November 27, 2024 • 15 mins
In this episode of The Great Retirement Debate, Ed Slott and Jeff Levine discuss whether or not you should aim for a zero percent tax rate in retirement.
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Episode Transcript
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(00:00):
Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just loveto talk about retirement and taxes.
Look, our mission is simple to educateyou, the saver, so that you can make
better decisions because better decisionson the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debatethe pros and the cons of a particular
retirement strategy or topic.
(00:22):
With the goal of helping you keepmore of your hard earned money.
At the end of each debate, there'sgoing to be one clear winner.
You, a more informed saver whocan hopefully apply the merits of
each side of the debate to yourown personal situation to decide
what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.
(00:44):
Hey Ed, you like zero calorie soda?
Yeah, I actually have a vitaminwater, zero vitamin water.
I love that stuff.
I like it too.
You ever have a Paycheckthough with zero dollars in it?
No.
All right, so that's not so good, right?
I can see already.
I don't even think, canthat be called a paycheck?
Well, that's a good question.
A no paycheck.
That's called an intern.
(01:05):
Ooh, you're going to rub someinterns the wrong way with that one.
All right.
Well, I think even withthose two examples, we can
see sometimes zero is good.
Sometimes zero, not so good.
So Ed kind of leads us intotoday's topic of discussion.
Zero percent, more specifically,should people aim for a zero
(01:26):
percent tax rate in retirement?
That sounds fantastic, and I alwaystell people tax free is fantastic.
You want to have zero percent, butif you do the planning, it may not
be the best course of action becauseyou may be leaving a lot of tax
savings on the table if you only stopplanning or so once you hit zero.
(01:49):
All right, so.
First, before we get intogood, bad, and different.
How do we get to zero?
Like what, what would, what arethe ways that someone can pay
zero percent tax in retirement Ed?
Assuming they have income, right?
That's what we're assuming.
Yes, we'll assume they have income.
It would be zero if they have zero income.
They don't have to file a return.
It is always an easy way to notpay taxes to have no income.
(02:09):
Yes.
Yeah.
See, nobody ever comesup with that strategy.
And you heard it here onthe great retirement debate.
That's right.
Have no income.
There you go.
Done.
Zero taxpayer.
But you could have, you know, theyhave large, uh, Standard deductions
now, uh, certain income is exempt.
So you could actuallyend up with zero percent.
It depends on how you invest andwhat level of income you're in.
(02:32):
So maybe, like, thingslike municipal bonds.
Right.
0 percent taxes.
Uh, you have, let's say, Roth IRAs.
Right.
More places you can shield.
You could have a 0 percent tax rate.
Uh, could be possibly, uh, throughthe use of certain loans from life
insurance or even really any asset.
A loan is going to be received tax free.
(02:52):
Even taxable assets that are covered,say, by the standard deduction.
Yup, yup.
And then ultimately you can haveup to that standard deduction
amount of income tax free per year.
Plus, for a lot of retirees, if theyhave minimal to no other income, their
Social Security can be tax free as well.
And even capital gains canbe, uh, tax free, zero percent
in certain circumstances.
That's right.
If you're in either the 10 or the 12percent ordinary income tax bracket,
(03:15):
then your long term capital gainsrate is zero percent, which applies
both to your, uh, capital gainsas well as to qualify dividends.
But the question is, should youstop there and think, this is great.
Right, is it great?
If you get to that point where everythingis in one of those areas, and you are
paying a 0 percent tax rate, Is it good?
Generally, no.
Especially if you have a lotmore built up income, say in
(03:38):
a retirement account, an IRA.
The key to tax planning is gettingthis money out at the lowest rates.
Now, zero is the lowest rate, but thereare other low rates that you want to
take advantage of every year you can.
Yeah, I think you're hitting on somethingthere, Ed, which is, you know, zero
percent may be good in theory, like itsounds great, but zero percent for that
(04:00):
One year might mean that you either,either you or your heirs have to pay
a lot more than zero and a lot morethan they otherwise would later on.
Or you might have gotten to zeroby prepaying your taxes to a
much, uh, too high degree, right?
You might have prepaid in the form of Rothconversions way too much earlier in life.
