Bogleheads® on Investing Podcast 085: Ed Slott, CPA on new OBBB tax law, Roth conversions & more
00:00:00.000 | welcome to the 85th edition of the bogleheads on investing podcast in this episode we're going to
00:00:15.520 | talk about the new tax law changes under the one big beautiful bill act with questions about the
00:00:21.920 | new tax law sourced from the bogleheads community both from the forum and elsewhere on social
00:00:28.220 | answering our questions is none other than ed slot cpa a nationally recognized ira distribution expert
00:00:36.180 | professional speaker television personality and best-selling author
00:00:41.020 | ed is known for his unparalleled ability to turn advanced tax strategies into understandable
00:00:54.940 | actionable and entertaining advice he has been named the best source for ira advice
00:01:01.500 | by the wall street journal and usa today wrote it would be tough to find anyone who knows more about
00:01:07.820 | iras than cpa slot hello everyone my name is john luskin filling in for the normal host of the
00:01:15.360 | bogleheads on investing podcast rick ferry and since we're changing up the host of the episode
00:01:21.400 | why not change up the format too if you're listening on youtube you already know what i'm talking about
00:01:28.220 | we have video so if you'd like to watch this podcast on video go to bogelcenter.net where we'll have the
00:01:35.580 | video linked or just jump straight to youtube at the bogleheads page this episode as with all episodes
00:01:43.360 | is brought to you by the john c bogle center for financial literacy a non-profit organization that is
00:01:50.220 | building a world of well-informed capable and empowered investors visit the bogle center at
00:01:56.280 | boglecenter.net where you will find a treasure trove of information including transcripts of these podcasts
00:02:03.360 | while there you can make a donation to support the mission of financial literacy at boglecenter.net
00:02:09.940 | before we begin a special announcement tickets for the 2025 bogleheads conference are now on sale at
00:02:18.900 | boglecenter.net slash 2025 conference this year's conference will begin at noontime on friday october
00:02:26.300 | 17th running through noontime on sunday october 19th we will be at the hyatt regency san antonio riverwalk
00:02:33.980 | hotel you can find a list of speakers at boglecenter.net as well as a full agenda soon i look forward to
00:02:41.840 | seeing many of you there lastly a disclaimer the following is for informational and entertainment
00:02:48.680 | purposes only it should not be relied upon as tax planning or investment advice and now the 85th episode
00:02:57.500 | of the bogleheads on investing podcast with head slot cpa ed thank you for joining us for the bogleheads
00:03:05.380 | on investing podcast it's great to be here with you today as you know we're going to talk about some of
00:03:11.840 | the changes under the one big beautiful bill act we got some great questions from the bogleheads
00:03:16.340 | community beforehand but before we dive into the questions maybe let's talk about some of the highlights
00:03:22.740 | of the one big beautiful bill act some things that you may see are opportunities or challenges
00:03:28.320 | in light of those recent changes there are big items that really some of them will apply to everybody
00:03:34.000 | and the interesting part because of the budget gimmickry some things start in 25 some provisions
00:03:41.040 | start in 26 some provisions end in 28 some provisions end in 29 some provisions are permanent not only are
00:03:48.680 | so what we really have is a tax code that has devolved into a game of whack-a-mole you get one benefit but
00:04:03.500 | then you may lose something else or you get that one and you lose this one a perfect example when we get
00:04:09.200 | into it the six thousand dollar senior deduction that sounds good on its face but it faces out at relatively
00:04:15.840 | low income rate many people may want to raise their income to take advantage of still lower brackets for
00:04:24.460 | a Roth conversion and they may have to concede on the six thousand which is not really six thousand it's a
00:04:30.620 | six thousand deduction but the largest bracket you'd be in because of the income levels that you would get
00:04:37.620 | is about 22 percent comes out to about thirteen hundred and tax savings over the long haul you may do much
00:04:45.560 | better with a Roth conversion even if you have to concede this deduction
00:04:49.700 | john luskin jumping in for a quick post interview note to provide some helpful context ed mentioned the new
00:04:59.360 | six thousand dollar senior deduction twelve thousand dollars for joint filers available through 2025 through 2028
00:05:07.980 | it phases out starting at seventy five thousand dollars of income for singles and a hundred and fifty thousand for joint filers and has gone entirely at a hundred and seventy five thousand and two hundred and fifty thousand of income respectively
00:05:21.980 | roth conversions increase taxable income which could push you into the phase out range and even wipe out the new deduction entirely
00:05:30.060 | ed's view on this for many it's still worth skipping the deduction to get more money into roth accounts
00:05:36.260 | and now back to the show
00:05:38.360 | it's a lot of delayed gratification that's the key to all tax planning by the way you want to give up something now to get something bigger and better later
00:05:50.480 | yeah i know you're a big fan of roth conversions and for folks in the audience who aren't familiar with your work now they know
00:05:58.320 | and certainly a big part of that is based on that assumption that tax rates might go up
00:06:03.680 | there's other assumptions you don't need me to tell you ed that goes into calculating the quote-unquote value of roth conversions
00:06:10.400 | what your investment returns are going to be what inflation is going to be your life expectancy
00:06:15.320 | how do you think about those other considerations when doing roth conversion planning
00:06:22.240 | well as you said i am totally biased i love roth conversions because i love anything tax-free to me that's money in the bank
00:06:31.280 | you never have to worry about the uncertainty of what future higher taxes could do to your standard of living and
00:06:38.000 | spending ability in retirement so you can't assume you'll always be in a lower bracket in
00:06:44.720 | retirement you may have less income but taxes may be higher so you really have to plan that's why i love
00:06:52.400 | the roth conversion you lock in today's rates now but that means paying taxes now but here's the secret to all
00:07:00.000 | good tax planning i shouldn't even give you the secret but since it's a great show i'm going to give you the
00:07:05.280 | secret the secret to all good tax planning always and it's one of my it's in every one of my books
00:07:11.360 | always pay taxes at the lowest rates that's it it's that simple if you always pay not at the rates at your rates
00:07:22.640 | because rates could be high but your rates personally because the deductions could be low
00:07:26.960 | or rates could be low but your rate is higher because you had to increase business or personal income
