5 Tax Traps in Retirement Income Planning Video from Savant Wealth Management

Download our complimentary guidebooks, checklists, and other useful financial resources at savant wealth dot com slash guides. Good afternoon. Welcome to Savant Wealth Management’s webinar series. We try and cover helpful topics here for any range of circumstances that you might encounter with your personal finances at different stages of your life. My name is Joel Cundick. I’m a financial advisor in Savant’s Vienna, Virginia office, and I’m joined today by Joe Marmorato. Good to be with you today, Joe.

Good to be with you too, Joel. Thanks, everyone, for joining us. Again, my name is Joe Marmorato. I’m a senior tax strategy adviser coming to you from our Lancaster, Pennsylvania office. I’m looking forward to discussing today five tax draft in retirement income planning.

We’re we offer this to hopefully give you some useful things to think about. It’s going to be by necessity general somewhat, to to cover a wide range of circumstances. And we’d love to talk about your unique personal situation, so there will be an opportunity. We’re happy at any time for you to schedule some time to sit down with us to talk about your unique situation in in more detail. So any questions we cover today will probably be the ones that are more general in nature that can help a wider audience. Alright. So, Joe, what are we talking about today?

We are gonna be covering the agenda today. We have surprises due to tax complexity. We also have Medicare premiums and IRMAA. We’re also gonna be talking about Social Security and claiming strategies there. We’re also gonna be talking about IRA withdrawal and required minimum distributions along with tax diversification and coordination. And as Joel mentioned before, we’re to leave some time here at the end for a little Q and A.

Great. Well, why don’t I launch off covering these surprises due to tax complexities? One of the, you know, the the theme of the day being tax traps, the way that I think about a tax trap as a financial adviser with clients is is actually something that holds clients back from taking action that they otherwise might take. I mean, you might think about a tax as as, traps has got used or things that happen behind the scenes you you need to watch out for.

Yes. We’ll talk about that. But one of the bigger risks, to retirees comes when something, some point of decision halts you from taking action that you should otherwise take. And and and that’s what is gonna be a common theme throughout today.

Hopefully, we’re gonna be able to talk about pushing out some of those stumbling blocks away from you so you don’t need to worry as much. The decision points will become a little bit more clear, because there are, principles at play that we can talk through that can get you the education you need to make better decisions. So what’s the first tax trap that comes to someone when they retire? It’s that their income no longer comes from a single source.

Right? We see that rather than getting a paycheck where they do automatic tax withholdings, they’ve been doing that probably for forty, forty five years, All of a sudden, withdrawals are gonna be coming from retirement accounts, from Social Security, from pensions, and from portfolios, each of which are gonna have their own tax rules, each of which are gonna have their own ways of withholding taxes or not withholding taxes.

And as a result, it can get to a point where someone just throws their hands in the air and says, forget it. I’m gonna live off the cash of my checking account for the next couple of years and just take this decision down the curve. And then they get to the point of decision, and they they end up taking the path of least resistance, which is which I’ll just take some money from my IRA, or I’ll just take some money from my taxable account. When in fact, the best answer often is integration of multiple strategies together.

So as I said, each of these are gonna be governed by different tax rules. Let’s talk through, some of them. And and they’re going to interact with each other.

So go to the next slide here, Joe.

The common thread we’ll see, but behind the number of these tax surprises is tends to be for the people that we work with on a day to day basis, not that they have a lack of wealth, not a lack of assets, but they have a difficulty in deciding how to coordinate those assets to work together to get them to the destination they wanna get to.

So you have this big decision the day you retire. Hopefully, you’ve thought about it years in advance of your retirement because we’d like this to be well thought out.

I brought it up as tax traps at retirement.

One of the things that a lack of the ability to make a decision can actually lead people to do is work years longer than they can afford to retire at because it’s just easier to keep showing up to the thing that they’ve been doing every day. So, ideally, you’ve done some of this analysis before you retire, and you start looking at, alright. Where are the places that I can take money from? I have IRAs.

I have taxable assets. I have cash reserves. I have Social Security. I may have annuities that I’ve funded.

I may have 401(k).

Getting a list of where the accounts are, how they are titled is a great starting point. And after that, we start to look at, well, where should the money come from?

And the decision on where the money should come from is different if you’re answering minimize taxes for twenty twenty six, or if the question is minimize the taxes over the course of my retirement.

And again, this is a place where somebody can come. I’ve had friends come to me three years into retirement with a smile on their face and say, I paid zero in taxes since I retired. And I kind of cringe internally.

And and the reason I cringe is because most of those people who are telling me that have very large tax deferred accounts. And what they’re actually doing and and being proud of paying zero taxes in the first three years of retirement is they’re ignoring the opportunity that was present over the initial years of retirement to be able to draw some money as something of a pressure release valve from their tax deferred accounts, expose that income to the ten, the twelve, maybe the twenty two or twenty four percent bracket, depending on how large those IRAs are, and avoid what could be a thirty two, thirty five, thirty seven percent tax rate that might otherwise spike later in retirement by just optimizing for the current tax.

So when we decide how to take the cash flow, we’re deciding how much to take from the IRAs, generally not to defer all IRAs. We’re deciding, should we file for Social Security the year that we retire, or should we defer Social Security to a later date and live on other income in the meantime? Should we draw from a Roth IRA? Should we be converting money into a Roth IRA from a traditional IRA?

So there’s a number of decisions to make here. The best thing you can do is categorize all your investments, know the tax treatment of each, and know what the tax brackets are. We’ll have those tax brackets up on the slides later in the presentation, but we wanna make sure you are aware of those flex points where where maybe you make a different decision because you’ve crossed over a certain level. Alright?

But we definitely only have a limited number of years where we can contemplate Roth conversions. They may make sense. They may not. A lot of it depends on the assumptions and your unique circumstances.

