Tax-Savvy Retirement Planning for Affluent Investors Video from Savant Wealth Management

Speaker 1:

Download our complimentary guidebooks, checklists, and other useful financial resources at savantwealth.com/guides.

Joel Cundick:

Good afternoon everyone, and welcome to Savant’s live webinar series. My name is Joel Cundick. I’m your host today. I’m a financial advisor in Savant’s Vienna, Virginia office. I’ve doing this for a lot of years, and I love talking about tax topics, at a time of year when there’s actually something that we can do about it, as opposed to April. Everybody thinks about taxes in March and April, but there’s a time of year when we’re within the tax year, we can actually do something about it. A couple of housekeeping items for today. There is a Q&A window that you can use to post questions to me. I’m probably going to be going through my presentation for the majority of the time. But we’ll get to the end, I’m sure we’ll have time for questions. I want to make sure I answer them. If you don’t get a question answered, we will have a survey link posted at the end in the chat that you’ll actually be able to click on to ask any questions that were not answered during the time today.

So, our goal is to make sure that you get the answers to the questions you have. There’s a lot of webinars that you’re going to go to that are going to be light on content, heavy on marketing, hoping that you didn’t get any questions answered and you scheduled time with one person. But my hope from our time together this afternoon is, you get a lot of your questions answered that you brought with you today.

The agenda for the meeting today is we’re talking about tax-savvy retirement planning for affluent investors. That’s a mouthful. What does it boil down to? Well, we’re going to talk about how to withdraw funds when you’re in retirement in a tax sensitive manner, how to take advantage of Roth conversion opportunities. When would we want to do that? And there’s a lot of articles written about Roth conversions and there’s a lot of truth, but a lot of error mixed in with that. So, we want to quell some of that and really zero in on the appropriate times that we would want to do Roth conversions.

We’ll talk about how to invest in retirement, which by the time you’re nearing on retirement, you’ve got generally quite a few buckets of where you’ve been saving into and what’s the best way to invest in a tax savvy manner. And then we’ll finish up talking about both estate concerns and charitable giving concerns. These are both topics that can really grow in importance. I mean, they were always important, but as we get close to retirement, we zero in on them more and start thinking, is there something that I need to do there? Hopefully I’ll help you figure out if there’s any changes you need to make there as well. Let’s get started though with taking money out of our portfolio in retirement.

This is one of the hardest things to do as I’ve talked with folks over the years, especially those who get to a position where they have a substantial amount of money. Generally the way that has happened is from saving in a disciplined manner over the arc of a 40, 50 year career. And the saving muscle is very well-developed in the wealthy, right? That’s how you accumulated the money that you got. You remembered every paycheck, I’m supposed to put money aside, I’m supposed to defer. You don’t want to be five years into retirement and still deferring money for retirement, but that often is what will happen in a vacuum. And one of the most important jobs that an outsider bringing a third party into the conversation would have would be to help you come to terms with how much you’ve accumulated and when it’s okay to stop and when it’s okay to start withdrawing.

And it’s easy to just continue with this deferral of gratification saying, no, it’s not for me. Now it’s for my heirs or it’s for my charities and my choosing. And they’re all going to get plenty. But what you want to do is prioritize the spending side. And in order to do that, oftentimes you have to come to grips with taxes because you’re going to have to pay some taxes to withdraw and that is going to act like a significant barrier in your desire to spend. But if you don’t overcome that, you’re going to leave everything locked up and feel like you could never spend money because there will always be tax. If anything, the tax bite will grow in the future if you don’t do something to take care of it now. So, we look at withdrawal sequencing, which accounts are appropriate to take from.

Then we look at your brackets each year. This is something that’s going to be a moving target. We think we know what the brackets are going to be for the next few years if we can kind of assume some inflation, but one thing that has been proven in my over 20 years of doing this, I’ve learned is that no tax regime is constant. We think that we have a good idea of what taxes are going to be, but at the end of the day, tax regimes are going to change.

And so, we’re going to need to be responsive to that in the way that we withdraw. And then we’re going to need to be mindful of required minimum distributions, RMDs. Those are coming to us at some point in the future if you are not already receiving them. And if you’re not careful and thinking about them well in advance, then they can crop up and become a major tax for you at a time of life where you were really hoping to maybe reach the point where you were spending a little less. You still have to pay taxes, and sometimes substantially more taxes in then your early years of retirement if you haven’t done it right.

So, the first thing I want to get on the same page about is the kinds of accounts that are out there. And you have 401(k)s and 403(b)s and 457s and EDCs and TSPs and alphabet soup, IRAs, right? But at the end of the day, there are three types of accounts. There is a taxable account, which means that all of the assets in there are going to be subject to taxes when you sell the holding. So, it’s going to be a joint brokerage account, an individual account, a trust account. These are things that we make purchases, hopefully the assets in them grow. At the point that we decide to sell, we will owe a tax on the difference between what our purchase price was and our sale price was.

Then we have tax deferred accounts. Tax deferred accounts start life as a 401(k) or 403(b) or TSP or even just an IRA. But over time, once we’re no longer working for an employer, they can all be rolled over into a traditional IRA. And the idea here is that you did not pay income taxes at the time of receiving the funds because you said, “I won’t use those funds now. I’ll push those off to the future until I retire.” When you retire and you start withdrawing funds, now you have to pay ordinary income taxes on the entire withdrawal. Often this is good math because we were in very high income tax brackets while in our working years, maybe we’re in a lower income tax bracket in retirement years. But again, we can get a little lost in the woods here if we decide that we’re going to try and just have zero tax in retirement.

Having a lot of assets in a tax deferred account is going to make that difficult. And we’ll talk about that as we go on here. Annuities often can be considered like tax deferred vehicles. Even if you have a non-qualified annuity with basis, all the growth that occurs in an annuity is going to be subject to income taxes someday when you withdraw the funds. And then we have our tax-free bracket, which was not available when most of us started working probably on this call. Now your children have a lot of opportunity to save into these Roth accounts. The idea on a tax-free account, you kind of think, “Well, why didn’t I put all my money into that?” Well, you had to pay taxes at the time that you received the funds. So, you still paid ordinary income taxes, you just paid it before you put the money in the account, and now you’re not going to have to pay any money on it after.