00:07:32.560 | so always pay at your lowest rates even if that means and here's the part that gets people why they blow my always roll
00:07:41.360 | even if it means paying a tax before it's required and that's where the roth conversion comes in people
00:07:48.640 | don't like to pay a tax before they have to many people have this minimum mentality i call it they
00:07:55.920 | focus on rmds required minimum distributions which means i am not touching my ira till you know they take
00:08:04.320 | me out screaming and kicking and force me to take it out at age 73 but then look at all the years
00:08:11.200 | of low rates that you blew you never want to waste a low tax bracket the sweet spot really is people in
00:08:19.360 | their 60s the key to the roth conversion is when you convert you control your tax rates by converting
00:08:28.240 | certain amounts looking at the brackets you can convert and control the taxes you want to pay
00:08:34.240 | and given today's low rates i would make sure that nobody wastes 24 bracket or lower
00:08:41.040 | these are historically low brackets now that means converting some money now using up those brackets
00:08:47.760 | because if you waste those brackets if you don't fill up a low tax bracket you don't get credit in
00:08:53.120 | the future years in fact over the years my cpa colleagues used to tell me they said they would be
00:08:58.960 | so happy they'd say ed you're not going to believe it but i kept one of my clients in a zero percent tax
00:09:04.240 | and you know what my answer would be oh i'm sorry to hear that that means you wasted the ten percent
00:09:11.520 | the twelve percent the income you could have got out or i'll give you another example this happened
00:09:16.960 | during covid a lot of small businesses suffered huge losses a lot of small business owners had these
00:09:24.560 | passed through entities like s corps and llcs and partnerships and they had huge losses which were
00:09:31.520 | deductible on their taxes in some cases they even had negative income yet nobody thought of converting
00:09:39.040 | in those years when they could have converted a lot of their ira and almost no tax so you have to
00:09:45.360 | look at getting money out while tax rates are the lowest you'll always end up with more so the benefits of the roth you're in control of your tax
00:09:54.400 | rates and you get to use the lower brackets and hopefully by the time you get to rmd age you won't
00:10:00.480 | have much in iras where you're forced to take money so you're getting the point i love roth ira's
00:10:07.200 | absolutely one reason i ask about those other variables when it comes to tax planning bill
00:10:12.960 | richtenstein he's a co-creator of income solver income strategy and this is and i'm sure you're familiar
00:10:18.640 | with it for those folks who aren't it's some tax planning software looks at roth conversions and one
00:10:23.680 | thing that's interesting about it is that it lets you move the levers on terms of life expectancy
00:10:27.920 | investment returns future tax rates and even if you leave that future tax rate lever alone
00:10:33.440 | just increasing life expectancy or increasing investment returns makes a case for roth conversion
00:10:40.800 | so even if tax rates stay the same roth conversion still might make sense in some situations
00:10:45.760 | absolutely true see the roth conversion decision comes down to a very simple concept it's one big
00:10:52.320 | giant bet on where you believe your future tax rates will be when you're forced to take that money
00:10:59.760 | out if you don't convert and for most people again like me that believe in math i gotta look at the numbers
00:11:06.960 | and say you know i gotta believe tax rates will be higher all right let's jump to some questions from
00:11:15.520 | the bogleheads community for you ed about the new tax law change we got a couple related questions
00:11:21.280 | from the bogleheads forum username five cane eagle 33 both wanted to know about some misconceptions
00:11:27.680 | misunderstandings that you've maybe seen about the new tax law change what folks are getting wrong oh yeah
00:11:33.760 | so the big misconception or things that were actually wrong and even in the professional tax services
00:11:40.160 | on the new deductions the whole business or whether they are above the line or below the line let me
00:11:46.320 | explain what that means above the line means it will reduce agi your adjusted gross income that is
00:11:54.000 | the key number on your tax return that will tell you if you qualify for certain benefits credits deductions
00:12:00.240 | like a lot of these deductions have income limitations that's the key number but these
00:12:06.160 | deductions do not reduce that number it's after that number so they're below the line they reduce
00:12:12.960 | taxable income but not adjusted gross income so i'll give you one which actually the misconception
00:12:20.560 | was right on the social security website there's the six thousand extra deduction for seniors it was
00:12:26.640 | book that nobody pays tax on social security has nothing to do with social security nothing to do
00:12:32.960 | just an extra standard deduction for people 65 or over that meet certain income limitations like i
00:12:39.680 | talked to you about before basically it's 75 000 for individuals 150 000 for joint married couples after
00:12:47.200 | that it phases out so it's a six thousand dollar deduction that can reduce all taxable income even
00:12:55.920 | if you have no social security income and it's only for 65 or over so somebody collecting social security
00:13:03.760 | say early at 63 they don't get this deduction or somebody who waits who's 66 and would qualify but they didn't
00:13:12.880 | take social security i think smartly waiting till age 70 where they can get the maximum check
00:13:18.320 | they still get the deduction even though they're not taking social security so it does not reduce the
00:13:24.800 | amount of your social security benefits that are taxable here's a good way to think of agi on a tax return
00:13:32.000 | i'll use a football analogy football has two hands the first half and the second half so does a tax return
00:13:39.520 | tax return has the first half and halftime is agi adjusted gross income let's say
00:13:46.160 | you're losing the game you're way down at halftime right but you have an amazing comeback you got five
00:13:54.880 | touchdowns in the second half does the score at halftime change no the score at halftime is what
00:14:02.800 | it was at halftime you just did better in the second half or worst that's what a tax return is agi is
00:14:10.240 | halftime no matter what happens after that the second part of the tax return it doesn't reduce agi those are
00:14:16.480 | called below the line deductions that's what most of these deductions are they do not reduce agi they're
00:14:23.360 | below the line so i'm talking about the 6 000 one i'm talking about the misnamed in the law no tax on
00:14:30.480 | tips no tax on overtime that money is still included in income but you get a deduction that can reduce
00:14:39.040 | all income so the deductions that's the biggest misinformation out there that i've seen i think a
00:14:46.160 | lot of that's been corrected by now but the big deductions people are looking at do not reduce adjusted
00:14:52.080 | gross income whatever that is that's the number you're going to still have to use to determine if
