Jag: Welcome in to Financial Matters with Richard Oring. I am Jon "Jag" Gay. And Rich, we have a new Administration, we have a new Congress, it is the beginning of a new term for everybody and a new year, as we enter 2021. I know we've got a lot to talk about today, and a guest to do it with.
Rich: That's correct. I'm really excited. We've had a few guests now, on our last couple episodes, so maybe this is a new trend for us.
Today, we have a great speaker. He's the director of wealth management for Putnam. What's really nice about this speaker we have from an investment company, he's not talking about investments. Today's topic is going to be on the Washington outlook for the first quarter of 2021. He's going to tell us what his happening already since Biden took office, what he's working on, and then possibly for the next, let's say, 100 days. We can probably go out as far as we want, but I think 100 days is probably more reasonable.
Bill, welcome to our show. We're really glad to have you.
Bill: Thanks, Rich. Happy to be here.
Rich: Bill, let's just dig right in. I know we spoke a little bit before the show. Why don't you give us the political landscape, post election?
Bill: Sure, Rich. Things got a heck of a lot more interesting with the election results in Georgia. If you asked me back in mid-November, looking forward to those Georgia runoff elections, what the chances were of the Democrats sweeping both those races, I would have said probably not very good. But a lot changed over those weeks, and low and behold, the Democrats won both of those races which brings us to a 50/50 Senate. Which, effectively gives the Democrats control, obviously of the White House, the House of Representatives, and the Senate. I do think, from just an outlook perspective, it makes things a little bit more interesting because it gives the Democrats a little bit more leeway to push through some of their agenda items they're talking about.
Rich: Do you think President Biden, knowing that there's so much conflict between our country right now of Republicans and Democrats, do you think he's going to try to get both parties to agree on the issues? I guess the big thing right now is that stimulus package they're working on, there's such a big difference in the numbers.
Bill: Right.
Rich: Do you think he's going to be sensitive?
Bill: It's a little early to tell. We saw this flurry of executive actions in the first week, right?
Rich: I think the first hour in the Oval Office.
Bill: Exactly. It could have been the first hour. They were largely along party lines. Obviously climate, immigration. It's a way for the Biden team to say, "Hey, we're different. These are our core policy areas." It was almost like a branding exercise to really draw a distinction from the last Administration.
That exercise wouldn't suggest that he's going to come too far over to the other side. We'll see how the negotiations around the stimulus play out. I think he has echoed his support for a bipartisan type of approach to it, but that remains to be seen. At the same time, what we're seeing right now, Rich, is the House and the Senate are going through a process called budget reconciliation, or budget resolution process. That's happening on a parallel path to the negotiations. On the bipartisan side, we saw Biden sit down with 10 senior Senators the other day and have some discussions around the stimulus package.
So, I think they're hedging their bets a little bit. Can they get 10 Republicans on board to pass something in a bipartisan manner? Maybe, maybe not. But, I think their backup plan is maybe to go down the budget reconciliation path, which just requires a simple 50/50 majority. I shouldn't really say simple, because it's not that simple. The budget reconciliation process is complicated. There's these arcane rules that have to be followed, and you have moderate Democrats like a Joe Manchin in West Virginia, he just came out yesterday and said he's not on board with all of the things in the Biden package, that $1.9 trillion package, including that $15 minimum wage proposal as well. I don't think it's going to be easy either way.
I think there's a lot of folks in the media that are saying, "Well, the Democrats have a path to do it just by themselves, there's reconciliation, simple majority vote. It's going to be a pretty straightforward process." I just don't think that's the case. There's more requirements and restrictions around that type of pathway. Not to say that they're not going to go down that pathway, but just to say that that's going to take time and there's some complications with it.
Rich: Okay. So I guess we don't know, is the ultimate answer. Sitting on my side, I'm really hoping that our country can get together, and the politics can work together, being a Democrat or a Republican, or whatever you are, Independent. I know that both parties are looking out for the best of our country, at least.
What do you think the first 100 days, Biden's going to be doing? I know that he has the COVID, center on his desk, focusing on.
