Well, hi everybody. We’re going to go ahead and get started. Uh, my name is Kim Kennedy and with me today is Malcolm Horn and we are financial consultants with Alliant Credit Union. We get the question often, do we really work for the credit union and we absolutely do. We work in the Alliant Retirement and Investment Services division of Alliant. Both Malcolm and I are based in Denver. We have offices in the Denver Tech Center and also on the west side of town in Lakewood. Clearly, if you’re joining from another state, we can do virtual appointments or even within Colorado, we have a lot more people wanting to do Zooms instead of face to face. So, we get that. Um Malcolm is going to be walking you through the webinar today. So, thanks for spending some time to learn about taxes. At the end of the webinar, we’re going to answer all of your questions. So throughout, feel free to put your questions in the the chat or Q&A box at the bottom of your screen. You will get a follow-up contact from Malcolm or I after the webinar, usually within a week or two, just following up, making sure your questions got answered and seeing if you need any help with your retirement planning or tax planning. We have a couple webinars coming up and the first one is Thursday, July 16th. That’s going to be on Roth IRA conversions. This has been a really popular topic just like taxes. Everybody’s concerned about that going down the road. Uh not that a Roth conversion is appropriate for everybody, but we’ll walk you through the different scenarios and um let you let you see what you think. And then the next one is Thursday, July 23rd, and that one is IRA planning. Just the different types of IAS. How do you utilize those in retirement? And if you’re interested in either one of those, feel free to watch for those emails coming through and sign up for either of those. We also have some resources available to you.
Malcolm and I aren’t the only consultants doing webinars. Our colleagues across the country are also doing the same thing we are. So, if you go to our website, uh, aerys.alliancreditun.com alliancreditun.com and click on the events page. You can see all of the webinars that are occurring and you’re free to attend any of those. So, if there’s some topic you want to get smart on and you see an upcoming webinar, feel free to sign up. Same thing with our podcast. If you’re looking for a piece of information, we produce a podcast inhouse and we store all those historical ones on our podcast page. So, again, take a look there. And then lastly, both our website and blog contain just a barrage of information about various financial topics. So again, if you’re looking for a little more information or confirming what you thought on a specific talk topic, either any of these places are a great place to go. So with that, I’m going to turn you over to Malcolm and he’s going to walk you through taxes and thanks for spending part of your day with us.
Thank you. Thank you, Kim. All right. Well, let’s get started. And again, thanks for attending today’s webinar on taxes. And before we jump into taxes, I like to start with a a little bit of a brain teaser. So, you have Bill. He’s retired, 64, and he has taxable income of around 50 58,000, which puts him in a 22% tax bracket. that includes 45,000 that is taken from his IRA, 37,500 that is getting from social security. And he decides, hey, look, I’m retired. One of my favorite bands is playing and I’m going to take $1,000 out of my IRA to cover whatever expenses, the tickets, the gas, the food, whatever. And so he says, “Well, I’m in the 22% tax bracket, so I’m going to withhold 22% from that $1,000 that I take out of my IRA.” And so you would think, “Yeah, right. 20 You’re at 22% 22% of $1,000 is $220. That’s the amount of taxes that you would think you would pay on that.” Well, is that really true? And the reality of it, it’s wrong. He’s actually going to owe 40.7% tax rate on that $1,000 that he takes out of his IRA to go see a concert. We will discuss this later in today’s presentation and show you why it was 40%. So, whenever you’re dealing with taxes and you’re dealing with something very very specific regarding taxes, we always say please seek professional advice. And especially when you’re dealing with traditional IAS, money that’s in traditional IAS, whenever you take money out, you’re going to be paying taxes on it. Roth IAS, as long as you’ve had it for 5 years, you’re over 59 and a half, all interested and earnings is going to come out taxree. This presentation is going to be focused on federal taxes only. Some of you may have to pay state taxes, but just be aware of that. This presentation is purely federal. And so you might be, well, why are you doing a a tax presentation? Well, we do not do taxes, but we need to know the tax code to help people plan for the future, plan for retirement, plan for Roth conversions, plan for those capital gains that you might be faced with. And so today’s webinar is going to be purely educational and focus on things that we think are very important when it comes to your situation. And also in while you’re working, you’re in the we call it the accumulation phase. You’re working, you’re saving, but once you hit retirement, you’re in this distribution phase, which is a completely different tax code. Well, that tax code is the same, but you’re going to be faced with different kinds of taxes that you weren’t subject to while you worked. For example, in retirement, your children have probably moved out of the house. They’re independent. You don’t get to write them off anymore. Maybe you’ve paid off the house and you no longer get to deduct the mortgage interest. You no longer get to contribute to the 401k because you’re no longer working. So, that’s another way that reduces your taxable income. But in retirement, now you’re going to be faced with how’s my social security test? Oh, wait a minute. I’m going to be required to start taking money out of my retirement accounts and be subject to required minimum distributions. How do I pay for long-term care? Or what about health care expenses in retirement? So, you’re walking into this new complex world of taxes that you weren’t previously faced with while you’re working. So the problem that we run into is people often pay more taxes in retirement than expected because the system is confusing. There’s various types of income that you might be receiving, but then there’s also these hidden taxes and penalties that you need to be aware of in retirement. And so people just don’t understand these hidden taxes and penalties and they pay more taxes than they need to. So, we want to help you develop a solution. We want to help you kind of show you these these hidden taxes or penalties so you can come in and say, “Hey, we want to avoid paying these additional taxes in retirement.” So, and also there’s when we talk about taxes, we’re going to be talking about four different stages of retirement. First one is pre-retirement. you know, people between the age of 50 and 60, you’re still working, you’re still saving, but you’re on the brink of retirement. Early