September 24, 2024 • 23 mins
Ever wondered how to recreate a steady paycheck in retirement? Join me, Rob Wolf, as I uncover the secrets to creating efficient retirement income streams that can ensure financial stability during your golden years. From deciphering the tax implications of 401(k)s, IRAs, Roth IRAs, and after-tax brokerage accounts to the vital role of Social Security, this episode is packed with essential insights. We'll demystify the process of setting up distributions and provide clarity on how to strategically manage your income sources to minimize tax burdens.
Maximize your retirement savings with strategic tax planning! Discover how to make the most of the 12% tax bracket, understand the intricacies of Roth conversions, and learn the impact of proactive tax planning before you hit the age of required minimum distributions (RMDs) at 73. Unravel the misconceptions about retiring in a lower tax bracket and losing deductions, and find out why taking on some tax liability now could be a smart move. Plus, I’ll emphasize the importance of having a trusted advisor who can help you navigate these complex financial decisions with ease. Tune in for practical, actionable advice to confidently manage your retirement income and tax planning.
Learn more about Wolf Financial Advisory:
https://www.wolffinancialadvisory.com/
Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.
The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Voiceover (00:00):
The strategies and concepts discussed are for
educational purposes only and donot represent specific
investment, tax or estateplanning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA
(00:22):
Financial Securities memberFINRA/ SIPC, a registered
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
Wolf Financial Advisory.
When it's important to you,it's important to us.
This is the Wolf FinancialPodcast.
(00:42):
Here's your host, Rob Wolf.
Rob Wolf (00:52):
G'day everyone.
Rob Wolf here with the WolfFinancial Podcast.
Today, we're going to betalking about how do I recreate
my paycheck in retirement.
You know, it's really funnywhen I meet with people.
I do this stuff every day, andbecause I do it every day,
sometimes what seems to bepretty routine to me is a real
big issue for other people, andI found that this issue how do I
(01:16):
recreate my paycheck is one ofthe biggest areas that people
worry about as they transitionto retirement, and so I want to
talk about that a little bittoday, because in many cases,
it's just a logistical issuethat we have to do and it's
(01:36):
really simple, and in some othercases it isn't as simple.
So, number one, if you haveretirement assets, such as a
401k, iras, roth IRAs I got allthese different buckets of money
.
Well, how do I access them?
(01:56):
Well, it's pretty simple.
Whether you're dealing with afinancial advisor, such as
myself, or you're going with adirect custodian like a Vanguard
or a Fidelity, it's prettysimple.
You got a retirement account.
You need X amount of dollarscoming in on a monthly basis.
You just do a distribution formrequesting $3,000 a month.
(02:20):
You pick out how much taxes youwant withheld, you tell them
where you want to direct depositthe account and you send it in.
It's just that simple.
Too many people try toovercomplicate what should
normally be a pretty simpletransaction.
The difficulty in recreating apaycheck, however, is from which
(02:47):
accounts should I be drawing mymoney from?
Because for many they haveaccounts that are all taxed
differently.
So if I have a 401k and Iretire and I choose to roll that
over into a traditional IRA,the very act of rolling it over
(03:13):
is a tax-free event.
No tax, no harm.
I get a 1099 at the end of theyear from the 401k custodian and
and I have to just report on mytax return how much I rolled
over.
None of it's taxable.
Okay, so far, so good.
(03:35):
But then, in addition to mytraditional IRA, I may have a
Roth IRA.
I may have an after-taxbrokerage account.
Well, what's the difference?
Well, my Roth IRA is alltax-free as long as I've had it
open for five years and I'm over59 and a half.
(03:56):
All the money I put into it,all my gain that's grown in it,
I have access to it tax-free.
That's grown in it.
I have access to it tax-free.
So far, so good, no issues,right.
And then I have my after-taxbrokerage account.
This is where I've taken someof my money that I've
(04:17):
accumulated over time Maybe itwas in my bank Wasn't happy with
the interest I was earning.
So I decide to open up aninvestment brokerage account.
I buy stocks, mutual funds,bonds, you name it and as it
spins out interest and dividends, I got to claim it as taxable.
And I get a nice 1099 DIV atthe end of the year and I have
(04:38):
to claim that on my tax return.
So now I got my after-taxbrokerage account.
I got my Roth IRA.
I got my traditional IRA.
Maybe I have some annuities outthere.
They have some guaranteedbenefits.
