Mail Bag: Answering More Questions from Listeners with Chris Rett

June 16, 2022

Mail Bag: Answering More Questions from Listeners with Chris Rett

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Mail Bag: Answering More Questions from Listeners Show Notes

Every week, our listeners send us questions on YouTube and through email–and every season, we try to answer as many of them as we can. The first time around, we had the privilege of speaking with Chris Rett, CERTIFIED FINANCIAL PLANNER™, and he kindly made time to join us for this episode as well.

While we can’t give perfect guidance for your specific financial situation in an episode of a podcast, we do have a special offer for you as a listener of the Guided Retirement Show. Simply click here to schedule a 20-Minute Ask Anything session with one of our CERTIFIED FINANCIAL PLANNER™ professionals, and we’ll be in touch to help you chart a course toward a smart, sustainable retirement.

In this episode, Chris and I dig into a wide array of topics, including how to accurately estimate your income and taxes in retirement, how to determine which retirement vehicle is best suited to your needs, and a ton of other issues facing people in their pre-retirement and early retirement years.

In this podcast interview, you’ll learn:

  • How to calculate your estimated retirement income.
  • What Biden’s executive order to “do away with money and go digital” actually did.
  • Why the government simply can’t take away your 401(k) and bank accounts.
  • How to determine whether to pay off more of your mortgage or invest that money in the market.
  • The common misconceptions surrounding Roth IRAs.
  • How COLA benefits affect your Social Security income.

Inspiring Quotes

  • “If the right financial planning techniques are applied, a couple with $750,000 could have the exact same income as one with a million.” Dean Barber
  • “Roth conversions look good, but overdoing them can have an adverse effect.” – Chris Rett

Answering More Questions from Listeners - Retirement Plan Checklist

Interview Resources

Interview Transcript – Mail Bag: Answering More Questions from Listeners

[00:00:42] Dean Barber: Hello, this is Dean Barber, your host of The Guided Retirement Show. This is the season finale for Season 6 of The Guided Retirement Show. This is our question-answering session. I’ve got Chris Rett, CERTIFIED FINANCIAL PLANNER™ Professional with me here today to answer all of your questions that you have submitted either through YouTube or through email.

And I want to let you know before we really get started here that as we go through and give advice here and answer these questions, this is not intended for you to go make decisions on because we don’t have nearly enough information to give a perfect answer for you, and that will come out more in my conversation with Chris. Throughout the show, we’ll invite you to go to a link in the show notes where you can request a 20-minute-ask-anything session for you personally with one of our CERTIFIED FINANCIAL PLANNER™ professionals. So, please enjoy my conversation with Chris Rett, CFP Professional.


[00:01:32] Dean Barber: Alright, so Chris Rett, CERTIFIED FINANCIAL PLANNER™ Professional, you were with me on the first episode of Questions from Our Listeners. And so, here we are again. That was Episode 50, I believe. And so, we decided to do this on a regular occasion because we do get a lot of questions. And so…

[00:01:51] Chris Rett: Yeah, a lot of good questions.

[00:01:53] Dean Barber: A lot of good questions. So, let’s get started, Chris. And it looks like our first one comes from Rob in Arkansas.

Answering a Question from a Listener on Retirement Planning

[00:01:59] Chris Rett: Yep. So, Rob in Arkansas says, “Guys, I’m trying to get ready for retirement. I have some savings, an annuity, and two different 401(k) plans. One is through work and the other is a personal one. How can I calculate an estimated income for retirement? I want to find out how much more I need to be able to save and afford retirement.”

[00:02:19] Dean Barber: Alright. So, this is really, I think, the number one question on people’s minds as they’re headed into retirement is, do I have enough? Have I saved enough? Do I need to save more?

[00:02:32] Chris Rett: Correct.

[00:02:32] Dean Barber: And the only way that you can effectively do that is by going into the future, and then coming back to the present. And what I mean by that is you have to first lay out what is your expenses going to be in retirement? You’ve got your necessary expenses, and then you’ve got your discretionary expenses. You need to be factoring in things such as new car purchases throughout the years, potential repairs to homes throughout the years, family vacations, other family vacations.

[00:03:05] Chris Rett: Weddings, education, yep.

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Working with a CFP®

[00:03:07] Dean Barber: You really need to spend some time with a good CERTIFIED FINANCIAL PLANNER™ like Chris Rett here. He can actually walk you through the whole process.

[00:03:14] Chris Rett: Absolutely.

[00:03:15] Dean Barber: Even virtually from Arkansas there, Rob. He can go through where you’re at today, what it is that you need to spend, and then based on all the resources that you have and then based on how you decide to distribute that money, there can be some very effective ways to maximize Social Security, there can be some very effective ways to minimize taxes.

[00:03:38] Chris Rett: Yeah.

[00:03:39] Dean Barber: And so, until you know the answer to all of those pieces, you really won’t be able to know for sure if you have enough and if you’ve done it all right.