Let’s take a look at the next slide. So Medicare premiums, Medicare is one of those big decisions, again, can lead to pauses and delays in retirement. If I look back a number of years to early on in my career, Medicare was a major reason why people continued to work until sixty five. Prior to the Affordable Health Care Act, there was no ability to guarantee coverage separate from a group plan.

You could get an individual coverage upon the point of retirement.

You could have a major health event occur to you in early retirement, and your health insurance provider could say, we’re not covering you anymore. We’ll cover all the expenses this year, and we’re not gonna cover any next year. You’re on your own. This was a major reason for people continuing to work until age sixty five.

With the arrival of the Affordable Care Act, now individual policies cannot be canceled. Now we have any number of other reasons that we’re watching out for individual policies right now, and we want to be aware of those. And there’s there’s uniqueness to everyone’s situation. But we are to a point where, in many cases, you should not decide to delay retiring until the point of Medicare at age sixty five if you’re sixty and you’ve saved enough in resources.

Alright? That is an important decision. So waiting for Medicare, maybe it’s right, maybe it’s not. It depends on your unique circumstances and the level of assets you’ve accumulated for retirement.

But do not think that it is a have to to work until sixty five.

So how does Medicare function? Well, it’s a universal health insurance that functions after someone is sixty five years old.

There is an initial enrollment period.

This means that you need to apply somewhere between three months prior to your birth month, the month of your birth, and three months after your month of your birth. So a seven month window in which to apply for Medicare. Can you wait to apply to Medicare? Yeah. Everyone can wait. That is one hundred percent true.

There are situations in which you can wait and will not be penalized and situations in if which if you wait, you will be penalized when you decide later on to file for Medicare.

And what what to keep in mind here is it really has to do with the coverage that you have through your employer. If you have group coverage through your employer that is considered creditable coverage, which means, you know, it can replace Medicare, and you keep working, generally, then that is an exception to having to apply for Medicare at age sixty five. The best way to know this is to talk to your HR team at work.

And make sure you know this before you’re age sixty six, leaving your employer and find out that the actual coverage you had through your employer was not creditable coverage, and you have delayed, and you’re now going to have permanent penalties on your Medicare premiums because of waiting. Right? But if you, have a qualified, employer plan and you retire at sixty nine, you can stay on that employer plan through age sixty nine, seventy two. I read an article recently with someone who waited till eighty five.

Again, I would not wait to retire because of health insurance. It’s not that big a deal generally, but I would, be mindful about the exceptions for applying.

There is the opportunity at the point of applying for Medicare to get supplemental coverage. What this means is that Medicare covers a certain number of things. It does not cover other things.

And there are standardized supplemental plans that you can apply for to marry with your Medicare coverage to cover things that Medicare would not. In many cases, this makes a lot of sense to apply for. There are standard lettered plans, a through l, I believe, but they they don’t don’t hold my word to it. You can look at those plans.

Different health providers offer them. They charge different rates. So the great, resource, though, is medicare.gov. You can go there.

You can find out what different health insurance providers would charge for those supplemental plans in your zip code.

But the other option that people consider is a Medicare Advantage plan. A Medicare Advantage plan replaces all of Medicare and kind of goes with a single solution. And it can be one of those decisions that is a great short term decision, not necessarily a great long term decision. Again, like we were talking about with taxes, zero taxes in early retirement can sound like a great idea unless it triggers major taxes at age seventy three. The same thing here. A Medicare Advantage Plan can sound like great on the premium side when we’re sixty five and healthy and may not sound as good when we’re eighty two and we have major health care needs coming to us that are actually gonna require more out of pocket than if we had been on Medicare. You definitely wanna talk to somebody who knows, in detail about what what each of these options involves, and and look at what’s the right answer for you.

You also, though, need to watch out for IRMAA. And we can go to the next slide for this one. So IRMAA is this adjustment to your Medicare premiums that occurs if your income is too high.

This is basically saying that Medicare is means tested. Right? Those who earn more money have to pay more for their Medicare.

Now there are is a way to challenge the premiums that you’re being charged. So contemplate that. If you’re if you’re saying, well, wait a second. I’m earning three hundred fifty thousand dollars a year, but I’m going to retire.

And when I retire, I’m only gonna be making two hundred thousand dollars a year in income that I’m taking from my investment accounts. You can challenge that. So just be aware of that. Right now, Medicare in twenty twenty six, this is one of the strange this is, again again, wow.

How people get paralyzed.

We’re looking at your twenty twenty four modified adjusted gross income to decide how much premium you pay in twenty twenty six.

So it’s a two year look back. Again, exceptions apply, and you can apply if you can ask for changes if there’s a uniqueness to your situation. But let’s just consider someone who is married filing joint, and so that’s the second column here, and they earn somewhere between two hundred and eighteen thousand and two hundred and seventy four thousand dollars of income in twenty twenty four. They’re gonna have an eighty two dollar penalty, extra premium surcharge, whatever you wanna call it, in Part b.

They’re also gonna have a fourteen dollar and fifty cent, penalty for Part d. That’s drug coverage. So overall, that’s about a hundred dollars a month of difference in your your what it costs you to be covered by Medicare. That functions like a tax, but it’s a weird tax.

Because if you have two hundred eighteen thousand dollars in income, you pay zero. If you have two hundred eighteen thousand and two dollars, you pay twelve hundred dollars in extra. So what we wanna be mindful of is looking forward and not coming close to these, Irma inflection points because you can reach an inflection point that you just crossed over and end up having greater than one hundred percent tax on additional dollars of income. Think of it like income tax brackets and IRMAA surcharge brackets integrating together in kind of multiple actual effective tax rate brackets.

