Bogleheads® Chapter Series – Sean Mullaney Discusses Tax Strategies

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome to the Bogleheads Chapter Series.

00:00:06.080 | This episode was hosted by

00:00:07.600 | the Pre and Early Retirement Life States Chapter

00:00:10.320 | and recorded July 29th, 2021.

00:00:13.480 | It features Sean Mullaney, a CPA, financial planner,

00:00:17.120 | and president of Mullaney Financial and Tax Incorporated.

00:00:20.560 | He also blogs at fitaxguy.com.

00:00:23.620 | Bogleheads are investors who follow

00:00:26.240 | John Bogle's investing philosophy

00:00:28.020 | for attaining financial independence.

00:00:30.600 | This recording is for informational purposes only

00:00:33.020 | and should not be construed as investment advice.

00:00:35.680 | - Then I'm gonna speak about tax topics relevant

00:00:44.680 | for the most part to those ages 50 to 70,

00:00:48.220 | those thinking about retirement

00:00:50.040 | and those beginning retirement.

00:00:52.080 | Now there's gonna be some nuggets in there for all ages,

00:00:54.600 | right?

00:00:55.440 | Obviously all of us, even if we're under 50 years old

00:00:58.140 | are thinking about retirement.

00:00:59.940 | So we're hopefully gonna get to ages 50 to 70.

00:01:03.160 | And there will be some things in there

00:01:04.560 | for those who are a little further along

00:01:06.540 | in their retirement journey.

00:01:08.000 | Again, my name is Sean Mullaney.

00:01:11.660 | Carol, Jim, thanks so much for the introduction.

00:01:13.820 | And I wanna, first of all,

00:01:14.940 | say it's an honor to be presenting tonight.

00:01:17.820 | Really glad to have this opportunity

00:01:19.820 | to be in front of the Bogleheads group.

00:01:22.060 | Real honor to be here.

00:01:23.900 | And thanks so much to Carol, Jim, Miriam,

00:01:26.400 | the entire team for putting this together.

00:01:28.360 | I know there's a lot of work that goes on into it.

00:01:30.740 | So thank you so very much for that.

00:01:33.440 | Just a little bit about me and sort of my background there.

00:01:38.800 | Just, you know, we always do disclaimers, right?

00:01:41.480 | So this is for educational

00:01:43.560 | and hopefully entertainment purposes.

00:01:45.420 | It's not investment advice, tax advice,

00:01:48.000 | legal advice for any one person,

00:01:49.800 | but hopefully this gives you some knowledge.

00:01:51.840 | This gives you some resources

00:01:54.300 | and some more information and some more power.

00:01:56.860 | Let's see here.

00:01:58.900 | So doing a tax presentation,

00:02:02.100 | every now and then it can be a little dry.

00:02:04.060 | So I wanted to think about,

00:02:05.020 | well, what's sort of in the news in the tax world,

00:02:07.780 | especially as it applies to pre-retirees, early retirees.

00:02:12.580 | And to my mind in this investing environment,

00:02:15.540 | it's capital gains, right?

00:02:17.500 | There are so many people out there right now

00:02:19.940 | with an old dog or cat in their investment portfolio.

00:02:23.520 | It did well.

00:02:24.420 | They essentially have the good problem, right?

00:02:26.680 | They have the problem of years ago,

00:02:29.240 | I bought a stock or a mutual fund

00:02:32.680 | and that thing is shot through the roof.

00:02:34.840 | Oh no, how do I access it, right?

00:02:37.560 | Because capital gains are subject

00:02:39.840 | to federal income tax rates of potentially 0%.

00:02:43.280 | We'll talk about that, 15% or 20%.

00:02:47.120 | And that's today's rates.

00:02:48.300 | You never know what the future is gonna hold.

00:02:50.480 | And then also for some of the higher income people,

00:02:54.960 | you're gonna add on to that

00:02:56.720 | a 3.8% net investment income tax, right?

00:03:00.360 | If your AGI is over 200,000 for single people,

00:03:05.360 | 250,000 married filing joint,

00:03:07.720 | we've got this 3.8% net investment income tax to tackle.

00:03:11.480 | And then there's just the whole issue of AGI, right?

00:03:14.080 | As I'm sure most of you are aware.

00:03:16.520 | AGI is one of those things

00:03:18.260 | that really limits other benefits in the tax code.

00:03:22.740 | So, maybe we're not even so much worried

00:03:24.940 | about this particular tax,

00:03:26.500 | but we're worried about spiking our AGI

00:03:28.860 | because of a potential capital gain.

00:03:30.940 | But we wanna access that money.

00:03:32.500 | And I just give you a very simple example.

00:03:35.180 | 1995, Candace purchased 200 shares of Acme Corp

00:03:38.980 | for $100 a share.

00:03:41.840 | That means her stock basis for tax purposes is $20,000.

00:03:46.840 | Today, that stock has gone from $100 a share

00:03:50.160 | to $500 a share.

00:03:52.120 | So, we're talking about $100,000 of total value.

00:03:55.520 | And we're talking about an $80,000 capital gain,

00:03:59.080 | but Candace wants to access that.

00:04:00.720 | That's her money.

00:04:02.000 | How can she access that money in a tax efficient manner?

00:04:06.360 | And so, there are exit strategies out there.

00:04:10.480 | I'm actually gonna just lead off

00:04:12.120 | before I get into the ones that I tend to favor.

00:04:14.520 | I'm gonna mention two quickly that I tend not to favor.

00:04:18.200 | And look, your mileage may vary, right?

00:04:20.160 | Just because it's not my favorite technique

00:04:22.080 | doesn't mean it couldn't work

00:04:23.160 | in your specific circumstances.

00:04:25.520 | One of them is the like-kind exchange, right?

00:04:28.960 | 1031 exchange, like-kind exchange.

00:04:31.720 | However, it doesn't apply to Candace, right?

00:04:34.060 | Because it only applies today to rental real estate.

00:04:38.080 | 1031 exchanges can work out really well,

00:04:41.000 | but a couple of drawbacks.

00:04:42.660 | One is it's not really an exit, right?

00:04:45.440 | All it is is a deferral, right?

00:04:47.400 | So, the idea behind a 1031 exchange

00:04:49.760 | is I have rental real estate property.

00:04:52.240 | I exchange it for another piece of rental real estate.

00:04:55.840 | It could even be something called

00:04:57.360 | a Delaware Statutory Trust.

00:04:59.720 | But all I've done is I've deferred the reckoning on that,

00:05:03.860 | right?

00:05:04.700 | So, now instead of rental property A,

00:05:08.600 | I either own rental property B or rental properties C and D,

00:05:13.120 | right?

00:05:13.960 | It doesn't have to be one for one.

00:05:14.780 | It could be two for one or one for two.

00:05:17.320 | Or I own something called the Delaware Statutory Trust.

00:05:20.980 | There are issues with 1031 exchanges.

00:05:23.240 | And like I said, they only apply to rental real estate,

00:05:26.000 | right?

00:05:26.840 | So, limited subsection there.

00:05:28.360 | The other potential exit is something called

00:05:30.280 | a Qualified Opportunity Zone, right?

00:05:32.080 | So, Candace could sell this stock

00:05:34.980 | and then roll the gain into something called

00:05:37.060 | a Qualified Opportunity Zone Fund.

00:05:39.460 | These are new to the tax law.

00:05:40.940 | They came in in late 2017.

00:05:43.220 | And to my mind, they're not optimal

00:05:46.860 | because they are an investment product

00:05:49.560 | that is very designed around tax rules, right?

00:05:53.460 | They have to invest in certain assets

00:05:55.580 | in these Qualified Opportunity Zones.

00:05:57.900 | And it's a very tax-motivated investment.

00:06:01.800 | And it has a bunch of tax rules, right?

00:06:04.160 | So, I don't wanna spend any time on those.

00:06:06.720 | We could talk about those a little bit.

00:06:08.400 | Frankly, it's not something I believe

00:06:10.180 | I've ever recommended to a client.

00:06:11.920 | So, you sort of see where I am

00:06:13.680 | on these Qualified Opportunity Zones.

00:06:15.720 | In the right set of circumstances, maybe it could work,

00:06:18.440 | but certainly not my go-to solution.

00:06:20.880 | But what are some things that I tend to favor?

00:06:24.280 | Well, the first one is something

00:06:25.800 | called tax gain harvesting.

00:06:27.280 | You'll see why I favor this in a second.

00:06:29.280 | The idea here is that if Candace

00:06:33.520 | can keep her taxable income below $40,401 if she's single,

00:06:38.520 | $80,801 if she's married, filing joint,

00:06:42.920 | she can dispose of some of this stock

00:06:45.960 | and be in that 0% federal capital gains tax rate, right?

00:06:50.280 | So, capital gains tax rates right now are progressive

00:06:54.200 | and below these levels of taxable income,

00:06:57.320 | it's actually a 0% rate.

00:06:59.540 | There is a drawback on that.

00:07:02.640 | One, she's gonna manage her taxable income,

00:07:04.980 | not gonna be available to everybody,

00:07:07.180 | but if she is otherwise low income,

00:07:09.480 | this could be a great way of slowly getting out

00:07:12.960 | of this stock in a tax-efficient manner.

00:07:15.440 | She does need to remember, though,

00:07:17.280 | she's subject to state income tax on that sale.

00:07:20.080 | Now, look, if she lives in Florida, Texas,

00:07:22.960 | believe there are nine states without a capital gains tax,

00:07:25.800 | not a problem at all, and in many states,

00:07:28.800 | it's gonna only be a little bit of leakage, right?

00:07:30.800 | Because state income taxes tend to be progressive.

00:07:33.560 | So, tax gain harvesting,

00:07:36.040 | if she's got the right level of income,

00:07:38.320 | could be a great answer,

00:07:39.920 | maybe a little bit of state tax leakage,

00:07:41.880 | but no big deal there.

00:07:43.720 | I like tax gain harvesting for two reasons, right?

00:07:47.920 | One would be, I'm sitting on some appreciated securities,

00:07:53.400 | I wanna reset the basis on them, right?

00:07:55.760 | So, it could be a mutual fund I like, it has a gain,

00:07:59.240 | I just wanna reset that basis,

00:08:01.160 | and if I can keep my income below these thresholds, fine,

00:08:04.320 | I just reset my basis.

00:08:06.160 | The other one is maybe more like Candace's situation.

00:08:10.020 | She's been in ACME stock for 25 years,

00:08:13.080 | she doesn't like it from an investment perspective anymore,

00:08:16.280 | so she wants a tax-free exit,

00:08:18.440 | or at least a tax-efficient exit,

00:08:20.280 | so she starts dripping it out

00:08:22.360 | in terms of some taxable sales,

00:08:24.160 | does this tax gain harvesting, manages her income,

00:08:27.180 | and then she reallocates into her desired stocks,

00:08:30.880 | bonds, mutual funds, ETFs, whatever it is she likes.

00:08:33.480 | So, to my mind, there's the tax angle

00:08:35.920 | to tax gain harvesting, just resetting basis,

00:08:39.240 | or it's, hey, I want to reallocate

00:08:42.300 | or get into cash in a tax-efficient manner.

00:08:45.560 | So, that's tax gain harvesting,

00:08:47.360 | a lot been written about that,

00:08:48.640 | I myself have written about that,

00:08:50.560 | but you need to keep that income low enough.

00:08:53.200 | Another exit, and this exit is charitable gifting,

00:08:58.440 | this is for the otherwise charitably inclined, right?

00:09:01.440 | Charitable contributions are great,

00:09:03.320 | but they're a real expensive way to get a tax benefit

00:09:06.440 | if you aren't otherwise charitably inclined,

00:09:08.760 | and there are plenty of people,

00:09:09.720 | hey, you know, I go to mass every week,

00:09:12.360 | I donate to my church,

00:09:14.080 | or I have this charity I give to year in and year out,

00:09:17.400 | or maybe I'm just looking for a one-time donation,

00:09:19.720 | something really hit my heart,

00:09:21.960 | something really pulled at my heartstrings,

00:09:24.360 | I want to give some money to them.

00:09:26.940 | This Acme stock, in Candice's case,

00:09:31.220 | could be a real win from a tax perspective,

00:09:34.600 | and so what am I talking about?

00:09:36.800 | There are plenty of 501(c)(3) charities today

00:09:40.240 | that will accept, appreciate securities as a donation.

00:09:45.880 | They have a brokerage account set up so they can accept them.