Misconception About Needing $1 Million to Retire

[00:03:46] Chris Rett: Yeah. And I think the misconception here, a common one, is that I need a million dollars, I need that nest egg of a million dollars. And that number is unique for everybody because, like you said, everybody’s retirement is unique. Is it single file? Or is it joint file? Or I mean, these tax codes are different. So, there’s, like you said, a lot of moving pieces. It’s not a one size fits all. And we have clients that have a million dollars, and sometimes that isn’t enough. So, it’s not a million dollars, it really comes down to, like you said, income sources and expenses.

[00:04:17] Dean Barber: Right. And you remember, Chris, we did, close to a year ago, a video on retiring with a million dollars.

[00:04:26] Chris Rett: Yep.

[00:04:26] Dean Barber: And we pointed out in that video on retiring with a million dollars that you could have a couple that’s got $750,000 versus somebody that’s got a million dollars, and if the right financial planning and tax planning techniques were applied, that couple with the $750,000 could have the exact same income as the couple with a million.

[00:04:45] Chris Rett: Absolutely.

[00:04:45] Dean Barber: So, it’s not a dollar amount that you have saved. It’s what you do with it in those years getting leading up to and then through retirement, and there’ll be a link to figure out how to watch that video in the show notes as well as if you’d like to. Anybody listening, if you want to schedule a complimentary consultation or even just a 20-minute-ask-anything session with Chris Rett, one of our CERTIFIED FINANCIAL PLANNER™ professionals here or any of our CERTIFIED FINANCIAL PLANNER™ professionals, you can do that also through a link in the show notes.

Answering a Question from a Listener on Policy Changes

[00:05:10] Chris Rett: Absolutely, yep. Great question, though. That was a great question. So, Janet from Missouri says, “My husband saw Biden signed an executive order to do away with money and go digital. Can this happen?”

[00:05:21] Dean Barber: So, first of all, that’s not what happened. It was an executive order to ensure responsible innovation in digital assets. And there’s a lot going on in the digital asset world, the cryptocurrency world. It really has more to do with the application of blockchain technology and how can it be utilized in our banking system? How can it be utilized in our financial system? And one day, things will be more digital than they are today, but they’re still going to have to be an asset that backs that digital currency. It’s like every time I go into a restaurant, a grocery store, a gas station, or whatever, I use my phone to pay. That’s digital.

[00:06:11] Chris Rett: That’s digital.

[00:06:12] Dean Barber: I’m paying digitally. Now, it comes right out of my checking account. And yes, it’s still dollars that are being spent. My feeling is that in the future, there’s going to be much more innovation for business-to-business transaction in that digital world, but it doesn’t mean that the dollar goes away.

Skepticism of the Government Isn’t Unusual

[00:06:29] Chris Rett: Sure. No, and I think that I remember back to our first time doing this, you mentioned Roth for the first time, and people were skeptical, and then the government was behind it. I think, like what you said, it’s more looking at the benefits of what can come out of digital currency rather than something that is to be looked or feared from.

[00:06:49] Dean Barber: Now, if there was somebody that was going to do it, it would probably be Biden. But I just take it, we can remove politics.

Answering Questions from Listeners on Investments

[00:06:56] Chris Rett: Yeah, exactly. So, John also from Missouri says, “I’m receiving a pension and Social Security, but I’m working full time. Can I still contribute to my tax-deferred IRA and my wife’s deductible IRA? I’m not covered at work by a retirement plan. Also, what are the income maximums when filing jointly on my taxes to fund my IRA?”

[00:07:18] Dean Barber: Alright, Chris, you’ve got the cheat sheet there for the income limits for being able to fully deduct an IRA for a married couple. What is that?

[00:07:28] Chris Rett: Yeah. So, if one spouse is covered by a plan, I’m showing that phase out starts at $204,000 combined.

[00:07:34] Dean Barber: And what if no spouse is covered? Still the same, I think.

[00:07:37] Chris Rett: I think, yeah.

Forward-Looking Tax Planning Strategy

[00:07:38] Dean Barber: So, it still would be the same thing. So, the phaseout begins with $204,000. The question, John, would be also, would it be smart to do the traditional deductible IRA? Or would it make sense to potentially use some of the money that you would be putting into those traditional IRAs and using that money to pay the tax to convert traditional IRAs over to Roth IRAs? So, the answer to that question comes, and it really goes back to Rob’s question from Arkansas, how do you maximize what you have? The ability to put money into a deductible IRA doesn’t always make the most sense. What John’s asking really would be part of a forward-looking tax planning strategy to make sure that you’re doing it properly.

[00:08:33] Chris Rett: Yeah. And that’s really a great question to take a peek and what we do a little bit behind the scenes, different from a lot of firms out there that are looking and saying, “Hey, you want to maximize your deductible IRAs this year because it will reduce taxes today,” but we’re also looking at a very tax-friendly environment. So, this is actually a multiyear question that he’s asking rather than just a 2022 question.

