October 25, 2025 • 21 mins
Retiring early isn’t just about having enough money, it’s about using the right tax moves in the right years. This conversation between James and Ari maps the three biggest levers for early retirees: Roth conversions, ACA health insurance subsidies, and 0% long-term capital gains. A real-world case study shows how account mix and spending levels can flip what’s “best,” and how small income shifts can change the math in a big way.
The episode breaks down when Roth conversions pay off versus when they backfire, how keeping modified AGI under ACA thresholds can save five figures, and how harvesting capital gains at the 0% federal rate can reset cost basis and rebalance efficiently. It frames the tax window between the final work years and required minimum distributions, modeling income year by year to prioritize lifetime impact, not short-term refunds.
The focus is clarity and control—ranking strategies by pre-tax versus brokerage mix, showing how different spending assumptions can reverse the outcome, and outlining a practical process for tax-gain harvesting and rebalancing. James and Ari guide you to use tax strategy as a tool to buy more freedom, not more complexity.
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Advisory services are offered through Root Financial Partners, LLC, an SEC-registered investment adviser. This content is intended for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. Viewing this content does not create an advisory relationship. We do not provide tax preparation or legal services. Always consult an investment, tax or legal professional regarding your specific situation.
The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (00:00):
Almost every person who wants to retire early is
facing the same three things ifthey want to truly optimize for
their early retirement.
Number one, they're wondering,should I try to massage my
income to get like a healthcaresubsidy?
Number two, should I try to dothose Roth conversions where I
move money from a 401k to Rothbecause most of my money is in
(00:21):
that pre-tax account?
And number three, should I dothat tax gain harvesting that
paying 0% in taxes potentiallyif you massage your income well?
And you have what's called a taxwindow to be able to do this.
And this is what I imagine mostof your retirements are looking
like.
(00:41):
So here's a visual to see thatmore clearly.
Here's someone who's 55, makinga very healthy income, they want
to retire at 60.
That's when their income's gonnadrop.
And then what's gonna happenhere at 75?
Those RMDs.
SPEAKER_00 (00:54):
Hey everyone, I'm James Cannol, CEO of Root
Financial.
I'm with Ari Taubleb, ChiefGrowth Officer of Root
Financial, and we are here todayto do a collaboration to help
you understand what's the righttax strategy to implement as
you're moving into retirement.
And Ari, as you mentioned,there's three big ones that we
think about that most peoplethink about.
That's the easy part.
The harder part is understandingwhat do you prioritize, and it's
(01:15):
very much based upon yoursituation, and we're gonna walk
through a case study to helpshow people why.
Let's learn about the couple.
SPEAKER_01 (01:21):
James, so here is a couple, John and Jane, we're
getting real creative with thenames here.
55 and 49 with John Jr., theirson, 21 years old.
Now they have invested well.
They have 8.4 million as theirnet worth, and whether that is
your net worth or not, which Ican promise, I don't think
anyone watching this video,James, is gonna have the exact
(01:41):
net worth of$8,414,085.
But if that is you, commentbelow because I will be shocked.
But we do want you to know thesame principles we talk about
today do apply to you regardlessof your net worth.
You can hopefully learn.
And we want to make sure thatyou are resonating with the
content we put out.
So if this does resonate, pleasecomment below.
SPEAKER_00 (02:03):
And all right, just to add to that, by the end of
this video, I'm gonna talk tothat person that has$100,000 in
the retirement portfolio.
I'm gonna talk to that personthat has$20 million in the
retirement portfolio and giveyou a sense of based upon your
net worth and the range thatyou're in, which of these should
you lean towards looking toprioritize first?
So yes, not everyone is thissituation.
Most people are not, but we aregonna talk to everyone as we go
(02:24):
through this.
SPEAKER_01 (02:25):
I'm excited to hear your feedback at the end of this
video to see how that doeschange.
Now, this person has$1.2 millionin their traditional 401k.
They have one point uh excuseme,$161,000 in a Roth IRA and
$5.6 million in a superheroaccount.
Now, superhero account,brokerage account, taxable
account, joint account,individual, they all mean the
(02:48):
same thing.
This is money that you've putinto an account that can grow
however you see fit.
You can invest it however youwant.
There's not a limit.
You can put$10 trillion intomorrow if you do have it.
And you might be very popular ifyou are putting$10 trillion in.
You might be the first of itskind.
Now, this person didn't put$10trillion, but they invested over
(03:10):
the last 30 years and their costbasis, meaning what they
actually put in, their originalinvestment totals$1.7 million,
and it's grown to$1.6 million.
So, James, do you think theymight be worried about taxes?
SPEAKER_00 (03:29):
They are, and they will be, and everyone I think
watching probably is, becausehere's the thing is most people
think that in their workingyears, you hear tax strategy.
And if you're working a W-2 job,you're probably thinking, ah,
that doesn't apply to me.
Sure, I have my 401k, sure maybeI have a health savings account
that I can contribute to.
But tax strategy, that's that'sfor the other people.
That's for people that ownbusinesses, that's for people
(03:49):
that own real estate, that's forpeople that own something that's
different than me.
There's some truth to that whenyou're in your working years,
but the thing that changesalready is as soon as you
retire, there's so much taxstrategy available to you.
So those of you who are startingto tune out because you're
thinking, oh, yeah, they'regonna tell me to save money to
my 401k or donate money tocharity or whatever it is.
(04:10):
That's not what we're talkingabout.
We are talking about taxstrategy that is very available
to everyone who is retired.