retirement, ages 60 to 70, it’s kind of your go- go years. You’ve retired, you’re active, you’re traveling more, doing more things. Middle retirement, 70, 80. It’s kind of the go slow years. You’re still travel, you’re still playing golf, but maybe not as active as you once were. And then late retirement is 80 plus. You you’ve done all your traveling. you may not be playing golf or pickle ball anymore. It’s kind of this late retirement. So, these four stages of retirement. And then also I also want to make sure that you’re aware of you could have the best retirement plan put in place, but there’s always going to be surprises along the way. For example, inflation. Cost of goods are going to increase and there’s nothing we can do about it. You know, longevity. You might live longer than you expect. My grand my wife’s grandfather lived to 99 and 9 months. His expectation was like, “Ha, I I I don’t expect to live till 70.” He lived to 99 and 9 months. Expenses, you might have high expenses in the first 5 10 years of retirement and then hopefully maybe they decrease, but there’s always going to be unexpected expenses that pop up. And then healthcare, you know, my wife’s wife’s dad worked till 70 and their plan was to travel the world and then a healthc care arose that the next two years all it was was doctor visits. So there’s always going to be surprises along the way when it comes to retirement. Okay. So what’s the first thing you need to understand about retirement and taxes? You have to know what your after tax retirement savings picture looks like before retiring. Well, what does that mean? Well, you save in the 401k. You put money into the 401k. And let’s say hypothetically you retire. You have 500,000 in the 40k. You’re like, “Awesome. I have $500,000.” But the reality of it is don’t forget you’ve been putting money in pre-t all these years. You’ve been putting money in pre-tax. When you start take that money out, you have to say, Uncle Sam says, “Hey, I’ve been giving that benefit to you. I want a piece of it.” And if you came in and took all that money out at once, you could be subject to a 35% tax or 37% tax rate. That just means that’s the highest tax rate that you could be possible up to. So be aware is that when you take money out, you’re going to pay taxes. Depending on what your taxable income is, depends on the taxes you pay. So maybe it’s saying, “Okay, I have $500,000, but I’m going to spread it out over 30 years. And maybe you’re able to spread it out and be in a 12% tax bracket or 22% tax bracket.” So just be aware the way you take money out of that that retirement plan determines what well it’s added to your taxable income for the year and depending on what your total taxable income is depends on the taxes you need to withhold from that. Now there was this thought in 2026 the taxes were going to go up um because the the TCGAA was going to expire. Well, they came in and permanently extended that. And permanent just means that, hey, there’s no expiration date on it, but Congress could still come in and decide, hey, in 4 years, 10 years, 15 years, decide to uh change the tax code. So, as of this point, for the next 3 years, we know what the tax code looks like in regards to taxes are not going to increase. We’re on the same tax brackets as we were the last 10 years. They also increased the standard deduction. So in 2026 as a single person your standard deduction is 16,100. As a married it’s 32,200. That just means that this is the amount of taxable income that you can have and none of it’s going to be taxable. So you can have for a single person you could have up to $16,000 $16,100 of taxable income and that standard deduction means that you don’t pay any taxes on that. But any additional income above that you would be paying taxes on it based on your brackets. Okay. Well, at least I still have social security to supplement my income and supplement my income and Medicare to pay my health care costs. And that’s true. But you need to be aware of some social security and Medicare traps, tax traps, and you need to plan for them. And what are they? Let’s first talk about social security. Remember that example where Bill went on that went to concert, he took $1,000 out. Let’s specifically look at that. So before the concert trip, he had $45,000 of taxable income or sorry, he had $45,000 he took out of the IRA. Now he took out 46,000. He took additional $1,000 out. So that’s the the only thing that increased. He he increased withdrawal from his IRA by $1,000. But because he took $1,000 out of his IRA, it caused 85 85 cents more of his social security to be subject to tax. So every dollar he took out actually a $1.85 was now added to his adjusted gross income. So that $1,000 increased his taxable income by $1,850 which that is where we’re getting this 40%. So this additional tax liability because now he’s paying more taxes on social security, we need to take into consideration on that when it comes to his tax liability. And that’s why if you single that $1,000 out where you come up with the 40%, it’s because there’s you have to pay they’re they’re collecting tax on that additional social security income that you’re receiving. So when you look at the tax brackets and if you’re married filing jointly, if your provisional income, which is your addressed gross income plus one half of your social security benefit and any tax exempt interest, if it’s over $44,000, that means that 85% of your social security is subject to taxes. Now, this is not a 50% or 85% tax. It just means that portion of your social security isn’t including your adjusted gross income. And depending on your adjusted gross income determines how much tax liability you pay on social security. The thing that sucks about this bracket is that you’re looking at something that’s over 40 years old that’s never increased. the first bracket of 50%. They started taxing social security in 1984 and then they added a second layer of tax liability in 1993. And this bracket has never increased for inflation. So every year it just catches more and more people because this has never been increased for inflation. Now, in this new tax bill that was signed last year, they did come in and say, “Hey, we’re going to add a bonus deduction for seniors over 65.” They spent it as, “Hey, we’re not going to tax you any of your social security.” Well, your social security is still subject to tax. They just came in and added a bonus deduction to help offset some of the taxable income that you might have. So, if you’re over 65, they’re giving you $6,000 per person. Now, there’s phase out limits. So, if you’re a single person and your income is over $175,000, you don’t receive any of the $6,000 the additional standard deduction. Joint, it’s 250,000 or more. So, if your income is over modified adjusted gross income is over $250,000, then you don’t receive any of this bonus deduction. But if your income as a single person is below 75,000 then you receive it. If you’re joint 150 below you receive 12,000 6,000 per person. This is a temporary bonus deduction. It does expire at the end of 2028.
