The Roth 401(k) Tax Trap

[Music] you [Music] it's time for wise money with core horn Financial Group with Financial Advisors Kevin core horn Mike Bernard and Josh Gregory welcome to another episode of wise money with core Horn Financial Group where every week we're helping you take your next wise step in your financial life my name is Mike Barnard I am your host I'm also one of the certified financial planners on the show thank you so much for being with us with me in the key of G studios my business partners and friends and fellow CFPs Kevin Corcoran and Josh Gregory yeah we love the Roth IRA it's a tool and we are fans of having as many different tools on your tool belt as you can so we've been thrilled to see the Roth 401k become prevalent in the last five years or so now the interesting thing about that there is a trap that can impact your Roth 401k when you go to withdraw money in retirement most people don't know about it even as a financial advisor you might find this a little shocking so we're gonna talk to you about that today and get to some listener questions all right if you have any questions for us especially I mean today's contents going to start a little heady if you have any questions reach out to us you can do so a few different ways call our text five seven four two two two two thousand that's five seven four two two two two thousand online wise money radio.com you can also check out the blog right there wise money blog calm as well but you can submit questions right there on the website and catch up on previous episodes and then all over social media as well just search wise money show Facebook YouTube and Twitter and I'd encourage you stay engage with that content and subscribe to it like it and share it all that sort of stuff so as we come out with further announcements or blog stuff different content that it's always going directly to you and you can stay on top of it alright I'm going to chalk this one up to if you're not doing comprehensive financial planning even like Kevin said if you're not working with a financial professional who is always trying to sharpen the saw you just would never you would never know about this stuff I mean the US tax code is one of the most complicated tax systems in the world and I have felt that but I was actually doing some research for this and the authors stated that the u.s. tax code is one of the most complicated in the world and it's full of rules and an exception to the exceptions to the exceptions and so on and I mean that's why you need a CFP helping you with your financial planning well Matt Hoch on our team one of our CFPs I think he's been on the show before has he I believe he yes one stories maybe we need to get him on here but he was doing some research helping someone that had a significant amount of money in their Roth 401k was getting ready to withdraw the money and he said yeah I just we need to double check something here and came across a tax trap that essentially no one knows about so let's dive in from there what is it how does it work what's going on well the five year rule for the Roth IRA distribution it relates to distributions and it stipulates that five years must have passed since the tax year of your first Roth IRA contribution before you can withdrawal the earnings in the account tax-free yeah I feel like maybe we need to confess our contribution to the misunderstanding because whenever we talk about Roth IRAs we always sing the praises of how great this tool is that if you set aside money into a Roth IRA and let it grow for the future you won't pay tax on the the gains which is wonderful and we often cite the age fifty nine and a half if you keep the money in the account until age fifty nine and a half you can start taking withdrawals and spend it in retirement no taxes no penalties but there's actually an add-on to that rule that no one ever mentions yeah I mean it's not just you've got to get to age 59 and a half you have to be age 59 and a half and the account has to have been open for five years to avoid the penalties even that though is simple but it's but I think the rule is even more complicated in that you have to have an IRA open Roth IRA Roth IRA open for at least five years not just this specific account you could open a Roth area right now wait for five years and then you're done you've you've met that test it doesn't need to be that specific account so yes it is it is confusing we often do cite this simplified version because yeah you would expect that you'd have a Roth IRA open for at least five years but as we even pull back the layers of this onion even more you're gonna realize yeah I better get that done well we're often talking about Roth IRA being so powerful for young people if you're at the beginning of your career and you have literally decades that you could be contributing to this account it's so powerful that that growth can accumulate without ever being taxed so of course if you've got decades then you're gonna more than satisfy the five-year rule but the the Roth IRA can be an amazing tool for those who are approaching the end of their career as well and you want to really have this on your radar screen something that you're considering beginning to use within five years of your preferred retirement date all right so here's the wrinkle you guys thought that was the wrinkle here's the wrinkle everything that Josh just said Kevin just said that's the Roth IRA Shirley yes Shirley if you have a Roth 401 K and you're putting money into the Roth 401 K then you meet that five year rule right let me give you an example you start working and you're saving in that Roth 401 K Roth 401 K Roth 401 K and then you are ready to retire and you roll just like I think ninety nine people out of a hundred you roll that money from your 401 K over to your IRA so you