Compare your way to retirement with a road trip.
You load up your fortune truck with a portfolio of assets, and fuel it with enough income for a pleasant journey.
The goal may be a legacy for your family, maintaining vibrant health, or a visit to the Galapagos Islands.
Then, a tax loophole appears, and shakes you up.
One may not hurt that much.
But, if they become too many, they take a toll on your retirement plan and your sanity.
Therefore, it’s better to include a map for tax planning, so you can avoid these obstacles.
And in today’s episode, you’ll gain an overview of how to bypass the IRS with efficient tax planning, how to reduce your tax liability with your stock portfolio, and why Medicare is a potential tax trap on its own.
Show highlights include:
- Why tax planning isn’t going to make you rich (and what to focus on first) ([1:28])
- The ever-growing tax liability trap most people ignore (and ruin their retirement) ([2:53])
- The “Asset Allocation” method to save thousands in taxes per year ([4:09])
- How to stop the IRS from enriching themselves with you (and have more left for charity) ([5:38])
- The “Tax Harvesting” strategy to reduce your tax liability (with the help of your stock portfolio) ([7:16])
- The pure magic of Roth IRAs for tax planning (and why Medicare is a tax trap for high earners) ([8:22])
Do you want a wealthy retirement without worrying about money? Welcome to “Retire in Texas”, where you will discover how to enjoy your faith, your family, and your freedom in the State of Texas—and, now, here’s your host, financial advisor, author, and all-around good Texan, Darryl Lyons.
Darryl: Hey, this is Darryl Lyons, CEO and co-founder of PAX Financial Group. Thanks for tuning into Retire in Texas. This information is general in nature only. It’s not intended to provide specific tax, legal advice, or investment advice. Visit PAXFinancialGroup.com for more information.
I want to encourage you to text the word “TEXAS” to the number 74868. The number is 74868, where you can speak with an advisor for 15 minutes to see if PAX is a good fit, and it’s a way to meet an advisor with the heart of the teacher and see if there’s a fit. So, we find that to be a non-threatening way to kind of kick the tires, so to speak. [01:11].5]
This specific show, when I talk about taxes, I want to talk about some of the stuff that’s going on in the tax world today, and I’ll probably have to do some spin-off shows because I won’t be able to cover everything. I try to keep these topics at about 15 minutes, because the mind can only absorb what the tail end can endure.
But I find it very interesting. I didn’t grow up with a lot of money, so I’ve been observant about how rich people think about money, and I think I’ve made some pretty interesting observations over the years and drawn some conclusions that I think are true—one of which I’ve found is very interesting is how wealthy people think about money and they often think about their net worth. [01:55].2]
Rich people often think about their net worth, and for those that know, at PAX Financial Group, we like to measure people’s net worth and see this bar chart grow. We like to see, are you paying down debt that helps with your net worth? Are you buying real estate that helps with your net worth? Are your stocks growing that help with your net worth? Are you making good investment decisions? Those are all net-worth ideas. That’s what rich people think about. “Can I increase my net worth?”
But you know what poor people think about? They think about their tax return. I’m not saying the tax return is not worth wrestling with, but to put much emphasis on it is not what rich people do. They just don’t. I mean, it’s almost into lottery-purchasing thinking. Rich people care little about their tax return. They really do. If it’s flat and they don’t have a penalty, that’s good, but getting a tax return, it’s not what rich people think about. [02:53].1]
So, I just want to make sure that you understand how important tax planning is. I’m not talking about tax, like this year, tax planning. I’m talking about thinking 5, 10, 15 years down the road. Now, my undergraduate degree is in accounting, but I’m not a tax expert, only enough to be dangerous. But I’ve always had an affinity towards taxes and I think that’s been helpful as a business owner. I would suggest that any undergrad degree, if a student is struggling, I’d suggest accounting a hundred percent of the time because it translates to almost all things business. You just have to get them through those intermediate courses, which are a real challenge.
But when you understand taxes and you start doing some planning 5, 10, 15 years down the road, you can make significant dents in your overall lifetime tax liability. Yes, we want to reduce our taxes this year, and we’ll talk about some of those things in just a minute. Yes, we want to do that, but, really, long-term, how do we reduce our tax liability long-term?
We’re 55. How do we reduce our tax liability to 75? At 55, you already know time goes by fast. You’ve already recognized that truth that time flies, so you’re going to be 75. You don’t want to admit it, you’re going to be 75 before you know it, and wouldn’t it be nice if you didn’t have a bubble of a tax burden down the road? [04:08].8]
So, this idea of tax planning is thinking of your future self with maturity, knowing that it will come. So, there’s strategies behind this. Let’s talk about some of those strategies. Maybe I’ll get all six of them here, but let’s see how many I get. I think I can.
One of it is just being very intentional about how you locate different assets, where you put different assets. You have your real estate and you have your cash, and then you have some investments, your IRA and your 401(k). Sometimes being intentional about where those investments are at helps. For example, you might own a lot of dividend-paying stocks, and actually, if you ever want us to, we can tell you. We run this report and we can tell you where. If you have an account that’s paying a lot of dividends, we have a way to identify that. [04:57].8]
But if you have an account that’s paying a lot of dividends, then asset location, thinking about asset location is important because you might want to shift those into the IRA, because those dividends are taxable each year, right? Then you could shift your stocks that don’t pay dividends outside your IRA, and just that shift alone could save you $1,000, $2,000 a year. Over time, that’s $10,000, $20,000. A minor move, but one to consider, also consider HSAs as a part of that solution or Roth IRAs, but asset location is a part of tax planning.