[00:08:56] Dean Barber: That’s exactly right because you got to take a look at the whole picture, really, but the answer to the question was $204,000. Alright. But I don’t want John from Missouri to just say, okay, we’ll fully fund those deductible IRAs. You can do that, obviously, but again, through a link in the show notes, you can schedule a 20-minute-ask-anything session with one of our CERTIFIED FINANCIAL PLANNER™ professionals, and they can walk you through, ask you some questions, and then try to get a better idea of whether you should be doing deductible or Roth.

Can the Government Take Our 401(k) Accounts?

[00:09:25] Chris Rett: Yeah. So, Mark from Kansas, “Can the federal government take our 401(k) and bank accounts? I’m hearing this on The Glenn Beck radio show.” Is there any truth to this, Dean?

[00:09:34] Dean Barber: No.

[00:09:36] Chris Rett: Pretty self-explanatory.

[00:09:38] Dean Barber: Well, look, your 401(k) assets are probably the most protected asset that a person can have. They’re even protected from bankruptcy. And so, there are very strict laws around that. Now, if you are breaking the law, you’re doing income tax evasion, and you’ve been found out by the IRS that you’ve done things and you owe a bunch of money and you have money in your 401(k), yeah, they’re going to go after it.

[00:10:06] Chris Rett: Sure. Yeah, but that’s a one-off and that’s deserving. But the government, in essence, is not trying to seize your 401(k)s.

[00:10:13] Dean Barber: No.

Pay Off My Mortgage or Invest for Retirement?

[00:10:13] Chris Rett: William from Illinois, “If you’re in a position where you have the option of paying off a home mortgage or investing that money in the market, which one is typically the best approach to choose regarding the long-term big picture?” We get asked this fairly decent amount.

[00:10:28] Dean Barber: It’s a big question, and the prevailing answer will always depend on the interest rate that’s on your mortgage. So, as an example, if you have a mortgage and you’re headed into retirement, and that mortgage, let’s say, you got a $300,000 mortgage and it’s at 3.5%. Where you got $300,000 in the bank, should you take that $300,000 and just pay that mortgage off? I would say no because the interest rate is so low.

If somebody has recently purchased and they’re getting 5.25%, and what they’re anticipating by the end of the year is a 30-year mortgage being as high as 6.75%, that changes the dynamic quite a bit. Just as an example and this, by the way, is not an investment recommendation for William from Illinois. But the thing is that there are products out there, investment vehicles out there that can do what you want to do to generate the income. So, there are very safe what are called fixed to float notes. And those fixed to float notes will give you a fixed interest rate for a specified period of time. And once that specified period of time is up, the interest rate will actually float.

A Quick Example of Mortgages in Retirement

So, an example of something that I did for one of our clients here at Modern Wealth Management just a few weeks ago was we bought a fixed to float note that would be callable or mature in August of 2024, 4.75% return between now and August of 2024. And in August of 2024, the interest rate would float to be equal to the 5 Year Treasury yield, plus 3.18%. So, the 5 Year Treasury yield today is about 3%. So, if you fast forward and if this was August of 2024, you’d actually be getting paid now 6.18%.

[00:12:26] Chris Rett: Yeah.

[00:12:27] Dean Barber: So, the thing is, I wouldn’t say the stock market is the place to be for something like this. And you need to do something that’s liquid all the time. So, if you change your mind in the future, you can go in and do that. But in most cases, if you have the cash and your interest rates are low, you’ll be able to generate enough income off that cash to actually make the mortgage payment. And at the end of the day, if the mortgage is paid off and you still have the cash and all you do is spend the interest on it, it’s much better for the long-term picture.

[00:12:55] Chris Rett: Absolutely. And you have that flexibility. But ultimately, I think the bottom line is there is a lot of opportunity cost that you’re giving up by paying off the mortgage when you really don’t necessarily need to. Now…

Setting Up an Investment to Pay the Mortgage

[00:13:08] Dean Barber: Because you can create the same cash flow structure.

[00:13:10] Chris Rett: Exactly.

[00:13:11] Dean Barber: And I’ve even set up scenarios in the past, Chris, where we’ll make an investment, and the investment is designed specifically to pay the mortgage. And so, we just do a systematic withdrawal that goes directly to the mortgage company every month. And so, those people don’t have to worry about making that mortgage payment anymore.

[00:13:26] Chris Rett: Yep. Nope, that’s exactly true. So, I think that’s a good point, but also, this doesn’t give us an excuse to overleverage on something that we might not be able to afford in retirement for the sake of saying, hey, opportunity costs, we’re talking about, again, a responsible mortgage that we have the money. Do we pay off the mortgage? Or do we look at some of these other avenues like you discussed?

[00:13:48] Dean Barber: Absolutely.

Answering Questions from Listeners on Taxes

[00:13:49] Chris Rett: So, Karen from Kansas, “Do you have any recommendation for the best resource to search different state tax laws for federal retirement?”

[00:13:58] Dean Barber: I don’t. Do you know of any, Chris?