Bill: It's clearly all about the domestic side, and the COVID crisis, and the vaccine distribution and execution. That is the near term priority, getting this next phase of stimulus. Now, like you mentioned, the Senate Republicans countered with a $600 billion proposal, the Biden team is at $1.9 trillion. Like anything else, we're going to come to some place in the middle on that, and we'll see how long that takes. So that is priorities A, B, and C.
Rich: Well, there's a due date on that because Unemployment runs out what, mid-March?
Bill: Yeah, mid-March so there is a deadline on that. Mid-March, the extra $300 a week that the Federal government provides to Unemployment benefits, that runs out. And, both sides want to address that issue, so that is a bipartisan issue. Now, the Republicans would be more interested in extending that out to June, and the Democrats want to extend it out to, let's say, September. It's going to end up somewhere in the middle.
Again, just because the Democrats control the Senate doesn't mean they can push the entire Biden agenda through. Again, I just want to reiterate that, because you have moderate voices in the Senate. Like I mentioned, Joe Manchin from West Virginia, Kyrsten Sinema from Arizona. They're going to act as a governor to maybe moving too far towards the progressive goals of other members of the Senate, like a Bernie Sanders for example.
Jag: We're recording this on February 3rd, and everything we're talking about accurate as of February 3rd. It changes by the hour, sometimes. You mentioned the budget reconciliation bill, Bill, that you can do with a simple majority. But, as long as the filibuster stays in place, any actual legislation is going to take 60 votes in the Senate, which is going to take a lot of Republican support to get anything through, right?
Bill: Right. There's two different paths. If they don't address the filibuster issue and removing that, and I don't see a scenario where that happens in the current political climate.
Jag: You don't see a scenario where it goes away or where it stays?
Bill: Filibuster is here, I don't think there's going to be any major changes to it. So you really have two choices, you go the normal, what we call regular order is the 60 votes. Or then, you go down the reconciliation path.
Now, the reconciliation path can only be used for a certain number of policy items. You know, tax and spending items, there's restrictions around it. This goes back to the mid-80s with Senator Bird from West Virginia. For example, in reconciliation bill you can't have any provisions that would impact Social Security, for example. That's just one of the examples.
But, if you look at the $1.9 trillion proposed package from the Biden team, there some folks out there that are real policy experts around reconciliation, they really get into the weeds on this stuff. They would suggest that only probably half of those items, half of that spending package, could be pursued through reconciliation. You can't take that $15 minimum wage, unless they get super creative, which I'm not really optimistic that they'll be able to cross that hurdle ... But, you can't take that $15 minimum wage and push that through a reconciliation bill, most likely. There are limits to the process.
Rich: So Bill, with the budget and so forth, we're not going to see a government shutdown if they can't agree, like we'd seen years ago?
Bill: No, the government's funded but just the process of reconciliation ... The first step of the process is that Congress has to go through this budget resolution process. With that process, they attach what's called reconciliation instructions to all the various committees, to all the various committees. Those committees will have a budgetary footprint to work with, and whatnot. And then, the policy provisions emerge from there.
Rich: Okay. So right after inauguration, past President Trump said his goodbyes. Or, boarding Air Force One to go to Florida. And, it was quiet for a couple days. We didn't really hear about the impeachment. And then, we saw that all the attorneys quit, or resigned, or Trump replaced them. He has a new team going to help defend him.
Do you see the impeachment going forward? What's the outcome? Really, what's the purpose of even pursuing this?
Bill: Well, on the Democratic side, I think there is some desire to come up with a final resolution. Whatever type of analogy, Rich, you want to attach to this, close the chapter for example. I think, at this point, I think the impeachment proceedings will go forward. I think there's not enough votes in the Senate to move forward on a conviction.
But for example, if you look at Democratic leadership ... Let's take Chuck Schumer, who's the new Senate Majority Leader. What the impeachment proceedings do is it provides him with the opportunity to force the vote on these Republican Senators. That's a matter of record. That's a matter of record which could impact them politically down the road.
