The "Tax Time Bomb" That Could Be Waiting For You

In this conversation, Joe Yocavitch discusses the critical aspects of retirement planning, emphasizing the importance of understanding tax implications, the need for a comprehensive financial plan, and strategies to navigate market volatility. He highlights the significance of embracing retirement as a new beginning and the necessity of building trust and transparency in financial planning to ensure a fulfilling retirement experience.

Transcript

SPEAKER_00 0:00

Welcome to the Heart of Your Money with Joe Jakovich, president and founder of JML Financial Group. We hope today's show can help you on the road to your financial wellness. Now, here's Joe Jakovich and the Heart of Your Money.

SPEAKER_02 0:15

Taking retirement, you had to take it really seriously as a way of life. It's like the first swim of the summer. Now we live close to the beach, so you can understand why I'm using this scenario. When the water is still almost too cold for swimming, but it you have to grasp at first. But after the first few minutes, well, maybe a little longer in my water, you get to use to it and you say to yourself, I'm bracing the effects, and I feel great and exuberated. But when you're dealing with retirement, it's the same way. You need to really embrace it. You've got to understand things that are going to be changing all the time. In this particular situation, it's a major change because most people have not paid taxes on most of the money they have been putting away. IRAs, uh 401ks, 457s. You know, all these vehicles that I talk to people about every single day, eventually they have to pay the Piper. They have to pay the government.

SPEAKER_03 1:18

But that's what we were told to do. I mean, from the time that 401ks were available to us, right? We were told as employers, put your money there because you're not paying your taxes. But that was the big benefit to it.

SPEAKER_02 1:30

Well, that was the big benefit. As you hear you say, was the big benefit. Yeah. Because taxes were high, so it was a great opportunity to take a major tax deduction, thinking you're going to be in a lower tax bracket when you retire. But that might not be the case if you start to think about what is going to be in terms of tax-wise in the future. When I say future, within the th next five to ten years, because of the boomers coming out, and because of all the changes that have taken place. Now you we've been lucky enough uh to be benefacted in with the big beautiful bill that Trump put together. Again, better tax deduction, better tax-wise now. But when you start to think about, and this is the that's why we talk about this all the time on our all our shows, you know, the Roth IRA to be able to convert some of those dollars into tax-free dollars. Because again, when you're pulling money out of these vehicles eventually, and the IRAs and the 457s, you gotta pay ordinary income tax. But more importantly, guess what happens? It also counts against other things that you have. For instance, this tax bomb we're we're talking about, you you also have to understand when you turn 73, you know, most of us will start to take the RMD required a minimum distribution. You know, you understand when you have a 401k, you can you can't touch it before 59 and a half. But if you're born after um 1960, you can start to take the RMD at 75. So most of us on the call today or listening to me or 73 RMD. And this is where it could really put a dent in you in terms of tax-wise, because remember, when you're taking the money out of those type of vehicles, RMDs require minimum distributions from the IRAs. You not only have to pay tax on that money, but it will affect your Social Security and pension and Irma the dollar amount that you'll pay for your Medicare premium. So again, these are things that we put together, the best strategies for RMD that will not push you in the higher tax bracket and disqualify you from an interest, and in this case, very interest and income-sensitive deductions and credits. So again, these are things that we talk to people about all the time. And on my show, as you're well aware, you know, I wrote this book called The Heart of Your Money, and this is the radio show. But if you think about it, Sari, you know, heart of your money is like your health. You must take care of movement of blood going through your body. No difference than your money must move inside your master plan. That's why we use the master plan. We look at sequence of return, issues that would take money down when we retire. We look at withdrawal factors, volatility. And again, I used to say this and I continue to say this to everyone volatility kills income planning. Now think about it. When you're going into retirement, you have an income plan, but you better have a long-term care plan attached to that because of longevity. You also have to have good tax strategies working. You don't want to be a burden on your family. And the government, let's face it, you said it earlier, they were supposed to be responsible for us, but now I guess they turned their back on us because all that money that we've not had any tax on now becomes taxable. So that's the concern of me and all my clients I talk to. I'm always in that conversation mode of making sure that taxes don't erode the dollar amount that they're pulling from, andor at least the least amount they're pulling from. And people need to understand this. Going into retirement is different than putting money away. You know, we have another book that we've written called Getting Up the Mountain, but getting down the mountain, how do you do that? I mean, it's different than getting up the mountain or putting money away. When you're pulling money out of these vehicles, and it could be all different types. My question to all of us when you have volatility and the market drops, and you have to pull money out because it's an RMD, and if you're 73, just to kind of give you a roundabout percentage, you're going to have to pull out somewhere about 4%. 4%.

