All right, we can go ahead and get started now. It’s two minutes after the hour and I’d like to just point out my voice is a little raspy today. Forgive me. I uh was blessed to be invited to my younger cousin’s bachelor party this weekend. So, I had to herd cats basically this entire past weekend. Um, all in all, a good time. But, let’s begin. If you can’t hear me, if I might have uh said something you didn’t understand, pop it into the chat or the Q&A section. I’ll try to catch it and go back. But I’ll do my best. I’ve been trying to save up my voice all week for today’s webinar. But anyway, good afternoon everyone. Hey, my name is Baptiste Brunner. I’m a Texas-based financial consultant with Allion. I cover the Gulf Coast in the southeastern parts of the country and just part of a team of with the credit union of financial professionals who give regular educational webinars. Again, I’d like to just start by thanking all of you for taking the time to learn about, you know, your IRA and retirement planning, how to get that maximum benefit from your IRA or your retirement accounts in general. Find ways to save you some money in taxes. avoid some potential costly mistakes that are common. You we’ll cover them today. You want to learn more, ask us questions. We’re here to help. Uh presentation be probably about 4550 minutes long. And as always, we’re going to reserve time at the end to answer any questions you might have. When that time comes, mentioned them already, but go ahead and identify the Q&A as well as the chat section. I’ll be sure to get to those questions. Little bit of housekeeping, though. Please don’t throw an AI notetaker in here. Not allowed to do that. Um, if you want to take photos, I can’t stop you from doing that, but we’re not allowed to have any AI note takers in here. Uh, my next webinar’s coming up. I love doing them on Saturdays. Our members seem to really like doing it on Saturdays, too. So, uh, this one will be on the tax planning changes, some other tax planning as well, but just, you know, four stages of retirement with tax planning. It’s going to be Saturday, September 19th at 10 a.m. Central, that’s a really important one. I’d say this is a top three webinar if I had to put that, you know, up there along with um couple other ones, but tax planning, very important. And also another one in estate planning, you know, principles of preserving your wealth, wanting to make sure all your ducks are in a row in case anything were to happen to you. You know that you can sleep well at night because you have your state matters taken care of. That’s going to be next month, Wednesday, October 7th, at 2 central, 3 Eastern. And of course, our team at Alliant Retirement Investment Services. We’re focused on helping you, our members, understand the ins and outs of investing, saving for retirement, and of course, much more than that. But go ahead and take a look at our website, Aerys AI.creditun.com.
Put a slashevents in there to find our webinar schedule. I’m not the only one that does webinars, but got plenty of other folks that do. Team of 10 guys that do. We also have our podcast, and we also have just a really good resource center. Go ahead and check it out. Feel free to take a photo of this slide, but these are some of the resources available to you just for being a member with the credit union.
All right, so again, today we’re going to talk about savvy IRA planning. And it’s not necessarily for baby boomers. Those who are really retiring aren’t necessarily in that generation anymore. But savvy IRA planning for retirees, let’s call it. And you know, a lot of people have a plan for accumulating money for retirement, but far too often that’s just where the planning stops. And that’s not good enough. And the reality is that a sound distribution strategy, in other words, a plan for taking money out of your retirement accounts is just as important, if not more so. And when it comes to your IAS and other retirement accounts, you probably have a lot of questions like, “How much are my withdrawals taxed? When do I need to begin taking withdrawals? How much will I have to take? What happens to my IRA when I pass away? And perhaps most importantly, how can I minimize my taxes so I can spend more of my hard-earned money?” And you know, years ago, life was simpler in many ways. Retirement was really no different. Many people went to work and then when they retired they collected a pension and social security benefits. There wasn’t as much needed in the way of planning and people weren’t all that concerned about running out of money since they had all this income from between their pension and their social security benefits. You those were generally guaranteed and for most people that along with whatever else they had managed to save along the road was enough. Today though things are different. companies and other organizations. They’ve abandoned pensions in mass numbers and instead they’ve turned to 401ks and similar plans. That’s shifting many of the risks they once shouldered onto the backs of employees and their families. Retirees are now responsible for making more of the critical decisions that will determine how successful they are in retirement. And that includes keeping up with changes to the law. You know, that just happens all the time. For instance, the law known as Secure Act 2.0 made nearly 100 changes to the rules for retirement accounts, some of which we’re going to cover today. But the bottom line of all this though is that today, more than ever, when it comes to retirement, you’re on your own. On top of that, your retirement savings may have to last you a lot longer than you think. You know, according to many studies, over 40% of retirees underestimate their life expectancy by five plus years. So, take a look at this chart to see what I mean. If you’re a man and you’re 65, you have a pretty good chance of living to at least 85. If you’re a woman and you’re 65, you have a really good chance of living past 85 than you do dying before it. And if you’re married, both you and your spouse are 65. There’s a very strong chance that at least one of you will live to be at least 90. In fact, there’s about a 33% chance that at least one of you will live to be 95. And that means your retirement savings could easily have to last you 20 to 30 years or even longer than you expected. And that’s probably much longer than a lot of you even considered. And put all of this together and makes having a plan all that much more important.