If I'm Chuck Schumer, I'm already looking at 2022. I just got the job, but I want to keep the job. He wants to be Senate Majority Leader in 2022, which is going to be a hugely contentious election. You've got a 50/50 split in the Senate, you have a really narrow margin in the House, 2022 is going to be super contentious. It's going to be his opportunity to put some of these Republican Senators, like a Ron Johnson in Wisconsin ... I don't know if there's been indications that Senator Johnson might not run again in 2022. But Wisconsin is not a solidly Red state, so it's going to put him on the record to vote one way or the other.
For example, Ron Johnson in Wisconsin, he's been a staunch Trump supporter so I don't expect him to vote against Trump in the impeachment proceedings, but that vote will obviously fuel the fire for a Democratic challenger in 2022. If he did vote against Trump in the impeachment proceedings, then maybe he'd get primaried by a Republican challenger in 2022.
So if you look at it just from a pure political standpoint, it's an opportunity for Schumer to put some of these Republican Senators on the hot seat, if you will.
Rich: That's going to be big for the Republicans, because they need to have somebody come up for 2024 election. I'm not really sure who that's going to be right now, but I'm sure they've got to start grooming somebody.
Bill: Right. And I think, overall, both parties have a vested interest to make sure these impeachment proceedings go pretty quickly. The Republicans just want to move on, this doesn't help them at all, they want to move forward at this point. The Democrats, frankly, have other policy items they'd like to do. They would like to pursue, at some point after they get past the COVID bill, they'd like to pursue a tax and spending bill, for example.
Rich: That's a great lead way in the next topic. Let's talk about the tax legislation Biden's been talking about. There was a few things he talked about, raising the corporate taxes. It wasn't that long ago when Trump wanted 15%, the Democrats wanted 27%, they met in the middle at 22%.
Now, I don't know if the corporate taxes are going to scare me as much as they go up, because we've seen them much higher in the past. And, I think there's more what goes into the calculation to be taxed than before. Some companies who've never paid taxes are now paying taxes. They might be at a lower rate, but it's something. Individual taxes, I think everyone's concerned about. I know he proposed raising FICA taxes over 400,000.
That's a big sensitive issue for me, because individual taxes, I really hate how they do it. I think there should be some sort of cost of adjustment living, where you live.
Bill: Right.
Rich: Someone making 500,000 in Northern Jersey or New York City is not the same as someone making 500,000 in North Dakota.
Bill: Absolutely.
Rich: It's funny. A lot of my business owners who are LLCs are saying, "Oh my God, if I make more than 400, I'm going to have to pay more FICA tax." I'm like, "Well, we can switch to an S-corp, take a W2 income, 250, 300,000, and take the rest of them through distributions, dividends," which aren't subject to FICA.
I don't know how much Biden's really dug into the tax reform, how far, of if it was general. Do you want to comment about that?
Bill: Sure. We'll call this the crystal ball segment of the session.
Rich: Is it scratched, is it clear?
Bill: It's pretty cloudy, as usual. It's pretty cloudy, as usual.
Rich: It's not one of those number eight balls, where you shake it?
Bill: At least not mine, not the one that I have. Maybe I need to trade it in for a new one, at this point.
Let me start with corporate taxes, because I think, from the Democrats standpoint, that's probably the "lowest hanging fruit." That's where they're going to go first, because that's where they have the broadest support amongst their caucus.
You're right, Rich, we used to be at a 35% rate and Biden's talked about going from 21% to 28%. But, you alluded to this, it's not an apples-to-apples comparison. When we were at 35%, there were other provisions in the corporate tax code. There were other, I don't know if you could refer to them as loopholes, but there was a lot of companies not paying close to 35% rates. The effective rate, if you look at the SMP, was probably 10 to 12 percentage points lower than that, their effective tax rate. There was a wide variation amongst different industries.
When they brought that corporate rate down to 21%, they eliminated and made other changes in the code which, basically, matched up the statutory rate, the 21% rate, to be more reflective of the effective rate companies were actually paying. If you now raise that 21% to 28% without changing anything else, the potential is it's going to have an impact.
