Minimizing Taxes In Your Retirement Accounts

I want to talk today about tax planning and how it relates to investing. So we often think, let’s put it this way, in our financial life there are really four quadrants. 

There is the tax planning quadrant, then we have cash flow, which is kind of your income, investment planning, and then estate preservation. What happens a lot is people will focus on whatever area they’re in, so let’s just think about investing, but the fact is whatever you do with investments can affect the other quadrants. It can affect your income and it definitely can affect your taxes. 

So, we really want to come and have a full approach, right? So when we’re looking at the entire picture it’s coordinated, all four of those quadrants need to be coordinated and working together to really get what you want. You want to make sure your plan performs the best and is efficient in all areas. 


Today we’re going to talk about tax planning as it relates to investing and there are really two sides to this. We have some great guests and have broken this segment into two parts.


Moving on to Part 2 we’re going to switch gears a little bit. I’m going to come over to you, Neil. 


I know that your firm focuses a lot on Roth IRAs and retirement vehicles that are there and is the most tax-efficient with them. 


To start off, why don’t you tell us a little bit about what you do?


Neil Wilding:

Yeah, thank you, Michelle. I appreciate the opportunity to be here with you. 


I am kind of a student of this industry. I grew up in this business and I’ve been working with financial advisors like you for 25 years now. 


I started this business where I was a student of the markets and really tied to asset allocation and getting the most out of individual securities. But then as clients started to retire and as I worked with those advisors, more and more, I started to realize a lot of these clients had done a nice job of saving.


They saved mostly in tax-deferred instruments like 401K’s and IRA rollovers and have done a really good job of building diverse portfolios. But then when they retired, all of that money was taxable, and so I realized there was an opportunity there. I noticed I had never really thought about what the IRS’s role is in retirement.


Because of that, I partnered with a gentleman by the name of Marty Ruby. Marty is an actuary, by the way, so I had these thoughts that in concepts that like OK, I know clients can save money on taxes and if we start looking at taxes in a certain way, but I wanted to bring an actuary into my business so that we could actually quantify that and so that’s what we did. 


We built a business where we work with advisors like you and your clients to help clients look at taxes, not just in a micro, not how can we save taxes this year, but how can we save taxes over a lifetime? And that’s really what we’ve focused on here. 


How Can I Reduce Taxes On My IRA?

Michelle Bertram: 

I think anybody who is an advisor has seen this. 


Somebody retires and maybe they have a large amount in IRA’s, but they don’t need it for income right away. Then all of a sudden at age 72 they start getting these RMDs and they’re like, “What the heck? I don’t even need this money,” and their taxes go up. 


Sometimes it can affect Medicare, but it can really affect lots of things, right? 


So it becomes a problem later, but what we want to do is try to plan it now and think about it ahead of time because there are fewer things we can do. 


Tax Planning Quote - Bertram FinancialThe longer we wait, there are fewer things we can do to reduce it, right? So I know Marty kind of wrote a few books on that and you guys have some software, so let’s talk about why you think it is important to look at the taxes on IRAs at the macro level? On the lifetime taxes versus this year?


Neil Wilding:

Well, I think it’s kind of looking at taxes through a different lens because you know, so many people are just focused on the now and they’re focused on this year and how can I save taxes this year? 


And if that’s the lens that we’re looking through, then many times that’s going to be, well, it’s just deferral. Let’s just put him off until the next year. It makes perfect sense until the future becomes now and I’ve deferred all those taxes and now I have to start spending money and everything is taxable. 


Anytime something’s on sale, right, people will line up to buy it. And that’s really where we have an opportunity. 


Now, taxes are at all-time lows. They’re historically low, they’re artificially low, and we know at some point they’re going to be going higher. Well, maybe there’s an opportunity now to take some of that money out of my raise and really reallocate some assets into tax-free instruments, and so that allows us to pay those taxes now while they are a known quantity and get them out of the way. 


Then we can immunize those assets from the IRS going forward. When we start looking at things that way, we start to realize we have a tremendous opportunity to take some of that action. It certainly does mean paying some taxes now, but we want to do that because we’re going to get him out of the way now while taxes are low. 


That way when we use them later on down the road with all of that additional growth and if we retire into a different tax environment, then we’re immunized from at least that part of the portfolio. That type of macro tax planning helps do that. 


