December 9, 2025 • 17 mins
“Hey Mike, can you explain what tax planning is? Everyone talks about it but then recommends IRA to Roth conversions.”
Discover different ways you could implement tax planning in your retirement plan other than IRA to Roth Conversions.
Text your questions to 913-363-1234.
Request Your Wealth Analysis by going to www.retireontime.com
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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. Saygoodbye to that oversimplified
advice you've heard hundreds oftimes. This show's all about the
nitty gritty. Now that said,remember, it's just a show, not
financial advice. It'seducational.
So do your research. As always,text your questions to (913)
363-1234. Again, (913) 363-1234.Let's dive in. David, what do we
(00:29):
got?
David (00:30):
Hey, Mike. Can you explain what tax planning is?
Everyone talks about it, butthen recommends IRA to Roth
conversions.
Mike (00:38):
First off, let's just dispel the IRA to Roth
conversion bit.
David (00:41):
Okay.
Mike (00:42):
It's not essential for everyone to do. Some people have
a sufficient amount of assetselsewhere that the IRA is maybe
a third, maybe a half of theiroverall portfolio. And if they
just focused on generating theirincome through their IRA, that
their RMD is a part of theiralready expected income anyway.
So do you really wanna do IRA toRoth conversions? And if so,
(01:03):
what's the benefit later on?
See, people want the 0% taxbracket. Yeah. Well, that's
nice, but how much does it costto get there? Are you willing to
pay, I don't know, 20 somepercent in taxes, in federal
taxes at the federal tax rate sothat you can maintain a 0% tax
bracket, or would you ratherthan just take income for life
(01:26):
at the 10 to 12% tax bracketwhile you're utilizing the
standard deduction, the seniordeduction, and the one big
beautiful bill deduction? Soassuming that tax planning's IRA
to Roth conversions, yes, is anoversimplification, and yes,
it's not right for everyone.
Everyone's different. Yourplan's different. Your
projections are different. Yourstrategies should be different.
(01:47):
But that's just the tip of theiceberg when it comes to tax
planning for what it's worth.
David (01:51):
Okay.
Mike (01:51):
And did I hit that hard enough? That there's more to
life than IRA to Rothconversions?
David (01:56):
Why, why is everybody talking about it? Is just
because we have it ingrained inour mind like, oh, Roth is tax
free growth. I'm gonna dowhatever I can to get there.
Mike (02:04):
Yeah. You know, I was talking with the CPA the other
day, and he made a really goodpoint. He says, your IRA to Roth
conversion opinion changed thisyear. I said, yes. It did.
Because the tax brackets, thepercentages were supposed to
increase at the end of the year,and the tax dollar thresholds
were supposed to decrease at theend of the year. In other words,
(02:25):
your taxes were gonna increasein two different ways. So it
made sense to maximize highertax brackets now because
overall, your tax bill isexpected to increase. Okay. And
then the one big beautiful billcomes into play.
Uh-huh. Oh. Alright. Trump comesin, and whether you like them or
not, I don't care. Whether youthink this is good for the
economy or not, I don't care.
(02:46):
Well, here's what happened. Yourtaxes were maintained. Oh.
They're not going up, so maybethat increases the deficit.
Maybe supply chain economicssolves the issue.
No one really knows what willhappen, but your taxes got
locked in at a lower rate.Allegedly made permanent, but
tax code's really written inpencil. So there you go. But,
(03:07):
yeah, your opinion on will taxesbe greater in the future, that's
an opinion. No one knows thefuture.
Yeah. So you are making educatedassumptions on what you think
will happen and then proceedingas such, because you can't
actually plan for the future.You can plan around the
(03:27):
different variables for thefuture. Talk about meta or
existential right there. Yeah.
And people say, oh, well, theThe US debt's really, really
high, so taxes have to go up.Just remember that solving the
the deficit, which by the way,deficit's different than the
debt. The deficit is spendingtoo much every year, which adds
(03:51):
to the debt. The debt's its ownthing. Yeah.
They can solve debt in otherways. There's more than one way
to solve these issues. Mhmm.It's not just increasing taxes.
David (04:00):
Yeah. That would just be one out of all the strategies,
that's one option.
Mike (04:04):
Yeah. Growing the economy is another option. Yeah. And
maybe AI contributes to thegrowth of the economy. Maybe it
doesn't.
