Tax Planning Strategies with Marty James

August 15, 2022

Tax Planning Strategies with Marty James

START PLANNING Subscribe on YouTube

Sign up for our Weekly Newsletter Share this Episode

Tax Planning Strategies with Marty James Show Notes

We talk about tax planning strategies a lot at Modern Wealth Management, and with good reason. There’s a misconception that tax planning strategies are only applicable for the ultra-wealthy, but that’s far from being true. To help me convey that important message, one of my good CPA friends, Marty James, is joining me on Guided Retirement Show.

In this podcast interview, you’ll learn:

  • The goal is to not pay the least amount of taxes over one year, but over your lifetime.
  • When the best times are to do a Roth conversion
  • The role Social Security plays when you’re looking at tax planning strategies
  • Why it’s critical to have tax diversification

Inspiring Quotes

  • “I don’t care who you are, there’s something that can be done to make your situation better through tax planning strategies.” Marty James
  • I think some people play the game of maybe waiting too long to begin the Roth conversion. They wait until they’re on Medicare. And, then the IRMAA tax that you mentioned really comes into play. The IRMAA tax tells you how much your Medicare premium is based on your total adjusted gross income. If you’re doing a big Roth conversion, it’s making your adjusted gross income really big. You’re paying taxes on the conversion, and then you could also then cause your Medicare premiums to be higher, which is just an additional tax.”  Dean Barber

Interview Resources

Interview Transcript – Tax Planning Strategies with Marty James

[00:00:24] Dean Barber: Welcome to the Guided Retirement Show. I’m your host, Dean Barber. Today, we’re going to talk more about tax planning strategies. I’m with Marty James of Martin James Investment & Tax Planning. It’s going to be a great conversation. We’re going to travel through tax planning strategies, not for the ultra-wealthy, but just for the average American. And as you’ll learn from Marty, tax planning strategies are critical. But to have a proper tax plan, you need to have a financial plan done first.

[00:00:53] Dean Barber: Before we hop on today’s episode, I would remind everyone that you can access the same financial planning tool we use for our clients, all on your own time and all from the comfort of your own home. All you need to do is click the “Start Planning” button below and you can visit the link in the show notes, click the Start Planning button below to start building your retirement plan, no cost, no obligation. Please enjoy my conversation with Marty James.


Meet Marty James

[00:01:14] Dean Barber: Marty James is the founder and the owner of Martin James Investment & Tax Management. Marty, welcome to the program here. It’s exciting to talk to you. Tell us a little bit about yourself so that everyone can have an idea of who we’re talking to here.

[00:01:32] Martin James: Well, thanks for having me. I started my practice in 1986 and have continued to grow since then. We have nine employees now. We’re a CPA firm, but we really focus on the tax planning strategies and the wealth management and financial planning side of the business. We don’t do a lot of traditional CPA services. We don’t do audits, financial statements, and things like that. If a client needs that, we have other CPAs we can refer that out to. But our focus is tax planning strategies and trying to get people to keep as much as they can.


The Goal of Tax Planning Strategies: To Pay as Little Tax Over Your Lifetime

[00:02:15] Dean Barber: Marty and I know that as long as we live in the United States and we have money or make money, taxes are going to be a fact of our lives. We don’t focus on tax planning strategies so that you’re saving money on taxes just in a given year. It’s about creating a structure so that you can pay as little tax as possible over your lifetime.

So, let’s start from the very beginning. I want to know that you’re on the same page as I am, and if you’re not, that’s OK. I believe that the only way that a person in your role as a CPA can develop good, effective, long-term tax planning strategies is by first having a comprehensive financial plan done. Would you agree with that?

[00:03:00] Martin James: I agree. The key word you said there was lifetime. The thing you need to look at no matter what tax planning strategies you’re doing is their cash flow. What’s it going to look like? Can they pull this off? You need to have the financial plan part done to see the cash flow and say, “OK, yep. This could work.” Then, you dive into the tax plan to see what you can do to make this better.

RMDs and the Roth

[00:03:33] Martin James: It might start off where typically you might do a 10-year tax plan. That’s especially the case for people who are trying to run them up to Required Minimum Distribution age. See what it might look like. Then, of course, there are Social Security benefits. What are those going to look like? Then, you move forward from there.