So with that in mind, one of the best things that you can do as you approach retirement, if you’re not already there, is to beef up your retirement savings by contributing as much as possible to tax favored retirement accounts. So although contributing at younger ages is more powerful because it gives your contributions more time to compound, you may have been unable to save as much as you wanted to because you were bogged down by mortgage payments. You know, maybe you were saving for a child’s education. you just had other expenses. Chances are you no longer have those expenses in retirement or you know they’ll be ending soon once you finally do retire. But as a result, you may have finally you might pardon me, you may finally have discretionary income that can be used to fund your retirement accounts. So just how much can you contribute? And that depends on the type of retirement account as well as a number of other factors like your age. But let’s begin with traditional IAS. traditional IRA or an individual retirement account is a personal retirement account that offers certain tax benefits and contributions may be taxdeductible and while your money is inside the IRA it grows tax deferred ultimately when you take money out of your IRA the amount you take out is generally then added to your income we’ll talk about that more later also but in 2026 the maximum that you can contribute to a traditional IRA is 7500 if you’re 50 or older by the end of that year. Uh then you have a catchup which brings you up to 8,600 a year. You can’t always make a traditional IRA contribution though. You know, for instance, to make a traditional IRA contribution, you must have what the tax code refers to as compensation. And for most people, compensation is just earned income. But it also includes a number of other types of income such as taxable alimony. does not however include things like interest payments, dividends, capital gains, social security, or unemployment compensation. So essentially, if you are fully retired and living off of your retirement plan and your social security, you can’t do an IRA contribution. You can move money into it. You can’t put new money into it, though, basically. But in the past, age was also a barrier that prevented some people from making traditional IRA contributions. That hasn’t been the case since 2019, though. And traditional IRA contributions are deductible unless you or your spouse are active participants in an employee sponsored retirement plan and your income exceeds an applicable threshold amount. And those limits depend on your filing status and who’s contributing to employer sponsored plan. And many of you probably know that there is another type of IRA. It’s called a Roth IRA. And Roths are similar to traditional IAS, but there’s some key differences. And I love Roths. Talk about them on many of my webinars. But one of those differences is that you don’t get a tax deduction when you make a Roth IRA contribution. But once your money is in there, it grows tax deferred and then you get to take out that money tax-free down the road. you paid the taxes off early, you take everything out including the gains tax-free generally speaking. So that’s the big benefit is that the Roth IRA distributions can be tax-free in retirement. So, if you’ve had any Roth IRA though for more than 5 years, aside from this, if you’ve had any Roth IRA for more than 5 years and you’re over 59 and a half, then all of your withdrawals from any of your Roth IAS will be tax and penalty-free as part of what’s known as a qualified distribution. So even if you need to take the withdrawal sooner though, you can always take out your Roth IRA contributions, not earnings, but you can always take out your Roth IRA contributions tax and penaltyree. And same some of the same contribution rules that apply to traditional IAS also apply to Roth IAS. For instance, that same contribution rate, $7,500 plus an additional $1,100 a year if you’re ow 50 and up. But those Roth IRA contributions are also subject to the same compensation rules as traditional IRA contributions. Now, if you have sufficient compensation, then the only thing that could prevent you from making a Roth IRA contribution is having too much income. And you can see the income limits up here on the screen. Just note that if you’re a single filer, as long as your income is under 168K, you can make a full Roth IRA contribution. uh if you’re married doing a joint return, it’s $252,000.
Now, while some while some of our future retirees and current retirees, you know, those couples, they like to retire at the same time. Often times though, one spouse retires before the other. And in such cases, you may be able to take advantage of spousal IRA and/or Roth IRA contributions. And these are special contributions that allow a spouse with compensation to make a contribution to the traditional IRA or the Roth IRA of the non-working spouse. So in essence, the non-working spouse can use the working spouse’s compensation as their own to declare that they’ve made an income allowing them to contribute to their IRA. And you might also be asking yourself, well, can $8,000 contribution really make a difference when it comes to my retirement? And the answer is absolutely. So, here’s just a quick example. Suppose you’re 55 now and you plan to retire at 65 in 10 years. Kids are out of the house. They’ve flown the coupe already. You finally have a chance to focus on saving for your retirement so you can make a full $8,000 Roth IRA contribution annually until you retire. And let’s just say for making consistencies with this argument, you you’re going to have a 6% earnings per year, which is conservative compared to the most recent times. Still good earnings. So 6% per year. By the time you retire in 10 years, you’d have come up with more than $10,000 or more than $100,000 that at that rate. But remember, we’re planning for you to live until you’re 90 95. So, let’s say that you leave that account alone and it continues to earn 6% per year. You’re using the funds from your 401k and the money that you started saving when you were 20 to 65. These are funds that we’re putting towards the back half of retirement. So, let’s say that you leave that account alone and it continues to earn 6% per year. By the time you reach 85, even if you never put another dollar in after the first 10 years, you’d then have earned up to and turned it into an account of more than $350,000. Plus, pardon me, since you made your contribution to a Roth, that entire amount would be taxree. Be nice to have 350K that’s 100% taxree, wouldn’t it?
still think just $8,000 a year can’t make a difference. If you’re still thinking that, I hope this changes your mind. So, just think if you’re married though and you’re able to make that $8,000 contribution to both yours and your spouse’s IRA, well, now you have twice as much. This example uses an $8,000 annual contribution just for simplicity. Remember, it’s 8,600 right now. That number is probably only going to go up as years go by. So, if you’re still working, you have access to one or more plans throughout your current employer, you might be able to do even better. While the limits on contributions can vary depending on the type of plan, you know, 401ks, 403bs, 457s, simple IAS, SE IAS, they allow you to contribute much, much more than just regular IAS. And that secure act that we mentioned earlier introduced a new special ketchup. Remember, you get a catch-up starting at 50, but from the years of 60 to 63. For these kind of plans, it’s an additional 11,250 as opposed to an additional $8,000. So, it’s 24,500 as your contribution limit. When you’re 49 and younger when you’re 50, it goes up to 325, but once you’re 60 and 63, there’s that special catchup down here at the bottom. Now, you can contribute 35750 a year. But again, depends on your plans provisions. you can be eligible to receive employer contributions such as a company match or profit sharing that’s separate from your contributions. The real number if you’re doing your contributions plus your matches somewhere around 74 $75,000 a year. Now, of course, at some point, you’re likely to retire, and when you do, you’ll be faced with one of your first major retirement decisions. And what to do with the money that you’ve accumulated in your employer sponsored retirement plan. You know, in many cases, people choose to roll those funds over to a traditional IRA or a Roth IRA because they tend to offer greater control over one’s retirement funds. They’re not the only options, though, and such rollovers are not always the best move. And believe it or not, you may have as much as six different options for your employer sponsored retirement plans funds for whenever you leave work. And you can see them here on the screen. Each of these potential alternatives, they offer unique benefits and drawbacks. So, it’s usually a good idea to discuss your options with a financial professional. That way, you can make those savvy decisions that are best for you and your family.