But most importantly, how do youprioritize which tax strategies
to look at?
And already, there's three.
As we mentioned, let's jump intowhat those are and what we
should start thinking about.
SPEAKER_01 (04:25):
Thank you, James.
Let's talk about the biggest onethat everyone wants to know
about Roth conversions.
How much value can that add?
And as you can see, we're notgonna have a deep conversation
about John and Jane's goals andhow much they want to spend.
I want you guys to assume we'vealready done that, but that they
want to spend$15,000 a month,take some vacations, they want
to make sure they'recomfortable.
(04:45):
We're not saying all of youshould do Roth conversions.
In fact, we put out a video thatgot over 100,000 views that you
can see here that is literallytitled Stop, Why You Should Not
Do a Roth Conversion.
But the reason I'm bringing thisup is because if you do tax
strategy well, it can add a lotof money over time.
So, James, we've both had peoplereach out and they'll say
(05:06):
something like the following.
And I'm paraphrasing here, butthey go, Look, my my nephew,
they just think I'm the coolestperson ever, because I do Roth
conversions, you know, and andI'll say, Look, that's cool, but
maybe you shouldn't do anythingat all.
And they're like, What do youmean?
I need to get close to my nieceand nephew.
It's been a while.
This is the first time theythink I'm cool.
I'm talking about Rothconversions.
And we'll say, Listen, we wantyou to be cool.
(05:27):
We want, trust me, we're allabout being cool, but we don't
want you to do somethingunnecessarily.
And there are situations whereRoth conversions do not make any
sense.
So you're probably wondering,well, when do they make sense?
Well, this is a tool that we'lloften use with clients, and you
can see if we were to do Rothconversions up to the 12%
bracket, meaning saying, yes,I'm happy to pay taxes a little
(05:48):
bit today to hopefully make moreover time, you can see it can
add value, certainly.
And as you continue to use thisslider, it looks like it can add
more and more value.
But then what happens is all ofa sudden it actually looks like
there's maybe less.
So this whole concept of just domore conversions, do more
conversions, yes, Rothconversions can be valuable, but
(06:11):
there are times where itliterally makes sense to do
nothing at all and forget yourpassword.
SPEAKER_00 (06:17):
So there are times are that you absolutely should
do Roth conversions.
That first example you showed, Ithink, is a perfect illustration
of that.
There are times where you shouldnot do a Roth conversion.
You're actually going to paymore in taxes by doing it than
you would how you just sat onyour hands doing nothing, maybe
even forgetting your password,as you just mentioned.
So, how do you know?
Here's how I encourage people tothink of it.
(06:37):
Start with understanding what'sthe impact of a Roth conversion.
I say start here because this isthe one where I would say
there's the biggest deviance orthe biggest variation of
sometimes it costs you,sometimes it makes you a ton of
money.
So if you don't have thefoundation, or if you don't
almost have the anchoredstarting point of what's the
benefit of that, it's tough tocompare and contrast because
we're not asking are each ofthese things good or bad?
(07:00):
All of them can be good, butoftentimes we're not choosing
between good and bad.
We're choosing between good andbetter, or better and best.
And so you have to start withsomething.
You have to have somefoundational starting point to
know what's the potentialsavings from this strategy.
So when I compare the others, Ihave something to look at.
So with Roth Conversions, we didexactly that.
And with Roth Conversions, whatyou're projecting out is two
(07:23):
things.
You're projecting out both whatdo you expect your taxable
income to be, not just thisyear, but really every year
throughout retirement, basedupon things like social
security, based upon things likedividends, based upon things
like interest, based upon thingslike pensions, whatever income
sources you're gonna have inretirement.
When you model that out, you'regonna get a sense of what will
your taxable income be.
(07:44):
And then on top of that, you canlayer what are expected tax
brackets to be.
So it's not enough just to knowwhere tax bracket's gonna be.
It's not enough to know what'syour taxable income going to be.
You need to compare the two soyou can start to see where am I
projected to be?
Am I gonna be in the 12% bracketin the future, the 22% bracket,
the 32% bracket?
All those have very differentimplications.
(08:06):
Now, this is something that's alot easier to do with software.
The software that you justlooked at are if people want
access to that, they can get itin the link below in the
retirement planning academy andthe early retirement academy.
That is something that you canuse to actually model out where
you project it to be.
Because when we look at thingslike health insurance subsidies,
for example, that's usually apretty simple thing to
(08:26):
understand.
You can say, if I keep my incomeunder certain thresholds, and
these thresholds depend on a fewdifferent factors, but what it's
looking at is if you keep yourincome under certain thresholds,
you receive a certain dollaramount in benefits.
So that dollar amount, if you dothe analysis, you can start to
actually calculate that out.
What is that?
And these are things that you'relooking at in your pre-Medicare
(08:47):
years.
So once you're on Medicare, thisisn't so much of a question.
There's other things toconsider, like IRMA surcharges,
but say you retire at 60.
And if you keep your incomeunder a certain threshold, you
maybe save$15,000 per year onhealth insurance premiums, you
and a spouse.
Well,$15,000 times five, you'reat$65,000.
(09:07):
So you say, if I'm going to usethis tax planning window, if I'm
going to use this window that Ihave of having a low income tax
bracket, having a low taxableincome, I can fill up that
bracket, or I can use that lowincome tax bracket to qualify
for health insurance subsidies.
An example, that's$15,000 peryear savings.