Investment Quote - Bertram FinancialMichelle Bertram: 

Right and I think you said a couple of things that are important. One is, taxes are at an all-time low and I think we all intuitively know that, but everybody thinks they pay too much in taxes, right? 


I think Arthur Godfrey says it best, “I don’t mind paying my fair share, but I think my fair share is half the price you know.” 


When we’re thinking about this, it’s hard to realize that we are in a low tax rate and they probably could go up. So I think everyone would probably agree that, yeah, they’re going to go up in the future so now is the time to play. Plus, we know what taxes currently are, right? We don’t know what they will be like in the future. 


The probability is there going to be higher, but we don’t even know exactly what that looks like. 


The other thing you said, and I think is really key to point out,  is I think sometimes people get into their head that they have to change everything. 


They think that they have to take their whole IRA and you hit a point there that I think is really good. To reiterate that it’s really a plan and maybe taking a portion of it. It also depends on the overall situation. Do we need to take this? And we’re going to create? 


In the future, right like tax-free income? Or is it something we don’t ever need? 


Or we don’t think we’re going to need that to go to our beneficiaries at some time but will grow tax-free in case we do. There are a couple of ways to look at it. 


Neil Wilding:

In that direction, Yep. 


How Do I Reduce Taxes In Retirement?


Michelle Bertram: 

So you have some software that does this and I think that’s really great because it puts down numbers for people. 


Could you talk a little bit about it and what your thoughts are when you’re looking at how much you can change and what vehicle you use to do so?


I mean we all know about a Roth, but is there something better that we could look at? 


Neil Wilding:

Well, I think you know when we start to think about taxes in a different way, I think it’s always important to understand the opportunities both conceptually and from a numbers point of view, right? That’s where I said it was important. Bringing an actuary into the business allows us to be able to build some software that’s available exclusively to advisors like you.


We can now calculate the role of the IRS over someone’s lifetime, right? So we can look at any pool of assets, whether they be taxable assets or tax-deferred assets, and we find a lot of those assets nowadays that have been just deferred taxes in those tax-deferred vehicles. What we can do is just calculate the IRS’s total roll in those assets over your lifetime. 


If you have a retiree then we can look at whatever their assets are. We can just look at what the total tax bill would be if they just stay put and stay in those tax-deferred instruments and take those RMDs and see how much taxes we really pay. We quantify that. That’s where we really start to get shocked. 


You know the current value of your IRA. You might have a higher tax bill on that than it is to work today because all of that growth is taxable.


So what we can do is put you down to maybe two different paths and kind of analyze what the tax bill would be if we just stay in our tax-deferred accounts or what the tax bill could be if we take action now and maybe pay our taxes now and kind of get them out of the way. 


The software just looks at that and provides an analysis level on taxes that people really have never had before. 


I think you know a lot of CPAs can kind of calculate where your taxes might be in this year, but I think just by looking at them through a different lens is what the software allows people to do.


What that does is it, you know, for a portion of the assets you know, it’s really more of like a rebalancing strategy here.


What a lot of clients come to see is when they look at the reports they see that maybe they’re heavily weighted towards tax-deferred instruments. What they need to do is reallocate a portion of those assets into something tax fee as you mentioned.


You know, a lot of people are doing Roth conversions right now, which can really make great sense. But there are other instruments out there as well, and as you know, there’s actually something called index universal life. It’s a life product, and by using a life insurance chassis, what it allows you to do is to operate in that tax-free realm of the tax code, which allows people to pay their taxes now, while there are known quantities.


Then they put that money into something tax-free like an indexed life product and so that hedges the taxes for you. Get some out of the way now and then any growth inside of those would also be tax-free.


It’s a nice arrow in the quiver when you’re looking at overall portfolio construction. Still plenty of room for managed accounts, managed assets, annuities, and a guaranteed income type product. 


But what this does is it helps balance out, right? So if you have a portfolio of a managed account, what you’re doing is you’re building your mitigating risk through allocation and in growth that way, and then I know you have an annuity product that you’ve offered to your clients. That mitigates income risk and making sure that we have a paycheck for life and for your clients. 


By doing this and taking this extra layer of diversification. You help mitigate that tax risk and so you have a complete picture here with asset allocation and mitigating the market risk and you have income risk mitigated. And finally, you’ve got now some tax risk mitigated. 