(04:23):
You might have prepaid in the form of,uh, or even things like municipal bond
interest, you know, municipal bonds.
Municipalities know there's a specialtax rate associated with their interest.
And so a typical municipal bond willpay less in interest than a comparably
rated and duration corporate bond.
Why?
Well, because they know that there'sa tax benefit attached to it.
(04:44):
That's what you pay.
That's right.
So to that extent, right, if you'rein municipal bonds, you would
expect a lower level of interest.
And it varies from time to time,depending upon what yields are,
what market conditions are.
But oftentimes, if you're not someonewho's in the highest, or at least one
of the highest tax brackets, you'reusually better off taking a bond where
(05:07):
you have more gross interest, whereaspaying a higher yield, in other words,
where you're getting more income taxable,and then exactly a taxable bond, and
then paying the income tax on it.
0 percent is great, but sometimesit's better to have, you know, a
lot of of a bigger number than itis to have all of a smaller number.
Right.
And it also depends howmuch you have stockpiled.
(05:30):
Because if you're only putting a littlein at a time, that means the rest of
your assets are growing and growing.
And if they're in taxable accounts,like an IRA, for example, the taxes
are going to, are going to explode.
Yeah.
I mean, so let's talk about why thisis even a question to begin with,
because I think it's fair that thereare, there are some people who really
believe that this is the best way to go.
(05:51):
Right, where, uh, you know, eitherfor their own accounts or either
even professionals out there who, um,who support the idea that retirees
should aim towards having a 0%, uh,you know, tax rate in retirement.
And the thought behind it effectivelyis if you have a 0 percent retirement,
you have some predictabilityover what your taxes look like.
It's all yours.
(06:12):
Uh, you don't have to worry anymoreabout, you know, what will this happen?
What will that happen?
There's a, there's a, apeace of mind and it's fair.
Like we, it.
You know, but that's generallyyou're looking at one year.
Well, but even, even if you want, right,if you want to get to the extreme, right?
How do you get to 0 percent forever?
Well, if you had, you mighthave a million dollars in your
401k, convert it all today.
(06:33):
You never have to worry abouttaxes on it in the future, right?
You get down to 0%.
So the, the.
The challenge I have, again, with,with that philosophy, um, you know,
and I, I totally agree that we shouldtake into consideration people's,
uh, comfort levels with things and,you know, what makes them feel good.
It's okay.
Sometimes it's okay to do things thataren't the best dollars and cents
(06:54):
wise, if it makes you feel comfortable.
But it's also fair to say thatwe should be careful about doing
things that are blatantly, uh, notin our financial best interest.
Long term.
Yeah.
Long term.
Exactly.
And to the beneficiaries.
Sure.
Yeah.
If that's important to you.
Yeah.
Sometimes people say, well, I'mgoing to leave my kids Roth money.
(07:15):
It'll be the best thing for them.
Well, maybe, but maybe they would havebeen better off getting traditional
IRA money plus a lot more money inyour bank account because they're
in a lower tax rate than you.
Right.
Right?
Ultimately, that 0 percent tax rate.
The question is, how much did itcost you to get there already, or how
much would it cost you in the futureby not using up today's low rates?
(07:37):
I guess a different way to saythis would be, a low income tax
year is a terrible thing thing towaste from a planning perspective.
Tell me, uh, I've heard it before,but I like when you say it.
Tell me what you say to a, an accountantwho's so proud of themselves, Jeff, I
got my clients a zero percent tax rate.
How do you like that?
I'm so sorry for the bad advice.
That's really what it comes down to.
(07:58):
And what do they say?
What?
Yeah.
You know.
I'm a hero.
Unfortunately, and look, you're a CPA, Ed.
I know.
You're a CPA.
It, it, it pains, I know both ofus to say that, you know, many
of, uh, many persons of our ilk.
So to speak are too focused on the hereand now they're looking at today's tax
return and saying How do we keep thatnumber lower when really what the focus
(08:21):
should be on is how to keep the totalamount of taxes That someone pays over
their lifetime as low as possible, whichoften means spreading out out income
and paying at least a little bit, butyou know, some amount, but hopefully
a little bit in each year rather thannothing in some but an outsized tax
(08:41):
bill in other years to get it there.