Now, the Democrats will want revenue from that type of provision, in order to offset spending priorities on the other side. Those spending priorities are going to be primarily in three areas. It's going to be infrastructure, which is going to get bipartisan support. Albeit, they're going to carve out some of that infrastructure money most likely for green or climate related projects, which will be more of a nod to the progressive wing.
Rich: I think some of the stocks in that category have already seen the effect since Biden won. A lot of the hydrogen power ...
Bill: Certainly.
Rich: And lithium. Companies just skyrocketed, it's amazing.
Bill: Not surprising. So I'd say infrastructure, healthcare, and education is three primary areas.
I do think there is risk of the corporate tax rate going up. Does it go up to 28%? A lot of these times, Rich, there's negotiation, and it somehow settles in the middle. I wouldn't be surprised with a 25% rate, for example. That would not surprise me at all, if I had my cloudy crystal ball out at this point.
On the individual side, I think higher earners have to be prepared for maybe a move to reverse some of the Trump tax cuts from late 2017. Although, I don't think the payroll tax ... I'd be really surprised if there were any changes to payroll tax. That's a murky area, because any tax legislation that they do, it will definitely go through the reconciliation process. They'll go through a simple party line vote, a simple majority vote.
I go back to the Bird Rule. I think you can make an argument that changing the payroll tax does impact Social Security. I don't know how the Senate Parliamentarian would rule on that, but some of the experts I lean on would say that it would be difficult to raise the payroll tax via the reconciliation process at this point.
If I was a higher earner, I'd be more concerned about the top tax rate, at those top brackets, going from 37% back to 39.6. How do you do that politically, what's the positioning? Well Rich, it's not a tax increase. We're just going back to the old rates that were in place before Trump, we're going back to the old rates. You and I know it's a tax increase, but that would be the political positioning of that.
Rich: It shocks me, because every time they talk about raising taxes for individuals, it's not fair for someone who owns a business and someone who has a W2. When you own your business, you have choices. You can file a different way, and tax it a different way. There's deductions, you can increase spending, maybe, with tax rates going up. This is the year you might be looking to buy a building compared to renting, and other things. There's ways we can control, as business owners, how much income we show. Whereas a W2 employee, they've just got to suck it up. They're already maxing out their 401Ks, there's not much they can do in planning all the time.
Bill: There's not anymore, there's no big loopholes in the tax code. There's no such thing as tax shelters anymore, that used to exist back in the early '80s and the '70s. You're absolutely right.
I think if I'm a higher earner, I'd also keep my eye out on capital gains. Do they raise the capital gain tax rate? During the Biden campaign, they floated this idea of taxing capital gains, for those that are making more than $1 million of income, as ordinary income, so as high as, well presumably 39.6%, not including the 3.8% Medicare surtax. I don't think that will emerge. I think a more likely scenario is they take the top rate on capital gains from 20% to a higher number, 23%, 25%.
With capital gains, from a tax policy perspective, there's a law of diminishing returns that applies. When you're thinking about deriving or generating revenue from a tax increase, at some point, if you keep raising that capital gains rate, at some point you get less revenue because investors will change their behavior. They will change their plan to avoid those capital gains taxes. A lot of economists in the past have set that threshold at around, let's call it, 28%. I don't think we'll see capital gains taxed as ordinary income, but I do think there'd be some pressure to raise that number above the current maximum of 20%. Of course, I'm not including the extra surtax that applies for some taxpayers.
Rich: So if that happens, I guess people are going to be making their donations with appreciated stocks on their non-qualified accounts.
Bill: Correct. Charitable giving is one of those last areas that you can rely on to control your tax bill. You can't do it with the SALT deduction anymore, to a great extent. Rich, I know that hurts you and it hurts your clients, and all of your friends there in New Jersey.
Rich: I could move to Idaho.
Bill: You could move to Idaho, of course.
Jag: I heard the potatoes are good.
Bill: That's what they're known for.
