How Taxes Impact Your Retirement Plan Video from Savant Wealth Management

Download our complimentary guide books, checklists, and other useful financial resources at savantwealth.com/guides. Good afternoon, everyone. Good to be with you today. Welcome to Savant’s uh live webinar series. Uh this afternoon, we’re going to be talking about how taxes impact our retirement plan. I’m uh Joel Kundik. I’m a financial adviser in Savant’s uh Vienna, Virginia office and I’ll be hosting today. Uh this is a topic that gets a lot of attention. I’m glad that we’re even after April uh 15th looking at our taxes and trying to figure out uh how they impact us over retirement. We could uh take this down to kind of just a current year situation or a broader picture. And we feel like with many things financial uh when you look at just the current year, you’re going to miss a lot of things. So, we are going to broaden the lens to a multi-year uh picture today. But, uh this is a topic that’s near and dear to my heart. I I think that way too many people just take a look at investments and try and isolate well just we need to maximize return on investments every year. I don’t think that’s a bad idea in and of itself, but taxes affect our investment return. there’s there’s no way around it. And so when we are able to think clearly about the interplay between tax and investments, we make better long-term decisions. So the agenda today, we’re going to first talk about how you are taxed. Uh we’re going to cover uh the different explicit taxes, but then also the implicit taxes that are involved. And uh you know, you you’re pretty familiar, I would suspect, with ordinary income and capital gains taxes, but we’ve also got other taxes to worry about and and we’ll talk about that. Then we’re going to talk about how important it is to determine what you own. And then we’ll also go into where you own it. So these are the many ways that we can be impacted on taxes uh not just by uh what we own but the locations we own it in. Okay. See seems like somebody might be having an echo issue. You might want to rejoin the webinar because I don’t think that’s something being experienced by others. If you are chime in please. But I suspect you might need to exit and rejoin the webinar. We’ll talk after that point about where you withdraw from, which uh accounts uh you should consider using at which time, and then I’m going to conclude with five answers that you just need to give yourself that uh you need to pose to yourself, get a clear answer on, and that’s going to help guide you in better decision- making throughout retirement. Okay. So, let’s talk about how we’re taxed. It’s pretty obvious that the top right corner here and the bottom left corner, ordinary income and capital gains, hopefully those are two methods of taxation that are familiar to you. They are separate, right? Uh but but they they impact one another. So our ordinary income tax is what all of us have been paying probably since we were 16 years old in many cases. Capital gains taxes only some of us on this call are paying right now. Some of us are only going to have a capital gain uh to worry about in a sale of a business or sale of a home. Others of us have a large taxable brokerage accounts where uh capital gains are an issue every year right now. We’ll talk about some ways of limiting that. But in addition to those methods of taxation, we’ve got to consider well how are we what is our effective tax rate? And that’s going to be impacted by like standard deduction that we might take or itemized deductions that we might take if our deductions are large enough. Another example of a stealth tax. I’ll give I’ll give a couple others in the call, but like Irma, this is the Medicare uh adjustment, which really they call kind of like a higher premium for your Medicare, but the way it functions is like a tax. When your income crosses a certain threshold, then you owe additional Medicare uh uh premiums. Okay. So, h how do all all how does all this work? Let’s start with the deductions. First of all, for 2026, you are able to take a $32,200 standard deduction if you’re married filing jointly or a $16,000 $16,100 uh standard deduction if you’re singled or married filing separately. That that’ll cover most of the people on this call probably. Uh though in many cases you think that you are taking itemized deductions and you may only be taking standard. The the whole code changed about eight or nine years ago where up until that point there was uh limits on how much you could get on a standard deduction. Quite a low limit actually. And so most people were itemizing. And a lot of us are in the habit of still just sending in the documents to our tax repairer and assuming that those things are helping us on our tax return, things like uh our our property taxes, things like our uh charitable giving or donations, right? And uh it’s important to really look under the hood. I would look at schedule A on your tax return. That is where you itemize your deductions. And you may be surprised to see that, yeah, you’re listing things on there, but at the end of the day, you’re just taking the standard deduction because the standard deduction has risen so high. Uh we we have a little bit of of new nuance to that. A a grace period if you will opened up in that uh we’re allowed to count a much higher amount of our uh taxes. Our state income and property taxes are allowed to be counted on our standard uh our itemized deductions this year. But that’s something that you’ll want to keep an eye on. Regardless, this deduction influences what the effective tax rate is that we pay on everything else. Really, I mean, just let me give you a clear example. If I make less than $32,200 in this year and I’m married filing jointly, I’m going to owe zero tax because even if there are tax brackets that charge me a certain amount on a certain level of income, all of my income will be wiped away by that $32,200 standard deduction, right? Most of us are at higher levels of income than that, but I use that as a a case in point to just give an example. Any deduction that is taken, whether itemized or standard, is going to lower your effective tax rate, and it becomes more and more effective as you get to upper levels of income. If you are uh if you have children, you can get a child tax credit. That’s applicable as well. If you’re a senior right now, uh there was a big headline a couple years ago that we’re going to not tax social security. Uh would would it would that it be so easy as that, right? But that’s not actually how things function behind the scenes. If if you’re 65, you have not claimed social security, you’re still eligible for a $6,000 senior deduction. This is the way that we’re kind of covering the headline news of t social security is not taxable. There’s this uh additional deduction for seniors. Okay? And that’s val if you’re a married filing joint, there’s two of you, then there’s two $6,000 deductions you get. Uh so we have to think about what are our deductions. This gets us if we’re working with a tax repair uh or even on our own. The software should trigger this for us. There’s two tax rates that we should be able to see from there. One is our marginal tax