That’s how you develop your Roth conversion strategies, or whether I should be making Roth contributions in my 401(k) or traditional, or a mix of the two. Tax planning strategies look at a lot of different factors, but it starts with that cash flow plan, the comprehensive financial plan. That identifies a lot of things, and you know where to start.

Tax Planning Strategies Aren’t Just for the Ultra-Wealthy

[00:04:11] Dean Barber: So, Marty, let’s get something out of the way right up front here. I think that a lot of people believe that tax planning strategies are only for the ultra-wealthy. They think you need to have millions of dollars for tax planning strategies to do anything for them. What’s your opinion on that?

[00:04:29] Martin James: That is just so wrong. I don’t care who you are, there’s something that can be done to make your situation better through tax planning strategies.

[00:04:43] Dean Barber: So, let’s say someone has $500,000 saved and they’re 10 years or so out from retirement. Tax planning strategies can help them create the right structure for the distribution strategy in retirement. It’s important to make sure that those distributions in retirement are as tax efficient as possible so that you’re keeping more of your own money.

[00:05:08] Martin James: Correct. When you think about it, the person who is super wealthy compared to the person with $500,000, that person with a $500,000 has a lower margin of error because of the dollars involved. That’s why it’s even probably more important for those people.

Click Here to Read More

The Power of the Roth IRA

[00:05:25] Dean Barber: Interesting point. I love that. So, Marty, you talked about a couple of things earlier regarding your tax planning strategies. One of the things that you mentioned was Roth conversions. The Roth IRA is my favorite investment vehicle from a tax perspective. I think most people should know by now that the money that’s in your Roth IRA is all yours. And if you’ve held that in there for at least five years and have attained the age of 59 1/2, that money is all going to come out tax free.

There are a lot of other benefits to that, but I don’t think people really understand how to do a proper Roth conversion calculation. And I don’t think that a CPA can do a proper Roth conversion test and find out whether that’s the right thing to do unless they’ve already completed the plan. There are so many other parts of the person’s financial situation that are going to dictate how much money should be converted to Roth, if anything, and then when should it be converted.

The Relationship Between Roth IRAs and Social Security

[00:06:29] Martin James: Exactly. These other factors that show up in that plan are like when Social Security kicks in. That’s going to impact how much I can convert to Roth in the later years. Then, there’s your IRMAA tax. I’m not talking about that little old lady in the corner, but IRMAA for Medicare.

[00:06:48] Dean Barber: Let’s first discuss why the Roth IRA plays really well with Social Security?

[00:06:58] Martin James: We have this concept called provisional income. Determine how much of your Social Security benefits are going to be taxable. Take all your income, plus even your tax-exempt interest and such, and come up with this thing called modified adjusted gross income.

You’re going to use that, one half of your Social Security benefits, and if that number hits a certain level, depending on whether you’re single or married, then that determines whether you’re going to pay taxes on your Social Security benefits.

[00:07:28] Martin James: That’s always kind of a game. So, when you’re in that phase out up to that, you can pay taxes on up to zero on it, or up to 50% of it, or 85%. You’re going from that zero to that 50%, so every dollar of additional income is really like a $1.50. Or if you’re on up into that 85%, it’s like a $1.85.

When you take money out of your Roth account, it doesn’t go into that provisional income calculation. By doing the Roth conversions early, that’s going to reduce your future Required Minimum Distributions out of your traditional IRA. That could have a big impact on how much in taxes you’re paying on your Social Security as well as other things.

What Can Happen If You Wait Too Long to Begin Roth Conversions

[00:08:16] Dean Barber: Right. I think some people play the game of maybe waiting too long to begin the Roth conversion. They wait until they’re on Medicare. And, then the IRMAA tax that you mentioned really comes into play.

The IRMAA tax tells you how much your Medicare premium is based on your total adjusted gross income. If you’re doing a big Roth conversion, it’s making your adjusted gross income really big. You’re paying taxes on the conversion, and then you could also then cause your Medicare premiums to be higher, which is just an additional tax.

[00:08:52] Martin James: Right. And if you look at the increases in the Medicare premiums, the base rate went from 148.5 to 170-something this year. Those are huge increases. And I think we would expect to see more of those. And who’s to say that threshold was going to stay where it is. Maybe they cut it in half. So, if you can get ahead of that game now, you need to be doing it.

