You must have compensation, earned income to be able to contribute to a traditional IRA. There is no age limit. There used to be an age limit, but if you’re still working, let’s say at age 80, you have earned income. You can contribute to a traditional IRA if you wanted to. Also, you have up to April 15th of 2027 to make a contribution into your IRA and have it counted in 2026. So it’s very important to know. Now there are certain contribution rules for you to be able to deduct it. You and your well for you be able to deduct it. There’s some income limits that you have to kind of be aware of. If both you and your spouse contribute to a 401k at work, for you to be able to deduct that traditional IRA, your income needs to be below $149,000. As a married couple, as a single person, your income needs to be below $91,000. If your income is above those amounts and you put money into a traditional IRA, you’re not going to be able to deduct that. So, be aware of that. Let’s talk about Roth IRA basics. When it comes to Roth IAS, there’s no deduction for contributions. Money still grows tax-free. And as long as you’ve had that account for 5 years and you’re over 59 and a half, all earnings and interest come out tax-free. It’s considered a qualified distribution. Now, contribution limits are the same as traditional IAS. 7500 for a single p uh 7500 for someone younger than 50, 8,600 if you’re over 50. You have to have earned income also to be able to contribute to a Roth IRA. There is no age limit either, but there is an income limit that says, hey, if you’re over this amount of income, you cannot contribute to a Roth IRA. As a single person, it’s $168,000. As a married couple, it’s $252,000. So, if your income is over these amounts, you cannot contribute to a traditional sorry, you cannot contribute to a Roth IRA. and there’s the phase out window. But if your income is below 153,000 and below 242,000 as a married couple, then you are able to contribute to a Roth IRA. There is something called a spousal IRA, Roth IRA contribution. [gasps] And well, we come across this as let’s say you’re a married couple and one person has already retired. They usually come in and say, “Well, I can’t contribute to a traditional tra traditional IRA or Roth because I have no earned income.” Well, it as long as your spouse is working and has earned income, then you are able to contribute to contribute to a traditional or a Roth. Now, here’s the thing. If your spouse is contributing into a 401k and even though you’re retired and your income, combined income is over $252,000, you’re not going to be able to deduct that traditional IRA contribution. And also, if you’re over certain income limits, you’re not going to be able to contribute to a Roth IRA. [clears throat] But be aware that if you’re under these limits and let’s say you’re not working or you’re retired, you might be able to contribute to a traditional or a Roth IRA for that year. Now, you might say, “Well, it’s $8,000.” Well, $8,000 if you continue to contribute to it over time, it will start compounding and start growing. And that’s what this chart is saying. If you’re coming in and see assuming a I think they use a 6% rate of return, contribute $8,000 for 10 years, you see the money start to grow and start to compound over time. So it does add up over time. Now make sure you’re taking advantage of your employer sponsored plans, 401ks, 403bs, 457s because pensions have kind of gone to the west side. Most corporations come in and say, “Hey, we have a 401k set up for you. You contribute to it. We’re going to match your contribution.” So, it’s a great and easy way for you to save for retirement. This year, if you’re under 50, it is 24,500 that you’re able to contribute to. If you’re over 50, you can do 32,500. Now, if you’re between the ages of 60 and 63, there’s a super catchup that allows you to do a total of $35,750. So, just make sure that if you’re between 60 and 63, I would call your 401k provider and say, “Hey, there’s a special contribution I’m able to do, and is the plan set up for me to make this extra contribution into the plan?” There’s also a new change for 2026. If you had an income over $150,000 last year starting in 26, any ketchup pro ketchup amounts that you put into the plan will automatically go into an after tax bucket or a Roth bucket. So just be aware of that because be prior you used to be able to put all that money in