Maximizing Savings and Minimizing Taxes in Retirement

Ever wondered how to recreate a steady paycheck in retirement? Join me, Rob Wolf, as I uncover the secrets to creating efficient retirement income streams that can ensure financial stability during your golden years. From deciphering the tax implications of 401(k)s, IRAs, Roth IRAs, and after-tax brokerage accounts to the vital role of Social Security, this episode is packed with essential insights. We'll demystify the process of setting up distributions and provide clarity on how to strategically manage your income sources to minimize tax burdens.

Maximize your retirement savings with strategic tax planning! Discover how to make the most of the 12% tax bracket, understand the intricacies of Roth conversions, and learn the impact of proactive tax planning before you hit the age of required minimum distributions (RMDs) at 73. Unravel the misconceptions about retiring in a lower tax bracket and losing deductions, and find out why taking on some tax liability now could be a smart move. Plus, I’ll emphasize the importance of having a trusted advisor who can help you navigate these complex financial decisions with ease. Tune in for practical, actionable advice to confidently manage your retirement income and tax planning.

Learn more about Wolf Financial Advisory:
https://www.wolffinancialadvisory.com/

Disclosure: Robert Wolf, James Koenig, Sara Wolf, and Michael Rock are investment advisor representatives of, and securities and advisory services are offered through, USA Financial Securities. Member FINRA/SIPC. Additionally, Amanda Opulskas and Adam Wallace are registered non-solicitors of USA Financial Securities, A registered investment advisor. 6020 E. Fulton St., Ada, MI 49301. Wolf Advisory Services and Wolf Financial Advisory are not affiliated with USA Financial Securities.

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax, or estate planning advice. Investing carries an inherent element of risk and it is in everyone’s best interests to consult a tax, legal, or investment professional. The opinions expressed herein are not meant to provide specific investment advice or serve as a prediction for future stock market performance. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities, member FINRA/SIPC. A registered investment adviser. Wolf Financial Advisory and USA Financial Securities are not affiliated entities.

Transcript

Creating Retirement Income Streams Efficiently

Voiceover 0:00

The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities member FINRA/ SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.

Voiceover 0:33

Wolf Financial Advisory. When it's important to you, it's important to us.

Voiceover 0:40

This is the Wolf Financial Podcast. Here's your host, Rob Wolf.

Rob Wolf 0:52

G'day everyone. Rob Wolf here with the Wolf Financial Podcast. Today, we're going to be talking about how do I recreate my paycheck in retirement. You know, it's really funny when I meet with people. I do this stuff every day, and because I do it every day, sometimes what seems to be pretty routine to me is a real big issue for other people, and I found that this issue how do I recreate my paycheck is one of the biggest areas that people worry about as they transition to retirement, and so I want to talk about that a little bit today, because in many cases, it's just a logistical issue that we have to do and it's really simple, and in some other cases it isn't as simple.

Rob Wolf 1:42

So, number one, if you have retirement assets, such as a 401k, iras, roth IRAs I got all these different buckets of money. Well, how do I access them? Well, it's pretty simple. Whether you're dealing with a financial advisor, such as myself, or you're going with a direct custodian like a Vanguard or a Fidelity, it's pretty simple. You got a retirement account. You need X amount of dollars coming in on a monthly basis. You just do a distribution form requesting $3,000 a month. You pick out how much taxes you want withheld, you tell them where you want to direct deposit the account and you send it in. It's just that simple. Too many people try to overcomplicate what should normally be a pretty simple transaction.

Rob Wolf 2:39

The difficulty in recreating a paycheck, however, is from which accounts should I be drawing my money from? Because for many they have accounts that are all taxed differently. So if I have a 401k and I retire and I choose to roll that over into a traditional IRA, the very act of rolling it over is a tax-free event. No tax, no harm. I get a 1099 at the end of the year from the 401k custodian and and I have to just report on my tax return how much I rolled over. None of it's taxable. Okay, so far, so good.

Rob Wolf 3:35

But then, in addition to my traditional IRA, I may have a Roth IRA. I may have an after-tax brokerage account. Well, what's the difference? Well, my Roth IRA is all tax-free as long as I've had it open for five years and I'm over 59 and a half. All the money I put into it, all my gain that's grown in it, I have access to it tax-free. That's grown in it. I have access to it tax-free. So far, so good, no issues, right. And then I have my after-tax brokerage account. This is where I've taken some of my money that I've accumulated over time Maybe it was in my bank Wasn't happy with the interest I was earning.

Rob Wolf 4:21

So I decide to open up an investment brokerage account. I buy stocks, mutual funds, bonds, you name it and as it spins out interest and dividends, I got to claim it as taxable. And I get a nice 1099 DIV at the end of the year and I have to claim that on my tax return. So now I got my after-tax brokerage account. I got my Roth IRA. I got my traditional IRA.

Rob Wolf 4:46

Maybe I have some annuities out there. They have some guaranteed benefits. I may have a pension, I may have some social security. Well, now it's like, oh my gosh, I got so much, which is a great problem to have. I rarely have too much than nothing. I rarely have too much than nothing.