For some clients, it even makes sense to go ahead and bump all the way into an IRMAA year and pay IRMAA in two years. Then, you know you’re going to be in that lower rate forever by doing that larger Roth conversion. If you time that large Roth conversion in the year that you retire, there’s a SSA-44 form where you can appeal that higher thing saying, “Hey, I had a change of situation. I had a reduction in work or reduction in income,” or something like that, and possibly not have to pay it.

[00:09:46] Dean Barber: I’ve seen people be successful at doing that.

Timing Is Everything

[00:09:49] Martin James: We’ve done it quite a bit. The timing on when you’re doing this is important. Sometimes, it’s best to do it in that last year when you’re working and make that larger one. And remember, right now, we have these lower tax brackets. They end in 2025 before we go back to 2017 rates. About $326,000 or so of taxable income is the top of the 24% bracket. That will throw me into that higher IRMAA thing, but you have a chance of beating that.

When Does Doing a Roth Conversion Make Sense?

[00:10:17] Dean Barber: Right. So, when you’re looking at doing a Roth conversion, what are some of the things that you look for to determine whether a Roth conversion makes sense for somebody?

[00:10:33] Martin James: Well, we don’t want to over Roth, especially for the people who are charitably inclined. We can do the Qualified Charitable Distributions out of there. Let’s say that you have a client who wants to give as much money to their kids as possible. By paying that tax off in there by doing that Roth conversion, you’re making a gift to the kids without having to file a gift tax return. Plus, if you have a taxable estate potentially, we’re scheduled to have these large exemptions get cut close to half at the end of 2025. I’ve reduced my estate, also.

What Works Best for Someone Else Might Not Work Best for You

[00:11:10] Martin James: Those are some of the things to keep in mind. Another important factor with tax planning strategies is life expectancy. On the Roth conversion, people say that you should pay the tax with after-tax money or with money that you have outside of your IRA so you get the most in your Roth.

Well, that’s true. But if we’re dealing with these tax brackets and you’re already in my 60s and might be tapping some of your Roth money later as part of your cash flow, controlling your tax brackets later, you might be OK with paying taxes out of the Roth conversion. It’s just to take advantage of this tax arbitrage that we have right now. Everybody is a little different.

[00:11:51] Dean Barber: Yeah. You’re one of the first CPAs that I’ve ever heard say that. That’s very rare. And, by the way, I think that CPAs who focus on tax planning strategies is very rare. Tell me why it is, Marty. Why are so few CPAs that do long-term tax planning strategies for people?

The Tale of Two Types of CPAs

[00:12:15] Martin James: It is hard to have two different mindsets. You have the CPA who is into the compliance mode, tax compliance only. Then, you have the CPA who is in the tax planning strategies mode. It’s hard to cross the streams there.

Back in 1984, I took a continuing education class from a guy by the name of Lewis Walker. He said, “You can’t do both. It just doesn’t fit.” Most CPAs like doing the compliance stuff. I’d rather do the tax planning strategies stuff.

Seeing the Whole Picture

[00:12:52] Dean Barber: Yeah. I think another reason is that typically the CPA who’s only doing compliance, it’s not that they’re not capable of doing the tax planning strategies, but they don’t have the information to do it. They’re going to see, what was the W-2, 1099-DIV, 1099-R? What were the rentals, royalties, or whatever? They’re going to see those things, but they don’t really have the whole picture.

All they know is what shows up on the tax return for the compliance. They don’t know what that person needs. They don’t know the asset allocation. It’s almost impossible for them to do anything other than ask a few questions. “Did you do this last year? Did you do that last year? Well, maybe we can do a couple of things.” All they’re doing is reporting on history. And at that point, they’re trying to maybe save a buck or two on last year’s taxes. To me, that’s not tax planning. That’s just compliance.

[00:13:48] Martin James: It’s triage.

[00:13:49] Dean Barber: Right. We need to understand what that individual needs to live on and what their resources are. Are there going to be pensions? Are there going to be future inheritance dollars in the money that’s in their 401(k)? How much of it’s in Roth 401(k)? How much of it’s in traditional 401(k)?

Understanding Net Unrealized Appreciation

Another big one that I think gets missed all the time is net unrealized appreciation in 401(k) plans. How do you treat that and how do you put that into the plan for when you retire? Talk a little bit about NUA because that’s a big topic. It used to be more than what it is today, but there are still so many people out there that can benefit from the rules around NUA.