pre-tax. They changed the rule a little bit and says now, hey, if you’re over 50 and you’re maxing out your 401k, the the normal contribution, which is 24,500, will go in pre-tax, but everything above that will go into after tax bucket as long as your income was over 150,000 last year. So, it’s something new just to double check. Now remember, whenever you put money into the 401k, if it’s all pre-tax, at some point you’re going to have to take that money out. When you start taking that money out, it’s going to be taxed at whatever your current tax bracket is. So, this rule or this kind of this thinking was, hey, put money in pre-tax because when you retire, you could be in a lower tax bracket in retirement. that sometimes is the case, but is also I’ve seen it where it hasn’t been the case. So, just be aware of what is your current tax bracket today and what do you think your current tax bracket’s going to be in the future. Now, historically, if you look at tax rates, you could say we’re in a low tax environment going back I mean, just looking at this chart going back to the ‘ 50s, the top marginal income tax rate was 90%. Right now, we’re sitting at 37%. So, historically, you say, “Hey, we’re in a low tax bracket. What’s taxes going to do in the future? Are they going to go up, stay the same, go down? They’re either going to stay the same or they’re going to go up.” Now, there was this idea that taxes were going to go up this year because the tax cuts and jobs act was going to expire. Well, there was a bill that was signed last year that came in and permanently made the current the permanently made the Tax Cuts and Job Act permanent. Now, that just means there’s no expiration date. Congress could come in in 4 years, 8 years, and change the tax code, but Congress has to come in and do that. Do that. So, not only did they not prevent taxes from going up, but they also expanded some deductions for families and seniors. We we’re not going to go into a lot of these changes. Um, next week, we’ll talk more about taxes. Now, whenever you take money out of IAS, be aware of certain side effects. And what I’m what I mean by that is it’s not simply, hey, I’m taking money out of my IRA. I’m going to pay taxes and all is good. That’s where the IRS comes in and hids these has these kind of tax traps that you need to be aware of. So, whenever you take money out, be aware there’s something called a net investment income tax. If you’re a single person and you have income over 200,000 or you married couple and your income’s over 250,000, they could impose a net an investment income tax on passive income, which is dividends, interest, rental income. So again, it’s really important to understand when you take money out of IAS, if I take money out of my IAS, how much where is going to where is that going to move my bracket? You might be phased out of certain deductions or tax credits. Your Part B premium might increase because it’s all based on what your modified adjusted gross income is. You might see more of your social security subject to tax because you took more money out of your IAS than you expected. You might eliminate some financial aid. You might eliminate the ability to contribute to a Roth IRA. So, it’s really important to understand that when you start taking money out of IAS, traditional IAS, that’s going to be taxable to you in that year. And how does that affect your overall uh taxable bracket? Now, now the IRS comes in and says, “Hey, you can contribute to a traditional IRA or a 401k. put that money all in pre-tax. But at some point, we want you to start taking money out and it’s something called required minimum distributions. So even though you have this money in IRA and 401ks and you’re like, I don’t I don’t need it. I want to let it continue growing. Well, the IRS comes in and says, hold on. We’ve been giving you that benefit all these years. You need to start taking money out so we can start collecting taxes. Depending on when you were born, your RMD is either 73 or 75. If you decide, hey, I’m not going to take any money out, even though they required me to take money out, the IRS can come in come in and penalize you by 25%. So, what that means is if your RMD was $10,000 and you decide, I’m not going to take it out, they could come in and say, we’re going to charge a 25% penalty on that. So, it charge you a 25 24 $2,500 would be your penalty for not taking your R&D out.
