2022 EP0219 - Planning Matters Radio - Tax Season

Plan planning matters.

You welcome once again to planning matters radio show where we make some sense of the personal financial issues of the day and hopefully get a smile or two along the way, my guest today is a brand-new trust. Smart Mr. Pro, he's the author of understanding your investment options is a fiduciary financial investment and retirement planner serving his clients throughout the great state of North Carolina, Peter Sean. Welcome to the program money and smiles at the same time, you only on days when the market is up right arm. Our mood gets dictated by whether it's red or green on the screen way too often.

I think crazy. It's crazy. And if you want to talk to Peter Sean you can go to his website is www.richenplanning.com or call about 919-300-5886 919-300-5886. Welch happened it's tax time. Once again Peter and W-2s, 1099s, K-1's all that stuff is cut hay in the barn at this point will write all all the assorted reasons why there are are not smiles about our money right, nobody's happy tax time. It seems like there are people out there that expect a big return but unfortunately for a lot of those folks it's going to be significantly less than they expect or anticipate especially with the way that the child care tax credit was structured in last year.

A lot of people get surprised by that.

But oh, I didn't actually get free money. It was just a credit that I normally would have received when I went and filed my taxes yet you know there's a lot of noise that goes around tax season, but to be honest, we don't need a tax season.

We need to be proactive with our thinking about an approach to taxes year-round Scott. I know that tax prep season when we were actually preparing the documents does have a deadline and therefore the first four months. 3 1/2 months of the year. People are really engulfed in that, but we need to do a lot better job about planning proactively for taxes not just preparing historical data to file the taxes. There's a whole lot of opportunity to save a whole lot of money and by the way, keeping more of your money is as effective as shooting for higher returns, typically with a lot less risk involved. It makes a lot of sense to me. Get people arch splitting hairs try to get just a tiny bit more return and good good on them to try to do so, and perhaps ignoring easier returns are easier lack of losses and things like that kind of on the way in. Well, if you could if you can shoot for higher returns to to maybe target two or 3% more in returns, but you're taking on the possibility that in downturns you might lose five 1015% more or you don't take any risk of loss but you get to keep 10 or 15% more of your money, which is going to be more effective proper tax planning really looking with a pro active lens at the future of taxation and what your liability is what liability your building for your self into the future is really important and effective when creating and structuring an ideal plan for financial confidence keeping as much of our money as possible because I believe that I can spend my money better than the government. And I think most people I talked to believe so as well. Yeah, it's interesting the it's an ongoing process to write because you can make a great plan right now. But those kind of rules or the landscape changes that as we go. So it's a forward-looking process that's kind of just ongoing. That wheel keeps turning which is why it's important. Have a great relationship with a great financial planner like Peter Sean you talk to yourself. 919-300-5886. Speaking of looking into the future. One of the big questions is taxes. In the span of your retirement and for many people have is obvious that's in the future and some people it's closer than others.

What is the tax situation. Someone can expect in their retirement. We should they be planning for well let's let's look at where we are today and what we anticipate the future to be worth $30 trillion in debt.

The government has already hinted at the fact that they are targeting certain types of accounts, retirement accounts, by and large are tax-deferred and oh coincidentally there's right around $30 trillion there now. I do see a lot of marketing saying hey the government's coming after your retirement and it's it's fire and brimstone, and you know the sky is going to fall because the government is going to confiscate your wealth that seems to be this scare tactic around the marketing. I don't think they're going to shutter the doors of your IRA and say sorry no money there.

If they did that they would have real real problems. Their number one job is to be likable enough to get reelected right and if they stole the money of the hard-working Americans who have been disciplined enough to save and accumulate that money they would see a whole different side of America and that hope for reelection probably would be out the window. That's not what they're going to do. They're not just going to say sorry you saved a million, but you can only have 500,000s. Sorry, you saved a million, but it's gone. Not going to happen and there is a lot of scare tactic marketing around that and using that kind of language but here's the reality of it is that they don't have to.