[00:14:35] Martin James: Yeah. For example, maybe I’m investing in the company’s stock units that I work for. Let’s say that stock appreciates and it goes up to $100 a share. And, in the plan itself, they’ve paid $25 a share for these.

[00:15:00] Dean Barber: Over time.

[00:15:00] Martin James: Yeah. At a triggering event, I can take that stock out. It is now in a brokerage account, as a distribution, but I only pay ordinary income tax rates at that $25 a share and not the $100 a share. Then, that difference then would be long-term capital gains once it’s outside.

It’s a great way to get money out of the ordinary income tax world, which is always higher, into that capital gains rate situation. As far as getting ahead of that, clients need to be educated that they’ve got this in their plan and what’s going on so that they don’t get nervous and pull the trigger and sell the stock. And then, come back in and buy it again later and set up a new basis, because that’ll blow up.

When You Should Start Considering the NUA?

[00:15:51] Dean Barber: Right. There are some limitations on that. It needs to be a publicly traded stock. It can’t be a private company. Anybody that has a company where they have the option to buy company stock in their 401(k) plan, and that’s a publicly traded company, they need to look at the NUA as a part of their distribution strategy in retirement. They should start doing that at least up to 10 years prior to retirement. What are your thoughts?

[00:16:26] Martin James: Absolutely. They need to know where they’re at and realize that it’s best to not touch that low basis stock in there if they could avoid it at all costs. This could play in for the client that’s going to retire at 62. They’ve got three years to 65 to hit the Medicare. They may have to go to the marketplace to get their insurance.

Well, if you can do this NUA thing in the year you retire, before you get in the marketplace, now you might qualify for all the tax credits that they give you for having lower income. Because now you’ve got this money out and it is liquid, and that’s what you’re going to live on. You can also use Roth money to bridge you to Medicare.

[00:17:04] Martin James: I did an article on this. If I’m going to retire at 62, it’s possible because of that credit. I need to pay $20,000 a year for my health insurance when I could get it at $300 to $400 a month. That’s like the highest tax bracket there is. It’s higher than 37%. So, if I can plan ahead for that, the NUA would be one great tool to do that with. And you’re right. Ten years before is something they really need to be looking at.

Don’t Play Games with Your 401(k)

[00:17:34] Dean Barber: Yeah. I’ve seen so many cases of this and you’ve probably run into the same thing. You started in this industry in 1986 and I started in 1987. We’re very similar as far as our careers in this industry. But I’ve seen so many people that had that company stock in their 401(k) plan and they’d play games with it. They’d sit and talk to their buddy. They’d say if it hits this price, we’re going to sell it. And then when it comes back down to this price, they’re going to buy it back again. They totally blow any of the tax planning opportunities in there because they’re trading that company stock within inside the 401(k) plan as opposed to just buying the shares over time.

[00:18:13] Dean Barber: Most companies will split that up and they’ll say, “Well, this block of shares has a X-cost basis. This block of share has a Y-cost basis.” You could even go to that example that you gave of $25 per share as the cost basis on a $100 stock. Well, with some of that stock, you may have paid $5 for. You can do an NUA with part of it from most companies. It’s not an all-or-none type of a thing. It’s such a little known thing that people that have the ability to have company stock in their 401(k) plan know about, but it’s a huge tax planning strategies tool.

Being Aware of What’s in Your 401(k)

[00:18:47] Martin James: Yeah. It’s amazing. You ask people, “How much money do you have in there?” But they really don’t know. They don’t look at it. Then the other thing is, “Does your plan have these certain provisions?” But they don’t know. So, we start talking about the summary plan description. Let’s get a copy of this and just dive into it. What do you have available in your 401(k)? What can you do?

[00:19:14] Dean Barber: Exactly. There’s another tax planning strategies tool that’s handy for retirees as well. We’ve been talking about pre-retirement, but people need to be aware of tax planning strategies during retirement as well. One of the mistakes people make all the time is not paying attention to whether they should be contributing to the traditional 401(k)—where it’s pre-tax—or whether they should be contributing to the Roth 401(k).

Roth or Traditional? What’s the Best Option for You?

There’s not a black and white answer there. It’s a depends on where you’re at in your earnings level. What do you think your income is going to look like in the first few years of retirement? Marty, talk about what you do to help people figure out if should they be contributing to the Roth or traditional portion of their 401(k)?