Or I can use it to do a Rothconversion by converting parts
(09:28):
of my IRA into my Roth IRA tofill up those lower tax brackets
so I don't pay taxes in thefuture at a higher rate when
required distributions kick in.
Or I can do something called taxgain harvesting.
Tax gain harvesting alreadymeans you can sell a certain
portion of your long-term gainsin a brokerage account.
And if you're under a certainthreshold of taxable income,
(09:50):
there's a 0% capital gains taxbracket.
That's wonderful.
Can you sell stock under athreshold?
You can see here on the screen,if you're married finally and
jointly for 2025, if yourtaxable income is under$96,700,
any long-term gains you realizeup until that point, you're
paying 0% federal tax on.
(10:10):
Might be a different storydepending on what state you live
in.
But on the federal level, that'swhat you're looking at.
Now keep in mind, this is afterdeductions.
This is after the standarddeduction.
If you're 65 and older, there'san extra senior deduction.
And then for the next few years,from 2025 to 2028, there's an
additional senior deduction.
So this means your total incomecan even be much higher.
(10:32):
And after all those deductions,if it's under this threshold, 0%
tax bracket.
So what you're doing here isyou're prioritizing those.
All can be good, but again, it'swhat's good, what's better,
what's best.
If I'm using the Rothconversion, I've already used
this tool or use a scenarioplanning analysis to say that
might save me$400,000, thatbecomes a benchmark there.
(10:54):
Then I look at healthcaresubsidies and keep in mind,
these are just examples.
These numbers will be differentfor everyone.
But if I'm saving$15,000 peryear for five years, that's
$65,000.
But I also want to know if that$65,000 that I saved is$65,000
that stays in my investmentportfolio that I no longer have
to take out.
It's not just$65,000 of savings,it's$65,000 of direct savings
(11:18):
plus the growth that would comefrom that because that money's
remaining in my investmentaccount and not being withdrawn
to spend.
So you might project out what'sthe long-term value of that if
it remains in my account.
Let's assume, just to use simplenumbers, that$65,000 could turn
to$250,000 over the course ofyour retirement if you're not
pulling it out.
Finally, same thing with taxgain harvesting.
(11:41):
What are you going to do there?
How much could you realize inlong-term gains?
Is there a need to realizelong-term gains?
You know, or if that portfoliothat you showed, I think is
about$5 million on the screenthere.
If that$5 million, for example,was one single stock that was
purchased for$10,000 years andyears and years ago, and now
it's$5 million, I might leanmore towards, I want to use this
(12:02):
tax planning window to realizegains from that because I need
to diversify.
There's a strong need to do so.
Versus if that$5 million is, oh,this person just inherited$5
million from their parents whenthey passed, there's zero tax
implication for taking all thatand doing what you want with it.
So you can start to see how muchof a need is there to realize
these gains, not just for taxplanning, but to move that
(12:25):
investment into the desiredinvestment that's gonna allow
you to meet your needs longterm.
How do you prioritize these?
So back to what I said at thebeginning.
I mentioned whether you have100,000 or 20 million in your
portfolio, how do you thinkabout this?
The less you have in yourportfolio, the less you have in
pre-tax accounts, typically theless impactful a Roth conversion
(12:45):
is gonna be.
Usually you're doing Rothconversions because you have a
pre-tax 401k, you have a pre-taxIRA.
And if you allow that to keepgrowing, when you turn 73 or 75,
depending on how old you are,you're gonna be required to
start taking distributions fromthat.
When you are required to starttaking distributions, the bigger
your pre-tax account, the biggerthat required distribution.
(13:08):
The bigger the requireddistribution, the higher the tax
bracket you're gonna be in whenthat time comes.
So all right, if you're lookingat this and you have a$7 million
portfolio, that's not what I'mlooking at.
I'm looking at how much of that$7 million portfolio is in a
pre-tax account.
If only$50,000 is in a pre-taxaccount, I'm leaning towards
Ari, don't think about doingRoth conversions.
(13:30):
The impact of RMDs in the futureis gonna be negligible based
upon the size of your IRA.
I'm gonna prioritize tax gainharvesting, or I'm probably
gonna prioritize qualifying forhealth insurance subsidies.
Even if you don't have$7million, if your whole portfolio
is, say,$100,000 and you have$50,000 in an IRA.
To me, the benefit of tax gainharvesting or Roth conversions
(13:52):
is relatively minor at thatpoint.
I'm probably looking at healthinsurance subsidies.
So you start to get the sense ofthe greater the portion of your
portfolio that's in a brokerageaccount, specifically one that
has lots of unrealized gains,the more I'm going to prioritize
tax gain harvesting, all elsebeing equal.
These aren't hard and fastrules, but just kind of a
benchmark to think about.
(14:13):
The more of your portfoliothat's made up of pre-tax
accounts, the more I'm probablygoing to be thinking about Roth
conversions.
And overall, the smaller yourportfolio, and again, this is
very relative, but the smalleryour portfolio as a whole, the
more I'm probably going toprioritize looking at health
insurance subsidies andqualifying for those because I
might not even be in a positionwhere Roth conversions or tax
(14:35):
gain harvesting is going to addthat much value for me.
So, all right, going back to thequestion, when you can start to
rank which of these is going tobe most impactful, I start with
a Roth conversion because thatgives me a very clear picture
very early.
Is this going to save me money?
Is this going to be net neutralevent?
Or is this actually going tolose me money?
That becomes the benchmark.