00:14:57.920 | you're eligible for some of these big benefits yeah i've seen that as well i think another thing that
00:15:03.760 | i've seen a lot is misunderstanding that the no tax on tips and no tax on overtime and it's only for a
00:15:08.720 | limited amount right right is is the issue yeah so here if you this is the actual law you see what i
00:15:14.880 | highlighted here the name of that section can you read it there you can do tax tips oh wow it's called
00:15:21.280 | that that's not what it does the same thing with overtime if you look at the section of the law this
00:15:26.960 | is the actual law the name of that provision what does it say there no tax on overtime all right that's the
00:15:35.200 | title it doesn't do that let's take the tips for example and this income limitation it's a great
00:15:41.280 | provision you just have to understand what it does if you're in the tip business you know a waiter or
00:15:46.480 | waitress something like that could be great for you you can get a big deduction but here's the catch
00:15:52.400 | to get the tip deduction you would have to report that it has to go on w-2 your tip income and most
00:15:59.360 | tip income actually is on a w-2 unless you're working off the books when i'm talking to people
00:16:03.760 | if they're thinking oh they're working off the books and they get a deduction no the tips have
00:16:07.840 | to be on the books and for most you know upstanding places the tips are on the w-2 and you have to pay
00:16:14.560 | payroll taxes like and medicare taxes on those tips but you do get a nice corresponding deduction but
00:16:21.360 | it doesn't mean there's no tax on those tips you get a deduction related to the tips which is nice
00:16:28.240 | but it can reduce all income same thing for overtime and ed mentioned a social security
00:16:34.400 | claiming strategy delayed till 70 generally the high earner does definitely want to do that for
00:16:39.440 | those folks who want to dive into that topic a little bit more i'll link to some interviews we
00:16:43.760 | did with mike piper a social security expert so folks can check those out that'll be in the show notes
00:16:50.480 | right that's a no-brainer i think for most people waiting till age 70 to get a larger check for
00:16:55.280 | the rest of your life yep yeah at least that higher earn right two-person households lower
00:17:00.960 | earner what they do they have some options higher earner always wants to delay until 70 lower earner
00:17:05.840 | are going to inherit that higher earners benefit if that higher earner passes first that's why that
00:17:10.800 | higher earner wants to wait until 70. but let's go back to abba the big winners are a lot of people in
00:17:17.280 | businesses so they have that qbi qualified business income deduction was retained that's a big 20 deduction
00:17:24.720 | for a lot of businesses so you know the big items are there increased depreciation if you're a small
00:17:30.480 | business owner would pass through income you do great on this with respect to qbi i'm curious to hear what
00:17:36.480 | what your thoughts are on making a and gosh i think i know this answer given you know your pro roth
00:17:42.160 | approach but given that in some circumstances if you make a traditional contribution you're going to
00:17:47.920 | lose that qbi deduction those self-employed folks like myself if they make a roth contribution to an
00:17:53.120 | individual workplace retirement plan like an individual 401k they get to keep that qbi so
00:18:00.320 | that is argued for at least personally or for some other self-employed folks i really like making a
00:18:05.040 | roth contribution for that reason because you get to keep that qbi deduction i'm curious to hear what
00:18:10.720 | your thoughts are on that you are brilliant most people even the accountants don't pick up on this
00:18:16.720 | this is one of the few provisions where a roth conversion can actually increase the deduction it's
00:18:24.400 | counterintuitive because if it's based on income limits for those people if you're a writer a
00:18:30.320 | performer a accountant attorney you know not a manufacturer they don't have the income limits but
00:18:36.320 | it's mostly professionals like i said accounts attorney all of that they're subject to these income limits
00:18:41.840 | anyway the roth conversion why what you said is brilliant the roth conversion is one of the strange
00:18:48.640 | items that can either increase the qbi and that stands for qualified business income deduction it's
00:18:54.720 | a 20 deduction off your based on the taxable income of your business and here's the key or your taxable
00:19:02.800 | income on your return whichever is lower so you can have a high taxable income on your business but if you
00:19:10.000 | have a lot of other deductions and your taxable income on other stuff is low the qbi goes to your lower
00:19:16.480 | amount so a roth conversion can increase your other taxable income and increase the deduction but watch
00:19:23.600 | it if you do too much of a roth conversion you go over the limit and you lose the 20 so this is why i
00:19:30.080 | say what you picked up on is brilliant because the roth conversion has to be really projected so make sure
00:19:36.720 | it's a balancing act you want to convert enough to maximize the 20 qbi deduction but not so much that you
00:19:43.920 | lose it and remember roth conversions cannot be undone anymore they cannot be re-characterized you
00:19:52.000 | have to know your business income or have a good projection of it by year end let's say you think
00:19:57.440 | your business income is going to be i don't know three hundred thousand so you may be in line for a twenty
00:20:03.360 | percent sixty thousand dollar deduction and let's say your income is getting close and you're subject to the
00:20:09.840 | limit getting close leave yourself some breathing room don't over convert to a raw thinking i'm going
00:20:14.880 | to go right up to what that number is because all kinds of wacky stuff happens at the end of the year
00:20:20.480 | like you get capital gain distributions from mutual funds you have other sources of income you didn't count
00:20:26.800 | on you know anything can happen at year end especially that first week in december and as a tax preparer
00:20:33.120 | i used to have a cpa tax practice i stopped that a few years back but people used to come in and say
00:20:38.800 | what are all these capital gains you know well in the funds you have throw off capital gain distributions
00:20:45.600 | at the end of november early december the funds report them so when it's a year like this those numbers
00:20:52.160 | could be pretty big gosh yeah quick tangent there that's why sometimes when folks come to me and they
00:20:57.920 | have all these actively managed mutual funds in a taxable account and they have gains on them and
00:21:03.040 | they don't want to sell the funds because of the gains the downside is well those funds are going to
00:21:07.680 | keep spitting out capital gains for as long as you hold them so it really is worth considering to sell
00:21:13.600 | those things sooner get rid of that annual distribution you're going to get from those funds
00:21:17.840 | you mentioned roth conversions with respect to the qbi issue is there anything distinct between making a