rate. That means what percent taxation is charged on the next dollar of income, the top dollar of income. The other is our effective tax rate, which just takes our total taxes, divides by our total income, and says what was our our our rate of taxes. Okay. So, ordinary income tax rates apply to earned income. This is our employment income. Very familiar. Bank interest earned outside of IAS. Uh, interestingly enough, you know, we see like the bank saying, well, we’ll give you three and a half% rate of interest with us. A lot of times we don’t think about the fact that, yeah, that’s interest, but it’s going to be taxable. So, it’s all subject to ordinary income taxes, and it will layer on to our employment income. So, whatever our top tax rate is, that’s what we’re going to pay taxes on on our uh bank interest. Then there’s uh non-qualified dividends earned outside of IAS. So, there’s there’s two kinds of dividends you receive from your investment accounts that are not in an IRA. There’s qualified and non-qualified. Some of those are subject to ordinary income taxes, the non-qualified ones. When we take withdrawals from our IRA, this is the big one affecting us in retirement, right? We we’ve had a lot of people are calling it like a a tax bomb embedded in your uh portfolio throughout your career. I think that’s kind of uh inflammatory language. What really it just means is that hey when when as we’ve been saving for retirement using the traditional route through a 401k or an IRA or 403b TSP any of those methods of saving that we’ve been using we have been able to take a tax deduction on what we contributed and the the the the other end side of the coin to that deal was that hey we’ll give you the tax deduction when you fund it when you take money out of it then it will be subject to income taxes and that’s an income tax that cannot be avoided. it’ll be paid by us or it will be paid by our heirs. And that’s really going to be important particularly in light of the fact that in the over the last few years they’ve made a change to how inheritors receive IAS. Most inheritors are now going to be subject to a 10-year limitation in taking all the money out of an inherited IRA. It’s not applicable to a spouse. It’s not applicable to most people of the same generation to the deedent. But since most of us are ultimately giving IAS to our children or our nieces and nephews, uh ultimately someone is going to have to take that balance out over 10 years. And that’s going to be something that we want to be mindful about, right? What is the total tax paid on distributing from an IRA? The other thing is annuity withdrawals. And and this is, you know, when we take money out of an annuity, we we we were told maybe that an annuity is a tax favorable vehicle. I don’t tend to think of them as very tax favorable. We’re putting in after tax money. Everything grows subject to taxation. And whenever we take a withdrawal from it, unless we annuitize it, every withdrawal we take out will be subject to income taxes until we get down to what we put into the annuity. Then we can take everything out free of tax. Whatever we put in, we can take out free of tax, but only after we’ve taken out all growth. So this means that we have uh ordinary income taxes on a substantial amount of income. All right. Let’s look at the ordinary income tax brackets for these were for 2025. All right. So for we we can see that there is a 10% bracket that is applied quite low. Then at 12 these are considered kind of our low tax rates. Then there’s this jump at around $100,000 for married filing joint from 12% to 22%. That’s one of those inflection points that we want to watch carefully because when we cross over that level, now we have an additional 10 cents on the dollar that’s going to be taxed on everything on top of that. Hopefully, we’re all on the same page. The United States is a progressive tax country. Meaning that if you make $200,000 of income, it’s not true that all of it will be taxed at 22%. The first 25,000 or so will be taxed at 10%. the next six 75,000 or so at 12% the next 100,000 or so at 22%. So it just layers on top of each other. Okay, but uh that’s one of the big inflection points is around $100,000 for married filing joint. And if you’re single, it’s half that, around $50,000. And then the next big inflection point happens up here at this 24 to 32% threshold. Really, if you’re under $400,000 or so of income, you don’t have to uh ma do major tax planning because there’s this wide band from 100 to $400,000. We’re in a relatively similar tax bracket, at least on income. We’ll talk about some capital gains uh changes that happen over that the band there, but 22 and 24 are very similar taxation. Then we jump though, we cross over 400,000 into 32%, we really make a big jump again. So, I I’d like to tell couples that I’m working with, uh, you know, look at $100,000, look at $400,000. Those are our big inflection points. We want to be managing from a tax perspective. If we’re single, it’s half that. $50,000 if uh uh on on the 12 to 22 and then $200,000 on the 24 uh to 32. So, sometimes people will talk about, hey, when when one spouse passes away, there’s a huge spike in tax rates. That is true because the tax rates cut. And I think uh uh you know again a lot of articles get written about this. Maybe you’ve read them, maybe you haven’t, but you you need to be mindful of if one spouse passes away, where are we going to be at on on taxation uh when there’s just one spouse living? Because it’s an interesting uh uh dual effect, right? Things affect one another. We’re probably going to be spending less, not 50% of what we were spending, but somewhat less. But at the same time, we’re going to be subject to higher taxes. So, some of that lower spend will be absorbed by higher tax rates. Okay. So, that that’s ordinary income tax. That’s the biggest uh that all of us really are should probably be familiar with. I did see a question about whether those standard deductions were for 2026. And uh yeah, standard deductions I posted at the screen were for 2026. So then we have a capital gains tax though. A capital gains tax uh is on different income. It’s not on your ordinary income. It’s when you sell things that have appreciated in value. And the first thing you’ll think of is, well, wait, what if I buy and sell inside of my IRA or my uh 401k? Nope. No taxes there. All right. Uh but uh what if I sell uh a home that I’ve owned for 30 years? Am I going to owe taxes there? Well, if you’re single, you get a $250,000 exclusion. If you’re married filing joint, you get a $500,000 exclusion on uh gains. But somebody’s owned a house for 30 years, it’s pretty easy to be over that threshold. And yes, you could owe a capital gains tax on selling a home. You can also owe capital gains taxes on stocks that you hold outside of an IRA or 401k. and you can owe taxes on uh capital gain distributions along the way on mutual funds that you own. This is interesting territory where you know you may have noticed some years maybe the market’s kind of doing average or or below average and all of a sudden it gets to December and you realize well January you get this uh a tax statement saying you owe a lot of taxes on uh gains. You’re