[00:14:00] Chris Rett: I don’t. No, I mean, we can always look up what the state tax laws are for different states if you want. Again, that could be our 20-minute-ask-anything.

[00:14:10] Dean Barber: I don’t know that there’s one spot to go to that outlines how every single state treat. I’m assuming we’re talking about federal retirement pension benefits.

[00:14:19] Chris Rett: Sure.

[00:14:20] Dean Barber: Now, obviously, you go to the states in which there is no state income tax. That’s a pretty no-brainer.

[00:14:25] Chris Rett: Absolutely.

[00:14:27] Dean Barber: But as far as states that have an income tax that wouldn’t tax your federal retirement benefits, I’m not aware of a site that does that.

[00:14:32] Chris Rett: No, and I know for some of our federal employees, too, they can always go to TSP, and there’s usually a list there that has different states that are more tax-friendly for TSPs, but as a general resource, that would be just, again, a great 20-minute-ask-anything.

[00:14:52] Dean Barber: Yeah, I always do that through a link in the show notes.

Roth Conversions

[00:14:55] Chris Rett: So, Stuart from Kansas, “In what ways can a retired person convert IRA funds to a Roth IRA account as a way to realize overall income tax savings? Is it possible to make such a conversion even if the retiree has no W-2 income?”

[00:15:11] Dean Barber: That’s a good question. And this is a really misunderstood tax strategy. When you’re converting money from a traditional IRA to a Roth IRA, it becomes a taxable event in the year that you do it. And so, what you want to look at is what are the long-term implications of not doing the Roth conversion? How much will the required minimum distributions be in the future? What tax bracket will that put you into the future?

You also want to look at whether or not doing a Roth conversion is going to trigger an IRMAA tax. You also want to figure out whether that Roth conversion is going to cause more Social Security to be taxable. That Roth conversion could also cause capital gains that were otherwise not taxable to be taxable, qualified dividends that were otherwise not taxable to be taxable. So, Stuart, what this really requires is a year-by-year look at your personal tax situation and this is really part of a long-term tax plan.

It All Goes Back to the Financial Plan

And so, you kind of go back to what we were talking about a little bit ago, Chris. What we have to do is we have to draw up the financial plan and we have to understand what expenses are going to be there in the future. We have to then understand what resources you have overall, and then we can actually put together a side-by-side comparison that says if you don’t do any conversions, this is what your long-term situation looks like, this is what your wealth accumulation is going to look like, this is what your tax situation’s going to look like. If you do conversions in whatever amount, it would be something we would talk about.

[00:16:47] Chris Rett: Sure.

[00:16:48] Dean Barber: What does that do to your long-term tax situation? And what does that do to your long-term wealth accumulation? Because ultimately, most people that have retired and have wealth, at some point, that wealth will pass to the next generation. And so, the taxes don’t stop when it passes to the next generation. So, you can’t just look at that in a vacuum and say, during my life, how does this work? You have to say, throughout the life of the investment, how does this work? And how do I get as much wealth transfer as possible?

[00:17:17] Chris Rett: That’s exactly right. I think there is a common misconception when it comes to Roth is I think now, looking at it is we love the idea of no taxation, but we don’t want to necessarily overdo it in a particular year, like you mentioned, all the moving pieces. So, this is unfortunately not just a very straightforward, simple answer. It is very complex. There are a lot of moving pieces. And again, it comes back, we say it again, every situation is unique.

What’s Ed Slott Think About the Roth IRA?

[00:17:46] Dean Barber: And it all comes back to the overall plan. It’s interesting, we just had Ed Slott on one of our episode. Ed, of course, is America’s IRA expert. And I’ve been a part of Ed’s organization now for almost 20 years. He thinks that the Roth portion of the tax code is the very best part of the tax code that’s ever written. And it makes sense in so many circumstances. It doesn’t always make sense, but it does make sense in so many circumstances.

[00:18:17] Chris Rett: It does. Yeah. And I think, too, is one of the things that we didn’t touch on, and you mentioned it, but wealth transfer is that if that is something– I just, unfortunately, met with clients today that their loved one passed and it was all tax-deferred. And they didn’t understand the tax implications of receiving that money and said, well, what ways are there to avoid this? Could this have been avoided? And so, there are.

[00:18:41] Dean Barber: It could have been avoided. The problem is, think about this, the people that inherit money are typically in their 50s, maybe early 60s, and they’re inheriting…

[00:18:53] Chris Rett: High earning years.

The SECURE Act Is Coming for Your IRA

[00:18:54] Dean Barber: They’re inheriting that money in their high earning years, and the SECURE Act that was signed into law here a few years ago essentially now is going to force all of that money out of the IRA within a 10-year period to the beneficiary. So, if you’re already in your peak earning years and now you have more taxable money thrown out there coming out of the IRA because it has to, that money could be taxed at a much higher rate than it was ever deferred at. And so, the opportunity to do some conversions prior to passing that money down where you could do it in a lower tax bracket makes all the sense in the world.