00:09:50.600 | I believe most of the common,

00:09:53.000 | most popular brokerage platforms facilitate this,

00:09:55.840 | I myself have done this,

00:09:57.600 | and what you do is you just go into that account

00:10:00.140 | and transfer a certain number of shares

00:10:04.040 | to the charitable organization,

00:10:06.200 | and so what you're doing is you're taking

00:10:08.960 | this appreciated stock and you're making it currency

00:10:12.160 | to do something you probably would have otherwise done,

00:10:14.880 | which is make this charitable donation, right?

00:10:16.920 | So instead of sending $500 to her church,

00:10:21.920 | she just goes into her brokerage account,

00:10:25.160 | grabs one, says, all right, brokerage,

00:10:27.800 | send one share of Acme, which is worth $500,

00:10:31.560 | to that charity, right?

00:10:33.240 | So instead of having to go into her checking account,

00:10:35.720 | she gets to make that same donation

00:10:37.520 | with the appreciated stock.

00:10:39.600 | What does she do from a tax perspective by doing that?

00:10:42.680 | One, the capital gain on that share of stock, forgiven,

00:10:46.960 | it's gone, it is never gonna be taxed,

00:10:50.240 | and that benefit is not income limited.

00:10:52.680 | So Candace could be making a billion dollars a year,

00:10:55.680 | maybe she's some big movie star or whatever,

00:11:00.080 | venture capital, I don't know what,

00:11:01.960 | but the capital gain is forgiven

00:11:05.360 | regardless of her taxable income, right?

00:11:08.560 | No income limitation on that.

00:11:10.880 | And then the second potential benefit,

00:11:15.560 | which is income limited,

00:11:17.520 | is she could take an itemized deduction

00:11:20.280 | for that donation, right?

00:11:21.880 | So there is a limit,

00:11:23.520 | you can only take a current year itemized deduction

00:11:27.520 | of up to 30% of your so-called adjusted gross income

00:11:30.800 | for donations of appreciated stock.

00:11:35.000 | And it may be that Candace,

00:11:36.880 | we're gonna talk about this in a second,

00:11:38.520 | in a little more detail,

00:11:39.720 | Candace may not be itemizing, right?

00:11:42.280 | That said, I think benefit number one is good enough, right?

00:11:46.280 | Who cares?

00:11:47.120 | Maybe she's taking the standard deduction,

00:11:48.600 | maybe she's married, right?

00:11:50.080 | So if she's married filing joint,

00:11:52.240 | her standard deduction is 25,100 this year,

00:11:55.760 | and it might be a little higher if she's over 65

00:11:58.560 | and blind and those sorts of things.

00:12:00.680 | But so maybe this is a $20,000 donation,

00:12:03.760 | maybe she doesn't have enough taxes,

00:12:05.680 | mortgage interest, other donations,

00:12:07.640 | so she doesn't itemize.

00:12:08.840 | Well, okay, that's fine.

00:12:10.320 | She avoided going into her checking account

00:12:14.000 | to make this substantial donation,

00:12:16.440 | and she avoided a big capital gains tax.

00:12:19.040 | So with or without benefit number two,

00:12:21.560 | I think benefit number one is powerful enough

00:12:25.400 | that she might wanna do this charitable gifting.

00:12:28.600 | And like I said, in today's environment,

00:12:30.840 | I believe there are plenty of retirees

00:12:32.840 | that should just never donate cash to charities again.

00:12:35.400 | Maybe you do $10 at your grandchild's raffle or something,

00:12:40.400 | but for the most part,

00:12:41.880 | the serious charitable donations

00:12:44.080 | should be made with appreciated stock

00:12:46.320 | that you don't, for whatever reason,

00:12:47.600 | don't wanna have anymore.

00:12:49.120 | One big caveat on this.

00:12:51.880 | Stock bonds, mutual funds, ETFs,

00:12:53.640 | securities with built-in losses,

00:12:55.480 | never donate those, right?

00:12:58.000 | What do you do, right?

00:12:59.080 | So, hey, I'm sitting on Acme stock,

00:13:00.920 | it's got a $10,000 loss.

00:13:03.000 | I want to donate some of that to charity.

00:13:05.440 | Don't do it.

00:13:06.400 | Sell the Acme stock first.

00:13:08.760 | Pop that taxable loss.

00:13:10.640 | It may be limited, right?

00:13:11.840 | I'm sure everybody on this call

00:13:13.000 | is very familiar with the $3,000 per return limit

00:13:16.160 | on taking capital losses against ordinary income, right?

00:13:21.160 | So maybe you create a big loss, it's deferred,

00:13:26.600 | but that loss goes on for perpetuity, right?

00:13:29.880 | So for the rest of your life.

00:13:31.040 | So you create a capital loss,

00:13:33.440 | maybe you can't use it this year

00:13:34.680 | 'cause of other losses, fine.

00:13:36.000 | You use it the next year or the following year,

00:13:38.520 | but a loss is a terrible thing to waste.

00:13:40.520 | So do not donate built-in loss stock

00:13:44.560 | or securities to a charity.

00:13:46.720 | Sell them first, donate the cash.

00:13:48.960 | Well, all right.

00:13:52.560 | I don't wanna donate directly to my charity.

00:13:54.840 | Are there other charitable things

00:13:56.360 | I could do with this appreciated stock?

00:13:58.920 | I call this planning technique,

00:14:00.320 | the hyper-donor advised fund,

00:14:02.560 | because it essentially combines two planning techniques.

00:14:05.840 | Something called the donor advised fund,

00:14:07.480 | which I bet a lot of you are familiar with,

00:14:09.640 | with that first idea of skirting the capital gain

00:14:13.440 | by donating appreciated stock.

00:14:15.600 | So now what I do is instead of donating appreciated stock

00:14:18.760 | to a charity, I donate it directly

00:14:22.480 | to my donor advised fund, right?

00:14:25.320 | And what I'm doing there is I'm sort of stepping up

00:14:28.800 | this game of charitable giving with a tax advantage, right?

00:14:33.800 | I'm avoiding the capital gain.

00:14:35.480 | So I transfer $1,000 worth of ACME stock

00:14:40.480 | to my donor advised fund.

00:14:42.960 | First of all, subject to that 30% limitation,

00:14:45.240 | I get that deduction potentially,

00:14:48.160 | and I avoid the capital gain

00:14:50.840 | on whatever I put into the donor advised fund.

00:14:53.280 | The donor advised fund will sell off that stock

00:14:55.800 | in all likelihood, and then you can redirect it

00:14:58.920 | to invest in, usually donor advised funds

00:15:02.760 | are a little more conservatively invested,

00:15:04.440 | but each brokerage will have a different investment menu

00:15:09.440 | for the donor advised fund.

00:15:10.880 | The donor advised fund is a great timing play.

00:15:13.840 | So what it does is it says, okay,

00:15:16.320 | I'm gonna transfer some assets

00:15:18.360 | to the so-called donor advised fund.

00:15:20.840 | I'm going to take a tax deduction

00:15:22.840 | for the fair market value of what I put in.

00:15:25.080 | I avoid capital gain, and then I can donate

00:15:30.080 | to charities on my schedule, right?

00:15:33.160 | So maybe I have a big capital gain.

00:15:35.920 | There's, let's just say I have a stock position.

00:15:37.680 | It's worth, let's just say it's worth 20,000,

00:15:41.520 | and I have a basis of 10,000.

00:15:43.240 | I don't want to sell it and trip a $10,000 gain.

00:15:45.800 | So I just put it in donor advised fund.

00:15:47.840 | It's gone, right?

00:15:48.720 | I can never use it again, right?

00:15:50.840 | It can't fix my roof.

00:15:52.320 | It can't install a pool, right?

00:15:54.040 | So I gotta be terribly inclined,

00:15:56.120 | but I might be saying, look,

00:15:57.240 | I donate 5,000 a year to charity.

00:15:59.600 | Well, why don't I do this?

00:16:00.840 | Why don't I do the donor advised fund

00:16:02.880 | for 20,000 in the year 2021,

00:16:06.040 | take that with other deductions

00:16:08.080 | as an itemized deduction this year.

00:16:10.680 | So let's say my other itemized deductions are $20,000.

00:16:14.880 | So now I take a $40,000 itemized deduction in 2021,

00:16:19.520 | and then in 2022, 2023, 2024,

00:16:23.200 | I get the standard deduction at 25,000 plus if I'm married.

00:16:28.200 | And over the next four years,

00:16:31.440 | I donate 5,000 a year to the charity

00:16:34.280 | out of the donor advised fund.

00:16:35.960 | The charity's experience with me is not different at all.

00:16:38.800 | They just get 5,000 a year every year from me, right?

00:16:42.240 | 'Cause people in real life,

00:16:43.760 | people rarely say, you know,

00:16:44.960 | I like to donate 5,000 a year to this charity.

00:16:48.040 | I'm just gonna front load, do 20,000 a year,

00:16:50.720 | and then not give them a penny

00:16:52.320 | for the next three or four years.

00:16:53.760 | People don't wanna do that, right?

00:16:55.320 | So how do I optimize, right?

00:16:58.080 | In this environment where I've got

00:17:00.040 | such a high standard deduction,

00:17:02.880 | what I wanna do is I don't wanna be giving 5,000 a year

00:17:06.480 | and it just goes away and I get my standard deduction.

00:17:09.240 | Why not take a bunch of money now,

00:17:12.080 | put it in the donor advised fund,

00:17:14.120 | and then, you know, get a one-time tax benefit,

00:17:17.320 | and then rely back on those standard deductions

00:17:19.680 | every year after that.

00:17:21.000 | That could be a great timing play

00:17:22.640 | and a great way to avoid capital gains.

00:17:25.440 | All right.

00:17:27.240 | Another one.

00:17:29.360 | So I had an AICPA conference this week,

00:17:33.240 | and I will say in the advisor world,

00:17:36.040 | and I'm sure in the client world,

00:17:38.240 | people are starting to get a little freaked out

00:17:41.960 | about future tax increases.

00:17:44.640 | I think it's very speculative,

00:17:46.600 | and I certainly don't think it's gonna be retroactive

00:17:49.480 | if it happens.

00:17:51.080 | But there are people out there saying,

00:17:52.840 | look, you know, Sean had that slide,

00:17:56.200 | 15%, 20%, 3.8% surtax.

00:18:01.200 | Maybe these are the golden days.

00:18:04.400 | Maybe I should just sell now at 23.8% federal income tax

00:18:08.520 | rate and be happy I bailed out then

00:18:10.960 | before capital gains rates increase.

00:18:13.360 | I think that's very speculative.

00:18:17.240 | So it is not my go-to technique.

00:18:19.200 | Look, every taxpayer needs to make their own decisions,

00:18:23.200 | and I don't have a perfect crystal ball of the future.

00:18:26.200 | So, you know, I'm not gonna speculate

00:18:29.640 | as to whether or not the tax plan is gonna pass or not,

00:18:32.000 | but I certainly don't think it's a slam dunk, right?

00:18:36.280 | So this is definitely not my favorite way to go about it,

00:18:41.320 | but there are at least some people out there

00:18:42.920 | who are very worried about future capital gains tax rate

00:18:45.960 | increases and are looking to accelerate capital gains

00:18:49.680 | into the year 2021.

00:18:52.080 | Like I said, because it's so speculative, I don't like it,

00:18:54.480 | but there's a second reason.

00:18:58.480 | You know, like I said,

00:19:01.160 | there are other planning techniques available,

00:19:02.960 | but there's a second reason that I don't like,

00:19:05.320 | and it has to do with this.

00:19:07.320 | That tax may never come due, right?

00:19:10.960 | Look, I get it.

00:19:11.800 | Candice has an $80,000 built-in gain in her Acme stock.

00:19:14.960 | If she doesn't mind Acme,

00:19:17.720 | then maybe that tax never comes due.

00:19:20.080 | If she's staying up at night

00:19:21.560 | because she's worried Acme is gonna drop 50%,

00:19:24.400 | then yeah, maybe she should just sell, get out,

00:19:26.560 | pay some capital gains tax

00:19:28.000 | or do one of these other techniques.

00:19:29.800 | But if she's okay with Acme

00:19:31.800 | or whatever the built-in gain asset is as an asset,

00:19:35.400 | maybe she doesn't care, right?

00:19:37.040 | So there is the ultimate planning technique.

00:19:41.840 | And I'm sure most of you are familiar with this.

00:19:44.720 | This is the step up of basis at death, right?

00:19:47.440 | So this is something in our tax law

00:19:50.520 | that I think administratively makes a lot of sense.

