A Wiser Retirement®
Ready to take control of your financial future? A Wiser Retirement® Podcast breaks down the strategies, insights, and real-world lessons you need to build lasting wealth and retire with confidence.
Each week, we cut through the noise to simplify complex financial topics, covering everything from smart investing and retirement strategies to practical financial planning you can actually use. You’ll hear real success stories and actionable tips designed to help you make informed decisions at every stage of life.
Whether you’re just getting started or fine-tuning your retirement plan, this podcast is your roadmap to financial freedom.
A Wiser Retirement® Podcast is produced by Wiser Wealth Management in Marietta, Georgia, where we specialize in comprehensive wealth management and financial planning services.
Take the next step toward a smarter financial future, schedule your complimentary consultation with one of our fiduciary advisors: https://wiserinvestor.com/schedule/
A Wiser Retirement®
355. What Are the Best Tax Strategies for High-Income Couples?
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
Making more money does not automatically mean keeping more of it. For high-income couples, taxes often become more complicated as compensation rises, investment income grows, employer benefits expand, and multiple tax rules begin interacting at the same time. The challenge is not finding a loophole that makes taxes disappear. It is understanding which planning decisions are available and how those decisions fit into a household’s broader financial picture.
In this episode of A Wiser Retirement® Podcast, Senior Financial Advisor Shawna Theriault, CFP®, CPA, CDFA®, and Financial Advisor William Medcalf, CFP®, CBDA, break down practical tax-planning strategies high-income couples may want to consider.
Related Podcast Episodes:
Ep 331. Crypto, Retirement, and Taxes: What’s the Strategy?
Ep 308. The Silent Tax: How Inflation Erodes Your Retirement
Related Financial Education Videos:
Second Home Considerations: Tax Implications of Multiple Residences
Learn More:
Founded in 2001, Wiser Wealth Management is a fee-only fiduciary financial planning and wealth management firm helping individuals, families, and business owners make informed financial decisions.
Have questions about your financial plan? Schedule a Complimentary Consultation to discover how we can help you achieve financial freedom. We are local to Atlanta, but can meet with you virtually from wherever you are.
Access Our Free Guides: Gain valuable insights on building a financial legacy, the importance of a financial advisor for business owners, and the tax impact on inheritance, and more!
Stay Connected:
Follow Wiser Wealth Management on Social Media: Facebook | Instagram | LinkedIn | Twitter
Subscribe to A Wiser Retirement® YouTube Channel for more financial education videos and podcast episodes.
This podcast was produced by ...
Why High Earners Lose Money
SPEAKER_04Making more money does not always mean keeping more of it. For high-income couples, a few overlook tax decisions can quietly cost thousands of dollars each year. Today we're going to break down the strategies that may help you keep more of what you earn.
SPEAKER_02Welcome to a wiser retirement podcast, where we cut through the noise and bring you real, honest conversations about investing, retirement, and building lasting wealth. No sales pitches, no gimmicks. Just insights to help you stop guessing and start planning your financial future.
SPEAKER_04Welcome to a wiser retirement podcast. I'm senior financial advisor Shauna Therrial, and today I'm joined by financial advisor William Metcalf. Today we'll be discussing what are the best strategies for high-income couples.
SPEAKER_05Good morning.
SPEAKER_04Good morning.
SPEAKER_05How's it going?
SPEAKER_04Good. It's always a good morning when you get to talk about taxes.
SPEAKER_05I know, isn't it super fun?
SPEAKER_04Super fun. Try not to make it boring, right?
SPEAKER_05Yeah, or give people PTSD.
SPEAKER_04Yeah, I can just summarize all this really quickly. There's not a lot you can do. There are some things you can do, but you know, there's no uh there's no like bullet. No, there's not. It's like the clients that are like, yeah, I want to make a lot of money, but I don't want to pay any tax. It's like, well, we're not wizards, you know. So the tax rules are the tax rules. Uh of course, there's some things that we can do, but um I guess first we can uh, you know, what does high income actually mean
What High Income Really Means
SPEAKER_04for tax planning? So, I mean, what what do you think of high income when you're thinking of our clients or just people in general?
SPEAKER_05Yeah, well, it's subjective. Um and you know, one thing to think about too, I'm getting a little ahead of myself, but is also to think like what's high income relative to your total earnings in your career.
SPEAKER_04Yeah.
SPEAKER_05Um, so that's something we can touch on a little more later, but it is it is subjective um when it comes to planning. Um, but to give people perspective, the 24% tax bracket starts around 211,000 for married filing jointly. Yeah. And then to give top in the top tax bracket at 37% starts above 768,000. Yeah. So that's yeah. Those are that's sort of the 24 is sort of where we think there's more tax planning things at play. And then the 37 is where we're, you know, all hands on deck trying to make sure that we can do as much as possible.
SPEAKER_04Right. Because we've had I've had clients come in before and they're like, I'm paying so much tax. And when I look at it, that doesn't mean so it really is relative to what they feel because they could be in a 15% tax bracket, but they feel like they're paying a lot of tax, you know. But sometimes that's like I'm owing at the end of the year, or you know what I mean?
SPEAKER_05Or my cash flow short during the year and I get a huge refund, right? Right on the opposite side. Exactly.
SPEAKER_04So it's so it really just depends. And those brackets you're talking about, you know, I just want to remind, I know we've talked about it before, but the you know, just because your income is at a little over 211,000, that doesn't mean that all of your income is being taxed at 24% because it's very it's progressive. So the lower brackets are being taxed at lower amounts to the 10%, 15%, et cetera.
SPEAKER_05So it is, you know, progressive, but um I love our tax software shows uh basically it it gives you a visual of that. So it shows you what basically dollar amounts you paid in each bracket. So you can see what it is across all of the brackets. Um, and then it gives you your effective rate, which is basically all of your tax paid um average across all the brackets.
