Elizabeth Inman -- Chapter Five -- Tax Strategy

Join Elizabeth Inman and Jeff Roediger as we discuss how to minimize your retirement income taxes.   Elizabeth discusses important tax reduction strategies as they pertain to the following retirement income options:

1. FERS/CSRS Pension Income
2. TSP Traditional and Roth Distribution Options
3. Social Security Income Options 

and more....

Transcript

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This conference will now be recorded.

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Hello everybody and welcome back. We're on chapter five. Elizabeth Inman is joining me again, Elizabeth. Welcome back.

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Hi, Jeff. It's good to be here. Here we go

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again and one of my favorite subjects No, not really but an important subject taxes.

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You have to have a tax strategy, right?

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Ah, yeah. Everybody's favorite topic.

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No. Okay. So this is very important. And we we've seen a lot of mistakes over there are people not planning to make sure that they keep as much money in their pocket as they possibly can. So it you know, it's one thing to earn it. But you talked about gross versus net. So let's get into this focusing on your earning savings growing your money. Real isn't the only opportunity to maximizing your retirement. You need have certain steps in place so that when you retire, that impact on taxes is minimized, correct?

Unknown Speaker : 1:10

That's correct, Jeff, you know, no one likes to pay taxes. But no one wants income so low, there are no taxes either. So, you know, all through my federal career as I worked, I was always looking for ways to reduce my taxes while I was working. But unfortunately, I was not making plans for retirement that took those taxes into consideration, quite frankly, I just didn't have the foresight to know to do that. So, boy, did I live to regret that lack of planning, you know, previously, we'd already talked about that in retirement, you're no longer in that accumulation phase of earning your money. But now in retirement, you're in the income phase of retirement. That is that you're now you're paying yourself from those assets that you accumulated over the course of your career like the tsp for instance. So when you're retired and you're saving money on taxes, it's even worth more than earning new money. So think about this, assuming that you're in a 30% effective tax rate $1 you save on taxes is like $1 30 or more that you would have to earn just to get that same dollar in your pocket. That's that that's quite alarming. I mean, it's very eye opening.

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It isn't most most of those listening and they don't, I mean, I don't we just don't think that way, dude. We

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know I didn't all the way through my career. I didn't. So you know, and again, the system's broken. It's not really our fault that we don't I mean, we're working we're making a living and and there's nothing in place to help us or these kind of things as we progress through our retirement. Career, our retirement our federal career. retirement. So it's not not necessarily our fault, the system's broken, but you want to look at your income bracket, you want to look at Social Security income, your rmds and your taxable and tax free income options when you're putting together your retirement income plan. So the the portion of your strategic retirement plan, that we're talking about today's that retirement income plan specifically and how taxes are affected by it. So this kind of planning helps you leverage your assets as much as possible so that you can get that best financial outcome.

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And so a diversified portfolio

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is one thing, right? But the goal isn't necessarily to, as I mentioned earlier, it's it's one thing to accumulate as much as possible but keeping as much money as possible is the ultimate goal. So as part of your working In your strategic planning with your clients, do you implement a tax planning strategy as part of everything that you discuss with them as they approach retirement?

Unknown Speaker : 4:11

We do we do. It's really kind of hard for me to even think about a retirement plan that doesn't have something to do with taxes, because it's going to be such a big part of what we do. And the other thing, Jeff is I meet with clients. And as they come in, they were no gift. They're no different than I was before my retirement from the Federal workforce, in that they hadn't thought about taxes. But there's also this mindset out there not with everybody, but with a lot of the federal and postal employees. There's a mindset of Oh, how much is my income going to go down? How much is my income going to go down? So that mindset right there keeps them from doing much tax planning because they're thinking their income is going to go down. And the reason is because it's very hard to put together our pension which most of Our first retirees now. So the pension income, Social Security income, and then tsp income along with any other income you may have. It's like random numbers out there. Oh, there's my pension number. Well, I might have looked up my social security number, and I have no idea what tsp is going to do for me. So when we sat down and start looking at it, they're amazed to see that not only might they make the same kind of income in retirement, they did working. In some cases, they actually make more, which makes tax planning even more important to them in retirement.

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Wow.

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So then, from a tax standpoint, what are the what are the four areas? You mentioned this in your book?