00:19:53.760 | And what it says is,

00:19:55.360 | okay, at death, generally speaking,

00:19:59.200 | your taxable assets get a basis reset,

00:20:03.360 | generally speaking on the day of your death.

00:20:05.560 | And so what happens here is,

00:20:10.080 | let's say Candice dies

00:20:12.320 | and her heirs inherit the Acme stock,

00:20:15.320 | their basis when they go to sell it

00:20:17.200 | is the fair market value close of business,

00:20:20.080 | I believe on the date that Candice died.

00:20:23.400 | And so generally speaking,

00:20:25.400 | if Candice's heirs inherit this Acme stock,

00:20:28.560 | and let's just say it was worth 100,000 on the day she died,

00:20:32.880 | they get it, the estate closes out three months later,

00:20:35.960 | it's now worth like $102,000,

00:20:38.720 | they only have $2,000 of capital gains.

00:20:41.040 | So this is a reason not to sell these assets

00:20:45.240 | because essentially this is not a tax

00:20:47.680 | that we ultimately know is due.

00:20:50.040 | It very well may be due,

00:20:51.840 | but it will, generally speaking, go away,

00:20:55.440 | it'll go away upon your death.

00:20:58.440 | And so that is the ultimate tax planning technique is,

00:21:01.360 | look, you've got this tax planning opportunity out there,

00:21:05.480 | you have to balance it

00:21:07.280 | with your other financial considerations,

00:21:09.840 | but if you're only motivated by tax,

00:21:14.000 | then maybe you just let it ride out

00:21:16.960 | and get that step-up basis.

00:21:19.200 | A couple other comments on the step-up basis.

00:21:23.360 | One is it's great with rental real estate,

00:21:28.240 | 'cause your heirs get to redepreciate,

00:21:30.040 | so it's a reason to hold rental real estate

00:21:33.280 | in a taxable fashion.

00:21:35.600 | Two, IRAs do not get the step-up and basis at death, right?

00:21:40.600 | So in some ways, if the option is live on your IRA

00:21:46.160 | versus live on your taxable assets

00:21:48.240 | and you're older in life,

00:21:49.840 | oftentimes, hey, if I'm really concerned about my heirs,

00:21:52.480 | I might wanna live off my IRA instead of my taxable assets

00:21:56.040 | because the IRAs get no step-up and basis at death,

00:21:59.080 | but my taxable assets do.

00:22:01.280 | And then three, apparently this is a little before my time,

00:22:04.440 | but in the year 1976,

00:22:05.760 | they actually got rid of the step-up and basis

00:22:08.280 | and they brought it back real quick.

00:22:10.640 | So there was a year, apparently,

00:22:12.720 | and I gotta do a little more research on my tax history,

00:22:15.080 | but in 1976, the step-up and basis went away upon death.

00:22:18.960 | Now, back then, the computing power was much less,

00:22:21.560 | so it created nightmares because you would inherit stock

00:22:25.280 | or a house or whatever,

00:22:26.440 | and you'd have to reconstruct asset basis.

00:22:29.880 | Today, that's gonna be a lot easier,

00:22:31.360 | but still, there's so many assets out there,

00:22:33.560 | particularly real estate,

00:22:34.560 | where I still think that would be a real headache.

00:22:37.040 | So we always have to think about,

00:22:39.160 | yeah, Washington's looking for some more money,

00:22:41.360 | but I think this one's a very popular

00:22:44.320 | and administratively sensible tax rule,

00:22:47.480 | so I think it's gonna be around for a while,

00:22:49.800 | but don't take my word for it.

00:22:53.440 | You have to make your own decision on those sorts of things.

00:22:57.200 | So yeah, capital gains.

00:22:59.640 | There are ways, like I said, to get out,

00:23:01.840 | but it's gonna be an issue for folks right now,

00:23:05.440 | and then there's the ultimate out.

00:23:07.160 | This next one, I think it's a great opportunity.

00:23:12.400 | You do need to have a high-deductible health plan.

00:23:14.800 | So this high-deductible health plan

00:23:17.000 | is a type of medical insurance.

00:23:19.760 | You need to be covered by one of these things,

00:23:22.720 | and it needs to be your only health insurance,

00:23:24.840 | generally speaking.

00:23:25.920 | For the healthy high-deductible health plan,

00:23:29.360 | I think it's a really good coverage option.

00:23:31.360 | Not everybody has it, right?

00:23:32.640 | So there are gonna be some in the audience

00:23:34.680 | where this is just not gonna be an option.

00:23:36.560 | If you're on Medicare, no option, right?

00:23:38.960 | So you cannot have a high-deductible health plan

00:23:41.720 | once you turn 65.

00:23:43.480 | The planning technique here is while you're still working

00:23:47.960 | and you're relatively healthy,

00:23:51.640 | have your high-deductible health plan

00:23:53.320 | be your medical insurance, and then max out your HSA,

00:23:57.920 | and you're creating a tax-advantaged account

00:24:00.720 | that can really serve you later in life.

00:24:02.920 | And that's, I actually, I've got a blog post,

00:24:05.440 | I say this all the time.

00:24:07.440 | You should generally be spending down your HSA

00:24:10.480 | in two situations, if you're in a dire medical situation

00:24:15.200 | or you are a elderly, dire or elderly, right?

00:24:19.360 | But we'll talk about, let's talk about building up our HSA

00:24:21.840 | and then spending it down, right?

00:24:23.520 | How do we build it up, generally speaking,

00:24:25.240 | through our workplace, right?

00:24:26.520 | So we've got our medical insurance through our workplace.

00:24:29.720 | They offer a high-deductible health plan.

00:24:31.600 | We like that as insurance for us.

00:24:33.640 | We should then maximize our HSA

00:24:36.120 | through payroll tax withholding, right?

00:24:38.400 | So the money that we take out of our paycheck

00:24:41.360 | to put into the HSA, not tax, it's excluded, right?

00:24:45.320 | That's fantastic.

00:24:46.840 | Not only is it excluded from our taxable income,

00:24:49.640 | it doesn't show up in our FICA income.

00:24:52.560 | So we don't pay FICA tax on that at all, right?

00:24:56.040 | We don't pay Social Security.

00:24:57.640 | We don't pay the Medicare tax on that.

00:24:59.880 | That's only, if we're well above that 142,800 FICA cap

00:25:04.880 | on the Social Security cap, this is only a minor benefit,

00:25:09.480 | but you still get that Medicare benefit.

00:25:11.640 | And if we're below the 142.8, we get a big benefit

00:25:14.800 | because we don't have to pay the 6.2 on Social Security

00:25:18.920 | on what we put in to our HSA.

00:25:21.400 | That's really cool.

00:25:22.840 | One caveat about that though,

00:25:24.360 | it has to be through payroll withholding

00:25:26.200 | for this payroll tax benefit.

00:25:28.280 | You can just not do it through payroll withholding

00:25:31.280 | and write a check to your HSA.

00:25:33.040 | You take a tax deduction on your tax return.

00:25:35.120 | That's perfectly fine.

00:25:36.680 | But if you can do it through your payroll withholding

00:25:39.280 | and get that FICA tax benefit, I say, why not?

00:25:42.360 | So it's tax excluded on the way in, right?

00:25:46.440 | So we get a tax benefit the year we put it in.

00:25:49.480 | The tax, the investment income grows

00:25:52.040 | inside that HSA tax-free.

00:25:55.120 | So HSA is a great place to have investment growth.

00:25:58.400 | And then if we withdraw it

00:25:59.480 | for qualified medical expenses at any time,

00:26:02.000 | it's tax-free there.

00:26:03.400 | So it's tax-free on the way in,

00:26:05.280 | it's tax-free while it's in there,

00:26:07.040 | and then it's tax-free on the way out.

00:26:09.080 | That's a really powerful tool.

00:26:10.800 | One thing for my fellow Californians,

00:26:12.960 | California does not recognize the HSA.

00:26:16.240 | Same thing with New Jersey.

00:26:17.720 | So in California and New Jersey,

00:26:19.840 | the HSA is a taxable account.

00:26:22.240 | No deduction on the way in

00:26:23.800 | and the interest and dividends and capital gains

00:26:26.160 | that are generated on your HSA, taxable in California.

00:26:29.960 | So it's a little bit of a drawback

00:26:34.800 | for California and New Jersey residents,

00:26:37.040 | but again, you get this federal tax benefit,

00:26:39.640 | which is so powerful.

00:26:41.240 | So I still recommend them

00:26:42.600 | even for those in California and New Jersey.

00:26:45.320 | In most cases, right?

00:26:47.560 | Again, when I say recommend,

00:26:50.280 | I mean that in a general sense,

00:26:51.600 | not for anyone on this particular meeting.

00:26:53.720 | Well, okay, great.

00:26:56.640 | We work, we have our high deductible health plan,

00:27:00.720 | we have our HSA,

00:27:01.720 | we're building up this money in this tax sheltered account.

00:27:04.640 | When the heck do I withdraw it, right?

00:27:06.480 | You're saying it's tax sheltered.

00:27:08.360 | I should keep it in there as long as possible.

00:27:10.640 | When do I withdraw it?

00:27:12.600 | I would argue it's best to withdraw it at age 65 and later.

00:27:17.320 | A few reasons.

00:27:18.360 | One, we wanna keep it in there as long as possible

00:27:20.920 | to generate as much tax free wealth as possible.

00:27:25.080 | But the second thing is the HSA has a time limit

00:27:30.560 | and it's basically the later of your death

00:27:33.400 | or your spouse's death.

00:27:35.000 | So let's talk about that for a second.

00:27:37.400 | An HSA can be left to a spouse, no problem,

00:27:41.000 | just becomes their HSA.

00:27:42.720 | But what if I leave my HSA to my parent,

00:27:46.680 | my sibling, my friend, anybody, not my spouse,

00:27:51.040 | they can inherit the HSA, they'll take the money,

00:27:53.320 | but the money becomes taxable income in the year of my death

00:27:57.320 | and it's also no longer an HSA.

00:28:00.280 | So an HSA is a really bad asset to leave behind.

00:28:03.920 | So essentially there's this sort of pressure

00:28:06.080 | and we're talking about tax free estate planning

00:28:08.680 | a little later, or tax efficient, I should say,

00:28:11.200 | estate planning a little later,

00:28:12.520 | but there's a bit of a time clock there.

00:28:14.880 | And so it's this delicate balance of, okay,

00:28:17.200 | I'm 65 versus how long am I gonna live?

00:28:21.080 | Am I only gonna live to age 70,

00:28:22.640 | in which case I probably should start spending it

00:28:24.480 | in my late 60s, or am I gonna live to 95?

00:28:27.880 | And why am I gonna start spending it down now, right?

00:28:31.080 | In my late 60s, if I'm gonna live to 95,

00:28:34.520 | I wanna have it enjoy tax free growth into my 80s

00:28:37.440 | and maybe even my 90s, and then I'll spend it down.

00:28:39.840 | So there's a little bit of a tension there.

00:28:44.280 | One thing you should do though,

00:28:45.440 | is before age 65, pay your medical expenses

00:28:49.200 | out of your checking account, right?

00:28:51.800 | And then track it, right?

00:28:53.240 | Just track all your medical expenses.

00:28:55.760 | And then at age 65 and later,

00:28:57.600 | you reimburse yourself tax free

00:28:59.640 | for the weekend warrior injury you had at age 53.

00:29:03.840 | You're playing Frisbee golf,

00:29:05.640 | sprained ankle, $300 medical bill.

00:29:09.120 | Keep that, Google Sheet, whatever you gotta do

00:29:11.960 | to keep a record of all that.

00:29:13.840 | And then bam, in your 60s, 70s, or 80s,

00:29:17.000 | reimburse yourself for that old medical expense.

00:29:20.000 | Fantastic tax-free distribution out of your HSA.

00:29:24.320 | That's some nice little tax planning.

00:29:26.960 | And generally speaking, before age 65,

00:29:30.240 | if you're not in a dire situation,

00:29:32.840 | just let the money grow in that HSA.

00:29:34.760 | HSAs also can pay Medicare premiums.

00:29:38.800 | They generally, they can't pay Medigap premiums,

00:29:41.800 | but they can be used to pay Medicare premiums tax free.

00:29:46.080 | But then this becomes, well, wait a minute,

00:29:48.640 | do I really wanna pay my first and second

00:29:50.640 | and third premiums out of my HSA?

00:29:52.920 | Maybe I wanna just keep records, right?