I'm trying to be neutral aboutall these things instead of
being trying to be prophetic.I'm not a prophet. Okay. So tax
planning. What in the world istax planning?
What is it? Let's really taxplanning, in my opinion, is
understanding the tax code andthe various loopholes that may
(04:28):
or may not be available to youto help you lower your overall
tax bill. Yeah. So when WarrenBuffett says, I pay less in
taxes than my assistant Yeah.What he's really saying is he
makes like a what?
A 100 k salary is what he makes.Mhmm. So maybe his assistant
makes more than that, but he'soperating mostly off of long
(04:49):
term capital gains. What's that?The first 96,000 or so is taxed
at the 0% tax rate as long asthere's no ordinary income.
That's a tricky part. Yeah.Because it means you don't take
any ordinary income. IRA to Rothconversions shows up as ordinary
income.
David (05:05):
Okay.
Mike (05:05):
IRA distributions shows up as ordinary income. Social
Security pensions, they show upas ordinary income. Your
dividends, if it's notstructured correctly, shows up
as ordinary income. K. Sothere's all these things that
could get in the way that maybeyou can, maybe you can't utilize
the 0% tax bracket, but maybeyou utilize the 15% tax bracket
for long term capital gains.
Understanding what you can giveand what you can take as you
(05:28):
manipulate how you're going togenerate income in retirement,
that's tax planning. It'sunderstanding the difference
between two a, which affectsyour modified adjusted gross
income that's showing up there,and your two b. Maybe you've got
some interest that's being taxedbecause you're holding too much
in cash. And if you're holdingtoo much in cash, does the
interest put you over athreshold that then triggers
IRMAA or not?
David (05:48):
Two main two beer lines on the ten forty.
Mike (05:51):
On the ten forty. Yeah. And does that put you a dollar
over on the IRMAA? Because thatcould cost you an extra $102,100
dollars a month just because youheld too much in cash with
everything else that was goingon. Tax planning also needs to
be coordinated with yourinvestment adviser and your CPA
or enrolled agent or taxprofessional.
Because if you've got someoneover here trading your brokerage
account, and they have greatgrowth, but they create too many
(06:12):
capital gain issues, thataffects your modified adjusted
gross income and other parts ofyour ten forty, which then push
you into other situations thatmay not be favorable. So tax
planning isn't just saying, hey,CPA. Here's what happened. Well,
here's where you pay your taxes.Good luck next year.
Yeah. That's not tax planning,and tax planning is not saying,
alright. Well, we're gonna dosome IRA to Roth conversions.
(06:33):
Here's the tax bracket. Let'sjust make this work.
Forget about all the otherunintended consequences. It's
not about maximizing yourordinary income brackets. You
need to acknowledge the otherparts of your ten forty. What's
going on on line seven? Or soI'll just kind of go through,
you know, schedule d.
You got schedule c. Do you havea side business? Do you have a
business? What's going on there?Are are there short term capital
(06:54):
gains or the long term capitalgains?
What's the cash flow look like,and is that going in the right
direction? Too many times I'vehad people say, hey. Let's do
some tax. I say, great. Thefirst thing we're gonna talk
about is line three a and threeb.
Because you're trying to get alot of dividends in here. You're
reinvesting dividends. Thisnumber is gonna get bigger every
single year, which is gonna getin the way of other things. Do
you wanna start spending thisincome? Well, but I need to do
(07:15):
my IRA to Roth conversions.
That's true. So what if we soldsome of these positions? Yeah.
This year, we might have adifficult tax bill, but we can
move it over other positionsthat then don't create ordinary
dividends. Maybe we buy specificstocks, and now it's a qualified
dividend because we're holdingit for the correct duration of
time, and now we're gettingtaxed at long term capital gains
(07:36):
instead of the dividends, andwe're matching roughly what the
the actual dividend targetpayout would be.
These are things that are nottalked about at all because how
many people pull up their tenforty, and then they pull up
their statements and thencompare the two? It doesn't
happen.
David (07:52):
Yeah. Statements like from financial statements or IRA
statements.
Mike (07:56):
Yeah. If someone has a brokerage account, I'm looking
at their ten forty and theirtheir statements next to each
other. And then saying, okay. Sohere's your positions here.
That's probably what'scontributing here.
Let's take a six or 7% expecteddividend on here. Okay. That's
kind of how much we're gettingright here. Got it. And then
we're adjusting along the way.