This I understand how this can seem more complex entering retirement. There’s software that handles all of this. We can discuss any of these things and come up with, well, what is your effective tax at certain levels of income? But we wanna be mindful and think about IRMAA surcharges as an extra tax on our income in retirement once we’re sixty five and have filed for Medicare. If you haven’t filed for Medicare yet, don’t worry about any of this. The the IRMA surcharges only apply to those who are on Medicare. 

We have a section here on Medicaid. I think the the number one thing I actually want you to get from this slide is keep in mind that Medicaid is, health care for indigent. Medicare is health care that is for everyone in retirement. So the majority of callers, today listening in are going to be subject to Medicare.

Medicaid is is something that applies if if you’ve, you know, a a very low levels of income and you want some base level of coverage. Right? And the the other way this is going to apply for retirees is at the point of entering into long term care. Medicaid is a system that actually has solutions for covering long term care expenses.

Medicare is not. Medicare has one hundred days of rehabilitation care, and then it’s done. But before you start saying, oh, well, wait. Medicaid sounds great.

Let’s get over there.

The the the the shortest way I can describe that is can you please make sure that you visit a facility that, accepts Medicaid and see if that is the kind of facility that you would want to enter to get yourself to a position where you would qualify for Medicaid and enter that kind of care if you were to need it in a long term care situation. Alright?

So until you get to Medicare, how are we covering our health care health premiums?

You’re probably going to go with a COBRA plan if you retire before sixty five and want to continue health care. The reason is it’s just easier.

COBRA is continuing coverage offered by most employers. It can be anywhere from eighteen to thirty six months. It depends on your circumstances.

But you have to pay one hundred percent plus a bit of administrative cost of the premiums. So where your employer was covering a portion of the premiums in many cases while you were working, you cover all the premiums when you go on to COBRA in retirement.

And that, though, can get you if you’re sixty two in some cases or sixty three and a half in other cases. You can leave the employer early, continue your employer health coverage straight up to the time that you need to apply for Medicare. Alright? Marketplace insurance, this is, you you you can decide to go on the the marketplace to apply for coverage, individual coverage for yourself. This is another solution available to you prior to Medicare.

These coverages are all gonna cost substantially more than Medicare is gonna cover. Even those who are paying, the the highest Irma surcharge are still probably gonna be paying less for coverage than we’re in their private marketplace. Reasoning for this is we rate health insurance by age in the United States, and somebody who’s sixty years old is gonna hate pay more in premiums than someone who is forty. Alright?

But, obviously, you can some some employers are gonna have an employer retiree plan. You should look at that if that is a benefit available to you. If you’re a federal employee, I’m I’m based here in the DC area. Many people are on federal health plans.

I wanna make sure you you qualify for that.

Before you leave your employer, there are provisions that you need to meet in terms of years of service, but that is can be a a great solution to get yourself to Medicare age just because of how much lower something like that will cost. In fact, you may end up using that beyond Medicare age.

Again, I can use federal as an example just because I work with so many federal folks. You can apply for Medicare Part B and D as as a federal retiree and then keep on paying for your, federal employee health benefit at the HP and retirement, and that converts into a supplemental plan. You don’t need to get a supplemental plan then because your employer coverage has turned into a supplemental plan. Right?

So these are the things to be aware of about Medicare. Hopefully, we’ve given you enough that you have a good idea of the moving parts. You don’t need to think of that as something that holds you back from retiring because it doesn’t need to be. There are answers regardless of your situation.

Right?

And as I said earlier, there are effective brackets in between the brackets when we integrate Irma and, the regular tax brackets. These is these are the regular tax rate schedules for twenty twenty six if you’re single or if you’re married filing jointly. And you can see what we’re watching for here, as financial advisers is the difference between the twelve and twenty two percent bracket. That’s a big jump in rate.

And then the difference between the twenty four and thirty two percent bracket. That’s a big jump jump in rate. Not as concerned about ten to twelve. Right?

That that’s kind of in the same territory. Twenty two to twenty four could still make sense for you to be soaking up those brackets in early retirement. So we want to be aware of the tax brackets. And if we file for Medicare, we wanna factor in into those as well because we showed you the tables earlier about, our surcharges.

K? Let’s talk about Social Security for a few minutes because this is another big decision. And and the elephant in the room that we’ll just get head on right now is talking about the the potential of Social Security not being there for me when I retire.

Do not worry about Social Security not being there for you when you retire. There are lots of headlines.

Unfortunately, those headlines have persisted through the twenty two plus years I’ve been in this industry because this has been a known problem about Social Security for that long and longer. Congress has still not handled the issue. And right now, it’s estimated that in twenty thirty three, if no, adjustments are made, the system will not be able to pay out all, claims. That does not mean the system will not pay out claims.

It’s estimated that probably eighty, I’m sorry, seventy eight, seventy seven percent maybe of all benefits would still be payable, by Social Security if we cross through that point where all of a sudden the system, cannot afford to make all payments. And at that point, the system would be solvent for another fifty years.

So your downside here is thinking that, well, what my Social Security, report tells me I might get, it might be twenty percent lower. But please do not think that it might be zero. That’s that’s not a possibility here. There is an earnings test, that you need to be aware aware of when you claim Social Security prior to age sixty seven, which for pretty much everyone on this call, that’s full retirement age now. There were other, forward retirement ages in the past. We’re all in the window of sixty seven now. And, if you earn income at, like, say, sixty five, and let’s call that roughly roughly twenty thousand dollars if you’re over twenty thousand dollars earned income, they’re going to start reducing your Social Security benefits for the dollars that you earned from your job.

It’s not technically a penalty because behind the scenes, you’re still contributing into Social Security, and your benefit later on will be higher. But functionally, why would you apply for a benefit that you’re then not going to be paying? If we’re earning more than twenty thousand dollars a year in income, let’s wait and file for Social Security at a later time, generally. It might be unique circumstances that we can talk about in your your situation that would be different.