00:29:54.840 | So I pay my Medicare premiums in my 65, 66, 67, 68,

00:29:59.840 | just keep these records and then reimburse myself

00:30:02.360 | in my 70s or my 80s for my Medicare premiums

00:30:05.440 | from my late 60s and early 70s, right?

00:30:08.840 | This is a bit of an art and more than it is a science.

00:30:12.560 | We don't, we neither know the time nor the place, right?

00:30:16.040 | So we gotta be a little artistic here.

00:30:18.920 | And then I've mentioned some of these concepts here.

00:30:22.980 | Definitely start at age 65

00:30:25.520 | to let that tax-free growth accumulate.

00:30:27.520 | And then when exactly after age 65

00:30:32.560 | is really gonna depend on your circumstances

00:30:34.560 | and just how long you think you're gonna be around.

00:30:37.520 | And basically HSAs are great to leave to your spouse.

00:30:41.520 | They're actually a good asset to leave to a charity

00:30:43.960 | because the charity ain't gonna pay

00:30:45.520 | a dime of income tax on it,

00:30:47.560 | but it's not a good asset to leave to anybody else

00:30:50.240 | because anybody else, any other individual

00:30:52.240 | is gonna, your estate, a trust,

00:30:54.920 | they're gonna pay income tax like crazy on that thing.

00:30:57.280 | So leave it, generally speaking, leave it to your spouse.

00:31:01.520 | If you don't have a spouse, well, look,

00:31:03.240 | if you have someone in your life

00:31:04.880 | you just need to leave money to, fine.

00:31:07.000 | But if there's a situation where there's some optionality

00:31:11.320 | and you're leaving it to an heir

00:31:12.600 | who perhaps doesn't need the money as much

00:31:14.480 | and you have a charitable intention,

00:31:16.400 | the HSA is sort of where I look first

00:31:19.480 | for where to leave money.

00:31:21.040 | Okay, Roth conversions.

00:31:24.800 | This is a real hot topic.

00:31:27.180 | And we're gonna talk about Roth conversions

00:31:29.720 | while we're working and then Roth conversions

00:31:32.480 | once we've retired, right?

00:31:33.960 | So while we're working, to my mind,

00:31:36.440 | there are two big planning techniques, right?

00:31:39.200 | While we're working, the first planning technique

00:31:42.100 | is the so-called backdoor Roth IRA.

00:31:45.140 | This is the two-step transaction, right?

00:31:47.840 | So we do two independent steps.

00:31:49.960 | The first step is a non-deductible contribution

00:31:53.880 | to a traditional IRA.

00:31:56.440 | And then the second step,

00:31:57.680 | I like to do this in the following month,

00:31:59.640 | the second step is we convert the money

00:32:02.020 | we contributed to that non-deductible traditional IRA

00:32:05.600 | to a Roth IRA.

00:32:07.600 | And we do this though, generally speaking,

00:32:09.520 | only if we have no other traditional IRAs,

00:32:11.800 | SEP IRAs and simple IRAs.

00:32:14.240 | That's a big thing here, right?

00:32:15.880 | So I like to say the backdoor Roth IRA

00:32:19.600 | is a great planning technique,

00:32:21.320 | but it's profile dependent, right?

00:32:24.920 | For those of us who make too much

00:32:26.640 | to make a direct contribution to a Roth,

00:32:28.900 | we do this backdoor Roth IRA,

00:32:31.580 | but if and only if we have no other traditional IRAs,

00:32:34.520 | SEP IRAs and simple IRAs.

00:32:36.640 | And when do we determine whether we have that?

00:32:39.160 | It's by 1231 of the year of that second step,

00:32:43.400 | the Roth conversion step.

00:32:45.260 | If we have other traditional IRAs,

00:32:48.160 | SEP IRAs or simple IRAs on that December 31st date,

00:32:52.000 | most likely our backdoor Roth was not a smart transaction.

00:32:55.600 | We're gonna pay some tax on it, not the end of the world.

00:32:58.280 | And the big thing I like to say is get clean by 1231.

00:33:03.340 | So if we have other traditional IRAs

00:33:05.560 | and we wanna do a backdoor Roth,

00:33:07.380 | move those out in a direct trustee to trustee transfer

00:33:10.680 | to our workplace retirement plans or 401Ks, 403Bs.

00:33:14.760 | But we only do that if we like the investment options

00:33:17.280 | inside those plans.

00:33:18.480 | If we do, great, it's a great way to get clean.

00:33:21.200 | The other thing is the trap for the unwary.

00:33:22.880 | I do my backdoor Roth in January, right?

00:33:26.520 | New Year's day, I make my 6,000 or 7,000 contribution

00:33:29.880 | into my non-deductible IRA.

00:33:31.960 | A few weeks or at the end of the month

00:33:33.880 | or beginning of the next month, February,

00:33:36.040 | I do my conversion step.

00:33:37.960 | Great, backdoor Roth IRA, isn't this great?

00:33:42.080 | Oh, but wait a minute, in September, I left my job

00:33:44.160 | and in October, I rolled my old 401K to a traditional IRA.

00:33:48.720 | That creates a problem for your backdoor Roth

00:33:50.720 | because at 1231, you're gonna have another traditional IRA.

00:33:55.160 | I've blogged about this.

00:33:56.520 | So you can go to my fitaxguy.com blog.

00:34:01.080 | I've written about it.

00:34:02.440 | So that's the first Roth conversion idea for the working.

00:34:05.840 | The second one is the so-called mega backdoor Roth.

00:34:08.440 | This is using your workplace retirement plan

00:34:10.960 | to make after-tax 401K contributions.

00:34:13.700 | And then shortly thereafter, could be automatic.

00:34:17.160 | What you do is you convert the after-tax contribution

00:34:20.440 | into the Roth 401K, or you roll it to a Roth IRA.

00:34:24.560 | Great little planning technique.

00:34:26.480 | The thing about the backdoor Roth

00:34:28.240 | and the mega backdoor Roth,

00:34:29.560 | you need to think about it is that the choice is,

00:34:32.200 | I either invest that money in a taxable brokerage account

00:34:34.880 | or I invest it in a Roth account.

00:34:36.800 | This is not a deduction versus Roth,

00:34:39.720 | traditional versus Roth question.

00:34:41.480 | This is, am I gonna invest that money

00:34:43.860 | into a brokerage account that'll have a 1099,

00:34:47.560 | that'll have interest dividends

00:34:48.940 | and later capital gains taxes,

00:34:50.800 | or can I get that money in the Roth, right?

00:34:52.660 | So generally speaking, for those who make too much,

00:34:56.640 | backdoor Roth IRA is a great thing.

00:34:58.480 | The mega backdoor Roth has no AGI limits.

00:35:01.920 | So you can be at the lower end of the income spectrum,

00:35:05.640 | you can be Patrick Mahomes,

00:35:07.600 | you make whatever Patrick Mahomes makes, $40 million

00:35:11.000 | as the quarterback of the Kansas City Chiefs.

00:35:13.240 | If the Chiefs 401K has this option,

00:35:16.120 | he can do the mega backdoor.

00:35:17.600 | Okay, well, all right.

00:35:19.920 | That's like the mostly non-taxable Roth conversions

00:35:23.760 | while working.

00:35:24.800 | If it works for you, great.

00:35:27.180 | What about while I'm working, right?

00:35:28.920 | So I'm working and I have an old traditional IRA,

00:35:31.840 | should I do Roth conversions?

00:35:34.040 | And I'd say in many cases for the "early retiree",

00:35:38.840 | I'd say no, right?

00:35:40.280 | The idea would be, look,

00:35:41.660 | if you're gonna be an early retiree

00:35:44.120 | and I have an old traditional IRA

00:35:46.280 | and I'm gonna have to be fully taxable

00:35:47.760 | on the Roth conversion while I'm working,

00:35:50.000 | I probably should hold off.

00:35:51.360 | Now, your mileage may vary,

00:35:54.760 | but I would generally hold off

00:35:56.480 | because there's gonna be this opportunity,

00:35:58.280 | hopefully in early retirement,

00:36:00.240 | and I'll let you define that.

00:36:01.900 | You're hopefully gonna have artificially low taxable income.

00:36:06.280 | And so why not do those Roth conversions

00:36:08.340 | while you have artificially low taxable income

00:36:10.400 | as opposed to now?

00:36:12.880 | So that's Roth versus traditional while working.

00:36:17.600 | Now, while we're retired, okay.

00:36:20.200 | Now we're retired, hopefully early, but we'll see.

00:36:24.840 | But if now, if we're retired,

00:36:27.120 | the planning changes in terms of,

00:36:30.400 | backdoor Roth isn't on the table anymore.

00:36:32.520 | Mega backdoor Roth isn't on the table

00:36:34.360 | 'cause we don't have earned income.

00:36:35.700 | So don't worry about that.

00:36:37.080 | Those are off.

00:36:38.000 | But what we can do is we have old 401k, old IRA.

00:36:43.160 | We can do Roth conversions that are fully taxable.

00:36:46.200 | And we have two goals here, right?

00:36:48.600 | One of them is just the artificially low tax rates, right?

00:36:51.720 | We're before age 70.

00:36:53.580 | So we don't have any,

00:36:54.640 | and maybe we're delaying social security hopefully, right?

00:36:59.400 | So we may not have much taxable income.

00:37:01.300 | We have a little bit of interest,

00:37:02.360 | but we know it's a low yield environment.

00:37:04.140 | So low dividends, low interest.

00:37:06.640 | So you look at our tax return

00:37:08.640 | and it looks like at least initially that we're poor.

00:37:11.080 | All it is is that we're living off assets

00:37:13.440 | and we're not generating

00:37:14.960 | a lot of traditionally taxable income.

00:37:17.160 | So we take advantage of the progressive tax rates, right?

00:37:20.600 | So we do Roth conversions

00:37:22.660 | where our income is maybe only taxed at 10%

00:37:24.980 | or 12% for federal tax purposes,

00:37:27.100 | maybe even 22% or 24%, right?

00:37:30.100 | So that's the first goal is just to take advantage

00:37:32.340 | of the luck of the draw before age 70.

00:37:35.100 | We're not getting social security.

00:37:36.540 | We're only getting a little bit of interest in dividends.

00:37:38.660 | Let's throw some Roth conversion income,

00:37:40.980 | move money from our traditional account to our Roth account

00:37:43.540 | where it's tax-free while we're at a low tax rate.

00:37:46.760 | The second thing we're trying to do is at age 72,

00:37:49.780 | you're probably aware,

00:37:50.940 | you have to take taxable requirement distributions

00:37:53.260 | from your traditional IRAs,

00:37:55.100 | traditional 401Ks, 403Bs, et cetera.

00:37:58.220 | So we want those to be lower, right?

00:38:00.420 | Because if we can get that money

00:38:01.940 | from the traditional side of the ledger

00:38:03.540 | to the Roth side of the ledger,

00:38:05.260 | we're gonna have lower RMDs in our future.

00:38:08.180 | We're happy with that outcome, right?

00:38:10.660 | The exercise here is to right-size those conversions.

00:38:14.320 | People sometimes don't understand this.

00:38:17.480 | You can convert a dollar or you can convert every dollar

00:38:20.980 | or anything in between, right?

00:38:22.760 | There's no income limit on the ability

00:38:25.660 | to do a Roth conversion.

00:38:27.160 | Everybody, every American

00:38:28.880 | with a traditional retirement account

00:38:30.920 | can do a Roth conversion regardless of their income,

00:38:34.480 | but you wanna right-size it, right?

00:38:36.800 | And this is a subjective exercise, right?

00:38:40.300 | Because you have to coordinate,

00:38:42.080 | well, how much tax do I wanna pay now?

00:38:44.800 | 'Cause I'm gonna have to pay tax later,

00:38:46.500 | either me or my heirs.

00:38:47.800 | Somebody's paying tax on this IRA at some point.

00:38:50.640 | And I only wanna pay so much tax today.

00:38:53.720 | Maybe I'm, you know, I might be thinking,

00:38:56.720 | boy, they're gonna raise tax rates

00:38:58.880 | and my RMDs as I get older are gonna start killing me.

00:39:02.520 | So what do I care?

00:39:04.240 | 24%, go for it, right?

00:39:06.360 | Other people are gonna be a little more conservative, right?

00:39:09.640 | This really does depend on your circumstances.

00:39:12.180 | So that first bullet,

00:39:13.520 | marginal federal and state income taxes rates,

00:39:17.580 | so important to consider in terms of

00:39:20.460 | whether you're doing these Roth conversions.