Right? So that's a conversationthat's not really happening. Are
(08:17):
you a business owner? Do youwant an encore career? Maybe
you're an executive or just areally smart person.
You've got all these skills, andyou're going, you know, I I'd
like to keep working, but not asmuch. Maybe I want to be a
consultant or something on theside. Great. Now we're looking
at line 12. Line 12 is where yougot your deductions, you got
(08:38):
your write offs, and so on.
Gotta be careful because thereare certain things you can write
off. There are certain thingsyou can't write off. But do you
see how tax planning is one partunderstanding your investments?
Mhmm. One part understandingyour cash flow, and cash flow is
not income.
Cash flow is the movement ofcash in and out of your
investments and accounts.
David (08:57):
Okay.
Mike (08:58):
So you can have tax inefficient cash flow that's
trying to grow your portfolio,but you're creating tax issues
along the way.
David (09:06):
And so what what's an example of some cash flow? Is
that like a a position paying adividend and then the cash?
Mike (09:11):
Yeah. Your tax on your dividend is being reinvested or
spent. Is that efficient? Or ifyou've got rental income. Okay.
You've got rental income comingin. Do you have is it efficient?
Are you writing too much off?Are you getting a reasonable
cash flow or income from thatpoint? It's understanding the
flow of money through youraccounts and the tax
(09:32):
consequences that are beingtriggered in every bit of
movement.
Mhmm. And if I can go a stepfurther, are you getting a good
amount of return from yourmoney? So some people are
dividend investors, which iswonderful. That's one of the 10
strategies that work when itcomes to retirement income, but
they're getting like 2% fromtheir dividend because they
(09:53):
haven't really done the researchon appropriate dividend stock or
investments. Lot out there.
So it's a highly nuancedconversation that doesn't start
and stop with IRA to Rothconversions.
David (10:09):
Yo, it sounds like tax planning is, if I can put it in
a nutshell, you're trying to beproactive and not like reacting
every year. Yeah. You're beingproactive with if I do this,
then this sets me up in acertain way.
Mike (10:22):
Right now, we're doing our year end tax planning for our
clients for next year's income.So we're anticipating by holding
these positions, you're probablygonna get around this much in
your dividends. This much willprobably be taxed as ordinary
income, this won't be probablyqualified dividend. But what if
we shift this around? What if wetake this much and do an IRA
Roth conversion?
We're gonna be within thisbracket, but your standard
(10:42):
deductions over here. We areproactively assuming next year,
and the things that we can docan save, it's not guaranteed
for everyone, but thousands ofdollars.
David (10:52):
Okay.
Mike (10:52):
There's one guy was we were looking at who's got a side
business, and it's just an LLC.I said, I won't say his name, so
we'll say David, because you'reright here, and I can say your
name. David, your LLC, it's justpassed through taxation. This
doesn't make sense. Let's haveyou file as an s corp.
We're gonna have your incomethis much being now taxes
income. Mhmm. So you're gonnapay FICA tax on this and so on,
(11:14):
and then the rest is gonna beprofit. And because you want
your kids to help out, we'realso going to have them as
employees a part of here. Here'show we're gonna structure that.
So that lowers your overallincome, and you're getting your
assets to the kids. That savedhim, I think it was like 7 to
$10,000. Just in that one littleadjustment right there. Yeah.
That's net of all of the otherburdens of the bookkeeping and
(11:38):
things like that he'd had tosign up for because he has to
manage things slightlydifferently in that situation.
He's more than happy to do that,and that was also fun. This
isn't tax planning. This is morelegacy planning, but we then
were able to structure so hiskids were able to be employees
of his side business. Nowthey're able to contribute to a
Roth, and they're actuallyhelping him out. It's a
legitimate, like, employeesituation.
(11:59):
Right? So now they're gonna befunding their Roths at the ripe
age of 16 and 17 years old. Andif they just put it in high
growth vehicles just by fundingthe 16, 17, and 18 year old Roth
contributions, probably half hisretirement has already been paid
for before he even startscollege. Wow. Yeah.
(12:21):
So there is so much that can bedone when you stop looking at,
hey. Let's just pick out yourstocks and grow your money, and
you you take a step back and youlook at the whole picture.
David (12:32):
Right.