Once we reach sixty seven, though, there is no earnings test. What does that mean? It means that if I’m earning two hundred thousand dollars a year as an attorney and I wanna get my Social Security benefit, by golly, I can get my Social Security benefit and still keep every dollar. Okay?

That’s what that’s actually the only important significance of age sixty seven.

Everything else, it’s actually just a blended scale. It’s it’s a from age sixty two to age seventy, every month you wait to take Social Security, you get a slightly higher benefit.

But the major inflection point at sixty seven is you can now receive Social Security and earn as much income as you want to.

Social Security benefits are taxable. For majority of people on this call today, eighty five percent of your Social Security benefits are going to be taxable. There are unique circumstances where somebody can get their Social Security benefits and have them not be taxable. But if you have meaningful portfolio income, if you’re doing Roth conversions, if you are taking any money out from IRAs, you’re probably putting yourself in a situation where Social Security benefits are taxable. That’s okay.

It’s still income that is desirable, right, to to get and receive. And we have to talk about whether it’s right for you to receive it early or not.

I would say, generally, if there’s a known issue with your health and you have a shorter life expectancy than most, claiming Social Security early is generally beneficial.

If your health is good and you have enough income from other sources to to to cover your your needs, maybe waiting till age seventy is is is a good answer. What I can tell you, we’ve run the numbers on this in detail, and we’re not talking about major differences. Okay? The only way we get to major differences is if we assume that you live to age ninety five and a hundred.

There start to be more substantial differences in delaying your benefit. But for the majority of time, these things are actuarially calculated to be roughly equivalent. Since we don’t know when you’re gonna die, we know when you’re gonna claim. We’re gonna try and average.

This is what administration does, is try to average the payment that’s gonna be payable to you so it’s equivalent whether you were to take it at sixty two, sixty five, sixty seven, or seven. K?

You can apply for Medicare at the same time, or you can apply for it separately. Do not link mentally, Social Security, and Medicare in your minds. The only way those are linked is that Medicare premiums can be paid from your Social Security benefits. So if you file for Medicare, before you file for Social Security, you’re gonna have to write a check to to Medicare to cover your premiums.

If you wait until after you file for Social Security, then your Medicare premiums are gonna be covered from your Social Security benefit. No difference in costs. It’s just administratively where the where the money’s coming from. And the last thing to be aware of on the on the thirty thousand foot level for Social Security is that some of you may be thinking of, well, I worked for my state government for a while, and I think somehow I remember that I’m gonna have an issue on my benefits when I retire for Social Security.

That’s not true anymore. There was the Social Security Fairness Act that was passed a couple years ago, and and its major provision was to say, never mind. Your Social Security benefit is your Social Security benefit. We’re not gonna look at you or your spouse and what each of you earn from employers who are not contributing to the Social Security plan.

It’s beyond the scope of this presentation as to whether that’s a good thing or a bad thing, but the the end of the day, everybody gets more some people may get more in Social Security as a result of this. It’s also one of the reasons why Social Security is going to run out of money a little bit faster than it was otherwise going to because of that act. But it it does certainly simplify things for a lot of people who had, public employment that that was not contributing to Social Security for a while.

Things you should keep in mind before claiming. Some of these I already mentioned in in embryo, the previous slide. So health and life expectancy. As I said, if you have a cancer diagnosis, file for Social Security immediately. If you have, some kind of chronic condition that has shortened your life expectancy, file on the early side for Social Security. I’m not gonna tell you to file for it if you are working, loving your work, and you’re under age sixty seven and you just don’t wanna stop. Do what you wanna do, but keep in mind that the likelihood is you’re going to receive lower cumulative benefits from Social Security if you die in the early years of when you were receiving benefits.

Earnings test, we talked about, but let’s think about spousal benefits. Some people still are not aware that even if you did not work and you are married, you’re going to be eligible for a Social Security benefit.

Okay? A half benefit of your worker’s spouse.

So you can look at the the the Social Security statement they receive. If it says they’re going to receive thirty five hundred dollars a month at their full retirement age, you would receive one thousand seven hundred fifty dollars a month, if if you claimed as a spouse.

There’s nuance in there and differences in ages. The only thing that I’ll say here to keep in mind, which can erode actually some of the delayed tactics, is that if you are the same age, for example, and the worker delays their benefits, the worker will get an eight percent print, a jump in benefit for every year they wait to claim. The spousal benefit will not. Spousal benefit maxes maxes out at full retirement age.

And so the blended effect of that means that you will have a lower jump annually in cumulative Social Security benefits, for waiting. So that’s just to give you an example of the nuances involved in the moving parts of Social Security. It definitely is a good idea to have somebody look it through your personal situation, each of your, benefits that you would qualify for, your own spousal benefits, ex spousal benefits, survivor benefits. These are all factors.

Social Security is not a simple system. It is possible to know the rules. I would like to say we do a pretty good job at knowing them. But it one of the advantages of of being a a a group like Savant is we’ve seen this movie hundreds of times.

It’s your first time seeing the movie. Why not sit next to somebody who’s seen it before, right, and and can kinda walk you through some of these important decisions? Ex spouse benefits, if your marriage lasted longer than ten years, likely, you’re gonna be entitled to some form of ex spouse benefit if it’s larger than your own. You can’t stack these benefits.

Right? That’s something that we should keep in mind. Survivor benefits, if you’re age sixty, many cases, you can file for a survivor benefit on your, deceased spouse’s work record. And then you have to consider, alright.

How does that work? What about my own benefit? You know? So these are all important inflection points, important elements to the decision process that we’re just trying to tell you, if this is your case, take consideration.

Social Security is going to have cost of living adjustments all throughout. Alright? It’s a program that is going to increase your benefit over and over. So so that’s gonna be helpful to it.