I may have a pension, I mayhave some social security.
Well, now it's like, oh my gosh, I got so much, which is a
(04:59):
great problem to have.
I rarely have too much thannothing.
I rarely have too much thannothing.
Did you know, just on a sidenote, that the average American
retires with less than $80,000?
Think of that.
You are completely relying onSocial Security, which is only
(05:29):
meant to replace a third of youroverall income for the rest of
your life.
That's pretty depressing.
So for those people that mightbe listening.
Whatever you have, that's allyou can draw from right.
There's really no other options.
So for the people that havemore complexity, they have
(05:54):
multiple accounts all taxeddifferently.
That's where it could getreally confusing.
How do I start this incomestream from?
Where do I take the money from?
Do I take it all from my IRA?
Do I take it all from myafter-tax account?
And the big issue is what arethe tax consequences on the
(06:20):
decision I make?
And if you don't understand howyour accounts are taxed, that's
going to cause a lot of concernand keep people up at night.
Okay, so let's break this down.
The first thing that you needto understand is how the tax
(06:41):
code works.
Okay, and it's like well, how,how, how do you even talk about
the tax codes, that thousandsand thousands of pages?
I'm not talking about the taxcode in total.
I'm talking about how basicincome taxes work.
We're in a progressive taxsystem.
The more you make, the more youend up having to pay taxes on.
(07:04):
So simplicity here.
Let's say all I got is socialsecurity and I got $50,000 in
the bank.
Guess what?
I'm not going to pay any taxesfor the rest of my life.
You know why?
Because your social security,if you're in that situation,
(07:26):
isn't subject to tax.
The only thing that causes yoursocial security to become
taxable is what's calledprovisional income.
Provisional income are thoseoutside income sources, when
added to your tax return, willcause some of your social
security to become taxable.
(07:47):
So if all I got is socialsecurity let's say I got $40,000
of social security and I got$50,000 in the bank and that's
it.
Well, in order for any of mysocial security to become
taxable, if I'm married, filingjointly, I have to have more
than $32,000 of provisionalincome.
(08:11):
And once I go over that level,then my social security starts
to get taxed.
Well, 50% of your socialsecurity is considered
provisional income.
So if you got $40,000 coming in, that means you got 20,000 of
provisional income.
(08:31):
Okay, so I got 20,000 plus somebank interest.
Let's say the bank interest is$2,000 a year.
I got $22,000 of provisionalincome.
Social security only gets taxedonce I'm over 32,000 in
provisional income, which meansall 40,000 of my social security
is not subject to tax.
So the only thing I haveflowing through to my tax return
(08:54):
is my $2,000 of interest.
That gets wiped out by mystandard deduction no tax.
Well, that's pretty easy.
But what if I have a pensioncoming in?
I have social security comingin.
I have dividends and interest.
I have dividends and interest.
(09:15):
I have IRAs I got.
I'm getting close to age 73.
I need to take required minimumdistributions.
I got this Roth IRA hanging outthere, wow.
Now it's starting to get morecomplex because now as I take
IRA distributions, as I takedistributions off my after-tax
(09:38):
brokerage account, that's eithergoing to cause a capital gain
or a capital loss.
Right as I take distributionsoff, maybe an annuity that I had
purchased in the past, all ofthose things have tax
consequences and all of thosethings added up can cause my
(09:59):
social security to becometaxable and in fact, up to 85%
of of social security, almostall of it, 85% of it could get
taxed if I pulled money fromdifferent accounts in an
(10:28):
inefficient way.
Okay, that's why it's soimportant to not only understand
what the tax code is, how itworks, but ultimately what is
your goal when it comes to notonly the income you need but the
distribution strategy you wantto take in place.
(10:51):
So, for instance, I have amarried couple in place.
So, for instance, a marriedcouple married filing jointly
can have up to about $130,000this year in adjusted gross
income, okay, and still only bein the 12% bracket, that's not
(11:11):
bad.
When you factor the standarddeduction right around 30 some
thousand dollars, that's goingto bring them into taxable
income right around in thenineties.
And that's where the 12%bracket ends.
You may say to yourself hey,you know what?
I'm willing to pay up to 12%because that's not a bad income
(11:32):
tax to be paying, especially onsome of my money that's never
been taxed.
Okay.
So we have a lot of people thatare maxing out the 12% bracket.
Now, the only disadvantage ofthat is 85% of your social
security is going to becometaxable, right?