When you take the money out, it grows tax-free, all withdrawals are tax-free, but it’s because you put in money that was post-tax to begin with. So, if the tax brackets are equal, you would generally say that tax deferred, Roth, both pretty similar outcomes. You either put the money in, don’t pay tax, grow it and pay a lot of tax when you take it out, put the money in after tax, have less amount to grow, and then be able to take funds out tax-free at retirement. It’s the tax arbitrage, the idea of I don’t know what my tax rate is going to be when I withdraw. I know what my tax rate is going to be a point of funding. And that leads to the creation of these accounts where you kind of think, oh, I’m going to owe less tax in the future, probably use a tax-deferred.

Oh, I’m going to owe more tax in the future. Maybe we think about a Roth account. But you’re going to be at the point of retirement where you have maybe just one of these account types. I’ve worked with folks who only have a tax-deferred vehicle. You may have all three, taxable, tax-deferred, and tax-free. And what you have to think about then is, well, where am I going to take the cash from? And the big principle at play here, the one I want to make sure everybody remembers going home today, is that if you are only thinking of the current tax year, you’re going to make very different decisions than if you’re thinking about the whole arc of your retirement. And it can lead to some very bad tax decisions.

I’ve sat across the table from a friend looking at their tax return and they were very proud, because in year one and year two of retirement, they owed zero tax. They were in the 0% tax bracket. And I kind of had to sheepishly point out to them, but truthfully, I’m going to speak truth where I see it, that was a foregone opportunity. You do not use any of the tax brackets available to you, and we’re going to talk about multiple ways you can use them. But we want to blend tax rates over the course of a long retirement. We do not want to solve every single year for what’s the lowest tax I can pay this year. If we do that, we’re going to pay very low taxes in early retirement, very high taxes in later retirement potentially. So, we have to analyze which of these accounts are we going to take from?

In early retirement when all our income source or ordinary income source has gone away, that’s a time when we can take some money out of our traditional IRAs, use it for spending or convert it over into Roth accounts. We’ll talk about that later. We can realize some gains in our brokerage accounts, because there is actually a 0% capital gains bracket that we can take advantage of with the first portion of our withdrawals. So, that’s called capital gain harvesting. It’s not very commonly used when you’re in your working years, but quite commonly used in early retirement years. And we want to consider, are there years where we want to be taking withdrawals from Roth accounts? That’s probably going to come later in retirement though, as we’re trying to control our tax brackets, manage our tax brackets by not spiking into new levels, but taking what we want when we need it.

So, optimize lifetime taxes, that’s the message what I was just trying to convey. We’re not going to optimize for 2026. We’re going to optimize for 2026 through 2056. And we don’t know what future taxes are going to be, but we have a pretty good idea. Generally, you would expect that tax rates stand to rise in the coming decades. We’ve been in a low tax regime for a number of years here. I don’t think there’s much expectation that taxes are going to go substantially lower. We can adjust the timing of our income. And this means that, when we have saved into these tax deferred accounts, we have a lot of control over when we take the money out. And so, we want to be very deliberate and conscious about when we take the money out. And when we get to a period of the year where it’s towards year-end and we have a good idea of where our income’s going to be for the year, it may be that it makes sense to accelerate some income into this year when we look at our bracket.

For example, if I’m right at the beginning of the 22% bracket, I’ve got plenty of room there and I can see that, in retirement, if I’m not careful, I’m going to be in the 32% bracket and at my age 73 or 75, whenever my required distributions are going to start, it may make a lot of sense for me to withdraw from my IRA up to the top of the 22% bracket, either to just put in a brokerage account or a bank account, because I’m going to be making, have large expenses over the next couple of years or to do Roth conversions and move that money out of the tax deferred account into a Roth account. But we want to control our income time. We want to utilize tax loss harvesting. So, I said capital gains harvesting. Now I’m going to say tax loss harvesting. What are these two concepts?

Well, the idea here is that, when you purchase a security, I think I referred to this earlier, you have a purchase price and you have a sale price. You hope that sale price is higher. The sale price could end up being lower. If you’ve gotten to a stage of the year, and this is a common time to do this, where you look at your investments and you say, Wow, some of those purchases I made didn’t go the way that I wanted them to. You have a choice. You can say, Well, I still believe that this is the best investment for me to hold and so I’m going to keep it. Or you can say, Actually, I like another investment better, I think my chances of making money are going to be better in another investment than this one. And so, why don’t I lock in the loss to use on my taxes?

What does that amount to? Let’s say I purchased something for $100,000, it’s now worth $80,000. When I sell it, I get to claim that $20,000 loss on my tax return. Now, if I have other gains that I’ve realized throughout the year, I can use that to offset. If not, I can carry forward that loss into a future tax year. I think I’ll have a slide on that. We can go a little deeper in a moment. We’ll also want to be implementing state tax planning. And what does this mean? Well, some states have unique regimes on the way that they tax income. For example, they may tax capital gains, but not tax ordinary income, vice versa.

You may be considering moving in a future year to a state with a lower income tax than the state that you are in. We want to be mindful of that. All of the things that are coming up in the future, we want to be careful about. If I live in a very high income tax state like New York, I’m contemplating moving in the next five years to the state of Florida that has zero income tax, I might not want to be accelerating moving any kind of income into these tax years. I might want to be waiting to take income out when I’m going to be subject to a 0% state income tax rate. The opposite could also be true. I could be living in a low income tax state like Wyoming, and I could decide that I’m moving to California just because that’s where my kids are, let’s say.

And when I do that, I’m going to move from a very low state income tax regime, zero, to a very high state income tax regime. So, now I want to consider accelerating income into those years. So, when you have so much more visibility in retirement than you did in your working years, somebody in your working years, oftentimes you’re just following where the job is, but now you’re in control. Well, let’s be in control of taxes, not just in control of the life decisions we’re going to make. And let’s think, over multiple years, when is the best time to time income?