With the SALT deduction, there is talk about bringing it back actually. I don't think it's going to happen, it won't happen in its current form. But, I think you're going to see accounts in the media. In fact, in the last couple days we've seen a bill in the House, and a bill sponsored in the Senate, that would lift the cap on the SALT deduction. Of course, we know that you can only deduct up to $10,000 of state and local taxes since the Trump tax deal back in 2017. I'm very pessimistic about it happening. If it does happen, I think there's going to be a lot of restrictions about who can benefit from bringing back some form of the SALT deduction, whether you raise the cap from 10,000 to 20,000, or whatever you do, as a nod to people in those areas.
Rich: Well, that number should be inflated anyway. Your real estate taxes are going up every year, you're getting raises, and your state taxes are going up. Some states have asset taxes, a car. It would be interesting, I would like to see that inflate each year, or even be adjusted depending on your zip code.
Bill: I think there's two issues to making changes to the current structure for the SALT deduction.
One issue is it's going to cost money. Where are you going to find the money to pay for that? That's going to be a challenge.
And then, number two, if you just bring it back as it was before, more than 50% of the benefits go towards households with more than $1 million of income, that's according to the Joint Committee on Taxation. That's a tough political argument.
You're right, the cost of living is apples and oranges, or some other comparison. It's apples and something else, it's not even the same ballpark. But again, would a moderate Senator like Joe Manchin sign on to radically change the SALT deduction for folks in New York, New Jersey, California?
Rich: It's interesting, because when they raised the standard deduction, they doubled it. That was amazing, how much that benefited a lot of my clients, we would do some tax projections. Even with capital gains on longterm, a lot of times we were able to take them at zero tax because a client going through transition from working to retiring, or they just have Social Security and they're living off IRA distributions, or savings. It was amazing how much planning we were able to do, knowing that the standard deduction got doubled. Unfortunately, it does hurt higher wage earners, especially living in expensive real estate areas.
Bill: Right. New Jersey has the distinction of having, per capita, the worst property taxes in the country.
Rich: That's why I live in Pennsylvania.
Bill: That's why.
One of the things, Rich, we haven't talked about was the alternative minimum tax, which it doesn't hardly impact any taxpayers at this point, since it was changed dramatically on the 2017 tax law. What people forget and don't realize, prior to the 2017 tax law, if you were subject to the AMT, as long as you were subject to the AMT, you technically weren't benefiting from the SALT deduction anyways. I guarantee, 99% of those taxpayers don't realize that.
Rich: I sold my tax practice in 2011 and I could tell you, anyone who paid AMT looked at the AMT schedule. They knew what was being added back in, and looking at why they had to pay that excised tax.
On the tax issue, I want to ask you one more question, is on estate taxes. That's been a big thing right now. I just had a conversation with a client. They already changed the IRA rules that, when someone inherits an IRA, that you have to take it out by the tenth year. There's special clauses why you don't, but for the average person that's the rule. But, the estate tax, one of the things a client asked me was about the step up basis.
I can't see them ever taking away step up basis, because in 2010 it was a disaster. It hurt low income, middle class people. The only person who benefited was George Steinbrenner, for the Yankees. If you didn't do the step ups and you filed your estate return, they let you amend it and go back, because it was a failure. It wasn't fair for the middle class and low income families. Do you see them changing that?
Bill: I don't know, but, I will tell you this. Going back to 2010, there were four billionaires who passed away in 2010.
Rich: Perfect planning.
Bill: When I'm speaking to groups ... Outside of the pandemic crisis, I'm usually on planes, and traveling all over the country. I always, to an audience, I'll bring that up and say, "There's one billionaire in particularly that particularly offends me. I wonder if people can guess who that is?" And they say, "George Steinbrenner." Because obviously, I'm from Boston, I'm a Red Sox fan. Steinbrenner did amazing planning, even on the way out the door of course.
On step up in basis, Congress tried to address this, and tried to limit this back in the mid-70s. It did actually pass. It was incorporated into a tax law back in the mid-70s. But, it was repealed before it ever took effect. I'm with you, I think it's very difficult to track. People think with stocks and cost basis, that might be a little bit easier consider technology. But, think about a house that's been in the family for decades. Are people keeping track of the cost basis? Are people keeping track of improvements to the houses? Those vacation houses, for example, we see up here in Cape Cod, for example. To a large extent, no, so I think it's very difficult to do.