So if you say you know what Ineed $70,000 a year to live off
(11:57):
of, all right and you decide youwant to do some proactive tax
planning, maybe you decide to dosome Roth conversions, bring in
some extra income now, whilethe tax code is favorable.
Well, that act of doing thatproactive tax planning is going
(12:18):
to cause your social security toget taxed.
It's neither right nor wrong,it's just the way it is.
If I were drawing $50,000 ofsocial security and I just chose
to take $20,000 out of ataxable IRA to meet the $70,000
(12:40):
income need.
Well, guess what folks.
I'm probably not going to endup paying any taxes, why?
Well, half my Social Security isconsidered provisional income,
so that's $25,000 in thisexample.
And the $20,000 in IRAdistribution is going to be
(13:01):
considered provisional income,so that's going to put me at
about $45,000 of provisionalincome.
Social Security starts gettingtaxed on any provisional income
greater than 32.
So that means I'm about $13,000over the threshold, so roughly
50% of that 13,000 is how muchof my social security is going
(13:26):
to get taxed.
So in that case, about $6,500of my social security benefit,
which is at $50,000, 6,500 ofit's going to get taxed, plus
the $20,000 IRA distribution.
Well, 6,500 plus 20,000 equals26,500.
(13:46):
Folks, how much is the standarddeduction this year?
It's almost $30,000.
Your standard deduction wipesout all of the tax consequences
in that case.
So if you decide you're goingto max out the 12% bracket,
you're also making the decisionto have up to 85% of your social
(14:10):
security to become taxable.
I'm not saying one is betterover the other, but you do need
to understand how it impactsyour overall tax.
I could have $70,000 no tax, orI could have up to $130,000 and
end up paying about $11,000 infederal income tax.
(14:32):
Well, depending on what youroverall goal is as far as legacy
planning to the next generation, flexibility for down the road
if tax rates go up, what yourprojected required minimum
distribution is going to be, allwill lead to making the correct
(14:56):
decision based on your uniquefinancial situation.
I have a lot of clients, folksthat can get away paying zero
taxes until what?
What?
(15:21):
They turn 73.
What happens when they turn 73?
The IRS comes a knocking andthey want their money and they
want you to pull out what'scalled the required minimum
distribution.
That's when they take all ofyour qualified money, that's,
your IRAs, your 401ks, your403bs and they say you know what
?
We've been a partner with youthis entire time.
We allowed you to deduct thatmoney when it came out of your
(15:44):
paycheck.
We allowed that money to growtax deferred and now it's time
for us to get paid.
As your partner, we arerequiring you to take out a
certain percentage of thatpre-tax money starting at age 73
.
So let's say I've had a prettysuccessful run right.
(16:07):
I've been able to accumulate alot of pre-tax dollars, hundreds
of thousands of dollars, maybemillions of dollars, whatever it
is.
Well, if I got a milliondollars in an IRA, my first
required minimum distribution,at a minimum, is going to be
roughly $35,000 a year.
(16:27):
Well, now, just the requiredminimum distribution alone, plus
the social security, is goingto cause more of my social
security to become taxable,which is going to exceed my
standard deduction, and now I'mgoing to end up having to pay
income taxes.
So sometimes it makes sense,especially prior to your
(16:53):
required minimum distributiondate, to be proactive and start
taking some of those tax dollarsoff the table now, paying a
little bit now, so that when youdo get to the age where you're
forced to have to pull money out, we can control how much that
(17:14):
required distribution is.
Because the one thing, folks,that we don't know is what will
tax rates be in the future?
Let me ask you this we were alltold for years put as much
money in that 401k, sonny gonna.
(17:36):
It's gonna create a great nestegg for you.
And so we did.
A lot of us took that advice.
We built up these hugeretirement plans and they say
you will always retire in alower bracket than when you were
working.
Well, let me ask you this forthose of you that understand how
the tax code works how manypeople in retirement still have
(18:01):
a home mortgage that they get towrite the interest off on
(18:22):
credit?
How many of you end up paying alot in state income tax anymore
when you're not working to beitemized off later?
All our deductions go away Inretirement we have none.
So the vast majority of peopleare stuck with the standard
deduction and for many peoplewho are successful that have
(18:44):
built up a wonderful nest egg,there's a very good chance that
you will retire in the same or ahigher tax bracket than when
you were working because youdon't have the deductions.