00:21:23.200 | roth conversion or if i'm just going to flat out make a contribution to my individual 401k because
00:21:28.880 | naturally i can do yeah yeah i'm not a big fan of that but it gives you a deduction but here's why i'm
00:21:35.040 | not a big fan of 401ks anymore first of all this has nothing to do with the other bill but people say
00:21:41.280 | well isn't a 401k good no and they say well you get a deduction like you just said people call it a
00:21:48.000 | deduction it's not a real deduction it's a fake deduction why do i say that because you have to
00:21:55.920 | give it back what i call a real deduction is your mortgage interest you deduct it you keep it charity
00:22:02.400 | you deduct it you keep it now state local taxes you deduct it you keep it when you make a 401k contribution
00:22:09.280 | and get this so-called deduction all you're really doing is taking a loan from the government that will
00:22:15.200 | have to be paid back at the worst possible time in retirement when the last thing you want is a big tax
00:22:22.960 | bill at who knows what rates then so i don't like taking those deductions anymore i think most people
00:22:30.560 | should now contribute smartly to a roth yes give up the deduction again always pay taxes at the lowest rates
00:22:39.200 | if you go back to my theme there remember you shouldn't remember because i told you to keep it secret
00:22:44.400 | always pay taxes at the lowest rates in tax planning you want to take deductions when rates are high not
00:22:51.520 | when rates are historically low like they are now you want to take income when rates are low so you're
00:22:58.880 | better off with the roth 401k that people say but ed the match you know i get the company match that law
00:23:05.680 | changed now you can have the match and catch-up contributions in your roth 401k young people
00:23:13.520 | especially should only be doing roth iras and roth 401ks at work that's my two cents thanks for
00:23:22.800 | answering my questions selfishly i appreciate it whatever questions you have i will answer in person
00:23:28.160 | where john at the bowhuts conference this year that's in let me check my schedule i speak on the 18th
00:23:34.960 | october 18th i'll be there and i'll give you the skinny on all of this in person and i'll stick
00:23:41.280 | around for all your questions we're going to have a great time you're going to hear things from me like
00:23:45.600 | on john's program here that you never heard anywhere else and it will make you money i'm telling you
00:23:52.000 | everybody says they can make money in stocks stocks go up and down there's a lot of uncertainty
00:23:57.520 | you can make bigger money in good tax planning the other thing you can lose more money if you don't do
00:24:03.840 | good tax planning because with stocks if the stock market goes down all right it'll recover you'll get
00:24:10.320 | your money back if you lose money to taxes you're never getting that money back that is a loss
00:24:18.880 | and the full days for the bogus conference this year are the 17th through the 19th so we're going to
00:24:23.200 | have you right in that middle day ed and that's going to be in san antonio this year folks go to
00:24:28.720 | bogus center dot net slash 2025 conference to register and gosh one thing that i do love about
00:24:35.600 | the conference is that you do get to ask your questions to the speakers on a one-on-one it's
00:24:41.440 | phenomenal i think a few years back i cornered clark howard for a little while and got to
00:24:45.520 | pick his brain since i'm a huge clark howard fan yeah oh that guy's great all right let's jump to
00:24:52.000 | some community questions we have two related questions about roth conversion case studies
00:24:57.840 | first one is from jock doc from the bogus forums he writes my income in retirement is over 75k as a
00:25:05.200 | single filer what does ed think about the value of roth conversions in this lower income period
00:25:11.280 | also known as gap years in retirement first doing no roth conversions to maintain a low income
00:25:17.040 | to get the highest extra senior deduction so we touched on this a little bit but if there's
00:25:21.680 | anything else you'd like to add please go ahead personally i would concede the senior deduction
00:25:27.280 | it's only a six thousand dollar deduction which relates down at about 22 to about 1300 actual tax
00:25:34.480 | savings if you give up that and convert more to roth using the 22 and 24 brackets
00:25:41.120 | i believe you'll be in much better shape down the line when rmds start and you don't have any so you
00:25:47.920 | keep your future income low and your money starts building tax free we are in an era of the lowest tax
00:25:56.240 | rates in history and it's going to continue at least for another few years and you don't want to lose out on
00:26:03.760 | any one of these years to take advantage of the low brackets so in that case if he was sitting in front
00:26:10.160 | of me i'd say concede concede on the six thousand yes interesting clark howard talked about how excited
00:26:17.760 | he was to sell a rental property that he had that was no longer fit for his goals and that's because tax
00:26:23.520 | rates for him with his long lifespan he had seen much higher rates he was excited to sell that rental at
00:26:29.200 | the 15 long-term capital gain rates he knew that was effectively a tax sale if you will this question
00:26:37.040 | comes from cody garrett a similar question about roth conversions this one about roth conversions while
00:26:41.520 | working cody asked a married couple age 65 has gross income of a hundred thousand dollars this year they
00:26:48.880 | have an effective 5.9 federal rate so was making roth contributions while working the answer when we talk
00:26:58.320 | about tax rates we're talking about not the general tax rates everybody knows what those are it's your tax
00:27:04.480 | rates based on your own situation your own deductions and income so all tax rates may be low maybe your
00:27:11.120 | rate is high or vice versa but then we have something called marginal rates these are the taxes you pay on
00:27:17.920 | the last dollar of income for example if you add a roth conversion at your 24 you'll be taxed at 24
00:27:25.280 | but not on all of it because we have something called a progressive tax system graduated rates which means
00:27:32.880 | yeah maybe on a few dollars you'll pay at 24 but most of them will be at the lower rates the 10 12 22
00:27:39.520 | percent so it's kind of like a bunch of buckets of water once you fill up the 10 percent then the next
00:27:45.440 | goes to 12 and 22 and 24 it's only the last dollars that's the marginal rate what he's talking about
00:27:52.640 | is the average rate or what we call the effective rate on all his taxable income so you take all your tax
00:27:59.840 | liability or what you project it will be and divide it by your taxable income that's why he's coming
00:28:06.480 | up with 5.9 percent he may have a lot of deductions so he's a great candidate for roth
00:28:12.480 | again always pay taxes while the rates are low and the reason i say roth means paying taxes you're paying
00:28:19.600 | if you want to convert but you're also paying for a roth contribution in the loss of a deduction but again