Then I can compare that numberto, well, what about tax gain
(14:57):
harvesting versus what abouthealth insurance subsidies?
And you get a much clearerpicture from there.
SPEAKER_01 (15:03):
Not every strategy is for everyone, but it is for
someone.
So as you can see, it totallydepends on your situation.
But I'm going to let you in on alittle hidden secret here and
we're going to finish the casestudy so you can see what we
recommend for this case.
Obviously, a sample study here.
I'm going to take a wild guessthat if you go to your advisor
and you ask anything taxrelated, they're going to say,
(15:24):
go talk to your CPA.
Then you're going to go to yourCPA because they you're doing
what your advisor said.
You're a good client, and youask them a few questions, a
little investment related.
They go, whoa, whoa, whoa, thatsounds like you should have an
advisor.
So here you are in the middlegoing, well, what the heck do I
do?
That happened to my parents.
That happens to lots of peoplewho reach out to us going, I
want someone who's going to dothe tax planning.
(15:44):
Well, here's the little hiddensecret here.
Your CPA might be the nicestperson in the world.
We, both James and I use CPAs.
We are big fans, but their jobis to save you an amount in
taxes so you pay them again nextyear.
Nothing wrong with that.
But our job as tax planners isto go beyond that and say, how
do we save you the most over thecourse of your lifetime?
(16:05):
And here's an example of that.
So, James, do you remember whatthis number said a little bit
ago?
It feels like maybe hours now,but hopefully if people are
still awake with us here, whatdid this say before?
I believe that number was in thetwo and a half million dollar
range.
That's correct.
It said about two and a halfmillion more dollars.
Now, everyone here is wonderingwhat the heck happened.
(16:25):
Now, while James was talking,maybe Ari was playing with
numbers.
I only did one thing.
James, there's only one thing Idid, and all I did was double
their spending.
So here's someone that onceagain, they have a$7 million,
they're$55, they're planning onretiring at$60, and they were on
track for$22 million.
(16:46):
What can feel like monopolymoney, but it's the truth of
compound interest.
And they wanted to spend$15,000a month.
I doubled it.
I said, what if you spend$30,000?
They go, well, I don't know whatI would need if I had$360,000 a
year.
I don't even know how I wouldspend it.
I go, well, I'm going to forceyou to find a way.
And they're like, okay.
And so now there's$6 million atthe end, but it's making those
(17:08):
Roth conversions not only lessvaluable, but actually better to
truly forget your password.
I know I said it as a jokebefore, but these are times when
Roth conversions don't makesense.
So pretend this person, John andJane, go, Ari, James, I watch
the content.
I resonate with it.
I never thought this would bepossible, but 30,000 a month,
(17:29):
wow, I'm really excited.
If you say I'm in a good spot,that's encouraging.
But now I see maybe Rothconversions are less valuable.
And the reason, as James broughtup earlier, if there's, let's
say, 5 million in a 401k and 1million in a superhero account,
well, the numbers would be verydifferent.
But this is a case where wemight want to prioritize tax
(17:50):
gain harvesting.
So, James, I know this issomething we get a lot.
How do we do the tax gainharvesting?
I think this is something thatwe should go into the weeds on a
little bit because this comes upa lot.
Okay, this tax gain harvesting,maybe realizing gains at, let's
say,$120,000 plus dollarstax-free.
How do I decide?
SPEAKER_00 (18:10):
Let's use that top stock that you see here, Apple.
None of this is recommendation,none of this is advice of buying
or selling any specificinvestments, but use it as an
example.
Um, all right, let's assume thatthis client, they they're
married, of course.
Let's assume that their taxableincome is$46,700.
I'm using that number becausethat's exactly$50,000 under the
(18:34):
threshold at which they wouldcross into the 15% tax bracket
for federal long-term capitalgains.
So what that's telling us isthat's saying we have$50,000
that we can actually realize ingains and have that be
completely tax-free.
So even if we were to look attheir portfolio here and say, we
love the makeup, we don't wantto change a thing about that.
We still want to do tax gainharvesting.
(18:54):
An example of what that couldlook like is do you sell an
amount of apple stock thatrealizes$50,000 in gains?
Want to be clear here, that'snot selling$50,000 of Apple
stock.
It's selling an amount thatresults in$50,000 of gains.
So based upon the cost basis andthe value here, what you can see
(19:15):
is the cost basis is about 20%of the overall value.
So more or less, this individualmight end up having or might end
up selling, I'm using roundnumbers here,$60,000 in Apple
stock.
Let's assume$10,000 of that iswhat they originally purchased
it at.
$50,000 is gains.
So you've sold$60,000 and you'resaying, well, wait a minute, I
(19:37):
like Apple stock.
I don't want to get out of Applestock.
Fine.
Use that$60,000 to repurchaseApple stock.
What you have done is you'vereset the cost basis for those
specific shares that you soldhigher.
And you did it without realizingany federal income taxes.
So what you're doing is down theroad, when you do actually sell
(19:58):
Apple stock, what you're doingis you're not paying the
difference between the pricethen and the original cost
basis, you're paying thedifference on the price then and
these stepped up cost basis,these cost bases that you're
resetting as you tax gainharvest.
So that's the concept.
Practically speaking, where welike to apply that is when we
see a client's portfolio, wewant to say, where is it out of
(20:19):
balance?
Where could we do some work hereto fill in some gaps or fill in
some shortfalls?
And how do we tax gain harvestout of one thing to repurchase
into another in many cases tobalance out the overall
portfolio as much as possiblewithout exceeding that 0%
federal gains tax bracket?