So does it make sense to beproactive about the tax planning
(19:06):
that you're doing?
Maybe pay a little bit more nowto save potentially a lot more
in an uncertain tax environmentgoing forward?
Me put it another way how manyof you would ever take out a
loan where the loan terms werenot fully disclosed?
(19:30):
Well, guess what?
That's exactly what we did whenwe put money into a pre-tax IRA
, into a 401k 403b.
We got the deduction up front.
The deduction, the terms werewe were effective 15, 18% tax
bracket, whatever it was.
(19:51):
We know what we got as far asthe tax benefit going in, but
what they didn't tell us is howmuch we will have to pay in
taxes on the way out.
How many of you believe thattaxes are going to get worse?
I happen to be one of manypeople who believe that taxes
(20:14):
are going to get worse.
You add that with limiteddeductions where maybe you're
only stuck with the standarddeduction, deductions where
maybe you're only stuck with thestandard deduction Congress is
looking for more money.
The deficits going up, thedebts going up, wars overseas
Somebody's going to have to payfor all this.
(20:34):
And guess what?
If you have a lot of money,that's all in pre-tax accounts.
Guess what folks?
It's not going to be the peoplethat are retiring with less
than $80,000 to their namesthat's paying this.
It's going to be the peoplethat sacrificed and set aside
(20:57):
money into the retirement plans.
They're the ones with thebullseye on their shirts.
Okay, they're the ones that aregoing to be paying the bill,
because almost half of allAmericans don't pay income taxes
already.
So if you're under the age of73 and you're thinking this is
(21:24):
the best thing in the world,none of my social security is
getting taxed.
I'm not paying any taxes at all.
Take a look at your portfolioand what the projection is going
to be as you go down the road.
What is that first requiredminimum distribution, looking
(21:44):
like If it's a prettysignificant number.
You may want to think aboutbeing more proactive and taking
on some tax liability now whilethe tax rates are good, versus
waiting for something to changeand find out the tax rates
(22:05):
aren't as good as they are now.
So, folks, it all comes down toplanning.
It's really important that,when you deal with these complex
issues, that you have a plannerthat understands how to put
this all together, a plannerthat has a process.
(22:26):
I would encourage you to find atrusted advisor that
understands these concepts.
This is Rob Wolf with the WolfFinancial Podcast.
Voiceover (22:39):
Thank you for listening to the Wolf Financial
Podcast.
For additional informationabout our firm, please visit our
website, wolfadvisoryservices.
com.
The strategies and conceptsdiscussed are for educational
purposes only and do notrepresent specific investment,
(23:00):
tax or estate planning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA
Financial Securities memberFINRA/ SIPC, a registered
(23:20):
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
The strategies and concepts discussed are for
educational purposes only and donot represent specific
investment, tax or estateplanning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA
(00:22):
Financial Securities memberFINRA/ SIPC, a registered
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
Wolf Financial Advisory.
When it's important to you,it's important to us.
This is the Wolf FinancialPodcast.
(00:42):
Here's your host, Rob Wolf.
Rob Wolf (00:52):
G'day everyone.
Rob Wolf here with the WolfFinancial Podcast.
Today, we're going to betalking about how do I recreate
my paycheck in retirement.
You know, it's really funnywhen I meet with people.
I do this stuff every day, andbecause I do it every day,
sometimes what seems to bepretty routine to me is a real
big issue for other people, andI found that this issue how do I
(01:16):
recreate my paycheck is one ofthe biggest areas that people
worry about as they transitionto retirement, and so I want to
talk about that a little bittoday, because in many cases,
it's just a logistical issuethat we have to do and it's
(01:36):
really simple, and in some othercases it isn't as simple.
So, number one, if you haveretirement assets, such as a
401k, iras, roth IRAs I got allthese different buckets of money
.
Well, how do I access them?
(01:56):
Well, it's pretty simple.
Whether you're dealing with afinancial advisor, such as
myself, or you're going with adirect custodian like a Vanguard
or a Fidelity, it's prettysimple.
You got a retirement account.
You need X amount of dollarscoming in on a monthly basis.
You just do a distribution formrequesting $3,000 a month.
(02:20):
You pick out how much taxes youwant withheld, you tell them
where you want to direct depositthe account and you send it in.
It's just that simple.
Too many people try toovercomplicate what should
normally be a pretty simpletransaction.
The difficulty in recreating apaycheck, however, is from which
(02:47):
accounts should I be drawing mymoney from?