There’s pros and cons of delaying to seventy. The biggest con I can think of is that, well, what if you were to die prematurely? Right? That by having delayed the benefit, you would have received potentially years of benefits if you haven’t claimed any.

Oftentimes, we’re just taking that risk knowingly. Right? But we want to take it knowingly. We wanna be conscious of this rather than an implicit, risk that we’re not aware of.

As I said in the previous slide, there are four, types of benefits. There’s the spousal benefit you can receive on top of the worker benefit. There’s the divorced spouse benefit. You need to know your divorced spouse’s Social Security number.

You need to have a marriage certificate and a dissolution of marriage certificate that you proof that you can bring to Social Security, and then you can research that yourself. There are survivor minor benefits. So if somebody is, sixteen or under, they can qualify for minor benefits off of the work record of someone who deceased. And then there are widow widower benefits for the survivor, surviving spouse.

So there are many benefits paid out by Social Security that have nothing to do with the benefit paid to the worker, and we should be aware of these and be receiving these as we are able.

So we said you can start receiving it at sixty two as long as you don’t have earned income. If you have earned income, it’s going to reduce the benefit you get. The nuance I will add on this slide is just keep in mind that it’s a reduction of benefit, one dollar for every two dollars of earnings up to the year that you turn sixty seven. In the year you turn sixty seven and haven’t actually reached the age of sixty seven, for every three dollars you earn, one dollar will be reduced.

So this is one of those those things where it’s not just about, the year. Okay. Great. You’ve turned the year that you turned sixty seven.

It’s actually turning sixty seven that turns off that earnings test all the way.

So the thing I’ll say here on deferring benefits is the idea that if you have not saved a level that is gonna put you in a position where you feel comfortable with your income and retirement, Then taking from other investment accounts early in retirement and maximizing the guaranteed benefit that you would get from Social Security can be a good idea.

That’s as nuanced as I can get in this kind of generalized presentation. But the idea would be Social Security is a benefit of the the full faith and credit of the United States government.

If you can get that benefit to the largest possible level, and that benefit, if you were to receive it, would cover all of your needs, that’s something to contemplate. And it’s, in essence, an annuity that is paying you out over a lifetime. The disadvantage to taking that approach and spending down other sources early on is that you cannot take an advance on Social Security. It is simply an income payment to you.

And so we have to think about the interplay between investment accounts, IRAs, four zero one k’s, taxable brokerage, versus a a monthly payment like an annuity or like Social Security. And it’s really important as a result to be cognizant of that in advance of filing. There used to be all these possibilities where you could file, you can figure it out, and if you decided you didn’t like it, you could actually pay the money back to Social Security and recalculate everything. That’s not where we’re at anymore.

So the the once you filed, you’re locked into a lot of things. Before you filed, you have a lot lot of optionality.

With that, Joe, we’re gonna hand the mic over to you so we can you can talk us through all the other aspects of retirement that are not Social Security and Medicare.

Thank you so much, Joel. That was great information there. So, yes, I’m gonna be talking a little bit about some IRAs, withdrawals, and RMDs. So let’s get right into it here.

Now before retirement and you start taking withdrawals from IRAs or claiming social security, one thing to keep in mind is prior to retirement, you’re likely in your highest earning years. Right? So make sure that you’re reviewing those retirement contributions that you’re eligible to make through your employer. So check to make sure you’re on track to max out your four zero one, an IRA, or other retirement plans available to you.

While you’re in those highest earning years, offsetting that ordinary income with the pretax deductions can be really beneficial to you, especially if you’re going to be in a lower tax bracket upon retirement and can withdraw those funds at a lower rate.

So on this slide here, I have the contribution limit for some popular plans here. These are twenty twenty six. These do change annually, so please keep that in mind.

Looking here at the first column, we have employer plan. This is really going to cover your four zero one k, four zero three, four fifty seven plan. The base amount that an employee can contribute here is twenty four thousand five hundred dollars for the twenty twenty six tax year. Individuals who are age fifty and above can contribute an additional catch up contribution up to eight thousand dollars.

But you’ll see another line item here, ages sixty to sixty three. This is pretty new here, and this is called the super catch up. So individuals who are aged sixty to sixty three as of December thirty first of that tax year are eligible to make a catch up contribution of eleven thousand two hundred and fifty dollars. You don’t get to make both the eight thousand and the eleven thousand.

It’s the one or the other. So for those individuals who are aged sixty to sixty three, they can make that eleven thousand two hundred fifty catch up contribution. That means at the end of the day, total contributions to these employer plans can range for those folks from thirty two thousand five hundred all the way up to thirty five thousand seven hundred fifty. Now I wanna mention one thing here.

There was also another recent law change that basically said certain high earners, if your income exceeded about a hundred and fifty thousand dollars, your w two income from the prior year, those catch up contributions need to be made on a Roth basis, an after tax basis. So just keep that in mind because that’s a new change here that came into law that’s gonna impact a lot of individuals here. So that means you can still make that twenty four thousand five hundred dollars pretax contribution that you get a deduction for. But that catch up piece might need to be made on a Roth basis depending on your income from the year prior.

In the next column here, we have IRA limits. This is going to include your traditional and Roth IRAs. So the base amount here for twenty twenty six is seven thousand five hundred dollars Catch up contribution is only eleven hundred dollars But I will say, catch up contribution is finally being indexed for inflation. It’s been a very long time since this has occurred, so we will see this starting to increase over the next couple of years here based on inflation indexing. So that means the total amount that you’re eligible to contribute to a traditional or a Roth is eight thousand six hundred dollars for those folks above age fifty.

And finally here, we have HSA. That is a health savings account.