SPEAKER_01 (20:35):
If it's unclear by now, we love this stuff.
And this is exactly what we helpclients with.
So if you're interested inworking with Root to get a
better understanding of taxplanning, estate planning,
insurance, withdrawalstrategies, how to invest
properly, our job is to takewhat you care about most and
make it a reality.
So we always like to say thesign of a good financial plan is
a life well lived.
(20:56):
You can go to our website,rootfinancial.com, and see the
little button in the upper rightthat says see if you're a fit.
If you click on that, you'll beprompted to answer a few
questions and we might betalking very soon.
Almost every person who wants to retire early is
facing the same three things ifthey want to truly optimize for
their early retirement.
Number one, they're wondering,should I try to massage my
income to get like a healthcaresubsidy?
Number two, should I try to dothose Roth conversions where I
move money from a 401k to Rothbecause most of my money is in
(00:21):
that pre-tax account?
And number three, should I dothat tax gain harvesting that
paying 0% in taxes potentiallyif you massage your income well?
And you have what's called a taxwindow to be able to do this.
And this is what I imagine mostof your retirements are looking
like.
(00:41):
So here's a visual to see thatmore clearly.
Here's someone who's 55, makinga very healthy income, they want
to retire at 60.
That's when their income's gonnadrop.
And then what's gonna happenhere at 75?
Those RMDs.
SPEAKER_00 (00:54):
Hey everyone, I'm James Cannol, CEO of Root
Financial.
I'm with Ari Taubleb, ChiefGrowth Officer of Root
Financial, and we are here todayto do a collaboration to help
you understand what's the righttax strategy to implement as
you're moving into retirement.
And Ari, as you mentioned,there's three big ones that we
think about that most peoplethink about.
That's the easy part.
The harder part is understandingwhat do you prioritize, and it's
(01:15):
very much based upon yoursituation, and we're gonna walk
through a case study to helpshow people why.
Let's learn about the couple.
SPEAKER_01 (01:21):
James, so here is a couple, John and Jane, we're
getting real creative with thenames here.
55 and 49 with John Jr., theirson, 21 years old.
Now they have invested well.
They have 8.4 million as theirnet worth, and whether that is
your net worth or not, which Ican promise, I don't think
anyone watching this video,James, is gonna have the exact
(01:41):
net worth of$8,414,085.
But if that is you, commentbelow because I will be shocked.
But we do want you to know thesame principles we talk about
today do apply to you regardlessof your net worth.
You can hopefully learn.
And we want to make sure thatyou are resonating with the
content we put out.
So if this does resonate, pleasecomment below.
SPEAKER_00 (02:03):
And all right, just to add to that, by the end of
this video, I'm gonna talk tothat person that has$100,000 in
the retirement portfolio.
I'm gonna talk to that personthat has$20 million in the
retirement portfolio and giveyou a sense of based upon your
net worth and the range thatyou're in, which of these should
you lean towards looking toprioritize first?
So yes, not everyone is thissituation.
Most people are not, but we aregonna talk to everyone as we go
(02:24):
through this.
SPEAKER_01 (02:25):
I'm excited to hear your feedback at the end of this
video to see how that doeschange.
Now, this person has$1.2 millionin their traditional 401k.
They have one point uh excuseme,$161,000 in a Roth IRA and
$5.6 million in a superheroaccount.
Now, superhero account,brokerage account, taxable
account, joint account,individual, they all mean the
(02:48):
same thing.
This is money that you've putinto an account that can grow
however you see fit.
You can invest it however youwant.
There's not a limit.
You can put$10 trillion intomorrow if you do have it.
And you might be very popular ifyou are putting$10 trillion in.
You might be the first of itskind.
Now, this person didn't put$10trillion, but they invested over
(03:10):
the last 30 years and their costbasis, meaning what they
actually put in, their originalinvestment totals$1.7 million,
and it's grown to$1.6 million.
So, James, do you think theymight be worried about taxes?
SPEAKER_00 (03:29):
They are, and they will be, and everyone I think
watching probably is, becausehere's the thing is most people
think that in their workingyears, you hear tax strategy.
And if you're working a W-2 job,you're probably thinking, ah,
that doesn't apply to me.
Sure, I have my 401k, sure maybeI have a health savings account
that I can contribute to.
But tax strategy, that's that'sfor the other people.
That's for people that ownbusinesses, that's for people
(03:49):
that own real estate, that's forpeople that own something that's
different than me.
There's some truth to that whenyou're in your working years,
but the thing that changesalready is as soon as you
retire, there's so much taxstrategy available to you.
So those of you who are startingto tune out because you're
thinking, oh, yeah, they'regonna tell me to save money to
my 401k or donate money tocharity or whatever it is.
(04:10):
That's not what we're talkingabout.
We are talking about taxstrategy that is very available
to everyone who is retired.
But most importantly, how do youprioritize which tax strategies
to look at?
And already, there's three.
As we mentioned, let's jump intowhat those are and what we
should start thinking about.
SPEAKER_01 (04:25):
Thank you, James.
Let's talk about the biggest onethat everyone wants to know
about Roth conversions.
How much value can that add?
And as you can see, we're notgonna have a deep conversation
about John and Jane's goals andhow much they want to spend.
I want you guys to assume we'vealready done that, but that they
want to spend$15,000 a month,take some vacations, they want
to make sure they'recomfortable.
(04:45):
We're not saying all of youshould do Roth conversions.