00:28:26.320 | the ira deduction is not a real deduction because you have to give it back and then some you've got
00:28:32.320 | to look at the long-term big picture and even people that say i'm going to be in a lower bracket in
00:28:38.080 | retirement and that's what a lot of people think they say well i had a big w-2 maybe three four
00:28:42.640 | hundred thousand of income and i won't have that in retirement well it doesn't usually work that way
00:28:47.920 | because first of all you don't have the deductions in retirement you're generally your house is paid off you
00:28:53.520 | you don't get tax benefits for dependent kids so you have lower deductions and
00:28:59.520 | you may have larger income because your rmds if you do nothing and it continues to grow and build and
00:29:07.680 | compound and snowball your rmds can be larger than your highest w-2 ever was and i've seen that with people
00:29:16.560 | and they say how can this be i'm retired how can my tax bracket be higher so even if rates are the
00:29:22.320 | same you may not be in a lower tax bracket and we don't even know about future rates and cody garrett
00:29:28.960 | he's a planner himself he's been on our show before so i'll link to some of those episodes in the podcast
00:29:35.760 | notes for those who want to check that out let's jump to a question about trump accounts again we had a
00:29:43.760 | couple users from the bull guts forums asking about this users djm 2001 and user slow and steady
00:29:50.240 | and then we also had katherine payton ask about this on linkedin questions being would ed recommend trump
00:29:57.760 | trump accounts once they become available or should we wait until the final details are sorted out can
00:30:04.960 | they be converted to traditional iris after age 18 etc what's his take and what's his take on the
00:30:10.880 | restriction to hold only equities within the accounts doesn't that result in worse tax treatment in the long
00:30:17.520 | run mainly long-term capital gains tax at ordinary rates well number one they're not available till july 4th
00:30:25.280 | next year one year after the date of enactment so nobody can do it but some people qualify already
00:30:32.560 | babies born between january 1st 25 so already 25 through 28 babies born in those years get an automatic
00:30:42.480 | exceed a starting kickoff of a thousand dollars so for that alone nobody's going to say i don't want
00:30:49.120 | a trump account because it's free money but there's a catch one of them is the investment restrictions you
00:30:55.920 | mentioned the biggest downside i see there's nothing wrong with a free thousand dollars except you can't
00:31:01.680 | get to it till you're 18. it's not like oh i'll take it but i'll pay a penalty no it's a lock box you can't
00:31:08.880 | touch it so i have a feeling some people may be parents that put a thousand in for a newborn and
00:31:15.040 | then all of a sudden the pipe breaks and they need a thousand dollars can't get it till the child is that
00:31:19.840 | you have to wait 18 years to get to any of that money it's only for people that can put the thousand
00:31:26.080 | dollars in and forget about it but i wonder how many people will do it for the thousand dollars thinking
00:31:31.680 | they can touch it you can't touch it for 18 years so that's one downside and the investments u.s
00:31:38.800 | companies are very strict and it's meant to be conservative and nationalist but that's okay but there's
00:31:44.720 | three sources of contributions the government seed i said the child themselves or the parent
00:31:50.160 | the grandparent can put in five thousand employers can put in twenty five hundred the great thing about
00:31:55.680 | the trump accounts forget about the thousand if you're really dedicated to not touching that money
00:32:02.000 | let's say you have a new child here you get the thousand you can put another five thousand in
00:32:06.240 | even though the child isn't working because he's lazy he's just born and he's not working yet how is
00:32:12.560 | that possible but remember with iras to put money in an ira you have to have compensation wages or
00:32:19.520 | self-employment income this you don't have to have compensation so you can keep putting money in for
00:32:26.480 | all the early years of a child's life up to 18 5 000 a year so you can really compound wealth if you're
00:32:33.920 | okay saying we're gonna load this account up i'm not touching it because you can't touch it until the child
00:32:40.160 | turns 18. i'm curious ed any thoughts on the practical considerations of having an 18 year old inherit
00:32:46.320 | whatever amount that's going to grow to 18 years from now well that's a problem too it's their money
00:32:52.320 | that's why some people put it in a trust or something even the uniform gifts to minors or
00:32:57.680 | transfers to minors it's there when they're no longer a minor so i guess you have to educate your
00:33:02.640 | kids you do what i did i had accounts for my kids they're in their 30s they still don't know about
00:33:08.320 | it that is not the first time i've heard that and i've got it covered too nobody can find out because
00:33:12.960 | i do their taxes yeah that's certainly something i encourage folks to think about whether it's the
00:33:18.080 | trump account or the account ugma custodial roth ira also pretty common i would say it's a good bet for
00:33:25.600 | the i don't know the first 12 to 15 years of the child's life why do they even need to know they have
00:33:31.440 | an account i work with someone once and that was their plan and then they were getting statements in
00:33:36.800 | the mail and then the kid came home and the kid was you know an adult right the adult came home and
00:33:40.800 | they saw the statement and you know they said you know hey dad what is this and at that point the dad
00:33:45.840 | had to turn the account over but he had the same strategy as it sounds like most folks just don't tell
00:33:51.120 | the kid about it which is right obviously given that anecdote doesn't always necessarily work
00:33:57.520 | any thoughts on the commenter's question with respect to ordinary income tax treatment on what
00:34:05.440 | would otherwise receive long-term capital gain treatment well that's true yeah it's going to be
00:34:10.560 | ordinary income tax on the earnings which will be a lot normally we say well the earnings are the smaller
00:34:15.360 | part but compounding over many years yes there will be earnings and you make money so yeah you could
00:34:21.360 | put it in a stock account and get capital gains that's true and for those folks who want to nerd
00:34:28.080 | out more on the issue of having the stocks which would otherwise qualify for long-term capital gain
00:34:35.600 | rates be taxed at the ordinary if held in a tax-deferred account michael kipsis has a phenomenal article
00:34:42.080 | on the subject and it almost sort of debunks the issue because michael points out yes stock funds
00:34:49.440 | normally tax efficient because they are taxed at lower rate they're still not perfectly tax efficient
00:34:54.560 | because they still have that dividend tax drag and on a long enough timeline because of that dividend
00:35:02.160 | tax drag it might actually make sense to put something like a stock fund in a tax-deferred account because