So for twenty twenty six, the contribution limit’s around four thousand four hundred for self covered individual, while family coverage is eligible up to eight thousand seven hundred and fifty dollars. Now the ages are a little bit different here for catch up contribution. You need to be over age fifty five to make that catch up, which is one thousand dollars, meaning the total amount for those individuals could be up to fifty four hundred for self coverage or nine thousand seven hundred fifty per family. I do want to highlight one other thing.

While HSAs are typically through an employer here, if a spouse, a nonemployee spouse, is also over age fifty five, they are eligible to make their own catch up contribution to their own personal HSA, meaning that family amount of the nine thousand seven hundred and fifty can really be ten thousand seven hundred and fifty. HSAs are a great vehicle here where you can contribute funds, receive a tax deduction, and withdraw those funds tax free, as long as they are used for qualified medical purposes.

So while I just covered three types of retirement plans here, I want to just mention that there are a whole handful of others.

So evaluate contributions to retirement plans like a STEP IRA or a solo four zero one. These plans are really geared towards business owners. STEP IRAs and solo 401s, they work similar to one another, but they have their own differences here. So step IRAs generally allow employer contributions based on net income from the business. Solo four zero one k’s, while they also allow for employer contribution, they can allow for those other, elective deferrals that I covered on the previous slide up to the twenty four thousand five hundred dollars for individuals. So these are great savings vehicles to contribute, to your retirement and stash away some additional funds there while receiving a tax deduction.

So while I just covered about contributing funds for retirement, I want to talk a little bit about withdrawal strategies here. So there are some penalties that are associated with certain types of accounts. And that’s what I want to cover here on this slide. So for individuals who are under age fifty five, when you’re in need of some additional funds here, one of the key accounts to take funds from would be taxable non IRA brokerage account. So those accounts would be, in essence, your stock, your bond, anything within your taxable brokerage account with a custodian.

You can take those monies out. And generally speaking, because they are in a taxable account, those withdrawals will be subject to capital gains rates, more preferential rates.

Joel had spoken about ordinary income tax brackets before ranging from zero to thirty seven percent. Capital gains brackets are a whole different ballgame. Those range from zero, fifteen, and twenty percent. So withdrawing funds from a taxable portfolio and subjecting those gains to a capital gains tax tends to be more preferential than taking an ordinary tax deduction from an IRA that could be subject up to a thirty seven percent tax rate.

So under age fifty five, it’s ideal to pull from a taxable account because if you were to pull funds from a retirement account, you’re likely gonna be penalized. The reason being, Congress established retirement accounts, IRAs, four zero one k’s for retirement. They don’t want you withdrawing those funds before retirement. Hence, they added a penalty up to ten percent on those withdrawals.

So Congress determined age fifty nine and one two should be when you’re eligible to withdraw those funds and only pay ordinary taxes or no taxes, depending if it’s a Roth account. But you get to avoid all penalties. So what happens when you’re age fifty five between age fifty five and fifty nine and one two? Well, there’s an exception here, the rule of fifty five.

This is really applicable to those individuals who are working, have an employer sponsored retirement plan, such as a 401(k) or 403(b), and they terminate service with their employer after attaining age fifty five. So say that age fifty seven you decide to retire, you are allowed to withdraw funds from your employer sponsored retirement plan penalty free, but it must be the retirement plan from the employer that you just terminated with. Again, you can’t roll those funds from a 401(k) into an IRA. That would disallow that ability to avoid that penalty. So there are some workarounds there. And that one key workaround is being able to pull funds out upon retiring before age fifty nine and one two from your retirement accounts penalty free.

Over age fifty nine and one two, you’re able to pull out funds again penalty free. However, you may be subject to ordinary income depending on the account that you are pulling those assets from.

So while you have the ability to take assets out from withdrawals from an IRA upon attaining age fifty nine and a half, you’re not required to at that time. You have some flexibility here from fifty nine and and a half until your required minimum distribution age.

What Congress had basically said is, while we want you to pull funds from your retirement accounts, we don’t want you to be able to let those grow indefinitely and pack those on to your heirs and beneficiaries. We want to ensure that the funds that you stacked away for retirement are going to be used for retirement. So they established required minimum distribution ages. So previously, this used to be seventy and a half for many, many years. Until about twenty nineteen, twenty twenty, they started changing the RMD age as life expectancy in the US has been increasing. So as you see on the first line here, the current required minimum distribution age is now seventy three. It was seventy two in twenty twenty two, and like I said, seventy and a half prior to that.

This is also set to increase to seventy five in two thousand thirty three. So I’m throwing a lot of numbers out here, but look at the table down on the bottom half of the slide. What is your RMD age? Well, if you were born in nineteen fifty or earlier, it was likely seventy two or seventy and a half. Those individuals born nineteen fifty one to nineteen fifty nine, your RMD age is seventy three. Those born in nineteen sixty or later will be aged seventy five.

So what is an RMD? How is that determined? Well, what you do is take your total account values for these pretax retirement accounts as of December thirty first of the prior year.

There is a factor that then you divide that amount by, and that factor is basically your remaining life expectancy. And that is the amount that must come out of the account each year until you pass away.

So that calculation is needed to be completed on an annual basis because the account value change and that life expectancy factor will change. So if you don’t take out those RMDs, well, you may be subject to penalties. And those penalties used to be quite harsh. They used to be fifty percent of the required minimum distribution.

The IRS has been pretty lenient in forgiving those penalties in the past. But recent legislation reduced the penalties because I think Congress determined that they were a little bit too harsh, especially if it was due to an accident that you failed to take that RMD. They reduce that penalty down to twenty five percent with a further reduction to ten percent if you correct it in a timely manner, basically saying if you correct it before the IRS corrects it for you.

There is an ability, though, to still attempt to abate and waive that penalty if you were subject to one at the end of the day.

Now, with these required minimum distributions, they largely result in taxable income. Right? So that can increase your taxable income. That could impact your Medicare premiums, as Joel alluded to earlier.