The outsized tax bill is the bigsurprise and that could be the big
hit and it could be at a higher rate.
It will be at a higher rate, Even ifrates don't go up, because it'll push you
into a higher bracket for that one year.
Because you only get one crack atthe apple, rather than use, where you
said, you know, you spread it overmany years, that's the way to do it.
(09:02):
I think we, uh, we all, we allunderstand what you're saying, Ed,
which is, you know, effectively, ifyou have these opportunities, you
want a little bit each, look, I'llgive you another analogy, Ed, right?
You're supposed to eat 2, 000or 2, 500 calories in a day.
That's a standard thing, right?
You want it all in one meal or you wantit spread out throughout the day, right?
Right.
It'd be very difficult to eat all that.
(09:22):
You know, I thought you were gonna go.
I get it only on Saturday night.
You know, I'm gonna take, you know, Idon't know, 20, 000 calories on Saturday.
There you go.
You could take it to an extreme, right?
Yeah, yeah, you need to spread it out.
And, and, uh, Ultimately, right, by, um,by, by doing that on the tax return, you
know, we have a progressive tax system.
That's really why this, this matters.
(09:44):
Right.
If we had a flat tax system, as isthe case in some other areas of the
world, and even some states have a flattax, then it wouldn't matter as much
because effectively, whether you tookthe income today or you took it in the
future, you'd be paying the same rate.
But in our system, if you have a milliondollars of income today, you'll pay
more than if you had 100, 000 of income.
(10:04):
Each year over 10 years.
Yes.
I always tell people the same exact thing.
Exactly.
That you'll always pay less taxthe more years you spread it out.
All right.
So conceptually, if we agree that goingto a 0 percent tax rate is is is not the
best and or is not the aim that peopleshould be, you know, not not what people
should be aiming for in retirement.
(10:27):
And we're saying that youshould try and spread it out.
How do you like what?
What's one or two things thatlisteners should keep in mind
as they're trying to spread out.
Like how do you actuallydo that in, in, in reality?
Well, you have to do aprojection and this is best done.
For example, with Roth conversions,this is best done probably November,
December, after you have a goodidea of what your income is.
(10:50):
The reason I said with Rothconversions, because no longer
can you undo a Roth conversion.
So I have people, I, I tell people tothink about it, but don't, don't, Pull
the trigger on a Roth conversion untilmaybe first week in December when you,
when you know better what it's goingto cost after you get your capital
gain distributions and all of that,maybe bonuses, things that come in.
(11:11):
So you're better off, uh,doing it at that point.
And then you have a better idea whatthat conversion is going to cost by
knowing how much of each lower graduatedbrackets, that's, uh, what you talked
about, the per, the per Progressivetax system, their graduated rates, you
get a certain amount of each bracket.
You, I think you said it earlier,you never want to waste a bracket.
(11:33):
I agree with that becauseyou don't get it back again.
If you only used, I don't know, 80percent or just a part, forget about
the percentage, a part of the 22percent bracket or the 24 percent
bracket, you left the rest on the table.
You never get credit forthat in a future year.
You want to start usingthose brackets each year.
(11:53):
So the more income you can throwin to max out whatever bracket you
feel comfortable with, I think giventhese rates, uh, 12 percent, 22, 24
percent, you could have hundreds ofthousands of income, taxable income,
and still be in a 24 percent bracket.
Yeah, the way I like to think about it andexplain it, and it's, This is much more
(12:14):
at a 10, 000 foot view at a micro level.
You may have to manage a little bitmore specifically, but you basically
want to look at your entire life, right?
And you want your income to be asflat as possible over all the years.
Like if you want to plotthis on a chart, right?
With, with ups and downs, well, someyears your, your income is higher
cause you've got a better year inbusiness or some years are higher
(12:36):
because interest rates are higher andyou've got more interest from the bank
or some years are, are higher becauseyou had, uh, You know, um, some bonus
that wanna spike and operations.
Yeah.
Right?
Sure.
But you want to take the other savingsthat you have and sort of mix it into
those years and, and spot low points,if you will, and fill it in so that
(12:56):
there are no more low points, so thatyour income looks as flat as possible.
over your entire lifetime.