Michelle Bertram: 

Yeah, you’re really just pulling all those four quadrants we talked about together and that’s the whole point is to have that efficient plan. We have some over here for income that we want to be guaranteed and we might take income from some of what we converted. But you know, we have our income part. We have everything we’re doing. 


You need to be in the market and reduce risk there and then the tax planning piece and you send life insurance. 


I know sometimes people when they hear about life insurance they think “death insurance” like they think it only matters if I die.


I’ve said this lots of times, but life insurance has a lot of living benefits. You can create it so that you can take the income or you can have it available, but there is that component to that. 


If it goes and it passes to the beneficiaries, not only is it tax-free in your lifetime, if you need it but instead of giving them the money, it’s the IRS who wins big.


So it’s like they’re passing the kids a big tax burden. By utilizing some of the tools they can create the income tax efficiency now and also whatever is left to the kids. So we kind of pull data to that what’s left is really going to the kids and not to the IRS, right? 


So whether they need it or not, it ends up being a win-win-win, right? Like when if you need it you can get it back tax-free and if you don’t, it’s going to go to the beneficiaries tax-free.

Then if you needed it for long-term care or something like that, a lot of those have some additional features where you can get more of the death benefit as well. 


I just had to put that out there because I think a lot of times people think that life insurance just means death insurance. 


Should I Convert To A Roth?


That last thing I want to talk to you about is we’re talking a lot about people who have built a lot in the IRAs, which would be a lot of our clients, but let’s say we have somebody who is trying to figure out if they should max out their 401K. They might have 10 years left of savings or just start out, but do you have some other resources on that side too? Do you have a tool that advises on how I should be saving?


Neil Wilding: 

Yes. What it allows you to do is just kind of make realistic reasonable projections on both sides of the equation so you can look at the options that you have inside your 401K or your existing retirement account. You certainly want to contribute up to the max. 


If you’re getting a match, you certainly want to take advantage of that. That’s free money. But anything beyond that, there are some opportunities to start to save tax-free.


What our software will allow you to do with your clients is just make realistic, reasonable growth assumptions and tax assumptions to be able to compare the two instruments and say OK, does it make sense to overfund my 401K beyond just the match, or does it make sense to look for some other options like Roth or maybe even some of that index life stuff that we’ve talked about, to really start to build a tax-free component to my retirement plan?

When you can do that while you’re still actively saving, then we don’t go through the conversion process. By the time you go to retire, you can actively select which instruments we’re going to use to satisfy distributions based on your current tax situation. 


It just gives you a nice way to balance out your market risk., balancing out your market risk. Who is the mitigation of allocation risk, income risks, or what are some of the tools that you have there? 


And by looking at some of these tax-free instruments, allows you to start to build that new layer of diversification, which is some tax risk for all clients. 


Michelle Bertram: 

Right. I just thought it was important to talk about that. I know that I use life insurance a lot for my own retirement and trying to get younger people to think about it too on how they’re saving. 


You mentioned Marty’s got a couple of books out there and I always joke when I give them to people or tell people to get them. It’s called The No Compromise Retirement Plan for those of you that already have the money and IRAs. 


For those who are trying to think or save, he has a book called The New Rules Of Retirement. While he’s an actuary, the books are very easy to understand and reader-friendly.


Maybe you had a lot to do with that Neil, I don’t know, but they’re an easy read in my opinion. 


Neil Wilding:

Well, that’s the point, right? Like the whole idea is to take the complex situation, break it down to something simple, and we always say you can knock that book out. Each one of them in about an hour. 


It takes me more like 2 hours since I’m more the simpleton. So maybe I am the one that simplified it a little bit. 


Michelle Bertram: 

We say he must be an actuary with a personality because not all actuaries have very relatable personalities. 


Well, thanks guys for sharing today. I appreciate your time and anybody that has any questions, make sure you schedule a call with us and we can always schedule a time to review your personal portfolio, see where it’s at, where the taxes are, and if you do have that big tax burden already. 


If you’re trying to de-risk, then let’s do it the smart way. 


Same thing with Neil and his software. The team will help and we can do some analysis to see what the lifetime tax might be, the best way to reduce, and possibly diversify.


Not just in investments and strategies but in taxes, but how things are being taxed.


So make sure you schedule a call. Thanks, guys for joining. I appreciate your time.

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