SPEAKER_04Exactly. So, so you know, when we're looking at terms of that's a great point, like marginal versus effective. So, you know, if you're if your income is at, you know, 405,000, let's say that you're in the 32% marginal tax bracket, but you know, because that's where at the top end of it is, but when you're looking at the effective, so you have either you itemize deductions if you're over the standard deduction of the 32,200, or you just get the standard because they raised it a few years ago. So most people don't a lot of people don't have a higher deduction than the 322.
SPEAKER_05Yeah, it takes a lot to get you there.
SPEAKER_04Exactly. And so, but then when you look at the effective, it's really because like I said, it's staggered between all of those different breakpoints. You're not paying everything at that 32% bracket.
SPEAKER_05Yeah, that would be another level of crazy. But uh, you know, even even now with people that are, you know, even with that structure, it's still pretty crazy what we see some people paying in tax. Um, so we're trying to talk through some ways to help you to minimize that. So um you just want to move to the next point.
SPEAKER_04Yeah, absolutely.
Workplace Benefits That Cut Taxes
SPEAKER_04So, you know, looking at the the first thing is the benefits that you have at work. Yeah. So touch on a little bit about, you know, how we help clients or how they can look at it and you know, try to help save money.
SPEAKER_05You know, when you have two spouses working, it's important to consider what options both of you have. So that could be a wide range of things depending on where you work and what your income is and things like that. Um, you know, most people have access to a 401k plan. So, you know, assuming both of you have access to a 401k, then that's something we could look at. Um, potentially contributing pre-tax to a 401k would be uh one way that you could minimize tax on that side. Um, another thing that comes to mind is like a deferred compensation plan for some people. They have access to that through their employer benefits. Yeah. Um, so that's another way. And that that one takes a little more complex planning in terms of, you know, are we in a window when it makes sense to do this? Are we close to retirement or not? You know, that's something we factor in because in a deferred comp plan, depending on how it's structured, your assets could be you basically forfeited if the company went under.
SPEAKER_04Exactly. You're a creditor of the company. Exactly.
SPEAKER_05Um, so you're basically telling them, I don't want this income this year, I want it. And then you get to elect when you want it. And so there's a lot of complexity around that and things that that you want to think about um when using a deferred comp plan. Absolutely.
SPEAKER_04If for as far as the 401k plan is concerned, you know, right now each spouse or each individual can come defer 24,500 to a 401k. So we get the question a lot. It's like, should I do a pre-tax or Roth? Well, you know, it just depends. It depends on where that tax bracket is. It depends on what you're projected to do in the future. Also, I think, you know, uh we look at generally, I mean, there's other things to go into play there, but generally if you're in a 24% or below tax bracket, maybe consider doing a Roth at that point. Um, especially if your income is gonna ramp up in future years, because that'll help put more money into a Roth, you know, it you you don't need a huge tax deduction right now. The CPA me always wants to save the tax now, but you do have to look at in the future also, you know, what are the required minimum distributions and all of that, and what is your income going to be in the future?
SPEAKER_03Yep.
SPEAKER_04So there's things to consider. So you can defer the 24,500 per person. So really a couple could do 49,000.
SPEAKER_05Right. And that's before catch up too. Right. So that's just the base limit at 24,500.
SPEAKER_04So the catch up starts at age 50. Yeah.
SPEAKER_05Yeah. And then there's the super catch up now, which starts at 60 to 63. So there's another rule for us to memorize. Exactly. Um, yeah.
SPEAKER_04It's job security, right? Because it's always changing. I don't know.
SPEAKER_05Yes. Uh so yeah, that then basically it goes from 8,000, which is that first level of catch up starting age at age 50, and then starting at age 60 to age 63, very specific, it goes up to 11,250.
SPEAKER_04Yeah. I wonder if they did that because during COVID, it was like, you know, people put things on hold and now they're helping them super catch up. I don't know. Right. I was wondering wondered about that.
SPEAKER_05Could be. And and depending on your income, something we should mention there too, is that that also may be forced to be a Roth contribution as opposed to a pre-tax contribution.
SPEAKER_04The catch-up port. The catch up portion.
SPEAKER_05So you may not get additional tax deferral out of that depending on your income situation.
SPEAKER_04Obviously, you have to have the cash flow to do this. Yes. You can't defer all this and then, you know, not have the cash flow to do it to save the tax, and then you're taking money out of other things. So, you know, you have to you have to look at what makes sense. Um, but I've even, you know, we've even looked at things like I don't know, I've had clients, younger clients recently. I feel like more and more grandkids are inheriting money. Um, at younger, maybe their parents passed away, or maybe the, you know, older generations are leaving more money to grandkids. Yeah. You know, grown grandkids that are in their 20s, 30s. I've seen more of that recently. And then them coming to an advisor, you know, for help. Um, but it could be that maybe their cash flow is was kind of tight. So they weren't, and now all of a sudden they have this inheritance. They may have, you know, inherited IRAs where they have to take the 10-year distribution or they have capital gains, you know, and dividends and they have all this income. And so, you know, we could look at structuring does it make sense to kind of shift some to the 401k and take some distributions because you have to do that. You know, there are things to look at and other things to consider in that situation.
SPEAKER_05And what you're saying is basically like for in the example of the inherited IRA where you basically are forced to take the money out, right? It may make sense to then contribute more to the 401k basically to balance that out.
SPEAKER_04Yes, through your deferral, potentially. Yes, absolutely. And normally I wouldn't, you know, normally if it's just, you know, a client who has uh I wouldn't make sense to me if you have an outside IRA and let's say you're nearing retirement to defer to 401k and then take out an IRA over here. That wouldn't make sense.
SPEAKER_03Right.