move your Roth 401 K to a Roth IRA start pulling money out nope you have not had a roth IRA for five years exactly and you know even that concept that most people do not leave the money in their 401 K at work when they retire it is there's all kinds of reasons for why people would roll money over to an IRA they have more flexibility on the investments easier method of taking those distributions and everything but as you just said when you do a rollover from a Roth 401k to a Roth IRA you're beginning potentially a new five year period of time and you may not want to be waiting five years to start taking those distributions you may be subjecting yourself to unnecessary penalties because you just didn't realize that this this trap existed so there are ways in and the only thing that I would add the other wrinkle when you think about this with a Roth IRA if I put money and let's call that my basis I can withdraw my basis at any time totally tax-free because I put after-tax money in so I pull it out tax-free it's the earnings that were we are concerned about so when you when you look at this people say well can I use the Roth IRA as this tool this is a great tool can I use it there are some income constraints on whether or not I can use it and so there are not everyone necessarily qualifies to do a Roth IRA so you really again mike says work with a financial planner make sure they're certified make sure they work in the six areas of CFP and they've got a good handle on the tax planning but also this technical side of it because there are lots of different ways to do it I think of the situation with the client who's an incredibly high income they don't qualify to make a contribution to a Roth IRA but they've got the Roth IRA in their 401k so they don't have a Roth IRA outside and you say well start one well if you can't contribute to a Roth IRA outside how do you start it well there there's lots of kind of creative ways to do it one way to do it is to look at your plan see can I do an in-service withdrawal can I roll money out of my plan and and get that that clock started ticking well I mean so so that is so what's the what's the prevention mechanism here and the prevention mechanism is to start that five-year clock right now for your Roth IRA if you don't have a Roth IRA even if you've looked and said you know what I actually am working with a certified financial planner and we're doing comprehensive financial planning so I'm good and I'm funding everything pre-tax I would take 50 bucks and put it into a Roth IRA if you're allowed to if you're eligible which hopefully you are I would at least get 50 bucks into that Roth IRA so you get that account open and start that five-year rule and if you're not sure whether or not you are eligible for a Roth 401k not every 401k plan out there has added this relatively new feature it's something that your employer has to build into the plan for you at work but if you if you're not sure then it may be one of your best action items come Monday morning to contact your human resource manager contact your supervisor find out whether or not this feature is available and whether or not you should maybe begin considering using it moving forward I mean yeah that's the thing that the takeaway here is not avoid this Roth 401k and avoid Roth IRA because that's five year rule is confusing those guys tried to explain it and they didn't do a great job and so no it's not to avoid it it's actually to use it but then be aware of these rules and so on we're actually going to spend a couple minutes then talking about well hey here are some clear-cut examples and circumstances where you would want to use the Roth IRA and 401k and then even a couple where you might not want to so we've got a lot more to come here on wise money with core horn Financial Group all right let's pick it back up we'll talk about hey when really should you consider using the Roth IRA and 401k and a couple honorable mentions for when you shouldn't good is the Roth 401k such a great tool or does there are there some tax traps you need to be aware of before jumping headlong into it actually we shared a tax trap that was boy quite alarming not a lot of people know it and we're gonna talk a little bit more about that in just a few moments thanks for being with us this is wise money with core horn Financial Group my name is Mike Bernard here with me in the key of G studios Kevin core horn and Josh Gregory thank you to the attorneys at LaDuke earning keen now south bank legal as well as First State Bank for sponsoring the content of today's show thank you very much and a few moments were going to be getting to your questions thanks for submitting them and thanks for your patience if you have questions give us a call send us a text by some four to two to two thousand that's five seven four two two two two thousand online wise money radio.com and then social media districts wise money show YouTube Facebook Twitter and subscribe to it and so on so that you get all that content and never missed a thing ok so we were sharing that there is this unique five year rule when it comes to withdrawing dollars from your Roth IRA and there's even a five year rule when you're doing withdrawing dollars from Roth conversions which maybe that's a whole nother show this gets really really technical and it turns out that this obscure five year rule is not immediately free Roth IRA is not satisfied by a Roth 401k so you've got to make sure that you open up a Roth IRA even if you just put $25 in or $50 and you've got to be eligible but get that thing open because really all you need is a Roth IRA open for at least five years and then you're good you're good with this rule forever and so get that started now so with all these complexities and concerns is the message that you shouldn't be using the Roth 