There's definitely an appetite to bring it up, because there's folks on the Democratic side that see it as a loophole, the step up and cost basis at death. I think there's a couple different proposals out there you're going to hear about. I don't think either of these, in the short term, are likely to happen. But, one is just applying carryover basis. If you pass away and you leave assets to the next generation, they assume your original costs basis, that's one type of alternative. The other alternative would be more of a market-to-market approach on capital gains. This would be very complicated.
The only reason I bring it up is because it is a policy, or it is a provision, that's being brought up by Senator Ron Wyden of Oregon. Ron Wyden is someone I follow because he's going to head up the Senate Finance Committee. If you think about Congress and tax, who are the key people? Anybody on the Senate Finance Committee on the Senate side, and then House Ways and Means on the House side. Those are the tax writing committees, so those are the folks that I pay particularly-
Rich: Did Elizabeth Warren just join that committee?
Bill: Elizabeth Warren was named to the Finance Committee.
Rich: Is anything really going to get done?
Bill: We'll wait and see. And, you have Bernie Sanders on the Budget Committee as well, so that is also causing some consternation amongst more fiscal conservatives up in Capitol Hill. In the grand scheme of things, again, with a 50/50 margin, you're really limited, you can't afford to lose any votes on the Democratic side.
I don't expect a lot of changes on the estate tax side. I think there's going to be a lot of talk. I think Bernie Sanders is going to bring this up, because he would like to make big changes to the estate tax, bring the lifetime exclusion down from 11.7 million down to maybe 3.5 million on estates, and one million on gifts.
Rich: I guess, the estate attorneys will love that. More planning, new trusts.
Bill: Well, I think estate attorneys will always be okay as long as people are just talking about this stuff. Regardless if it happens or not, they're going to have a way to engage their clients on this type of planning, at least ahead of time.
I don't expect major changes with the Federal gift and estate tax, with the caveat that these are very fluid discussions. Frankly, if you go after the estate tax in terms of changing those numbers, it's not a great source of revenue. It's what is probably going to be on the order of $15 billion annually, in terms of revenue, if you make drastic changes to it. That's just not a lot, in the grand scheme of things.
But Rich, I would follow other potential developments on the estate tax side. They're going to apply to a limited amount of people. We're talking about high net worth to ultra-high net worth people. They're going to apply to these advanced estate and wealth transfer strategies that are out there, which could be scaled back. They could be scaled back outside of the legislative process. So without getting into a lot of depth, valuation discounts. If the parents own the family business and they're transferring ownership to the kids, and you're able to efficiently transfer that wealth because you're discounting the value of it, because it's not a publicly traded asset.
Rich: If you want to keep our farmland in America owned by Americans, you've got to do that.
Bill: Correct, correct. But, I wouldn't be surprised if there's a carve-out for farms, because that's a political suicide if you go after the farmers. That's an area that both parties will respect. But, I think the Treasury Department could take steps on scaling back some of these things like granted retain annuity trust, or what we call dynasty trust. I think they can do that in a way that doesn't require the legislative process.
Rich: Sure. Bill, I want to move on to the next topic, because a lot of people are saying, "I don't have an estate problem. I'm just glad I can write a check and it doesn't bounce every week, when I pay my bills."
Bill: Right.
Rich: One of the things I've been getting phone calls on is last year, with the Secure Act, where they made some special provisions with loans from 401Ks and IRAs. Let's break this down. And, the RMDs for anyone over 72, or 70-and-a-half.
Do you see anything being renewed for 2021 from the Secure Act? And, what other changes do you think might be going forward to help the average American?
Bill: I've actually gotten this question over the past week or so, specific to required minimum distributions. Will they extend the waiver into 2021? My gut tells me probably not, there's no talk of that currently. But, that's the type of innocuous type of provision that could be added into a bill at some point, that doesn't get a lot of attention, that just gets attached at the end. These things happen. You know, at the end of the process, I'll read different versions of the legislative text and then we'll see things added.