SPEAKER_04But in that situation where you have to take the distribution anyway from the inherited IRA and then move it, you know, because sometimes I'm we're seeing clients that are getting all this money and from inheritance and they went from a lower tax bracket to higher. Now they're like, what do I do? Right. You know, because they they didn't work into it. They weren't expecting it. No, it was totally unexpected. Maybe they didn't even know.
SPEAKER_03Right.
SPEAKER_04Or their parents died prematurely. And it's like now it's like, how do we manage this? Cause you're going from, you know, so there are there are things that we could potentially look at that normal normally just looking at it be like, well, that doesn't make sense to take a distribution than a contribution, but in that situation it might. So there's there's other factors there.
SPEAKER_05Yeah.
SPEAKER_04You know. Um there's also, you know, as far as Roth versus pre-tax, it just it just really depends. Um, you know, that's an evaluation that we do a lot. So I mean, if someone's in the highest tax bracket, I'm like pre-tax, pre-tax, pre-tax. Because, you know, if you save the tax now and you're able to invest the difference, that's very powerful, you know.
SPEAKER_05Yeah. Well, and it's we're not gonna give you very like easy, hey, you should be doing Roth because you're this age. Like, there's not a very one size fits all answer to this. And one thing I like to talk about with clients, there's a couple things. Um, one is I like to say if you're contributing pre-tax,
Roth Versus Pre-Tax Decision Framework
SPEAKER_05you always can convert to Roth later. Whereas if you're contributing Roth, you don't have the option to do the opposite. Um, so pre-tax is good for that reason. Um, the other thing that I like to say is again what we were talking about a minute ago, with basically thinking about your wherever you are in your career, do you expect your income to increase over time? And then also doing financial planning, we're able to sort of project what your tax situation would look like in retirement based on what you're doing. So if you're looking at what you're basically what brackets you're contributing at now versus what your future tax brackets are going to be, that's also a serious consideration. Um and then especially if you have the ability to save on top, right? Right. So again, it doesn't mean that Roth is bad or that pre-tax is better, or vice versa. It just means that for your for specific situations, um, it should be looked at on a case-by-case basis. That's what I would say.
SPEAKER_04Yeah, I mean, I would think pre-tax contributions, you know, just in general, more compelling if you're in a higher tax bracket. Maybe you have large influx of bonuses or compensation coming in, um, you know, a large business event, something like that, and you're in your company, if you're self-employed. Um, like you said, if retirement income is going to be lower, potentially, um, because sometimes I I know we have clients that come in and they're really worried, like, well, what about all this money you have to take out in the future? And when we break down the numbers, you know, they may be in a somewhat, I don't know, it depends. Sometimes you're in a lower tax bracket, but sometimes you're in a similar tax bracket the whole way. So it's like, you know, sometimes we just have to use our best judgment and maybe do 50-50, you know, spread it, you know, split the baby, if you will. So it's like sometimes do half and half. So that way you're hedging some of it, you know. Um, so there's not one perfect way to do planning. Obviously, there's multiple ways to get there because we don't know what's going to happen in the future either.
SPEAKER_05And that's one thing that we don't always talk about, but a lot of people talk about like, oh, like tax brackets are gonna increase in the future. Some people assume that. And so that's one reason that some people recommend doing like you should be putting every dollar you have into Roth right now. And I don't know. I feel like that's an overly simplistic way to think about it, especially when you consider um there's you know, kitsis, the he's like a guru in the financial planning space or whatever. Um, he and his team did a study, I don't know, a year or two ago. Basically talking about this whole issue and you know, Roth versus pre-tax and talking about the historical where tax brackets were. Obviously, there were tax brackets in the 50s that were like literally the top bracket was 95%. But the way that the government taxes and decides how they're gonna tax basically set the brackets now is completely different. Yeah. Um, and and now we print more money and things like that. So there's a lot of different ways to think about this. It's not just, oh, this is what it was historically, so they're gonna do it again. Right. They do because their methodology has changed.
SPEAKER_04That's interesting. That's very that's really interesting. I guess they could search that online and find that study, I'm assuming.
SPEAKER_05Yeah, I don't remember the name of the article, but maybe we can link to it.
SPEAKER_04That's amazing. Yeah. And then Roth, maybe, you know, obviously if future rates are gonna be lower, you're getting lower income right now, your income is expected to go up. Um, sometimes we look at, you know, I don't know, we have some some situations where, you know, maybe a spouse goes on maternity leave or some kind of leave, or maybe they take a step back from the workplace and all of a sudden the income shifts lower.
SPEAKER_03Yep.
SPEAKER_04So, you know, you're as your situation changes over time, you should just always be thinking about it. So we're just looking at it and planning, and like it's that's the key thing throughout the whole theme of this is is something changing this year or what is it going to be in the future? You know, we we use the best you we use the best judgment we can with the information we know at the time.
SPEAKER_05Exactly.
SPEAKER_04And it could be changing annually depending on what's happening.
SPEAKER_05And the other thing is like if tax brackets were to increase, we probably would have some sort of heads up on that. So there may be opportunities to do Roth conversions at that time too. So again, there may be a year where you're paying a lot of tax, but if they did hike the top tax rate to, you know, 50% or something like that, then maybe that's something that we would consider at that time.
SPEAKER_04Yeah, I mean, things change. I mean, back in 08 and 09, I remember, you know, yeah, the market fell out, and that's when they that's when they lifted the income. It used to be you couldn't do Roth conversion if you had over a hundred thousand of AGI or adjusted gross income of your income. Right. And they lifted that during that time, which they still left it, you know, there's no income restriction now, and they allowed you to spread the taxes over 11 and 12. So you could convert in 2010, and then you could pay the taxes over 11 and 12. So it was like this anomaly time. Yeah. I'm assuming the government needed money and that's why they were doing it to try to help spawn, you know, uh get government money. Yeah, exactly. Yeah, and so you know, things like that come up.