Because for many they haveaccounts that are all taxed
differently.
So if I have a 401k and Iretire and I choose to roll that
over into a traditional IRA,the very act of rolling it over
(03:13):
is a tax-free event.
No tax, no harm.
I get a 1099 at the end of theyear from the 401k custodian and
and I have to just report on mytax return how much I rolled
over.
None of it's taxable.
Okay, so far, so good.
(03:35):
But then, in addition to mytraditional IRA, I may have a
Roth IRA.
I may have an after-taxbrokerage account.
Well, what's the difference?
Well, my Roth IRA is alltax-free as long as I've had it
open for five years and I'm over59 and a half.
(03:56):
All the money I put into it,all my gain that's grown in it,
I have access to it tax-free.
That's grown in it.
I have access to it tax-free.
So far, so good, no issues,right.
And then I have my after-taxbrokerage account.
This is where I've taken someof my money that I've
(04:17):
accumulated over time Maybe itwas in my bank Wasn't happy with
the interest I was earning.
So I decide to open up aninvestment brokerage account.
I buy stocks, mutual funds,bonds, you name it and as it
spins out interest and dividends, I got to claim it as taxable.
And I get a nice 1099 DIV atthe end of the year and I have
(04:38):
to claim that on my tax return.
So now I got my after-taxbrokerage account.
I got my Roth IRA.
I got my traditional IRA.
Maybe I have some annuities outthere.
They have some guaranteedbenefits.
I may have a pension, I mayhave some social security.
Well, now it's like, oh my gosh, I got so much, which is a
(04:59):
great problem to have.
I rarely have too much thannothing.
I rarely have too much thannothing.
Did you know, just on a sidenote, that the average American
retires with less than $80,000?
Think of that.
You are completely relying onSocial Security, which is only
(05:29):
meant to replace a third of youroverall income for the rest of
your life.
That's pretty depressing.
So for those people that mightbe listening.
Whatever you have, that's allyou can draw from right.
There's really no other options.
So for the people that havemore complexity, they have
(05:54):
multiple accounts all taxeddifferently.
That's where it could getreally confusing.
How do I start this incomestream from?
Where do I take the money from?
Do I take it all from my IRA?
Do I take it all from myafter-tax account?
And the big issue is what arethe tax consequences on the
(06:20):
decision I make?
And if you don't understand howyour accounts are taxed, that's
going to cause a lot of concernand keep people up at night.
Okay, so let's break this down.
The first thing that you needto understand is how the tax
(06:41):
code works.
Okay, and it's like well, how,how, how do you even talk about
the tax codes, that thousandsand thousands of pages?
I'm not talking about the taxcode in total.
I'm talking about how basicincome taxes work.
We're in a progressive taxsystem.
The more you make, the more youend up having to pay taxes on.
(07:04):
So simplicity here.
Let's say all I got is socialsecurity and I got $50,000 in
the bank.
Guess what?
I'm not going to pay any taxesfor the rest of my life.
You know why?
Because your social security,if you're in that situation,
(07:26):
isn't subject to tax.
The only thing that causes yoursocial security to become
taxable is what's calledprovisional income.
Provisional income are thoseoutside income sources, when
added to your tax return, willcause some of your social
security to become taxable.
(07:47):
So if all I got is socialsecurity let's say I got $40,000
of social security and I got$50,000 in the bank and that's
it.
Well, in order for any of mysocial security to become
taxable, if I'm married, filingjointly, I have to have more
than $32,000 of provisionalincome.
(08:11):
And once I go over that level,then my social security starts
to get taxed.
Well, 50% of your socialsecurity is considered
provisional income.
So if you got $40,000 coming in, that means you got 20,000 of
provisional income.
(08:31):
Okay, so I got 20,000 plus somebank interest.
Let's say the bank interest is$2,000 a year.
I got $22,000 of provisionalincome.
Social security only gets taxedonce I'm over 32,000 in
provisional income, which meansall 40,000 of my social security
is not subject to tax.
So the only thing I haveflowing through to my tax return
(08:54):
is my $2,000 of interest.
That gets wiped out by mystandard deduction no tax.
Well, that's pretty easy.
But what if I have a pensioncoming in?
I have social security comingin.
I have dividends and interest.
I have dividends and interest.
(09:15):
I have IRAs I got.
I'm getting close to age 73.
I need to take required minimumdistributions.