Mike (12:32):
And a lot of that is tax planning. These are things that
are not commonly talked aboutbecause a lot of people will
have in their disclosures, wecan't offer you tax advice. We
can't talk about taxes. We canhelp you with IRA or Roth
conversions, but that's kind ofthe limit of our scope. It's
hard, in my opinion, to giveinvestment advice without
acknowledging the taxconsequences.
(12:54):
Yeah. How about that?
David (12:56):
I'll let that sink in. It seems like it should be a no
brainer. Right? Well, of course,taxes and your wealth planning
and management and retirement
Mike (13:03):
Yeah.
David (13:04):
Should go together, should be considered together,
but often it's not, you'resaying.
Mike (13:08):
Well, imagine trying to bake a cake with half the
recipe. Ugh. And the rest of it,you just gotta guess. Have you
ever tried to like, let's sayall you have all the wet
ingredients. Uh-huh.
K? But you're not really sureexactly how much flour, so you
kind of keep adding it till youthink it's the right texture.
Right. And you're not reallysure about the baking soda or
the baking powder, so you'rejust kinda guessing it. And then
you put it in there, and it'slike a brick.
David (13:29):
Yeah. So you've guessed, and it didn't work out.
Mike (13:32):
I did try once to bake a cake without a recipe. Uh-huh.
It did not go well. Yeah. Bakingis very scientific.
David (13:41):
It really is. There's a
Mike (13:43):
reason why there's a recipe, but that's something you
need to consider with taxes.Yeah. There's a reason for
certain you don't wanna jumpover dimes to pick up pennies.
Here's another one I'll justthrow out there as we kind of, I
guess, end this segment. No onewants to pay taxes.
I get that. But what's worse?Avoiding a potential tax bill
and making adjustments to yourportfolio positioned for the
(14:05):
next environment for thefinancial markets, or just
writing it out and seeing whathappens. Because avoiding taxes
could actually hurt you morethan help you. Right?
Avoiding taxes can cause you toget just nailed in a potential
market crash. Avoiding taxesmeans you've given up your
(14:27):
ability to make investmentdecisions or adjustments in your
portfolio. So if you have nocontrol, you have already
determined the next twenty tothirty years of your life, and
you have no willingness to adaptalong the way, that's a risky
thing to do. That's like saying,alright. We're gonna drive
straight for the next 70 mileson this road.
(14:50):
You've got your car locked in.You're not gonna change
anything. You think it's gonnago straight, but you can't see
it because there's ups and downsalong the way. But what if you
need to turn? It's kind of aweird analogy, but does it make
sense?
Yeah. Sometimes it makes senseto just have a higher tax bill.
Maybe once every three years,you make a significant
(15:13):
adjustment to your portfolio.You pay the tax bills, and,
yeah, you're getting hit byIrma, but you're not getting hit
by Irma the other two years.You've gotta have some sort of
system, some sort of schedulethat allows you to adjust along
the way.
You've gotta make adjustmentsalong the way. You don't wanna
buy and hold and close your eyesand hope it works out. Just
(15:33):
remember, Cisco, the darlingcompany of the nineties Mhmm.
Crashed over 80% and took twentyfour years just to recover.
Woah.
But they didn't pay taxes, thosewho didn't sell. Hopefully, that
illustrates my point. You don'twanna just get on the roller
coaster, not put your yoursafety belt on, and to hope it
(15:54):
works out. You'll wanna beprepared for the good, the bad,
and the ugly. It's like whenclients have charitable intent,
I say, great.
Donate in January January andDecember of that same year, and
then the following year, don't.It's really hard to exceed the
standard deduction. But if youdo all of your donations, all of
your charitable gifting, youpile it up into the same year,
(16:16):
but you just do it in Januaryand in December of the same
year, then you're able toprobably write off part of it
and actually benefit from it. Sothese are things to consider,
but tax planning is much morethan IRA to Roth conversions.
Though IRA to Roth conversionsmay be an appropriate part of
your overall plan, and maybe youeven started earlier before
fifty nine and a half, if youunderstand what I mean there,
(16:37):
and there's a lot of nuance.
It's looking outside of justthat strategy and looking at the
other strategies, even to theextent of things like qualified
opportunity zones, oil and gaspartnerships. I know some people
that have even used lifeinsurance as a mechanism to
utilize some tax efficiencies.Everyone's different, so be
mindful of that. That's all thetime we've got for the show
(17:00):
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(17:21):
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to learn more and get started.