SPEAKER_05And I always like to make the joke it's like the government figured out uh time value money, like they figured out a dollar today is worth more than a dollar tomorrow. So that's why they allowed Roth. You know, so that I mean again, it doesn't mean it's nefarious or anything, it's just like you have to consider it.
SPEAKER_04Well, right, so they're using your money now versus you use your money now. And I've seen it really powerful. I mean, I don't know. I saw an estate come in where, you know, they had a lot of money that was in a trust, millions of dollars, and they had converted back in 08 and 09, and now this this Roth money was in a trust. Um, you know, and it there's no tax on it, and you can defer it for 10 years, you know. So it's just it was just really, it was just really, I was like, wow, that was really, but at the time they didn't know that a spouse was gonna pass away either, you know. So it's like we don't, but but doing that, you know, kind of forward looking, it was just it was just really interesting.
SPEAKER_03Yeah.
Backdoor Roth And Bucket Planning
SPEAKER_04Um, so there's always the backdoor Roth also for high income that can't contribute to a Roth. Um, that doesn't really help your taxes today. I mean, it helps in the future. Exactly. So I mean, I guess it helps in terms of, you know, you can do this if you don't have any IRA money. I mean, you can do if you have IRA money, but it's going to be taxable if you convert it. But it's it's best if you don't have any IRA money. So if all of your retirement funds are in a 401k or what have you, you know, you don't have any IRA money, you can make a non-deductible IRA contribution where you contribute it and then you subsequently convert it to a Roth.
SPEAKER_03Right.
SPEAKER_04So that is the backdoor Roth method. Um, and you're converting it. And if you make the non-deductible contribution and then convert it, there's no tax due on that unless there's earnings or something. But if you do it, you know, simultaneously, then there's no tax. So you are you are effectively taking money out of brokerage accounts or bank accounts and and putting it into Roth after tax money. Exactly, and allowing it to grow tax-free, right, you know, until the future where either you withdraw it in the future or you give it to heirs. Yep, you know, but you don't touch it in the future.
SPEAKER_05So yeah, and that's that's another thing to consider too, is like you could be doing maxing your you know, 401k pre-tax and still be getting money into a Roth by doing the backdoor Roth, or maybe by doing Roth conversions inside your employer plan if they allow that too. Um, and it again, it depends on your situation and what you're doing.
SPEAKER_04That just hurts your taxes more. That's where it's like, you know, I it just depends. Um, but if you made after tax contributions and converted it, that's what I mean. Yeah, then that's what I mean.
SPEAKER_05So sorry, I should have said that. So after tax and then going into the plan and converting it, similar to the backdoor Roth, but inside your employer plan because there's a higher limit there.
SPEAKER_04But I don't want you to be cash poor either. Cash poor. So I don't want everything being pushed to retirement accounts. Yes, exactly. Because I like having all the buckets we talked all before. It's like brokerage money, Roth money, I pre-tax, because if you have all of these moving pieces, and if you have enough income, you could be doing all of that. Um, it gives you more options and flexibility.
SPEAKER_05Yeah. And if it again, if you are worried about where taxes are going to be in the future or you know, now that's a way of hedging is like, okay, I'm spreading out what you know, you've got pre-tax, Roth, and brokerage money. So that's a way of kind of hedging there.
SPEAKER_04So then in retirement, you can decide where's the best thing to pull from when, right? You know, depending on the overall situation, what you're trying to do.
SPEAKER_03Yep.
SPEAKER_04And then, you know, there's there's benefits to each leaving it to heirs. You know, there's not a lot of benefits to pre-tax leaving it to heirs, I guess, because they have to take it out over 10 years. And, you know, but if you are charitably inclined, which a lot of clients that have the higher income, some of them are charitably inclined. That's the amounts that I would leave to charity usually. Right. And HSA is another way to save taxes as well.
HSA Strategy And The Receipt Method
SPEAKER_05Yeah, and that one's a kind of special account because it can benefit you now and in the future. And it's the only it's the only one that does that really. So you get the deduction, basically a pre-tax deduction when you make the contribution, uh, none of the growth is taxed. And then when you make a withdrawal, as long as it's for qualified medical expenses, then there's no tax there either. Um and I I don't know if you want to talk about like using it as a long-term retirement account, or if and I I've recommended this recently for a few people because they're interested in it. And I think that it's one of those things that it probably could get a little bit cumbersome in terms of tracking your expenses and all of that. Because let me just back up. So, what I'm talking about is basically the shoebox method, um, is one way I've heard it put. Um, but basically using the HSA is essentially a retirement account. Um, and what you're doing is basically saving your receipts for all of your medical expenses that qualify. And I would digitize those. I would not keep a physical shoebox, but um I've heard of people doing that. Digital shoebox. I've heard of people doing that. So that's why I say that. That doesn't anyway, but um, and then whatever that amount is in terms of medical expenses that you've basically quantified, you can take a withdrawal from that account to that that equals that total amount of medical expenses over that period.
SPEAKER_04Yeah, so so in other words, so if you have a high deductible health care plan, you can make contributions to it if it's offered a health savings account if it's offered through your employer or if you're self-employed. Health savings account, high deductible health care plan, it has to be that, you know, there's individual and family max you can put in and then you can invest it. And, you know, you can use it for future, it's not if FSA is where you have to spend it all within the next year. That's not true for the HSA, you can use that as an investment ongoing, um, and then take distributions to your point for medical. And so, but you can use historical medical expenses. Right. So it's not like it has to be from here forward, you can use or this calendar year. So you can get reimbursed on medical expenses. Right. So it can be another savings account or and or you know, or you can use it for health, you know, health uh health expenses and retirement.
SPEAKER_05So that's another great advantage of that, especially considering that healthcare expenses are pretty expensive based on, you know, when we're projecting them out, they do seem like they're gonna be pretty expensive just based on uh historical inflation and things like that.