00:35:08.240 | you eventually will have more wealth even after taxes by shielding that annual dividend tax drag
00:35:14.320 | with that tax referral mechanism that you get with that ira again i'll link to the article in the show
00:35:18.640 | notes for folks who want to nerd out on that subject that reminds me of another point on the other side
00:35:24.240 | to the stock account and this goes way out because we're talking about kids so who knows what the
00:35:29.120 | rules will be when they die age 90 or 100 or maybe 150 whatever life expectancy will be the benefit
00:35:36.240 | there's a step up in basis on on those you never pay the capital gains tax but you do pay tax on the
00:35:42.080 | dividends absolutely which you have to remember to add to your basis i'm told by the brokers and so
00:35:47.840 | forth they figure that in but just in case they don't i keep track of my all my reinvested dividends
00:35:53.840 | i keep a running total it's easy you go to the 1099s just to make sure if you ever sell a stock
00:35:58.800 | position you're not paying tax on money already paid tax on i know this is something that rick
00:36:02.640 | ferry has advised in the past you want to opt for what's called specific identification with your
00:36:07.280 | custodian at least that's what vanguard calls it and then that's going to help you identify what your
00:36:12.800 | tax lots are how many shares you bought at what cost and when helps you figure out the tax
00:36:18.000 | consequences and helps you with tax planning helps you decide you know which lots you want to share
00:36:22.000 | to optimize your tax planning for the year hey it's low tax here maybe i want to sell you know some of
00:36:26.720 | the stuff with a lower basis first selling stuff with a higher basis during a high tax year given cash
00:36:32.640 | cash needs all right let's jump to charitable contributions slow and steady from bogus forums
00:36:38.160 | asks about this who wants to know what your take is on this new provision the charitable provisions the
00:36:44.400 | benefits the big one the charitable deduction for non-itemizers that doesn't start till next year
00:36:49.760 | everybody gets 2000 married or 1000 and that's also below the line deduction but everybody gets it that
00:36:56.880 | it's not related to income
00:36:58.560 | one more quick clarification ed also mentioned here from the recent tax law change starting in next year
00:37:08.240 | in 2026 you'll be able to deduct cash charitable contributions of up to a thousand dollars for single
00:37:15.120 | filers or two thousand dollars for married filers even if you don't itemize that's a shift from the
00:37:21.040 | prior rules in the past if your itemized deductions including charitable contributions didn't exceed the
00:37:27.280 | standard deduction you likely receive little to no tax benefit for your giving but under this new rule
00:37:33.920 | non-itemizers folks who take the standard deduction which is most people can now get a small deduction
00:37:41.440 | for charitable giving even if they continue taking the standard deduction back to the show
00:37:47.440 | but this brings up another issue to do the charity wait for next year what do you do this year maybe
00:37:57.600 | and you have to tie in the new salt deduction estate and local taxes because more people in high tax states
00:38:07.520 | because of this law will now be qualifying to itemize their deductions so more people can take more
00:38:14.720 | charitable contributions if you're in a high tax state like where i am in new york new jersey california
00:38:21.360 | so if you're in a high tax state you're probably going to start itemizing your real estate taxes and
00:38:29.360 | state taxes you can go up to forty thousand dollars you can put in mortgage interest charitable deductions and
00:38:35.440 | other deductions that you may have so you can really do well with itemizing and i may take the deductions
00:38:41.520 | they're talking about take more of that now again while you're able to itemize now if you're in a
00:38:48.080 | state that doesn't have any state tax like florida texas and some of those that's not an issue for you but
00:38:54.480 | also next year even if you do itemize and this may be a reason for some people to do their charitable
00:39:00.240 | planning now while they can itemize and also if your charitable deduction is large enough that might
00:39:05.600 | get you into the itemizers club anyway what i mean where the itemized deduction is higher than that you
00:39:11.360 | would have got from the standard deduction so if that gets you into the club you're better off doing it
00:39:16.720 | this year because next year your deductions are limited if you're a high earner number one charitable
00:39:23.680 | deductions have this point five percent floor half of one percent people say oh that's nothing let me
00:39:30.800 | give you an example if you think that's nothing let's say you make four hundred thousand a nice w-2
00:39:36.720 | so the first two thousand dollars of charitable deductions you don't get so let's say that person
00:39:42.800 | makes a two thousand dollar charitable gift and goes to itemize they don't get that deduction
00:39:47.760 | so it doesn't sound like a big number point five percent but if you have a high income and you're making
00:39:54.480 | relatively low and i'm not saying two thousand is a low deduction but you'll lose it and then if you're in
00:40:00.640 | the top bracket in the 37 percent bracket and again these things i'm talking about happen next year so
00:40:06.080 | you may want to front load your charity and bunch them into this year next year if you're in a 37 percent
00:40:12.800 | bracket you only get a tax deduction for all your itemized deductions including charity worth 35 percent
00:40:20.800 | you don't get to deduct 37 cents on the dollar so for the charity i would look at what you can put in
00:40:27.040 | this year well there's no restrictions and you may be able to itemize because of the soft deduction or
00:40:33.440 | if not if you're in a low tax state because you're giving a lot and we just had phil demuth on a
00:40:40.000 | previous episode of bogle heads on investing talking about some charitable gifting strategies i'll link to
00:40:45.680 | that in the show notes for folks who want to check that out i will tell you another thing that he picked
00:40:50.800 | up on it was in the wall street journal last week i believe for those who i said qualify now for
00:40:56.880 | the forty thousand dollar soft deduction state and local taxes the extra 40 it go went from 10 to 40
00:41:04.960 | that 30 additional that's what you got in the abba law it cuts off when income goes over 500 000 it
00:41:12.240 | starts phasing out what he pointed out in that article is that once you're in that 500 000 at 600 000 you
00:41:19.280 | lose it completely so it's not most people but if you're in the 500 000 to 600 000 the tax
00:41:26.720 | because of the phase out in that last 100 000 of income is actually 45.5 percent
00:41:34.800 | because of the loss of that 30 000 salt you don't lose the whole salt deduction it goes back to the
00:41:41.040 | 10 000 but that loss it's like a domino effect the loss of that 30 000 not only puts you in a higher rate
00:41:49.680 | but you lose the 30 000 which in turn puts you into a 35 percent bracket so you lose there too and