[00:19:58] Martin James: One of the things that we look at again is circling all the way back around to that financial plan. We see what their income is going to look like. A lot of people think when they hit retirement that they’re going to be in a lower tax bracket. Well, maybe not, and more than likely not. We look at that and say, “Based on what we see happening, let’s look at our 401(k).” And we look at their current tax bracket. Well, when we do our planning, we say, “Here’s how many dollars.” We have this marginal tax system that’s progressive, so every dollar isn’t taxed at 24% for me. Some of it is in the 22% bracket.

Your Current Tax Bracket and Your Future Tax Bracket

[00:20:42] Martin James: OK. So, we do this. We say, “Out of your income, here’s how much is in the 24% bracket. But we don’t think you’re going to be there in the future.” Maybe we do enough of our Roth contribution or traditional contribution to get those dollars at the 24% bracket. We’re not paying at the 24% bracket.

We’re going to get a current tax deduction for that or a current loan from the government on that. For the rest of it, we’re going to be at the 22% bracket. We’re just going to maintain a 22% bracket all the way through. That also works for the person who’s in the 12% bracket because that next move is up to 22%. And again, you need to be looking at Social Security, RMDs, and other factors. And is my spouse going to outlive me?

[00:21:30] Dean Barber: What you’re saying is that you can’t make the right decision on whether you should do Roth or traditional or a combination of the two until you’ve already looked into retirement. Ask yourself, “What are all the sources of income going to be? What are our assumptions there?” And then you can come back and determine where you’ll be in retirement. You can make an educated decision on how much goes to Roth versus traditional.

In-Plan Conversions

[00:21:59] Martin James: Correct. A lot of plans now have what we call the in-plan conversion. For a younger person, maybe they already figured out that they want to make Roth contributions. Maybe that’s what they want to do because they think it will be best for them in the long run.

And it probably would be, but maybe they start the year off by making pre-tax contributions to their traditional 401(k). And of course, the government’s given them a little larger check because they’re loaning them the money to do this. Then, let’s say the market corrects fairly decent. Well, I could do that conversion at that point.

Let’s say it was a $10,000 contribution. The government loaned me money based on that $10,000 contribution, but I’m converting it at $8,000. So, I get to keep a portion of that tax loan that they gave me forever. That’s mine.

Tax Planning Strategies in Your Peak Earning Years

[00:22:53] Dean Barber: Yeah. The one that I think is one of the most obvious is when people that get into their early-to mid-50s and suddenly find themselves in their peak earning years. If they’ve done a decent job of saving some money outside of their 401(k) in a normal brokerage trust or taxable account of some sort, you can earmark that money that’s already been taxed to spend in the first five or so years.

Let’s just assume we’re dealing with somebody that’s 55 and they’re in their peak earning years. They’ve got enough money in their taxable account that they can live and not even spend all that in the first five years. And now, maybe I’m in that upper 33% bracket or something like that. I can defer pre-tax. And then, suddenly I get into retirement. I’m living on all this other money, and now I’m converting up to the 22% rate for those first five years of retirement. I’m getting a lot of money in a Roth IRA, but I get to win the tax game that way.

[00:23:55] Martin James: Or let’s take the person who’s making moderate income. They inherit some money from a brokerage account, CDs or whatever, from their parents. And they save it over in this account, but they’re not maxing out their 401(k)s. Well, why don’t they go ahead and just max out that 401(k)? Maybe it’s all going into the Roth so they can live on this inheritance. Build up the tax-free part of it. The money in the qualified plan is much more protected from creditors and everything else compared to the money that I’ve got sitting in an outside brokerage account.

Getting As Much Money to Roth at the Lowest Possible Tax Bracket

[00:24:28] Dean Barber: Again, it’s almost like a shell game. You need to be wise enough to know what to do. You’re just shifting money from one type of a tax bucket to another type of a tax bucket. The idea is to get as much money in that Roth bucket as you possibly can at the lowest tax bracket possible. When it comes time to start pulling that money out of retirement, we don’t have a partner in it.

[00:24:53] Martin James: Exactly. Because the dollars are fungible, but tax attributes are not.

[00:25:00] Dean Barber: Right.

[00:25:00] Martin James: You just need to be aware of that. Everyone thinks, “Well I need to be doing a Roth.” Well, every year, something could change. Maybe one year I do Roth, one year I’m doing traditional. Whatever makes sense. It’s all about awareness.