I got this Roth IRA hanging outthere, wow.
Now it's starting to get morecomplex because now as I take
IRA distributions, as I takedistributions off my after-tax
(09:38):
brokerage account, that's eithergoing to cause a capital gain
or a capital loss.
Right as I take distributionsoff, maybe an annuity that I had
purchased in the past, all ofthose things have tax
consequences and all of thosethings added up can cause my
(09:59):
social security to becometaxable and in fact, up to 85%
of of social security, almostall of it, 85% of it could get
taxed if I pulled money fromdifferent accounts in an
(10:28):
inefficient way.
Okay, that's why it's soimportant to not only understand
what the tax code is, how itworks, but ultimately what is
your goal when it comes to notonly the income you need but the
distribution strategy you wantto take in place.
(10:51):
So, for instance, I have amarried couple in place.
So, for instance, a marriedcouple married filing jointly
can have up to about $130,000this year in adjusted gross
income, okay, and still only bein the 12% bracket, that's not
(11:11):
bad.
When you factor the standarddeduction right around 30 some
thousand dollars, that's goingto bring them into taxable
income right around in thenineties.
And that's where the 12%bracket ends.
You may say to yourself hey,you know what?
I'm willing to pay up to 12%because that's not a bad income
(11:32):
tax to be paying, especially onsome of my money that's never
been taxed.
Okay.
So we have a lot of people thatare maxing out the 12% bracket.
Now, the only disadvantage ofthat is 85% of your social
security is going to becometaxable, right?
So if you say you know what Ineed $70,000 a year to live off
(11:57):
of, all right and you decide youwant to do some proactive tax
planning, maybe you decide to dosome Roth conversions, bring in
some extra income now, whilethe tax code is favorable.
Well, that act of doing thatproactive tax planning is going
(12:18):
to cause your social security toget taxed.
It's neither right nor wrong,it's just the way it is.
If I were drawing $50,000 ofsocial security and I just chose
to take $20,000 out of ataxable IRA to meet the $70,000
(12:40):
income need.
Well, guess what folks.
I'm probably not going to endup paying any taxes, why?
Well, half my Social Security isconsidered provisional income,
so that's $25,000 in thisexample.
And the $20,000 in IRAdistribution is going to be
(13:01):
considered provisional income,so that's going to put me at
about $45,000 of provisionalincome.
Social Security starts gettingtaxed on any provisional income
greater than 32.
So that means I'm about $13,000over the threshold, so roughly
50% of that 13,000 is how muchof my social security is going
(13:26):
to get taxed.
So in that case, about $6,500of my social security benefit,
which is at $50,000, 6,500 ofit's going to get taxed, plus
the $20,000 IRA distribution.
Well, 6,500 plus 20,000 equals26,500.
(13:46):
Folks, how much is the standarddeduction this year?
It's almost $30,000.
Your standard deduction wipesout all of the tax consequences
in that case.
So if you decide you're goingto max out the 12% bracket,
you're also making the decisionto have up to 85% of your social
(14:10):
security to become taxable.
I'm not saying one is betterover the other, but you do need
to understand how it impactsyour overall tax.
I could have $70,000 no tax, orI could have up to $130,000 and
end up paying about $11,000 infederal income tax.
(14:32):
Well, depending on what youroverall goal is as far as legacy
planning to the next generation, flexibility for down the road
if tax rates go up, what yourprojected required minimum
distribution is going to be, allwill lead to making the correct
(14:56):
decision based on your uniquefinancial situation.
I have a lot of clients, folksthat can get away paying zero
taxes until what?
What?
(15:21):
They turn 73.
What happens when they turn 73?
The IRS comes a knocking andthey want their money and they
want you to pull out what'scalled the required minimum
distribution.
That's when they take all ofyour qualified money, that's,
your IRAs, your 401ks, your403bs and they say you know what
?
We've been a partner with youthis entire time.
We allowed you to deduct thatmoney when it came out of your
(15:44):
paycheck.
We allowed that money to growtax deferred and now it's time
for us to get paid.
As your partner, we arerequiring you to take out a
certain percentage of thatpre-tax money starting at age 73
.
So let's say I've had a prettysuccessful run right.
(16:07):
I've been able to accumulate alot of pre-tax dollars, hundreds
of thousands of dollars, maybemillions of dollars, whatever it
is.
Well, if I got a milliondollars in an IRA, my first
required minimum distribution,at a minimum, is going to be
roughly $35,000 a year.