00:41:56.800 | that's how you get a 45.5 tax rate on that hundred thousand okay let's talk about the value of comparing
00:42:06.720 | roth conversions or having traditional dollars in retirement this question comes from username
00:42:11.760 | jbtx from the bullguts forums who writes is there value in holding a certain amount of money in
00:42:18.480 | traditional dollars to fill up lower tax brackets down the road or if one has high medical expenses in
00:42:24.560 | the future in which point it'll be good to have taxable income to offset that deduction should i keep some
00:42:32.000 | traditional iras that's a great question and the answer is yes for several reasons you have high
00:42:39.120 | standard deductions even if you're not itemizing or you may have itemized you want some of that income
00:42:45.120 | to come out tax-free also you may have medical expenses you want to use taxable money to get an offset
00:42:52.480 | a big reason is if you're charitably inclined and you can take advantage of qcd's qualified charitable
00:42:59.520 | distributions only available to traditional ira owners over 70 and a half iras are the worst assets
00:43:07.120 | because of the tax law well they're also the best assets if you give them away because they're so lousy
00:43:13.600 | tax-wise give them to somebody else but the charity doesn't pay taxes so iras are the best assets to give
00:43:20.560 | to charity and you can do that now by making a direct transfer from your ira to a qualified charity
00:43:28.400 | the amount is up to 108 000 with inflation increases so that's a great way to give to charity i never say
00:43:36.560 | just to be clear to give to charity for the tax benefits you give because you want to give that's
00:43:42.720 | really the reason because anybody i ever saw that did it for tax reasons was always unhappy when they
00:43:49.520 | realized they actually had to give the property away what do you mean i thought i just get a tax benefit
00:43:56.320 | so you have to want to give that's why i use the term charitably inclined but if you're giving anyway
00:44:01.360 | if you qualify for qcds give through your ira you're giving anyway but now you get a benefit and that benefit
00:44:09.280 | is one of those above the line deductions that reduces agi it can also offset the income from your rmd your
00:44:16.880 | required minimum distribution that's the way to give but you'd need the traditional ira balance to do it
00:44:24.000 | so if you're saying well i converted everything to a roth i don't want to really have rmd income and
00:44:31.120 | during my life my plan is to give a hundred thousand to charity so keep a hundred thousand or so in your ira
00:44:36.960 | little by little as as rmds come out give it to charity and nobody pays the tax all right let's
00:44:43.360 | talk about some tax changes with regards to roth accounts this one is from you the name lie rad from
00:44:49.920 | the little guys forums who asked what's a good way to think about possible future tax law changes and how
00:44:55.760 | it should affect how much should be converted to roth i think one thing that the user is trying to get out
00:45:02.400 | here is that we don't know what the future holds so how do you plan how do you do tax planning
00:45:08.880 | oh it's easy you plan with things you know you know what today's tax rates are that's why i said you
00:45:15.920 | can lock in lower rates and you can control the taxes you pay you can control how much you're going
00:45:21.760 | to use the 22 of the 24 bracket hit it while you can control it we have another question from the
00:45:29.360 | booklets community this one pits your favorite roth accounts against the hsa the health savings account
00:45:37.440 | and the user asked if i have a thousand dollars to invest which one should i put my money in a roth ira
00:45:43.200 | or an hsa i still like the roth because the roth has no restrictions the actual original contributions
00:45:51.440 | most people don't realize this can be withdrawn any time for any reason tax and penalty free not the
00:45:59.200 | earnings the actual contributions so they could be used for education or anything you could use it to
00:46:05.280 | bet on a horse i mean you can use it for anything hsa's on the other hand is an amazing account because of
00:46:11.680 | the triple tax benefit you get a deduction on the way in you get a deferral on the income it
00:46:17.920 | generates and if you use it for qualified expenses it's tax free and people are using it as another
00:46:25.040 | type of retirement account but what i'm seeing happening people have too much in these accounts
00:46:31.040 | that they'll never spend and then you get hit with a big tax at the end or at death people are really
00:46:36.560 | hitting these things hard so you have to balance i would definitely take advantage of the hsa
00:46:42.400 | if you don't already have one because there will be medical expenses no question about that
00:46:47.360 | but you're limited to using it just for those so i would say you know all right a hundred two hundred
00:46:53.920 | thousand after that i know expenses can get high but you should start really diversifying and have
00:47:00.160 | more in the roth that can be used for anything and another benefit of making hsa contributions at least
00:47:05.600 | through an employer is you got to avoid payroll tax so there's an additional tax savings there right
00:47:11.280 | yeah that is a big ben there are big benefits and for folks who aren't super tax nerds a popular
00:47:18.160 | strategy is to contribute to a health savings account and then don't spend the money immediately for
00:47:23.840 | qualifying medical expenses rather you're going to invest the money in that account and then spend
00:47:29.360 | that later in life once that money's had a chance to grow tax-free all right let's jump to another
00:47:35.520 | question from the bulkheads community this question comes from username sc9182 from the forums who asks
00:47:42.560 | once you finish converting all your tax-deferred traditional dollars to roth dollars what is your
00:47:48.640 | next tax move well two things we just talked about maybe it's not a good idea to convert everything to
00:47:55.200 | hold back some traditional iras for tax risk diversification using up low brackets and standard
00:48:01.040 | deductions each year or for qcds those charitable or for medical bills that may pop up so let's say you did
00:48:08.800 | everything in the roth you did all of that i love i'm going to say the cash value life insurance because
00:48:14.560 | to me it's like a super roth the income tax exclusion the tax-free feature of life insurance
00:48:20.880 | is the single biggest benefit in the tax code and i would load up there especially a cash value policy
00:48:28.240 | that you could draw from if you need it during life most people say they don't want to do it or if they
00:48:33.200 | don't want to do it they say well i know about the death benefit most people don't realize they has
00:48:38.400 | lifetime benefits i have this myself i have a cash value policy because i'm all wrought out also i have
00:48:45.600 | a cash value policy but it has a long-term care rider i love that feature if i ever needed money for
00:48:52.880 | long-term care it could take it right out of the policy so what the kids get less who cares about