Welcome to how to retire on time, a show that answers
your retirement questions. Saygoodbye to that oversimplified
advice you've heard hundreds oftimes. This show's all about the
nitty gritty. Now that said,remember, it's just a show, not
financial advice. It'seducational.
So do your research. As always,text your questions to (913)
363-1234. Again, (913) 363-1234.Let's dive in. David, what do we
(00:29):
got?
David (00:30):
Hey, Mike. Can you explain what tax planning is?
Everyone talks about it, butthen recommends IRA to Roth
conversions.
Mike (00:38):
First off, let's just dispel the IRA to Roth
conversion bit.
David (00:41):
Okay.
Mike (00:42):
It's not essential for everyone to do. Some people have
a sufficient amount of assetselsewhere that the IRA is maybe
a third, maybe a half of theiroverall portfolio. And if they
just focused on generating theirincome through their IRA, that
their RMD is a part of theiralready expected income anyway.
So do you really wanna do IRA toRoth conversions? And if so,
(01:03):
what's the benefit later on?
See, people want the 0% taxbracket. Yeah. Well, that's
nice, but how much does it costto get there? Are you willing to
pay, I don't know, 20 somepercent in taxes, in federal
taxes at the federal tax rate sothat you can maintain a 0% tax
bracket, or would you ratherthan just take income for life
(01:26):
at the 10 to 12% tax bracketwhile you're utilizing the
standard deduction, the seniordeduction, and the one big
beautiful bill deduction? Soassuming that tax planning's IRA
to Roth conversions, yes, is anoversimplification, and yes,
it's not right for everyone.
Everyone's different. Yourplan's different. Your
projections are different. Yourstrategies should be different.
(01:47):
But that's just the tip of theiceberg when it comes to tax
planning for what it's worth.
David (01:51):
Okay.
Mike (01:51):
And did I hit that hard enough? That there's more to
life than IRA to Rothconversions?
David (01:56):
Why, why is everybody talking about it? Is just
because we have it ingrained inour mind like, oh, Roth is tax
free growth. I'm gonna dowhatever I can to get there.
Mike (02:04):
Yeah. You know, I was talking with the CPA the other
day, and he made a really goodpoint. He says, your IRA to Roth
conversion opinion changed thisyear. I said, yes. It did.
Because the tax brackets, thepercentages were supposed to
increase at the end of the year,and the tax dollar thresholds
were supposed to decrease at theend of the year. In other words,
(02:25):
your taxes were gonna increasein two different ways. So it
made sense to maximize highertax brackets now because
overall, your tax bill isexpected to increase. Okay. And
then the one big beautiful billcomes into play.
Uh-huh. Oh. Alright. Trump comesin, and whether you like them or
not, I don't care. Whether youthink this is good for the
economy or not, I don't care.
(02:46):
Well, here's what happened. Yourtaxes were maintained. Oh.
They're not going up, so maybethat increases the deficit.
Maybe supply chain economicssolves the issue.
No one really knows what willhappen, but your taxes got
locked in at a lower rate.Allegedly made permanent, but
tax code's really written inpencil. So there you go. But,
(03:07):
yeah, your opinion on will taxesbe greater in the future, that's
an opinion. No one knows thefuture.
Yeah. So you are making educatedassumptions on what you think
will happen and then proceedingas such, because you can't
actually plan for the future.You can plan around the
(03:27):
different variables for thefuture. Talk about meta or
existential right there. Yeah.
And people say, oh, well, theThe US debt's really, really
high, so taxes have to go up.Just remember that solving the
the deficit, which by the way,deficit's different than the
debt. The deficit is spendingtoo much every year, which adds
(03:51):
to the debt. The debt's its ownthing. Yeah.
They can solve debt in otherways. There's more than one way
to solve these issues. Mhmm.It's not just increasing taxes.
David (04:00):
Yeah. That would just be one out of all the strategies,
that's one option.
Mike (04:04):
Yeah. Growing the economy is another option. Yeah. And
maybe AI contributes to thegrowth of the economy. Maybe it
doesn't.
I'm trying to be neutral aboutall these things instead of
being trying to be prophetic.I'm not a prophet. Okay. So tax
planning. What in the world istax planning?
What is it? Let's really taxplanning, in my opinion, is
understanding the tax code andthe various loopholes that may
(04:28):
or may not be available to youto help you lower your overall
tax bill. Yeah. So when WarrenBuffett says, I pay less in
taxes than my assistant Yeah.What he's really saying is he
makes like a what?
