See How Roth Conversions Saved Them $595k in Taxes In Retirement

when you retire the first thing you want to know is do you have enough money to last the rest of your life the second thing you want to know is how do you put a plan in place to minimize your lifetime tax liability so you don't overpay in taxes in your retirement that's the exact situation Luke and Shannon were in when they came to us they actually already felt pretty comfortable they had enough money saved to be able to last the rest of their lives but what they did want is number one validation that that was accurate but number two they had serious concerns because a lot of their retirement savings were in pre-tax IRAs and they wanted to void a situation where they're going to get hit with a massive tax liability that could be avoided with some good planning so in today's video I'm going to share with you the exact changes we made for Luke and for Shannon and show you how those changes helped them save almost $600,000 in taxes over the course of your retirement so let's jump into Luke and Shannon's situation and their planning projections but before I do just a little bit of background Luke and Shannon came to us and they were just wonderful people and they're simple people they' done a great job of saving for their retirement but they just loved the simple things in life they loved being outdoors and riding their bike they loved pickle ball and volleyball they didn't come to us with his huge extravagant desires for retirement they just wanted to be sure they were going to be okay and like I said more than anything they didn't want to get whacked with a huge tax bill that could be avoided with some good planning so let's walk you through that so I can show you what I showed Luke and Shannon and show you the strategies we implemented to save them several $100,000 in taxes without any work on their part so here's Luke and Shannon and their situation Luke is 65 Shannon's 64 Shannon had about a million dollar in her IRA and Luke had $825,000 in his they had another joint investment account about $600,000 or so and then they had their primary home about 1.7 million now important thing to note is they had prioritized living in a place that they really loved and that was more important to them than spending a ton of money on travel so they had the home they loved they lived in the area that they loved and they've been watching our YouTube channel and they said you know what we've done pretty good we feel good about our situation but it might make sense to reach out for guidance it might make sense to do this so we can understand that we don't know what we don't know what are those gaps in our plan specifically how can we avoid getting killed in taxes if it's not necessary for us to do so so here's their situation here the next thing that we took a look at was what their goals were so Luke and Shannon came to us they had already retired because like I said they had already felt pretty comfortable that they were in a good position to do so they had a pretty clear idea of what their monthly living expenses were they were living on about $6,000 per month and that 6 000 per month love them to do everything that they wanted to do they could ride their bikes they could play pickle ball they could go to the beach they lived in a wonderful area that they didn't need to spend huge amounts of money to support that lifestyle now in addition to that $6,000 per month here's what we're planning for in terms of medical costs so if you see here for Shannon Shannon needed one year of health insurance before Medicare kicked in and here's what that annual premium was Luke was already eligible for Medicare so we didn't need an additional premium for for him Prem Medicare here's the out-of-pocket cost that we are planning for based upon the medicare premiums or the Medicare plans that Luke was already enrolled in and Shannon was going to enroll in now on top of that they said you know what we don't have any lavish travel goals we love taking trips and we love taking trips to yosd and out to the desert and doing things like that but that's already included in our monthly expenses the 6,000 per month allows us to take those trips just get in our car and go but we do want to make sure that we have enough money we're setting aside so when a new car purchase comes up or onetime expense comes up we don't want to be caught flat floated and unable to afford that so we're planning for new car purchase every few years in the amount of $25,000 so these are their goals fairly straightforward fairly simple the next thing we looked at was their income Luke had a pension of about $600 per month so you can see that right here and then Luke has his social security benefit Luke's social security benefit at age 67 is $2,800 per month but he was actually planning to wait until 70 to collect it so his actual benefit will be higher than his full retirement age amount Shannon social security benefit which she'll also collect at 70 her full retirement age benefit is $22,900 per month which would be higher because she's waiting until 70 so those are the income sources that they're going to have and they came to us saying look show us that we're going to be good we already feel like we're good there but just validate that but more importantly show us are there areas are there opportunities to save on taxes so that exactly what we did next but to show that we need to have an illustration we need to have a projection of what our cash flows going to look like Year bye so we could start to identify the areas where tax savings existed so here's those cash flows that we're looking at they were already receiving Luke's pension so here's his income Source pension doesn't have any cost of living adjustment but here's his pension for the rest of his life social security for Luke that would start at his age 70 which is 2029 Shannon's age 70 is until 30 but here's those combined benefits for each of them so strong Social Security benefits but that doesn't fully kick in for a few years so their total income is here in this column and you can see that right there what we're comparing that to is what are their expenses so their living expenses are 6,000 per month which is $72,000 per year but we're going to increase that with inflation so we need to make sure there's an inflation adjustment apply to their spending otherwise they're receiving the same dollar amount every year but their lifestyle slowly being deteriorated because they're not keeping up with inflation so you can see we're increasing this by 3% per year here so here's those expenses 6,000 per month in living expenses to support lifestyle an additional amount for health care now on top of that they still do have those goals with buying a new car and that's not every year but every so often we're going to plan for that as well and then finally on top of that here's the tax payment and the tax payment that they were concerned about isn't so much today but as we fast forwarded and looked in the future pretty significant tax liability growing tax liability not necessarily because their income needs