Rob Wolf 5:11

Did you know, just on a side note, that the average American retires with less than $80,000? Think of that. You are completely relying on Social Security, which is only meant to replace a third of your overall income for the rest of your life. That's pretty depressing. So for those people that might be listening. Whatever you have, that's all you can draw from right. There's really no other options. So for the people that have more complexity, they have multiple accounts all taxed differently. That's where it could get really confusing. How do I start this income stream from? Where do I take the money from? Do I take it all from my IRA? Do I take it all from my after-tax account? And the big issue is what are the tax consequences on the decision I make? And if you don't understand how your accounts are taxed, that's going to cause a lot of concern and keep people up at night.

Rob Wolf 6:34

Okay, so let's break this down. The first thing that you need to understand is how the tax code works. Okay, and it's like well, how, how, how do you even talk about the tax codes, that thousands and thousands of pages? I'm not talking about the tax code in total. I'm talking about how basic income taxes work. We're in a progressive tax system. The more you make, the more you end up having to pay taxes on. So simplicity here.

Rob Wolf 7:08

Let's say all I got is social security and I got $50,000 in the bank. Guess what? I'm not going to pay any taxes for the rest of my life. You know why? Because your social security, if you're in that situation, isn't subject to tax. The only thing that causes your social security to become taxable is what's called provisional income. Provisional income are those outside income sources, when added to your tax return, will cause some of your social security to become taxable. So if all I got is social security let's say I got $40,000 of social security and I got $50,000 in the bank and that's it. Well, in order for any of my social security to become taxable, if I'm married, filing jointly, I have to have more than $32,000 of provisional income. And once I go over that level, then my social security starts to get taxed.

Rob Wolf 8:19

Well, 50% of your social security is considered provisional income. So if you got $40,000 coming in, that means you got 20,000 of provisional income. Okay, so I got 20,000 plus some bank interest. Let's say the bank interest is $2,000 a year. I got $22,000 of provisional income. Social security only gets taxed once I'm over 32,000 in provisional income, which means all 40,000 of my social security is not subject to tax. So the only thing I have flowing through to my tax return is my $2,000 of interest. That gets wiped out by my standard deduction no tax. Well, that's pretty easy.

Rob Wolf 9:04

But what if I have a pension coming in? I have social security coming in. I have dividends and interest. I have dividends and interest. I have IRAs I got. I'm getting close to age 73. I need to take required minimum distributions. I got this Roth IRA hanging out there, wow. Now it's starting to get more complex because now as I take IRA distributions, as I take distributions off my after-tax brokerage account, that's either going to cause a capital gain or a capital loss. Right as I take distributions off, maybe an annuity that I had purchased in the past, all of those things have tax consequences and all of those things added up can cause my social security to become taxable and in fact, up to 85% of of social security, almost all of it, 85% of it could get taxed if I pulled money from different accounts in an inefficient way.

Rob Wolf 10:30

Okay, that's why it's so important to not only understand what the tax code is, how it works, but ultimately what is your goal when it comes to not only the income you need but the distribution strategy you want to take in place. So, for instance, I have a married couple in place. So, for instance, a married couple married filing jointly can have up to about $130,000 this year in adjusted gross income, okay, and still only be in the 12% bracket, that's not bad. When you factor the standard deduction right around 30 some thousand dollars, that's going to bring them into taxable income right around in the nineties. And that's where the 12% bracket ends. You may say to yourself hey, you know what? I'm willing to pay up to 12% because that's not a bad income tax to be paying, especially on some of my money that's never been taxed. Okay. So we have a lot of people that are maxing out the 12% bracket.

Rob Wolf 11:43

Now, the only disadvantage of that is 85% of your social security is going to become taxable, right? So if you say you know what I need $70,000 a year to live off of, all right and you decide you want to do some proactive tax planning, maybe you decide to do some Roth conversions, bring in some extra income now, while the tax code is favorable. Well, that act of doing that proactive tax planning is going to cause your social security to get taxed. It's neither right nor wrong, it's just the way it is. If I were drawing $50,000 of social security and I just chose to take $20,000 out of a taxable IRA to meet the $70,000 income need. Well, guess what folks. I'm probably not going to end up paying any taxes, why?

Rob Wolf 12:48

Well, half my Social Security is considered provisional income, so that's $25,000 in this example. And the $20,000 in IRA distribution is going to be considered provisional income, so that's going to put me at about $45,000 of provisional income. Social Security starts getting taxed on any provisional income greater than 32. So that means I'm about $13,000 over the threshold, so roughly 50% of that 13,000 is how much of my social security is going to get taxed. So in that case, about $6,500 of my social security benefit, which is at $50,000, 6,500 of it's going to get taxed, plus the $20,000 IRA distribution. Well, 6,500 plus 20,000 equals 26,500. Folks, how much is the standard deduction this year? It's almost $30,000. Your standard deduction wipes out all of the tax consequences in that case. So if you decide you're going to max out the 12% bracket, you're also making the decision to have up to 85% of your social security to become taxable. I'm not saying one is better over the other, but you do need to understand how it impacts your overall tax. I could have $70,000 no tax, or I could have up to $130,000 and end up paying about $11,000 in federal income tax. Well, depending on what your overall goal is as far as legacy planning to the next generation, flexibility for down the road if tax rates go up, what your projected required minimum distribution is going to be, all will lead to making the correct decision based on your unique financial situation.