A 100 k salary is what he makes.Mhmm. So maybe his assistant
makes more than that, but he'soperating mostly off of long
(04:49):
term capital gains. What's that?The first 96,000 or so is taxed
at the 0% tax rate as long asthere's no ordinary income.
That's a tricky part. Yeah.Because it means you don't take
any ordinary income. IRA to Rothconversions shows up as ordinary
income.
David (05:05):
Okay.
Mike (05:05):
IRA distributions shows up as ordinary income. Social
Security pensions, they show upas ordinary income. Your
dividends, if it's notstructured correctly, shows up
as ordinary income. K. Sothere's all these things that
could get in the way that maybeyou can, maybe you can't utilize
the 0% tax bracket, but maybeyou utilize the 15% tax bracket
for long term capital gains.
Understanding what you can giveand what you can take as you
(05:28):
manipulate how you're going togenerate income in retirement,
that's tax planning. It'sunderstanding the difference
between two a, which affectsyour modified adjusted gross
income that's showing up there,and your two b. Maybe you've got
some interest that's being taxedbecause you're holding too much
in cash. And if you're holdingtoo much in cash, does the
interest put you over athreshold that then triggers
IRMAA or not?
David (05:48):
Two main two beer lines on the ten forty.
Mike (05:51):
On the ten forty. Yeah. And does that put you a dollar
over on the IRMAA? Because thatcould cost you an extra $102,100
dollars a month just because youheld too much in cash with
everything else that was goingon. Tax planning also needs to
be coordinated with yourinvestment adviser and your CPA
or enrolled agent or taxprofessional.
Because if you've got someoneover here trading your brokerage
account, and they have greatgrowth, but they create too many
(06:12):
capital gain issues, thataffects your modified adjusted
gross income and other parts ofyour ten forty, which then push
you into other situations thatmay not be favorable. So tax
planning isn't just saying, hey,CPA. Here's what happened. Well,
here's where you pay your taxes.Good luck next year.
Yeah. That's not tax planning,and tax planning is not saying,
alright. Well, we're gonna dosome IRA to Roth conversions.
(06:33):
Here's the tax bracket. Let'sjust make this work.
Forget about all the otherunintended consequences. It's
not about maximizing yourordinary income brackets. You
need to acknowledge the otherparts of your ten forty. What's
going on on line seven? Or soI'll just kind of go through,
you know, schedule d.
You got schedule c. Do you havea side business? Do you have a
business? What's going on there?Are are there short term capital
(06:54):
gains or the long term capitalgains?
What's the cash flow look like,and is that going in the right
direction? Too many times I'vehad people say, hey. Let's do
some tax. I say, great. Thefirst thing we're gonna talk
about is line three a and threeb.
Because you're trying to get alot of dividends in here. You're
reinvesting dividends. Thisnumber is gonna get bigger every
single year, which is gonna getin the way of other things. Do
you wanna start spending thisincome? Well, but I need to do
(07:15):
my IRA to Roth conversions.
That's true. So what if we soldsome of these positions? Yeah.
This year, we might have adifficult tax bill, but we can
move it over other positionsthat then don't create ordinary
dividends. Maybe we buy specificstocks, and now it's a qualified
dividend because we're holdingit for the correct duration of
time, and now we're gettingtaxed at long term capital gains
(07:36):
instead of the dividends, andwe're matching roughly what the
the actual dividend targetpayout would be.
These are things that are nottalked about at all because how
many people pull up their tenforty, and then they pull up
their statements and thencompare the two? It doesn't
happen.
David (07:52):
Yeah. Statements like from financial statements or IRA
statements.
Mike (07:56):
Yeah. If someone has a brokerage account, I'm looking
at their ten forty and theirtheir statements next to each
other. And then saying, okay. Sohere's your positions here.
That's probably what'scontributing here.
Let's take a six or 7% expecteddividend on here. Okay. That's
kind of how much we're gettingright here. Got it. And then
we're adjusting along the way.
Right? So that's a conversationthat's not really happening. Are
(08:17):
you a business owner? Do youwant an encore career? Maybe
you're an executive or just areally smart person.
You've got all these skills, andyou're going, you know, I I'd
like to keep working, but not asmuch. Maybe I want to be a
consultant or something on theside. Great. Now we're looking
at line 12. Line 12 is where yougot your deductions, you got
(08:38):
your write offs, and so on.