Now, obviously, you've got to work atinflation and things like that, but
that's, that's generally the idea.
You want your income to be smooth.
You don't want large peaks some yearsand large valleys in the other, because
when you see that, if you look at a, youknow, if you were to plot your income
over the course of your lifetime, Anylarge value you have and large peak you
(13:20):
have is probably an opportunity wherehad you equalized that income more over
those two years or series of years, youwould have paid cumulatively less tax.
And again, this is an oversimplificationtax rates change over time.
There are certain things likeMedicare Part B premiums, which
only matter after a certain point.
And only, you know, if you go over1, Then you're over the cliff.
(13:42):
So if you've gone over 1, youmight as well go over by 50, 000
because it can't hurt you anymore.
But as a general statement, smoothingout income over lifetime helps
to create that lowest lifetimetax bill, which has tax planners.
We value more than anything else, right?
So back to your 0%, you might geta 0%, but at some point it's going
(14:04):
to be the top rate, 37 percent orwhatever the future top rate is.
And that will wipe away allthe prior year's savings.
Yeah.
So ultimately I think we agree at 0percent sounds nice, but the reality
is for most individuals who are healthyearners, who accumulate significant
amount of assets, 0 percent is notsomething you should strive for.
(14:26):
Instead, focus on thatlowest lifetime tax bill.
Use up low rates while you have them,and take advantage of today's low
tax rate environment while you can.
That's right.
And inflation, because thatexpands the brackets each year.
Absolutely.
All right.
That's all the time we have for today.
Ed, great discussion as always.
We'll see you next time onthe Great Retirement Debate.
Jeffrey Levi is Chief Planning Officerfor Buckingham Wealth Partners.
(14:49):
This podcast is for informational andeducational purposes only, and should
not be construed as specific investmentaccounting, legal, or tax advice.
Certain information mentioned maybe based on third party information
which may become outdated orotherwise superseded without notice.
Third party information is deemedto be reliable, but its accuracy and
completeness cannot be guaranteed.
The topic discussed in correspondingarguments are those of the speakers
(15:09):
and may not accurately reflectthose of Buckingham Wealth partners.
Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just loveto talk about retirement and taxes.
Look, our mission is simple to educateyou, the saver, so that you can make
better decisions because better decisionson the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debatethe pros and the cons of a particular
retirement strategy or topic.
(00:22):
With the goal of helping you keepmore of your hard earned money.
At the end of each debate, there'sgoing to be one clear winner.
You, a more informed saver whocan hopefully apply the merits of
each side of the debate to yourown personal situation to decide
what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.
(00:44):
Hey Ed, you like zero calorie soda?
Yeah, I actually have a vitaminwater, zero vitamin water.
I love that stuff.
I like it too.
You ever have a Paycheckthough with zero dollars in it?
No.
All right, so that's not so good, right?
I can see already.
I don't even think, canthat be called a paycheck?
Well, that's a good question.
A no paycheck.
That's called an intern.
(01:05):
Ooh, you're going to rub someinterns the wrong way with that one.
All right.
Well, I think even withthose two examples, we can
see sometimes zero is good.
Sometimes zero, not so good.
So Ed kind of leads us intotoday's topic of discussion.
Zero percent, more specifically,should people aim for a zero
(01:26):
percent tax rate in retirement?
That sounds fantastic, and I alwaystell people tax free is fantastic.
You want to have zero percent, butif you do the planning, it may not
be the best course of action becauseyou may be leaving a lot of tax
savings on the table if you only stopplanning or so once you hit zero.
(01:49):
All right, so.
First, before we get intogood, bad, and different.
How do we get to zero?
Like what, what would, what arethe ways that someone can pay
zero percent tax in retirement Ed?
Assuming they have income, right?
That's what we're assuming.
Yes, we'll assume they have income.
It would be zero if they have zero income.
They don't have to file a return.
It is always an easy way to notpay taxes to have no income.
(02:09):
Yes.
Yeah.
See, nobody ever comesup with that strategy.
And you heard it here onthe great retirement debate.
That's right.
Have no income.
There you go.
Done.