[00:19:28] Chris Rett: It does. And it’s a call to action from the 40- and 50-year-olds out there who are watching this to say, hey, if mom and dad are secure and they have enough money and their intention is to transfer some of the wealth, it may be worth it for them to sit down and say, hey, does it make sense for us to start Roth converting in hopes of transferring this to our kids in the most tax-efficient way? And again, always utilizing our 20-minute-ask-anything.

[00:19:56] Dean Barber: Absolutely. Which obviously is through a link in the show notes.

[00:20:00] Chris Rett: Oh, and then the second part of that, we did skip over that, is it possible to do without W-2 income?

[00:20:05] Dean Barber: 100%. You do not have to have W-2 to do Roth conversions. You have to have W-2 income to make Roth contributions, and you have to have earned income. Now, that W-2, you can be an independent contractor or something like that. As long you have earned income, you can do a Roth contribution, but you can always do a Roth conversion.


[00:20:27] Chris Rett: Absolutely. So, ESPY from our YouTube, “I was forced into early retirement due to my health. My plan is to stay within this year’s 12% tax bracket, which means I can take out around $30,000 for the rest of this year. I have savings, which I used to live on. That won’t work next year. So, anything left, I will roll over my Roth from my 401(k), but are there limits on rollovers? I know there is a limit on adding, but I plan to do that every year until either I kick the bucket or run on a 401(k) plan.” So, a lot of words there.

[00:21:05] Dean Barber: Yeah. So, the two main points here, is there a limit to how much she can roll over from her Roth 401(k)? And the answer is no, there is no limit.

[00:21:15] Chris Rett: There is none, yeah.

[00:21:16] Dean Barber: Now, if you’ve got a 401(k) that’s got Roth portion in the 401(k), that’ll go directly to a Roth. When you do your rollover, if you’ve got pieces in there from a company match or you had pretax or traditional 401(k) options in there, that piece will be rolled over to a traditional IRA. Now, the limit on adding the $6,500 requires income.

[00:21:39] Chris Rett: Piggybacking off of our last question.

[00:21:41] Dean Barber: Yeah, you got to have earned income in order to make those $6,500 contributions. So, unless Espie is planning on getting a job and earning at least $6,500, she will not be able to contribute to that Roth IRA once she retires.

[00:21:55] Chris Rett: Yep, that’s exactly right. So, again, you could utilize Roth conversion there. Again, if you’re looking to maintain a certain tax bracket, that’s why it makes sense to, again, see if it makes sense to do Roth conversions. But you’re absolutely right, have to earn money to be able to contribute that.

RMDs and Backdoor Roth Conversions

JJ from YouTube, “On the Roth conversions episode with JoAnn, so if both husband and wife are in their 70s and taking RMDs, which are required minimum distributions as required and are working, at what point do you consider is it still worth it, not worth it to do a Roth conversion and/or a backdoor Roth?” JJ notes also good point about taxable rate changing when one passes. I think that’s something we should talk about too at the end, but…

[00:22:39] Dean Barber: That’s a great question. So, as far as whether it makes sense to do a Roth conversion and/or a backdoor Roth, we’ll again go back to the long-term plan. These questions can all be answered and they could be answered very, very specifically with data to back up the answer, but until that plan is done, there’s really no way to know whether or not you should start doing a Roth conversion now or whether you should consider a backdoor Roth. That’s a tough question to answer without knowing more about the personal situation.

But obviously, that’s what we do. We’ve got to dig in. And it’s almost like you’re trying to send a note to a doctor and saying, hey, doc, this is the symptoms that I’ve got. Can you send me some drugs to make me feel better? Well, no, we really want to run some tests before we start prescribing anything. And so, that’s really the way I look at our consultation is we’re digging in, we’re asking a lot of questions, we’re understanding more about that person’s personal situation before we start prescribing any type of solution.

Don’t Overdo Roth Conversions

[00:23:55] Chris Rett: No, and using that analogy is a great one, is that everybody runs to Tylenol or Excedrin or whatnot for headaches, but you take too much of it and it has an adverse effect that can be similar to a Roth conversion is, yeah, it looks good and it looks like it could be a potentially great thing, but overdoing it can have an adverse effect.

[00:24:15] Dean Barber: Again, especially when in your 70s and taking RMDs and still working.

[00:24:18] Chris Rett: Yep. But also, the highlight, I think JJ there makes a great point about when you’re in your 70s and one spouse passes away…

[00:24:26] Dean Barber: Oh my gosh. That’s something that almost nobody really considers unless you’re working with a CFP.

[00:24:31] Chris Rett: It’s a tough conversation to have.

Watch Your Tax Rates

[00:24:33] Dean Barber: Well, what happens is you get the rates here. Let’s just take a quick look at that, Chris. So, what happens here is if you’re married filing jointly, and I’m just going to go to the 22% tax bracket, you’re in the 22% tax bracket between $83,551, and $178,150. So, all the money in that range of income is in the 22% tax bracket. But if you’re in the single taxpayer, so you’re going to be a single taxpayer if one spouse dies, your 22% bracket only runs from $41,000 to $89,000, and anything above $89,000 is now to 24% bracket. And if you get above $170,000, you’re going to be taxed at the 32% bracket.