All right. So getting money into your retirement accounts is only the first half of the story. Coming up with an efficient way of taking those funds out and avoiding costly mistakes is the other half. And this is far easier said than done, particularly when it comes to your traditional IAS, 401ks, 403bs, etc. In general, withdrawals from these accounts are taxed at ordinary income rates. Just like interest, your withdrawals are added to your income and taxed at whatever tax bracket you happen to find yourself in. And if your overall income is relatively low, you might have a low tax rate for your withdrawal. On the other hand, if your overall income is higher than when you were working, your tax rate will be higher and more of your IRA withdrawal will end up in Uncle Sam’s hands. Nobody wants that. But here’s a quick look at the tax brackets for single and joint filers for 2026. These numbers change every year with inflation, but you can find these online as well. One of the troubling aspects of IRA planning is that the tax rate in your future distributions, it’s unknown. Even if you can project your income with relative confidence, there’s no guarantee that tax rates will remain the same. And while it’s hard to find someone who doesn’t think that they paid too much in taxes, now the reality is that the top tax rates today are pretty low in historical context. So, take a look at this chart. See what I mean? When the income tax was first introduced in 1913, something that should have been eradicated in 1914, but I digress. The top rate was only 7%. But within just a few years, top rate had already skyrocketed to over 70%. Dropped back down to as low as 25 after World War after World War I. Then that top rate jumped to 63% in 1932. And from there wasn’t until more than 50 years had passed where in 1987 top tax rate finally dropped back below 50%. But he knows in the top bracket keep more of their income and they were forced to give over to Uncle Sam. Now of course not everyone pays that top rate. In fact it’s only very small percentage of taxpayers that do but it still affected median households because the second highest third and fourth were also much higher than they are today. That said, though, with our national debt currently at an all-time high, a budget that hasn’t been balanced since, I think, the Clinton administration, and fiscal troubles for many of our entitlement programs like Social Security, Medicare, it’s possible that tax rates could go up across the board. That makes coming up with that right plan even more important. So, to make matters even worse, if I haven’t scared you already, your IRA withdrawals can cost you in a lot more ways than just adding to your income. They can also cause you to be phased out of itemized deductions, personal exemptions, and various tax credits as well. They can increase your exposure to that 3.8% net investment income tax. If you take an IRA withdrawal, you might have to include more of your social security benefits and income and then causing your social securityities now to be taxed and your Medicare Part B premiums can increase. And if you haven’t heard of Irma yet, IR Ma, that will be your Medicare cost one day. And those grow dependent on how much money you live off of in retirement essentially. That’s just the beginning. But if you want to try to avoid these issues, you need to make a plan. And one way to minimize the tax impact of retirement account withdrawals is to avoid taking withdrawals altogether. That allows your retirement money to grow tax deferred and keeps that nasty taxable income off of your tax return for as long as possible. You can’t put off taking withdrawals forever, though, because once you reach a certain age, the law will require you to begin taking what are known as required minimum distributions or RMDs for short. So, if you have a pre-tax 401k or a pre-tax IRA, Uncle Sam is going to say, “Well, now that you’re 73 or 75, it depends on when you were born, but now you’re this age, you’ve had these funds in this account pre-tax all these years, and you haven’t paid me yet. I’m now going to require you to take money out of these accounts.” It’s not fun. A lot of people don’t know about these ear early enough, and that’s why there’s some other things to do. But if you were born before 1960, you have to take it at 73. If you’re born after 1960, you don’t have to start taking them until 75.
But a final thought before we move on. If you don’t take out the right amount of your minimum required minimum distribution, the IRS will penalize you 25% of the amount that you did not take out. So, if you were supposed to take out 10 grand and you didn’t take out 10 grand at all, the IRS will penalize you 2500 bucks.