SPEAKER_04One of the things that was really interesting, so that uh in learning about an HSA, you know, a while back, obviously I've known him for a long time, but one of the things I didn't know was that you cannot use it to pay for premiums. So clients were saving to these so that you know if they uh retired before Medicare age, before age 65, they were gonna take distributions to pay for their premiums, but you can't do that. So it you can do it for Cobra premiums. Uh that's the extension of your workplace premiums, but you can't do it for just paying for premiums, which is interesting. You can do it for you know Medigap policies and in yeah, after when you get Medicare and all of that. So, you know, they they will be used, hopefully. I mean, I I see them being used. You just with to your point medical expenses getting so high, but it is the only account that gives you a tax deduction on the way in, grows tax-free, and then distributions are tax-free. So it's kind of like the trifecta there.
SPEAKER_05Yep.
SPEAKER_04Um, but some clients just use them as they go as well because medical expenses are so high and they have a high deductible health care plan. And when you're raising littles, and you know, you need all the cash flow you can get. But again, we're talking about the higher income earners that are like, I have all this money, I don't know where to put it, or what is the best way to save tax. So it is a way to save tax.
SPEAKER_05So and you you can sort of strategically choose when you want to be on a high deductible health plan. Like, for instance, if you're expecting to have children, you may not want to be on a high deductible health plan or something like that. But I've also heard stories of people that do that. They're like, uh, you know, that the year I went on the high deductible health plan was the year my kid broke their arm. Or like, what you know what I mean? So it's like we never really know.
SPEAKER_04And then you might take it out of there for then, you know. But um, if you have other means to pay for it, then you could do that, and then maybe you could itemize on your tax return, you know. But if you're a high income earner, you'd have to have a lot of medical expenses to be able to itemize that.
SPEAKER_01So not all financial advice is created equal. Available now. Everything your financial advisor won't tell you. An eye-opening book that reveals what's really happening inside the financial industry
Medicare Surtaxes That Surprise Couples
SPEAKER_01and what it takes to build a plan that actually works. Because what you don't know could be costing you.
SPEAKER_04Another couple of taxes that we, you know, it feels like it's buried in the tax return and people don't really talk about it. And it is uh Medicare related, it's the surtaxes. So we have the additional Medicare surtax that's 0.9%, so 0.9%. So that is on your income. So wages, self-employment, compensation of if you're over $250,000, then another point, anything above that, the 0.9 is applied to for your earnings. Um, and a lot of times we just see that fallout in our tax return, but a lot of people don't see it. It's kind of like that additional line that says additional tax, and that's where the calculation goes.
SPEAKER_05And you typically like a lot of people don't end up withholding for it because it's something, especially if there's two spouses working, because they don't, you know, your employer doesn't see both of your incomes and the fact that you're in that bracket now, um, where you would be paying, you know, this SER tax. So that's something to watch for. Um and, you know, if you have an advisor that they could be looking at to try to basically make sure you're withholding enough. And we can talk more about that in a little bit.
SPEAKER_04Yeah, I mean, if you're doing ongoing tax projections, which we, you know, for our clients that are ongoing clients or asset center management clients, we run tax projections all year round. So that way we're, you know, walking beside them as they're earning, we can see what those estimated taxes are. Because typically they like they just fall out on the tax return. And the other one is um, I don't if you can touch on that a little bit.
SPEAKER_05Sure, yeah, net investment income tax. So that's a 3.8% surtax um that applies basically to the lesser of net investment income or the modified, the amount of modified adjusted gross income that exceeds the applic applicable statutory threshold.
SPEAKER_04Yeah. So the threshold's 250. Right. Again, so you know, uh that's additional 3.8% Medicare surtax. So both of those taxes, the 0.9 on just earnings, but then the 3.8 um net investment income, uh, those were part of the package to help pay for the, you know, um Affordable Health Care Act. Okay, yeah. So the ACA. So it was for yeah. Um, so that that's what helps pay for that. But this is something that you know applies to investments. Um, so you just have to take into consideration when you're looking at, you know, your combined marginal rate and your effective rate, because it does, you know, it does affect it. So you're looking at um capital gains rates when you're when you're talking about investments, the capital gains rates, which if it's short-term capital gains, that's at ordinary income, which falls in those brackets we talked about. Right. If it's long term, meaning it's been held longer than a year, then you know it's either zero, 10, 15, or 20, usually the 15 or 20 percent, depending on where your income falls. And then you have to take into consideration state income tax.
SPEAKER_05Right.
SPEAKER_04So some states have zero, a few of them. Um, most of them do not, and then some states have larger taxes.
SPEAKER_05So you have to look at that and then some states have capital gains taxes too. I don't think Georgia does. Um, but some I believe some states have capital gains tax as well.
SPEAKER_04Yeah, so you really need to like look at your state and then um then the net investment tax, you know, the 3.8%. So you just need to kind of look at all of that. So when you're looking at capital gains, it may not be just 15%. It's like, yes, 15% plus state plus 3.8%, depending on the overall income. Um, so you really have to look at that. And that that one feels like it's kind of buried too.
SPEAKER_05Yeah.
SPEAKER_04You know, it's not something that's just coming out of your paycheck or coming out of taxation training.
SPEAKER_05Right. There's all these taxes and surcharges that you see um after the fact if you if you're not paying attention um when it's too late. So again, that's where tax projections are very helpful because I mean we know sort of the range, obviously, like being the threshold being 250,000, but um for some people it may make sense to take less gains, spread gains out. There's different ways we could basically plan for this. Yeah. Um, and there's ways we can be more proactive in terms of setting up the portfolio, which we'll talk about in a second. But um but yeah, that definitely is one of those things where your lifestyle may mean you just start paying this, but we may be able to be strategic in the way that we pay it or the years we pay it. It just it just depends. Yeah.