So, you have to figure out, health is a big issue. Longevity of each spouse is a big issue. But if you don’t take into consideration that tax increase that the surviving spouse is going to have, then the plan can blow up or you wind up paying far more in taxes than what you need to.

[00:25:35] Chris Rett: I can’t tell you how many times we sit down with clients, and their biggest concern is making sure that they don’t outlive their money. But what we don’t often talk about, and one thing that we stress test is, unfortunately, one passing away too early. And the stress that that has on a plan.

[00:25:51] Dean Barber: Yeah. And obviously, I’ve been doing this for 35 years and I’ve had to have my share of conversations when somebody passed away. And now, we’ve got the surviving spouse, and here’s the different tax bracket, but thank God we did the Roth conversions when we were able to at a much lower rate. So, now, we can control that tax bracket for the surviving spouse.

Annuities and 401(k)s

[00:26:13] Chris Rett: That’s exactly right. So, another YouTube viewer, BMX Mom asked, “I maxed out my 401(k) and I maxed out my Roth inside my 401(k), can I do a Roth conversion within my 401(k) to my Roth 401(k)? How do annuities affect all of this?”

[00:26:31] Dean Barber: Okay, so annuities really will have no effect on it. And the answer is, yes, you can do a conversion inside your 401(k) from the traditional part to the Roth part. How much you should convert? Again, it will depend on where you’re at in your tax bracket so we can go back to our handy tax guide here. And let’s say that this lady’s income is $90,000 a year. Well, we know from $90,000 up to $178,000, she’s going to be in a 22% tax bracket. So, if you wanted to convert all the way up into the 22% tax bracket, you could convert about $90000 and still stay in that 22% bracket.

So, what you want to ask yourself is, what is my tax bracket going to look like once I do retire and start taking distributions out of my 401(k) or IRA rollover? And is that going to be at a higher rate than the 22%? Or will it be at a lower rate than the 22%? So, again, we’ve got to look into the future to come back and answer the question, should you do it? Yes, you can do it, but the question is, should you do it?

Low Tax Rates Won’t Be Here Forever

[00:27:35] Chris Rett: And you see now the complexities of some of this. Now, we’re forced to ask a question that nobody really knows the answer to, is what are the tax rates going to be here in the next four or five years?

[00:27:45] Dean Barber: Right. And I think we know generally and we can plan for that, but the question, the way they really figure it out, Chris, is through the plan and how much income you want to have in retirement, then what are all the sources of that income and how is each source going to be taxed? And that’s where you wind up getting down to kind of the magic formula. There’s a real art to putting this together and answering these questions.

[00:28:14] Chris Rett: And the final piece, which is also tough and which complicates that, just a straightforward answer is it’s different for everybody. As we can show you on paper, going back to the question on paying off the mortgage, there is somewhat subjectiveness to some of these questions. Now, it’s our job to be thorough and show you on paper what the best decision is, but ultimately, though, our philosophy is arming our clients with that information so they can make really what the best decision for themselves.

[00:28:43] Dean Barber: Exactly.

Taxes on Social Security Income and the Impact on Medicare Payments

[00:28:44] Chris Rett: James Bond, on YouTube, “Two individuals at full retirement age, they both apply for Social Security and Medicare benefits. One has $3 million in the traditional 401(k), and the other has $3 million in the Roth 401(k). Will they be taxed the same on their Social Security? And will their Medicare payments be the same?”

[00:29:06] Dean Barber: The answer is no. They will be totally different. The Roth IRA is magical in this sense, whether it’s Roth IRA or Roth 401(k). So, what happens is on the traditional 401(k) or traditional IRA, every dollar you take out is treated as ordinary income. So, under the rules of how you calculate the taxability of your Social Security, you have to add all ordinary your taxable income to 50% of the total Social Security payments. If that exceeds $32,000, then up to 50% of your Social Security becomes taxable. And if it exceeds $44,000, then up to 85% of the Social Security becomes taxable.

The crazy thing about the Roth is that none of the distributions that come out of the Roth show up anywhere on your tax return. And so, if, essentially, the person has a $3 million in the Roth, he’s going to have a totally tax-free retirement because Social Security by itself will not be taxed.

Watch Out for IRMAA (Medicare Income-Related Monthly Adjustment Amount)

[00:30:22] Chris Rett: Not only that, but you’re not going to face, as you mentioned earlier, IRMAA.

[00:30:25] Dean Barber: IRMAA, yeah, the higher Medicare premiums.

[00:30:27] Chris Rett: And not only that, so again, going back to our previous, we haven’t touched on it that much, but if your full retirement age in about five years depending on what your full retirement age is, one is going to be affected with required minimum distributions, the other won’t.