So, to calculate your RMD, they have these tables. Tables change every year. Let’s make it simple. If you just turned 75 this year, I’m sorry, 73 this year because it’s still the 73 folks. If you haven’t taken it out, you haven’t heard of R&Ds yet. Easy to find out. You find the uniform life expectancy table. It’s on their website. All you do is you take your December 31st balance from the end of 2025 and divide it by 26.5. That’s your amount you’re supposed to take out this year. For next year, for 2027, you base it off of your remaining balance from 2026 and so on and so forth. But the number changes every year. They change the numbers in these tables, but it also changes each year that you go. If you have more questions about it, just give me a ring. Happy to help. Of course, most people just don’t think about things in terms of factors or life expectancy. So, just here’s a chart. Think you’ll help find this one helpful. It shows the approximate percentage you need to take out of your IRA from 73 to 90 just in order to steer clear of that 50% penalty. But if you look, you’ll see that each year the percentage you need to take out does increase. That doesn’t necessarily mean you need to take out more money each year than the last though, as that also depends on how much your IRA gains or loses. So if it gains more, you got to take out more. If it goes down, you got to take out less. But RMDs can actually get much more complicated. And as we’ve already discussed, the penalties for making a mistake can be pretty severe. And with that in mind, let me tell you about three of the most common R&D mistakes people make so you can avoid making them. Just remember part of any savvy IRA plan is just minimizing these cost and mistakes. So one common RMD mistake people make is incorrectly aggregating their RMDs between different types of retirement accounts. For example, suppose you have a 401k and an IRA. After calculating your RMDs from each account comes out to 4,000 and 3,000 respectively for a total of $7,000. Now imagine your IRA over here is earning a higher rate of return than your 401k. might be tempted to just pull all that seven out 7,000 from your 401k, leave your IRA alone and just call it a day. After all, what’s the difference? They’re both retirement accounts and whether you take 7K from just your 401k or 4,000 from your 401k, 3,000, it’s the same impact in your tax return, right? That’s logical thinking. Federal government doesn’t really think all that logically most of the time. So, the tax rules are anything but logical and they specifically prohibit you from doing that. An RMD for one type of retirement account like an IRA can never be taken from an RMD of another account like a 401k. Another common RMD mistake is aggregating your RMDs between spouses. Same thing as the first example. Husband can’t take out the RMDs all out of his account or all out of the wife’s account and say that that’s good for the husband and the other spouse. You both have to do it. But a third common R&D mistake is forgetting to take an R&D altogether. Just remember, it’s a 25% penalty on the amount you weren’t supposed to take out on the amount you’re supposed to take out. If you’re supposed to take out 10 grand and you don’t take it out at all, you owe Uncle Sam $2,500. I don’t like it any more than you guys. Just the rules. Let’s vote against these next time. Now, one strategy to minimize the impact of taxes on your retirement savings is to avoid taking distributions from your IRA for as long as possible. And this allows your retirement money to enjoy its favorable tax deferred status for as long as possible. It also helps to keep income off of your return, which as you’ve already learned, not only helps keep your income tax bill lower, but can also help prevent increases in other costs tied to your income. There are some major downsides to this approach, though. Most notably, as your IRA gets bigger, so does your problem. You know, think about it. If your tax bracket remains about the same, your IRA grows, so does the amount that you’re eventually going to be required to take out by Uncle Sam later, you’re going to have more RMDs and be thrown in bigger tax brackets. So, it’s much different from other things you may be used to. So, imagine you buy a house for 200K and have a $50,000 mortgage. If the house doubles in value to 400K, does your mortgage increase to 100K? Of course not. But you get to reap all the benefits of that appreciation. But that’s not the way it works with IRA and retirement accounts like 401ks. If those accounts double in value, you don’t get to keep all the gains. Uncle Sam is well, he feels he’s entitled to his share. Plus, by waiting to take distributions for as long as possible, the required minimum distributions later on will be larger, and this could increase the impact of some of those side effects we’ve talked about. Thankfully, there are ways to fix this. So, that to go back to the mortgage analogy for a moment, you can own your IRA free and clear so that only you benefit from future appreciation, and it’s called a Roth IRA conversion. Many of you may have heard of this before from some of our other webinars, but it’s our next savvy IRA planning strategy. So, a Roth IRA conversion is the name given to a special type of transaction where you can move money from your pre-tax retirement account to a Roth IRA. When you make a Roth conversion, the amount of money you convert is just added to your tax return for the year. It’s taxable whatever income tax bracket you’re you happen to be in. But here, let’s take Jill. Jill has 100K in a traditional IRA. Like to convert it to a Roth. We’ll talk more about why she might not want to do that in a moment. But if Jill moves forward with her 100K Roth IRA conversion, she’ll have to add 100K of income to her tax return for that year, which will be taxable at whatever rate Jill happens to be be. Because this is a big decision and can have a significant impact in your taxes, it is always best to discuss this option with both both your CPA, tax repairer, whichever on your tax side, and your financial professional as well. But why would you voluntarily choose to make one of these Roth IRA conversions and pay taxes before you have to? Well, there’s in fact a lot of reasons. Perhaps the most common reason is one we’ve already discussed and it’s just to pay off Uncle Sam now so that you own your retirement account free and clear for life. Just remember with the Roth IRA, you have the potential for future tax-free withdrawals of everything in your account. So, right now, we have the lowest tax rates in quite some time. and we’re scared, we’re all kind of worried that they might go up one day considering our current balance sheets in this country. So, if they have to go up later, let’s say you convert it to 12% now, but that 12% bracket goes up to 18. Wow, you just saved a lot of money in taxes. But remember, if you’re over 59 and a half and you’ve ever had any Roth IRA for more than five years, then all those withdrawals from those Roth IAS will be tax and penaltyfree for a while. Something else to keep in mind is that unlike Roth IRA contributions, there are no restrictions on who can make Roth IRA conversions. You can be you can’t be too old, you can’t be too young, you can be working, you can be retired. There are no minimum amounts of incomes or maximum amount of incomes you can have. You understand what I mean? If you want to convert your IRA or 401k to a Roth IRA, there’s nothing in the tax rules that will stop you from doing so. This is very pertinent. Most people are good candidates for a Roth conversion. I would say of the folks that I meet with, nine out of 10 folks are good are good candidates for a Roth conversion to some degree.