Now there are different approaches to retirement. Some people might say, “Hey, I’m going to completely retire altogether and not work.” Some people might come in and say, “Hey, I’m going to slowly go into retirement. I’m still going to work part-time, my current job, and then slowly pass out or kind of slowly exit out.” Some people might come in and say, “Hey, I’m just going to retire, but I’m going to do something that I love, that I’m passionate about, and it’s not based on whatever income I’m making.” Or you might just retire and volunteer altogether. So when you think about social security and you think about the good, the bad, and the ugly when it comes to social security and you kind of in these different retirement stages, let’s talk about social security. The good of social security, when it comes to determining your social security benefit, they look at the highest 35 years of earnings. So, if you’ve, you know, maybe you took some time off from working and you have zeros within your working career. If you work within retirement, you might be replacing some of those zeros, which might increase your social security benefit. That’s good. The bad is if you decide, hey, I’m going to work part-time. I’m going to decide I’m going to take social security early at 62. You there is something called an annual earnings test. And in 2026, you can make up to $24,480 before they start withholding some of your Social Security benefits. So for every $2 above that $24,000 amount, they’re going to withhold a dollar of your Social Security benefit, if you’ve taken Social Security early and you still have earned income. Now, they will recalculate your benefit depending on these earnings, and you might see an increase or not, depending on if it replaces any of your lower earning years. But just be aware of this. Now, once you hit full retirement age, this annual earning test goes away. So, again, just something to be aware of when it comes to, hey, if I’m going to take social security early and I’m going to work part-time, you’re going to be subject to this annual earnings test. The ugly to social security is that hey let’s say you’ve paid the max into social security for the last 35 years and you decide hey I’m going to work part-time you’re still going to pay into social security part-time but you’re not going to see any benefit to it because you’ve already paid the maxes to social security. So that earnings that’s being calculated within your benefit does not increase your social security benefit. So that is the ugly to this. So, if you’re self-employed and you’ve kind of paid yourself the max o over all these years, you might consider, hey, I’m self-employed. Why am I paying to social security if I’m not going to see my benefit increase? I know there’s a reasonable income that you have to pay yourself depending on what your position is, but it’s something to kind of talk to you about, talk to to your accountant about if you’re self-employed. All right, let’s talk about Medicare and taxes. So, watch out for something called the Medicare Irma cliff. And what is this? We actually do a full webinar on this app, but let’s use an example. Georgia Martha, they’re on Medicare. They’re they’re part B and part D. And in 2024, they had $342,000 of modified adjusted gross income. In 24, they also sold some stock for $1,000 gain. And capital gains tax is 15% because they were over 250, they were subject to additional 3.8% net investment income tax. So the tax rate on this $1,000 is 18.8%. Right? Well, if you look at the Irma brackets and Irma is based on Irma is tied to your Medicare Part B and Ded premiums based on the amount of income you make, your premium that you pay towards Medicare increases. So in this case, because their modified adjusted gross income went to $343,000, their part B premium increased from 405 to $527. Their Part D increased also. They went from 37.50 to $260 for Part D, which is prescription drugs. So, when you look at this, and remember, you sold $1,000 of stock that caused your your modified adjusted gross income to go into a higher Irma bracket, which caused your part B and D premiums to increase, and it’s per person. So, they saw an additional $3,470 increase on their Medicare Part B and D premiums. So when you add that plus the 18.8% tax, it triggered the real tax rate of 365,000 365% tax liability on that $1,000 that was made on that sale of the stock. So the the 188 plus the new Medicare increase for premium cost $3,658. Now, the hard thing about Irma is that it’s always a 2-year look back. So, right now, if you think about 26, they’re not going to look at your income until 28. So, with them, it was like, “Yeah, we did in 24, but now our premiums went up. Why?” Well, it was because of the stock sale you did in 24. It’s always a 2-year look. Now, I’m not going to get into a lot of this, but biggest thing to point out when it comes to Medicare, make sure you’re enrolling on time. understand when you need to enroll on Medicare because if you do not enroll on Medicare on time and you miss your window, they will come in and penalize you 10% of the base premium for life. So going back to this example of Jim and Nin, if they missed their Medicare enrollment and were like, “Oh my gosh, missed the Medicare enrollment.” they next year they signed up for it, Medicare’s going to come in and say, “Hey, you missed your enrollment period, so we’re going to subject a 10% penalty to the premium.” So, if you look at in 2026, if they miss the premium, that’s an additional $20 times 12 months times two people, that’s an additional $500 that they’re paying each year. That’s going to increase by inflation each year. It could be a lifetime over $10,000 mistake. So, make sure to enroll on Medicare on time. Understand when your windows are to enroll. What are the tax drops? This is a very common question we get a lot. How and when to use your taxable, tax deferred, and taxfree assets to manage your income and tax brackets efficiently. Very common question. Let’s use an example. So pick on Sam and Mary. They both have money in the IRA. They both have money in Roth and they have 300,000 in the savings. The conventional wisdom is, hey, I’m going to spend my cash out first and then spend