Rich: I've had two clients ask me the same question, about the RMDs, the required minimum distribution. I said, "I don't know. I really don't know if they're going to extend it or not, for another year." Both conversations with those clients, they were more fearful that the market was going to drop. They decided not to wait, to find out what was going to happen with the RMDs, and they decided to take them out now, while the market is still at a high.
Bill: Right. That was the concern. When we saw what the market did, in mid-March last year, and I think it was a concern amongst lawmakers saying, "Jeez, if these markets continue for the foreseeable future, we're going to have people liquidating shares at much lower prices." That's just not an issue right now, largely because markets have returned, and then some at this point.
I think if you do see some downward market pressure, that might make it more likely that they extend an RMD waiver for 2021. Not related to the CARES Act, but I wouldn't be surprised if they maybe gave some folks some flexibility on filing their taxes this year. That's something easy that the Treasury Department can do, they could push that deadline out and give people a little bit of extra breathing space. It wouldn't be the first time, and I don't think there's anyone on either side of the political spectrum that would be really opposed to that.
Rich: Hey Bill, I want to move on to another topic. I know that you write a blog for Putnam, which our listeners can find at putnamwealthmanagement.com. You can find that link in our show notes.
But Bill, in your blog you write about so many different things. You talk about risk and management, tax legislation, retirement income. You're one of us. As an investment advisor, you sat for your Series 6, 7, 26, 63. You took the time to become a CFP, a certified financial planner. So, I really value your opinion, I love the blog, I subscribe to it. I encourage our listeners to also go online, look at the blog.
I want to talk about what we can do to plan for tax season. At the end of the day I always tell my clients, "Our goal is to keep money in our pockets, and not give it to Uncle Sam."
Bill: Right. One of the things I've been talking about on all my client conversations this year have been how to hedge the risk of higher taxes in the future. That would involve using Roth accounts and Roth conversions. I would work very closely with my financial advisor, and my tax advisor, to look for opportunities to move money, in a tax efficient as possible manner, from pre-tax retirement accounts like a traditional IRA, to a Roth IRA. And not do it all at once, but try to do it maybe on little bits and pieces here and there, partial Roth conversions. Because I'm a big proponent of having some diversification tax-wise, so that when you retire, you have different buckets of money to draw from.
Rich: One of the services we offer at New Century Financial Group, is a tax reduction and we can run it for the Roth conversion. I don't care if you have another advisor managing your investments, but you just want to get some information what the taxes would cost you for a Roth conversion. Are you bumping up your income and losing some rental loss income? Or, things like that. There's things you've got to be careful, whenever you adjust your income. We have the technology, we have the expertise to run these reports and show you, very clearly, the benefits of doing it.
Bill: You have to be super careful, Rich, because you cannot do it anymore. Once you do a Roth conversion, like I say when I'm speaking to clients, you're committed to that relationship, whether you want to be or not. Prior to the 2017 tax law, you could recharacterize, you could undo that transaction, or a portion of that transaction, afterwards, if you felt that the tax burden just had too much of a negative impact on you.
Rich: Are they still allowing the non-deductible 401K contributions to be rolled into a Roth if your plan allows it?
Bill: They do. What I found, anecdotally, is that a lot of 401K plans simply don't allow you, as a plan participant, to voluntarily contribute extra after tax dollars in the plans. But, for the plans that do allow that, if you're maxing out your 401K, this can be a pretty powerful strategy. And that way, making after tax voluntary contributions into your 401K. And then when your plan allows, whether you're leaving the company or you have some type of plan event, what we call triggering event, you're allowed to directly transfer those after tax funds sitting in your 401K directly to a Roth IRA.
It's a really powerful strategy for folks that are maxing out everything else, and they're coming to you Rich, they're saying, "I'm doing all this other stuff. What else can I do?"
Rich: I'm going to add on the show notes, also, a flowchart to see if you qualify to do the backdoor Roth conversions.