SPEAKER_03 6:00

Which is what we hear is what you want to take out, right? That's the rule that we've heard for years. 4%, if that's all you draw, usually you don't run out of money. Do we still think that that's true?

SPEAKER_02 6:10

Well, unless you tell me your inflation number is low and you don't have to pay tax on that money, and your lifestyle is kind of boring, and you watch old reruns of I Love You Lucy, you might be okay with it.

SPEAKER_03 6:21

But you don't like the one where Lucy's stomping the grapes. Come on, you make it. Love that part.

SPEAKER_02 6:25

Love that part, but you can't watch the reruns again and again and again. So you need to prepare yourself like a like a game. We're in this sports game because you never know what's going to be thrown at us. And I want to prepare people specifically for if they need to get advice from us. We have the other workbook that we use: The Advice Matters. It's these are decisions that can change and land you in a situation in retirement that might not be exactly what you thought it was going to be. Volatility, on the other hand, it's a market guide. It gives you the directions when markets change and how to diversify, because we do a lot of that with our clients. We put portfolios together specifically, and we use, and you said something last week. I I hope you remember this. You said, Joe Jakovic, you're old school with an AI mentality.

SPEAKER_03 7:16

Yes, I do remember that.

SPEAKER_02 7:17

Very, very true, what you said. So I remember that, and I truly believe that. We were, I was with uh some attorneys today for lunch, and we had this conversation about my book. I gave him one of the copies of my book and I and I signed my autograph for him in the book. But I explained to him, I said, you know, it's just a sport that we're in. I mean, it changes all the time, like you. You know, you're in the uh the legality issue with clients, but it's always changing. He goes, Yeah, absolutely. And I'm in the tax planning or future tax planning for clients, and it's always changing. And you need to prepare for these changes. Not everyone wants to get in the game with me because it does change, but I'm trying to benefit them on the current information that we have now are able to present the clients easily and make their life better without emotion roller coasters that we all have and shouldn't have.

SPEAKER_03 8:12

What would you say is the biggest change you've seen even in the past year when it comes to tax planning?

SPEAKER_02 8:18

I think the most uh in this case, Roth conversions, when to do that or when to do them the right way, because it's it's not in a vacuum that you do these things. Right. You know, it it's not something that you go, okay, I'm gonna do it and and put myself in a higher tax bracket. No, no, no. You don't do it that way. You look at the standard deduction, you look at how old you are, you look at doing it a little bit every year until 73 before the RMD sets in. And these are the type of things that you do. You also have to consider where do you move the money in from a 401k or an IRA into a portfolio? Do you have some guarantees in these portfolios? Do you have still have growth and risk to these portfolios? You know, some of these vehicles that we present to people, a lot of them are principal protected. So if you're over the age of 65, anywhere between 60 and 70, you could probably pull out anywhere between six and eight and a half to nine percent withdrawal rate. So forget about the 4% rule. And these are guaranteed withdrawal rates for the rest of your life. And these are the things that I talk to people about. What is the most amount of dollars that I could share with you that you want to live the lifestyle that you're accustomed to? Not just live from paycheck to paycheck. Be able to really enjoy yourself when you're in your 60s or when you start the retirement downhill situations that we all looking forward to in the future.

SPEAKER_03 9:51

Do you find that some people actually want to live a more luxurious lifestyle than they're used to in retirement? Like their idea of retirement is more than what they've lived on a day-to-day raising kids and working?