SPEAKER_04So sometimes if it's getting nearer to retirement, your income's gonna change, we can spread things out. But I mean, generally speaking, you know, there's that saying you don't want the tax tail to wag the investment dog. So if there's, you know, we we wanna pay we want to pay tax because that means we made money. Right. Um, that doesn't mean we want to pay as much tax as possible, but you know, we want to we want to be smart about it. But also if there's something that we want to get out of because we think it is, you know, reached its peak, or maybe it's not a very good investment or something's changed, you know, I'm not gonna let that dictate avoiding the capital gain either. Exactly. You know. Um so just talking about one way to help with Medicare surtax or just taxes in general, is making the portfolio a little more tax efficient.
Asset Location And Tax Efficient Investing
SPEAKER_05Yeah. So there's a few different strategies that we use um uh wiser. Um, but you know, this is something that if you have an advisor that that you should also they should be looking at as well. Um, one is asset location, and this one is more it's I wouldn't say it's passive, that's the wrong wrong word, but it's more of an ongoing strategy. So it's not necessarily tied to like one decision point, like we were talking about with capital gains or choosing when to realize capital gains. What asset location does basically is you know, so we have an investment portfolio mix, say 61% stock to 39% fixed income. So we're basically choosing again, going back to those tax buckets, where to invest different portions of the portfolio based on the taxation of it. So the clear one clear example of this is putting fixed income instruments, if possible, in a pre-tax account because there's no interest income, you know, annually. Um, and then also what that does is we're not expecting fixed income really to grow. So the future tax on that is gonna stay a little lower because again, pre-tax accounts, you're gonna have RMDs down the road. So it helps minimize the amount of growth in that account to minimize RMDs down the road. The flip side of that is when you have an investment you expect to grow a lot, you want that in a Roth IRA because there's no future tax on that.
SPEAKER_04Right.
SPEAKER_05So that's again, it's just being a little more thoughtful about where we're basically allocating everything. And it, you know, it's this is another thing where it's not just cut and dry. This is exactly how you do this, this, and this. But um doing that can save you. I I think there was a study done on that, it's like almost 25 basis points per year. Yeah. Um, in investment returns. So that's that's even higher in terms of tax. But um, but yeah, it's it's a definitely a strategy that is a is a good thing to do.
SPEAKER_04Yeah. So the higher income, you know, things that generate higher income or ordinary income put it in tax-deferred accounts or tax free accounts, um, tax deferred accounts. So that way, but we but you still have to look at obviously, you know, if you're making withdrawals from a certain account, you need to have some set-aside cash, you know, with the buckets we talk about and have fixed income there. But if you're in a higher tax bracket, um you might be living off income in some regards, just depends on uh off your portfolio income. Um, because if you've invested a lot, then you may just have a lot of income coming off the portfolio in general. Because some of our higher, you know, income earners, they're higher income earners, but they're also savers. A lot of them are. And so they're not spending a huge amount, you know, uh pro rata to their portfolio. So it just depends. Every situation's different. Um, but we also look at doing more tax advantage bonds, you know, munis things, municipal bonds, things like that in brokerage accounts to try to save tax as well.
SPEAKER_05Yeah, good point.
SPEAKER_04The most frustrating thing is when the market's down really far and then people are selling their fund, which is creating gains. And so you may be holding on to this fund, it's down for the year, then all of a sudden you get a huge capital gain distribution at the end of the year that was not planned and you're paying tax on this thing, it's down. Right. That's frustrating. That's one of the reasons not to be mutual funds, but um in a taxable account or just in general, but um completely. But if you do individual stocks, which you know, you can do that through direct indexing, where you're still not being a stock picker, you're you're investing in all of the stocks of an index or certain index uh to be more tax efficient. So you can strategically go in and tax lost harvest, which tax lost harvesting is you know, selling a stock um or an investment, harvesting that loss, but you want you still want to be in the investment. So maybe you replace it with something that's a like kind investment. Right. Um, another, you know, similar sector.
SPEAKER_05Exactly. Yeah. So that would be Pepsi is a common example.
SPEAKER_04Yeah. So if it bounces back, then you know you're you're taking part in the upside as well, but you're harvesting that tax loss to use against future gains. Right. Um, so it's like you can use those losses against current gains or 3,000 of ordinary income for the year and then you know, then they carry forward. Right. So it's it's very powerful to be able to, especially when you're entering into retirement, if you have these tax credits that you can use against future gains and you're starting to trim back the growth in your portfolio and put more, a little more in fixed income because we're transitioning to withdrawal mode, yep, you know, when you have those gains, it'll help offset those gains in the future. Right. And just be overall more tax efficient.
SPEAKER_03Yep.
SPEAKER_04You know, or or if you know, early retirement or loss of a job, if you need to access your portfolio. Although I do obviously want to have your emergency fund in place, you know. I don't want to most of the time, you know, if people are losing their jobs, that's because the economy's not doing well and the stocks are down. That's not when you want to be selling stuff.
SPEAKER_05Yeah, you don't want to have all those things going on at the same time. No.
SPEAKER_04So it's like we can't foresee obviously what's going to happen. It's it's like if you can tell me what the economy is gonna do, if you can tell me when you're gonna die, we can do perfect planning.
SPEAKER_03Right.
SPEAKER_04That's not the way it works, right? Um, so you know, it's it's it's just kind of, you know, no knowing what has happened historically, what could happen in the future, and then just, you know, having um, having set aside cash for your emergency fund and and having your position, your portfolio positioned accordingly, depending on where you are and what's going on in your life.
SPEAKER_05Trying to create optionality for yourself too, is what I would say.