00:39:22.700 | Could also be, hey, I live in California today

00:39:25.420 | and in three years, I'm moving to Florida.

00:39:27.340 | Well, maybe I wanna hold off a little bit

00:39:29.220 | because maybe I don't wanna hit California income tax.

00:39:32.260 | I wanna hit Florida where there is no income tax, right?

00:39:34.540 | So there could be plenty of considerations in this regard.

00:39:38.220 | And then the other thing to think about

00:39:40.060 | is coordinating with tax gain harvesting, right?

00:39:43.220 | Tax gain harvesting, which we talked about earlier,

00:39:45.740 | is dependent on keeping my taxable income low.

00:39:50.740 | Well, my Roth conversions could blow me out

00:39:53.340 | so now my capital gains are taxed at 15%.

00:39:57.340 | If I'm only motivated by tax

00:40:00.540 | and I can either do tax gain harvesting or Roth conversions,

00:40:05.420 | I'm generally gonna tell you to do Roth conversions.

00:40:07.780 | And here's why.

00:40:09.100 | The tax on the traditional IRA is coming due,

00:40:12.860 | period, end of discussion.

00:40:15.020 | I might pay it during my lifetime

00:40:16.980 | or my heirs are gonna pay it.

00:40:18.580 | We'll talk about the inherited IRAs in a little bit.

00:40:21.620 | Somebody's paying that tax, right?

00:40:23.540 | The government's getting their piece.

00:40:25.620 | My tax gain harvesting, on the other hand,

00:40:28.620 | maybe that tax is gonna get forgiven

00:40:30.980 | with the step-up in basis, right?

00:40:32.820 | So if my only consideration is tax,

00:40:35.660 | I'm gonna favor Roth conversions.

00:40:38.060 | Now, it might be that I have

00:40:39.820 | an investment allocation consideration.

00:40:42.100 | So I might have an old cat or dog.

00:40:44.060 | I invested in some tech startup years ago.

00:40:46.540 | It's got a huge capital gain.

00:40:48.100 | I want a tax gain harvest out

00:40:50.020 | versus in my traditional IRA,

00:40:52.100 | I've got mutual funds that I really like.

00:40:54.500 | Maybe in that case, I say no,

00:40:56.820 | I'm gonna do my tax gain harvesting

00:40:58.420 | instead of my Roth conversions

00:41:00.300 | and get a 0% rate on the tax gain harvesting

00:41:03.580 | and get my old tech stock,

00:41:05.900 | which I'm a little leery about now,

00:41:07.860 | into mutual funds that I like better

00:41:10.580 | from an investment perspective, right?

00:41:12.700 | So this is a tax planning presentation.

00:41:15.420 | Of course, no investment advice in this presentation,

00:41:18.820 | but we always have to consider

00:41:20.180 | all sides of our financial life,

00:41:22.140 | and this is where tax and investment

00:41:23.740 | really can intersect.

00:41:25.220 | Another thing to consider

00:41:26.460 | when we're doing Roth conversions

00:41:28.220 | is the Affordable Care Act premium tax credit.

00:41:30.860 | This is if you're on an ACA plan, right?

00:41:33.620 | So maybe I'm on TRICARE or have other private insurance.

00:41:36.660 | I'm not on an ACA plan.

00:41:38.420 | Maybe I don't care about the premium tax credit.

00:41:41.660 | What you wanna do is think about

00:41:44.860 | without Roth conversions,

00:41:46.420 | do I qualify for a premium tax credit?

00:41:49.260 | And where this really is gonna come into play

00:41:52.100 | for a lot of folks is in 2023,

00:41:55.420 | where you get a premium tax credit

00:41:58.500 | up to having adjusted gross income

00:42:01.340 | of 400% of your federal poverty level.

00:42:03.860 | And the second you're a dollar over it,

00:42:05.580 | you lose the entire credit.

00:42:07.460 | So this is, it's something to consider

00:42:10.500 | in terms of managing your taxable income

00:42:14.300 | so that you optimize the premium tax credit.

00:42:16.740 | It only applies in those situations

00:42:18.660 | where you have an ACA plan.

00:42:20.580 | And by the way, once you go on Medicare,

00:42:22.740 | you're not gonna have an ACA plan.

00:42:25.180 | So this is not gonna be that big a deal

00:42:28.740 | for those already going on a Medicare.

00:42:31.100 | You do wanna think about IRMA, right?

00:42:32.700 | So that's the increase in Medicare premiums

00:42:36.540 | that results from increasing your taxable income.

00:42:40.180 | This is a bit of a marginal concern

00:42:41.860 | because yes, this exists.

00:42:44.740 | And yes, if you blow through one of these,

00:42:47.020 | it's a little bit of a cliff,

00:42:49.060 | but it really only matters if you're right there.

00:42:51.900 | I believe the first IRMA bend point is 176,000

00:42:55.380 | of adjusted gross income for a married couple.

00:42:57.980 | So you don't want a Roth conversion

00:43:01.460 | to ever take you from $175,999 over the line, right?

00:43:06.460 | But before the line, and even within the line,

00:43:11.340 | it's a relatively modest increase.

00:43:14.140 | And it does go up progressively,

00:43:15.980 | but so it's something to consider,

00:43:17.940 | but I wouldn't be losing too much sleep over it.

00:43:20.980 | And then qualified charitable distributions.

00:43:23.140 | Well, what the heck is a qualified charitable distribution,

00:43:26.020 | a QCD, and what does it have to do with Roth conversions?

00:43:28.780 | All right, qualified charitable distribution

00:43:31.460 | for the charitably inclined,

00:43:32.820 | another great planning technique.

00:43:34.740 | The idea here is you donate to charity up to $100,000 a year

00:43:39.740 | with your traditional IRA,

00:43:41.860 | instead of with your taxable accounts,

00:43:44.020 | your checking account, Roth IRA.

00:43:46.180 | And why do we do this, right?

00:43:47.540 | If we're 70 and a half and older,

00:43:49.180 | we can transfer up to $100,000 every year

00:43:54.780 | from our traditional IRA, and the money is not taxed, right?

00:43:59.780 | The whole point of doing Roth conversions

00:44:02.380 | is to get money out of traditional IRAs,

00:44:04.460 | so it's taxed where we want it to be taxed,

00:44:06.820 | as opposed to later when we may not be able

00:44:09.740 | to afford that tax, or that tax might be very high,

00:44:12.260 | or whatever it is, okay?

00:44:13.820 | The cool thing about the QCD is it's a way

00:44:16.820 | to bail money out of a traditional IRA and not pay tax.

00:44:20.940 | Now, look, you gotta be charitably inclined, right?

00:44:23.860 | But I might be saying, look, in my 70s,

00:44:26.100 | I'm gonna give a certain amount to my church,

00:44:27.900 | no matter what, might as well do it

00:44:29.940 | out of your traditional IRA,

00:44:32.460 | because what it does is it bails that money

00:44:35.060 | out of that traditional IRA fully tax-free,

00:44:38.500 | up to $100,000 a year.

00:44:40.480 | You don't get charitable deduction for it, but who cares?

00:44:42.820 | You're getting that big standard deduction anyway.

00:44:45.780 | And, oh, by the way, QCDs do a couple things.

00:44:50.080 | They satisfy my RMD, right?

00:44:52.660 | So, starting at age 72,

00:44:54.340 | I'm gonna have requirement distributions.

00:44:56.660 | Guess what?

00:44:57.500 | If my RMD from my IRA is just, let's say, $50,000,

00:45:02.340 | and I do a qualified charitable distribution out of my IRA

00:45:05.540 | to my favorite charity for $50,000,

00:45:08.540 | I don't have to take my RMD.

00:45:13.180 | That satisfies it, right?

00:45:15.260 | It's a way to bail money out of a traditional IRA

00:45:18.180 | without taxes, and if I'm gonna be giving

00:45:20.580 | that $50,000 to charity anyway,

00:45:23.100 | might as well do it out of my traditional IRA

00:45:24.980 | instead of taking my RMD myself, paying tax on it,

00:45:28.940 | and then giving money to the charity, right?

00:45:31.140 | So, this is just a great idea.

00:45:34.460 | And, oh, by the way, so the reason I bring it up,

00:45:38.300 | if you're before age 70 and a half,

00:45:41.020 | you definitely wanna think about this

00:45:42.220 | in terms of right-sizing your Roth conversions.

00:45:46.060 | Why convert every last dollar to a Roth

00:45:50.740 | if I'm gonna be making some substantial

00:45:52.940 | charitable contributions in my 70s and 80s, right?

00:45:56.140 | And then a little disclaimer,

00:45:57.780 | just don't accept any remuneration

00:45:59.660 | or trinket from the charity.

00:46:01.100 | That can blow QCD treatment.

00:46:04.780 | Very powerful planning technique.

00:46:07.220 | I'm very fond of it.

00:46:08.940 | Only applies if you are age 70 and a half, right?

00:46:12.220 | But you need to be thinking about it

00:46:13.980 | before you're age 70 and a half

00:46:15.420 | to right-size those Roth conversions.

00:46:17.380 | All right, tax-efficient estate planning.

00:46:22.620 | What are we talking about?

00:46:23.460 | What are we not talking about?

00:46:24.660 | We are talking about mostly income tax here.

00:46:27.620 | For most people, the estate tax is not gonna bite.

00:46:30.020 | Now, that could change.

00:46:31.540 | I tend to doubt it.

00:46:33.100 | Right now, your lifetime exclusion is $11.7 million.

00:46:38.100 | So, most of us are not gonna die

00:46:41.020 | with $11.7 million worth of wealth.

00:46:43.340 | Hate to break it to you.

00:46:45.140 | But that said, pretty much everybody

00:46:48.220 | with any sort of substantial assets

00:46:49.980 | needs an estate plan.

00:46:51.580 | And we'll talk about some reasons why.

00:46:54.260 | First thing is the elimination of the stretch IRA, right?

00:46:57.220 | The whole, the idea in the past was,

00:46:59.220 | oh, I've got an IRA.

00:47:01.940 | My heirs have to take or require minimum distributions.

00:47:05.020 | I'm gonna leave it to the two-year-old grandchild.

00:47:07.820 | He or she has to take and require minimum distributions,

00:47:11.660 | but it's based on them being two years old

00:47:13.500 | and then three years old and then four years old.

00:47:15.740 | So, they have to take a pittance out of it every year.

00:47:18.220 | And meanwhile, it grows either tax-deferred for an IRA

00:47:22.460 | or tax-free for a Roth IRA.

00:47:24.780 | They used to call that the stretch IRA.

00:47:27.260 | My grandchild could have like 90 years

00:47:29.540 | of tax-efficient income because of the stretch.

00:47:32.460 | Boy, isn't that powerful.

00:47:34.180 | Congress, you know, this was all over the news.

00:47:37.980 | People knew about the stretch IRA.

00:47:39.860 | And Congress said, no, we want some more revenue.

00:47:42.980 | So, here's what we're gonna do.

00:47:44.820 | For most beneficiaries, we're gonna get rid of these RMBs

00:47:49.300 | other than this one rule.

00:47:50.740 | We're gonna say for most beneficiaries,

00:47:53.260 | you're gonna now have to take the money out over 10 years.

00:47:56.580 | There's no required minimum distribution

00:47:58.540 | other than at the end of the 10th year

00:48:00.500 | following the original account owner's death.

00:48:02.860 | But otherwise, it has to come out in 10 years.

00:48:05.700 | So, there's no more stretch IRA.

00:48:07.740 | There's no more, I leave it to my grandchild

00:48:09.980 | and they get 90 years of tax deferral or tax-free growth.

00:48:13.420 | Not doing that.

00:48:14.860 | You gotta take it out in 10 years,

00:48:16.300 | whether it's a traditional or a Roth.

00:48:18.420 | To my mind, this makes Roth conversion planning

00:48:21.900 | for those thinking about their heirs even more impactful.

00:48:25.460 | There's not a lot that could be done to avoid this.

00:48:30.100 | You should leave it to your spouse.

00:48:32.740 | There are things that could be done.

00:48:34.660 | But if you happen to inherit an IRA,

00:48:38.060 | you now have a real financial planning issue

00:48:41.220 | that you either have to tackle or you need professional help

00:48:43.700 | because here's what you don't wanna do.

00:48:45.860 | You don't wanna inherit an IRA, a traditional IRA.

00:48:49.140 | Roth is different.