Now, the potential tax-free nature of the Roth IRA may also provide you with additional benefits such as a hedge against tax rates rising in the future. As we mentioned, you know, when it comes to retirement, there are a lot of unknowns. So, what will the market do? What will inflation be like? what will your tax rate be and so on and so forth. But the last one, taxes, is a major concern for many retirees and one we’ve been talking about throughout this webinar, but a Roth IRA conversion can help manage that risk by paying taxes at today’s known rates. If tax rates rise in the future, tax-free distributions from Roth IAS will be even more valuable. Of course, if you think your tax rate will be lower in retirement, then that’s something that should be covered and considered when having that run in a financial plan. Also, since Roth IRA distributions in retirement are generally tax-free, they typically don’t impact the other things tied to your income that we discussed earlier. So, if we’re trying to keep our social security fully tax-free, having a nice chunk of taxfree money that won’t be added to your income really helps you hedge right there. Another big benefit of the Roth IRA and one that many retirees do find attractive is that Roth IAS also have no RMDs associated with them. So remember all that bad talk we were having with the RMDs and required minimum distributions. Uncle Sam wants this cut, you already paid them. There’s no RMDs on a Roth IRA. So for good legacy planning purposes or wanting to leave a good amount of money to your spouse should anything happen to you first Roth conversions they get to inherit this and they have no RMDs on their inheritance in this case they get to take those funds on tax-free and it can be passed down generations and generations and never be touched
in the tax cuts and jobs act however it does eliminate the reccharacterization option. This really isn’t a big deal, but for it eliminates the recarerization option for conversions made in 2018 and later. So, if you convert your Roth IRA now or in the future, you’re stuck with that decision. But if you are going to make the decision to convert to a Roth IRA, you’re more than likely fully in and committed to it. It’s not that big of a deal here. But even if your tax bill is higher than you thought or if the conversion accidentally phased you out of a credit or if your investments dropped in value, no matter the reason, you just can’t reccharacterize them. But with that in mind, it’s very important that you are sure you want to convert as mentioned your Roth IRA before doing so. So here’s three questions to ask yourself before converting. Do you have a rough idea the conversion’s impacting your tax bill? Financial planning can help you out with that. Do you have a a plan to pay those resulting taxes? Another thing that a financial plan can help you with. And do you have a reasonable expectation that the benefits of prepaying your taxes like this make sense in your overall plan? A financial plan can help you with that. But to do a Roth conversion, your answer should be yes to all these questions. And one savvy conversion strategy might be helpful called filling up a bracket. So look, if you are in the lower end of the 22% bracket and you have all this space to go until you hit 24, fill up that 22% bracket. Don’t you, if you’re at the 24% bracket level and you want to convert a lot of money, well, you might be reaching into the 32% bracket. Doesn’t make a lot of sense to pay 8 points more on top of what you’re already being taxed. Just stay within your bracket. A lot of times a fixed rate works as well. It’s a fixed amount that you come up with your financial professional, but filling up the bracket allows you to stay within your tax bracket while converting and just filling up that amount. And that generally is working with a team between your tax preparer, CPA, as well as your financial advisor.
And Roth IRA conversions can be especially helpful and useful if you’ve had a low income year. And for example, if you’re a business owner with unusually low sales one year, um you’re paying high non-recurring medical bills. So now you have that big tax deduction. Or maybe you’re retired but not yet receiving social security benefits or a pension or an IRA distribution yet. These are questions to ask to see if a Roth conversion is a good move for you. And again, our planning software can help you figure all of this out. But of course, these strategies aren’t for everyone. As you can see, there’s no guarantee that the conversion will achieve the intended result. This is a disclaimer, but again, nine out of 10 folks are good candidates for this. And does a full conversion always make sense? No. But having a nice pool of tax-free money, boom, money that you can reach into whenever you need tax-free. You’re not jumping tax brackets now. you can avoid jumping a bracket from reaching into an IRA more by reaching into your Roth IRA. It offers you a lot more flexibility. You’ve now had another basket to put some eggs in. And there’s a good chance that at some point during your life, you’re going to want to move around some of your retirement money. Maybe it’ll be done as part of a Roth conversion. Maybe it’ll be to make a new investment. Maybe to work with a new adviser. Whatever the reason, you should be aware of how to move retirement money so that you don’t make costly mistakes that could completely derail your retirement. In general, there are two ways you can move retirement money. You can either move it directly or indirectly.
Moving money directly though is usually the savvy choice. So, look, all it is is you’re moving money from a 401k to an IRA or from an IRA to another IRA. If you’re doing it directly, let’s say you have an account with Fidelity and you want to move it to Alliant Retirement Investment Services, you have Fidelity, make the check out to the new custodian for your benefit. No problems. Everything goes into your new IRA. No penalties or issues. However, when you do a direct one, they’re going to make the check out to you, and it’s on you to then move it over. But if you don’t do it within 60 days, you’re going to have to claim everything as income of the year. So if you’re moving over $500,000 from your 401k to your IRA, if you do it directly, there’s no chance of anything bad happening. If you do it indirectly where they send it to you and then you send it to the other folks, Uncle Sam is not that nice to say, “Hey, even if you lost the check, sorry, 60-day rule. You can have the new check issued, but I hope you get it in before the 60-day deadline, or else I’m adding half a million dollars to your income for the year.” And now whatever income you had that year has half a million dollars added on to it and you’re paying at the 36% tax bracket rather than the 12.