Unknown Speaker : 5:47

Yes, there's four primary things that I really wish everybody would consider about taxes in retirement. Here. The first one we just kind of talked about it. What is your income tax bracket? What will it be when you Retired? Is it going to be a higher tax bracket? Or will it be a lower one, because when it comes to solidifying your income plan, this is important to know how to position your assets for income generation and the future growth that you hope to have. Then the second one is that old famous RMD. So, a lot of federal postal employees aren't real familiar with that term. rmds required minimum distributions. That's the IRS his way of ensuring that all those tax deferred dollars they let us put into our tsp, let us put into IRAs. If you have some IRAs or a 401 K, maybe from another employer, that they're going to be able to get taxed on that the IRS wants to make sure they get their taxes. So rmds required minimum distribution, that comes a point in time that based on our age, we have to start drawing those rmds out of these accounts. And once we do that, the rmds are designed to draw our account down to zero so that counts This on everything well, recently, the secure act of 2020 just changed that requirement of rmds from 70 and a half. So it used to be 70 and a half. Now at 72. I had somebody in my office just last week that still thought the RMD was at 70 and a half and their whole plan was based on 70 and a half. Well, this change can have a significant impact on your retirement income plan. rmds are considered taxable income and it will definitely affect your overall tax situation. Then that third option that I want people to really consider his his taxable and non taxable assets. You know, ideally you want to have a diversified set of assets that are subject to different taxation. That way you can use them at different times and in different combinations to harmonize your tax landscape. And then the fourth consideration is that is the big one, you know, our social security benefits. You know, Franklin Delano Roosevelt probably would roll over in his grave if he knew today that we're being taxed on our social security because that was one of the promises he made to people when he when he started. So security is that you will not be taxed on your social security. Well guess what if you file for your Social Security while you're still working, or if you earn a certain amount of money after you retire, while you're drawing, Social Security, security, a certain portion of your benefit could be taxable. So all of these things are important that you need to consider these when you're making your retirement income plan, a

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lot to consider. So there are also four types of money

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that are taxed differently. There is

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a lot of people don't know this a little bit.

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Yeah. So.

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So let's talk about that a little bit with the audience.

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Okay. four types of money. The first one, we've already kind of touched on a couple of these already. But let's just really, I'm really want to make a point that people understand these four types of money. first one's free money. That's money that your employer contributes to your tsp or federal employees in the first system. It's up to 5% of matching for our federal postal employees. And there's nothing better than free money and it really is free money, at least at this point in time. The second one is tax free money. And certainly this is good. It's not as good as free money. But things like Roth IRAs, missable bonds, cash values from our universal life policies or whole life policies falls into this category, tax free money. Then the third one is the tax deferred money. This is where qualified assets, including the money in your tsp are tax deferred. It's not tax money invested or save it but it is taxed as income as you withdraw it. And so remember that this new law, the secure act of 2020, requires rmds. Now at age 72, rather than 70 and a half, and then the final one is the one we're all familiar with, and that's taxable money. now or later, this money is taxed when you earn it. This includes income from your job, any capital gains from investments, qualified dividends and other regular income sources. You know, I had a client in my office not too long ago that retired and wanted to move. And so when they got ready to move, they they sold their house. Little did they know they had not actually thought through that whole process. And they got hit with a bunch of capital gains because they'd lived in the same house for a long time. So these are the kind of things we want to help you think through so that you're not caught off guard but by those kinds of things.

Unknown Speaker : 10:52

So if I'm sitting out there, listening and as a federal employee or postal employee, you as a federal Benefits coordinator where should they be looking at cutting their taxes or minute money minimizing their taxes? What are some of the recommendations you make on products or alternatives? And I know not everybody. products don't fit everybody in every situation. But generally speaking, what are some areas that you go to help them minimize their taxes?

Unknown Speaker : 11:22

Well, the first place Jeff is really truly how to how to structure their tsp from within their, their career, how you put money into the TSP, where you put money into the TSP is all part of this package. And certainly, you know, we know that in 2012 is the first time tsp allowed for these Roth contributions. So Roth contributions is another area, universal life or whole life insurance that can generate tax free income. Those are things I didn't even know about while I was still working, to be honest with you, and many employees don't fully understand them. Not only does a tsp allow for the Roth conversions, but there's also private companies who have a process that will take your qualified funds and allow for Roth conversions over a period of years to protect your tax status. And the client controls that whole process. It's all based on input from the client that the client gets from their tax accountant. So as of today, I'm not making any promises about tomorrow. Life Insurance is the last of the great frontier of tax free money that's transferred without taxation here in America. So the death benefits pass on. Without taxation. Very few people understand the value of transferring wealth and eliminating the taxes on it through life insurance. So I've got a couple that comes in and he's been a federal employee, and he's got $300,000 of his tsp money that he sets aside and the only thing he wants to do with that ever because he's got other funds is he wants to $300,000 to his children. And he didn't realize that because he was still healthy, he had some options to convert that to a wealth transfer product, that instead of just leaving 300,000 tax free, he could leave $750,000 tax free. And those are some of the ways that we can help you maximize. At the same time we minimize taxes, so maximize income, maximize wealth transfer to our beneficiaries, but minimize our taxes.