like well I didn’t sell anything. Well, if you own mutual funds and those mutual funds sold holdings at substantial gain in that tax year because they said, “Well, we don’t want to hold those investments anymore. We want to choose new investments,” they have to distribute out all of those capital gains to shareholders. So, that is definitely something to keep an eye on. If you have something going on where you have large capital gain distributions being sent to you every year, but you’re not selling anything, you probably have a tax inefficient portfolio. And it it it could use a at least a review. Uh capital gains tax brackets are separate. And now I say, well, what’s the interplay between the ordinary income and the capital gains brackets? Think of it this way. The ordinary income pours into the picture first and then the capital gains pour in on top. So, while we have this 0% tax bracket for capital gains all the way up to $90,000 for a married filing joint, uh you you you have very low zero tax rate, at least federally on capital gains. Uh in point of fact, very few people are going to get that 0% because first they have their social security income, they have distributions from IAS, they’re still working, they have employment income. All of those things pour into the bucket first and then we start thinking about capital gains brackets on top. So, it’s very common to be subject to 15% capital gains tax. All right? And and so that’s something that we want to watch. We will also want to watch this threshold here. There’s a 600,000 threshold that we’re capital gains tax jumps from 15 to 20%. So, we’re in a situation where we could look at selling a business. If we can sell a business over a couple of tax years, maybe we can get it exposed to lower taxation, right? So these thresholds at which tax rates change are something that we want to watch carefully before we uh uh have major transactions like a home sale or a business sale. But also when we contemplate uh when to retire, when to claim social security, when to start taking money from an IRA, all of that is going to be impacted by the tax brackets in effect in the year that you take that activity. Okay?

All right. But then I said there were going to be other stealth taxes we covered. Here’s one right here. Net investment income tax. So this is a tax tax on dividends, rents, and capital gains. Very similar to the capital gains tax, but it’s an extra tax that if you are uh married filing joint and you make over $250,000 cumively between ordinary income and capital gains, everything over 250 will be subject to a 3.8% net investment income tax. If you’re single, it’s not half, it’s just 50,000 less. So everything over $200,000. So there is a single advantage there, right? You get in essence get to account more capital gains singly than you do married filing jointly until you are taxed at that extra 3.8% rate. This was created in I believe around 2012 with the Affordable Care Act. Uh it’s another way of kind of covering Medicare expenses. So when we say in the previous slide there’s a 0% a 15% and a 20% capital gains rate. In actuality effectively in our life if we’re married filing joint right here at $250,000 tax goes from 15% to 18.8%. And there never really is a 20% uh capital gains bracket. There’s a 23.8% 8% capital gains bracket because by definition if you have capital gains and your income is above 600 you are already going to be subject to that net investment income tax kind of a stealth tax but it’s something to be aware of and then we want to manage so we do again we want to manage within these thresholds right and there was a question I saw about like why do we why do we not just have a regular increase in brackets uh that’s because you know the United States is heavily involved in engaged in social policy through its tax code. Uh and so we want to kind of incentivize uh allowing people to make below certain thresholds to keep a larger percentage of their income. And once we cross over certain thresholds, we want to institute much higher taxes. Okay. Uh there was a question about inheriting a home. Should you get it appraised to determine the cost basis for a future sale? I mean, yes, anytime you inherit property, you should get it appraised, but you’re not going to owe uh capital gains taxes. um watch our presentations on estate planning because we will cover cost uh step up in basis at death. All right, that that’d be something definitely to attend another webinar. Right. So I said that there was going to be this Irma that effectively is another stealth tax and this is not a percentage tax. This is just a dollars. And so this is one of those things where interestingly enough, if you make $19,01 instead of $ 109,000 when you’re single, then your premium is going to jump for uh part B by $82 a month. And uh for part D, you wouldn’t have had a a a adjustment, but it’s I mean a premium at all. And now you’re going to pay $1450. So really think of it as like a $100 a month. So, $1,200 of tax on $1 of income. So, we really don’t want to hit very close to these thresholds. They become less uh penalizing as we get farther away from that threshold point. If I’m at $136,000 and I had to pay an extra $100 a month or $1,200 a year on $36,000 of extra income, it’s not near as big a deal as if I’m right over that threshold. I can end up having greater than 100% tax on a couple dollars of of income. So, this is something we want to watch in retirement. It is a stealth tax and but the difference is it’s not a percentage. It’s a graded tax where if you cross a certain threshold, the whole additional penalty applies. Okay. So then the question becomes, if I’m just looking at things in isolation and I’m getting ready to retire and I’ve just looked at all these slides that talk about capital gains taxes and ordinary income taxes and I say, “Well, Joel, what I’m trying to do then is pay 0% tax every year, right?” And so what I should do is I should avoid taking any money from an IRA or a 401k as long as I can to keep myself in that 0% uh income bracket. to which I would say absolutely not. That feels like the right answer and it’s generally the wrong answer. Everybody’s situation is unique. I’d have to kind of see what your situation is, but generally I would say when you go through a 0% tax year in your 60s, you have missed out on an opportunity to expose assets to taxation in a low bracket. Right? If we come back for a second to these brackets here, the logic is if I have that large an IRA and I’m going to take social security, then I’m likely going to expose myself to 22% tax once I turn 73 or 75 depending on when my my required distributions start. That’s all by your age. But I would like to instead take a little bit out each year. And there’s multiple ways to do that. We’ll talk later on. But this is where multiple years of analysis is important when you’re considering how to take money out in retirement. So, I want to fill my tax bracket buckets. If nothing else, if I say, “Well, Joel, I I I really didn’t save much into a 401k or an IRA, but I have all these other taxable investments.” Then I’d say, “Well, let’s make sure that we’re using the 0% capital gains uh uh brackets every year, where I’m