[00:30:41] Dean Barber: That’s right. So, the bottom line is, if the money stays with inside the plan, yes, Social Security and Medicare will be exactly the same. But once the money starts coming out and you make a good point, Chris, at age 72, you have to start taking the required minimum distribution out of the traditional. There’s not even a required minimum distribution on the Roth side. Our government couldn’t really make this any more complicated. I call it the Full Employment Act for CERTIFIED FINANCIAL PLANNER™.

[00:31:06] Chris Rett: That’s exactly. It keeps good job security for us.

[00:31:08] Dean Barber: Yeah.

Answering Questions from Listeners Social Security

[00:31:09] Chris Rett: Kevin from Minnesota, “How will Social Security Cost of Living Adjustment, also known as COLA, affect me at my age of 64? And I’m not collecting benefits.”

[00:31:20] Dean Barber: So, the cool thing about the COLA benefits on Social Security is once you reach your minimum eligibility age of age 62, the COLA benefits start getting applied to your Social Security amount. So, you’re going to see next year when you get your statement of what your Social Security estimates are, they’re going to have increased by the 5.9%. So, all the way to age 70, that stays in deferment. That’s why a lot of people don’t realize that taking off Social Security is 62 versus 70. In most cases, you’ll get twice as much money at age 70 as you did at age 62.

[00:32:00] Chris Rett: We see three-quarters up to a million-dollar difference depending again on age, how long the person lives, but if you, again, good health and if you plan to be around for a while, we can see dramatic differences in Social Security. So, that is a very important aspect of retirement planning.

[00:32:19] Dean Barber: Great question.

Social Security Survivor’s Benefit

[00:32:20] Chris Rett: So, Julie from Missouri, “My husband is deceased.” We’re sorry to hear about that, Julie, but Julie is 61. She can’t collect Social Security, or Julie is saying, “I can’t collect Social Security on my survivor’s benefit until I’m at retirement age,” which she thinks for her age is 67. Then, whoever has the most benefits would be what I receive, which would be hers. “Social Security told me if I tried to collect on his that they would take that payment every month.” She doesn’t understand that. I guess what I need to do is wait until either she retires at 67 or 70 to collect on her own, or would she just never collect any of his? So, a lot to unpack there.

[00:33:02] Dean Barber: Yeah. And this is something that I’d have to do a little bit of research on to really be 100% correct on this. I believe what might be happening here is Julie is still working.

[00:33:14] Chris Rett: Yep.

What if You’re Still Working?

[00:33:15] Dean Barber: And she’s not full retirement age yet. So, if Julie’s still working, not full retirement age yet, then any Social Security that she would receive would be reduced by $1 for every $2 that she would earn over, I think, the limit is around $13,000 so…

[00:33:32] Chris Rett: It might even be a little bit higher, but…

[00:33:33] Dean Barber: Yeah, but that’s the point. So, if that reduction would apply and based on how much money Julie’s making today, it could be that she could turn it on, but she’s not going to get any of the money because she’s earning too much.

[00:33:44] Chris Rett: Correct. Because the first thing that she pointed out is she can’t collect it until she’s full retirement age is incorrect, is she can start at age 60, but what Social Security may not have relayed to her is because she’s working. So, there is circumstantial here taking place rather than a universal loss.

[00:34:00] Dean Barber: Absolutely.

More on Spousal Benefits

[00:34:00] Chris Rett: John from Missouri, “I plan to take Social Security at my full retirement age of 67. We are planning for my wife to take hers at 62,” her Social Security that is, sorry. “If I die first, does her amount then bump up to the higher amount?”

[00:34:15] Dean Barber: Yes, it does. So, what happens is whether John has started his Social Security or not, if he were to pass away even before he started, his wife will get his if it’s bigger. So, the easiest way to think about the rules on survivor benefits for Social Security is the smaller check always stops, the larger check always continues.

[00:34:40] Chris Rett: And that’s a common misconception that I hear a lot, too, is a lot of families and this goes back to a spouse, unfortunately, passing away too early is okay, we factor in this Social Security amount coming in, but they don’t realize is as one passes, then the lower amount falls off as well.

[00:34:57] Dean Barber: Yep. And that’s something that when you’re doing your planning, you have to take into consideration. Remember how we were talking about the tax bracket creep or the jumping up for the single taxpayer? You always have to understand that the smaller Social Security checks are going to go away. So, it’s not just a dollar-for-dollar increase. I don’t want people to get confused about that, but you need to know what the income sources will be after one spouse passes away to really calculate what the tax burden would be.

Answering a Question from a Listener on Medicare

[00:35:23] Chris Rett: That’s exactly right. Okay, Natalie from Kansas, “Do you have a source for people looking to acquire health insurance prior to Medicare?”

[00:35:31] Dean Barber: Absolutely. We certainly do. We can put you in contact with that individual. His name is Taylor Gardner. He is going to be part of an educational series that we’re doing here and may even be done. I can’t remember, but I know we did it. I just don’t know if we’ve released it yet, but you can message us through a link in the show notes and we will be happy to provide you with Taylor’s contact.