And then using charitable giving strategies, is going to be the last agenda point for today, but I’ll just put a pin in it for now and say that, if we have charitable intent, we want to be strategic about when we are using that charitable giving to be of the most benefit on our taxes. So, here are the 2026 tax brackets. You don’t need to take a picture of this. This is visible on a Google search. We’ve made these tax principles, these tax brackets permanent, where in the past with the Tax Cuts and Jobs Act, there was a sunset and oftentimes on tax bills there’s a sunset, which means that this tax regime will last until the end of such and such year. There’s no end to the current tax bill. Does that mean that the current tax regime is going to be in place forever? Absolutely not. It’s definitely going to change. We don’t know when, we don’t know how, but there is no time horizon for when it’s known that the regime is going to change.

So, we can be taxed anywhere from 10 to 37% tax. And there’s much lower brackets if we’re single than if we’re married. But this is another thing to be conscious of. If we’re married and we have substantially disparate ages with our spouse, we may want to be looking at taking extra income in years where we’re likely to be together in a joint tax return and anticipating taking less out when one of us stands a high probability of being single and subject to what amounts to a tax penalty when you’re single because you often have very similar sources of income, but the bracket’s cut in half.

Oftentimes when we retire, we decide that we want to gift. And what I’m saying, we’re gifting to family, we’re gifting to loved ones, and there are better ways to do this and not so good ways to do this. And it really depends on your unique personal circumstance. So, I can’t give an answer generally that will apply to everyone here on the call today, but I can tell you that to ask the question of yourself, what is the best way for me to accomplish this to the people I’m trying to give to? And there’s a number of components to consider. How are they going to respond to the gift? How is it going to affect their life? Certainly, how’s it going to affect my life? If I expect that I’m going to pay an estate tax someday, man, I’ve got to find ways of getting money to the next generation now.

Even if it’s not outright to them, there are trust vehicles that I can use, ways that I have control over the funds still to a certain extent, but I’ve moved them outside of my estate. Life insurance vehicles that can at times be appropriate, because I’m trying to control the amount of loss to my estate from estate taxes. So, lots of ways to give, but here is a table with some ideas of ways you might give and why you’d like to do it. So, cash is simple. Right? Currency check, electronic transfer. The thing I’d remind you to do with cash is, just keep track throughout the year. And why do I want you to keep track throughout the year? You’re allowed to give $19,000 per year to whomever you choose. If you are married, then your spouse can also give 19,000. So, now the two of you combined can give $38,000 to whomever you choose.

Everybody has seen articles about this, right? Oh, I can only gift. No, you can gift more. In fact, in some cases, it’s appropriate to give much more. The thing you need to know if you’re going to give more than that, is that you are going to have to report it to the IRS on a Form 709. It’s a gift tax form that you just notify the IRS that, “Hey, I know I was able to give without reporting to you $19,000. I gave 25, so now you need to take $6,000 away from my lifetime gift exemption.” What is your lifetime gift exemption? It’s $15 million. So now, if you gave $6,000 more than you could, you now have $14,994,000 remaining to you over your lifetime. For many of you on this call, you realize, oh, I don’t actually need to worry about my gifting at all.

There is some discussion about maybe how gift tax might be impacted by a new regime if Congress changes hands. I mean, the presidency changes hands in two years to another party.

What I can say, this is what I say in all situations, we don’t know what’s coming in the future, but we can kind of rhyme it from what’s happened in the past, at least to this point. When I was studying 25 years ago in school, we thought that the gift tax might go away altogether. It didn’t. We certainly did not think that it was going to be still around that it would go from $600,000 at the time to $15 million today. It’s only gone up over all that arc of years. The one year that I’d say is kind of an exception is 2010 when for one year the gift tax sunsetted for a single tax year and it was back the next year. But really, apart from that blip of a year, it’s only gone up over time. It’s very hard for Congress to get momentum to shift down a gift and a state tax exemption, because everybody thinks that at some point they might have wealth and they don’t want to be taxed on that wealth when they give it to their heirs. [inaudible 00:21:04] feel fair.

So, we’ll see. But my point here is, you can give more, and in some situations, it’s very appropriate to give more. We’re at a time of year where you have a unique ability where if you want to give more and you don’t want to have to report it to the government, you can make a large gift at the end of one tax year, a large gift at the beginning of the following tax year. You can split your gifts across two tax years, but in the course of two to three months, you’ve given double what you could have without reporting to the IRS.

How else do we give though? It’s not just via cash. We can use cash that goes straight into a traditional or a Roth IRA. Very common for children or grandchildren in their early years to not have the money, to save for retirement. When it’s the best time to save for retirement, it gives them the most time to compound that money. And if you can front load some of those retirement savings for them, putting into a retirement account that has a little bit of a wall at least. It’s not impossible for them to take the money out, but conceptually it feels more difficult when it’s inside a retirement vehicle. We can use securities and oftentimes that can be advantageous. If I’ve got stocks that are highly appreciated in my account, I’ve got an adult child who has a low level of income, they may be able to sell those stocks and not pay capital gains taxes.

We have to be very careful there with what are called the kiddie tax rules. So, they have to be independent, filing their own tax returns. So, I don’t want to just give this as a blanket statement. You want to talk about it with a trusted tax advisor, but that can be advantageous to getting assets out of your estate, sure, but also to an individual who might not have to pay capital gains taxes where you would have to. Real estate, lot more difficult to be doing as a transfer, which at this point I want to just be careful of doing that.

We get in our minds that, oh, I’m aging and I don’t want the transfer of a home asset to be difficult for my heirs. It still could be very advantageous for you to hold onto it. If you’ve held onto that home for 40 years and it has a lot of embedded gain and you own that property on your date of death, full step-up in basis to your heirs, they don’t pay any taxes for selling it. You gift half of that asset to one of your children during your lifetime, half of the asset will not get a step-up in basis and the kids could end up having to pay taxes that they otherwise might not have to pay.