getting my income up to $90,000 and I’m paying 0% tax and I’m resetting my cost basis to something higher because I know later on I’m going to want to take money out and when I do, if I could have taken money out and had it, if I could have made sales and had it be subject to 0% capital gains uh tax as opposed to taking out money for sales and be subject to 15% % capital gains tax. That’s 15 cents on the dollar that I’ve lost. So, lots of different ways that we’re going to think about this and it’s really going to depend on your personal portfolio, but we are going to want to be careful about how money comes out uh in in retirement. Don’t want to be in a 0% tax year generally. I know almost unless you got all your investments are in Roth IAS, right? If you’re an all Roth IRA person and you’re never going to pay a dollar tax in retirement, good for you. I I would suggest probably you’ve paid too much taxes earlier on, but I’m not gonna give you too hard a time for that. Well done. Uh but but you know, we really want to watch out for taxes. Let me give you one other point here because sometimes I’ll sit down with a couple and they’ll say that they want to get everything out of their IRA or 401k before they reach required distribution age. And that also can be problematic, especially if you’re inclined to give charitably because if you are planning on giving charitably throughout retirement, uh, and you drain your traditional IRA to zero, well, you’re going to miss out. You will have paid taxes on distributions from an IRA that you would not have had to take because there’s something called a qualified charitable distribution you can take beginning at 70 and a half up to $110,000 a year or so per year right now that you can take out from an IRA tax-free as long it goes as it goes directly to a charity. Uh I mean I’m not telling you to to to give charitably for this savings. That that never works, right? Giving charitably to save tax dollars is a losing enterprise because inevitably you have to give a lot of money up yourself. But if you’re already inclined to give charitably and you drained everything out of your traditional IAS and paid income taxes on it before you reach 70 and a half because you could have left money in that traditional IRA and and dripped it out with zero taxation uh over the course of your time after 70 and a half to give to charity. Okay, lots of uh moving parts when we’re managing retirement. All right, let’s talk about what we own. Okay, there’s and and this is really to just dive a little deeper on that topic I covered earlier about do I have big capital gains hits coming to me every uh tax year and why? And uh the the the genesis of this is really actively managed funds which used to be I mean even when I started in the industry over 20 years ago heavily uh driven by actively managed funds. Vanguard was a big player in the space, but was by no means uh the the only game in town. Now, that’s still not true, right? There’s lots of actively managed funds out there, but we’ve really come to terms with what a bad tax vehicle an actively managed fund is. What is an actively managed fund? The idea is you’re giving money to a fund manager. You’re buying a share of their fund and they’re saying, “Hey, inside this fund, we will pick the right stocks that you should own.” And then over time, our investment team will decide on stocks that we no longer think are stocks you should own, and we’ll buy other stocks. And the problem with doing that inside of a mutual fund is it’s going to kick out a lot of capital gains. And the timing of those capital gains is really going to be subject to number one, the success of the manager and and buying stuff that went up in value, but also then the timing of the manager and when they decided to sell those investments. So you could be in a situation where you’re in a year where you don’t want extra income, but for the manager, it was better to sell investments and and realize gains and all of a sudden you have an income spike that was not attrudable to you at all. It was just because the manager decided to sell some stuff that year. Um the timing of a manager selling stuff will have little to do with how the markets have done. Right? Sometimes, especially when the markets are doing very strongly, the manager is going to be reluctant to sell things that are going up in value. they’re wanting to continue to hold them for the future and they get in a time period then when an investment is doing poorly, the market is doing poorly, they will trade out holdings and kick out big capital gains. All right? And you have very little control, no control over that if you’re in an actively managed fund. So then the advent of index funds which really started about 50 years ago but have become a major player here in the space. Index funds give you better control in that uh you know that the index fund is only going to distribute gains uh every time that the index is reconstituted. Right? The fund manager what it’s trying to do is match what an imaginary index is doing. So when the index changes its composition the manager will buy a and sell a set of companies to match the index. But because that happens over much longer periods of time, your capital gains distributions are going to be quite a bit lower. But then we have direct indexing. Uh and I I’d even insert ETFs in here. ETFs have done a really good job at helping us on taxes. But the one that’s really been a game changer is this idea of direct indexing. Uh because commissions on stock trades have gone to zero and because uh computers can do such a good job matching indexes, right? We don’t need whole teams of people trying to to do that work. We can direct index a portfolio, which means you can put $500,000 into an account where the manager all they will do is they’ll buy all the underlying securities of whatever index they’re trying to match. We’ll just use the S&P 500 for this conversation uh to to to give that’s you know most readily uh uh understandable to all of us. 500 largest stocks in the United States. Rather than buying a share of an S&P 500 fund or many shares of an S&P 500 fund, we can buy all the underlying stocks and hold 500 stocks in an account that is seeking to match the index. What’s the advantage of direct indexing? Well, it’s that we can tax loss harvest, right? And and and I’m going to talk about this for a single stock and then I will apply it to this direct indexing concept. when you tax loss harvest. And this is counterintuitive. I I remember it took me my first few years as a financial planner to really get my head around why would I ever sell something that went down because it feels so wrong to do. Right? When you tax loss harvest, you sell a stock for $80,000 that you purchased for $100,000. Now, why would you do that? You lost money. Well, you do that because you think that that money that that stock is not doing as well as a number of other investments that you could uh invest in. As a result, why would you leave your money in something that you expect to underperform? So, there’s that layer just just kind of the investment return layer. What is my expected return on this investment versus other investments? But to add to it, now