Now, your R&D, your required minimum distribution is based on the life expectancy number, and they look at what the ending value was the year prior. So, hypothetically, let’s say you you turn 73 today and your RMD starts this year. They’re going to go back and say, “Your MD is going to be calculated on what the ending value was on December 31st of 2025.” They’re going to take that number, divide it by your life expectancy, which is 26.5 years. IRS comes in and says you’re going to live another 26.5 years, and that’s going to determine how much you have to take out. Now, when you look at this factor, the first year, it’s about 3.78% that you you’re required to take out. that percentage goes up each year because you’re getting older and the life expectancy number goes down. So you can see like you might start at less than 4% but once you reach age 90 it’s 8.2% that you’re required to take out in that year. Now some of the mistakes that I want you to avoid that we come across are these three mistakes. First mistake is you’re aggregating RMDs between different retirement accounts. So let’s say you have an IRA and you have a 401k. Those are different retirement accounts. So you might come in and say, “Hey, my RMD is 5,000 from my 401k, 5,000 from my IRA, so a total of 10,000. I’m going to take 10,000 from my IRA and call it good.” Well, I says, “Hey, wait a minute. You forgot to take money out of the 401k because it’s a different plan type. you’re required to take money out of that. So, just be aware 401ks and IAS are different plan types. Now, when it comes to you can have 10 different IAS and the IRS says, “Hey, those are all the same plan time plan type. We don’t care where you take that money from.” So, you take all of your RMD from one IRA. The second mistake that we come across is aggregating RMDs between spouses. So Bob and Sally, they each have to take out $10,000 from each of the IAS. Bob comes in and says, “Hey, I took 20,000 out of my IRA, so RVs are good. Don’t worry about taking any money out of your your IRA, Betty, or salary.” Well, the IRS says, “Wait a minute, wait a minute. These are retirement individual retirement accounts. Each individual has their own required minimum distribution. So Bob has to take his own and Sally has to take her own. The third mistake that we come across and this is more common mistake that we come across. I’m dealing with it right now with one of one of my clients um or a new client that I’m I’m bringing on board. He had an inherited IRA. He was in the Marines. He was in the last four years he’s lived in almost eight different locations. During that time, he did not take any money out of his inher out of his inherited IRA to meet his required minimum distribution responsibilities. And it’s one because he was just, you know, traveling all over the place being in the Marines and getting deployed and he just forgot to do it. Well, this is a very common mistake that happens. So, if you are subject to RMDs, make sure you’re taking that out. Now, how you get it fixed is you talk to your accountant and say, “Hey, I forgot taking out my RMDs.” They’re going to say, “Make your IRA current. Take up those distributions that you should have.” And we’ll just report it somehow and say, “Please excuse my mistake, my error, but I’ve rectified it and I’ve taken out what I needed to take out.” talk to your accountant about trying to avoid that penalty. But the third mistake is a common we see a lot. Maybe you had health issues and you just forgot to take it out. [sighs] Now, let’s talk about some different strategies when it comes to IRA distributions. You could come in and say, “Hey, I’ve retired. This money that I have in my IRA, I don’t need it. I’m just going to collect. I’m going to allow that to continue growing. So by doing so, you have that account that continues to grow. You’re not taking anything out, so it’s not being added to your taxable income. But and you maybe you’re avoiding some of those potential side effects right now. But the downside of doing that is think of it this way. Your IRA continues to grow. And if it continues to grow, what happens? your required minimum distribution when you’re required to take money out is much larger than if you started taking money out of the IRA at a slower pace. And who knows what taxes are going to be in the future. I mean, if you’re 10 years from R&D, I don’t know what taxes are going to look like. Taxes might be higher than they are today. So that means that you not only are required to take more money out, but the IRS comes in and takes more of your money because taxes are higher.
That’s where we also talk about Roth conversions. Roth conversions is when you have an IRA and you say, “Hey, I’m willing to pay the taxes on that money and convert it over to an account where basically it’s all going to live tax-free.” Now, in this example, Jill converts $100,000. 100,000 is added to her taxable income in that year, and based on her other income, she’s going to pay taxes on whatever her combined adjusted gross income is for that year on that 100,000. But now, she’s created a Roth IRA that as long as she keeps for 5 years and she’s over 59 12, everything within that continues to grow tax-free. Now, I’m not saying everybody should do a Roth conversion because we’ve definitely met with people where it does not make sense to do. But it’s a it’s a strategy to look at and say, “Does it make sense to do Roth conversions to help reduce some of the future tax liability that you have in the future?” Now, who can do Roth conversions? Well, anybody. There’s no age limits. There’s no income limits. And there’s no requirement to work. At one point, there was an income limit. If you made over $100,000, you were not able to do Roth conversions. But the IRS says, “Hey, I we kind of like that tax income. Let’s let everybody do Roth conversions and let them do it because we’re willing to collect those taxes now.” Now, 30 years down the road, they’re going to say, “Oh my gosh, what did we do?” Because there’s going to be so much money in these Roth IAS that’s all going to be taxfree. And then they’re going to be like, “Is there a way we can figure out how to tax it?” You know, hopefully that’s not the case. Everyone gets grandfathered in, but you