00:48:50.340 | You don't wanna inherit a traditional IRA,

00:48:52.340 | do nothing, wait 10 years

00:48:54.100 | and then have to take out the entire amount.

00:48:55.700 | That's gonna be painful.

00:48:56.900 | You don't wanna plan your distributions every year.

00:48:59.580 | One little potential planning technique here

00:49:01.660 | is get the inherited IRA

00:49:04.420 | into a properly titled inherited IRA account

00:49:07.060 | in the year of the original owner's death.

00:49:09.220 | That is the function of giving you,

00:49:10.660 | instead of 10 years, you actually have 11 years,

00:49:13.540 | the year of death plus the next 10 years

00:49:15.460 | to empty that thing out.

00:49:16.700 | It's a way to spread out the tax hit just a little more.

00:49:19.500 | But anyway, we'll talk about IRAs a little more

00:49:25.340 | in terms of who you wanted to leave them to.

00:49:28.060 | Two important things from a tax

00:49:30.140 | and an estate planning perspective,

00:49:32.300 | beneficiary designation forms, payable on death forms,

00:49:35.980 | make sure at all times you have up to date,

00:49:38.580 | on file beneficiary designation forms,

00:49:42.220 | absolutely critical in terms of just the estate planning

00:49:45.740 | in general and tax efficient estate planning in particular

00:49:49.500 | and then revocable living trusts.

00:49:51.260 | I've blogged about this.

00:49:53.020 | I'm a big fan of revocable living trusts

00:49:55.180 | in the right circumstances

00:49:57.180 | and they are great for real estate

00:50:00.060 | and they can be good for retirement accounts,

00:50:02.820 | but if and only if one of these two things applies,

00:50:05.580 | the intended beneficiary is a minor

00:50:07.460 | or the intended beneficiary

00:50:08.980 | has credit or protection issues, right?

00:50:11.340 | So if I'm 70 years old and maybe I'm a widow, right?

00:50:16.340 | I'm 70, but I'm a widow and or widower

00:50:19.820 | and I have three adult children, right?

00:50:22.460 | And they're in their thirties and forties

00:50:24.900 | and they're just regular people.

00:50:27.780 | They're competent.

00:50:29.660 | They don't work in high risk occupations.

00:50:32.900 | They're just regular people.

00:50:36.180 | I'm not gonna use, generally speaking,

00:50:38.140 | I'm gonna try to not use a revocable trust

00:50:40.460 | to leave the retirement accounts.

00:50:42.460 | I'm just gonna name them directly as the beneficiaries,

00:50:47.460 | but in certain cases using a revocable trust can be good.

00:50:51.420 | For the real estate though,

00:50:53.460 | the revocable trust can be very powerful.

00:50:56.340 | Think about your beneficiaries.

00:50:58.340 | Is it my elderly parents?

00:51:00.540 | Is it an out-of-state beneficiary, right?

00:51:02.980 | 'Cause you could leave the house

00:51:05.100 | maybe through a will or through a trust.

00:51:07.260 | The trust can sort of provide a lot of benefit

00:51:12.060 | to your loved ones when you leave it through the trust.

00:51:15.060 | Let's just say, I'll just give you one example.

00:51:17.700 | You own your house and maybe you're single

00:51:21.180 | and you leave it to your elderly parents.

00:51:23.220 | And maybe somehow you die early.

00:51:25.780 | Your elderly parents live out of state.

00:51:28.700 | Now your elderly parents have to come into your home state

00:51:32.380 | where they don't live.

00:51:33.740 | They have to get your will probated

00:51:36.180 | so that they can get the house

00:51:38.180 | and then get the house retitled all out of state.

00:51:41.780 | That is not a recipe for success.

00:51:45.220 | It's gonna probably work a lot better

00:51:47.180 | if you put the house in the revocable trust

00:51:49.380 | and there are clear directions

00:51:50.420 | about how it should be disposed of.

00:51:52.260 | It's gonna make your beneficiary's life a lot easier.

00:51:55.300 | Gotta work with a lawyer, right?

00:51:56.700 | This is not a DIY type thing,

00:51:58.820 | but I definitely think there's some real advantages

00:52:00.980 | to the revocable living trust.

00:52:02.860 | And then let's think about,

00:52:04.660 | let's think about our type of account

00:52:10.500 | and our beneficiary, right?

00:52:12.340 | So let's start off spouses, right?

00:52:14.580 | Spouses are the law's most favored beneficiaries.

00:52:17.580 | They can inherit these days all types of assets

00:52:20.420 | in a tax efficient manner, right?

00:52:22.420 | So for most people,

00:52:26.020 | leaving most assets to the spouse in today's environment,

00:52:29.980 | I think makes a lot of sense, right?

00:52:32.580 | So, look for the ultra wealthy, yes,

00:52:36.460 | there can be absolutely be planning around spouses,

00:52:39.900 | but for most people who would not be stars

00:52:43.940 | of reality television,

00:52:46.100 | it's gonna generally be spouses

00:52:48.820 | the tax favored beneficiary

00:52:50.380 | and generally speaking how you might wanna go.

00:52:52.980 | Let's talk about Roths, right?

00:52:54.860 | Roths are great assets to leave

00:52:57.740 | to any non-charitable beneficiary, right?

00:53:00.220 | Spouse, they're particularly good

00:53:02.060 | for your upper income beneficiaries.

00:53:04.140 | So, if you have a Roth IRA and a traditional IRA,

00:53:08.260 | and you've got one child who's a teacher

00:53:12.460 | and another child who's the quarterback

00:53:14.660 | of the Kansas City Chiefs,

00:53:16.500 | the Roth would be great to leave to the quarterback.

00:53:19.220 | The traditional would be great to leave to the teacher

00:53:21.660 | because the teacher's at a lower tax rate, right?

00:53:24.620 | Just some little nickel dime planning like that.

00:53:27.020 | Roths are not great to leave to charities.

00:53:30.500 | Look, if you wanna be charitable,

00:53:32.060 | don't have me tell you not to be for tax reasons,

00:53:35.140 | but if you're looking to be charitable and tax efficient,

00:53:38.020 | why waste the benefit of a Roth on a charity, right?

00:53:41.660 | Most beneficiaries today have 10 years of tax-free growth

00:53:46.100 | when they inherit a Roth IRA.

00:53:48.580 | Even without the stretch, that's pretty good, right?

00:53:51.300 | If I inherit a Roth IRA,

00:53:53.020 | I can leave that in there for 10 more years

00:53:54.940 | of tax-free growth, at the end of the 10th year,

00:53:57.860 | take it out, and now, yes,

00:54:01.140 | the money will now generate interest and dividends

00:54:03.540 | in my taxable brokerage account,

00:54:05.260 | but for 10 years, it grew tax-free,

00:54:08.260 | and I get a full step-up in basis when it comes out, right?

00:54:11.460 | So, Roth is a great asset to leave

00:54:15.420 | to not, don't waste that tax attribute on a charity, right?

00:54:20.260 | Where you might wanna start thinking about charities,

00:54:22.020 | the traditional retirement accounts, right?

00:54:23.660 | So, if you're thinking about,

00:54:24.740 | I'm gonna leave a bunch of stuff to my adult child

00:54:28.140 | and a bunch of stuff to charity,

00:54:29.380 | and I have a Roth and a traditional,

00:54:31.260 | leave the Roth to the adult child,

00:54:33.300 | leave the traditional to the charity.

00:54:35.660 | And traditionals are great for lower-income beneficiaries

00:54:39.420 | because they pay less tax

00:54:41.580 | than your higher-income beneficiaries.

00:54:44.020 | And then, like I said earlier on the HSA side,

00:54:47.300 | HSAs are great assets to leave to a spouse,

00:54:51.780 | and they're great assets to leave to charities

00:54:53.860 | because those are basically the only two categories

00:54:55.940 | of beneficiary that doesn't immediately pay tax on your HSA.

00:55:00.340 | Everybody else is pretty much paying a lot of tax

00:55:03.580 | when they inherit your HSA.

00:55:05.100 | So, just some things to be thinking about

00:55:07.380 | from an estate tax plan.

00:55:08.820 | Basically, a lot of what you're thinking about

00:55:11.140 | is your beneficiary's income tax situation,

00:55:15.180 | that bites, in today's environment,

00:55:17.340 | that bites much, much, much harder

00:55:19.780 | than any estate tax is gonna bite for 99.9% of Americans.

00:55:24.500 | But here's one thing that should be on your radar.

00:55:29.660 | And maybe in our audience,

00:55:32.180 | we have folks who are having parents now pass away, right?

00:55:35.260 | These things happen.

00:55:38.700 | Essentially, we all have one tax planning opportunity

00:55:41.540 | in our life.

00:55:42.380 | It's our death, and it's coming.

00:55:44.220 | But one thing you do wanna think about,

00:55:48.460 | if you or your parents, your spouse,

00:55:51.780 | dies with any sort of affluence,

00:55:53.700 | even though they don't owe any estate tax, right?

00:55:55.620 | So, they owe much less than $11 million today.

00:55:59.260 | Today's exemption is 11.7 million.

00:56:02.140 | You still might want to, if they're married,

00:56:05.260 | you may wanna file an estate tax return.

00:56:07.140 | That's a Form 706.

00:56:08.980 | And the reason is this, portability.

00:56:12.300 | So, what the heck is portability?

00:56:14.100 | Portability means that if the first spouse dies,

00:56:19.020 | the second spouse can get their lifetime exemption, right?

00:56:23.660 | So, spouse one dies in 2021.

00:56:26.380 | He or she has this 11.7 million estate tax exemption.

00:56:31.820 | They leave everything to the spouse,

00:56:33.980 | so they don't even use the estate tax exemption.

00:56:37.260 | The surviving spouse can get that 11.7 million

00:56:42.260 | from the first spouse,

00:56:44.500 | if the first spouse's estate files this Form 706.

00:56:49.500 | So, and the Form 706 is just gonna report,

00:56:52.020 | hey, Joe Smith died in February, 2021.

00:56:57.020 | He had $3 million worth of assets.

00:56:59.700 | He left it all to his spouse.

00:57:02.060 | Check a box.

00:57:03.380 | The spouse inherits an $11.7 million estate tax exemption.

00:57:08.380 | 30 years from now, spouse two dies, right?

00:57:13.060 | This happened in my own life.

00:57:14.300 | My grandparents on my father's side died 40 years,

00:57:17.900 | yeah, about 40 years apart, right?

00:57:19.660 | So, these things happen, right?

00:57:21.260 | Who knows what that $3 million is gonna grow to

00:57:26.220 | by the time the next spouse dies.

00:57:27.780 | Maybe it's 10 years, 15 years.

00:57:30.460 | And, oh, by the way, they're thinking about

00:57:31.980 | lowering the estate tax exemption.

00:57:33.700 | It's actually in the law right now,

00:57:35.140 | I think in 2025 or six, it lowers.

00:57:39.220 | But it's only to the upside

00:57:42.060 | to leave the estate tax exemption to the surviving spouse.

00:57:47.060 | The way you do that, though,

00:57:49.220 | you can't do that unless the Form 706 is timely filed.

00:57:52.700 | So, just a little thought there.

00:57:55.940 | And then the last slide I've got is just,

00:57:59.820 | when you approach your tax situation,

00:58:02.380 | I think more and more people are getting this,

00:58:04.700 | but it's just something that is sort of,

00:58:06.740 | people haven't really locked into this.

00:58:09.660 | There's a real distinction

00:58:11.420 | between tax planning and tax preparation.

00:58:14.340 | And I think some people go to their tax return preparer,

00:58:17.660 | they say, okay, I'm engaging you to prepare

00:58:20.180 | my federal and state tax return for 2021.

00:58:23.620 | And they expect that they're gonna get all this tax planning.

00:58:26.380 | Well, I actually don't even think that's really that fair

00:58:28.580 | to the tax return preparer.

00:58:30.900 | It's just, they're distinct exercises, right?

00:58:33.980 | Preparing one's own tax return is,

00:58:36.980 | it should be done correctly, but it's not tax planning.

00:58:40.900 | And then I do have a blog post here

00:58:44.020 | that actually talks about,

00:58:45.220 | hey, I just did my tax return for 2020.

00:58:48.660 | Could I use this as a tool

00:58:50.020 | to help facilitate my own tax planning?

00:58:53.020 | This little, this blog post has some tips and tricks

00:58:57.300 | to take out your old tax return

00:58:59.060 | and use it as a springboard to do some tax planning.

00:59:01.980 | So I think that's it.