SPEAKER_02 10:02

I think what happens is, Sari, is that you know, going into it, they don't have anyone that's gonna be able to have a conversation with that clearly, openly, and really educate them or at least give them the information that they look to have purposely to address just that. You know, they're afraid, they don't trust anyone, or they don't understand things because it's complicated. I mean, AI made our world super complicated. And what we want to do is be able to really fundamentally show people and share with people information that they can use immediately that will have a major impact on their life and their more importantly, their emotional life. That's the whole importance of a retirement plan. Don't go in and be stressed out because you won't make it past 75. And that's not the game we play. Like I was at the uh at an appointment this morning, and I'm um I'm looking at uh the menu, and I said, I don't know enough. Just give me a cup of coffee and a corn muffin, okay? And I said, Where's my girl, Joan? Mrs. B. He says, she retired. I said, Hold on for a second. She retired. I said, she was only 85 years old. And they're all laughing. I said, I know. I said, Well, what happened to her? Because I know her son real well. He he wrestled with me in high school. I go, what happened to her? She said she finally gave it up and she started to, you know, forget things. I said, Hold on for a second, you just forgot my honey over here. What are you talking about? You're you're not forgetting, just you're forgetting just as much as she was forgetting. But my point to that is 85 years old, she lasted great diner that I go to quite a bit.

SPEAKER_03 11:36

So, really, we should congratulate her. If anyone is listening that knows her, please tell her we said congratulations, but that Joe is gonna miss her and the honey for his biscuits.

SPEAKER_02 11:45

Absolutely. And we and that's the kind of stuff we talk to clients about. We want people to really enjoy themselves. You know, if it's if it's my wife or if it's someone in general working, uh, we want to believe in our heart of hearts, you know, when are you ready to get out? And what are you gonna do? You can only do so much for so long. I mean, you can watch babies around the clock. I don't know if that's the case. You can go to beats for some time from you know, in the summertime. But you want you want to be active, you want to be participating and don't have your brain be schmush by the end of the year or 10 years. You know, you want to be able to be active and participate in the world that we we live in. We don't know how long it's gonna be, but we also know that if you have a good life and you have a good financial plan like we put together, the master plan, you really don't have to worry that much. That's that's what we do. We make sure clients, and by the way, clients come in every year, either in person or we do Zooms. I have one just recently, and uh, you know, been a client of ours for I'm gonna say close to every bit 35 years, and he's always saying the same thing. Joe, we believe in you, we believe your strategies. Now, remember, not everything is perfect. Now, he's in his 60s and he's still vibrant. He had some issues with health-wise, so he had to stop work. His wife got a great profession, she's a now principal at a high school, so she's making really good money. This didn't start out that way, but I had him saving and changing and moving, you know, into Roth, into insurance, and so forth for the longest period of time, and they stuck by my plan. That's what they said. We we stuck by you because your plan was straightforward, it was open, it was very transparent. You shared with us information besides what you've done with the the investments that you've you were a part of. And I was like, you know, that's I felt proud of that. I felt good about that, and they felt good about it. And that's what I do every day. And this job, this guy was, you know, 30 years and he's you know in his early 60s and really still gonna continue to do business with me, and I have done business with his family also. But when you do things like that, Sari, it really makes you feel good, and more importantly, they feel good about the things you talk to them about.

SPEAKER_01 14:09

Securities and investment advisory services offered through Integrity Alliance LLC, member SIPC. Integrity Wealth is a marketing name for Integrity Alliance LLC and is not affiliated with Integrity Wealth. Joe Yakovich is an investment advisor representative and registered representative with Integrity Alliance LLC, a registered investment advisor and member SIPC. Integrity Wealth is a marketing name for Integrity Alliance LLC. Integrity Wealth is not an affiliated company. Opinions expressed on this program do not necessarily reflect those of Integrity Wealth. The topics discussed and opinions given are not intended to address the specific needs of any listener. Joe ML Financial Group does not offer legal or tax advice. Listeners are encouraged to discuss their financial needs with the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results. Fixed annuities are long-term insurance contracts, and there is a surrender charge imposed generally during the first five to seven years that you own the annuity contract. Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation if any of a stock market index. Such contracts have substantial variation in terms, cost of guarantees and features, and make cap participation or returns in significant ways. Investors are cautioned to carefully review an indexed annuity for its features, cost, risks, and how the variables are calculated. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxes, ordinary income, and if taken prior to 59 and a half, a 10% federal tax penalty. Converting an employer planning counter-traditional IRA to a Roth IRA is a taxable event. Increased taxable income from Roth IRA conversion may have several consequences, including but not limited to a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA. Rebalancing reallocating can entail transaction costs and tax consequences that should be considered when determining a rebalancing reallocation strategy.