know, that’s something to kind of think about. Roth conversions can also reduce future tax rates. Think about it. If you’re if all of your money is in Roth IAS and taxes go up down the road, well, all of your money is taxfree. None of it’s going to be subject to the higher tax rate. And also, you know, when it comes to taking money out of IAS, it’s added to your taxable income, which could cause your social security and Medicare Part B premiums to increase. But if all of your money is in Roth IAS, you don’t have to worry about having your Part B premiums increase or even having a lot of your social security be subject to tax. It just depend. Everybody’s situation a little bit different. Also, Roth IAS have no required minimum distributions, meaning you control when you want to take money out. You can let that money grow for the next 30, 40 years. You have the ability to let this money pass on to your beneficiaries all tax-free. So, a lot of flexibility when it comes to Roth IAS. Now, one thing that occurred that I still want to bring up, even though this is changed back in 2017 is that prior to 2017, you could do a Roth conversion and 6 months later and say, “Oh man, I shouldn’t have done that. That was a mistake. The market went down 20%.” And I I let’s just undo it. Well, now they’re coming in and saying the new rule they put in 2017 says, “Hey, if you do a Roth conversion, you’re stuck with it.” So if your tax bill is higher than expected or you phased yourself out of certain credits or the market dropped 20%. It doesn’t matter. You’ve done that conversion and it is done. You cannot undo it anymore. So when you do Roth conversions, kind of think about, hey, do I have a general idea what my tax bill is going to be? Do I have a plan to pay the taxes? And what’s the expectation? What’s the benefit of me doing the Roth conversions? If you have a general yes to each of these, then you know you’re on your way to maybe doing a Roth conversion. But trust me, not everyone should do Roth conversions. We’ve definitely met with people where it does not make sense to do. The other kind of Roth conversion that we run into is something called filling up the bucket or bracket. So, you have a certain amount of taxable income and let’s say you fill up the 22% bracket. You have another $50,000 before you go into the next higher tax bracket. You can come in and say, “Hey, let’s convert $50,000. I’m willing to pay 22% on that and but I’m not willing to go into a higher tax bracket.” That’s the filling up the bucket strategy. Sometimes people come in and say, “Hey, let’s go all the way up to 24 because I’m only paying 2% more in taxes, but I definitely don’t want to go from 24 to 32.” So, it’s up to you on how much you want to convert because at the end of the day, you are the one writing the check to IRS to pay the tax liability on the Roth conversion.
Other other times where it might be smart or beneficial to do Roth conversions is when you have low income years. Let’s say you retire at 65 and you’re going to delay social security until 70. Maybe you’re in a low tax bracket. Those are good years to do Roth conversions. Or maybe you’re self-employed and you’ve had kind of a crappy year. Low sales, low revenues. Maybe those are good years to do Roth conversions. or if you have a lot of medical expenses that you’re used to deduct that you’re able to itemize to lower your taxable income. Those are good years to do Roth conversions.
Okay, [sighs] let’s move on to talking about moving retirement money. Okay, you’ve retired, you have money in the 401k and you want to move it to your IRA. What is the best way to go about doing so? And there’s two ways that you can do this. You can do an indirect rollover or a direct rollover. An indirect rollover is where you come into the 401k and say, “Hey, I’m going to take all my money out and I’m going to put it into an IRA.” And they say, “Well, do you want a distribution?” You say, “Yes.” So, they cut you a check minus 20% in taxes and you get a check for the remaining amount. you have 60 days to put that check back into your IRA to have that money continue to be sheltered. Now, the 20% that they withheld for taxes, if you want all that to be sheltered, also you need to put that money back into the IRA also. Now, when you file your taxes, you’re going to get that those taxes back, but this is an indirect rollover. And it may not happen necessarily when you’re taking money from 401k to an IRA, but I see it happen when you have an IRA, let’s say, at a bank and you want to move that IRA to another bank. And you walk into XYZ bank and say, “Hey, I have an IRA. I’m going to move it to another IRA at the bank. Can you cut me a check?” and they cut you a check payable to you in the the amount and then you walk over to the other bank and you deposit it into an IRA and money’s in IRA. Well, that’s considered an indirect rollover. And when it comes to indirect rollovers, you can only do that once a year. So, if you took that money out of the ABC bank and deposit it in an XYZ bank and six months later you do the exact same thing, the IRS says, “Wait a minute, wait a minute. You can only do that once.” So, this second time that you try doing that, now we’re going to tax all of it and it’s added to your taxable income. So, be aware of indirect rollovers. The better route is direct rollovers. Direct rollers is you when you’re calling XYZ company and say, “Hey, I’m moving my money into an IRA at Y uh ABC and they say, “Okay, we’re going to cut you a check payable to ABC FBO your name.” As long as they do that, that’s considered a direct transfer. Same with the bank. If you went to XYZ bank and say, “Hey, I’m moving money my my my money to ABC.” make sure they cut a check to ABC FBO your name with that. There’s no 60-day rule rule. There’s no 20% withholding and you can do as many of these as you want because it’s considered a trustee to trustee transfer. So, this is just an example what a a check would look like. So, again, there’s two ways to do the rollovers. Indirect direct. always encourage you to do the direct because then you don’t have to worry about the taxes. You don’t have to worry about claiming any of that and you don’t you can do you don’t have to do worry about the one year one time rollover.