401k or Roth IRA no absolutely not you just need to have a sure but you need to have a guide let's talk about some circumstances some very clear ones don't make these decisions in a vacuum outside of the context of all six areas of your financial life but what are some circumstances where you definitely say you got to consider the Roth 401k you should be using it and before we do that can I just know you're going there I can't help it because I'm thinking about the the person listening right now saying okay so it sounds like I have a choice between doing a Roth IRA and a Roth 401 k that is actually not your choice you have think of this you have a coupon every year you can put in in the 2019 limits or you can do an IRA you can do an IRA or a Roth IRA when you can put six thousand dollars in if you're 50 plus you can add another thousand to that so your IRA slash Roth IRA limits for 2019 or $7,000 and then in addition to that if you work for an employer and they have a retirement plan you can just I'm going to keep it simple and say it's a 401k you can put $19,000 in that and you can do those as traditional contributions or you can do those as Roth contributions if you're 50 plus you can do another 6,000 so numbers don't work very well on the radio just think my IRA I can put 6 to 7,000 in my 401k I can put 19 to 25 in and yes you can do both of those and yes in spite of income limits with a little creativity if your situation allows for it and most people's does you can actually fund a Roth IRA if you exceed the income limits yeah it's amazing when you think back over the past 10 or 15 years how how big the contribution limits have gotten on these retirement plans I made a grant I think the government has recognized that there's a retirement crisis in this country people are not prepared they don't have enough saved and so we've been given the opportunity to set aside more money than ever into these tax advantaged accounts and we've been we've been highlighting the Roth IRA today and the Roth 401k because of some of the unique features that they have but there's some traps that we were unpacking in prior segment I think when I think of a Roth account either type Roth 401k or Roth IRA my mind naturally goes to younger people because the longer that you can use this tool the longer that the money can be out of the reach of the government and growing in some sort of investment portfolio that you've built tax-free it is just amazing and to me that the the power is in the length of time that you have the money set aside by way of an analogy if I were to give you a pair of round-trip first-class tickets to anywhere in the world okay you can go you can fly anywhere from any airport to any other Airport and back again you would probably pick some sort of long flight like you're probably thinking Hawaii or Fiji or Australia somewhere far away you're not gonna use those tickets to fly from South Bend to Detroit right Chicago Chicago even shorter right so the the value of those free tickets that I gave you is in being able to enjoy the flight in a better setting than you would have in coach right never enjoy the flight never just because you've never flown first class I'm just imagining what the people at the front of the plane enjoy but here's the thing the longer you let your dollars fly for free the longer that it stays in a Roth IRA the more powerful it really becomes in your life so think long think long on these dollars great analogy Josh and you know we're talking about this five-year rule I mean the benefit is on how long you have those dollars growing tax-free so that is why when you talk about the Roth benefits you rarely mention this five-year rule because yeah you're gonna have it for longer than five years you want this money to grow tax-free right so think about this what the practical application here is if you have children or grandchildren that are working in the summer and and maybe they made 1,200 bucks for the entire year and you a lot of times people think well if my child or grandchild made 12 hundred bucks in the summer they have they would have to put that those particular dollars into a Roth IRA well the reality is you could start up a Roth IRA for the benefit of your child or grandchild and put a thousand bucks in the plan and now they're started so a lot of times what we encourage clients to do is if they have a couple extra bucks laying around and they're so inclined to get that started for their children grandchildren it's never too early to get a Roth that Roth IRA started but if you're in your 50s and you don't yet have one it's time to get planning the other circumstances I think of so so the first thought that you had Josh was age and the second thought that I thought or the second thought I had was tax bracket mm-hmm you know a lot of times you got to move the needle as to pre-tax or raw depending on your current tax bracket now that's all changed and and I don't think the three of us are totally totally in agreement on this it's certainly circumstantial but what was two years ago the tax rates they're now a little bit lower and so right now the twenty four percent tax bracket seems high because you got to get through the ten in the twelve and the twenty two and then the twenty four that seems high couple years ago you'd say no twenty four that's better than twenty five and so that's pretty low and so knowing at what tax bracket for your situation you should be using Roth versus pre-tax that is a crucial decision that is found at the Kennedy the intersection of all areas of your financial life yeah if you look at tax brackets today it starts at ten percent a federally starts at ten percent it goes ten twelve twenty two and I remember back in the day when the Roth IRA contribution limit was two thousand dollars and the tax brackets started