Ken Moraif
Hello everyone, and welcome back to the Retirement Planners of America Podcast, where we try to have more fun than a human being should be allowed to have when talking about all this boring financial stuff. And I am your host. Ken Moray from the CEO and founder of Retirement Planners of America and our we work with people who are over 50, who are retired or retiring soon, and our goal is to help you to retire and enjoy your second childhood without parental supervision. That’s what we call your retirement, and part of that is to make sure that you don’t pay too much in taxes, because that could impact your ability to enjoy that afore said second childhood. So I’m gonna bring my Chief Investment Officer extraordinaire into the conversation, Jordan, how are you doing? Jordan Roach, how are you doing?

Jordan Roach
Doing great. Another one on taxes. I think,

Ken Moraif
yes, you know taxes. I hate taxes. I don’t want to pay a single dollar more in taxes than I have

Jordan Roach
to. I think we get asked about taxes more than about anything? Yeah,

Ken Moraif
and you know what? If you do it right, you can, if you do it incorrectly, rather, you could pay a lot of taxes. So we don’t want to do that. So let’s start off with just a basic question, what are the most common mistakes that retirees make when it comes to their their withdrawals? Well,

Jordan Roach
I think there, there are two things that are related. One is you have a misunderstanding between the tax treatment of different types of accounts. So we’re pulling money, maybe aggressively, out of certain accounts, and all that money comes out as ordinary income and suddenly pushes people into brackets they didn’t think they’d be in. Some of that could also trigger Social Security become more taxable than it would have been had you delayed. You don’t want that? No, that’s not a good deal. I’ve seen that one. I’ve seen even a good, really aggressive Roth conversions. Thinking a good thing, but then it turns into a bad thing, because it pushes you in a new bracket, so you’re paying more on your Medicare and all kinds of That’s exactly right. So usually not understanding the taxation different types of accounts.

Ken Moraif
Okay? So what you just said, basically, is that we should think about how to sequence where we’re going to get our money from during our retirement if we’re going to get withdrawals. Yes, absolutely right. So let’s go through that

Jordan Roach
So traditionally, then everybody’s different. But we have, you know, a couple sources of retirement accounts. You have your traditional kind of 401, K, traditional IRAs. Those dollars, money comes out as ordinary income. You have sometimes tax free accounts, whether Roth IRAs or municipal accounts, and then you have brokerage accounts, taxable accounts. And so they’re all taxed differently, but the traditional look on how we would do that sequence withdrawals would be taxable accounts first, right? We can push off. Then our tax deferred accounts let them grow tax free, tax deferred until maybe minimum withdrawal age, which is in their 70s, and then you’re going to save your Roth dollars for last. And that traditionally, is how we would sequence things. But again, this can change between the balance of those types of accounts, income brackets that we’re currently in, and all your needs.

Ken Moraif
Yeah, I’ve seen people, you know, they’re taking money out of their IRA because they don’t want to touch their brokerage account, and what they’re doing is they’re paying taxes way more than what they would have if they took it from their brokerage account instead. Absolutely. So that interplay is super important. And you know, it doesn’t sound like, you know, it might make such a huge difference, but if it saved you even, you know, $1,000 a year in taxes by the sequencing being correct. And you know, hopefully you live 30 years in retirement, you’re talking about $30,000

Jordan Roach
used for trips, for kids, education, for Medicare, premiums, like those things.

Ken Moraif
A lot of things that we could do with our own money, that I think we could do better than what the government will do with it, right? So, so how does it? What about Social Security? Obviously, that’s a huge part of most people’s retirement planning. So how does, how do withdrawals affect the taxation of Social Security? Well,

Jordan Roach
the one thing is, again, you know, when you were taking Social Security, it’s about the timing of it, and depending on the bracket you’re in, and seeing how much of your social security payment becomes taxable based on your other distributions. And so we always want to be very careful there, because I’ve seen this a lot, where social security goes from a non taxable state to all of a sudden, a lot of it’s taxable. Yeah, that’s a problem. And if

Ken Moraif
people aren’t careful, they could get into a situation where 85% of their social security

Jordan Roach
benefits could be easy. And to get to get to that number, it takes a very little amount of distribution income to cause your taxation to go from zero to now, 85% of it is taxable, not taxed at but it is

Ken Moraif
tax. And by the way, ladies and gentlemen, we have a fantastic podcast on the taxation of Social Security that I think you should watch that explains that in some detail. So, okay, well, what about large. Distributions. You know, in one year you take a large withdrawal, there any risks with that?