Unknown Speaker : 13:32

Well, you just mentioned right there are a lot of strategies to enhance your retirement income, leave a legacy. And this is why you and I've talked about this if others have attended podcasts I've done with other advisors. This is why working with a specialist and you're particular those of you listening and working with a specialist in your particular occupation or industry is so important. And just as you and I've talked about, just as you've spent the time, not only taking what you learned in your career in federal manage, but but now as a federal employee benefits coordinator.

Unknown Speaker : 14:18

Yes. And you know what, with what's going around this 2020, this virus this onslaught of just you know, our world has changed in 2020. In so many ways. I've actually had more conversations in the last six months about Roth conversions. And I have the whole going on 11 years that I've been doing this as a federal benefit coordinator. People are definitely anticipating tax increases as a result of the economic impact that this virus and all the social unrest happening in America is going to have on us in the future.

Unknown Speaker : 14:54

Well, and you know, there's been two recent tax reforms that, that hit those Baby Boomers and Gen X. You know, specifically, we talked about the secure act of 2020. But there was also the Tax Reform Act of 2018.

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That's right. And that's really big to us right now. Anybody that's retiring this year going to retire next year, you know, because as of today, we still have the lowest taxes on our income since the 1980s. And because of that tax reform of 2018. So that makes now the best time for Roth conversions. This also affects how rmds impact your taxes in retirement. So no relocation deduction changes. That alone is convincing many federal and postal retirees to move out of their pricey property tax locations because of the change in that 2018 tax reform. Standard deductions are more likely to be claimed on tax returns now, because the benefits of itemization now and retirements off is really greatly reduced because of the new and higher standard deductions that's available through that tax reform, and then changes for the deductions for medical expenses. You know, they're much more available to retirees in certain cases now, so lots of changes based on these two reforms that took place that directly impacts federal and postal employees retirement and the taxes and their retirement.

Unknown Speaker : 16:27

Well, I don't think, you know, those are major reforms and it's like, it's like playing chess with your retirement. In a, I think that there's gonna be a there's a lot more that's coming, you know, the, the debt that's been incurred at the federal level, you know, not just the, the legislation that has gone through but you know, the emotional impact of of 2020 And that's why I believe there's going to be more changes about the way people view their work, maybe the way they change their jobs. And that all impacts your retirement. So, you know, once again, this is why you and I talked about this, but it's a good way to close today. Why is it so important to have somebody that can walk you through hand in hand to make sure that you don't make mistakes, and one are numerous areas of planning.

Unknown Speaker : 17:31

And, you know, Jeff, there's a lot of folks out there that really enjoy helping federal and postal employees. I myself talk to a number of them as I go into closer and closer to my retirement. But at least to my knowledge today, right now today, to my knowledge, I am truly the only one that has a business model that I approach everything I do with federal and postal employees as though I was sitting in their chair why again. So I frame everything that I say and do with my federal and postal families, as though I'm the one who happened to make the decision. Again, it's going to impact my family as it did when I made those decisions. So, you know, I did it myself, and I suffered from it, I made some big mistakes, because I didn't take that step and call on a professional. The days of do it yourself retirement for federal postal employees are really behind us, especially as a result of what you just mentioned, Jeff, all of the things that are going to be coming at us as a result of this year 2020. And all that's happened. You know, the most successful retirees utilize the professionals that helped them put together a plan that benefits them at retirement. Most federal, and postal retirees simply call a friend and say, What did you do when you retired? You know, not only can we put together a strong strategic retirement plan for you, but we'll schedule a yearly review between now until you retire And a yearly review after you retire so that we keep up with these changing legislation and the effects that our retirement are undergoing from everything that's happening and everything that's changing. So happy to do that. I absolutely love working with my federal and postal family to help them have the best result. retirements when our dreams are supposed to come true not supposed to be going on anxiety medicines, because we don't know what we're doing. Yeah.

Unknown Speaker : 19:29

Well, Greg information, Elizabeth. Thank you.

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Thank you, Jeff. I sure appreciate it.

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And for those of you wondering, you can check out Elizabeth's book, retirement today. Five dangers of federal retirement. You can you can get that on Amazon. Also. You can request it on fed checklist.com. You can catch previous podcasts on there too. www dot fedde checklist calm. We have The workbook you can download for free, as well as retirement budget, great information there. Next week as we transition from tax planning, a great follow up chapter is estate planning. So you're gonna want to look for that next week, look for that episode to be uploaded. You can also catch us at 888-545-8840. If you have questions, we'll connected Elizabeth and her team. Elizabeth, what's your website as we close out here,

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www dot retar choices.com.

Unknown Speaker : 20:37

Awesome. Okay, everybody. We'll be back next week. We're going to get into estate planning, very important subject. We touched on a little bit with the tax issues today. And we'll be getting in a little more deeper next week. So make sure you catch the next episode. Thanks a lot. And this concludes our session. Transcribed by https://otter.ai