When it comes to IRA planning, it’s still really important to plan. IRA is just one piece of your overall puzzle. You still have to think about taxes. You still have to think about how money is going to pass on to the next generation. You know, your overall financial plan. So, the next piece we’re going to talk about is it’s not just what you own, but where you own it. Strategically allocating assets to certain accounts might be more beneficial than others. What do you mean by that? Let’s say you have 100,000 in an IRA. You have 100,000 in a nonir IRA account. You’re in a 24% tax bracket. And each 100,000 100,000 in the IRA and 100,000 in the nonretirement are invested in things that are producing about 4%. Interest one the IAS you have bonds that are paying 4% or CDs paying 4% and then you have dividends paying 4%. So, strategic allocation hypothetical says, hey, if you have 100,000 in your IRA invested in dividends, you’re taking that $4,000 of dividends, you’re being taxed at 24% rate. If you have 100,000 in a non-retirement earning 4% interest, and you’re taking that 4% interest, that interest is taxed at an ordinary income. So, in essence, your total tax bill on that $8,000 of distribution is $1,920. Now, if you flip the script script a little bit and say, “Hey, my IRA should own the CDs and my non-retirement should own the dividend stocks.” And the reason for this is with 100,000 in CDs in the IRA, you’re still getting 4%. It’s still being taxed at ordinary income, but dividends and capital gains are taxed at a different rate. So the 4% qualified dividends you’re receiving are taxed at a 15% rate verse 24%. So now your tax bill is a total of $1,560. So you’re saving almost $400 in taxes by simply having different investments in different buckets. So it’s again it’s really important where at certain assets lay when it comes to retirement planning.
All right, let’s talk about IRA planning and social security. Social Security is one of the biggest annuities you’ll ever own. It’s an income that you’ll receive for the rest of your life and it has cost of living adjustments to it. Now the question becomes, should you take your social security or should you take money out of your IRA and delay social security to a later point? These are the questions that you kind of have to think about when making the decision on social security. Now again, everybody’s situation is completely different when it comes to this and it is a personal choice if you want to delay social security or if you want to take it early. Social Security can be tax efficient because 85 the most tax of social security is 85%. There’s always going to be about 15% of social security benefits that’s going to be taxfree. This is an example of send planning that Kim and I do to help you understand should you be taking money out of your IRA or should you delay. Again, everybody’s situation is completely different. This was a lady came and she retired at 67 or she retired at 66. Her full retirement age was 66 and she asked the question of hey should I turn on social security or should I delay till 70? She’s single, no kids. And so we ran the first scenario, her taking social security at 66. And then we ran a second plan with her delaying social security till 70. And we laid them on top of each other. So you can see the dark blue represents her delaying social security till 70. The gray represents her just turning on social security. So her break even was 93 means that if she lives beyond 93 she starts to benefit delaying social security till 70. She’s like there there’s no way. I mean I’m probably going to live till about 87. I don’t see myself living beyond 93. So in her mind, it made sense to turn on social security early and start collecting that, you know, that social security amount versus using her own assets. But again, everybody’s situation is completely different. But we’re able to kind of represent that and create a plan that shows, hey, is there any benefits using IRA money versus delaying social security?