Rob Wolf 15:02

I have a lot of clients, folks that can get away paying zero taxes until what? What? They turn 73. What happens when they turn 73? The IRS comes a knocking and they want their money and they want you to pull out what's called the required minimum distribution. That's when they take all of your qualified money, that's, your IRAs, your 401ks, your 403bs and they say you know what? We've been a partner with you this entire time. We allowed you to deduct that money when it came out of your paycheck. We allowed that money to grow tax deferred and now it's time for us to get paid. As your partner, we are requiring you to take out a certain percentage of that pre-tax money starting at age 73.

Rob Wolf 16:03

So let's say I've had a pretty successful run right. I've been able to accumulate a lot of pre-tax dollars, hundreds of thousands of dollars, maybe millions of dollars, whatever it is. Well, if I got a million dollars in an IRA, my first required minimum distribution, at a minimum, is going to be roughly $35,000 a year. Well, now, just the required minimum distribution alone, plus the social security, is going to cause more of my social security to become taxable, which is going to exceed my standard deduction, and now I'm going to end up having to pay income taxes. So sometimes it makes sense, especially prior to your required minimum distribution date, to be proactive and start taking some of those tax dollars off the table now, paying a little bit now, so that when you do get to the age where you're forced to have to pull money out, we can control how much that required distribution is.

Rob Wolf 17:18

Because the one thing, folks, that we don't know is what will tax rates be in the future? Let me ask you this we were all told for years put as much money in that 401k, sonny gonna. It's gonna create a great nest egg for you. And so we did. A lot of us took that advice. We built up these huge retirement plans and they say you will always retire in a lower bracket than when you were working. Well, let me ask you this for those of you that understand how the tax code works how many people in retirement still have a home mortgage that they get to write the interest off on credit? How many of you end up paying a lot in state income tax anymore when you're not working to be itemized off later? All our deductions go away In retirement we have none. So the vast majority of people are stuck with the standard deduction and for many people who are successful that have built up a wonderful nest egg, there's a very good chance that you will retire in the same or a higher tax bracket than when you were working because you don't have the deductions.

Rob Wolf 19:00

So does it make sense to be proactive about the tax planning that you're doing? Maybe pay a little bit more now to save potentially a lot more in an uncertain tax environment going forward? Me put it another way how many of you would ever take out a loan where the loan terms were not fully disclosed? Well, guess what? That's exactly what we did when we put money into a pre-tax IRA, into a 401k 403b. We got the deduction up front. The deduction, the terms were we were effective 15, 18% tax bracket, whatever it was. We know what we got as far as the tax benefit going in, but what they didn't tell us is how much we will have to pay in taxes on the way out.

Rob Wolf 20:03

How many of you believe that taxes are going to get worse? I happen to be one of many people who believe that taxes are going to get worse. You add that with limited deductions where maybe you're only stuck with the standard deduction, deductions where maybe you're only stuck with the standard deduction Congress is looking for more money. The deficits going up, the debts going up, wars overseas Somebody's going to have to pay for all this. And guess what? If you have a lot of money, that's all in pre-tax accounts.

Rob Wolf 20:43

Guess what folks? It's not going to be the people that are retiring with less than $80,000 to their names that's paying this. It's going to be the people that sacrificed and set aside money into the retirement plans. They're the ones with the bullseye on their shirts. Okay, they're the ones that are going to be paying the bill, because almost half of all Americans don't pay income taxes already. So if you're under the age of 73 and you're thinking this is the best thing in the world, none of my social security is getting taxed. I'm not paying any taxes at all.

Rob Wolf 21:33

Take a look at your portfolio and what the projection is going to be as you go down the road. What is that first required minimum distribution, looking like If it's a pretty significant number. You may want to think about being more proactive and taking on some tax liability now while the tax rates are good, versus waiting for something to change and find out the tax rates aren't as good as they are now. So, folks, it all comes down to planning. It's really important that, when you deal with these complex issues, that you have a planner that understands how to put this all together, a planner that has a process. I would encourage you to find a trusted advisor that understands these concepts. This is Rob Wolf with the Wolf Financial Podcast.

Voiceover 22:39

Thank you for listening to the Wolf Financial Podcast. For additional information about our firm, please visit our website, wolfadvisoryservices. com. The strategies and concepts discussed are for educational purposes only and do not represent specific investment, tax or estate planning advice. Investing carries an inherent element of risk and it is in everyone's best interests to consult a tax, legal or investment professional. Past performance does not guarantee future results. Securities and advisory services are offered through USA Financial Securities member FINRA/ SIPC, a registered investment advisor. Wolf Financial Advisory are not affiliated with USA Financial Securities.