my IRA and then spend my Roth if I need it. That’s the conventional wisdom. So when we run an analysis that showing them showing them spending their cash down, this is a projection of what their assets look like. And so it shows where the assets are and they’re going to continue to increase because they’re not spending they’re not really spending what they’re making on their assets. But let’s change it up. instead of spending your cash first, let’s actually spend your qualified money first and see if there’s any benefit to that. And there was there’s actually a benefit to them. Their net worth increases by over $200,000. So, there was a benefit to spend IRA down. And what probably one of the reasons is that if they’re spending IRA money first, it’s helping them reduce the future tax liability down the road. There’s been so many studies regarding this type of strategy. Do you do spend your cash first? Do you spend your IAS? So you can Google any of these studies and read this white page on what’s the best way to do this. Another alternative approach would be, hey, let’s spend your taxable money but also do Roth conversions at the same time. And if we do that, then we increase their net worth by almost $700,000. So there’s better strategies that are out there in regards to how to spend your money in retirement. And you say, “Well, wow, that’s 700,000 more. How’s that the case?” When you get into the weeds of this, when for their situation, if they’re spending their cash, they pay really no taxes at all that first like 10 years. But if we do a Roth conversions, yeah, you’re paying taxes up front. But the biggest benefit is when they’re in their 80s and if they just spend their cash first, their tax liability is almost $20,000. But by doing Roth conversions, their tax liability is $10,000. So you’re reducing your tax liability for future years down the road by doing those Roth Roth IAS, Roth IRA conversions, and creating this tax-free bucket. Now, everybody’s situation is completely different in regards to what they want to spend in retirement and what their they want their retirement to look like. So, it’s it’s a matter of what’s your goal when it comes to spending your money. Roth conversions is where taking money out of your IRA, you’re moving it over to a Roth IRA. You’re adding that tax your whatever you moved over is added to your taxable income for the year. So, again, example, Jill converts 100,000 from her IRA to Roth. 100 th000 100,000 is added to her taxable income for the year and she’s paying taxes based on whatever her tax rate is in that year. Another strategy that people talk about is filling up the bracket or filling up the bucket when you come in and say, “Hey, like I’m I’m in a 22% tax bracket, but I actually can convert about $50,000 and still stay within the same tax bracket.” That’s filling up the bracket. And here’s an example modeling what that looks like. So every line you see here represents a different tax bracket. So that yellow is saying this is the amount you can convert and still stay within a 22% or 24% tax bracket. So, we’re able to model that for people and say, “Hey, this is the amount you can convert and still stay within the same tax bracket and show what what is the benefit.” The benefit by doing conversions over the next 5 years. That’s $112,000 $112,000 that you are not giving to the IRS, not giving to the government. Also, you should look for low income years when it comes to Roth conversions. If you’re retired and you’ve decided, hey, I’m going to wait till age 70 to take my social security and my pensions, maybe that you have five years where you really don’t pay you pay very little taxes. Maybe those are good years to do conversions. Or you’re self-employed, you have a kind of a crabby year, low tax liability. Maybe those are good years to do Roth conversions. Or maybe you have high non-recurring medical bills. Let’s talk about that a little bit. you can you can deduct medical expenses above 7.5% of your adjusted gross income. So, let’s use an example. Let’s say your mom’s in the nursing home. She’s 80 years old and her out of pockets out of pocket expense is almost $10,000 a month. Her adjusted gross income right now is $60,000 and she has 500,000 in IRA. She has 500,000 in a non-qualified account or savings, CVs, whatever the case. Without doing a conversion, her income is 60,000. She’s able to deduct anything above 7.5% of that based on the medical expenses she has. So, if that’s the case, then her itemized deduction is $115,000. So, in this year, she pays no taxes. Well, let’s add a tax. Well, let’s do a conversion for her. If we come in and convert $60,000 converting, she still has access to the money. So, you’re not removing the money from her kind of assets to be able to use. So, now her taxable taxable income is of 120,000. She’s able to itemize 113,000 because of her medical expenses. So now her taxable income is $6700. That puts her in a 10% tax liability. So her tax liability is $670. That’s what you would pay taxes on a $60,000 conversion. She still has access to that money to be able to use. But if something happens to your mom, this is money that now gets passed on to you all taxfree. So, it’s another way to use the tax code to help reduce future taxes.
But you have to ask yourself, what’s the most what’s your goal? What’s your goal when it comes to doing Roth conversions? All all of this, everything we talk about, what is your specific goal? If you’re single, have no kids, and this money is going to go to charities anyways, like why do a Roth conversion? If you’re trying to pass on money to the kids as much as possible, maybe it makes sense for you to do a Roth conversion to pay less taxes than what your kids may pay. So, what is your goal when it comes to this money? Some there are some other possible approaches to managing tax brackets. You know, again, if you understand what your tax what your taxable income is and you need more money, maybe take money out of your Roth IAS. For example, if Bill took money out of or the the first example I use with the guy going to the concert, if he would have taken money out of his Roth IRA, he wouldn’t have had any tax liability and he would have saved over $400 in taxes.