or their desired lifestyle spiked up dramatically but because their required distributions kicked in and once their required distributions kicked in it started to increase in their tax liability pretty significantly so much to the point though that their tax bill almost started to catch up with their core expenses that they wanted to actually live on so going through this right here helped us to identify some things were going to happen in the future and start to see is there a way for us to plan for that today to avoid some of the significant tax liability coming at a later time now before jumping right into that we did want to show them really quickly what was their probability of success are they in a good position just to validate what they came to us with we said yes look based upon your portfolio assets your income sources how much you're taking out of your portfolio each year based upon an assumed growth rate we're assuming a lower growth rate in their taxable account to moderate growth rate around 6% or so their Ira is they kept fairly aggressive so we don't really need to draw from the is for a while so we're going to assume closer to an 8% growth rate on that because they wanted to project a higher growth rate and really it was conservative of us to do so if we're planning on a tax liability being their big risk well there's a bigger tax liability the larger their IAS grow to so we don't want to too significantly limit the projected growth on their IAS because yes that's conservative from a retirement planning perspective to not count on too much growth but to not count on too much growth in your IAS is somewhat risky from a tax plan perspective because if you do get that growth higher IAS mean higher balances in the future mean higher required distributions which ultimately means higher taxes so we're trying to do a more accurate projection for them but what we could say is we could say Luke and Shannon yes here's your portfolio it's just projected to keep growing through retirement so conversation for a different day is what else can we do to really maximize lifestyle but secondly very high probability of success there's really even if there's a horrible Market horrible several markets in a row you have have a very high likelihood of success but now let's turn our attention to that tax piece because this is where Luke and shayon were really wise a lot of people say gez I'm in a good position I don't need to make any adjustments I'm going to be okay well a lot of other people say I'm glad that I'm okay but I want to just be okay I want to do the best I possibly can just because I have enough to last the rest of my life doesn't mean my taxes are optimized my investments are optimized my plan is optimized and Luke and Shan recognized that they reached out out to us knowing they were already okay to say can we do better and that's what we wanted to show them next so here's the tax page that we looked at to really start to identify Tax Strategies what this is doing what you can see here this purple this is showing their adjusted taxable income all things being equal today so before making any changes and what we saw is we could say luk and Shannon look your your taxable income is going to be pretty low for the next several years but what's going to happen is social security fully kicks in that bumps you into a higher tax bracket and then requireed distribution start and that again bumps you into a higher tax bracket so not only are we looking at their taxable income but we're overlaying the expected tax bracket that they'll be in so this blue bar here that's showing the 10% federal tax bracket so if their incomes below that it means well they're below the 10% Federal marginal tax bracket the next one the green is a 125% so today it's 12% when the current tax law expires or sunsets it's going to revert back to 15% and this is the level anything between this blue line and this green line they're in the 12% bracket then anything between the green and the yellow they're paying tax at 22% and you can start to see how those different tax brackets change over time so this was the picture that we painted we said look you're in a very low tax bracket today so yeah we could enjoy that we could enjoy a period of very low taxes but what that's going to do for you is if you don't make any proactive steps today in the future you're going to be in the 22 to 24% tax bracket could be higher if things change if tax brackets change so what can we do today to take advantage of very low tax brackets to avoid tax risk in the future of being in much higher tax brackets not because all a sudden you're spending more but because you're going to be required to start taking distributions from your account so here's what we started illustrating for them as we said let's start to see what happens if we fill up various tax brackets what do I mean by fill up well if you look very closely if we zoom in here they're below the 10% bracket today what if we moved enough from their Ira into their Roth IRA to fill up the 10% bracket to make sure that we're adding taxable income but just up to that level and then stopping what would that do well what we can see is if we fill up the 10% bracket it's going to have a little bit of an impact $65,000 of an impact not a huge amount though and that's simply because they don't have a toll lot of space to fill up that 10% bracket there's only a little bit that they can do to even make that happen so we said what if we fill up the the 12% tax bracket what does that do well what we can start to see is that's making a pretty significant dent in the overall tax liability that they're going to face now what we're looking at here I want to be very clear this is a tax adjusted ending portfolio that they would have so if I say to you you have a million dollars in an IRA or a million dollar in a Roth IRA same dollar value very different tax adjusted value because if you pulled all million out of an IRA you're only left with a much smaller number versus if you pull a million dollar out of a Roth irate you're left with a much higher number so this is taken that into account what's the actual value of what's left based upon a tax rate and based upon how much you have in IRAs versus Roth IRA versus other brokerage accounts but here's what's happening we can start to visualize this the purple is showing their current scenario what if you don't make any tax changes the green says look what if we pull some of that tax liability into today what if we intentionally pay taxes today up to 12% what it starts to do is it starts to lower the future bracket and starts to pull those numbers down so it's us saying look we'd gladly pay tax at the 12% rate today if it means we could avoid paying them at the 22 or 24% tax rate in the future now it costs money to do that we have to pay taxes earlier today and there's an opportunity cost for that because those dollars that we're using to pay taxes those other dollars aren't continuing to grow but this is taking all that into account and what we can see is is adding a significant amount to bottom line over the course of our