[00:35:54] Chris Rett: Yeah, and we don’t want that to be a reason why somebody doesn’t think that they can retire because they’re not age 65 yet. We have a lot of clients that want to retire really from that, 59 and a half, they can start taking distributions from IRA or 401(k) all the way to 65. It does require some additional planning, but we don’t want that to be a deterrent for somebody looking to retire.

Continue Working or Paying Premiums?

[00:36:15] Dean Barber: Right. And sometimes, people just think, well, I don’t want to pay those premiums. Well, okay, but not paying the premiums, is it worth the tradeoff of continuing to work? In other words, could your plan work if you paid the premiums for those five years or whatever? And if it’s not going to affect your ability to do all the things you want to do in retirement, then retire, if that’s what you want to do.

Don’t just work because you think you have to because you don’t want to pay those insurance premiums, get the plan done so that you can see what does my spending ability look like if I retire now and have to pay those insurance premiums versus if I wait five years, what can I spend then? And am I going to have the health to spend it later on? Because, Chris, we’ve seen so many cases where people, they work and work and work and they save and they save and they save.

Time Is Your Most Valuable Asset

We just lost a client this last week, and he was only 72 years old, didn’t have time to enjoy everything that he and his wife sacrificed for so many years to save. He was always afraid he’s going to run out of money. And I kept telling him you have plenty, there’s no way you can possibly run out of money with the way that you guys spend and the resources that you have. But he was always scared to spend. And so, I think that’s another thing that the plan can do for people. It’s almost like a permission slip. It allows you to say, okay, I can do this.

[00:37:42] Chris Rett: Yeah. No, and again, so many clients come to us, and with such a misconception, which is why we like people reaching out is because that number is a lot different for everybody. And we say, oh, if you– well, it’s always funny to get client’s reaction and say, hey, if you could retire tomorrow, would you? We haven’t done the analysis yet, but we sit down, we made him. Would you?

And a lot of times, it’s usually 50/50. I would, I would. And then we introduce the plan and we show them. Yeah, you could. Now, getting up every day and going to work is a choice. And a lot of people then really sit back and are blown away that, yeah, they can retire a lot sooner than they want. And that feeds into then our health once you get above 60 is our health is our wealth.

[00:38:27] Dean Barber: Well, I’ve seen many cases, Chris, where you give that information, one of the spouses will start crying, like really, we can do that? And yes, you can. And then there are others that like, you know what? Just knowing that is going to make me go to work with a whole different attitude.

[00:38:46] Chris Rett: Absolutely.

The Psychological Part of Financial Planning

[00:38:47] Dean Barber: Yeah. Because if I decide next month, next year, whatever, I’m done, I’m just going to be done because I know that I’m financially stable and I’m there. And that’s what I call financial independence. So, Chris, as an example, I could retire tomorrow if I wanted to. I don’t want to retire, and I love what I do and helping people. I have a lot of energy left and I don’t want to, but I also don’t want to kill myself and sacrifice everything. So, I think that’s kind of getting into the psychological part of…

[00:39:23] Chris Rett: Financial planning, which is a really, really big deal.

[00:39:26] Dean Barber: Yeah. We ask a question in meetings with people. It’s not really a question, it’s a series of questions that we consider it to be a prioritization exercise where we start talking about what are the most important things in your life.

[00:39:40] Chris Rett: Because it is different for everyone.

[00:39:42] Dean Barber: Yeah, and you know what’s interesting? I don’t believe we’ve had one person ever say that my money is the most important thing in my life. It generally has something to do with how they want to live and things that they want to do and people that they want to spend time with and those types of things. That’s really what people need to focus on. That’s my important stuff. Okay, do I have the resources to be able to do that stuff without working? If you do, then you’re financially independent, and work is a choice, like you said.

Finding Something New in Retirement

[00:40:10] Chris Rett: Absolutely. How many people do you know that then retire from their job, that maybe was a stressor to then start something that they’ve always wanted to try? Say, hey, I’m not ready to just retire and…

[00:40:23] Dean Barber: Do nothing.

[00:40:24] Chris Rett: Exactly. But also, hey, I’ve always wanted to take a leap and do X, and now that’s the comfortability of being able to do that.

[00:40:32] Dean Barber: Again, that’s when we go through that prioritization exercise, a lot of times, we’ll see where one spouse will turn to the other. So, I didn’t realize that that was important. I didn’t know that that’s something that you wanted to do. And it becomes a very enlightening experience, but that’s all part of the planning process.

[00:40:49] Chris Rett: Yeah. And the flip side of that, too, is if for our clients that maybe aren’t financially independent too is we know the areas that we need to improve to get them there.

[00:40:59] Dean Barber: Chris, thank you so much for joining me here on our episode answering questions from our listeners.

[00:41:02] Chris Rett: Thanks for having me.


[00:41:04] Dean Barber: Don’t forget, a link in the show notes will get you to a 20-minute-ask-anything session and also access to any of the resources that we talked about today. Thank you so much for joining us.


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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.