selling highly appreciated stock for no capital gains tax. Yeah, I don’t know if you’re aware, but there is a way for you to sell appreciated stock and pay no taxes on it. Now, you have to be below a certain tax bracket. For a single, it’s 49,450 and for a married, it’s 98,900. Now, how this works is this. If you’re a married couple and your taxable income is $40,000, you can have up to $58,900 of capital gains and none of that be subject to capital gains tax. Now, once you go go over that $98,900 number, that’s when you would start paying capital gains tax. So again, going back to my example, if you’re a married couple, you have $40,000 and all of a sudden you sold a house and made $60,000 of gains, that puts you at $100,000. So $1,100 of that would be subject to a capital gains tax. So those are the numbers you need to stay below to have no capital no capital gains subject to taxes. Also, again, look at your tax brackets. And if you’re in a low tax bracket, maybe it makes sense to do a Roth conversion or take money out of your IAS and 401ks and pay less taxes on it than in the future.
If you’re still working and you have a health if you have access to a health savings account, highly encourage you to contribute to it. And the reason I say this is because the money go in the money that goes into a health savings account goes in pre-tax gross tax deferred and when you use that money for medical expenses it comes out tax-free. Huge benefit. Now let’s let’s move on to charitable giving and tax planning. So Albert and Shirley, they’re in a 24% tax bracket. They give $5,000 to charities. they have $15,000 of existing itemized deductions. Well, in 2026 there, for you to itemize, you need 47,500 to do so. So, this $5,000 that they’re giving to charities is not really giving them any benefit. Now, with them being over 70 and a half, there’s something called a qualified charitable distribution. You can give $111,000 out of your IRA directly to a charity counts towards an RMD if you’re RMDH and none of that is added to your taxable income for the year. So what’s the cost of doing a non QCD contribution? So charity gets $5,000. 5,000 is satisfies the RMD. 5,000 is reported as taxable income. And if you’re in a 24% tax bracket, that means you pay $1,200 in taxes. And so really the cost to give to a charity is $6,200 cuz the IRS took their 1,200. But if you come in and say, “Hey, I’m going to give this money directly to a charity.” Then the charity gets $5,000. The $5,000 satisfies RMD. It’s not included in your taxable income. So it’s excluded. So, your tax bill on this 5,000 you’re giving directly to the charity out of the IRA. That’s there’s no tax liability. So, the charity still gets the $5,000, but you just saved yourself $1,200 by doing a qualified charitable donation. So, again, this is another way to help reduce some of the tax liability that might have. Okay. Well, I hope to have assets to pass on to my family. How does retirement tax planning figure into this?
So, if you inherit an IRA, you used to be able to stretch it over your lifetime. That is no longer the case. If you’re a non-spouse beneficiary and you inherit an IRA, you have to take it out over a 10-year period. So, you let’s use an example. Pam, 65, has son 40 years old. Pam dies, leaves her son, 100% of her IRA, it’s $400,000. If we use the 6% average rate of return on this again, if he comes in and says, “Hey, I’m going to take it out annually over a 10-year period,” that means he needs to take about $55,000 out of that IRA each year for that IRA to be completely liquidated. or he comes in and says, “Hey, I’m just going to take the minimum years 1 through 9 and then in my 10th year, I’m going to completely liquidate it.” Well, in the 10th year, it’s going to have to take over $700,000 out, which would automatically put him into the highest tax bracket. So, taking the money out, spreading it out over 10 years, would probably be a more beneficial way than coming in and saying, “Hey, I’m just going to take it all out in the 10th year.
Now, let’s talk about taxes and long-term care. If you have a traditional long-term care premium, uh, sorry, if you have a traditional long-term care policy, the premiums that you pay might be deductible, and any income you receive from those policies are going to come to you taxree. But the traditional loan to care path is more like car insurance. If you don’t use it, well, the insurance kept your money. We’re seeing more and more these hybrid policies. The hybrid policies are more like permanent life insurance. You pay into it. If you never use it, this money goes to a beneficiary all taxree. But let’s use an example of Florence. She qualifies for long-term care. She receives 60,000 a year in inhome care benefits. She has 20,000 from social security. She has 400,000 in IRA. And then she has a life insurance policy that has um 500 thou a $500,000 life insurance policy with long-term care rider that gives her $10,000 a month. So, so scenario one, she comes in and says, “Hey, I’m going to use my IRA to pay for these costs.” And when she passes away, the beneficiaries So, I’m going to sorry, sorry, I’m going to use my long-term care policy to pay for my care. So that means that when she passes away over a 5-year period, her daughter will inherit a tax-free life insurance of $200,000, but then she will also inherit this IRA of 400,000 that’s going to be all taxable to her that she’s going to have to spread out over a 10-year period. A second scenario would be, hey, instead of using a life in the long-term care policy, let’s use your IRA to pay for this care. Because of her cost to care, we’re able to, for the most part, take this money out and pay very little income tax on this distribution. So now when Florence passes away, she will inherit her daughter will inherit a tax-free life insurance policy of 500,000 and she’ll receive $100,000 that’s remaining in her IRA. So again, I don’t know what the kids tax rates are, but when you start thinking about when someone inherits money, do I want to give them something that’s going to be taxable? Maybe they have to pay more taxes than I would or would I rather them pass receive money that’s going to be all tax-free. Now, of course, this money is there for her to use. So, if she lived in a if she was in long-term care much longer, then you’re using this money for all that care. So, if you spent through the IRA and spent through the life insurance, that’s all there for use. But at some point, everyone’s going to die at some point. So when she passes on this money, whatever is remaining, it’s maybe more tax beneficial to the beneficiaries. All right, how do we manage all this? Kind of a review of what we talked about pre-retirement. Know your after tax savings before retirement. Understand what do you think your tax liability is going to be in retirement. Does it make sense to fund Roth IRA or should I be putting more money into pre-tax accounts? early retirement. Understand how social security and Medicare are going to be taxed. Maybe fill tax brackets in low income years. If you are going to come in and delay social security till 70, maybe it’s a way for you to to reduce some of the future tax liability you’re going to have down the road. Middle retirement, understand what your RMDs are going to be, your required minimum distributions, because this is money that you have to take out and it’s going to be added to your taxable income. How does that what kind of impact will that have on in retirement late retirement? Organize your assets for a taxefficient way to pass this money on to the beneficiaries. You might come in and say, “Yeah, this is money I’m never going to use. So, let’s figure out a way for this money to be passed on to kids more tax efficient.