This is what it looks like whenever I say doing the direct one. New custodian for your benefit though. But another essential component of any savvy IRA plan is just making sure that you coordinate your IRA planning with your overall retirement, estate, tax, education, and financial plans. And your IRA and other retirement accounts can impact each of these areas. It’s just important to factor those things into your planning. And some of you may have all of your savings in retirement accounts, but many of you probably have some of your savings in IRA, 401ks, and you know, with other savings in a non-retirement account. And if that’s the case for you, one savvy strategy you may want to consider is coordinating your IRA with your overall plan and carefully selecting which of your investments are purchased with IRA money and which investments are purchased with non-retirement account money as well. But doing so could help you meaningfully lower your tax bill. We can show you how that’s done, too. But here’s an example of what I mean. Let’s imagine that you have 100K in an IRA and 100K in a nonIRRA account like a brokerage. Let’s also imagine that you want to purchase 100K of bonds with a hypothetical interest rate of 4% and $100,000 of stock that will pay hypothetical qualified dividends of 4%. Also assume that you plan to live off of that income in these brackets and that you’re in the 24% range. So in the first scenario, you see all the stocks are purchased inside the IRA account and generate 4 grand of qualified dividends. And in general, qualified dividends receive special tax treatment and are taxed at a long-term capital gains rate. These rates are lower than ordinary income tax rates, generally about 15%. However, because this investment was made inside an IRA and all withdrawals from an IRA are taxed at ordinary income tax rates, if you take a withdrawal of that 4,000 of qualified dividends, there will be tax at your hypothetical 24% ordinary rate resulting in a bill of $960. But in the same scenario, you have 100k of the bonds that also generate 4 grand. Bond interest is tax at ordinary income, too. So that means that you’ll owe another $960 of tax in that income, bring your total bill to $1,920.
But in this second scenario, bonds purchased or made inside an IRA, they generate the same 4 grand. Everything is the same, but different story because now we’re going to be taxed at capital gains here because we put it in the correct account. It’s saving you 360 bucks. You just lowered your tax bill by 24% just now. We went from 1920 to$,560. It’s all about the right placement, too. So, make sure that you’re making informed decisions with all of the right information. Don’t make any impulsive decisions here. Use a professional.
And of course, you should be aware that anytime you’re dealing with investments, there’s no guarantee there’s they’re going to perform as expected. Well, I don’t anticipate that special tax rate for long-term capital gains to be eliminated anytime soon. There’s no crystal ball to predict with what Congress will do in the future. And if there was that crystal ball, and if I had it, um, I’d be in a much taller building right now. Now, another way for your IRA planning needs to be coordinated with your overall retirement plan is your social security claiming strategy. The decision of when to file for social security is one that far too many retirees make without thoroughly evaluating their options first. My last webinar was on this. Do not make that decision lightly. Have a plan made before you do that. You could make a very costly mistake depending on when you take your social security. It’s a major mistake and one that in some cases can cost you six figures plus of income over the course of your retirement. Now, the decision of when to claim social security is a very personal decision and one that varies significantly from person to person, couple to couple. That said, many retirement experts today believe that too many people claim social security way too soon. Remember, social security benefits are guaranteed to last your entire lifetime, no matter how long you live. Benefits are generally increased from one year to the next through cost of living adjustments. But additionally, delaying receiving Social Security benefits past what’s called your full retirement age, 66 or 67 for most of you, can allow you to earn an additional 8% increase in payments each year until you turn 70 through what are known as deferred credits. And for these reasons and more, it can be beneficial to claim Social Security benefits later than you initially planned for.
but you have to eat in the meantime. And that might require you to pull money from your IRA in the interimm to help cover your current living expenses. And retirees sometimes opt not to do this because they say, “Well, what if I die early? I’ve spent my IRA money, which takes away from my heirs and I’ve gotten little or nothing for it.” And while that’s certainly something to consider, here are two reasons you may want to give that approach a second thought. um you know a report from 2012 concluded that social security is the cheapest if uh one of the cheapest if not the cheapest annuities available and that might sound a little funny after all you don’t buy social security in a way though you kind of do if you use IRA money to hold off on claiming social security for say a year that’s kind of the price you pay to get that higher benefit and if you compare that price and increased benefit to what you can get from commercial annuity providers it’s almost always cheaper But another reason it can make sense to draw from your IRA in order to help delay claiming social security benefits is that social security benefits are generally more tax efficient than IRA withdrawals. So remember when you take money from an IRA, the entire amount is generally added to your income and taxed at whatever rate you might be at the time. But in contrast, social security benefits are different. They may be anywhere from 15% tax-free all the way up to 100% of them are taxfree. So, the key point for you here is that trading a dollar of IRA income on your tax return for a dollar of social security income or social security benefits will almost always leave you with a lower tax bill, more money to spend. But let me just make that point again. Social Security is taxed differently. To learn more, you can just reach out. Be happy to go over that with you. All right, time to move on to the next point and that’s coordinating your IRA planning with your estate planning. And in most estate plans, there are really two primary goals. First is to make sure that your assets passed to your tenant beneficiaries. And secondly, that they are passed to them as efficient as possible. And when it comes to IRA, 401ks, and other retirement accounts, that’s done with one form in particular, your beneficiary form. And I really can’t emphasize how important this form is. Again, time and time again, people fail to update these forms after major life events such as births, deaths, marriages, and divorces. Many times, people think that because they’ve updated their will, everything is taken care of. But that’s not so. So, for example, if you have your ex-wife or ex-husband named on your IRA beneficiary form, but your will has been updated to say all your assets go to your children or your current wife upon or husband upon your death. Guess who’s getting your IRA? That’s right, your ex. And I can’t tell you how often this happens to people. That’s why it’s so important to keep updated copies of your beneficiary forms with all of your other important estate planning documents. And we’ll cover this again in the next webinar about estate planning in October. But some of you might have five, six, seven different 401ks out there. And some are from different jobs from the 80s and 70s. um you might have been married to a different person then or your feelings for whoever your beneficiary for back then your beneficiary back then was those feelings might have changed. Check up on all those accounts. Sometimes it makes sense to start consolidating in that case.