you have taxes and you can when you sell a stock that is down in value, you are able to realize a tax loss that can offset capital gains on your tax return. And even if you don’t have enough gains to match with it this year, well, guess what? You can use $3,000 of it to uh to go against your ordinary income that year. And then you get to carry forward the losses to all future years until you use it up eventually in the future. So losses are like making lemonade out of lemons, right? You don’t like what happened, but you make the best of it by realizing that loss and getting help on your tax return. So it can offset $20,000 in this case in this example of realized capital gain or it can offset up to $3,000 of ordinary income and the rest of the uh of the unused loss would carry forward to next year’s tax return. So, especially, man, when somebody’s going to be selling a business in the next few years, we can be watching for tax loss harvesting opportunities to shelter against that sale. Beyond the scope of today’s call, there there are other methods that can really hypercharge this tax loss harvesting opportunity. And I would suggest if you’re looking at selling uh something that is highly appreciated, you talk with an adviser because uh it’s only become available in the last five or six years that there are real ways to shelter against major realized gains and reduce tax bills. But this tax loss harvesting concept applied to our previous screen with direct indexing is helping us because when I direct index and I hold 500 investments in the S&P 500, even if the S&P 500 is up 10 20% for the year, there’s going to be a certain number of the investments stocks in that index that will have gone down in value. If I can sell those and realize a tax loss and then hold off and then maybe reconstitute and still seek to match the index over time, I’m going to kick off not capital gains that hurt me on taxes, but capital losses that help me on taxes. Okay? So, that is a concept that you want to be familiar with as you near retirement. And it, like I say, it’s not necessarily that intuitive. It would be important to have somebody look through your investments and help you understand how can you use uh tax loss harvesting or direct indexing to better constitute your portfolio. Okay. The other thing I will say here that you want to consider because sometimes you’ll sit with an investment manager and the investment manager will say, “Well, if you work with me, we’re just going to sell everything in your portfolio right now. Uh because we don’t like any of these investments like we like our investments.” uh that would be a tax unaware uh investment manager. And I would suggest that it’s really important to be sitting down with a taxaware investment manager who says, “Yeah, maybe some of these things are not ideal. They’re not exactly what we would want, but we want to determine a capital gains budget for each year. We’d want to look and see where some of these investments are close enough to what we would do that we’re not going to trigger 20, 30, $40,000 in taxes for you just to get into an investment that we think is going to earn 0.2% more per year. right? That would be ineffective. You would lose more than that excess performance in just the upfront taxes of turning over that position. So, you want to make sure as you’re vetting who you’re going to consider working with that you are working with someone tax aware. Okay. So, now we have to f focus on where we own things because remember we said ordinary income tax brackets could go really high up to 37% capital gains tax brackets can go up to 20. And for those of you who are like tracking me and remember what I said earlier, yes, effectively it’s a 23.8% high end of the capital gains tax. So let’s look at where we own things, right? We we we need to remember we’re going to pay higher taxes on earned income, bank interest earned outside of IAS, IRA withdrawals, annuity withdrawals. These are all going to be subject to ordinary income tax rates. And we’ll get that lower capital gains tax rate on stocks and funds held outside of IAS and 401ks. real estate and then capital gain distributions. Well, let’s say I own a stock fund that I purchased for $100,000 and it’s now worth $150,000. If I own that in an IRA inside an IRA or 401k and I like some other investment better, I don’t even need to pause to think about selling that and switching to another investment because there’s no tax implication on selling that position. Taxes on a 401k or IRA are charged at the time of withdrawal. They’re not charged on turning over any investment positions. However, if I’m holding things outside of an IRA or 401k, I have a major capital gain to consider, right? $50,000 of capital gains tax if I am selling that stock fund that I purchased for 50,000 less however many years ago. So, it depends on where the investments are, how you should handle uh the the the selling and buying of securities. So, this is sometimes why like an investment manager you’re considering working with, if they’re talking with them and they say, “Well, the IRA or the 401k, we’re just going to sell that. We’re going to go immediately to other investments.” There’s no reason to maintain existing investments in an IRA or 401k, apart from the fact that you think that they’re going to get great returns. But outside of a of a IRA or 401k, there are many reasons why you might want to hold on to investment longer than you otherwise would because you have to contemplate the capital gains tax. So let’s look at the other way though. The bottom half of this slide, we’ve got a stock fund that we purchased at $100,000 and it’s now worth $80,000. Okay, it’s at a loss. If it’s held outside of an IRA or 401k, well, I would better make sure that that is still an investment that I think is going to outperform all the other investment choices available to me because if not, uh, I’m avoiding a a tax loss that could have helped me out, right? As opposed to inside of an IRA and 401k, there’s no tax advantage to selling that position inside the IRA or 401k, right? So where you own investments makes a big difference as you get towards retirement. If I have a very large taxable brokerage account in retirement, there are probably things that we can do to tax manage that to maybe avoid some degree of taxation on what we’re taking out, whether that’s through direct indexing or some of the other strategies I I alluded to earlier that I think are beyond the scope of today. But if I’ve got an IRA or a 401k, man, I no I I I what I’ve got to manage instead is the timing of my income. And I have to be very careful about that because uh if I realize if I take out too much right now, I could be exposing myself to higher brackets of uh tax unnecessarily. And if I take out too little right now, then I could be in a situation where, man, 10 years from now, I might look back and say, “Wow, I wish I had taken out more in the 10 or the 12% bracket that I did not take out at the time.” Because, wow, look, now I’m subject to the 22, the 24, the 32% tax bracket. Okay? So, you want to strategically position your investments to pay lower capital gains tax rates. Sometimes this can also mean right for example I