Taxes are going to cons continually changing. The current tax code we know is good to the end of 28. After that point, who knows? I mean, come midterms, we might have a better idea of what could change, but in the next four years, 10 years, taxes are going to definitely change. And so, it’s making sure we understand taxes every single year. And one way that we do that, this is some of the planning that Kim and I do. So, Richard and Richard and Deborah came and saw us. They’re both 62. Richard is going to work till 67. Deborah’s going to retire at 65. Richard had some health issues. So, we using a life expectancy of 85 for him. Deborra’s going to have long life expectancy in 95. They have money in savings. They have money in 401ks. Their house is completely paid off. So, this is just a net worth statement. They have this is their incomes while they’re working. Their social security is 6765 amount. They want to spend $5,000 a month. We’re using $500 a person for health care. They want to travel for the next 10 years once they hit richer hits retirement. And we’re looking at federal and state taxes for their situation. They’re both contributing to the 401k maxing uh maxing that out and contributing 3 receiving a 3% match. So the first thing we do is just put these pieces together and understand what the picture looks like. While they’re working, which is the blue, blue is them working, their income. The red line represents what they’re going to spend. The dark blue represents the social security they’re going to be receiving. The dark orange is the required minimum distribution. Anything above that red line is just excess income that’s coming in that they either they turn around and save. You see a drop off when Richard’s 85. You lose the social security benefit, but even at this point based on the required minimum distributions coming in, you know, Deborah’s good all the way out to age 95 and as you can see her remaining assets. This is what their tax liability looks like. So again, every line represents a different tax bracket. So right now they’re hovering around that that 24% line. Um in retirement they pay very little taxes at all. RMDs kick in. They’re pushed at 12% tax bracket. Richtor passes away. Deborah’s going to be in a 22% tax liability at that point. So we said, “Okay, let’s consider doing Roth conversions when you retire.” We’re able to model that and say, “Hey, let’s stay in a 12% tax bracket.” Is there any benefit to doing that? And when you look at that and model that 12% staying within a 12% tax liability with doing Roth conversions, it comes in and says, “Hey, we’re able to save $145,000 in taxes.” Again, that $145,000 is money that you’re not giving to the IRS, Uncle Sam, the government. this is money you get to keep in your own pocket which is helping increase your net worth. So we’re able to model this and say yeah does make sense or not. So again, retirement when you think about it, think of retirement as kind of climb the mountain. You climb the mountain, climb the mountain, you get to the top, you’re like, “Yes, I did it. I did it.” But sometimes going down the mountain is the most dangerous. And think about retirement. You might hit retirement and now in retirement, you’re going to be subject to different taxes you weren’t aware of. There’s all these different things that you didn’t even think about. sequence of return risk, you know, health care, interest rates, market timing, you name it. These are things that you necessarily don’t think about in retirement. While you’re accumulated, it’s work, save, work, save, work, save. And retirement is a different thing to kind of think about. So, in the end, Kim and I are here to help you. We’re part of the retirement investment services division. We do comprehensive planning to be able to answer a lot of the financial questions you might have. You know, what’s a good withdrawal strategy? Do I use my IRA money, diverse social security? What about Roth conversions? How do I maximize my rate of return but also reduce your risk? You know, help sure help ensure money passes on to the right beneficiaries. So, we’re full full comprehensive. we can do the full comprehensive plan and help you with all these different aspects. So, I know there’s a lot of information in this presentation, this webinar, but we can answer any questions that you might have regarding your situation. So, let’s see what we have here. We got Let’s see. So again, please put your questions in the Q&A or the chat. We’ll answer them from there. I almost I am also going to launch a poll. If you’d like to set up a meeting with one of us and run a plan for your specific situation, we’re happy to do that. There is no cost, no obligation. It’s services that we provide to members of the credit union. Well, somebody asked if we could give the out copies of the slides, and no, we’re not allowed to do that for compliance purposes. They don’t allow that. Uh, let’s see if there’s no open questions. I’m sure you guys have more questions. Yeah, there’s probably some questions. Let’s Let’s just give it a minute. We’ll give it a minute. Yeah, that’s a lot of information that Malcolm presented. All really good and a lot to think about, not only for your retirement, but for your heirs. Um, let’s see. It looks like something popped in. How do trusts change retirement planning? How do trusts change retirement planning? Oh, you know, when it comes to a trust, it’s what are you using the trust for is the biggest question. I don’t think it really changes retirement planning because the trust is a vehicle that you can use to make sure this this money bypasses probate, goes directly to whoever you name as beneficiaries. I mean, some people put up a put a trust in place um to make sure money stays within the bloodline. Maybe they don’t like the the the husband their daughter’s married to and they don’t want that that person to get any money if they get divorced. So, it just depends on what you’re looking what you’re what the trust is doing for you. In a lot of cases, it’s just set up as maybe as a beneficiary or a secondary beneficiary. If it’s a non-retirement account, usually the trust owns it, but for our purposes, that’s that’s