In fact, we put out a video thatgot over 100,000 views that you
can see here that is literallytitled Stop, Why You Should Not
Do a Roth Conversion.
But the reason I'm bringing thisup is because if you do tax
strategy well, it can add a lotof money over time.
So, James, we've both had peoplereach out and they'll say
(05:06):
something like the following.
And I'm paraphrasing here, butthey go, Look, my my nephew,
they just think I'm the coolestperson ever, because I do Roth
conversions, you know, and andI'll say, Look, that's cool, but
maybe you shouldn't do anythingat all.
And they're like, What do youmean?
I need to get close to my nieceand nephew.
It's been a while.
This is the first time theythink I'm cool.
I'm talking about Rothconversions.
And we'll say, Listen, we wantyou to be cool.
(05:27):
We want, trust me, we're allabout being cool, but we don't
want you to do somethingunnecessarily.
And there are situations whereRoth conversions do not make any
sense.
So you're probably wondering,well, when do they make sense?
Well, this is a tool that we'lloften use with clients, and you
can see if we were to do Rothconversions up to the 12%
bracket, meaning saying, yes,I'm happy to pay taxes a little
(05:48):
bit today to hopefully make moreover time, you can see it can
add value, certainly.
And as you continue to use thisslider, it looks like it can add
more and more value.
But then what happens is all ofa sudden it actually looks like
there's maybe less.
So this whole concept of just domore conversions, do more
conversions, yes, Rothconversions can be valuable, but
(06:11):
there are times where itliterally makes sense to do
nothing at all and forget yourpassword.
SPEAKER_00 (06:17):
So there are times are that you absolutely should
do Roth conversions.
That first example you showed, Ithink, is a perfect illustration
of that.
There are times where you shouldnot do a Roth conversion.
You're actually going to paymore in taxes by doing it than
you would how you just sat onyour hands doing nothing, maybe
even forgetting your password,as you just mentioned.
So, how do you know?
Here's how I encourage people tothink of it.
(06:37):
Start with understanding what'sthe impact of a Roth conversion.
I say start here because this isthe one where I would say
there's the biggest deviance orthe biggest variation of
sometimes it costs you,sometimes it makes you a ton of
money.
So if you don't have thefoundation, or if you don't
almost have the anchoredstarting point of what's the
benefit of that, it's tough tocompare and contrast because
we're not asking are each ofthese things good or bad?
(07:00):
All of them can be good, butoftentimes we're not choosing
between good and bad.
We're choosing between good andbetter, or better and best.
And so you have to start withsomething.
You have to have somefoundational starting point to
know what's the potentialsavings from this strategy.
So when I compare the others, Ihave something to look at.
So with Roth Conversions, we didexactly that.
And with Roth Conversions, whatyou're projecting out is two
(07:23):
things.
You're projecting out both whatdo you expect your taxable
income to be, not just thisyear, but really every year
throughout retirement, basedupon things like social
security, based upon things likedividends, based upon things
like interest, based upon thingslike pensions, whatever income
sources you're gonna have inretirement.
When you model that out, you'regonna get a sense of what will
your taxable income be.
(07:44):
And then on top of that, you canlayer what are expected tax
brackets to be.
So it's not enough just to knowwhere tax bracket's gonna be.
It's not enough to know what'syour taxable income going to be.
You need to compare the two soyou can start to see where am I
projected to be?
Am I gonna be in the 12% bracketin the future, the 22% bracket,
the 32% bracket?
All those have very differentimplications.
(08:06):
Now, this is something that's alot easier to do with software.
The software that you justlooked at are if people want
access to that, they can get itin the link below in the
retirement planning academy andthe early retirement academy.
That is something that you canuse to actually model out where
you project it to be.
Because when we look at thingslike health insurance subsidies,
for example, that's usually apretty simple thing to
(08:26):
understand.
You can say, if I keep my incomeunder certain thresholds, and
these thresholds depend on a fewdifferent factors, but what it's
looking at is if you keep yourincome under certain thresholds,
you receive a certain dollaramount in benefits.
So that dollar amount, if you dothe analysis, you can start to
actually calculate that out.
What is that?
And these are things that you'relooking at in your pre-Medicare
(08:47):
years.
So once you're on Medicare, thisisn't so much of a question.
There's other things toconsider, like IRMA surcharges,
but say you retire at 60.
And if you keep your incomeunder a certain threshold, you
maybe save$15,000 per year onhealth insurance premiums, you
and a spouse.
Well,$15,000 times five, you'reat$65,000.
(09:07):
So you say, if I'm going to usethis tax planning window, if I'm
going to use this window that Ihave of having a low income tax
bracket, having a low taxableincome, I can fill up that
bracket, or I can use that lowincome tax bracket to qualify
for health insurance subsidies.
An example, that's$15,000 peryear savings.
Or I can use it to do a Rothconversion by converting parts
(09:28):
of my IRA into my Roth IRA tofill up those lower tax brackets
so I don't pay taxes in thefuture at a higher rate when
required distributions kick in.
Or I can do something called taxgain harvesting.
Tax gain harvesting alreadymeans you can sell a certain
portion of your long-term gainsin a brokerage account.
And if you're under a certainthreshold of taxable income,
(09:50):
there's a 0% capital gains taxbracket.
That's wonderful.
Can you sell stock under athreshold?
You can see here on the screen,if you're married finally and
jointly for 2025, if yourtaxable income is under$96,700,
any long-term gains you realizeup until that point, you're
paying 0% federal tax on.
