modified
adjusted gross income, how thataffects the standard deductions
that you may or may not qualify,how that affects your IRMA if
you're 65 years older. It allplays a role. And so many people
miss it because they putblinders on and say, okay. What
was my performance?
They look at a percent, and theyforget how it affects the taxes.
Or they might realize it, butthey don't fully connect the
(15:30):
dots. It's not about how manytimes your adviser trades. If
you hire an adviser, the purposeis to help guide you through the
complexities of your ability tocreate and sustain your wealth.
The growth of your assets thatthey're used for your lifestyle
and legacy goals.
(15:51):
Don't get upset if adviserdoesn't trade frequently. Are
they keeping my best interest atheart? Are they a fiduciary that
can also do taxes? By the way,fiduciary doesn't mean they can
give you tax advice. Fiduciarymeans that they have a
securities license, and they'resupposed to put your interest
ahead of their own.
And it
David (16:08):
seems like everybody should follow that what you just
described.
Mike (16:11):
Well, the insurance companies have their own word.
It's called best interest.That's their version of a
fiduciary. They couldn't use thesame word though for No. I don't
know, probably legal reasons.
Yeah. But they're also supposedto put your interest ahead of
their own in their own way ofwording it. It is confusing, but
unless you have someone that cando both, tax and investment
advice, you may be creatingunnecessary resistance towards
(16:36):
your growth and your goals.That's all the time we've got
for the show today. If youenjoyed the show, consider
subscribing to it wherever youget your podcasts.
Just search for how to retire ontime. Discover if your portfolio
is built to weather flat marketcycles or if you're missing tax
minimization opportunities thatyou may not even know exist.
Explore strategies that may beable to help you lower your
(16:58):
overall risk while potentiallyincreasing your overall growth
and lifestyle flexibility. Thisis not your ordinary financial
analysis. Learn more about YourWealth Analysis and what it
could do for you regardless ofyour age, asset, or target
retirement date, go towww.yourwealthanalysis.com today
to learn more and get started.
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