what we use it for in terms of differentiating on account types. um to meet for a personal session. Is there really no charge? Yeah, we don’t charge. So, right now, we do not charge a financial planning fee to meet with us. If you want to meet with us, we’re happy to do so. There is no cost. You’re members of the credit union and this is a service that we’re providing. Well, and here’s the other thing I would add on to that. You know, we’re asking people to sit down with us and talk to us about their life savings and hopefully make a decision to work with us in some way, shape, or form. So, we really believe that the planning process is your opportunity to get to know us and see if you really think we know what we’re talking about or you could actually trust us. So, yeah, we do not charge a fee for that. Okay. I may have missed it. Did you mention if someone misses their first required RMD? Yeah. So, when it comes to the first required RMD amount, you actually have So, let’s let’s use an example. Let’s say you turn 73 this year, you you actually have up to April of 2027 to satisfy your RMD for 26. Now, the downside of doing that is that in 27 you have to double up for 26 and 27. So, depending on what that means could put you into a higher tax bracket. But, h excuse me. But if you do come in and miss your RMD, the IRS could penalize you 25% of whatever that amount is. So, if your RMD was $10,000, they could come in and say, “We’re going to assess a $2,500 penalty to do so.” Now, I would suggest if you miss your RMD to talk to your tax accountant and say, “Hey, is there a way to somehow wave this penalty?” Because missing your R&D is a common mistake that we do come across. Yeah. Typically, we just tell people, you know, let’s assume it wasn’t with us, of course, that we’ve discovered they’ve missed an RMD, and that’s usually the case. if you rectify it as soon as you become aware of the situation and then as Malcolm said talk to your accountant and there there’s a waiver of penalty form they can file but the big key is to fix it as soon as you you know reasonably find out about it. Um, another person asks if there’s a fee for services. Malcolm, I mean, yeah, at the at the end of the day, like if you go through our planning process and we determine, hey, this is a fit and you want us to help you with your investments, there might be fees associated with managing money, but then there’s also vehicles that we we put people in that have no fees. So, you know, at the end of the day, like if you if we all decide, hey, this is a good fit for us, we are going to be full, you know, full disclosure of this is what your fee is when it comes to our recommendations for your situation.
My husband turned 65 in October this year, but he’s going to keep working full-time. I understand he should file for social security and Medicare regardless of him working or not. Is this correct?
So when it comes to No, I mean yeah. So yeah. No, if you know if you have credible coverage, no matter how old you are, if you have credible coverage, you do not sign up for Medicare. Now, some people might come in and say, “Well, you turn 65, turn on sign up for part A, so you have this additional hospital coverage, but also at the same time, you necessarily don’t need to. And if you are contributing to an HSA, you definitely don’t want to because once you turn on Medicare Part A, like you are not going to be able to contribute to an HSA anymore.” So, no, it’s yeah, it’s the other thing I think the myth out there is sometimes people marry the two together. They think if they turn on Medicare and Social Security, they have to be done at the same time. And that’s not true at all. And in fact, turning on Social Security at 65 is going to cause your husband’s Social Security to be less. So, handle them separate. If you’re working beyond 65, as Malcolm mentioned, there’s an issue with, you know, part A and a HSA account, we usually tell people to talk to the HR department um and see what they say about it. Seems like the tax liability can be quite convoluted when it comes to RMDs and how that impacts Medicare, Plan B, and D premiums. Was this Congress’s attempt to generate more revenue for the less savvy taxpayer? Absolutely. I mean, at the end of the day, absolutely. I’ll say it. I’ll say it. And if you think about this 10-year rule, it’s another way for the government to uh increase tax liability because you used to be able to inherit an IRA and spread it over your life at time and keep you keep that money, keep the withdrawals at a very minimum amount to pay very little taxes on it. For them to come in and be like, “Okay, now we’re going to change rules and you have to take 10 take that money out over 10 years.” you know, there are going to be a lot of people that say, “Oh, just just give it all to me.” And they’re going to be paying a lot more taxes. So, absolutely. This is a way for the government to come in and people that are not tax heavy have to pay more taxes. So, yeah, absolutely. Definitely requires you to plan. I mean, the tradeoff of that 10 year was an extension on when our MDs start, right? I also think the theory of all this pre-tax deferral was that when we got in retirement, our tax rates were going to be a lot lower, and that hasn’t necessarily turned out to be the case. Uh, what non-t taxable income is included to determine your total taxable income as far as it relates to tax on social security? Yeah. So, they look at provisional income. Provisional income is your adjusted gross income plus half of your social security benefits plus any tax exempt interest that determines the provisional income which determines how much of your social security is subject to tax. So the non-t taxable income is the municipal interest or tax exempt interest mun bots. Yep. Is there a guideline for what percentage of your retirement fund should be in a taxable retirement account and how much should be in a Roth? I’ve heard 50% each. No, there’s no guideline. I mean, it’s all comes down to everybody’s situation is completely different. I mean, so there’s no guideline. I mean, in theory, in theory, if you could get all of your money in a Roth and go into retirement with a big