And then, loans. Loans are certainly a vehicle to consider using. I would just say, if you are considering giving a loan, yes, it can be a good vehicle, but you’d have to be mindful of a lot in terms of taxes, because even if you’re not charging interest, for example, you might have to report imputed interest on your tax return for the year. So, lots of ways of giving. I wanted to be mindful of, especially folks get into retirement, they have saved more than they need over their lifetime, they start thinking about giving. Let’s be conscious and gift in the best tax way we can as well.

And then we’re peeking over to the next topic, Roth conversions and strategic windows. We want to, while we’re in tax year 2026, take advantage of it as much as possible. This should be a time of year where we’re having a chat with our tax preparer, our tax advisor, saying anything that we should do within this tax year, capital gains harvesting and tax loss harvesting we’ve already talked about.

Let’s go in more depth on Roth conversions. And I said a little bit of this earlier, but you can see, I would want to use a Roth vehicle when I’m thinking I expect that I’m going to be in a higher tax bracket in retirement than I am right now. Very common, people in their 20s and 30s to be saving into Roths and having it be a good sense, because they’re not yet in high tax brackets like they’re going to be later in their career.

Very common for somebody in their 50s and 60s to be using the traditional method of saving for retirement because they’re taking the tax deferral. Now, they’re in a very high tax bracket. They know that coming up near in the future, they’re going to be able to withdraw in hopefully a lower tax bracket. I would argue that in your 50s and 60s, the tax deferrability of your retirement plan is actually of more value to you than the income deferral, the growth deferral that you get on it. We want to be saving no matter what. If I can control when my income is going to be taxed to me, get it out of my 50s and 60s, my highest earning years, put it into my 60s, 70s, and 80s that are lower income years, that could be very valuable to me.

So, when would I want to though do a Roth conversion? Well, and what is it? A Roth conversion is when I take money out of a traditional IRA and I move it into a Roth IRA. There’s no limit to how much I can do with this any given year. I could take a $2 million traditional IRA and convert it all into a Roth IRA in a single tax year. People immediately think, Well, why would I not do that? That sounds like a brilliant idea. The reason is, you’re creating a very substantial tax event for yourself in the year that you do that. Because, you are permitted to move the entire $2 million, in this imaginary case, from a traditional IRA to a Roth IRA, but you must pay income taxes on the entire amount. You must report the $2 million on your tax return. So, unless you have a good seven, $800,000 of cash or other security sitting around a taxable brokerage account that you’re comfortable sending to the government to cover the taxes, you’re not going to be able to do that.

You would have to actually reduce what you’re putting into the Roth to withhold enough to pay the taxes. And now really, I will tell you, we’ve run the numbers on this. It’s just not near as favorable if you’re going to pay the taxes from what was in the traditional IRA. It’s only really favorable if you can move the whole amount from the traditional to the Roth. So, the number one beneficiary of Roth conversions tends to be the next generation. Because, when people have the funds to be able to do this, they’re envisioning that, Hey, I’ll put that account into all growth vehicles, so some kind of stock investments. I’ll let it grow all the way till I die. There’s no required distribution I’ll have to take out from it there. And by that growth, my children will then be able to have this large account that’s tax-free. Well, that’s all well and good, but we’re now prioritizing the next generation above your generation.

The number one goal you should have in retirement is to cover your own expenses and the things you desire to spend money on, not transferring to the next generation. So, not saying it’s a bad thing. I’m just saying, let’s be mindful about our motivation for doing the Roth conversion. We certainly get to a position where we might want to make a Roth conversion, when we have a very large tax deferred investment account, an IRA or a 401(k). And we can see that when we reach age 73 or age 75, depending on your age, you might have either one of those as your required distribution age.

You’re going to have a required amount that you have to take out. It’s going to start out a little under 4% of the balance you have to take out. If that’s a $2 million tax deferred account and you’re going to have to take out $80,000 in your first year and you already have social security income and you may have pension income, you may find that that’s going to spike you up to a level of income that you don’t want to be at. You’re going to be paying taxes you’d rather not pay.

Well, if you’re in very low brackets right now, why not bleed out some of this money out of that vehicle and get it to where it’s lower and lower amounts? Maybe you only have a $60,000 required distribution by the time you reach that age. That can make a big difference in what you pay over time on taxes, particularly when we have two retirees who both saved into very large tax deferred vehicles. So, importantly, there’s no required distributions on a Roth, but you already took the money out of a traditional, so you did pay the taxes then.

It’s great for legacy planning. It’s great for getting your required distributions down in the future. Whether it’s right for you or not, is heavily dependent on all your other income story. Do you have a spouse who’s still working? Do you expect to have pension income in your earliest years of retirement? Would you like to wait to take social security or you’d like to take social security now? All of that’s going to tell a story about what your income is going to be for every year, and that’s going to build the narrative of whether it’s good to layer on Roth conversions or not. But sometimes, hey, if you’re retired at age 60 and we can do a 20, $30,000 a year Roth conversion strategy, and that means over the next 15 years we’ve moved $500,000 out of a tax-deferred vehicle into a Roth vehicle, doesn’t have to be a very large conversion every year to make a very big difference.

So, tax diversification can be advantageous to people in retirement. What does that mean? It means like, well, if I can take money from a taxable account or a tax-deferred account or a tax-free account, that gives me a lot of control in future years as seeing a situation where someone was looking to purchase a home in their late 70s, they actually wanted to buy into a assisted living, the continuing care retirement community. And they were not wanting to necessarily have to sell their house to do it. And we started looking and saying, Well, there’s this Roth IRA. This is this great vehicle. You’d already paid all the taxes on it. They were really reluctant to pay taxes in addition. And maybe this vehicle could end up being a source for a substantial amount to go towards a buy-in into a continuing care community and not have to pay any taxes.