They can just incrementally raised taxes into the future and effectively they have confiscated more of your retirement dollars and if you choose or chose to defer and delay paying your taxes. That's the deal you made. You got to save taxes when you made those contributions to your 401(k) or your IRA and not pay the tax rate then the government let you do that, they let you grow that account and they get to determine the tax rate.

Later, when you pull that money out. Now we know what that is. Year to year.

We know what it is. Now we know the rates we know the brackets. We also know that in 2026. The current rates in brackets expire and they revert back to the rates in brackets that they were previously so taxes are going up. This is not just speculation.

Unless this administration turns around and says oh no that last guy was right. We need to continue his policies which I don't care who's in office that just never happens in less that does miraculously happen. We are going to see taxes increase the 12% bracket will become the 15 the 22 will become the 25 the 24 will become the 28 so taxes are going up, and by the way, they could go up further because those rates in brackets are always subject to change based on the government's needs and wants and desires to collect more money and we've seen changes already such as the secure act and still not a lot of people know about the secure rack. Not a lot of people know the taxes are going up in 2026 of right now an important window of opportunity. Not a lot of people know about the secure act, which effectively ended the stretch IRA used to be that if I had an IRA.

I could hand it off to my son he could hand it off to his son and we could have three generations of tax deferral in 2020. The IRS and the government ended that they said now when IRA passes generationally.

It must be liquidated within 10 years.

What what is that that's a de facto tax increase because if I could take in account and stretch out the taxes over three lifetimes. I'm paying minimal amounts but I have to liquidate the entire thing within 10 years that's pushing it up basically to higher tax rates in brackets. Why did they do this well because people receiving a large inheritance typically don't complain if they gotta lose a portion of it in taxes and the people who worked hard to build up those IRA accounts aren't here anymore to complain, so it made for a pretty easy target for well where are we going to collect more tax dollars. Let's get it when these tax-deferred accounts pass generationally someone's entire retirement plan that they were doing for decades and decades may have been based on promised that they be able to pass this Mr. Kelly and others like it down for something to of been changed so radically.

How can that happen. Why did that happen is this type of thing happening all the time. You are right there. They are mean for decades, people were planning on this and basing their plans upon this and then in the blink of an eye. It seems to have changed. Now there was language around this and proposals around this for many years, but they seemed to never go anywhere.

So in 2019 the week between Christmas and New Year's. A bill passed and went into law than the following week they snuck it through between the holidays of Christmas and New Year's and made it go into effect January 1 they called it something nice and shiny and warm and fuzzy. The secure act and they did a lot of advertising about the fact they pushed our MDs required minimum distributions back a year and 1/2. So if you worked and saved your whole life, and if you were lucky enough not to actually need that money because you had enough income coming in from elsewhere.

You didn't have to take money out of your IRA until an another year and 1/2. They gave us in an extra year and 1/2 of available tax deferral time, but they took away two generations of available additional tax deferral.

They didn't mention that part so much right they wanted us to focus on the nice name. The secure act.

The setting every community up for retirement enhancement. They wanted to focus on the fact that they pushed our MDs back a year and 1/2 open. Don't pay attention to the man behind the curtain where we stole two generations of available tax deferral from you and a lot of people had set up their plans based around that a lot of people said hey I don't really love paying taxes during my lifetime. So instead of using my IRA.

I'm actually going to use other sources where available, and save my IRA for an inheritance because that tax deferral can continue well what they've done effectively is said that retirement accounts are for your retirement not for generational wealth transfer. That's what that law essentially set up and so we really now got to reassess and retool a lot of people's plans because if that's the case anyway, we may be better served by using some IRA money earlier on and letting those other assets nonqualified investments Roth accounts, life insurance, those kind of things be the tools for passing wealth generationally. Now a Roth is still under the same rules and regulations, requirements to be liquidated within 10 years, but at least they're not going to push your next-generation beneficiaries into any kind of higher tax situation.

Yes, the money needs to come back out of that Roth, the government wants it to because they want that money back in taxable circulation, but at least it's not taxable income is going to push them up to higher and higher tax brackets, nonqualified assets are fantastic to be left behind because right now this is another area where the government has hinted at.