retirement then we said just for fun what if we showed converting up to the 22% bracket we said look Luke and shanon this would save you almost $600,000 in taxes you're not having to work longer you're not having to save more you're not having to cut back on anything it's just the right tax strategy can put several $1,000 in your pocket that being said I want to show you that we're not just looking at ordinary income tax brackets what we're also looking at is we're looking at capital gains tax brackets now for you there's two capital gains brackets for everyone there's two capital gains tax brackets you have the 15% bracket and the 20% bracket you can be in zero below that 15 or 20 now regardless of whether you convert or don't convert you're probably going to be in the 15% bracket regard this so I'm not too concerned about what we're doing with capital gains bracket what I am a little bit concerned about is Medicare premium tax brackets so these are Herer charges so everything that we convert look if we did actually convert up to the 22% bracket we could do that and that makes sense from an ordinary income tax perspective but it's pushing you into a higher Medicare search charge bracket so what this is showing here is this just shows us high level where are the opportunities the reality is for Luke and Shannon it probably makes sense to convert somewhere between that 12 and 22% bracket keep in mind you don't have to convert the entire thing you don't have to go either all the way through the 12 or all the way through the 22 or all the way through the 24 you can do up to all the 12 and then part of of the 22 and that's probably what we'd end up looking at here for them so this software here helps us to identify those opportunities of what brackets lead to what tax adjusted ending wealth what conversion amounts today allow us to reduce the projected tax liability in the future and that's really what we want to look at we want to know what actions today bring down our projected required distribution in the future that's going to be totally subject to some tax bracket that we don't even know exactly what it's going to be at this point now by the way is this helpful to see if this is helpful then number one make sure that you subscribe because we release a lot of these Cas study videos where we change the names of course and protect client identities but walk you through the work we're actually doing with clients make sure you subscribe and leave a comment if this is helpful and let me know if there's anything else you'd like to see because these videos are all made based on feedback we get from you and feedback we get from clients hey here's what was fun we could show luk and Shan look based on this strategy you're projected to have over half of your money and completely taxfree accounts by the end of your lifetime so that's money that's been shielded not that the goal is to say how do we die with the most amount of taxfree money but one of the goals is to say we don't know what emergencies are going to come up we don't know if there's going to be major Long-Term Care events in the future we don't know if there's going to be major medical events in the future we don't know if longevity is going to be a significant risk so the best way that we can protect against those things is how do we have money in a tax-free bucket that we could drawn without increasing your tax liability to a significant degree in the future the other thing that's fun to look at is this we could show them here's what your required distributions are projected to be if you do nothing and you can see these required distributions get quite significant you're going to have almost $2.8 million of required dollars you have to take out of your IRA if you do nothing versus if you implement the strategy if you convert a lot of that money before even hitting required distribution age you'll still have a required distribution by the way the goal is not to eliminate that the goal is to make it so that these required distribution amounts don't push you into into a higher tax bracket than you need to be in and at the end of the day the goal is to say how do we see which option we pay the least federal taxes in and what we see is there's a pretty significant difference between the federal taxes paid with the proposed strategy versus the federal taxes paid if we do nothing the hard part and this is the expectation i' like to set is it requires paying a lot more federal taxes upfront it requires doing the hard work upfront to be in a position to minimize your future tax liability versus is the easy thing is to say you know what things are good I'm just going to sit on things as is but end up paying a whole lot more in taxes than you need to later on in life so what was the final result well number one we were able to validate for luk and Shannon that yes you're in a great position to retire and stay comfortably retired number two we are quickly able to identify way to save hundreds of thousands of dollars over the course of their retirement without them having to work longer save more or do anything else on their end number three we can now see how do we need need reposition Investments to optimize this even more to both support income protect you against market downturn and also free you up to do as much in Roth conversions as possible but number four and most importantly now it's time to dream a little bit when we look at this we see based on the position you're already in which is a wonderful position if we add to this the benefit of these additional strategies Tax Strategies investment strategies income strategies what else do you want to do with some of your money what else can we do to align your money with what's most important to you so that you can feel like you're getting the most life out of your money as possible so that was a fun conversation to have with Luke and Shannon to say yes you're in a good spot but by coming to us and saying look we don't know what we don't know we know we can do better we're able to put a great strategy in place to support their vision for a great retirement so in this video I highlighted just one strategy we're able to identify for Luke and Shannon pretty quickly I also made this other video right here and what this video highlights is it shows you three things three tax mistakes that most retirees make without even even realize they're making them be sure to check out that video because even if you're in a wonderful position to retire and have more than enough money to last for the rest of your life there's still probably tax opportunities to do even better I hope you'll take a look so you can learn what those opportunities are and what you can do to take advantage of them once again I'm James canel founder root financial and if you're interested in seeing how we help our clients at root Financial get the most our life with their money be sure to visit us at www.ro Financial partners.com

Channel: James Conole, CFP®

Views: 59,626

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: h47An54RzfM

Length: 18min 36sec (1116 seconds)

Published: Sat Mar 02 2024