Zero taxpayer.
But you could have, you know, theyhave large, uh, Standard deductions
now, uh, certain income is exempt.
So you could actuallyend up with zero percent.
It depends on how you invest andwhat level of income you're in.
(02:32):
So maybe, like, thingslike municipal bonds.
Right.
0 percent taxes.
Uh, you have, let's say, Roth IRAs.
Right.
More places you can shield.
You could have a 0 percent tax rate.
Uh, could be possibly, uh, throughthe use of certain loans from life
insurance or even really any asset.
A loan is going to be received tax free.
(02:52):
Even taxable assets that are covered,say, by the standard deduction.
Yup, yup.
And then ultimately you can haveup to that standard deduction
amount of income tax free per year.
Plus, for a lot of retirees, if theyhave minimal to no other income, their
Social Security can be tax free as well.
And even capital gains canbe, uh, tax free, zero percent
in certain circumstances.
That's right.
If you're in either the 10 or the 12percent ordinary income tax bracket,
(03:15):
then your long term capital gainsrate is zero percent, which applies
both to your, uh, capital gainsas well as to qualify dividends.
But the question is, should youstop there and think, this is great.
Right, is it great?
If you get to that point where everythingis in one of those areas, and you are
paying a 0 percent tax rate, Is it good?
Generally, no.
Especially if you have a lotmore built up income, say in
(03:38):
a retirement account, an IRA.
The key to tax planning is gettingthis money out at the lowest rates.
Now, zero is the lowest rate, but thereare other low rates that you want to
take advantage of every year you can.
Yeah, I think you're hitting on somethingthere, Ed, which is, you know, zero
percent may be good in theory, like itsounds great, but zero percent for that
(04:00):
One year might mean that you either,either you or your heirs have to pay
a lot more than zero and a lot morethan they otherwise would later on.
Or you might have gotten to zeroby prepaying your taxes to a
much, uh, too high degree, right?
You might have prepaid in the form of Rothconversions way too much earlier in life.
(04:23):
You might have prepaid in the form of,uh, or even things like municipal bond
interest, you know, municipal bonds.
Municipalities know there's a specialtax rate associated with their interest.
And so a typical municipal bond willpay less in interest than a comparably
rated and duration corporate bond.
Why?
Well, because they know that there'sa tax benefit attached to it.
(04:44):
That's what you pay.
That's right.
So to that extent, right, if you'rein municipal bonds, you would
expect a lower level of interest.
And it varies from time to time,depending upon what yields are,
what market conditions are.
But oftentimes, if you're not someonewho's in the highest, or at least one
of the highest tax brackets, you'reusually better off taking a bond where
(05:07):
you have more gross interest, whereaspaying a higher yield, in other words,
where you're getting more income taxable,and then exactly a taxable bond, and
then paying the income tax on it.
0 percent is great, but sometimesit's better to have, you know, a
lot of of a bigger number than itis to have all of a smaller number.
Right.
And it also depends howmuch you have stockpiled.
(05:30):
Because if you're only putting a littlein at a time, that means the rest of
your assets are growing and growing.
And if they're in taxable accounts,like an IRA, for example, the taxes
are going to, are going to explode.
Yeah.
I mean, so let's talk about why thisis even a question to begin with,
because I think it's fair that thereare, there are some people who really
believe that this is the best way to go.
(05:51):
Right, where, uh, you know, eitherfor their own accounts or either
even professionals out there who, um,who support the idea that retirees
should aim towards having a 0%, uh,you know, tax rate in retirement.
And the thought behind it effectivelyis if you have a 0 percent retirement,
you have some predictabilityover what your taxes look like.
It's all yours.
(06:12):
Uh, you don't have to worry anymoreabout, you know, what will this happen?
What will that happen?
There's a, there's a, apeace of mind and it's fair.
Like we, it.
You know, but that's generallyyou're looking at one year.
Well, but even, even if you want, right,if you want to get to the extreme, right?
How do you get to 0 percent forever?
Well, if you had, you mighthave a million dollars in your
401k, convert it all today.
(06:33):
You never have to worry abouttaxes on it in the future, right?
You get down to 0%.
So the, the.