(16:27):
Well, now, just the requiredminimum distribution alone, plus
the social security, is goingto cause more of my social
security to become taxable,which is going to exceed my
standard deduction, and now I'mgoing to end up having to pay
income taxes.
So sometimes it makes sense,especially prior to your
(16:53):
required minimum distributiondate, to be proactive and start
taking some of those tax dollarsoff the table now, paying a
little bit now, so that when youdo get to the age where you're
forced to have to pull money out, we can control how much that
(17:14):
required distribution is.
Because the one thing, folks,that we don't know is what will
tax rates be in the future?
Let me ask you this we were alltold for years put as much
money in that 401k, sonny gonna.
(17:36):
It's gonna create a great nestegg for you.
And so we did.
A lot of us took that advice.
We built up these hugeretirement plans and they say
you will always retire in alower bracket than when you were
working.
Well, let me ask you this forthose of you that understand how
the tax code works how manypeople in retirement still have
(18:01):
a home mortgage that they get towrite the interest off on
(18:22):
credit?
How many of you end up paying alot in state income tax anymore
when you're not working to beitemized off later?
All our deductions go away Inretirement we have none.
So the vast majority of peopleare stuck with the standard
deduction and for many peoplewho are successful that have
(18:44):
built up a wonderful nest egg,there's a very good chance that
you will retire in the same or ahigher tax bracket than when
you were working because youdon't have the deductions.
So does it make sense to beproactive about the tax planning
(19:06):
that you're doing?
Maybe pay a little bit more nowto save potentially a lot more
in an uncertain tax environmentgoing forward?
Me put it another way how manyof you would ever take out a
loan where the loan terms werenot fully disclosed?
(19:30):
Well, guess what?
That's exactly what we did whenwe put money into a pre-tax IRA
, into a 401k 403b.
We got the deduction up front.
The deduction, the terms werewe were effective 15, 18% tax
bracket, whatever it was.
(19:51):
We know what we got as far asthe tax benefit going in, but
what they didn't tell us is howmuch we will have to pay in
taxes on the way out.
How many of you believe thattaxes are going to get worse?
I happen to be one of manypeople who believe that taxes
(20:14):
are going to get worse.
You add that with limiteddeductions where maybe you're
only stuck with the standarddeduction, deductions where
maybe you're only stuck with thestandard deduction Congress is
looking for more money.
The deficits going up, thedebts going up, wars overseas
Somebody's going to have to payfor all this.
(20:34):
And guess what?
If you have a lot of money,that's all in pre-tax accounts.
Guess what folks?
It's not going to be the peoplethat are retiring with less
than $80,000 to their namesthat's paying this.
It's going to be the peoplethat sacrificed and set aside
(20:57):
money into the retirement plans.
They're the ones with thebullseye on their shirts.
Okay, they're the ones that aregoing to be paying the bill,
because almost half of allAmericans don't pay income taxes
already.
So if you're under the age of73 and you're thinking this is
(21:24):
the best thing in the world,none of my social security is
getting taxed.
I'm not paying any taxes at all.
Take a look at your portfolioand what the projection is going
to be as you go down the road.
What is that first requiredminimum distribution, looking
(21:44):
like If it's a prettysignificant number.
You may want to think aboutbeing more proactive and taking
on some tax liability now whilethe tax rates are good, versus
waiting for something to changeand find out the tax rates
(22:05):
aren't as good as they are now.
So, folks, it all comes down toplanning.
It's really important that,when you deal with these complex
issues, that you have a plannerthat understands how to put
this all together, a plannerthat has a process.
(22:26):
I would encourage you to find atrusted advisor that
understands these concepts.
This is Rob Wolf with the WolfFinancial Podcast.
Voiceover (22:39):
Thank you for listening to the Wolf Financial
Podcast.
For additional informationabout our firm, please visit our
website, wolfadvisoryservices.
com.
The strategies and conceptsdiscussed are for educational
purposes only and do notrepresent specific investment,
(23:00):
tax or estate planning advice.
Investing carries an inherentelement of risk and it is in
everyone's best interests toconsult a tax, legal or
investment professional.
Past performance does notguarantee future results.
Securities and advisoryservices are offered through USA
Financial Securities memberFINRA/ SIPC, a registered
(23:20):
investment advisor.
Wolf Financial Advisory are notaffiliated with USA Financial
Securities.
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