All right. So there’s a couple different types of IRA beneficiaries. Last time I did this webinar it we just covered way too long. So, I’m going to go through it pretty quickly here cuz we’re already at 13 minutes to the hour. But if you give it to your wife or if you give your if you pass away and you give everything to your spouse, they get to take it on as if they were you. Um there’s no problem there. They just take it on. They continue your RMDs or they just get to inherit that Roth altogether. If they’re eligible, you don’t want them to be eligible. Eligible means that or I’m sorry, let me just do this one then. Non-eligible designated beneficiaries are your children or your nieces and nephews. They have to take out those account those funds if they’re pre-tax like an IRA or 401k. They have to take that out over a 10-year period. Well, it’s not that bad. It is though. More than likely, they’re in their prime earning years. They’re in a 24% tax bracket. They take it on and now they have to take the 100 grand plus out a year for over 10 years. Now they’re paying tax 32% bracket. And great, yes, they got free money, but your money that you gave them is now being t of it is being taken away by Uncle Sam where you could have converted it at the 12% rate and they could have had it in a Roth IRA and kept it forever. Well, this eligible and then next we have the eligible designated beneficiary. They get the same treatment as a spouse essentially. You might think, well, I’ll just make my kids that and that’s not how it works. Um, eligible designated beneficiaries essentially means if you have a disabled child or someone who’s chronically ill as your beneficiary, then they get to have better treatment than healthy children in that case. If you want to learn more about that, talk to me. Um, but again, your spouse gets to take it on as if it was always theirs. your children have to take everything out or your nieces and nephews have to take everything out over 10 years, probably in their prime earning years, and they’re going to be paying a lot of taxes on that inheritance. And if they’re eligible designated beneficiaries, uh they’re a minor. More than likely, they’re either a minor, disabled, or chronically ill, they get to have better tax treatment.
All right, we’re just going to click through these because this one just does take a while, though.
Yeah, one question many boomers do ask is whether or not they should leave their IAS to a trust. And trusts are certainly good at providing post-death control, and if that’s a major concern for you, it’s certainly something to consider. However, naming a trust as your IRA beneficiary adds considerable complexity to your estate plan and if drafted properly, trusts can be treated as designated beneficiaries and preserve the stretch IRA. So, all too often, however, they do not meet the specific requirements outlined by the IRS and they still end up having to follow those less favorable rules that are mentioned earlier. So, just because you’re throwing it all in a trust doesn’t mean you’re avoiding that 10-year RMD.
And so again, back to the spouses, many name their spouse the beneficiary. If your spouse is your sole IRA beneficiary, then he or she will generally have several options after inheriting that, but they include choosing your main as a beneficiary of your account as well as making what is known as a spousal rollover. We’ll talk about that. We already covered it.
So with that, we’ve come to our last savvy IRA planning strategy. It’s off topic. It is important though. It’s one that you should all know, but for whatever reason, it’s still an industry, so it’s still there. People seem to forget. That’s to always do your homework before making any decisions with your IRA, especially when it comes to investments. IAS are often the target of schemes and scams because hey, let’s face it, that’s where a lot of people’s savings are. Your house and your retirement funds are going to be the largest part of your estate more than likely. And I know it and you know it, but you know who else knows that? It’s the scammers. So, in recent years, SEC’s always issued a lot of alerts warning certain IRA owners. They may be the target of scams. and the IRS has even put out publications with it. But the IRS does not approve IRA investments and respon that’s was made in response to many fraudulent promoters claiming that their IRA investments were somehow given the green light by the IRS. It’s BS. Just reach out to us. We’ll help you through that. If you see anything that is questionable coming across your email or anything you have questions about, whether it be with Fidelity, Vanguard, somebody that’s not us, we’re here to help you. You’re our members. you own this place, just give us a call. We’re here to help.
So, we’ve certainly covered a lot of ground today and you should have plenty of food for thought. As you probably realize by this point, IRA planning is a lot more complicated than most people realize. Let’s face it, deciding what strategies are best for your IRA crosses into just about every area of planning, from tax planning to investment planning to estate planning. and few retirees are aware of just how critical IRA planning is and even fewer have taken the time to truly evaluate all the issues and develop a comprehensive solution. So hopefully we’ve helped answer some questions for you today, but chances are you still have questions to um some other questions and that’s okay. You know, we’re here to help. So I’m sending out a poll right now. Say yes, no, maybe. So um it says Malcolm on there, but my name is Baptiste. Pleasure. Um, I’ll get that fixed. But look, please answer the poll. We’re here to help. It’s just a no cost, no obligation. Here to help our members, not here to sell you anything. We’re here to help our members make sure they can cross that finish line. I know your big bank’s not doing this for you. We know your other credit unions aren’t here to help you out with this as much. We are. Please let us know how we can do be of assistance. More than likely, do a financial plan. See if a Roth conversion is there to assist you. Find ways to fill in your income gaps. But let’s help you maximize your IRA. These are funds that you have been working on and saving up tirelessly all these years. You’ve been saying, “I can’t do this this month because I still need to put 2,3 $400 a month away to this IRA, this 401k.” You’re coming to the finish line. Let’s make sure that you’re all polished up and spruced up to retire and live to be 95 and 100. So, uh, everybody, we have about 60% have answered. If the other 40%, go ahead and answer. Again, you’re not going to hurt my feelings if you say no or not at this time. You will hurt my feelings if you do not answer the poll, though, just because that’s what makes me look so good with my boss with my great presentation skills. Um, we’re going to get into questions here in a second, folks. Tax planning. Taxes are going to be one of your biggest expenses, if not your biggest expense, especially if the house is paid off. Taxes will be your biggest expense in retirement. Join me for my next one on tax planning in a couple weeks. And then estate planning. If we’re all at this point of coming up in retirement, you’re past the point of needing to get your estate done. So, if you haven’t gotten everything in order, come give us a holler. We’re here to help. We even have tools to where you basically get to use a robo lawyer to create your trust and your will and it’s free to use if you’re a client of ours. So with that, I will start taking some questions. Please look at the Q&A or the chat section. Uh about 10% more to go to answer the poll. If you can’t find it, it might be behind some of your popups or might be behind the presentation. Sometimes that happens, but please answer the poll. I’d really appreciate that.