00:59:04.900 | I hope, I'm gonna stop sharing.

00:59:09.580 | So I hope we've got everybody still here.

00:59:15.820 | I hope that didn't,

00:59:16.900 | hope we didn't lose too many in the battle.

00:59:20.500 | So, Carol, I think there are some questions

00:59:23.660 | that have already come in.

00:59:25.540 | - Yeah, thank you so much for that presentation.

00:59:27.620 | That was very informative

00:59:28.940 | and just the kind of information we're looking for.

00:59:31.340 | Yeah, I'm gonna read a few of the questions

00:59:33.380 | that we have pre-submitted from the RSVP survey.

00:59:38.300 | And then we'll have Jim and Miriam

00:59:40.500 | read a few of the questions from the chat.

00:59:42.940 | And then after about 15 minutes of that,

00:59:45.340 | we're gonna open up to interactive Q&A

00:59:48.900 | where people can raise their hands.

00:59:50.460 | I think you did cover quite a few of the questions

00:59:53.300 | that people had pre-submitted, like with Roth conversions.

00:59:57.860 | Somebody did ask,

00:59:59.660 | discuss distribution strategies from inherited IRA

01:00:02.820 | subject to the 10-year rule.

01:00:04.220 | So as if you're the person that got the inherited IRA.

01:00:08.340 | - Great question.

01:00:09.620 | And let's start with, upon death,

01:00:13.020 | you wanna work with the executor,

01:00:15.620 | whoever's running the estate around properly tidying,

01:00:19.980 | and/or the financial institution

01:00:21.980 | around properly tidying an inherited IRA.

01:00:25.180 | Generally speaking, there's a little magic language

01:00:27.820 | around, you know, it's, you know, Joe Smith,

01:00:31.140 | decedent, you know, decedent, deceased,

01:00:34.460 | you know, 12/31/2021,

01:00:37.860 | IRA for the benefit of beneficiary name, right?

01:00:42.180 | There's, don't use that exact language,

01:00:44.260 | but there are resources to find that.

01:00:46.860 | So you wanna get that inherited IRA

01:00:48.860 | properly titled as an inherited IRA,

01:00:51.380 | you know, sooner rather than later.

01:00:54.460 | And then you wanna think about your distribution strategies.

01:00:57.020 | And basically what you need to do

01:00:58.860 | is you need to say, all right, you know,

01:01:01.060 | I have a 10-year spread on this.

01:01:03.580 | What was, what's my income this year?

01:01:05.300 | Did I sell a business?

01:01:06.660 | Did I have a big capital gain?

01:01:08.020 | Are there things that happened in my life

01:01:10.580 | where I'm gonna have more or less income this year

01:01:12.900 | versus other years in that 10-year window?

01:01:15.660 | And by the end of the year,

01:01:17.060 | take that right size, that distribution,

01:01:20.380 | so that you get the distribution in those 10 years

01:01:23.460 | in the right, you know, marginal tax bracket.

01:01:26.420 | So you need to be thinking,

01:01:27.700 | once you've inherited an IRA with this 10-year rule,

01:01:31.180 | you now have a lot more tax analysis to do

01:01:33.980 | than most Americans, 'cause you gotta say,

01:01:36.420 | oh, I sold a business this year.

01:01:39.380 | I had a big capital loss this year,

01:01:41.660 | whatever it is, and then take the right way.

01:01:44.740 | The one thing you don't wanna do

01:01:45.900 | is just ignore the issue on a traditional IRA.

01:01:48.940 | And then in year 10, you gotta take all of it,

01:01:52.060 | 'cause that's gonna be a tax time bomb, so.

01:01:54.260 | - Okay, thank you for that.

01:01:58.140 | And now there are two questions on minimizing taxes

01:02:00.420 | that are kind of related,

01:02:01.260 | so I'm gonna read them together.

01:02:02.820 | How to minimize taxes

01:02:04.100 | on a mostly fixed income stream during retirement,

01:02:07.500 | and how do you determine a tax-efficient order

01:02:09.780 | to withdraw assets in retirement?

01:02:12.020 | - Yes, great questions.

01:02:14.500 | So on our fixed income in retirement,

01:02:17.900 | there's not a whole lot you can do around,

01:02:20.180 | I'm assuming the fixed income's like a pension, right?

01:02:22.980 | If that's true, there's not a whole lot we can do

01:02:26.860 | to minimize tax there.

01:02:28.740 | Where we need to then shift our focus

01:02:31.060 | is deduction planning, right?

01:02:34.060 | So that could be things like doing a donor-advised fund

01:02:37.620 | so that we maximize our itemized deductions in one year,

01:02:40.980 | and then go back to the standard deduction in later years

01:02:44.420 | as opposed to just only being

01:02:45.980 | in the standard deduction every year, right?

01:02:47.660 | So deduction planning,

01:02:49.500 | that person might have a traditional IRA,

01:02:51.580 | so we might do like QCDs and those sorts of things.

01:02:54.740 | I will say fixed income is a little bit of a tough one

01:02:58.620 | because it's just a little more difficult.

01:03:00.860 | The other thing you could do is delay, right?

01:03:02.980 | So to the extent you can delay your pension,

01:03:07.980 | I tend to like that for clients because it does two things.

01:03:11.500 | One, it buys us some early retirement years

01:03:14.580 | where we could do tax planning like Roth conversions,

01:03:17.020 | and two, it gives us more longevity insurance

01:03:19.340 | on the pension.

01:03:20.180 | Now, pension's gonna have credit risk, right?

01:03:22.180 | So the more you delay your pension,

01:03:24.500 | the more credit risk you take on,

01:03:26.140 | but there is the Pension Benefit Guarantee Corporation.

01:03:30.500 | That's not gonna fully replace your pension.

01:03:33.300 | But anyway, so that's sort of my thoughts on fixed income.

01:03:36.300 | And then, oh, order of operations

01:03:38.180 | in terms of retirement distributions.

01:03:41.140 | To my mind, it depends on when you retire, right?

01:03:44.540 | If you're retiring early,

01:03:48.580 | I actually like taxable distribution.

01:03:50.580 | Living off the taxables early is something I tend to like

01:03:55.340 | because that limits us to interest dividends,

01:03:58.740 | capital gains from a tax perspective,

01:04:00.860 | and then we could do Roth conversions, right?

01:04:03.020 | So we sort of use the taxable accounts

01:04:05.660 | early in an early retirement as our life raft

01:04:09.140 | while we're doing Roth conversions.

01:04:11.580 | And then we get, you know,

01:04:12.700 | maybe we spend down those taxable assets.

01:04:14.940 | And what we do at that point

01:04:16.060 | is we've got a lot more in Roths,

01:04:17.940 | and then we sort of toggle between Roth and traditional

01:04:21.660 | managing our tax rate.

01:04:23.140 | So that, I will say, this is one of those,

01:04:25.700 | your mileage may vary.

01:04:26.860 | It really depends on your particular circumstances.

01:04:29.940 | I mean, it happens, and I would say

01:04:32.300 | it's gonna happen less and less,

01:04:34.340 | but it certainly happens

01:04:35.420 | that there are plenty of Americans who get to age 56.

01:04:39.500 | They're done with work mentally, maybe.

01:04:41.700 | And, oh, what do you have?

01:04:42.700 | I have 2 million in IRA or 401(k),

01:04:45.980 | and I've got my house,

01:04:47.580 | and I've got 10,000 in my checking account.

01:04:49.860 | Well, you're basically gonna be

01:04:51.700 | taking taxable distributions.

01:04:53.140 | And we can talk about 72(t),

01:04:54.740 | we can talk about separation from service at age 55 or after.

01:04:59.740 | I mean, there are things we can do,

01:05:02.300 | but definitely your planning landscape

01:05:05.700 | is a lot more limited.

01:05:07.260 | - Okay, thank you.

01:05:11.140 | Is there a better way to handle

01:05:13.340 | estimated income tax payments

01:05:15.460 | instead of just doing the 110%,

01:05:17.740 | especially when there's uneven investment returns,

01:05:20.100 | which makes planning difficult?

01:05:21.940 | - Yeah, so great question.

01:05:24.300 | For the year 2021, I'm actually very fond of the 110%.

01:05:29.060 | Here's why, for retirees.

01:05:31.460 | So 110% for the uninitiated, right,

01:05:34.220 | is as long as I make equal estimated tax payments,

01:05:37.300 | get 110% of last year's tax,

01:05:39.260 | so the 2020 tax liability in for 2021,

01:05:43.060 | I can win the lottery, no problem.

01:05:44.820 | I pay no, it doesn't matter.

01:05:46.380 | I can make all the money in the world in 2021.

01:05:48.700 | I make that 110% of 2020 estimated tax payment.

01:05:52.500 | I'm in, like, I'll have to write a big check in April.

01:05:56.580 | No penalties.

01:05:57.860 | I like that for this year.

01:05:59.260 | Here's why.

01:06:00.380 | Last year, think about it.

01:06:01.980 | I've seen this on clients' tax returns.

01:06:04.340 | Dividends, interest, way, way down.

01:06:07.220 | Capital gain distributions, way, way down, and no RMDs.

01:06:11.020 | So we have a lot of taxpayers out there

01:06:13.260 | whose income was artificially low in the year 2020.

01:06:16.820 | So let's do that 110% in 2021,

01:06:21.100 | and then we write our big check in April of 2022 for 2021.

01:06:25.860 | I will say, you know, outside of that,

01:06:28.780 | you have to go into that 90% safe harbor

01:06:31.540 | and you just have to be a little,

01:06:32.700 | you have to be a lot more precise

01:06:33.900 | because you have to estimate this year's taxable income

01:06:36.220 | as opposed to last year's,

01:06:37.260 | which I just grab off my tax return.

01:06:39.620 | So 110% is not, especially in a low-yield environment

01:06:45.580 | where, all right, maybe I gave the government

01:06:47.260 | a little bit of an interest-free loan,

01:06:48.780 | but it's a low-yield environment.

01:06:50.660 | It's not that bad of an outcome.

01:06:53.020 | So for this year, I really like the 110%.

01:06:57.220 | And then in the future, the only alternative is the 90%,

01:07:00.980 | or if you have W-2 income, right,

01:07:02.580 | you can use your W-2 to get those payments in.

01:07:06.060 | Yeah, there's no real magic bullet

01:07:09.500 | other than if I can really well estimate my 90%.

01:07:13.140 | Is there a second question that I missed?

01:07:16.100 | - No, no.

01:07:19.500 | Now let me do one more from the pre-submitted questions

01:07:22.420 | and we'll go on to the chat questions.

01:07:23.740 | The last one I have is,

01:07:24.820 | do you have any suggestions for retirement tax planning

01:07:27.340 | software for consumer use?

01:07:29.860 | - I actually don't.

01:07:30.780 | So a couple of things on this piece, and I get it.

01:07:33.940 | Folks love analytical tools.

01:07:36.100 | So I believe projections are sort of a necessary evil

01:07:41.740 | of the financial planning world and the tax world.

01:07:44.100 | That said, if we're doing the right things,

01:07:47.300 | we don't need to worry about projections so much, right?

01:07:50.020 | I just think about, you know,

01:07:51.500 | Bill Belichick, the New England Patriots.

01:07:53.540 | Now, yes, they have some analytics people

01:07:55.100 | predicting behavior and predicting

01:07:56.900 | what will happen on third down,

01:07:58.900 | but what they're doing is they're doing the right behaviors,

01:08:01.500 | the right preparation.

01:08:03.180 | You know, Bill Belichick's not in his office

01:08:04.940 | agonizing over whether the Patriots are gonna be 14-3

01:08:07.540 | or 13-4, 12-5 this year.

01:08:10.180 | Do the right things and the projections

01:08:11.780 | become a lot less meaningful.

01:08:13.700 | - Okay, thank you.

01:08:16.540 | Okay, now we're gonna move on to some of the questions

01:08:18.580 | that were submitted during the chat.

01:08:19.860 | Miriam, do you have any from the chat?

01:08:22.340 | - Yes, we have one question from Ben.

01:08:25.140 | He said, "I have a former employer, traditional 401(k),

01:08:30.140 | a personal Roth IRA, and also a simple IRA.

01:08:35.540 | Can I partially convert my traditional 401(k)

01:08:41.500 | to the Roth IRA?

01:08:43.540 | Does the ownership of a separate simple IRA cause any issue?"