at fifteen and went to twenty eight percent and if for a married couple is at about forty thousand that went to twenty eight percent so people were saying well hey hey taxes on the money now and get it in your Roth IRA because what do you know for sure is gonna happen 20 years from now 20 years from now tax rates are probably gonna be double well here we are 20 years later in their half that's true and we're we're adding to our debt about a trillion dollars a year right so since you meant it back then now we really just like interest rates they will have to go up from here right and and we've been saying since 2006 interest it's growing up in straits growing up the the the broken clock is Right twice a day so but ultimately you've got to make a decision based on your financial life this isn't one where you're talking to your colleague at the watercooler and they're saying well I'm using the Roth and you say oh well I should be - actually that must be a good idea it's gotta be based on your financial plan and your specific situation so we've got we've got to talk about well other times when you definitely should not use the Roth we've got that and your questions coming up here on wise money with core horn Financial Group I don't I don't wanna I don't think we should spend much more time on this but maybe a circumstance or two and then we'll get into questions and I have Eddie tickle in my throat I keep thinking I'm gonna call fight into this mic or worse what no I'm I'll be okay but thank you all right I have not looked at these questions okay so how long are we gonna go on the Roth area then just a couple of minutes yeah two minutes okay so can we talk about when it's a bad idea yeah that is two minutes I tell him but can can we also talk about when you must week instead I know but there's I got a little bit more I know we're able to say everything yeah we should we gotta get know okay extra content for YouTube oh okay YouTube here it is I'm delivering taxes we prepare 2,500 tax returns during tax season I'm delivering taxes to a divorced single woman and she's she worked at Notre Dame yeah I don't think you'll be able to identify her by that but she were tickler Dame and she comes in and she's paying in federal taxes zero and the the person who helps her with her retirement plan through a Notre Dame encouraged her to increase her contributions to the retirement plan protects traditional yeah so she's paying no tax and she's building up a tax liability to at some point in time pay taxes on at something higher than zero yes silly and or for her or her children yeah so that's when that's a shame lack of financial planning and it is it and there are a lot of Ministers in that situation yeah we're where they should not be doing pre-tax money yeah all right cuz they have housing allowance great hey we just started [Laughter] Josh all right how does it work if you are drawing Social Security and you want to work a little bit on the side part-time does that mess with your social security does it are you penalized we're gonna talk about that that was a great question texted in to us recently this is wise money with core horn Financial Group thanks so much for being with us my name is Mike Bernard coming to you from the ka-choo studios with my friends and business partners Kevin Corr horn and Josh Gregory if you're watching on YouTube right now Kevin is just flexing right there I say yes all right hey thanks to Bethel University adult and graduate studies as well as Diane Bennet and her inspired homes team serving Indiana and Michigan reach out to them if you have any needs if you have any questions we're gonna jump into those in just a second couple of the first ones were texted in you can text us five seven four two two two two thousand that's five seven four two two two two thousand and I'd encourage you to put your name and your age and maybe where you live at the beginning of that message so that we can identify it and ping it back to you online wise money radio.com also wise money blog comm to catch up on content that way and then social media just search twice when he show YouTube Facebook Twitter subscribe to it and you'll get all the content delivered right to you there we are wrapping up a a kind of complicated discussion about the Roth IRA the Roth IRA a great great idea in a vacuum it has some complexities to it though and so still don't be concerned by though don't shy away from the Roth IRA Roth 401k because of these complexities just be using that in the context of your overall financial plan there's just a couple of things we want to point out as to when you wouldn't want to use the raw there's another really big personality on the radio talking about finances who basically listen to him and it's like the Roth IRA can do no wrong you'd be an idiot not to use it and he might call you that actually but it's based on your financial plan so guys what what's an area tour a time or two when you'd say no I would not use the Roth you know a scenario maybe if you are getting ready to send kids off to college and the the beauty of the Roth IRA is that it grows tax-free however when you make your contributions it doesn't save you any taxes doesn't help lower your income and maybe lowering your income using a traditional account could help you qualify for financial aid so you need to pay attention not just to your tax picture but maybe other areas of your financial life like preparing for the college years I thought you were going to say there are some tax credits that are based off of your adjusted gross income the number that used to be at the bottom of your first page of your tax return but now I have no idea where but some of the tax credits especially these very valuable college credits are based off of that adjusted gross income number your Roth contributions