They could be targeting. But right now there is a stepped up cost basis for long-term capital gains on nonqualified equities, real estate, a fantastic asset class to be passed on generationally also has the ability to have that stepped up cost basis so if I bought my house at hundred thousand dollars and it's worth $500,000 on the day that I pass away my beneficiaries don't have to pay tax on that $400,000 gain. By the way, if I gift the house to them, then they may have to pay tax on that again. So it's it's something that you really need to look at because I hear a lot of people saying one to put the kids on the deed to my house you. You may want to rethink that. But if I have an investment portfolio that I've bought my positions in and paid $100,000 and now it's worth $1 million I pass away in those pass on in a nonqualified investment account where I've held them for the entirety of that growth my beneficiaries as tax laws stand don't have to pay tax on all of that gain life insurance even if I have an IRA where I'm taking money out and required to pay the tax on it. I may take the net proceeds from that and buy some life insurance because that can leverage to pass along tax free and especially for like family businesses, family owned farms, large tracts of land. If you've got a net worth where you are in the estate tax range. Another area that the government has hinted that they will probably adjust and focus on, but right now it's it's a pretty large amount of money but if you've got assets that would put you into that category you really need to look at life insurance because I've seen situations where children had to sell the family business dismantled the family farm and landholdings just to pay the tax on a substantial amount of money where the parents did not intend that they clearly did not intend that they wanted the children to continue with the car dealership Empire, but the children ended up not being able to hold onto that because of the tax that was due on it that the parents wanted the children to own the tracts of land and and the farm, but the children were not able to hold on all of it because the taxes due on it. So there are a lot of areas here where the government has already hinted, but with IRA Scott that's a big one where they have made their intentions clear. In fact, they've already passed laws that make IRAs less favorable for generational transfer and a lot of people actually use to put their IRAs in a trust where maybe they didn't want their children to blow through their hard earned life savings. I want them to have it.

I just don't want to be able to have them blow through it right. Well, they they put them in a trust so that the trust would control it and only distribute the minimum required distribution. Now those need to be completely dismantled and redesigned because there are no required minimum distributions any longer except for one final 100% minimum distribution at the 10 year mark so that same person that you didn't want to have or blow through all the money and because he wanted to save taxes you put it in an IRA trust now is going to do exactly the opposite of what you intended.

Yes, there's a lot of planning that was done that now needs to be revisited. Scott that's what people talk about a trust fund person with a trust, but that's that's what they're referring to one that is one you know that that is specifically one with tax-deferred retirement dollars. There are other ways to structure trusts that can be very effective. Family foundations. I mean the Ford foundation there. There are other ways that you can pass access generationally but a lot of those are actually structured off of life insurance chassis. The foundation or the trust itself actually buys life insurance on the next generations life to fund the even next generations amount of trust fund funding feeling a lot more education needs to go into life insurance because we hear that term. Some people don't even want to talk about it. It sounds you little a little too finite. Scary.

But it's really just one control of the many that are in a financial person's toolbelt. Now I am a Dave Ramsey smart Mr. Pro right and Dave has a very specific approach to life insurance by term and invest the rest and by all means, that is the right approach for the vast, vast, vast majority of insurance needs. We need to protect our family.

We need to replace our income. We need to cover debts right term insurance is the best way to do that. Were talking about pretty advanced tax planning is a little bit of a different concept and a little different structure and requirements for the tools that that could potentially be used. There is no financial tool that is always evil and always wrong.

Likewise, there is no financial tool that is always the right solution, but we needs to examine on a case-by-case basis and I would say the vast majority of life insurance that gets sold. If it's not term is probably this sold and being misused. There are cases, however, where we want to achieve specific goals where other forms of life insurance can help to fund generational wealth transfers can help to offset the potential for long-term care expenses can pass a tax-free death benefit can take a taxable asset such as an IRA and leverage it and then turn it into a tax-free inheritance. There are reasons why other pools are out there and available and everyone's situation is different. Even Dave Ramsey himself. Much of the advice he gives on a show is then buttressed at the end by you should talk to a smart Mr. Pro about your specific situation, because it a 510 minute segment of show they can address all you and him and his audience is generally an audience. No offense and nothing nothing to to take away from these people.