Bill: That's a good point as well. I'm not talking about getting to 50% of my retirement money in traditional pre-tax accounts, and 50% in Roth. I think that's a pipe dream for a lot of us, that having been using Roth for years. But, can you get to 10% of your retirement savings into Roth? Can you get to 15%? I don't know what, the number's going to vary depending on the specific circumstances. But, to what extent you have some type of Roth position, that will allow you to at least partially hedge that threat of rising taxes in the future.
Rich: One of the things I do for my clients is usually ... I'm going to tell you, 80% of the clients have the same problem. Most of the bulk of their savings is in their 401K, in a traditional. I encourage them, "Let's open a non-qualified account, let's see if we can do a Roth." They're like, "Why? I'm putting all this money away."
Yeah, but every time you take money out in retirement, it's taxable. So the more you take out to live on, the higher the percentage of the tax rate it's going to be. It's nice when you have two buckets and you can pull from, to maximize the bracket. Meaning, if I can keep you in a 15% tax bracket, or a 12 where it is now, and keep some of your Social Security not taxed, or maybe some of your qualified dividends, or longterm gains, that's ideal. If we have that option to plan for in the future, that's great. But, you're not giving me that option by putting all your money into a qualified, traditional 401K plan.
Bill: I couldn't agree with you more, Rich. To that point as well, I think there's folks out there in retirement, that are taking required minimum distributions, and maybe they should be taking maybe a little bit more than that. If they're in the lowest brackets, I might want to fill up those lowest couple of brackets.
Rich: And max out the bracket.
Bill: Exactly. I think there's folks out there ... I'll joke when I'm speaking at client events. I'll say, "Some people have a death grip on their IRAs. They don't want to take out any more than the minimum." Depending on their tax bracket, that might not be the best tax efficient strategy.
Rich: And if you can, maybe reset some of your longterm gains. Good time to reallocate.
Bill: You mentioned earlier in our session today about the 0% capital gains rate, and I think there's a lot of folks that forget about that, that 0% capital gains rate.
Rich: I think there's a lot of advisors that forget about that, too.
Bill: Exactly.
Rich: Hey Bill, I know that we're running over time. Jag's giving me the look, hurry it up. But, one of the things I'd encourage people to do is pull out your wills.
Just the other day, I had a client call me to check in on the beneficiary and there was a poor overtrust within the will. The one thing the client didn't think of was when they drafted this will, the new IRA rules. So when he passes, the IRA has to be liquidated within 10 years. He can't put stipulations in, saying that every five years part of it can be distributed.
Bill: Right.
Rich: Now, it has to be distributed within 10 years, it could go back into trust. I would pull out your legal documents, look at it. Call your attorney to see if anything needs to be modified. That's going to be my closing suggestion.
But Bill, thank you so much, I really appreciate it. I know that you're busy, you're always asked to be a guest speaker, you're running your blog, you're calling politicians. I think you just had a call the other day with one. Thank you so much for taking time out of your day to be a guest on our podcast, it's greatly appreciated.
Bill: Thanks Rich, I appreciate you inviting me to join the podcast as well. It's been a lot of fun having the conversation today.
Rich: I'll let you plug, one more time, the website for your blog.
Bill: Sure. It's putnamwealthmanagment.com. The nice thing about the blog, Rich, is that there's no login, there's no password. I know that'll make a lot of happy. Think about all those passwords for all those different websites you go to, and I just can't keep it straight. It's a big pet peeve of mine, frankly.
Rich: That's great, thank you.
Bill: Take care.
Rich: Again, if anyone wants to get a hold of me, they want a tax projection, they want to do some financial planning, you can always reach me by picking up the phone, which is the preferred way I like, 609-924-2049, extension 126. Shoot me an email at roring@ncfg.com. Or, you can go to my website at www.ncfg.com, and under the client center there's a place where you can schedule a call, which has my calendar linked up for available times. Thank you so much.
Jag: Richard Oring's branch office is One Airport Place, Princeton, New Jersey, 08540. The branch phone number is 609-924-2049. Securities offered through Royal Alliance Associates Inc, member FINRA SIPC. Advisory services offered through New Century Financial Group LLC, a registered investment advisor not affiliated with Royal Alliance Associates Inc. New Century Financial Group LLC and Royal Alliance Associates Inc does not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.