So I’m not saying that’s the right answer for everyone, but that tax diversification of investments can help you have more choice. There are estate planning benefits. The idea is here. We may end up doing Roth conversions for somebody in their mid-80s because they can see that they’re going to be subject to an estate tax at their death. But if we move assets over into a Roth IRA now and pay income taxes, those are lower rates than what they would pay in estate taxes. That could be desirable.

So, when are the years that we want to do this? Early retirement years, because they tend to be lower income, lower income years in general. And then years where there are market downturns, if we get a very prolonged market downturn. Now, what’s the rationale there? The thought is that, you can take a higher percentage of the traditional IRA out at that lower amount and pay the same amount of tax to get it then over into a Roth vehicle where it’s growing back up there.

Let’s talk about some tax efficient investing strategies. And this is something that, man, at Savant, we really, really love to think about taxes. Our rationale there is, paying for investment research to outperform a market. What we know we’re going to have there is high cost and what we have no idea whether we’re going to get or not is higher return. And so, that is not a great investment from our perspective. We’d rather be using low cost, low turnover funds. We’d rather be tax managing. And then we’d be rather looking at the tax saving opportunities that come to us in our portfolio. If there’s a way we can bring the taxes down, that’s going to move directly into our client’s pockets when they save taxes. So yes, low cost, low turnover funds, tax managed funds. We want to be using funds that are not going to kick out very high capital gain distributions.

If any of you have had actively managed funds, you probably have had a tax surprise year that is no fun at all. When you find out, oh my goodness, I didn’t make any money this year, but they kicked out five, seven, 10% of the fund in a capital gain distribution at the end of the year, because they sold a number of positions. Now I have to pay taxes even though I didn’t make money. Man, that seems weird. We like municipal bonds at times where somebody’s in a high tax bracket and we can use a municipal bond strategy to bring down their interest to what is a lower amount of interest, but a higher amount of after tax effective interest. We want to be very careful. I was seeing a situation where someone had municipal bonds in their IRA. It’s a very uncautious advisor who was doing that, because we’d never want to use municipal bonds inside of a traditional IRA. The whole benefit of them is tax efficiency and you’re in a tax efficient vehicle, you’re now just guaranteeing yourself lower returns.

We want to asset locate. So we want to put the tax unfriendly assets in a traditional IRA, the tax friendly assets in a taxable brokerage account. We talked about tax loss harvesting, Roth conversions, distribution planning, estate engineering. We want to build the estate plan out so it’s going to minimize the tax that would be due to our errors and we want to optimize the way that we use charitable strategies. So, there’s a lot of tools in that toolbox that you can talk to someone about, well, how would any of these apply to me? So, we’ll talk a little more detail about a couple of these capital gain management. We want to look at when we sell our assets, our appreciated positions, and especially in today’s climate, somebody’s got Apple stock that they’ve held onto for 20, 25 years.

Good for you. Well done. But a huge amount of unrealized gain and you may not want to be as concentrated in Apple as you are right now, but you should be mindful about the tax year change about to occur. And you might want to sell some of Apple stock in your November and more in January and do a significant reduction of what you’ve got, but spread it across two tax years. Timing of asset sales really matters for taxes. We want to manage our concentrated positions. Things get to be overly represented in our portfolio, things that we, if somebody gave us $500,000 of cash to invest, we would never pick the 5, 10 investments that we currently have in our portfolio. The reason we’re holding them is because of taxes. Let’s think about how we can manage those taxes and build a better portfolio. Tax loss harvesting, we want to offset gains where we can with losses, when they’re investments that we don’t think are going to perform as well.

Or even in some cases, one of the ways we think of it since we use funds, we would think about selling a fund that is temporarily down, buying a substitute holding and immediately locking in the tax loss. If you have substantially similar but not equal funds that you can invest in, you can unlock a tax loss and remain invested in the market. You can’t do the same thing if you want to. Let’s come back to our proverbial Apple stock. If we say, “Well, I bought a bunch earlier this year and it’s at a big loss, can’t I just sell it and lock in that loss?” You can, but you’re going to have to stay out of the Apple stock for 30 days, because otherwise you’re going to run into a wash sale rule violation. And so, that’s a little trickier. We want to be careful about tax loss harvesting assets where we still believe that position is going to go up substantially, it may in the next 30 days.

And then we just need to understand the way that dividends and capital gains are going to be distributed across the investments that we’re using. Sometimes we can end up with surprises there, where we did not expect to have to pay taxes, but we have large distributions coming out to us in November and December that are like, “Whoa, [inaudible 00:36:06] I’m going to pay.” And it’s not even just November, December that’s the problem. The bigger problem happens when you had no idea that it had a big distribution in December and then it’s a surprise when you pay your taxes in April. We want to be cognizant of within the tax year what’s happening, do we need to create cash accordingly? I think we’ve covered this pretty well, tax loss harvesting, but the bottom line is, if you sell a stock for 80,000 that you purchase for 100,000, you get to use that $20,000 loss to either offset $20,000 of gains you had elsewhere or to offset $3,000 of ordinary income and carry forward the other 17.

So, if you think you’re going to be selling a business or a large piece of real estate next year and the loss could be helpful to you to offset some of that, maybe we do some tax loss harvesting across a couple of years.

What investments do I want to use in each of these kinds of accounts? I can’t speak to everyone’s unique situation on this call, but I can give some general ideas. I want the Roth IRA to be invested in things that have a high expected return. Because this is a tax-free vehicle, I will never pay taxes on the growth. So, small value stocks, emerging market stocks are a couple of classic examples of investments that go well in a Roth IRA. Does that mean they’re going to go up every year? It does not. But over time, am I going to end up hopefully without performance there that is going to lead to better after tax results on my investing strategy? Yes.