Okay. When it comes to IRA and estate planning, it’s still really important. IAS, you name the beneficiary on the account. Meaning, if something happens to you, you name who this IRA goes to. No matter what you have in your will. It doesn’t matter what you have in your will, the IRA company will say, “Hey, you listed your dad as the primary beneficiary. That’s who’s going to get it.” Even though in your will it says all your money goes to your son, doesn’t matter. So, it’s really important to come in and review beneficiaries that you have on your IAS. And there’s different types of beneficiaries. You have eligible designated beneficiaries, non-eligible designated beneficiaries, and non-desated beneficiaries. There’s three types of beneficiaries. The first one we’re going to talk about is non-desated beneficiaries. These are people, these are non-living beneficiaries. So if you come in and say, “Hey, I’m going to name a trust or I’m going to name the estate as my beneficiary.” This is what happens. Let’s say hypothetically you name your estate as the beneficiary on your IRA. Well, if something happens to you before you started taking distributions, this money goes to your estate. whoever the whoever is listed in the will. Let’s say you have your sister listed in the will because what’s what’s going to happen is money’s going to go to the state. Probate’s going to have to be open. The judge is going to look at the will and if the will says, “Hey, your sister inherits this these assets, which is fine. This money now goes to your sister, but now your sister has to take that money out over a 5year period. If she inherited this money after, let’s say you passed away, but you had been taking RMDs out and it went through the same process, probate goes to your sister, then your sister now is going to have to take money out based on your life expectancy, whatever that is. So again, it’s a much quicker distribution of those assets. So if your intention was, hey, my IRA is going to go to my sister name your sister as a primary beneficiary so she doesn’t have to worry about opening probate because if you named your sister as the primary beneficiary now a sudden she’s a non-eligible designated beneficiary so usually non-spouse beneficiaries
and these type of people once they inherit a IRA and you’re non-spouse house, you have to take that IRA out over a 10-year period. So, let’s say hypothetically my mom passes away. I’m the primary beneficiary on her IRA. I give I receive that IRA. I have to take it out over a 10-year period. You used to be able to stretch that IRA over my life expectancy, but not today. NE today says, “Hey, if you inherit an IRA, you have to take it out over a 10-year period, which, you know, depending on how much money is in the IRA, could you cause your taxes to increase?” Now, there are still some situations where you have the ability to stretch the IRA, and this means that you just take money out on your over your life expectancy. if you’re a disabled person, chronically ill, if the individual within 10 years of dece’s age. So quote, going back to my example that that if your sister inherits [clears throat] your IRA and she’s within 10 years of your age, she actually still gets to spread that out of her life expectancy as long as you name her as primary beneficiary. But if you named your estate, then she’s going to have to take that out over a 5-year period or based on her your life expectancy. So, make sure it’s properly named. If you name a minor child as primary beneficiary, they get to stretch that IRA until they reach the age of majority and then at that point, it flips over and they have to take it out over a 10-year period. So again, when we talk about beneficiaries, make sure you’re updating it. Let’s say you got divorced and you still have your ex as primary beneficiary. I don’t know if that’s [clears throat] what you want to happen. So if something happens to you, this money goes to your ex versus maybe the kids or someone else that you want this money to go to. So make sure you’re updating your beneficiaries on your IAS. You can name a trust as a beneficiary on your IRA, but they can be costly. But the biggest thing to name the trust is you want control. And what I mean by that is that if you have a son or daughter that they make a dollar, but they spend $1.50, you might want to come in and say, “Hey, if something happens to me, I’m going to put this money into a trust to control how much you spend each year.” So with trust, you have a little bit of controlling power from the grave or you know that that might be one reason why you set up a trust. So again, if you’re thinking about setting up a trust and you want to put your IRA within it, talk to an attorney to to figure out what is the best way to accomplish that. Let’s talk about spousal IRA beneficiaries. So married couple, one spouse passes away. You have two options. You have the option of, hey, I’m going to take that money and just put it into my name, treat it as my own, or I’m going to leave it as a beneficiary option, beneficiary IRA. So let’s first talk about the first one. Your husband passed away. He has an IRA. you have the ability to say, “Hey, I’m going to take this money and just put it into my own name and treat it as my own.” Now, if you do this, be aware that again, if you’re under 59 and a half, you’re going to be subject to that 10% early withdrawal penalty if you needed to take money out. So, if you are under 59 and a half, you might want to treat that IRA as a beneficiary IRA because if it stays as a beneficiary IRA, then you can still take money out of that IRA and avoid paying that 10% early withdrawal penalty. Another reason that you might want to remain as beneficiary is that your your spouse has, you know, let’s say 10 years difference between you. Let’s say that your spouse, you’re 75 and your spouse is 65. Your spouse that’s 65 passes away. Well, instead of taking that IRA and combining with your own, you leave it as a beneficiary and your RMDs on that IRA is going to be subject to RMD rules once they would have hit age 75. Or flip, let’s say flip the scenario. Let’s say that your husband that’s 75 passes away. You might want to take his IRA and move it into your own IRA because you’re not going to be subject to RMDs until you turn 75 versus him already subject to RMDs. So, there are some pluses and minus to keeping moving the money into your own name or leaving it as a beneficiary.