Gotta be careful because thereare certain things you can write
off. There are certain thingsyou can't write off. But do you
see how tax planning is one partunderstanding your investments?
Mhmm. One part understandingyour cash flow, and cash flow is
not income.
Cash flow is the movement ofcash in and out of your
investments and accounts.
David (08:57):
Okay.
Mike (08:58):
So you can have tax inefficient cash flow that's
trying to grow your portfolio,but you're creating tax issues
along the way.
David (09:06):
And so what what's an example of some cash flow? Is
that like a a position paying adividend and then the cash?
Mike (09:11):
Yeah. Your tax on your dividend is being reinvested or
spent. Is that efficient? Or ifyou've got rental income. Okay.
You've got rental income comingin. Do you have is it efficient?
Are you writing too much off?Are you getting a reasonable
cash flow or income from thatpoint? It's understanding the
flow of money through youraccounts and the tax
(09:32):
consequences that are beingtriggered in every bit of
movement.
Mhmm. And if I can go a stepfurther, are you getting a good
amount of return from yourmoney? So some people are
dividend investors, which iswonderful. That's one of the 10
strategies that work when itcomes to retirement income, but
they're getting like 2% fromtheir dividend because they
(09:53):
haven't really done the researchon appropriate dividend stock or
investments. Lot out there.
So it's a highly nuancedconversation that doesn't start
and stop with IRA to Rothconversions.
David (10:09):
Yo, it sounds like tax planning is, if I can put it in
a nutshell, you're trying to beproactive and not like reacting
every year. Yeah. You're beingproactive with if I do this,
then this sets me up in acertain way.
Mike (10:22):
Right now, we're doing our year end tax planning for our
clients for next year's income.So we're anticipating by holding
these positions, you're probablygonna get around this much in
your dividends. This much willprobably be taxed as ordinary
income, this won't be probablyqualified dividend. But what if
we shift this around? What if wetake this much and do an IRA
Roth conversion?
We're gonna be within thisbracket, but your standard
(10:42):
deductions over here. We areproactively assuming next year,
and the things that we can docan save, it's not guaranteed
for everyone, but thousands ofdollars.
David (10:52):
Okay.
Mike (10:52):
There's one guy was we were looking at who's got a side
business, and it's just an LLC.I said, I won't say his name, so
we'll say David, because you'reright here, and I can say your
name. David, your LLC, it's justpassed through taxation. This
doesn't make sense. Let's haveyou file as an s corp.
We're gonna have your incomethis much being now taxes
income. Mhmm. So you're gonnapay FICA tax on this and so on,
(11:14):
and then the rest is gonna beprofit. And because you want
your kids to help out, we'realso going to have them as
employees a part of here. Here'show we're gonna structure that.
So that lowers your overallincome, and you're getting your
assets to the kids. That savedhim, I think it was like 7 to
$10,000. Just in that one littleadjustment right there. Yeah.
That's net of all of the otherburdens of the bookkeeping and
(11:38):
things like that he'd had tosign up for because he has to
manage things slightlydifferently in that situation.
He's more than happy to do that,and that was also fun. This
isn't tax planning. This is morelegacy planning, but we then
were able to structure so hiskids were able to be employees
of his side business. Nowthey're able to contribute to a
Roth, and they're actuallyhelping him out. It's a
legitimate, like, employeesituation.
(11:59):
Right? So now they're gonna befunding their Roths at the ripe
age of 16 and 17 years old. Andif they just put it in high
growth vehicles just by fundingthe 16, 17, and 18 year old Roth
contributions, probably half hisretirement has already been paid
for before he even startscollege. Wow. Yeah.
(12:21):
So there is so much that can bedone when you stop looking at,
hey. Let's just pick out yourstocks and grow your money, and
you you take a step back and youlook at the whole picture.
David (12:32):
Right.
Mike (12:32):
And a lot of that is tax planning. These are things that
are not commonly talked aboutbecause a lot of people will
have in their disclosures, wecan't offer you tax advice. We
can't talk about taxes. We canhelp you with IRA or Roth
conversions, but that's kind ofthe limit of our scope. It's
hard, in my opinion, to giveinvestment advice without
acknowledging the taxconsequences.
(12:54):
Yeah. How about that?