So one thing I wanted to bring to your attention here is using those required minimum distributions from your IRA to contribute those funds to charity. So there’s an ability here on the last line item. Individuals aged seventy and a half and older can make up to one hundred and eleven thousand dollars in QCDs in twenty twenty six. So that’s per taxpayer, meaning a taxpayer is about to make up to two hundred twenty two thousand.

Why is it seventy and a half years old? That’s a little unique. Well, as I said earlier, that was the age for RMD for many years, several years ago. Congress never changed that.

So individuals, even if you’re not subject to RMDs, consider making QCDs from your IRA to reduce future required minimum distributions.

Those QCDs can reduce your adjusted growth income, reducing your taxable income.

And by reducing adjusted growth income, that comes into play with a lot of other deductions as well. So when you’re able to reduce that significantly, that can, open you up for other benefits and other deductions that may not be available to you if your income was too high.

So I also want to talk a little bit here about tax diversification and coordination.

So an investment analysis for asset location by tax data. Going to cover a lot of this on the next slide, but just want to talk about how important it is to review default tax rates over time. And really, it’s key in retirement to determine a tax efficient retirement cash flow strategy. There’s many sources of income that you can receive from Social Security, pension, annuity, your investment portfolio, and your IRA. So you really wanna make sure that you are pulling of the appropriate levers here to not be hit with an unnecessarily large tax bill. So the goal is to smooth tax rates over time.

So creating a tax efficient portfolio is very important here to help managing taxes. Starting on the left side here, we have a Roth IRA. Roth IRAs have been in the news a lot, and they will continue to be and for good reason because assets grow tax free. Withdrawal can be tax free, right?

So Roth IRAs are a great, great bucket to have a lot of your assets in due to that tax free nature. So what would you tend to wanna have in a Roth IRA? Well, because of the tax free nature, you want assets that will produce high ordinary income that you might be subject again. If you’re in that thirty seven percent highest tax bracket, well, when a stock pays a dividend in your Roth IRA, that’s tax free.

You’re avoiding that. When you receive interest income, that is tax free because it’s held in that Roth IRA. So putting assets that are expected to grow significantly is ideal in a Roth, such as maybe you have some small value stocks, emerging value emerging market stocks.

Because when you pull those assets out many years down the road, again, all tax free, unlike a traditional IRA. Now traditional IRAs are great because you receive an immediate tax deduction for making a contribution, such as an employer sponsored four zero one k as well, very similar along those lines. Assets in a traditional IRA grow tax deferred, meaning that you’re not paying taxes currently, but look at that next line. Withdrawal, they are taxed as ordinary income.

So again, those RMDs that you have from pretax retirement accounts, those are going be taxed as ordinary income. They can really increase your income, potentially projecting you to increase Medicare premiums and other unnecessary taxes there.

So certain items, assets you want to put in there may be bonds or REITs. You want to try to have those assets not grow it substantially as a Roth IRA. Because again, when you’re subject to RMD, the need to pull these funds out, they’re subject to ordinary income. And that could push that could range all the way up to thirty seven percent, which is quite high.

Finally here, taxable accounts. These assets grow. Right? And they’re tax capital gains when sold. I mentioned it earlier on before.

When capital gains rates are more preferential, they only go up to twenty percent, disregarding other net investment income and other little factors here. But these are great assets to have large stock, the municipal bonds in.

The high growth, that’s fine. You want those assets to grow as much as possible because any gains that you have will be subject to capital gains rates, which are lower, more preferential than those ordinary tax rates.

Now, when you have all of these assets, this is great in all these various buckets. But then one concern that might come to mind is, how are these going to be passed on to my beneficiaries and heirs? Well, taxable accounts that I just mentioned before, those tend to be quite favorable because they are eligible many times for a step up in basis. Meaning, your passing, any gain that you had in those accounts basically goes away because the beneficiary can step up the cost basis to the current fair market value. That allows them to diversify the portfolio right then and there, essentially tax free. However, IRAs work a little different, and that’s due to the Secure Act, largely due to the Secure Act that passed a couple of years ago and the rule that came about with this. So what happened was back in twenty nineteen, the Secure Act one point zero passed, and I just want to mention too, there was a Secure Act two point zero that is passed.

And it sounds like Congress is currently working on a Secure Act three point o that we may see in the next couple of years here. Congress is very onboard, and it’s a very bipartisan bill when it comes to retirement plans here. But what they did was change the rule for most non spousal beneficiaries. Meaning, if you were to pass away and give your inherited IRA to a child or a grandchild, There are new rules here.

In the past, you used to be able to pass those assets onto those heirs, and they could stretch those required minimum distributions over their entire life expectancy. Think about giving one of these assets to a teenager. They have their entire life. They get to pull the pull funds out at a small amount each and every year.

Well, again, as I said, Congress wants retirement accounts to be used for your retirement. So now they implemented a ten year rule basically saying any inherited IRAs that come into play in twenty twenty and later, this includes both Roth and traditional, those must be liquidated within ten years. Certain beneficiaries might have required minimum distributions each of those years, for years one through nine, and then liquidate the account in year ten. But they can no longer be stretched over the entire beneficiary’s lifetime.

You now have the ten year window that can really compress these distributions, pushing those beneficiaries into much higher brackets because they need to pull these funds out in a very short period of time.

So when you have these large IRA values here and you’re trying to pass these on to maybe your children or grandchildren, you may not want them to have access to all of these funds because they’re minor children. Right? So that’s where trust can come into play. Trusts don’t necessarily just save taxes, but they necessarily save taxes. They really establish control around some of these accounts here. So when would you wanna establish a trust and leave an IRA to a trust? Well, if you have a substantial IRA balance in the hands of beneficiary and they need asset protection.