Okay, I know we talked about a lot and ultimately the the thing I want you to understand is that we are here to help you answer a lot of the financial questions that you might run into such as creating withdrawal strategy, doing Roth conversions, when should I take social security, all of these financial questions we can help you with. One thing I like to look at is something like this, and you might have seen this before. It’s climbing the mountain. Sometimes climbing the mountain, people say, “Hey, I’m working. I’m saving. I’m working. I’m saving. I’ve retired. I’ve reached the top of the mountain. Yay. We throw a party for you.” But sometimes going down the mountain is the most dangerous. And I would say that’s the same for retirement because there’s a lot of things that you don’t necessarily think about while you’re working that now you have to think about in retirement, such as, hey, is my Part B premium going to increase because of my income? Am I going to be paying more taxes? What about longevity or health care risk, inflation, the market declining? All of these things you never really think about until you’re in retirement. So, you have to watch out for some of these things. And some of the ways they would look at all these types of risks that you might be faced with in retirement is creating a financial plan. So, Richard and Deborah came and saw us. You know, Richard, Rich is going to retire at 67. Deborah’s going to retire at 65. Richard has some health issues. So, we have life expectancy of 85 for him. Deborah’s going to uh probably live beyond 95. They have assets in the 401k, savings, house is completely paid off. Their income while they’re working that we know what their social security looks like if they turn it on at 65, 67. Richard used to work for United, so he has the PBGC the they want to live on $5,000 a month of retirement. We built in health care, healthcare increases at a much higher inflation rate than normal stuff. Uh travel, they want to travel for the next 10 years after retire richer retires. And we’re looking at federal and state taxes. They are still contributing to the 401k, maxing it out and receiving a 3% match. So the first thing that we do is put these pieces together and we say, “Hey, based on the income you have coming in based on when you want to turn social security on, are you able to replace your income in retirement?” And that’s what this picture shows us. picture shows the blue is their income. Dark blue is social security. The teal is the PBGC. The yellow is withdrawals that they’re doing. The red is the required minimum distributions. And then when Richard passes away, we lose the social security benefit, but we’re still able to replace Deborah’s income throughout retirement up to age 95. We will then look at tax liability. while they’re working they’re in a 22% one retires they’re you know 22% they have this window where they really don’t pay any taxes and then taxes come back into the picture because of required minimum distributions they’re in a 12% tax liability but when Richard passes away Deborah’s going to be in a 22% so her taxes are going to increase so we said okay let’s consider doing Roth conversions when you completely retire and see if that makes sense and so we looked at doing filling up the tax bracket. We want to fill up tax bracket up to 12%. And stay within a 12% see what the benefit would be. The yellow represents what we can convert in those years and stay within a 12%. And ultimately we’re coming in and say by doing so there’s $112,000 that you are actually keeping in your pocket. That’s money otherwise if you didn’t do a Roth conversion that would be going to the IRS for them to spend any way they want. So, not only do we help you reduce your taxes, but we also increase your net worth. Well, let’s consider Richard delaying social security until 79. Is there any benefit of doing so? Well, break even based on this scenario of 79. We know Deborah’s going to live beyond 79. So, it probably does make sense to delay Richard till 79. Let Deborah continue taking her social security so that when when Richard passes away first, Deborah will always get the greatest social security benefit. Well, Richard wanted to consider retiring early. Let’s consider retiring at 62. Is that possible? Yeah, we’re able to to run this analysis and say yes. If you want to retire early at 62, you’re able to do so. All that’s happening