01:08:50.460 | - So if you're looking to convert a traditional IRA

01:08:54.180 | or traditional workplace plan, a 401(k) to a Roth IRA,

01:08:59.180 | it's possible, but you're gonna have to work

01:09:01.700 | with your plan administrator, right?

01:09:03.500 | So one thing you could do is if the plan has a Roth 401(k)

01:09:08.500 | and you, you know, if it has a Roth 401(k)

01:09:12.900 | and allows Roth conversions,

01:09:14.180 | which I believe they generally do if they have a Roth 401(k),

01:09:17.060 | probably gonna be easier to do an in-plan conversion, right?

01:09:21.540 | The other option would be, right,

01:09:23.740 | so you could do an in-plan conversion.

01:09:25.740 | You might be able to do a partial, all right,

01:09:28.780 | 401(k), send this to a Roth IRA.

01:09:31.260 | You'd have to look at your plan rules

01:09:33.100 | to see if they'll allow a partial withdrawal like that.

01:09:36.060 | Depends on your age, depends on their rules.

01:09:38.980 | The other option would be roll over the old 401(k)

01:09:43.260 | into a traditional IRA.

01:09:44.980 | Now you wanna be careful about that, though.

01:09:46.580 | If you have employer stock in there,

01:09:48.020 | that may not be a good idea.

01:09:49.700 | If you're relying on the separation from service

01:09:52.580 | at age 55 exception, that may not be a good idea.

01:09:55.540 | So you wanna be careful about that.

01:09:57.740 | That's not just a slam dunk,

01:09:59.300 | but that could be an option as well.

01:10:01.540 | And by the way, the simple, maybe the other option

01:10:04.300 | is convert the simple IRA to a Roth IRA.

01:10:07.220 | Don't do that if the simple is only two years old or younger.

01:10:10.900 | But once that simple is over two years old,

01:10:13.100 | generally speaking, you can convert the simple IRA

01:10:15.780 | without a penalty into the Roth IRA.

01:10:18.540 | And to answer the question, no,

01:10:21.980 | having a simple IRA is no impediment

01:10:23.900 | to doing a Roth conversion.

01:10:25.740 | It's just a little tricky when you have traditional 401(k)

01:10:30.260 | into a separate Roth IRA.

01:10:32.580 | That's where it can get a little tricky,

01:10:34.740 | but maybe an in-plan conversion

01:10:36.220 | would be a potential answer there.

01:10:38.540 | - Two points on that.

01:10:39.860 | Could you explain the two years on the simple

01:10:44.260 | for those who may want to know that?

01:10:46.420 | And second, what about the pro rata with the simple IRA?

01:10:51.020 | - Yep, so a couple of things on that.

01:10:53.260 | So simple IRAs have this nifty little rule

01:10:59.460 | that says if within two years of creation,

01:11:04.180 | you move it to any other account other than a simple IRA,

01:11:09.620 | you pay a 25% penalty.

01:11:11.820 | It's just this onerous rule out there.

01:11:14.180 | It's a trap for the unwary.

01:11:15.860 | So it's just, oh, I don't like, that's just annoying.

01:11:20.380 | Look, if you had the simple for 10 years,

01:11:22.100 | don't worry about it.

01:11:22.940 | But yeah, so you don't want to be doing Roth conversions

01:11:25.580 | out of a simple if it's under two years old.

01:11:27.780 | Be careful there.

01:11:30.100 | And then the other question was the pro rata rule.

01:11:32.940 | And the answer there is pro rata rule,

01:11:36.740 | if you have a simple IRA,

01:11:38.300 | you generally don't have non-deductible contributions

01:11:40.500 | inside a simple IRA.

01:11:42.260 | So there would be no pro rata only actually,

01:11:44.900 | well, I take that back.

01:11:47.100 | So if we had a simple IRA and only a simple IRA,

01:11:50.220 | no SEP, no SEP and no traditional IRA,

01:11:55.220 | then there is no pro rata rule.

01:11:57.180 | Every dollar you convert or take out is just 100% taxable.

01:12:01.260 | But let's say we had an old IRA

01:12:05.860 | with non-deductible contributions.

01:12:08.060 | The simple IRA would actually attract

01:12:10.060 | some of that historic basis.

01:12:11.700 | So I'll give you an example.

01:12:13.300 | You contributed 10 years, 5,000 a year

01:12:18.700 | to a non-deductible IRA.

01:12:20.020 | So you have 50,000 in basis in the non-deductible IRA.

01:12:23.180 | And that's now worth 100,000.

01:12:25.180 | And then you have a simple IRA that's worth 100,000.

01:12:27.740 | So 200,000 total.

01:12:29.460 | Every dollar that comes out of the simple IRA,

01:12:31.500 | 25 cents of it will be non-taxable under the pro rata rule.

01:12:35.100 | So this illustrates how complicated this can get.

01:12:38.900 | But basically, if you only have a simple IRA,

01:12:41.460 | don't worry about the pro rata rule.

01:12:42.820 | It's just all taxable.

01:12:44.740 | But if you have other traditional IRAs or SEP IRAs,

01:12:48.100 | the pro rata rule could come into play,

01:12:51.100 | generally in a favorable way.

01:12:52.340 | It'll attract some of that old basis

01:12:54.500 | and some of the simple IRA distribution

01:12:56.900 | or conversion will be non-taxable.

01:12:59.380 | - Could you explain in one or two sentences

01:13:02.340 | what a simple IRA is?

01:13:04.780 | That's not the same as a traditional IRA.

01:13:07.980 | - That's right.

01:13:08.820 | A simple IRA is a employer-sponsored plan,

01:13:12.740 | self-employed or actual worker,

01:13:15.500 | where it's an IRA that you can defer money into.

01:13:19.780 | I believe the limit is 13,000 right now

01:13:22.380 | and then a 3,000 step-up or additional contribution,

01:13:25.420 | catch-up contribution if you're 50 years old.

01:13:27.340 | So it's almost like a hybrid

01:13:30.580 | between a 401(k) and a traditional IRA.

01:13:33.700 | You need an employer,

01:13:34.820 | whether it's self-employment or another employer,

01:13:37.380 | and it's 13,000 a year is, I believe, the current cap,

01:13:41.340 | and then 3,000 a year additional catch-up contributions.

01:13:44.620 | It's only deductible, no raw simples,

01:13:47.820 | and it's for small employers

01:13:50.380 | where it's just an easy plan to maintain.

01:13:52.540 | - Okay, thank you.

01:13:54.420 | - Does Jim have any questions

01:13:58.500 | or do you have any more from the chat, Miriam?

01:14:00.060 | I'm not sure if Jim has any.

01:14:01.660 | - One just came up about what are your thoughts

01:14:04.180 | about using a non-qualified deferred compensation plan

01:14:07.540 | for high-income earners targeting an early retirement?

01:14:10.820 | - Yeah, it can be a really good thing.

01:14:14.060 | I mean, those things usually have a 10-year payout.

01:14:15.860 | Sometimes I think I've seen a five-year payouts.

01:14:18.500 | So the idea is basically what you're doing

01:14:21.420 | is you're moving income from a high-earning year

01:14:24.900 | to what is hopefully a lower-earning year, right?

01:14:28.260 | I mean, it's really that, especially for the early retiree,

01:14:31.620 | hopefully that's what you're doing.

01:14:33.380 | And generally speaking, I think for the very high earners,

01:14:38.460 | yeah, why not?

01:14:39.300 | Why not defer while you're very high-earning?

01:14:41.460 | I mean, you may then come into some not so pleasant surprises

01:14:45.780 | with things like premium tax credit,

01:14:48.980 | but it may be, I mean, I've done the analysis.

01:14:52.340 | I think premium tax credit is like a 13 or 14% tax.

01:14:56.540 | That's what's coming to mind.

01:14:57.980 | If you blow through that,

01:15:00.380 | maybe you wouldn't have qualified anyway,

01:15:02.220 | and then it's not really a tax.

01:15:04.820 | So I have to look at any one particular

01:15:07.460 | deferred compensation arrangement and plan.

01:15:10.900 | The other thing you want to think about

01:15:12.140 | is creditor protection, right?

01:15:14.220 | So this is a bit of a, it's not that big a deal,

01:15:19.220 | but on the deferred comp,

01:15:21.180 | sometimes there could be some issues.

01:15:22.900 | If your creditor, or I'm sorry,

01:15:25.260 | if your employer was to ever have a credit issue,

01:15:28.060 | they get sued for something.

01:15:30.500 | Theoretically, it depends on the nature of the plan.

01:15:33.500 | There are some plans where that could be an issue

01:15:35.740 | where the creditor could actually access it.

01:15:38.060 | So you just want to be a little careful with that,

01:15:39.980 | understand what you're getting into,

01:15:41.500 | but otherwise they can be good plans.

01:15:44.580 | - We probably have time for one more question from the chat.

01:15:50.460 | Is there a good one?

01:15:51.540 | - Yes.

01:15:52.380 | - Okay, great.

01:15:53.220 | - There is.

01:15:54.380 | - This is from M.A.R.

01:15:59.420 | In the tax harvesting example,

01:16:02.020 | I guess that you gave, Sean,

01:16:03.820 | does the 40,000 taxable income

01:16:06.620 | include the income from the sales of the stock?

01:16:10.540 | - Yeah, that's a great question.

01:16:12.580 | And generally speaking, yes, right?

01:16:14.660 | So it's not like, oh, I had no income, right?

01:16:17.380 | I have no interest, no dividends.

01:16:18.660 | I'm early retired.

01:16:20.140 | Oh, I'm in the 0% capital gains bracket.

01:16:23.260 | So what I'm going to do is I'm going to sell,

01:16:24.780 | I'm going to trip a $200,000 capital gain.

01:16:26.860 | No, you've got to manage the gain

01:16:29.540 | with all your other income.

01:16:30.780 | And that's why, that is a bit of a governor on it.

01:16:33.060 | But look, if you're married and 80,000,

01:16:35.860 | you have $10,000 capital gain,

01:16:37.460 | you're looking to wash away,

01:16:39.180 | you know, it can be very powerful.

01:16:40.500 | But yes, it is not a mechanism

01:16:42.820 | to be washing away $500,000 worth of gain.

01:16:45.540 | - Maybe time for one more?

01:16:49.340 | - One more.

01:16:50.380 | - Yeah.

01:16:51.220 | Any suggestions for a consumer version

01:16:52.900 | of tax forecasting software to use

01:16:55.180 | to optimize the Roth conversion

01:16:57.540 | and other tax planning issues?

01:16:59.700 | - Yeah, like I said,

01:17:00.740 | I don't endorse any particular product in that.

01:17:04.140 | You know, I think, I mean,

01:17:06.180 | some of it is quite mechanical, right?

01:17:10.140 | I mean, literally what you do

01:17:11.740 | is you pull out the tax brackets for the year,

01:17:16.100 | and then you look at,

01:17:17.660 | are you in the itemized deduction or standard deduction?

01:17:20.740 | By the way, 90% of Americans are standard deduction, right?

01:17:24.140 | So that's a great guidepost.

01:17:25.860 | And then I just say like, be a little conservative.

01:17:28.300 | The other thing too, is people sort of misunderstand this.

01:17:32.020 | This is an issue of degree, right?

01:17:34.020 | So what I mean by that is,

01:17:35.460 | let's say I've got $9,000 left in the 12% tax bracket.

01:17:40.020 | And I think I have 10 or 12,000 left.

01:17:43.700 | So I do a $10,000 Roth conversion.

01:17:46.100 | Okay, the first nine is taxed at 12% federal.

01:17:50.380 | And then the last 1,000 is taxed at 22%.

01:17:55.380 | Yeah, to my mind, that's not that big of a miss, right?

01:17:58.620 | Okay, I went a little over.

01:18:00.900 | Some of it got into the 22%.

01:18:03.780 | By the way, I mean,

01:18:04.620 | this is another thing to keep in mind too,

01:18:06.100 | is your future self is never gonna be annoyed at you

01:18:10.340 | that you paid a little too much tax on a Roth conversion.

01:18:13.100 | Your future self is gonna be thrilled

01:18:15.540 | that they have a ton of tax-free income

01:18:18.660 | to draw on retirement.

01:18:20.540 | And they are not going to be angry that,

01:18:23.580 | "Oh, you did some Roth conversions

01:18:25.140 | "that weren't 100% optimized.

01:18:27.360 | "You paid a little bit of tax in the 22% bracket.

01:18:30.220 | "How dare you?"

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01:18:54.200 | you

Bogleheads® Chapter Series – Sean Mullaney Discusses Tax Strategies

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