David (12:56):
I'll let that sink in. It seems like it should be a no
brainer. Right? Well, of course,taxes and your wealth planning
and management and retirement
Mike (13:03):
Yeah.
David (13:04):
Should go together, should be considered together,
but often it's not, you'resaying.
Mike (13:08):
Well, imagine trying to bake a cake with half the
recipe. Ugh. And the rest of it,you just gotta guess. Have you
ever tried to like, let's sayall you have all the wet
ingredients. Uh-huh.
K? But you're not really sureexactly how much flour, so you
kind of keep adding it till youthink it's the right texture.
Right. And you're not reallysure about the baking soda or
the baking powder, so you'rejust kinda guessing it. And then
you put it in there, and it'slike a brick.
David (13:29):
Yeah. So you've guessed, and it didn't work out.
Mike (13:32):
I did try once to bake a cake without a recipe. Uh-huh.
It did not go well. Yeah. Bakingis very scientific.
David (13:41):
It really is. There's a
Mike (13:43):
reason why there's a recipe, but that's something you
need to consider with taxes.Yeah. There's a reason for
certain you don't wanna jumpover dimes to pick up pennies.
Here's another one I'll justthrow out there as we kind of, I
guess, end this segment. No onewants to pay taxes.
I get that. But what's worse?Avoiding a potential tax bill
and making adjustments to yourportfolio positioned for the
(14:05):
next environment for thefinancial markets, or just
writing it out and seeing whathappens. Because avoiding taxes
could actually hurt you morethan help you. Right?
Avoiding taxes can cause you toget just nailed in a potential
market crash. Avoiding taxesmeans you've given up your
(14:27):
ability to make investmentdecisions or adjustments in your
portfolio. So if you have nocontrol, you have already
determined the next twenty tothirty years of your life, and
you have no willingness to adaptalong the way, that's a risky
thing to do. That's like saying,alright. We're gonna drive
straight for the next 70 mileson this road.
(14:50):
You've got your car locked in.You're not gonna change
anything. You think it's gonnago straight, but you can't see
it because there's ups and downsalong the way. But what if you
need to turn? It's kind of aweird analogy, but does it make
sense?
Yeah. Sometimes it makes senseto just have a higher tax bill.
Maybe once every three years,you make a significant
(15:13):
adjustment to your portfolio.You pay the tax bills, and,
yeah, you're getting hit byIrma, but you're not getting hit
by Irma the other two years.You've gotta have some sort of
system, some sort of schedulethat allows you to adjust along
the way.
You've gotta make adjustmentsalong the way. You don't wanna
buy and hold and close your eyesand hope it works out. Just
(15:33):
remember, Cisco, the darlingcompany of the nineties Mhmm.
Crashed over 80% and took twentyfour years just to recover.
Woah.
But they didn't pay taxes, thosewho didn't sell. Hopefully, that
illustrates my point. You don'twanna just get on the roller
coaster, not put your yoursafety belt on, and to hope it
(15:54):
works out. You'll wanna beprepared for the good, the bad,
and the ugly. It's like whenclients have charitable intent,
I say, great.
Donate in January January andDecember of that same year, and
then the following year, don't.It's really hard to exceed the
standard deduction. But if youdo all of your donations, all of
your charitable gifting, youpile it up into the same year,
(16:16):
but you just do it in Januaryand in December of the same
year, then you're able toprobably write off part of it
and actually benefit from it. Sothese are things to consider,
but tax planning is much morethan IRA to Roth conversions.
Though IRA to Roth conversionsmay be an appropriate part of
your overall plan, and maybe youeven started earlier before
fifty nine and a half, if youunderstand what I mean there,
(16:37):
and there's a lot of nuance.
It's looking outside of justthat strategy and looking at the
other strategies, even to theextent of things like qualified
opportunity zones, oil and gaspartnerships. I know some people
that have even used lifeinsurance as a mechanism to
utilize some tax efficiencies.Everyone's different, so be
mindful of that. That's all thetime we've got for the show
(17:00):
today. If you enjoyed the show,consider subscribing to it
wherever you get your podcast.
Just search for how to retire ontime. Discover if your portfolio
is built to weather flat marketcycles if you're missing tax
minimization opportunities thatyou may not even know exist.
Explore strategies that may beable to help you lower your
overall risk while potentiallyincreasing your overall growth
(17:21):
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 toww.yourwealthanalysis.com today
to learn more and get started.
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