Well, here’s a good one. 85% of social security is taxed, but is 85 or 100% of social security used to calculate Irma? Fantastic question. Two different things. Up to 85% of your social security can be taxed as mentioned earlier. It can be nothing. Depends on how much you’re taking out outside of your um social security. So, it’s your provisional income is what social security is measuring. And if your provisional income is below X threshold, none of your social security is going to be taxed. If it’s to the next threshold, then up to 50% of it can be taxed. And if it’s above that, 85% of your social security can be taxed based off of provisional income. When it comes to calculating Irma, that is based off of your modified adjusted gross income, which I’m not the tax pro here or tax preparer here. I do a lot of tax planning. We can cover that. But if you’re modified adjusted gross income, I think it’s for this year, it’s 109 for single or 216 or 218 for joint. If you’re below that, you’re in the lowest bracket. You pay nothing for part D and I think you’re paying 200 bucks a month for your Medicare and it only goes up from there. So find ways and we can help you find that. We’ll help you find ways to stay in that 22 24% bracket while still staying in the lowest Irma bracket because Irma gets expensive. Medicare gets very expensive as you go. um if the first bracket and the second bracket difference is about a h 100red bucks per person per month but the third bracket is about double of the first to where you’ll be paying about $400 plus dollars a month and so in Medicare um probably more than you’re paying right now your workplace retirement plan by a lot so consider that folks if you don’t mind let’s just need three more people to answer the poll and I will be looking good here any other questions to ask please go ahead and do that go ahead and identify the Q&A in the chat section.
You mentioned nine out of 10 people
You mentioned nine out of 10 people might be candidates for Roth. Yeah, about about 90% of the time I make um hundreds of financial plans a year, if not a thousand. Um, whenever I do a financial plan, I will show people a Roth conversion optimization strategy that comes after having a discussion with somebody, finding out what they’re comfortable with converting, finding out how much they convert. We’ll find out what the max is without jumping certain brackets, finding out what they’re really comfortable with and paying additionally in taxes where you’ve pulled that money. I like to just do that as a full comprehensive financial planning. and just an added feature I’ll throw in there, but we’ll come up with a personalized plan on whatever you’re most comfortable with and seeing if that works. And then our strategy tool will show you, hey, you can convert this amount at this amount, you’ll grow your account value by that much more, and you’ll save this much in taxes. Because once you convert money to tax-free and you’re getting 8% per year, you get to have that full 8% in gain to yourself. Whereas in your pre-tax funds, that 8% growth, well, quarter of it’s going to Uncle Sam still. So that’s how Roth can outpace a traditional in value. And then again, it’s a great legacy planning tool because whoever you give it to, they don’t have to touch it. They don’t have to pull RMDs from it, and they’ll never have to pay taxes on it. So learn more. Let me know, folks. One more person needs to answer the poll. If you just walked away to go grab water, it’s okay. I’ll forgive you. I still had better numbers than the rest of the folks in my team. Um, guys, thank you very much for joining today. Look, I’ll stick back for another minute. Uh, answer anybody else’s questions in case anybody got shy. Um, but I’m here to answer any questions, but join me for my next webinar and the one after that. If you’re coming up on retirement, please reach out. I didn’t even put this terrible photo up yet, but here’s my um that photo is from 60 pounds ago, but here’s my information. Uh, I have a different phone number, but if you call it, I’ll try to answer. Best way to get in touch with me is via email right there. And if you’d like to schedule an appointment with me, there’s a QR code. Feel free to take a photo of this right now. My educational background, I studied I’ve been in finance my entire career, but I studied international trade and finance in college. So I I studied macro and microlevel economics at international level as well as local.
That’s a good question. I’ve actually never had anybody ask me about my educational background.
I also speak Spanish as a second language, too. I don’t know if that’s really impressive or not. I do live in Texas. That does come with it. But, um, I minored in Spanish while I also studied international trade and finance.
I also add to it that I double mate minored in political science as well, but that’s not that impressive.
All right, folks. Well, those are all that’s all the questions today. Man, I usually get about 20 of them. Well, look, thank you guys all again. Looking forward to seeing y’all soon. Please join me for my next webinar. Have a wonderful day. Happy Labor Day. I know we’re all amped up. You guys enjoy it. I’m glad. No, webinars are not recorded. I apologize. That’s a compliance thing. You know, whenever you’re handling other people’s money, there’s a lot of regulation, which is good. Wolf Wall Street days are over with. Um, but we’re very highly regulated. We have some webinars that are recorded, but those are our SEG ones that we give to the uh company partners. You know, we used to be United Airlines Credit Union solely, but now we’re open to the public. as well as we’ll have certain groups called SEGs that are companies that we have good relationships with like we we do Tesla now. Tesla is one of our SEGs as well as United. There’s a lot of them in there but we only have recorded webinars for our SEGs but you can find those on YouTube I believe.
And hey, if there was something you missed from today, if you joined late, if there’s somebody else that you want to see this information, member or not, send them my way using this information. I’ll go through this info with them. Be happy to. Part of my job. All right, folks. Signing off. Happy Labor Day. Thank you all very much. Be safe this weekend.