Number two, charitable giving. I just heard a statistic just an hour ago, but qualified charitable distributions are blowing up in this country. What does that mean? It means when you retire and you turn 72—now that number has some variation to it. It used to be 70.5. You have the RMD, required minimum distribution—the government now allows you to title that required minimum distribution as a qualified charitable distribution. [06:04].7]
So, it doesn’t go to your bank account. It goes directly to a charity, which is good, obviously, for the charity, and I’m not going to get into the nuances of the taxes on this show, but it has to do with standard deduction and itemized deduction, and maybe we’ll talk about that on a separate show.
But, basically, by sending it directly to the charity versus you receiving it, you reduce your taxable income. Let me just say it that way, very just generally. You reduce your taxable income by sending it directly to the charity, rather than that money hitting your bank account and then you turning around and writing a check. That’s a more expensive way to send money to charity. So, that’s another way to reduce taxable income.
Tax-loss harvesting. We’ve really invested in this last 12 months and it’s been challenging. A lot of people don’t really know and they don’t care, and it doesn’t matter, it’s not really that important, but in the background, we’re having to spend a lot of time on technology and efficiencies. Technology changes all the time, so how can we find the best technology to do something called tax-loss harvesting? [07:01].1]
I feel like we’ve probably invested in some of the best tax-loss harvesting software in the country, but we’re early adopters and so I think we’ll be able to elevate our ability to do some tax-loss harvesting over the next 12 months in a very efficient way.
But, basically, if the market crashes, then you would sell your stocks, get a tax deduction and buy them back after 30 days. If you do it within 30 days, you don’t get the deduction, so you’ve got to make sure you avoid something called the wash-sale rule. But tax-loss harvesting says, “Hey, the market is down. Sell. I want to get a loss and then buy it again.” So, doing more of that is good planning. That’s three.
Number four is retirement-distribution planning. You’re retired and you have the money in your Roth IRA. You have money outside IRAs. You have money in an old 401(k). And you need to take money out of those accounts to live off. Which one do you take first? If you don’t pick the right one, you could find yourself in a tax issue down the road, so you’ve got to kind of map it out. Which one do I take? Do I take from the Roth to live off? Do I take from the non-qualified bucket or do I take from the IRA? [08:10].8]
So, really, it’s individualized, although I do have some rules of thumb on it. I do talk about that in 18 to 80, kind of the tax order, but it’s certainly heuristics and so everyone’s kind of personal. But tax-distribution planning.
Number five is Roth conversions, converting accounts to a Roth. Down the road, when you take money out of a Roth, it’s completely tax-free. Senator from Delaware in 1994, his name was Senator Roth, he came up with this idea of “Instead of me having an IRA that’s deductible, I don’t want the deduction so forget about the deduction. I want the money to be completely tax-free when I retire.”
So, what you would do is you take those traditional IRAs, those old 401(k)s, and you would convert a portion of them. You’d convert a portion of them. You have to pay your taxes on it. But then down the road, you have money that’s completely tax-free, so that’s the fifth way to do some tax planning. [09:00].8]
Then the sixth way is just to make sure you’re careful with Medicare, because Medicare has some gotcha taxes, if you have too much income. You can look online, but there’s an IRMAA surcharge, so you can pay more for your Medicare by having too much income, and that’s just frustrating. If I would have planned, I could have avoided that extra $100 a month that Medicare has cost me, if I would have just been thoughtful about how I take money out.
There’s a couple more, but those are six general tax -planning strategies for you to adopt. Again, an advisor at PAX can help kind of navigate those. But we have to pay the IRS. We just don’t want to leave a tip. And, hopefully, over good lifetime tax planning, you can improve your net worth, and like I said at the very beginning, focusing on your net worth, not as . . . [09:57].4]
Again, you know me as a believer in my faith, my identity isn’t my net worth at all. At all. But the idea of thinking about financial strategy in terms of tax return doesn’t make any sense. So, sometimes I might have a higher tax bill, but because I’ve been thoughtful in my long-term planning, I accept that knowing that my future self will be very happy, or the next generation.
So, consider tax planning today and consider it as a long-term part of your strategy and your dialogue with your financial advisor. I hope this was very helpful today.
One last thing I’ll mention is my accounting professor, the best tax advice he said he could give me. I asked him this, I said, “What’s the best financial advice actually, in general?” My accounting professor, if he’s listening, I just thank you for this advice. I didn’t take it, but I appreciate it. He said, “If you want to be wealthy, you marry rich.” Hey, I appreciate that. Dr. Persellin, I really do, but as a joke. [10:57].4]
I think one of the better strategies for being rich is to pay Uncle Sam less. Stay out of debt. Work hard. Pay attention to that net worth, and all along the way, have a heart of giving.
Thanks for listening today. Again, text 74868, text the word “TEXAS”, and one of the financial advisors at PAX can connect with you for 15 minutes. And remember, you think different when you think long-term. Have a great day.
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