or your Roth 401k contributions do not reduce that number and if you need to reduce that number to get some of these tax goodies you should use pre-tax mm-hmm well in the other situation is if you're in a really high tax bracket today and you anticipate being a lower tax bracket in the future and as we said in the last segment that was that used to be foolish talk right there's no way you're gonna be in a lower tax bracket in retirement no actually a lot of people if you're a married couple married filing jointly you can have about a hundred grand of taxable income and not get out of the twelve percent tax bracket so that's where you really want to have a tax plan I was just meeting with the client and talking to them about who does your tax planning and I almost went inevitably whenever that question is asked they tell me the name of the person who's preparing their tax return and I say well okay so that person prepares your tax return do they help you with tax planning and it was interesting because this guy's a business owner he said well if I ask questions they'll answer them for me and I said well that sounds like planning but it might not be and maybe what you want to do because you're in your 60s is look at how you're gonna display of the business and the real estate and the other assets and have a tax projection between now in the rest of your life so you know what it looks like and that's in the context of that that's when you decide should it be a Roth 401 K should be a Roth IRA so you really want to be making these decisions in the context of your plan not just making them in a vacuum it was in a vacuum any any bald-headed person can get on the radio and say well that's stupid you're stupid you should so you should have rot so anyway if you need some help you need to reach out to your certified financial planner who's doing comprehensive financial planning if you don't have one if you just have someone that's given an investment advice or you're not you don't have a relationship by all means you can contact us we'd love to help you can find us online why is money radio calm or if you're in the in and the market for a CFP and and you're just want to look at your option to go to CFP Netcom I believe search the CFP website so all right let's let's dive in some listener questions here we've got a few I talked to the first couple were texted in unfortunately no names and and locations here so the first one that was texted in here's here's the question if we are retired and we've begun drawing Social Security can we earn extra money on the side so that we can leave the rest of our retirement nest egg alone yeah the quick answer is yes you can go earn a paycheck even after you've started drawing Social Security however there could be a trap here depending on how old you are right so if you are under your full retirement age and this is a different age depending on when you were born somewhere between 65 and 67 these days most people at 66 to 67 but prior generations it was earlier if you are if you are under full retirement age then you are now limited on how much you can earn in paycheck money and that dollar amount has gone up a little bit each year it's seventeen thousand six hundred and forty bucks per year and I want you to I want to just tweak what Josh said a little bit you are not limited on how much you can earn you you can you can earn an unlimited amount of money the first seventeen thousand six hundred and forty dollars is not going to affect how your Social Security is taxed that's right but if you but no no no no you said that wrong I'm gonna tweak what the first seventeen thousand six hundred and forty dollars is the limit on how much you can earn before the government will start chipping away at your Social Security benefits that's exactly what I said so okay so let's make it a simple and easy scenario I'm retired my wife's retired were 62 and we both draw in Social Security we earned as a household twenty seven thousand six hundred and forty so we earned exactly ten thousand dollars above that limit what the government's going to do is take back a dollar for every two above that that we earned so they're gonna take back five thousand dollars of your Social Security your Social Security benefit so I look at that and and people will say well then I shouldn't make that money right like no make that money you have that you have the money that you made they're not taking back any of the money you made you have the money take the money and and so and if you think you're going to consistently earn well above the seventeen thousand six hundred and forty limit and you're 62 or 63 or 64 then you might you can actually stop your Social Security benefit so I would keep that in mind what we what we would encourage people to do is wait as long as you possibly can to start drawing Social Security and what you want to know is the year that you turn the the year in which you reach full retirement age for Social Security you want to be aware of that and if you're beyond the year in which you turned full Social Security retirement age you can earn an unlimited amount of money and you have your social security be my sole retirement age that I was referring to is an important age because it changes it takes away the the limitations on your income earning ability you can earn as much as you want starting full retirement age and beyond so keep working and don't start drawing your Social Security too early if you're going to still be earning high income because you're gonna that they're gonna chip away at that benefit and the longer that you delay your Social Security benefits anyway you're getting rewarded 8% a year for for waiting yeah there's a couple things you need to be aware of is your Social Security taxable and then is it penalized those are two different