want to use bonds inside my IRA or 401k and I want to use stock funds in my taxable accounts. The logic here is that uh the dividends paid by stocks can be qualified dividends and subject to low tax rates and I don’t have to pay taxes till I with uh till I sell. Whereas uh bonds are going to pay interest every year. Right? When you hold hold a bond, you’ve loaned money to a company or the government and you’re getting paid interest every year. And that interest that is paid to you unless you’re in a municipal fund is going to be subject to ordinary income taxes. Not great to hold inside of a taxable brokerage account. Better to hold inside of an IRA account where you don’t care about that tax anyway. You’re not going to pay it. You’re just going to pay taxes on whatever it grows when you take the money out. This is called asset location. That can help you. Uh asset allocation is what you think, well, how much should I have in stocks? How much should I have in bonds? How much should I have in other stuff? Asset location is where should I own my stocks and where should I own my bonds and where should I own my other stuff? And we want to be very careful about that because sometimes you can turn things around. You can say, well, I’ll put all my bonds in my taxable account because I don’t want huge capital gains there and I’ll put all my stocks in my IRA. That feels great because then as the stocks grow, I don’t have to pay taxes. Well, there’s a huge difference between the two because the money you take from the taxable account is going to be subject to a lower tax to begin with, right? It’s much more tax efficient. The money inside the IRA, you’re going to pay the tax someday. Either you or your heirs. The factor we have not covered here that I’ll I’ll just give you a little taste of, like I say, go to more of an estate planning call with us to to get deeper on this. But when you die, anything you hold in that taxable brokerage account gets what’s called a step up in cost basis. It means it doesn’t matter anymore what you paid for it. The basis resets on that at the time of death. And so your heirs can sell those investments and pay zero tax. An IRA gets no such treatment. The dollars of growth in there will be tax to you or to your heirs and and sometimes very high rates. So we need to be very careful about where we locate our assets. So now let’s take a look at where do we withdraw from? Right? Do I take it all from my IRA? Do I take it from IRA and taxable accounts? There’s different answers whether I’m pre- required minimum distribution that’s from age 59 and a half to age 73 or 75 depending on the year that you were born or my post required minimum distribution age uh 73 or 75. So let’s take a look at that. If I’m in my prem years from age 59 and a half to age 73 then level one is just think short-term tax efficiency. Isn’t this wonderful? We take from brokerage accounts. We don’t take anything from IAS or 401ks because we don’t have to. As I said earlier, that’s going to cause us a long-term problem. Over the arc of our life, we’re going to pay more in taxes because we did we we we paid as little taxes as possible each year. But level two is thinking longer term tax efficiency. Let’s use those lower tax bracket buckets. Now, let’s say I don’t need to take money out of my IRA. Well, that’s fine. You can take your money out of your traditional IRA and put it into a Roth IRA so that all future growth happens taxfree. You would have to pay income taxes on that withdrawal, but if you have a large enough brokerage account, you can just cover the taxes that way. Getting high growth assets over into a Roth IRA where it’s not going to be taxed the growth will not be taxed to us or to our children or or other heirs when we leave it to them. Okay. We we we also maybe want to realize capital gains in those years. As I said earlier, maybe I want to take money out and expose it to 0% tax uh capital gains tax if possible. What I want to defer is my income. I want to get income into later years, right? So maybe I want to tax loss harvest to reduce my capital gains tax now, even if that means higher taxes in the future because I’m saving dollars. And then charitable donations. Charitable donations. Now, this is one of the places that not enough people look to get tax savings on in their life. And I’m not saying I I said earlier, don’t give charitably to save money. You won’t save money, right? Because some of the money comes from you. But if you were already inclined to give charitably and let’s say that you’re going to give $100,000 at your death to your alma moater. Well, I would far rather you give out that $100,000 over the course of your life and get tax savings on it at the same time as opposed to making a gift to your alma moater at death where maybe it’s not going to save you any taxes at all depending on how you give it. So, if you’re already inclined to give charitably, that’s that’s factor number one. You want to talk to your adviser about how uh how much you want to give. And then we’re going to consider when to give it because it may be that we can bunch a lot of charitable donations into a single tax year that’s going to be high income and put that into a donor advised fund which is in essence a parking lot for charitable giving. And I can say I put the money into the fund this year and then I give to charities over the coming 10 years. So, give a pause here to just get let you think about your own personal situation, how some of these things could apply to you. I’ll I’ll I’ll emphasize that I do think it’s a great idea to have somebody look through your situation and just give a much more individualized tutorial on all this. How does this impact you? because I can’t speak to each individual of you on this call today, the large number of you that there are uh all of your situations are different and and I can never know I I I tell people who are thinking working with an adviser, well make sure you’re thinking of the after fee after tax cost I mean return of working with that advisor. No one can quote, no adviser can quote your aftert tax return because everyone’s tax rate is different. But it’s the only return that should matter to you as an investor because if you make a lot of money but then you pay a ton of taxes on those gains, then you weren’t really making as much as that you thought that you were. Okay? So, as I said, we’re going to look at front-loading income or deferring income. And oftentimes in our early years, particularly if we haven’t filed for social security yet, we’re going to frontload some income. And there’s multiple ways of doing that. But then we’re also going to focus on filling up tax bracket buckets. If we’re in a space where we are in the 12% bracket already, but we’re only at $50,000 of income, and we can take another $50,000 of income, still at the 12% bracket, we should use up that bracket generally. Okay. capital gains, right? If we’re in the 0%, we should make sure we get at least to the top of that 0% bracket there. Maybe if we’re in the 15%, we should get up to maybe 250,000 if we’re married filing joint. So that going up to where we would have been exposed to net investment income tax, but not cross that threshold.