The challenge I have, again, with,with that philosophy, um, you know,
and I, I totally agree that we shouldtake into consideration people's,
uh, comfort levels with things and,you know, what makes them feel good.
It's okay.
Sometimes it's okay to do things thataren't the best dollars and cents
(06:54):
wise, if it makes you feel comfortable.
But it's also fair to say thatwe should be careful about doing
things that are blatantly, uh, notin our financial best interest.
Long term.
Yeah.
Long term.
Exactly.
And to the beneficiaries.
Sure.
Yeah.
If that's important to you.
Yeah.
Sometimes people say, well, I'mgoing to leave my kids Roth money.
(07:15):
It'll be the best thing for them.
Well, maybe, but maybe they would havebeen better off getting traditional
IRA money plus a lot more money inyour bank account because they're
in a lower tax rate than you.
Right.
Right?
Ultimately, that 0 percent tax rate.
The question is, how much did itcost you to get there already, or how
much would it cost you in the futureby not using up today's low rates?
(07:37):
I guess a different way to saythis would be, a low income tax
year is a terrible thing thing towaste from a planning perspective.
Tell me, uh, I've heard it before,but I like when you say it.
Tell me what you say to a, an accountantwho's so proud of themselves, Jeff, I
got my clients a zero percent tax rate.
How do you like that?
I'm so sorry for the bad advice.
That's really what it comes down to.
(07:58):
And what do they say?
What?
Yeah.
You know.
I'm a hero.
Unfortunately, and look, you're a CPA, Ed.
I know.
You're a CPA.
It, it, it pains, I know both ofus to say that, you know, many
of, uh, many persons of our ilk.
So to speak are too focused on the hereand now they're looking at today's tax
return and saying How do we keep thatnumber lower when really what the focus
(08:21):
should be on is how to keep the totalamount of taxes That someone pays over
their lifetime as low as possible, whichoften means spreading out out income
and paying at least a little bit, butyou know, some amount, but hopefully
a little bit in each year rather thannothing in some but an outsized tax
(08:41):
bill in other years to get it there.
The outsized tax bill is the bigsurprise and that could be the big
hit and it could be at a higher rate.
It will be at a higher rate, Even ifrates don't go up, because it'll push you
into a higher bracket for that one year.
Because you only get one crack atthe apple, rather than use, where you
said, you know, you spread it overmany years, that's the way to do it.
(09:02):
I think we, uh, we all, we allunderstand what you're saying, Ed,
which is, you know, effectively, ifyou have these opportunities, you
want a little bit each, look, I'llgive you another analogy, Ed, right?
You're supposed to eat 2, 000or 2, 500 calories in a day.
That's a standard thing, right?
You want it all in one meal or you wantit spread out throughout the day, right?
Right.
It'd be very difficult to eat all that.
(09:22):
You know, I thought you were gonna go.
I get it only on Saturday night.
You know, I'm gonna take, you know, Idon't know, 20, 000 calories on Saturday.
There you go.
You could take it to an extreme, right?
Yeah, yeah, you need to spread it out.
And, and, uh, Ultimately, right, by, um,by, by doing that on the tax return, you
know, we have a progressive tax system.
That's really why this, this matters.
(09:44):
Right.
If we had a flat tax system, as isthe case in some other areas of the
world, and even some states have a flattax, then it wouldn't matter as much
because effectively, whether you tookthe income today or you took it in the
future, you'd be paying the same rate.
But in our system, if you have a milliondollars of income today, you'll pay
more than if you had 100, 000 of income.
(10:04):
Each year over 10 years.
Yes.
I always tell people the same exact thing.
Exactly.
That you'll always pay less taxthe more years you spread it out.
All right.
So conceptually, if we agree that goingto a 0 percent tax rate is is is not the
best and or is not the aim that peopleshould be, you know, not not what people
should be aiming for in retirement.
(10:27):
And we're saying that youshould try and spread it out.
How do you like what?
What's one or two things thatlisteners should keep in mind
as they're trying to spread out.
Like how do you actuallydo that in, in, in reality?
Well, you have to do aprojection and this is best done.
For example, with Roth conversions,this is best done probably November,
December, after you have a goodidea of what your income is.