things they yeah they sure feel like the same thing but that's you again you you need you need planning for that and there's also just one other honorable mention the year in which you start drawing your Social Security if it's before your full retirement age that annual income limit turns into a monthly income limit so just be aware of that hey what if you own a small business you're running out of your house at what level does it become taxable when can you take that home office deduction we've got that and more coming up here on why it's running with core horn Financial Group sorry they ran all along okay there's a bit at the beginning we can cut out did I had some some good stuff left on the table there so we did answering that question I think we'll have that question again well the the question that wasn't asked that I wanted to answer or just kind of add on to what Josh said was a lot of times when we have clients retire before full retirement age and they're just not sure but because everything is kind of up in the air they want to take control of something so they run down and sign up for Social Security and I would say hey mate last thing that you do because a lot of times you were saying well I'm I might get called back into work for for something I'm considering some consulting projects yeah I have contacts in the business that have asked me to do stuff for them for years and so just okay we are gonna talk about this for just a second longer on the air good okay sweet and I might stick my foot in my mouth no it's never stopped me before I'm here to pump you up alright thank you so much for being with us today this is why is Munny with core horn financial group coming to you from the world headquarters of core horn Financial Group in the key of G studios my name is Mike Bernard here with me Kevin core horn and Josh Gregory do me a favor if you are listening right now on podcast or on the YouTube channel what I'd like you to do is subscribe to it if you haven't done so yet subscribe to it on YouTube it's hit that little that little bell that subscription and that way every time there's a new episode that's that's posted or any other content that's posted that it immediately goes to you and you say yep I am completely up to speed and I can easily share this information with others same thing on the podcast the feedback that we're getting more and more people are listening to to podcast and to the show on podcast thank you very much but there I know are lots of other people that are looking for wise financial habits and so if you can subscribe to the show and then rate this show that will help others find it as well that helps us you can catch up on all previous episodes right there both of those ways on the podcast wherever you listen podcast search wise money with core horn financial group or on the youtube channel just search wise money show and you can also catch up on every previous episode right there on the website wise money radio.com alright we are wrapping up a question that was texted in that said hey if I've already begun my social security can I can I keep working making extra money so I can leave my retirement nest egg alone and we we should be done with this but I just I've got to get on a soapbox here I was driving around in my car and I'm listening to favorite radio station and I heard another financial professional on the air talking about how they can help you draw make avoid the mistake so that you draw Social Security as soon as you possibly can and not waste hundreds of thousands of dollars and guys I almost drove my car off the road I almost did it was that to me just being a you know we've got this show we are not we are financial planners we are not radio show people but we have an outlet here and I say that gives us a stewardship responsibility to give great guidance and I heard this individuals saying well that's exactly what the public wants to hear even though it's a flat-out lie that's what the public wants to hear so they're gonna spin that and say that is the best thing for you and see I told you so call us guys had to blatant mistake what Kevin and Josh said earlier is listen if you're unsure about when to retire and whether you really will be satisfied being done with work but you're done and you just think well I have to go draw Social Security just wait just wait then sit down with your certified financial planner make sure you're making the best decision because each year that you do wait that Social Security can grow will grow for you and it can be significantly higher over your lifetime but that's not Blake a blanket recommendation either it's got to be based on your personal financial situation anything you guys would add in there well it's just it's one of the biggest financial decisions you'll ever make in your lifetime and the only way to know whether you made ultimately the right decision will be in hindsight right you you you cannot know on your way into this decision whether it's the right one or not so you have to assemble get the right fact pattern and make the best possible decision and that is that's where we really encourage people listen there are 10,000 baby boomers are going to turn 65 today there are a ton of baby boomers and some of them are going to be seeking financial wisdom there there is a well-worn path to the door of certified financial planners who provide financial wisdom so I would get my spot in line now and get the plan going get the plan going more than three months before you need to implement it right get it going years in advance of when you need to implement it okay I want to get your opinion on another concept it's all related to this same question because this person who texted in their question they said should we start our social security so that we can leave our retirement