fat Roth IRA and social security, your taxes in retirement would be zero, which sounds great, but it’s not that easy to get it all moved over either. Yeah. Uh followup. Is a Roth distribution counted as income? As of right now, no, it is not counted as income. So, what determines the amount of an RMD, a percentage or what? Yeah. So, when it comes to RMD, they look at the previous year’s balances. So, they look at So, like if again, if you’re 73 this year, they’re looking at the ending balances on December 31st of 2025. And then they use a life expectancy number. The life expectancy number for someone that’s 73 is 26.5. And then they take that those ending values divide it by 26.5 and then that’s going to give you your the amount that you have to take out. The first year it’s about 3.77% and then every year that percentage goes up because your life expectancy number goes down. You get older and so you get older the percentage increases and the balance of your accounts is going to change too, right? Yeah. Uh let’s see. That’s another RMD. I just covered that. If I already have an investment management company, i.e. Fisher Investments, will you be able to work with firms like these? When you say work with them, I’m not sure exactly. Um, you know, ultimately we with people that work with Fiser, we come in and say, “Hey, we’ll help you do the planning aspect of it and then we’ll analyze what Fiser is doing.” What we find with Fiser is they’re taking on a lot of risk for very little return. So then it’s a question of well if that’s the case why wouldn’t you get the same amount of return for less risk. So again we we’re not going to be able to go to a Fiser and be like hey change this model because we don’t manage Fisher’s models. I mean, and yeah, that’s what would come. Well, and I think what usually happens to add on to what Malcolm said is if somebody says, “Well, yeah, I really like the aggressiveness of Fiser and how that’s done, but maybe I don’t want to bet the whole farm on something that aggressive. So maybe a piece of the money comes over to us at Allian and we end up being the conservative piece. I mean, we clearly have aggressive pieces as well. Uh, generally we also have fee than Fiser. I know they’ve worked on their fees somewhat, but I bet we’re still cheaper. Okay, next question. Roth five-year rule. Could you explain the five-year rule on Roth? Does each contribution have its own five-year calendar? And what calendar is the earned interest on? Yeah. So, when it comes to the five-year rule, it’s 5 years or 59 a half. So when it comes to contributions like you so your first contribution starts the clock so it doesn’t so if you think about it let’s see okay we’re in 2026 so let’s say you’re 60 years old in 2021 you were 60 years old you made your first contribution to the Roth come 2026 come 2027 you’re over 59 and a2 half you’re over 5 years from the start of that Roth. So even though you made a contribution in 24, all earnings and interest are still going to come out tax-free for you for that Roth. It’s not it’s not a rolling contribution 5-year clock. It’s your first kind of clock start of the Roth. You want to say it a different way for me. So, as long as you’re 59 and a half and you’ve had a Roth IRA account open for at least 5 years, whether it was contributions, conversions, moved from a Roth 401k to a Roth IRA, that is the initial date that’s stamped for your Roth clock. So, if you’re over 59 and a half and you’ve got 5 years in a Wroth anywhere, you’re good to go. And if you’re not, then let’s say you open a Wroth today and you convert $100,000. Your 5-year clock starts today on the earnings. The money you converted, you’ve already paid tax on. So, you can pull that out anytime you want. So, I always tell people, look, you’re not going to if you converted 100 grand, you’re not going to spend 100 grand in five years. So, by the time you get to that fiveyear clock, then your earnings are able to come out taxree. Also, um let’s see, somebody’s asking, “Will you review what I have invested in already?” Yes, we do that. Yes. I just started receiving social security but still am working and have contributions going into a Roth 401k and pre-tax 401k. Can I still do this? Mhm. Sure. Yep. You still contribute to the Roth. The nice thing about the Roth 401k is there’s no income limit in regards to putting money into the Roth. When it comes to Roth IRA, there is the income limits they look at. So your in earn income plus your social security might push you above the limit for you to be able to contribute to a Roth IRA, right? IRA Roth IRA. But when it comes to a Roth 401k, yeah, you can still do that. But there’s no connection between working contributing to a 401k pre-tax or Roth and taking social security. They’re separate. So you can contribute to either of those accounts as long as you’re working and then social security is a separate decision. All right. I think I got them all. Oh, here’s a few more. Oh, we just talked about the time rule on the Ross. Okay. We have accounts with Alliant and my husband’s 401k and stock through his last employer with another investment firm. Do we need to work with you and then do we need to work with you and then separately manage each account? I’m not exactly sure what the question’s asking, but you know, obviously we’d love to have the whole relationship come over to us, but sometimes that’s not the case. Uh, clearly we can do the planning for you and see where it goes and see what makes sense. If there’s something you’re really dead set on keeping, then we want to build an investment strategy around that. But we clear we have separately managed accounts as well. Not sure if I got the exact essence of your question, Dan. If you want to come back to me if I didn’t. Um, I think that’s it, Malcolm. Awesome. Again, thanks for all the questions. Yeah, great questions. We appreciate that. Again, there’s a lot of information when it comes to taxes. We don’t cover all of it, but um yeah, I think this will be a high level taxes that people should be aware. Okay, thanks everybody and hope you have a nice happy safe 4th of July and we look forward to talking with you all real soon. Thanks. Thanks. Bye.