00:48:58.160 | them anyway they're going to get plenty so last thing i want to worry about is if i need that high
00:49:03.360 | medical bills the nursing home and all of that that kind of extended medical care the last thing i want
00:49:08.800 | to do is rely on my kids to come up with the thousands of dollars needed for my care every month
00:49:14.080 | i want to know it's taken care of and i think everybody else should know that too so i took care
00:49:19.200 | of it for myself and again i do not sell life insurance i have never sold any financial products
00:49:24.800 | i don't sell stocks bonds funds insurance annuity none of that i'm not an insurance professional i'm a
00:49:30.560 | tax advisor always check this with your own insurance professionals let's jump to another
00:49:35.520 | question from the bullheads community this question is about designating a trust as a beneficiary of an
00:49:43.280 | ira this user wants to know what the downsides are of that approach and what individual should consider
00:49:50.000 | if they are bequeathing to either eligible designated beneficiaries and or spendthrifts here's how i answer
00:49:57.680 | because i get this question all the time when should i name a trust as my ira beneficiary or when should i
00:50:03.920 | name a trust for anything and my answer is always the same when should you name a trust when you don't
00:50:09.680 | trust because if you trusted them you wouldn't need a trust so i should have called it a don't trust that's
00:50:15.040 | when you name a trust when you don't trust and there are reasons you could have minor beneficiaries
00:50:20.800 | that can't handle money you can have even older adult children that also can't handle money they may be
00:50:26.080 | addicts they have gambling and drug addiction horrible things divorce bankruptcy if you're in the category
00:50:32.000 | you say i need a trust for this post-death control and protection you're not doing it for tax reasons
00:50:37.440 | if anything the taxes could be higher in their trust you're doing it for personal reasons control
00:50:42.640 | reasons and that's a good reason so for those people that have those issues do everything you can if it's
00:50:48.560 | that important to you convert that whole ira and it's probably a large one that's why you're worried
00:50:53.760 | about it to a roth ira and leave the roth ira to the trust the roth ira is the better asset to leave to
00:51:01.760 | the trust because you eliminate the whole trust tax problem and the taxes to the beneficiaries two has
00:51:09.040 | to come out at the end of 10 years after death or if it's an edb they can stretch it but you eliminate
00:51:14.720 | the tax this gives you the freedom to use that trust that ties up the money and holds it back from the
00:51:20.640 | beneficiary without worrying about trust taxes or better yet take the money out and put it in a life
00:51:27.200 | insurance policy and leave the insurance to an insurance trust there you don't even have to
00:51:32.560 | worry about rmd rules complicated tax rules you make your own rules you get your own customized plan
00:51:39.120 | and there's no tax so you want tax-free vehicles going to a trust so to be clear i'm saying yes some
00:51:46.560 | people need a trust but the ira is a disaster tax-wise leaving a traditional ira to a trust don't do it
00:51:54.160 | if they need a trust use a roth ira which means taking the money and paying the tax now but remember
00:52:00.400 | it's not if but when this tax will be paid possibly at much higher rates you're paying a tax now that
00:52:07.760 | will have to be paid anyway may as well get it off the table and then you have the plan you want leaving
00:52:13.760 | a roth to a trust or the life insurance to the trust and don't do the life insurance to the ira
00:52:19.520 | distribution going to the life insurance if you're under 59 and a half there would be a 10 penalty
00:52:25.040 | there is none with a raw you convert to a roth as long as all the dollars are converted you can leave
00:52:30.080 | the roth to the trust and the reason being to leave those roth dollars to that trust making the conversion
00:52:35.440 | yourself is because that trust is going to reach those higher brackets more quickly than you will as
00:52:40.480 | an individual or even married filing jointly oh yeah yeah yeah yeah you can control it now but when it goes into
00:52:46.480 | the trust there are no brackets all tax-free same thing with life insurance then you can have your
00:52:51.280 | customized plan you can put anything you want pretty much in those trusts and our last question looks
00:52:56.720 | like it's a fun one from david who asks about the what you call the greatest benefit in the tax code the
00:53:04.240 | greatest single benefit in the tax code is the tax exemption for life insurance it's just unbelievable that
00:53:10.960 | you can accumulate this kind of large amounts of money it's like a super roth and it's all tax-free
00:53:17.040 | and it can even be estate tax-free because life insurance can be on the outside of your estate in
00:53:22.240 | an irrevocable trust there's nothing like it and again i don't sell the product i have it myself because
00:53:28.640 | it's a great product everything that we talked about on this show which is why i get so passionate about
00:53:33.360 | it i've done for myself and my family all roth all the life insurance all of these things
00:53:38.720 | and ed we'll see you at the bowheads conference this year i hope to see everybody have great questions
00:53:44.640 | smart questions too it's a smart audience that's what i'm looking forward to i hope to see you all there
00:53:51.120 | it's in san antonio home of the alamo october 17th through 19th and i'm speaking on the 18th don't miss that
00:53:59.520 | session you'll love it and thank you so much for your time no you're great yeah you're a great
00:54:04.240 | question on that 199a the qbi deduction on how the roth affects uh most cpas don't pick up on that
00:54:10.880 | that was brilliant a lot of people always talk about you know shove those traditional dollars
00:54:14.880 | in for self-employed and like i don't want to give up qbi i love qbi s-corps same thing i think about
00:54:20.320 | escort a lot of people are bullish on s-corps i'm like well you're gonna lose qbi and you're also
00:54:25.360 | looking at a smaller social security benefit as well can't help but think about that when
00:54:28.880 | people mention the s-corps strategy yeah it's a big deduction and it got extended and improved
00:54:34.720 | next year with larger brackets larger phase out ranges all right good yeah we covered a lot of
00:54:40.160 | great stuff yeah i'll see you there remember the alamo thank you for listening to the 85th
00:54:48.400 | bogelheads on investing podcast rick ferry will return next month for the 86th episode in the
00:54:56.560 | meantime visit bogelcenter.net bogelheads.org the bogelheads wiki bogelheads twitter bogelheads
00:55:04.400 | youtube bogelheads facebook bogelheads reddit join one of your local bogelheads chapters and get others to
00:55:11.440 | join also be sure to like subscribe and leave a review on your favorite podcast platform and thank
00:55:19.520 | you for listening i look forward to seeing you all at the conference later this year