money alone or should we keep on working while drawing Social Security so we don't have to dip into our retirement assets and that's an interesting question a part of me thinks that it also has to do with what's going on in the markets or in your portfolio because there may be a time when drawing Social Security early or continuing to work while drawing Social Security maybe that allows you to postpone dipping into investments that happen to be at depressed levels at that time so some of this has to do with just the timing of as you're approaching your retirement goal what's going on around you what's the context that you're making this decision in as well yeah and I would say what it has to do with is what you did 20 or 30 years earlier like we talked about the Roth IRA at the beginning of the show having built in tax diversification into my portfolio where I can I can create the cocktail of retirement income that just absolutely maximizes my income tax situation and puts me in the best position to pay as much in taxes as I can at the lowest possible rate and possibly not have to draw Social Security yeah so we need to move on does it matter here's the next question that was texted in does it matter how much I make from my sewing business for tax reporting purposes in other words is there a threshold that I need to exceed before I need to start counting this income on my taxes that's a great question it continues and when I do start counting it what can I write off finally if I have a sewing room dedicated in my house to this side business but I also use it for my own personal sewing am I allowed to use a home office tax deduction lots of questions there great stuff I hope we have time to you know pull the thread on this one and and unravel it what do you guys think I was not a and you always needle me about that stuff and I'm thinking why is that oh ok so Joshy do you want to start well you know it's it's interesting because often we get this question more on from a different perspective it many times people start a hobby business that they start doing for friends and family they start earning some income and they often have more expenses than they have income coming in and so they're actually on their tax return it would show up as a loss they actually want to say no no this isn't a hobby this is a business and because they want they want the loss exactly but you know the government's kind of on to that and they really don't want you just perpetually showing a loss on your tax return because they're gonna deem it to not be a true business that exists for the purpose of creating a profit and you know and I'm not I don't have those exact rules right in front of you but I think it's you've got a if it's if it's a side business a side hustle then you've got to make you've got to show a tax profit within three years and if it's an actual business you're running and you haven't shown a profit in those three years then you kind of need to prove that nope this is a business that I'm running for profit that and my intent is to make money so I think that is probably the first question need to ask yourself is this yeah you might be calling it a business and selling some things but is this really a hobby and that would be the first thing if it if you're saying no I it's it's a it's a business and I am making some money at it then technically yeah you got to report that there isn't a fresh hold where it's like well once you make over ten grand you've got to report it now you've got to be reporting and then like we've said you then get to deduct your supplies and the other expenses related to you running that business yeah and one of the deductions or the write offs that you're able to take is the one that was referenced here it has to do with the business use of your home and what a lot of people may or may not know is that you you have the ability to carve out a certain portion of your house and dedicate it to a home office or some sort of assembly area and as long as you use it exclusively for the business then you can take a deduction on your tax return so you basically calculate what portion of my home am i using and based on that portion you get to write off things like your utility bills and your real estate taxes and things like that and there's a simple there is a simplified deduction where you can deduct 300 square feet at five dollars a square foot so talk to your tax planner and do planning you do because you're using this same space for a personal sewing and to me that means it's not eligible but I'd want you to talk to your tax planner and the person the CPA who's preparing your taxes great questions I hope that that was helpful thank you so much for listening today that's all the time we have for today if your again listening on youtube or podcast be sure to subscribe it like it share it rate it all that sort of stuff thanks folks on behalf of Josh Gregory Kevin car horn and the rest of us at core horn Financial Group have a great weekend we'll see you next Saturday for wise money with core horn Financial Group securities offerings are civil of securities member finra /si pcity advisory services offered through Camp G wealth manager see during this assess corn Financial Group kmg Wealth Management LLC and Silver Oak securities incorporated companies are unaffiliated [Music]

Channel: Wise Money Show

Views: 79,565

Keywords: Wise Money, Money Podcast, Financial Advisor, Financial Planner, Personal Finances, Save Money, Dave Ramsey, Taxes, Finances, Financial Peace, Financial Freedom, Financial Independence, Retire Early, Tax, Tax Laws, roth ira investing, tax tips, roth ira vs 401k, retirement income strategies, retirement income ideas, roth 401k, roth ira, retirement crisis

Id: wHHDSj1c0w4

Length: 45min 33sec (2733 seconds)

Published: Sat Jun 08 2019