It’s very different when we’re post RMD, right? Because now we’ve got some enforced taxes. We have a required minimum distribution that has to come out each year. All right. So now we probably are going to have social security. Maybe we have a pension. There might be other income sources to us, but then we’re going to have a required minimum distribution. Now we look at all right, how do we keep our income as low as possible. What do we use? I would say the qualified charitable distribution vehicle is ideal at that point because as I said, it has such a high threshold. Uh, and what I didn’t cover yet, uh, I said once you were 70 and a half, you can make a qualified charitable distribution. Once you are RMD age, that charitable distribution can go towards satisfying your required minimum. So, let’s say you have to take $55,000 out of your IRA this year and you were going to give $40,000 to charity anyway. Use a qualified charitable distribution to cover 40,000 of your RMD. And now you only have to expose $15,000 to taxes. And then we need to be thinking all throughout once we’re on Medicare, we really need to be thinking about Irma. And Irma is complex, right? Because Irma, you don’t really know uh what what what the thresholds are going to be until two years from now, right? Your income in 2026 is going to be subject to whatever the 2028 thresholds are on Irma to figure out whether you’re going to have to pay penalties or not. We we have some ways of kind of estimating uh u inflation to help you get that as as accurate as possible. But we are dealing with irreducible uncertainty there. Uh when you’re inheriting IAS, who’s going to pay the taxes? This is just hugely important. Particularly if let’s say that I have a million-doll IRA and I have one child, right? And that child is going to inherit $1 million and they’ll have to take that whole amount out over 10 years. Now, I really want to look at what’s my effective tax rate. What’s their effective tax rate? Could I take more out and subject to my income tax rates if they’re lower than my child’s or should I defer defer more to them? There’s many decisions to make there on where you withdraw from. Okay. I said I would give you five questions that you need to come up with answers to. These are unique questions to each one of you here. There’s there’s I can’t give you one right answer. You need to figure out what investment rate of return do I need to earn over the course of my retirement. That’s going to be very different depending on how much you’ve saved and how much you’re planning to spend. How much do I need to withdraw from my retirement savings and when? And hopefully a lot of the things that I’ve talked about today are going to help with that, right? How much should I take out prior to required distribution age? How much should I plan on needing to take out after that? That’s going to drive the other question. What is my first year required distribution going to be when I reach age 73 or age 75 if your birthday’s uh early enough? That’s a very important question and if you can answer it that tells you a lot about how much you should maybe consider taking out. If you have a three $4 million $5 million IRA you really need to be doing some tax management earlier on. If you have a $500,000 array maybe not as much. So, what is your first year required distribution going to be? Very important question. What is the cost basis for each investment we own outside of IAS and 401ks? Wow. I spent a lot of time on this still. Surprisingly, I remember I I’ve been doing this for over 20 years and uh the first 10 or so that I was in this industry. Brokerages did not need to track purchase prices on investments. It was all the way till 2012 that brokerages didn’t have to track that. And so investments that you’ve held for 20, 30, 40 years, you could see like a line or an an unknown or something like that for your uh purchase price for investments. That’s a good thing to be doing some leg work on and figuring out, all right, how do I estimate when I purchase that? And we can get a an estimated purchase price in there because that’s going to drive what our taxes are going to be in years that we sell investments may change which investments we sell. Lots of choices there. And the final uh of the questions to answer is how much for retirement savings of my retirement savings is in traditional IAS versus Roth IAS versus brokerage accounts. And this those are the three buckets, right? It may seem like there’s a ton of like simple IAS and SE IAS and 403bs and TSPs, but it all boils down to three types. It’s either tax deferred and it’s and it’s a traditional uh IRA, 401k, whatever. It’s Roth, which means taxfree growth, or it’s taxable. That’s what it’s going to boil down to. Three different tax regimes that we’re subject to there. And we need to know what percentages are on what. And we need to decide which investments to put in which. Those are those are major choices to make. Okay. So, put it all together. What rate of return do we need to earn? Let me show you how this can be different. Let me talk to you about Mike and Mary and Ron and Rose. And I’m going to tell you that their rates of return they’re going to need are very different. You’re going to say, “Well, how is that possible?” They’re all all four of them are 62 years of age. Both couples have $2.5 million in retirement savings. Both couples are planning to get $4,000 per month in social security and $3,000 per month in pension income. Well, their situation is pretty similar to each other, right? Except Mike and Mary have no mortgage or home equity line of credit in place. They recently completed a bunch of major upgrades to their house and they purchased new cars with cash two years ago and they hold on to their cars for 10 years. Compare that to Ron and Rose who have a 37 $70,000 mortgage balance. They have it because they covered college tuitions for their kids, weddings, they purchased a condo in Florida. Very reasonable choices they made probably for their their goals, right? They drive high-end cars. They replace those every three years. their home is in a position where it needs major upgrades. I’m telling you that the required rate of return in retirement for those two couples is very different and as a result all of our decisions on investments and tax cannot be made in a vacuum. They have to be made simultaneously and they have to be contemplating one and the other at the same time. This is what’s called in in engineering world a complex system, right? It’s a complex system and that decisions you make in one area impact decisions you make in another area. It’s not a simple A to B. So the complexity means that it it needs some good analysis and it’s not just enough to have good analysis because we can come up with ideas, we can come up with strategies, we