SPEAKER_04I like that optionality. Yeah, it's good. That's very good. You touched on this a little bit, um, you know, doing employee uh deferrals, things like that. Right,
RSUs Company Stock And Concentration Risk
SPEAKER_04yeah. Um I don't know. There's there's you know, restricted stock units, RSUs. Sometimes your employer pays you in these, you don't have a choice.
SPEAKER_05Sometimes the withholding is by selling the stock. So what that means is when you receive a grant of a stock, or basically when it vests and it be you have that income passed to you, uh they may use the sell the stock to withhold for that amount of income. Um, and that triggers you know, other types of tax. Um I think the biggest thing with you know stock grants and different types of options or you know, whatever sort of stock plan that your employer has, I would and you know, that we sound like a broken record, is doing a tax projection and at least making sure you know what's gonna happen. Right. And if you're gonna be short in terms of withholding for the year and meeting safe harbor, which is just the amount that that's the the lowest amount that the government makes you pay in during the year.
SPEAKER_04Right. So that you don't get penalties.
SPEAKER_05So you don't get penalties. Um, and then also if you're gonna owe at tax time, just so you know that you're gonna owe. Um, because some people get blindsided with that. I've I've had a couple clients recently that it's like their first year going through this whole thing where they're they're they've had these stock uh stock grants, you know, and it's taken a couple years for them to invest, and they're finally getting hit with tax from them.
SPEAKER_04Right.
SPEAKER_05Um, and so it's like their first time going through that. And usually they end up owing tax and they weren't aware that that was gonna happen or they weren't planning for it. So that's that to me is the biggest piece there. Cause there's not I don't know, unless I'm just not thinking of something, there's not a lot of ways to really minimize that.
SPEAKER_04No, there's not. I mean, you the timing of when you sell it, so you know, if you get you know, stocks or what have you, looking at the short versus long term and the holding period, but I also look at the risk, you know, it's like if you have, you know, a lot of clients that have large positions in the companies they work for, I understand obviously you want to partake in that, you may know what's going out the company that it's gonna do well. Um, and you know, sometimes it looks good that you own the stock and all of that, but you have to take into consideration, you know, if that's your livelihood, if you have a lot of company stock, if you're doing deferred compensation, you could be that could be a really concentrated position.
SPEAKER_05Well, going back to your point about, you know, when the economy's down, if the stock is down where you are, that's, you know, well, if you're getting laid off, it's very possible that the stock is also down where you're working too. So that wouldn't be a safe place for you to go for withdrawals necessarily. So again, it's like those sort of things may coincide.
SPEAKER_04But that's where the rules come in, where you really want to be smart about being diversified and not having a huge concentrated position out. There's many individuals that work for small companies that are private companies that private stock, or, you know, the clients that work in NVIDIA and the Apple, and they have so much company stocks. They were paid in it and it's really taken off, obviously, and then they don't want to sell it. It gets an emotional tie.
SPEAKER_03Yep.
SPEAKER_04Um, you know, it's just concern, you know, general rule of thumbs, you don't want 10% anyone holding. I know there's periods of time with company stock that you go higher than that, especially if you're an owner. Um, but you know, just know there's a risk there.
SPEAKER_03Right.
SPEAKER_04You know, there's a lot of companies that have gone out of business that we didn't foresee going out of business. And so, I mean, that would be a huge lifestyle change. So you just want to be smart about taking your profits and trimming and maybe not deferring so much potentially and diversifying your assets. And those are the times where I think it makes sense to pay tax to diversify because you're really you want to capitalize on the growth that you've had, take your profits, pay the tax, and then diversify that. Even though that tax bill is painful, you can spread it out as much as possible. But what's gonna be more painful is sleeping, not the sleep factor. It's like when that stock starts going down, it goes the opposite way. It's like, yes, when it's soaring, it's really, really exciting and this thing is running and I don't want to stop. But then when it starts going the other way, then you're like, oh gosh, I'm gonna wait till it goes back. And then you're waiting longer, you're like, oh goodness, I'm gonna wait till it goes back. And then it's not, that becomes very stressful. It's like, how do you manage, you know, how do you take your your gains and your and then you don't want any losses? Right. So sometimes it just just being diligent and thinking about what percentage of my overall investments is this. You just really want to be smart about that.
SPEAKER_05Yeah, it goes back to just being disciplined and making sure that even if you're not not sticking to the 10% rule, maybe you have a number in your head, and whatever hits that number that you are gonna liquidate some of it and you know, pay the tax and and diversify that. Absolutely. You know, like you said, it doesn't necessarily mean everybody's gonna stick to that rule. Um but you know, it that's something that you definitely want to be disciplined, is what I'll say.
SPEAKER_04There's a couple other things, obviously, like
Charitable Giving Bunching And DAFs
SPEAKER_04deductions. We didn't touch on that a lot. A lot of people are not over the standard deduction. A lot of our higher income earners might be, it depends. You know, you can deduct um a part of your taxes, you know, there's that 10,000 threshold. If you're over certain limits, um income limits, we're talking about the higher income earners, you probably are limited to the 10,000 deduction for state tax and local taxes, state and local taxes. Right. Um, and so you know, they did lift that a little bit, where if you had um a little bit lower income, you can you can deduct more, but the higher income earners are probably gonna be limited to the 10. But then charitable giving is something that, you know, you can get a deduction for and itemize. Um so you may want to look at if you have higher income in a year where you're getting a big payout and maybe you are charitably inclined, maybe bunching contributions.
SPEAKER_05Yeah, there's there's all sorts of ways you can do that more efficiently than just putting cash in the plate, you know, at church or whatever. So, like if you have company stock, right? Um, you could donate a large portion of appreciated stock. And like you said, bunching is a strategy that you could use. So you could kind of layer these strategies. So you have um bunching, which just means you take multiple years and do it in one year. So you receive a large tax deduction in one year. And then if you're doing that with employee stock or whatever kind of stock that has a large gain, you're basically foregoing that the gain on that.