But his audience's messages geared toward those who have had some trouble, and struggles dealing with debt for that audience, particularly that is the right message that they need to cover their family protect them pay off their debts replace income and they need to do it for the cheapest price possible. That is absolutely going to be through term insurance and they need to get investing. To begin building wealth that's investing the rest right of people.

This is a tax show when we get in the life insurance here, but people love to get term insurance because of the cheap cost, but they always forget the rest of the story which is to invest the rest. The rest would be what is the price if you wanted to have a permanent insurance versus what is the price. If that insurance is going to disappear on you or in 10 or 20 years will guess what the insurance companies don't issue term insurance to people who they think are likely to die during that term. In fact, of vast majority, 98% or so of term policies never pay out, they just lapse after collecting 10 or 20 years worth of premium payments.

That's why they're cheap. So what the differences is that with permanent insurance. The insurance company knows there on the hook to pay a tax-free death benefit at some point in time and they price it accordingly. If you want to really fully follow the advice that Dave has. You need to buy term yes but you should never forget to invest the rest because in 10 or 20 years when that insurance goes away the need for insurance hasn't gone away. If you have not been saving and investing and building up an amount that can replace it. And as you pointed out, you may not be able to buy a replacement policy at that point is, at least in any kind of stratosphere of a number that you were hoping for. To begin with, yet a young age and good health. Your best assets and guess what both of those things tend to go away over time. 919-300-5886 is the number what I'm hearing is that you have to take care of yourself because the rules can change, situations are different and what are some of the like.

The gotchas that are out there. If the government, redirecting back to the tax discussion is changing the rules as things go.

Perhaps sliding things through the how to know what they did. What are some things that we should be looking for. Maybe in the future. That type of thing. Why think one of the gotchas is tax deferral right it's short-term pleasure. While you don't have to pay tax on on those dollars but it's long-term pain and that tax is due in retirement when were no longer earning a paycheck with which to pay it on the day we retire. We got a finite amount of money that the concern for so many is what how do I make this last and yet we owe, what is one of our largest expenses in our lifetime taxes right out of that.

So if you look at that balance and you got $1 million. Fantastic. You've done a great job but you don't have $1 million you got a debt hidden right there inside of your retirement account and being that I don't like that and Dave doesn't like that you know we would think that hey maybe we should rethink this IOU that we have to the IRS, we want to pay off every other debt. But your debts to the IRS compounds at whatever growth rate your money does if it growth is your goal with your retirement dollars, which it should be obviously will guess what you and the IRS is goals are in alignment and that's rarely ever the case, but they want your account to grow to and whatever rate it grows by say 10% say 12% say 15% on average over the course of 30 years of your working career will that's the rate of interest that you are now accruing on the debt that you owe to the IRS. I would love to have $1 million but I'd rather pay tax on 100,000 right and so if I can pay tax on 100,000 over the course of my working career and be done with it and then build up 900,000 800,000.

It's still better than having that million dollars. They are, and having to pay 25% of it to Uncle Sam during the course of my retirement while trying to make my money last.

So that's a gotcha that is not to say that people who have deferred their tax up to this point have done things wrong.

In fact, you've probably done things right back in 1986 the highest tax bracket was a 38% tax bracket and you only had to be make about $68,000 to fall into that tax bracket today. The highest tax bracket.

You have to be making about $600,000 to get into the upper 30% so tax rates and brackets have come down but if we look where we are today and look forward to for taking a proactive tax planning approach, then we probably will realize that we have a window of opportunity right now to buy the IRS out of our retirement nest egg to buy them out of our retirement business to pay them off so they cannot control the terms of how we distribute our money to ourselves and how much we actually get to keep. That's a big gotcha now here's another gotcha if I've got $1 million in my IRA account and I need $50,000 a year to live on. So I think I'm going to pull out just $50,000. No you're not. You gotta pull out enough to compensate for your tax and and then you get to keep the rest. But guess what that distribution probably also causes your Social Security to become taxable.