can come up with intentions. One of the hardest things we have as humans uh is to get from that contemplation stage to the implementation stage. And I and and and that is one of the areas that advice and an advisor, a partner in the journey can give you is driving from these ideas that we should do someday to implementation. Right? How many times have have you thought that you should rebalance your investment accounts and you’ve gone a year or two years or three years longer than you planned on just because time slips away from you? Right? It’s important to take care of these things. get the get them handled. And it’s important to be contemplating, you know, we we talked about two aspects today, investments and taxes. But at Savon, we think about 10 different areas of of of financial planning that all interact with one another. Estate planning, we covered that just a little bit today. Education planning, we didn’t touch on risk management, asset protection, retirement income planning, all of these things impact one another and they need to be contemplated together. So, if you’re feeling in any way that uh uh you’re in a situation where you could benefit from somebody doing a a review of any of this, I’d be happy uh you know to to to make to have a 15-minute introductory call. It’s going to be in the link that comes to you at the end. You’re you’re welcome to schedule it. Uh I think it’s really important to get things like this taken care of uh and and to move to action, right? Rather than just contemplation of action. Okay, but let’s uh let’s go into questions for a couple minutes here. All right. Uh and I’m going to go through some that were posed uh today. So to confirm, only the growth portion is tax of an annuity withdrawal. Yes, that’s true. However, the growth portion is all that the withdrawal is considered to be until you get down to what you put in. So, I’ll give you a quick example. You have $300,000 in an annuity that you put $100,000 into. The first $200,000 that you take out will all be taxed as ordinary income. Once you get down to that h 100,000, then you can take that h 100,000 out and no taxes there. The only way to avoid that is to annuitize the annuity, which is to convert it from uh an asset into an income stream. Okay. Is Irma calculated each year with a two-year look back? I I did cover that, I think, later on. Um yes, it is. It’s always you’re looking back to income from two years earlier. Did you say if you sell property you inherit there is no capital gains tax or did I misunderstood? Uh as long as that property was not held in a 401k or IRA or irrevocable trust. Yeah. If that was owned in a taxable brokerage account or in a Roth IRA, there will be no taxes on on that property. Uh and that is very powerful in in in uh retirement planning to contemplate. Let’s think about how all these different assets are going to grow and what the taxes are going to be to heirs. That’s an added layer to what we covered today. We were just talking about how it’s going to be taxed through your retirement. What about how it’s going to be taxed to your heirs? Uh, is it difficult to revise your income when retired so that the two-year look back reduces Irma? Well, it’s difficult if you weren’t thinking of it two years ago, right? This is why uh you you have to be forward thinking. This is some of you are going to have echoes of this, right? To when you were planning to send kids to college, right? Because when you sent kids to college, your financial aid was going to be determined by your income three years ago on your taxes, right? For relative to their freshman year. Their sophomore year of high school was really when they were going to looking at income applicable to their freshman year of college uh for for um uh financial aid. Very similar here. It’s a two-year look back period and and you do have to be careful with that. All right. Uh what are typical lower limits on investment for direct indexing? that that depends on the firm, but I would say, you know, as soon as you got 200 $300,000, yeah, that’s that’s important uh to start contemplating because really uh direct indexing is just a great advent, right, to to the world of investing that didn’t exist 10 years ago. What about treasury ETFs that are exempt from state tax? Well, state tax is not really your bugaboo that you’re worried about, right? State taxes are a lot smaller than federal taxes. So yeah, there are uh ETFs, municipal ETFs uh that that you can avoid other forms of taxation, but you need to be careful how you do that. And it may be easier to just put your bonds into your tax deferred accounts, right? And I don’t know your individual situation. That’s definitely something to think about. Okay. Uh and I I have time for two more here. Uh does direct indexing only work with a portfolio of individual stocks? uh you can direct index in essence maybe a portfolio of bonds but the bond universe is so much larger that you’re you’re only going to be holding a representative set of bonds you’re having to be holding all bonds and you can direct index actually it can be an efficient way of direct indexing if you have a number of individual stocks with appreciated uh uh with with embedded gains that can be something that you can contemplate to try and build a set of stocks around those stocks okay and then Um,

see one more. My wife and I have non-governmental 457b plans in addition to Roth and pre pre-tax retirement savings and taxable accounts. How do you think about these accounts given that withdrawals from them are treated as earned income subject to FICA? Yeah. Well, you have to look at whether it’s subject to FICA. That’s going to depend on this specific plan. But in all other aspects, regardless, I’m going to think about that uh as a tax deferred account, right? Where there’s been growth that’s occurred inside of those plans that when I take the money out, it’s going to be subject to income taxes. FICO would just be an additional layer that I have to contemplate on top of that. Kind of like the net investment income tax being contemplated on top of the capital gains tax, right? Really been glad to be with all of you today. Okay, that’s all I had time for, but please make sure if I didn’t get to your question that you post it in the uh survey that you get afterwards. We really want you to to to benefit from these. Please give us feedback about how to make them better, more useful for you. And as I said before, if we could be of assistance to you and you would like to schedule a complimentary call with us, please do it. Let’s get you to action, right? Not not just contemplation of things that ought to change. Thank you and have a great day. If you enjoyed this webinar, visit savantwealth.com/guides and download our complimentary guide books, checklists, and other useful financial resources.