(10:10):
Might be a different storydepending on what state you live
in.
But on the federal level, that'swhat you're looking at.
Now keep in mind, this is afterdeductions.
This is after the standarddeduction.
If you're 65 and older, there'san extra senior deduction.
And then for the next few years,from 2025 to 2028, there's an
additional senior deduction.
So this means your total incomecan even be much higher.
(10:32):
And after all those deductions,if it's under this threshold, 0%
tax bracket.
So what you're doing here isyou're prioritizing those.
All can be good, but again, it'swhat's good, what's better,
what's best.
If I'm using the Rothconversion, I've already used
this tool or use a scenarioplanning analysis to say that
might save me$400,000, thatbecomes a benchmark there.
(10:54):
Then I look at healthcaresubsidies and keep in mind,
these are just examples.
These numbers will be differentfor everyone.
But if I'm saving$15,000 peryear for five years, that's
$65,000.
But I also want to know if that$65,000 that I saved is$65,000
that stays in my investmentportfolio that I no longer have
to take out.
It's not just$65,000 of savings,it's$65,000 of direct savings
(11:18):
plus the growth that would comefrom that because that money's
remaining in my investmentaccount and not being withdrawn
to spend.
So you might project out what'sthe long-term value of that if
it remains in my account.
Let's assume, just to use simplenumbers, that$65,000 could turn
to$250,000 over the course ofyour retirement if you're not
pulling it out.
Finally, same thing with taxgain harvesting.
(11:41):
What are you going to do there?
How much could you realize inlong-term gains?
Is there a need to realizelong-term gains?
You know, or if that portfoliothat you showed, I think is
about$5 million on the screenthere.
If that$5 million, for example,was one single stock that was
purchased for$10,000 years andyears and years ago, and now
it's$5 million, I might leanmore towards, I want to use this
(12:02):
tax planning window to realizegains from that because I need
to diversify.
There's a strong need to do so.
Versus if that$5 million is, oh,this person just inherited$5
million from their parents whenthey passed, there's zero tax
implication for taking all thatand doing what you want with it.
So you can start to see how muchof a need is there to realize
these gains, not just for taxplanning, but to move that
(12:25):
investment into the desiredinvestment that's gonna allow
you to meet your needs longterm.
How do you prioritize these?
So back to what I said at thebeginning.
I mentioned whether you have100,000 or 20 million in your
portfolio, how do you thinkabout this?
The less you have in yourportfolio, the less you have in
pre-tax accounts, typically theless impactful a Roth conversion
(12:45):
is gonna be.
Usually you're doing Rothconversions because you have a
pre-tax 401k, you have a pre-taxIRA.
And if you allow that to keepgrowing, when you turn 73 or 75,
depending on how old you are,you're gonna be required to
start taking distributions fromthat.
When you are required to starttaking distributions, the bigger
your pre-tax account, the biggerthat required distribution.
(13:08):
The bigger the requireddistribution, the higher the tax
bracket you're gonna be in whenthat time comes.
So all right, if you're lookingat this and you have a$7 million
portfolio, that's not what I'mlooking at.
I'm looking at how much of that$7 million portfolio is in a
pre-tax account.
If only$50,000 is in a pre-taxaccount, I'm leaning towards
Ari, don't think about doingRoth conversions.
(13:30):
The impact of RMDs in the futureis gonna be negligible based
upon the size of your IRA.
I'm gonna prioritize tax gainharvesting, or I'm probably
gonna prioritize qualifying forhealth insurance subsidies.
Even if you don't have$7million, if your whole portfolio
is, say,$100,000 and you have$50,000 in an IRA.
To me, the benefit of tax gainharvesting or Roth conversions
(13:52):
is relatively minor at thatpoint.
I'm probably looking at healthinsurance subsidies.
So you start to get the sense ofthe greater the portion of your
portfolio that's in a brokerageaccount, specifically one that
has lots of unrealized gains,the more I'm going to prioritize
tax gain harvesting, all elsebeing equal.
These aren't hard and fastrules, but just kind of a
benchmark to think about.
(14:13):
The more of your portfoliothat's made up of pre-tax
accounts, the more I'm probablygoing to be thinking about Roth
conversions.
And overall, the smaller yourportfolio, and again, this is
very relative, but the smalleryour portfolio as a whole, the
more I'm probably going toprioritize looking at health
insurance subsidies andqualifying for those because I
might not even be in a positionwhere Roth conversions or tax
(14:35):
gain harvesting is going to addthat much value for me.
So, all right, going back to thequestion, when you can start to
rank which of these is going tobe most impactful, I start with
a Roth conversion because thatgives me a very clear picture
very early.
Is this going to save me money?
Is this going to be net neutralevent?
Or is this actually going tolose me money?
That becomes the benchmark.
Then I can compare that numberto, well, what about tax gain
(14:57):
harvesting versus what abouthealth insurance subsidies?
And you get a much clearerpicture from there.
SPEAKER_01 (15:03):
Not every strategy is for everyone, but it is for
someone.
So as you can see, it totallydepends on your situation.
But I'm going to let you in on alittle hidden secret here and
we're going to finish the casestudy so you can see what we
recommend for this case.
Obviously, a sample study here.
I'm going to take a wild guessthat if you go to your advisor
and you ask anything taxrelated, they're going to say,
(15:24):
go talk to your CPA.
Then you're going to go to yourCPA because they you're doing
what your advisor said.