It could be tax-free if that was your only income, but if you got other taxable income. You can hit some thresholds were now you actually get taxed on your Social Security income. Some of it could be 50%.

A lot of it is going to be at 85%, meaning that that is included in your tax return as taxable income and people say well I felt like Social Security was a tax all the way along the way. No, it wasn't your government was holding your money in reserve for you. It actually wasn't a tax when they give it back.

That's when they can potentially tax it. If your income is too high.

Essentially, it's a means tested. Also your Medicare premiums. Part B is means tested. It's called Irma income related means assessment and and if you have income that is over certain thresholds as a single filer as a married couple filing jointly, it can cause yours. Medicare premium part B to bump up right now. This year I think the base is $147 a month. This deducted from your Social Security. But if your income crosses certain thresholds, it can go up $271, or even as high as 400+ dollars a month on your Medicare premium so it's a triple whammy right when he number one, the gross planning mistake. I've got this lump sum I didn't think to account for the taxation of that number two. Every time I take a distribution from it. It actually causes my Social Security to also be taxed in whammy number three is like press your luck here. Whammy number three is that this the Medicare premiums are our income related means tested and assessed Irma and overarching whammy on top of that, these roles most likely won't even be the same. By the time you actually go to retire and will and will be less favorable for us right there and they're not getting more generous. There they are going to be less favorable become less favorable over time, not just my opinion right but all plans are based on some level of assumption.

So if we assume that there probably going to get less favorable and then they do were ready. If we assume that they're going to stay the same and then they get less favorable than we have less money than we anticipated and so I'd rather be on that side of the assumptions that if I am wrong.

Things are better than I thought not. If I am wrong. Things are worse than I thought. Right if somehow pigs fly and situation got more favorable to be in a better position to take advantage of that. Somehow if it did, although we will not hold our breath 919300586 it's so important. The overarching thing that I'm hearing here is that rules can change, and even the rules that are in place are complex and layered, and nuance. Depending on what your situation is. That's why it's so important.

Even if you're self-taught and let's say you bought it up a relatively up-to-date investment book from two years ago all the things that you just talked about Peter have shifted in that time yet so so important to call 919300586. Talk to someone who knows what they're talking about has experienced and knows maybe perhaps can with wisdom can know how things may change in the future. Peter, it's been a great show. Anything else to take us out of this tax focused episodes like I want to talk about a couple quick opportunities that we have right now will dive more into these in the coming weeks and months.

But right now until the year 2026. Taxes are set. We know that they are going up in 2026.

We know we have the opportunity to do Roth conversions throughout that time.

Even if you're falling in the 22% bracket today that's going to become the 25 and there's a 24% bracket right now between those so Roth conversions a huge opportunity. We crunch the numbers on those if you go to a tax preparer and you say hey how can I get more contributions into my retirement accounts. There probably going to tell you, will you got a $6000 $7000 limit on your IRA contributions based on how old you are but right now until April this year it's April 18 I think right now until the tax filing deadline, we can actually make contributions for last year and this year and if you're married, even if you have a stay-at-home spouse, you can make spousal contributions so we could theoretically get four times that annual limit put away into retirement accounts right now and by the way, if you got excess cash sitting around in the bank earning next to nothing. Certainly getting it into some kind of retirement account can make that a little bit more fruitful for you contributions for kids.

Those are another big one custodial minor Roth IRAs are a fantastic option where you put some money into your kids retirement account. There are a couple different benefits and potential uses for that. So a whole lot of opportunity will touch more on those into coming weeks or as you've mentioned Scott very very well that folks can call me and they can get information on that. And by the way, we'll talk directly to me and I will talk as fast as I do on the radio 919300586 is never to talk to your shot himself. Thank you so much for joining us for another episode of planning matters planning matters.

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