is you’re leaving less money to the kids. So, it’s your choice. If you want to retire early, yes, you can do so. So, this is some of the planning that Kim and I do for members of the credit union to help you kind of visualize and understand your financial situation. and we come in and show you what’s bad, what’s good, what’s bad, what are things you can improve, what are things that we can help you reduce your tax liability, and maybe look at is there a way to maximize your rate of return, but also at the same time reduce your risk. So, [sighs and gasps] with that, I’m going to open up to questions. Um, I know I covered a lot of information. There’s a lot of information when it comes to IRA planning, but um, Kim and I have been doing this for over 20 years. each of us have been doing this for 20 years. It’s very rare that we come into something that we we don’t necessarily know about. Um I’m going to also put a poll out there. If you’d like to schedule a meeting with us, please let us know on the poll. Um and we’ll make sure we’re we’re going to reach out to everybody anyways next week. But um if you’d like to to re reach out to you, just just let us know. And so the first question Yeah. the first question, Malcolm, is what is the fee to do a plan? Yeah. So here at the credit union, again, Align Credit Union. We’re employed by the credit union. The credit union is a nonprofit. We do not charge a financial planning fee to do any of the planning. We just don’t. I mean, it’s part of the services that we provide. We’ve thought about charging a financial planning fee, but again with the credit union, we’ve decided not to. Now, at the end of the day, we’ll do all this planning for you, and it we’ll get to a point where it’s like, hey, if you want to hear specific recommendations from us, we’ll talk about those recommendations, and there might be a fee associated with implementing some of those recommendations. But we don’t know until we’ve gone through the financial planning process with you. You want to add anything else to that? Yeah, you know, we really look at it as going through that planning process as your opportunity to get to get to know us and see if you think we’re someone you could work with and trust with your life savings, that kind of a thing. But, uh, let’s see. Can you post the link to your blog again? Uh, I have that at the end. See, it’s at the beginning in the resources tab would be my guess.
And that is all the questions so far. Come on. You guys got more questions than that. [laughter] [clears throat]
Nothing. Huh? Nothing. Nothing. Nothing. Nothing. Nothing. Nothing. Okay. Hey, it’s okay. Yeah. Well, if you think of something when we reach out to you, um, you know, just Oh, here’s one. I have a question. Okay. Great. Pipe away.
Not sure Martha if you’re typing in a question. Can’t see that. Uh let’s see. Yeah, Kim. Yep. We’re going to talk next week. Yes, we are. Can you show the slide again with the 100K? Yeah. Know what they’re talking about? Yeah. I think it’s when it comes to like CDs and dividend stocks. Oh, the taxation on that in the two different accounts. Yeah, that’s what that’s what she’s talking about. Yeah.
All right. She said, “I can’t type fast enough.” No worries. No worries. Do you want to just run through this slide one more time, Malcolm? Maybe that would be helpful for everybody. Yeah. I think the the biggest thing to take away from this slide is just it’s kind of the breakdown of where assets are held. You know, again, certain assets create certain tax liability. So, for example, like CDs, CDs earn an interest. That interest is taxed at ordinary income where where you might own dividend stocks that as long as they’re qualified, they’re going to be taxed at a lower tax rate than maybe interest from CDs depending on what your tax liability is. So, this is just breaking down kind of running an example of understanding where assets might lay to be more tax efficient when it comes to your to your own situation.
Okay. Well, hopefully that answered your question, Martha, but anybody else, if you come up with any questions when we reach out to you, just jot it down and we’ll be happy to answer that when we talk um next week. So, I think that’s it. Anything else you’d like to say, Malcolm, or No, thanks. Thanks for attending and I look forward to talking to you next week in our tax planning webinar. All right. Thanks, everybody. Bye-bye.