You're a good client, and youask them a few questions, a
little investment related.
They go, whoa, whoa, whoa, thatsounds like you should have an
advisor.
So here you are in the middlegoing, well, what the heck do I
do?
That happened to my parents.
That happens to lots of peoplewho reach out to us going, I
want someone who's going to dothe tax planning.
(15:44):
Well, here's the little hiddensecret here.
Your CPA might be the nicestperson in the world.
We, both James and I use CPAs.
We are big fans, but their jobis to save you an amount in
taxes so you pay them again nextyear.
Nothing wrong with that.
But our job as tax planners isto go beyond that and say, how
do we save you the most over thecourse of your lifetime?
(16:05):
And here's an example of that.
So, James, do you remember whatthis number said a little bit
ago?
It feels like maybe hours now,but hopefully if people are
still awake with us here, whatdid this say before?
I believe that number was in thetwo and a half million dollar
range.
That's correct.
It said about two and a halfmillion more dollars.
Now, everyone here is wonderingwhat the heck happened.
(16:25):
Now, while James was talking,maybe Ari was playing with
numbers.
I only did one thing.
James, there's only one thing Idid, and all I did was double
their spending.
So here's someone that onceagain, they have a$7 million,
they're$55, they're planning onretiring at$60, and they were on
track for$22 million.
(16:46):
What can feel like monopolymoney, but it's the truth of
compound interest.
And they wanted to spend$15,000a month.
I doubled it.
I said, what if you spend$30,000?
They go, well, I don't know whatI would need if I had$360,000 a
year.
I don't even know how I wouldspend it.
I go, well, I'm going to forceyou to find a way.
And they're like, okay.
And so now there's$6 million atthe end, but it's making those
(17:08):
Roth conversions not only lessvaluable, but actually better to
truly forget your password.
I know I said it as a jokebefore, but these are times when
Roth conversions don't makesense.
So pretend this person, John andJane, go, Ari, James, I watch
the content.
I resonate with it.
I never thought this would bepossible, but 30,000 a month,
(17:29):
wow, I'm really excited.
If you say I'm in a good spot,that's encouraging.
But now I see maybe Rothconversions are less valuable.
And the reason, as James broughtup earlier, if there's, let's
say, 5 million in a 401k and 1million in a superhero account,
well, the numbers would be verydifferent.
But this is a case where wemight want to prioritize tax
(17:50):
gain harvesting.
So, James, I know this issomething we get a lot.
How do we do the tax gainharvesting?
I think this is something thatwe should go into the weeds on a
little bit because this comes upa lot.
Okay, this tax gain harvesting,maybe realizing gains at, let's
say,$120,000 plus dollarstax-free.
How do I decide?
SPEAKER_00 (18:10):
Let's use that top stock that you see here, Apple.
None of this is recommendation,none of this is advice of buying
or selling any specificinvestments, but use it as an
example.
Um, all right, let's assume thatthis client, they they're
married, of course.
Let's assume that their taxableincome is$46,700.
I'm using that number becausethat's exactly$50,000 under the
(18:34):
threshold at which they wouldcross into the 15% tax bracket
for federal long-term capitalgains.
So what that's telling us isthat's saying we have$50,000
that we can actually realize ingains and have that be
completely tax-free.
So even if we were to look attheir portfolio here and say, we
love the makeup, we don't wantto change a thing about that.
We still want to do tax gainharvesting.
(18:54):
An example of what that couldlook like is do you sell an
amount of apple stock thatrealizes$50,000 in gains?
Want to be clear here, that'snot selling$50,000 of Apple
stock.
It's selling an amount thatresults in$50,000 of gains.
So based upon the cost basis andthe value here, what you can see
(19:15):
is the cost basis is about 20%of the overall value.
So more or less, this individualmight end up having or might end
up selling, I'm using roundnumbers here,$60,000 in Apple
stock.
Let's assume$10,000 of that iswhat they originally purchased
it at.
$50,000 is gains.
So you've sold$60,000 and you'resaying, well, wait a minute, I
(19:37):
like Apple stock.
I don't want to get out of Applestock.
Fine.
Use that$60,000 to repurchaseApple stock.
What you have done is you'vereset the cost basis for those
specific shares that you soldhigher.
And you did it without realizingany federal income taxes.
So what you're doing is down theroad, when you do actually sell
(19:58):
Apple stock, what you're doingis you're not paying the
difference between the pricethen and the original cost
basis, you're paying thedifference on the price then and
these stepped up cost basis,these cost bases that you're
resetting as you tax gainharvest.
So that's the concept.
Practically speaking, where welike to apply that is when we
see a client's portfolio, wewant to say, where is it out of
(20:19):
balance?
Where could we do some work hereto fill in some gaps or fill in
some shortfalls?
And how do we tax gain harvestout of one thing to repurchase
into another in many cases tobalance out the overall
portfolio as much as possiblewithout exceeding that 0%
federal gains tax bracket?
SPEAKER_01 (20:35):
If it's unclear by now, we love this stuff.
And this is exactly what we helpclients with.
So if you're interested inworking with Root to get a
better understanding of taxplanning, estate planning,
insurance, withdrawalstrategies, how to invest
properly, our job is to takewhat you care about most and
make it a reality.
So we always like to say thesign of a good financial plan is
a life well lived.
(20:56):
You can go to our website,rootfinancial.com, and see the
little button in the upper rightthat says see if you're a fit.
If you click on that, you'll beprompted to answer a few
questions and we might betalking very soon.
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