I use a traditional IRA for things that I don’t expect to grow as much. So, if I’m sitting across the table from someone who’s saying, “Why is my traditional IRA earning less than my Roth IRA?” I might say to them, “Well, that’s good. That’s exactly what you want, because you’re putting the growth into the vehicle that’s going to have no taxes, growing somewhat in the vehicle that has taxes, but it’s in a tax efficient way.” I love bonds in a traditional IRA because bonds kick out interest and interest is tax as ordinary income. That’s much better to have in a traditional IRA where I don’t have to pay taxes on that income. I’m only going to have to pay taxes when I take money out of that account.

And then taxable accounts, we want to maybe look at municipal bonds there if we can be tax efficient. I want to maybe look at US large stock, a holding that I’m going to want to purchase and never sell over time and that is not going to kick off a lot of realized gains, capital gain distributions each year. Great for a taxable account. Okay.

Let’s talk a little bit about legacy and estate considerations. And I said to you, $15 million per person is the federal exemption this year. So a lot of people kind of say, “Oh, and why is everybody all worried about estate taxes? It seems like that’s not going to be that big a deal.” Well, one of the big reasons is because there’s a bunch of states in this country that still have a state estate tax. And then you kind of logically think, Well, isn’t that kind of pegged to the same thing that federal? Isn’t that kind of how states work? Nope. I mean, we’ve got states like Massachusetts, like Maryland, that have estate taxes. Maryland actually has an inheritance tax too. Pennsylvania has an inheritance tax. Rhode Island has an estate tax. And some of these taxes are pegged off much lower dollar amounts, DC, especially I think about the one in Massachusetts, where you get an exemption up to a certain amount, but if you exceed that amount, then you’re taxed back to the first dollar.

At least in a state like Maryland, you get a $5 million exemption and then it doesn’t go retroactively back to the first dollar. It only starts on assets above five million. It’s not generally as aggressive a tax as a federal estate tax, but for example, Maryland is a 16% estate tax. If you’re going to pass away with $6 million of assets, you’re going to pay $160,000 of taxes to the state of Maryland and maybe you could have avoided that. And I’ll give you a classic example in that case of one way to avoid that. Maryland doesn’t have a gift tax.

So, what if you gave a million dollars, you have to be several years before you died, because there’s a lookback provision. But if you gave a million dollars to the next generation and you brought yourself under five million, well now you’ve been able to transfer the whole $6 million to your heirs and you avoided that $160,000 of taxes. So, there’s some substantial planning opportunities that we need to be mindful of here.

We need to look at another issue is that, we refer to portability here. What is portability? Well, portability would’ve made sense back from the beginning, but for many years there was no such thing. What is it? It means that if I die and I didn’t use up my whole exemption, I give it to my spouse to use at their death.

You’d think that’s pretty common sense. But even now, if you want to use portability, you have to file an estate tax return to get it. And so, you have to say, the survivor has to file an estate tax return on behalf of their deceased spouse that says, yes, my deceased spouse left assets to me, did not use their exemption, but I’m going to port their exemption over to me to use at my death. If that’s not used, then you can end up owing estate taxes substantial. And a jurisdiction like DC does not have portability. So, now we have to use trusts to transfer assets to the next generation to use up the exemption of the first to die spouse, because otherwise the surviving spouse will inherit everything jointly and there will be an estate tax due at their death. So, there’s a lot of work to be done.

It’s beyond the scope of what I can cover in a one-hour webinar, but my point here and today is just to present to you the issues that can be at play and the importance of managing around them to be conscious about this. Sometimes you’d say, well, the easiest way to avoid that estate tax is move to a state that doesn’t have an estate tax. Very true. But this is one of those situations where I’d say, careful. Let’s not have the tax tail wag the life dog. Let’s not make all our decisions purely based on taxes when our whole friend group is located in the community we lived in 30 years and we don’t have any connections outside of that community. The quality of our life might be far better staying in the community that we’re in and then we just need to manage around the taxes.

We may want to use a revocable living trust. Why are we going to do that? Well, again, I’m going to speak to jurisdictions that are close to me. Maryland, not a particularly challenging probate state. DC, marginally more so. Virginia, not a fun state for probate. And why is that? Because the state requires all kinds of filings from the executor. They require all kinds of reports and monitoring of what they’re doing throughout the process. It can easily be a one-year process to transfer an estate in the state of Virginia. So, for most of our clients in the state of Virginia, we’d end up recommending having a revocable living trust.

What is that? Well, it avoids probate at death, number three. That’s the big reason we’d have that is because it says, “No longer are my assets that were titled in my name a matter of public record that have to be reported to courts in their transfer after my death. I have already put my assets into a trust and I’ve put conditions on how assets will transfer and we can go directly to that trust to transfer. We do not need to rely on the probate court.” So, maybe a good vehicle for you, maybe not, but my job is to think of myself as the CFO. To folks out here, and you all are the CEO of your own financial lives. I want to tell you about the financial tools, the toolbox, and then we figure out whether anything is appropriate or not in your situation.

So, this is a very common kind of structure that we could end up with having a living trust for spouse one and two. It could be changed anytime that they want. To start, both spouses are co-trustees. Then the survivor is a single trustee by themselves. And then after the second death, maybe we use a private trust, maybe we use one of our children or siblings.

And then we have shares that pay out of those trusts as appropriate to take advantage of estate tax laws in our state, eventually getting the money to our children or to whomever our beneficiaries we want to be. And so, there’s not too much of a difference to this trust structure to how there would be in a will. You can put a lot of these instructions into a will. The problem is, if you put it into a will, now everything has to go through probate. And if you’ve already titled to a trust, it’s going to be a matter worked out between you, your estate attorney, and your financial advisor, not through the state.

And let’s wrap up with talking about charitable planning opportunity. The most important thing I’ll say to you about this is that, you do not give to charity for the savings. I’ll say that one more time. You do not give to charity for the tax savings. Why would I say that? Folks come to me and ask, “Well, should I consider charitable giving? Wouldn’t that save me some money?” And the answer is, never. When you give money to charity, most of the money comes from you. Some of the money comes from a tax deduction that you receive, but most of the money comes from you. So, if I had the ability to give $20,000 to charity this year, and let’s say I’m itemizing my return, maybe I save $7,000 in taxes. That’s not something I’m going to make up in volume.