SPEAKER_04Right. So you get the deduction and you're not paying the tax on selling it.
SPEAKER_05Exactly. Um, so that's a big swing in your direction. And then, you know, the other thing that you could do that comes to mind is if you are, I think it's 70 and a half, then you could basically do that from an IRA as well. Right. So you could do a qualified charitable distribution from an IRA.
SPEAKER_04Exactly. And so even if you're not required minimum distribution age, if you're over 70 and a half, you could donate from it, just helps you get money out of your IRA in the future. Right. Um, it doesn't give you a tax deduction now, um, but it does help reduce your taxes in the future because you're getting money out of your IRA. So then you could buy a minimum.
SPEAKER_05Which, yeah, I didn't want to confuse people on that. Yeah. Yeah, yeah. But immediately it takes, it lowers the value of that account. And so in the future, like you said, you're not gonna be paying as high in RMDs.
SPEAKER_04Yeah. And if you're if you're bunching, like let's say you're, you know, I don't know, let's say you you tithe to a church or you give to a specific charity and you do a certain amount each year, you could always, if you don't want to give them the whole amount, you know, say three or four years worth at a time or whatever, because you're bunching, you could do a donor advise fund. Yep. You know, many of the brokerage houses have this where, you know, it's a DAF, a donor advice fund where you open that account and then you move the stock there, get the tax deduction today, and then decide where it's gonna go to the actual charity later. Yep. So, and and take it from there. So you could do that as well. Um, just overall, knowing where your income stands, running the tax projection, like we said, you know, just looking at managing bonuses, business income as a you have more options when you're self-employed.
Self-Employed Plans And Tax Projections
SPEAKER_04I would say, you know, you could um, you know, bill clients in advance or defer income um to future years, you know. So you you have the option of making more decisions a lot of times when you're self-employed versus when you are, you know, a W-2 employee. Usually the employer pays out as as they do.
SPEAKER_03Right.
SPEAKER_04Um, sometimes you can negotiate that. But um, you know, just understanding where your income lies and then looking at if you are self-employed, any kind of retirement plans you can open there. I do see a lot of many self-employed individuals just leave that part out. You do have to take into consideration if you have employees and and what's available, because you know, you can't just do it for yourself, you'd have to do it for employees also. But if it's just you or you and spouse, then there's a lot more options like an individual 401k or a unique that you can defer tax to, um, or even a defined benefit plan. If you have a huge self-employment income, defined benefit plan for you and your spouse or just you is also a way to get a lot of money into a retirement plan, way more than the limits.
SPEAKER_05Yeah, and and providing benefits to your employees is another thing that you could do, whether it's a retirement plan or even small amounts of life insurance that you can get tax deductions for. And again, it doesn't mean you're saving money necessarily because you're still putting that into their accounts and getting the tax deduction for doing that, but it's a way at least, you know, depending on your goals and situation with your employees, you're at least putting that back into, you know, them and hopefully winning their their trust and their loyalty by by doing something to help benefit them, yeah, as opposed to just giving it to the federal government.
SPEAKER_04So absolutely. Um, just really, you know, really high income couples or earners, just look at doing a mid-year tax projection, you know, review your year-to-day income withholding. I still like to look at it at the beginning of the year because if you're halfway through the year, you can still make changes, but half the year you can't, you know. So I still like to understand what I'm doing going into the year and then halfway through the year as well. Um, you know, looking at your bonuses, vesting events, any business income, capital gains. Sometimes we can't foresee capital gains, which is like what we like to do it throughout the year.
SPEAKER_03Yep.
SPEAKER_04Um, adjust your withholding if you can or you need to where appropriate, or make estimated tax payments where necessary. And then just look at the tax projection ear end as well. And, you know, the goal is not necessarily having a tax refund. You know, you can end up owing tax as long as you know about it, you know, that you can plan for that, but you don't want to have penalties. So making sure you're meeting that safe harbor requirement, um, either 90% of current year or 110% of last year if you're a high income earner. Um, just making sure you've paid in enough to meet safe harbor. And that way, you know, you may still end up owing, um, but you're not gonna have penalties and interest and all that.
SPEAKER_05So I would even say owing is probably better than getting a refund in in certain circumstances, just because you're holding on to your money longer. So you're not, you know, basically giving it away early. Um, so you could even keeping it in a high-yield savings account, you're doing a little bit there um in terms of
Safe Harbor Withholding And Closing
SPEAKER_05interest income. So it's a marginal difference, but it's still better to hold on to your money now.
SPEAKER_04Yeah, absolutely. Well, thanks for listening to today's episode. If you're listening to us on Apple Podcasts, please take 30 seconds to leave us a rating and review. Open the Apple Podcasts app, search wiser retirement, scroll down to ratings and reviews, tap the stars and write one sentence about what you found helpful. It really helps more people find the show and learn more about making informed financial decisions. Have a great week.
SPEAKER_00Thanks for listening to a wiser retirement podcast. We hope you enjoyed today's episode. Make sure to subscribe wherever you're listening. That way you don't miss any new episodes. We'd also appreciate if you could leave a rating and review. If you have any questions about anything that was discussed today, head to wiserinvestor.com and reach out. This podcast is strictly for informational purposes only and is not to be considered as investment advice or solicitation to buy or sell any financial products, securities, digital assets, or any other investment vehicles or basis to make any financial decisions. Wiser Wealth Management Incorporated is a registered investor advisor with the SEC. The host and or guest may personally own securities, digital assets, or other investment vehicles mentioned on this podcast. Neither the host nor guest of the show are compensated for their participation, and no referral fees are paid to or received by any host or guest for clients, listeners, or similar interests. Investments involve risk, and unless otherwise stated are not guaranteed, be sure to first consult with a qualified financial advisor, tax professional, insurance professional, and or legal professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
.jpg)
.png)