Jordan Roach
There can be, again, this is gonna be, depending on where you’re gonna take withdrawal from. Can we use a Roth account, or this is gonna be tax man’s gonna be involved, or is this all coming out of a qualified account, or an IRA, or 401, K typically, if we can, we like to straddle big distributions, big withdrawals over multiple tax years, because if we don’t, let’s just say, all of a sudden we want to do something fun, take a $25,000 trip, and it’s coming out of an IRA well, that can trigger cascade of, you know, cascading problems where we have now it’s more of our Social Security’s taxable. Medicare premiums will go up, and then again, this is all dollars, just and then your tax bill goes up. So it can be a problem.

Ken Moraif
I can tell you, there is nothing that annoys our clients more than when they find out that that their Medicare premiums went up to worse, or the taxes, you know, it’s like, where did that come from? Yes, and it’s because you did your withdrawals incorrectly, and you forced yourself into the whole Irma world, which we won’t get into and other places where suddenly you’re paying a lot more on your benefits, your Social Security and other things than you’d plan. Let’s talk for a minute about the greedy, unwashed, undeserving errors that most of our clients have. You know, their kids or grandchildren, and you know sometimes like waiting, depending on how you do it, like, for example, if I was one of the aforementioned greedy on washed I would love to inherit a Roth IRA. Wouldn’t that be awesome?

Jordan Roach
It’s a great point. So we have to balance and sequencing withdrawals. It’s the needs, right? Of the actual savers, the investors, the clients first. There may be a legacy or estate planning needs, yeah. And so sometimes it may actually might make sense, depending on how much they’re one trying to take care of the next generation of taking those IRA withdrawals early and passing on Roth accounts, passing on brokerage accounts, because those have much favorable rules than

Ken Moraif
IRAs, traditional IRAs. And by the way, ladies and gentlemen, I was only kidding about your heirs being greedy, unwashed and undeserving, because I know that you’ve hosed them off, so they’re probably pretty washed at this point. So please don’t be offended from by what I said. All right, so let’s talk about Top Tips for a retiree who wants to maximize their after tax withdrawals. What do you think that would be? And again, this is a self serving question, of course.

Jordan Roach
Well, I think one thing is, you know, work with maybe an advisor that can help you model a numerous situations on sequencing different types of draws in a blend and maybe between different accounts. So what that does to your tax bracket? Because this is about tax bracket management, yes, and so somebody helping eyes on of here’s where you are now, and depending on the accounts we’re pulling out of. What does that do for how you’re pulling across accounts, huge? How does it fix Social Security, Medicare, all those things,

Ken Moraif
and you just reminded me when you mentioned tax bracket management. One strategy that you could use is to drain your IRAs and keep yourself within the same tax bracket, so that when you’re in your 70s and you have to take required minimum distributions, you could reduce your distributions then and reduce your taxes significantly, yes, and so understanding what tax bracket you’re in and the withdrawals from your IRAs, that’s a very important strategy as well.

Jordan Roach
I mean, that’s a great one, where I’ve seen where, you know, you have clients coming in and they have very sizable IRAs. Well, those IRAs you think are yours, but they’re not. The government’s gonna have control of you starting the same starting this as a liability attached there is, yeah, so sequence those early so that you’re not forced to take distributions you might not even need later, and pull you into brackets and give more money away to the government. You don’t want to be doing very, very important. So I think understanding, you know, working with somebody to look through this, getting, understanding what is currently the balance between all your different types of accounts, and what could that imbalance create? Over a 10 year runway? Hugely important.

Ken Moraif
Well, Jordan, thank you for that insight. Well Well done. So, ladies and gentlemen, like I said, we try to have more fun than a human being should be allowed to have when talking about all this boring financial stuff. So I hope you did, in fact, have more fun than you should be allowed to have. And thank you for watching. Please like and subscribe, and I hope this podcast found you healthy, wealthy and wise, and we’ll talk soon.