(10:50):
The reason I said with Rothconversions, because no longer
can you undo a Roth conversion.
So I have people, I, I tell people tothink about it, but don't, don't, Pull
the trigger on a Roth conversion untilmaybe first week in December when you,
when you know better what it's goingto cost after you get your capital
gain distributions and all of that,maybe bonuses, things that come in.
(11:11):
So you're better off, uh,doing it at that point.
And then you have a better idea whatthat conversion is going to cost by
knowing how much of each lower graduatedbrackets, that's, uh, what you talked
about, the per, the per Progressivetax system, their graduated rates, you
get a certain amount of each bracket.
You, I think you said it earlier,you never want to waste a bracket.
(11:33):
I agree with that becauseyou don't get it back again.
If you only used, I don't know, 80percent or just a part, forget about
the percentage, a part of the 22percent bracket or the 24 percent
bracket, you left the rest on the table.
You never get credit forthat in a future year.
You want to start usingthose brackets each year.
(11:53):
So the more income you can throwin to max out whatever bracket you
feel comfortable with, I think giventhese rates, uh, 12 percent, 22, 24
percent, you could have hundreds ofthousands of income, taxable income,
and still be in a 24 percent bracket.
Yeah, the way I like to think about it andexplain it, and it's, This is much more
(12:14):
at a 10, 000 foot view at a micro level.
You may have to manage a little bitmore specifically, but you basically
want to look at your entire life, right?
And you want your income to be asflat as possible over all the years.
Like if you want to plotthis on a chart, right?
With, with ups and downs, well, someyears your, your income is higher
cause you've got a better year inbusiness or some years are higher
(12:36):
because interest rates are higher andyou've got more interest from the bank
or some years are, are higher becauseyou had, uh, You know, um, some bonus
that wanna spike and operations.
Yeah.
Right?
Sure.
But you want to take the other savingsthat you have and sort of mix it into
those years and, and spot low points,if you will, and fill it in so that
(12:56):
there are no more low points, so thatyour income looks as flat as possible.
over your entire lifetime.
Now, obviously, you've got to work atinflation and things like that, but
that's, that's generally the idea.
You want your income to be smooth.
You don't want large peaks some yearsand large valleys in the other, because
when you see that, if you look at a, youknow, if you were to plot your income
over the course of your lifetime, Anylarge value you have and large peak you
(13:20):
have is probably an opportunity wherehad you equalized that income more over
those two years or series of years, youwould have paid cumulatively less tax.
And again, this is an oversimplificationtax rates change over time.
There are certain things likeMedicare Part B premiums, which
only matter after a certain point.
And only, you know, if you go over1, Then you're over the cliff.
(13:42):
So if you've gone over 1, youmight as well go over by 50, 000
because it can't hurt you anymore.
But as a general statement, smoothingout income over lifetime helps
to create that lowest lifetimetax bill, which has tax planners.
We value more than anything else, right?
So back to your 0%, you might geta 0%, but at some point it's going
(14:04):
to be the top rate, 37 percent orwhatever the future top rate is.
And that will wipe away allthe prior year's savings.
Yeah.
So ultimately I think we agree at 0percent sounds nice, but the reality
is for most individuals who are healthyearners, who accumulate significant
amount of assets, 0 percent is notsomething you should strive for.
(14:26):
Instead, focus on thatlowest lifetime tax bill.
Use up low rates while you have them,and take advantage of today's low
tax rate environment while you can.
That's right.
And inflation, because thatexpands the brackets each year.
Absolutely.
All right.
That's all the time we have for today.
Ed, great discussion as always.
We'll see you next time onthe Great Retirement Debate.
Jeffrey Levi is Chief Planning Officerfor Buckingham Wealth Partners.
(14:49):
This podcast is for informational andeducational purposes only, and should
not be construed as specific investmentaccounting, legal, or tax advice.
Certain information mentioned maybe based on third party information
which may become outdated orotherwise superseded without notice.
Third party information is deemedto be reliable, but its accuracy and
completeness cannot be guaranteed.
The topic discussed in correspondingarguments are those of the speakers
(15:09):
and may not accurately reflectthose of Buckingham Wealth partners.
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