So there are certain trusts that are available, one known as the conduit, basically says that, hey, any of those RMDs and withdrawals, they come right out into the beneficiary and are taxed at the beneficiary tax rate. So there’s limited flexibility there on being able to maintain some of those assets in the trust because, again, it provides a lot of those assets directly outright to the beneficiary, which is where the accumulation trust comes into play. This allows only certain dollar amount to actually be tapped out to the beneficiary, if any at all. However, you are still subject to required minimum distributions or maybe.

So when those come out, they are going to be taxed at the trust level. And trust tax rates are very compressed. You reach that thirty seven percent tax bracket at a very low income threshold, around fifteen thousand dollars or so. However, if those funds were to be distributed outright to the beneficiary, they’ll be taxed at their rates.

So an accumulation truck can provide flexibility, but you really need to be careful with that ten year rule. Because if all of a sudden, the entire account is liquidated and paid out, that truck could be paying thirty seven percent on that distribution, eating away a lot of that value there for tax purposes.

So finally here, how can we help avoid some of these large required minimum distributions and passing on the pretax account? Well, good old Roth conversions. Right? A Roth conversion voluntarily transfers assets from your pretax traditional IRA to a tax free Roth.

Now in order to do so, you have to pay taxes. But there are no income limitation for Roth conversion, unlike Roth contributions. Those are work differently. Okay?

And I’m just talking about Roth conversions right now. So why would you wanna do that if I’m paying tax to move money from one bucket to the other? Well, again, a Roth conversion, future tax free growth. There’s no taxes on those future distributions within requirements.

So there are some certain holding rules about five years or so. I’m not getting into all of that right now. Just generally speaking, there are no taxes on those future distributions. Even when your beneficiary inherits that account, while they may be subject to that ten year rule, they can allow that account to continue to grow for those ten years.

And when they pull those funds out, guess what? Tax free. There’s no future required minimum distributions, so you don’t have to worry about potentially bumping yourself up into a higher bracket in retirement from your IRA withdrawal as you’re now collecting pension and Social Security and investment income. They are a great investment account for legacy planning because of the tax free nature.

So you don’t have to worry about having your beneficiary consider tax ramification with a Roth IRA. And again, they can reduce future taxes, resulting in smaller required minimum distributions. Roth IRAs do not have RMDs. Roth four zero one k’s no longer have RMDs, so there’s no need to be concerned about those of allowing for additional greater flexibility in your financial plan.

So I hope you found today’s webinar helpful. Please, let’s connect. There is a link in the chat to schedule a free fifteen minute introductory call to assess your retirement strategy. So please feel free to reach out if you have any questions or comments and wanna speak to, anyone on our tax team or advisers. We’d be happy to have that discussion and lead the way.

Yeah. I think, Joe, to sum up, I mean, just to come back where we started, we don’t want taxes to be something that paralyzes you from making decisions.

Taxes are are are a sign that you’ve made money, and and we’d love to get to a situation where you pay zero tax. Most cases, we’re not talking about zero tax, but we are talking about tax minimization.

And when we contemplate tax minimization, it’s important to contemplate the moving parts. Hopefully, we’ve talked about you today, Social Security, Medicare, IRA distributions, divorce, death, children.

There’s many ways to consider how taxes, should form a part of of the plan. Alright? So, yeah, we’ve got a few minutes for questions here. I saw one that came up, that I’ll answer. What happens to Social Security if my spouse dies? I think this is because we were talking about a spousal benefit. If I’m claiming a spousal benefit on Social Security and my spouse passes away, I will get my deceased spouse’s benefit.

My my spousal benefit will go away, but I will switch to receiving my my deceased spouse’s benefit. This is one of those reasons people tend to wait on the spouse I mean, on the worker benefit to apply until seventy because whatever that benefit was is received by the survivor. Okay? But but you’re right. Some of the Social Security will go away, but it is think of it as actually either spouse that dies first, it’s the spousal benefit that goes away. The worker benefit continues. It’s either just continuing to be paid to the worker or it’s paid to the the widow or widower if the worker passed away.

Perfect. Thanks, Joel. I have another question here. I have a large inherited IRA that I just recently inherited.

Can I make QCDs from this account if I’m only age fifty four? What about Roth conversion? It’s a good question. So QCDs, you can make a QCD from an inherited IRA, but you have to be age seventy and a half in order to do so.

So you’ll have to wait. But, unfortunately, if you just receive that, if you are a non spouse beneficiary, that’s probably gonna have to be liquidated and tenured before you attain age seventy and a half. So you may not be eligible to make QCDs after all.

So that’s that’s a really good question there. And Roth conversion, unfortunately, you can’t make a Roth conversion with an inherited IRA. There are some restrictions there that are different than a traditional IRA that you would have that flexibility.

So, unfortunately, in your scenario, there will be no ability to make QCDs or Roth conversions from that inherited account.

I see one. Does Medicare work if I retire outside of the United States? That’s I how did I miss that? No. Medicare does not function outside the United States with one exception. If you have a Medicare supplemental plan that includes foreign travel, then you can get emergent care when you’re traveling.

But when you are living outside of the United States, you are not gonna be covered by Medicare. So that is definitely a factor that you have to contemplate when you if you’re considering being an expat, that that Medicare would not be something available to you. You also have the question of, well, do you wanna file for Medicare then if you’re not gonna be able to get the benefit? Because if you don’t and then you need care later on, two things. You can have to pay a surcharge, and and you may have to be rated as well. So alright.

Thank you, Joel. Alright, everyone. I think we are up against the clock here, and that is all the time we have today. Really appreciate your attendance. If we did not get your question or you have one, please just enter it in the chat, and we’ll be sure to follow-up with you there.

And again, feel free to click on that link within the chat if you’d like to speak to someone here on our team. We’d be happy to lead that discussion.

Thank you again for taking the time to join us today, and we look forward to talking with you in the near future.

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