It’s going to cost me $13,000 of money that would’ve otherwise been mine under my control to do with as I pleased, to give that money to charity. So, why do we give charitably? Because we want to give to charity. And now, if we start with the premise that, well, I want to give to charity, that’s something that is a value of mine. Now we start talking about, okay, how can we give to charity in the best possible way to maximize the tax savings? Because with the new tax regimes that we’ve had for the last eight years or so, a lot of people don’t realize still to this day, that they are submitting their charitable receipts to their tax preparer each year and they’re getting no help on their tax return for it.

And I’ve sat across the table from many who have said, “Well, wait a second. No, I’m getting help on that. I know I give all it to the tax.” And then if we look at the return and we look at Schedule A, we realize, nope, they’re taking the standard deduction, they’re not itemizing. Because, even with all the giving that they’re doing, because they’re limited in their income and because of state and local tax rules that are in place, they are not able to get the charitable benefit on their tax return that they think that they’re getting. So, we want to be mindful about that. And then we want to look at potentially bunching our charitable gifts into a single tax year. It could be a value for me to give funds that I otherwise would’ve given over the next three or four years to charity, all in this single tax year, to get to the point where I’m itemizing and take advantage of that benefit and then take the standard deduction in each of the ensuing three years.

How am I going to do that? Well, I’m going to use a donor-advised fund to do that. I’m going to give the funds that I would’ve otherwise given directly to charity, into this donor-advised fund, and that’s going to do the job of my savings. Sorry, I’m having a little glare off my camera there. That’s going to do the job of being a holding place for the funds that I would give to charity later on. And that’s one of the number one reasons we’d use a donor-advised fund.

I might want to use appreciated securities for my donations. What does that mean? Well, in very few cases, is it going to make sense, when you have a highly appreciated taxable brokerage account, for you to give cash each year to charity. You should instead give securities to charity, and then you still get the same tax write-off. The charity sells the security, doesn’t pay taxes, and you avoid not only an income tax, but a capital gains tax as well. Very valuable to you potentially. Okay? Then sometimes people would say to me, “Well, wait, but my highly appreciated security is Apple. I love my Apple stock. I’m never going to sell my Apple stock.” That’s fine. Take the $10,000 of cash that you were going to give to the charity, give $10,000 of Apple stock, use the $10,000 of cash to purchase an additional $10,000 of Apple stock. You’ve reset your cost basis higher than the Apple stock to give you tax advantages in the future when you decide that you don’t want to hold that position anymore.

And then, what else do we have? Well, we have this qualified charitable distribution. This is not available to us until we’re 70 and a half, but it’s one of the best charitable giving strategies out there. As soon as you turn 70 and a half, I mean, you have to have turned 70 and a half. It’s not the year you turn 70 and a half, you have to reach age 70 and a half. You can now take money out of your traditional IRA and give it directly to charity and not pay income taxes on that distribution. You’ve in essence turned that portion of your traditional IRA into a Roth IRA, because you did not have to pay taxes on it. Now you had to commit it to charity. But when you were already planning on giving to charity anyway, and now you’ve got to avoid all the taxes on the growth of what happened inside the traditional IRA, really powerful vehicle. And now we don’t need to look to itemizing. We don’t need to know, am I itemizing enough so that my charitable donations will give me benefit?

From the first dollar, I’m not paying income tax on that transfer out of my traditional IRA to charity. And to add gravy to the great mashed potatoes there as we enter the Thanksgiving season, once you turn age 73 and you’re subject to required distributions, that qualified charitable distribution counts towards satisfying your required distribution. So, if you were going to have to take $40,000 out of your IRA, you gave 10,000 to charity, now you only have to take out 30,000 from your IRA. The other 10,000 that you gave to a charity counts toward it. So, it really does take down your tax bill once you reach required distribution age. I talked about bunching, that’s giving a few years of charitable donations all in a single tax year. We talked about a donor-advised fund. I would also say a donor-advised fund can be a very helpful vehicle in a year where you’re selling a business, selling a highly appreciated piece of real estate.

You can pair it up with Roth conversions in a year to be subject to a lot lower income taxes than you otherwise might be. So, donor-advised fund can be very powerful. It’s really the vehicle that has taken over what used to be the role filled by private foundations. Private foundations are so expensive, they’re limited in their giving ability, they’re high administrative cost, and a donor-advised fund is very simple. So, something you should consider talking with the tax advisor about.

Qualified charitable distributions and charitable trusts. Now, charitable trusts are vehicles that can be helpful to us too. Let’s see, I’m going to jump ahead here. No, I won’t.

Let’s talk about the donor-advised fund a little bit more. You can use a donor-advised fund to lump multiple years of contribution into a single year of contribution, and you can use appreciated assets to do it. So, this is actually the one other way that I see somebody use a donor-advised fund, is they don’t want to hunt down the brokerage accounts of all their charities, so they just give a bunch of appreciated stock into a donor-advised fund and then give out cash to those charities from that fund over the course of a year. Very valuable tool potentially to us. Also, one you want to be careful about, because what I don’t want to see is that you open a donor-advised fund and then just leave a ton of money in it year after year. These are not inexpensive vehicles, and we want to use them for optimizing taxes, but we want to make distributions from them.

So, we want to have strategy behind it. We don’t want to just throw money into a donor-advised fund and forget about it, because we’ll end up paying fees on that, that I don’t want to see you pay. So, you give property into the donor-advised fund and the donor-advised fund makes grants then to charities for you. You have to be careful that you’re not receiving any economic benefit for any of those. These have to be straight up charitable gifts. You can’t pay for a dinner that you’re going to charitably with a donor-advised fund, because then you’re receiving a benefit for it. So, you have to be a little careful, but great tools for you.

We talked about QCDs pretty well. The only thing I’ll add to this is that, you can do up to $111,000. That’s your maximum of what you can give via QCD, and that can exceed your required distribution or it could be not subject to required distribution yet. It’s 111,000 a year, once you reach seventy and a half that you can give each year to charity directly from your IRA.

So, QCDs are made directly from an IRA to a charity. They’re excluded from income, but they count towards satisfying your required distribution and you have to be 70 and a half or older. I wanted to have a few different slides talking about this from different angles. Some of you are visual, some of you were reading the words, some of you are auditory, you’re listening to what I describe about it. But this is one of the most important points of making sure we minimize taxes in retirement, where we already have charitable intent.

So, that is the subject matter I wanted to cover with you today, and I do have schedule a complimentary consultation. We’ll handle some questions now, but there’s going to be a link to a survey that’ll pop up in your chat that you can click on. You’re welcome to schedule some time with us. We’d love to have conversations one-on-one with you about what your unique situation is and whether we could be of assistance to you. I’ve proved to you today that we’re trying to get you real content, real solutions that are helpful to you, but I can tell you that there’s a lot more helpful solutions when we’re talking one-on-one and we can look at your unique situation.

Let’s go through some of your questions, okay? Somebody says that they want to zero out their IRA within about nine years. This will be done by taking the taxes for the RMD and the Roth conversion out of the IRA. Any concerns? Yeah, my number one concern with that is just you have any charitable intent. Let me talk about this very carefully. You do not want to zero out an IRA if you have charitable intent, because once you reach age 70 and a half, you can make tax-free withdrawals from your IRA via the QCD. So, zeroing out an IRA, that’s the biggest alarm bell that goes off in my mind.

Another one that would, just be mindful about, is just why are we not using up future low income tax years? Are we accelerating payments into a current year paying a higher tax, when in a future year we might be subject to lower taxes? But other than that, no, it’s important to be considering that. How you take your money out of your IRA.

Let’s see here. Is it beneficial to transfer an RMD to a Roth IRA since I have paid the tax anyway? It’s a great question. I’m glad you posed that because you cannot do that. You are not permitted to use an RMD funds to go into a Roth IRA. Those RMD funds can go into a taxable brokerage account, they can go into your bank account, but they’re not permitted to go over into a Roth. If you’re subject to required distributions and you want to do a Roth conversion, you have to layer Roth conversions on top of your required distributions. Okay?

If you have tax loss carry forward for years, how do you use it to minimize taxes for a future year? You’re going to have to look at other assets that you have that are going to be subject to capital gains when you sell them. So you want to be looking at real estate, other investments. It could be private investment, it could be public equity investment, it could be even other… You could have bonds that are appreciated for all I know. But what you want to look at is, what other assets do you have that you would like to sell at some point and to use up that loss carry forward? The losses can be carried forward in a limited fashion, but only until your date of death. They cannot be carried forward beyond there. So, that’s something to be mindful of.

If planning to do a Roth conversion from a traditional IRA, can you describe a backdoor Roth conversion? So, a backdoor refers to doing a contribution into a traditional IRA and then immediately converting it to a Roth IRA. You do not do a backdoor Roth conversion with funds that have been in a traditional IRA for years, okay?

And then, in your example about tax loss harvesting, you had an example loss of $20,000. Can you exclude up to $3,000 from ordinary income plus $17,000 of long-term capital gains? Well, you can exclude all $20,000 of capital gains if you have them in that tax year. If you don’t have capital gains, so the example I was giving is, if you have zero capital gains and all you’ve done is realize a $20,000 loss, you can use $3,000 of the loss to offset ordinary income in the current year, and then you can carry forward the $17,000 capital loss to use in a future year, where you’re going to have capital gains in that year. All right?

My IRMAA two-year lookback starts in a few years. I have a pension and my wife still works and is a high earner. What is the best way to avoid the IRMAA surcharge? Yeah, so IRMAA surcharge is all about controlling income, just like we were talking about. You got to look at ways that you can move income out of a current tax year into a future year. You’re not going to be able to… I mean, if you can delay your pension, that’s one way to avoid or limit an IRMAA surcharge.

But if you’re still in a high wage bracket, the other way you can do it is, you can challenge. Let’s say that, in your first year that you would’ve been subject to IRMAA surcharge, your spouse was still working, but in your second year, your spouse is going to have retired. Well, you’ll have a substantial change in your income situation. You can file a request for a modification to avoid the IRMAA surcharge because you know that you’re not going to be in such a high tax bracket in future years, because otherwise, you’re right. When they calculate IRMAA, they look back two years.

Someone says here, “I have a revocable living trust in Massachusetts set up in 2015. Are there any updates to the law since then?” Substantial. There have been substantial updates to laws. I would generally recommend that you look at your estate plan a minimum every 10 years and ideally every five years, unless you’re aware of a major strategy that has emerged in the interim, but at a minimum every five, at a maximum every 10. So, definitely if you have a 2015 estate plan, you should be having that reviewed by a qualified estate attorney.

There’s one other question here about, is there an age where conversion to a Roth does not make financial sense? It’s very unique to an individual. I mean, I’ve worked with folks who have done Roth conversions in their late 80s, because in their unique circumstances it made sense and referred back to a situation where you’re trying to avoid a state estate tax. Converting to Roth could make a lot of sense, but there’s a lot of situations where It’s not going to.

Another thing is just how much do you want to value a continued tax-free growth that your children or other heirs are going to receive? Some people really want to value that, and that really lengthens out the time you can do Roth conversions. Some people say, no, I’m really just wanting to think about my life only. And if they get money from me, that’s great, but I’m not going to make that the center of my tax planning. And I would say, in those situations, maybe a Roth conversion doesn’t make sense.

So, that’s the time we’re going to have today. We filled the hour. I’m really glad. But I will tell you, look to the link in the chat, select a time that you can talk for 15 minutes with an advisor. We’d love to be sitting down and talking with you about your unique circumstance. Thank you for your time, and I wish you best of luck in your retirement plan.

Speaker 1:

If you enjoyed this webinar, visit savantwealth.com/guides and download our complimentary guidebooks, checklists, and other useful financial resources.