[00:25:17] Dean Barber: There were some amazing opportunities in 2020 for people to do Roth conversions when COVID-19 hit. Maybe they lost their job or were out of work for six months, nine months, or whatever, and didn’t have much income. That would’ve been a perfect year to do a Roth conversion because your income was lower. You might even have been able to convert up to the top of the 22% bracket or even the 12% bracket and got a lot of money out of that tax-deferred and into tax-free. It’s a tax-free forever type of a bucket.

[00:25:50] Martin James: Oh yeah.

Tax Planning Strategies for Retirees

[00:25:51] Dean Barber: So, let’s switch gears to tax planning strategies for people that are retired. I know that there’s a lot we can talk about here. There’s no way we can cover everything that a person needs to be looking at from a tax planning strategies perspective in one podcast.

The Three Tax Buckets

But the point that I want to make to everybody is that tax planning strategies are critical. It’s not about preparing your tax return. It’s about looking forward and making sure that you pay as little tax as possible over your lifetime. I think one of the things that people should be doing as they’re getting to retirement is really focusing on the three tax buckets. Tax-deferred, taxable, and tax-free.

So, let’s talk about once somebody has done that. If they’ve done a good job in diversifying from a tax perspective, then how do you coach people on their best distribution strategy? How much from each bucket do you spend each year? That needs to be very dynamic. And it might change from year to year.

[00:26:50] Martin James: It is. But the goal is to smooth out that tax bracket. We don’t want these large spikes, so we’re trying to smooth that out. Whatever that mix is, as far as distributions between Roth, brokerage account, traditional, that’s really what you’re trying to do. You’re trying to smooth that out. And the person who’s thought well in advance can do this.

The Difference That Tax Planning Strategies Can Make

[00:27:18] Dean Barber: I ran into an individual 14 years ago who had retired at 60. He was 62 when he came to talk to me. I told him about tax planning strategies and he had brought in his tax return. He handed me his tax return and said, “I don’t know how you can do any better than this.”

His tax liability for the last two years was zero. So, I said that was interesting and asked him what he was living on. He was living on the money in his savings account. I then asked him if he had any IRA money. And he did. He had about $1.5 million in his IRA. Again, I thought that was interesting.

[00:27:55] Martin James: Ouch.

[00:27:56] Dean Barber: He could have converted $92,000 each of those years and paid a total of $11,000 each year in taxes. I asked him if there was a reason he didn’t do that. Well, his CPA never talked to him about that. And I said, “Well, surely he at least told you that you could go up to your standard deduction and personal exemptions. You could have gotten $30,000 or so out of that 401(k) with zero tax. Surely, he told you about that?” His CPA didn’t talk to him about that either.

Why the Financial Plan Needs to Come First

[00:28:27] Dean Barber: That goes back to the whole tax planning strategies issue. This CPA had no idea that he even had money in an IRA because nothing was coming out of the IRA to show up on the tax return. That goes back to the whole thing where unless the financial plan is done first, that CPA can’t really do an effective job at helping him reduce taxes over the long term.

[00:28:48] Martin James: That’s correct. I agree.

[00:28:50] Dean Barber: I think it’s fascinating. Marty is a CPA. And we’ve studied with a good friend of ours, Ed Slott, for several years. He calls himself a recovering CPA. Are you in that mode, too, Marty? Or are you a full-on CPA?

[00:29:06] Martin James: I’m still full-on CPA. Ed’s focus is IRAs only. I just suck some knowledge out of him any chance I get. We have such a broad swath of everything we need to look at. With some of this stuff that’s out here, you have people who know things and you have people who don’t know things. If you know these things, then it can tie right back into those IRA retirement plan strategies. That’s why we have a pretty broad knowledge. And if there’s something I don’t know, I know people around the country who’ll know if I don’t know.

Investing in Tax-Free Municipal Bonds

[00:29:47] Dean Barber: Yeah. Let’s go to the possibility of investing in tax-free municipal bonds without getting into too much detail. This obviously isn’t a recommendation on investments. But a lot of times, people will say that they don’t want to pay any tax, so they want tax-free bonds. How do you look at a tax-free bond versus a taxable bond? And how do you determine whether the tax-free bond makes sense? Or does it make sense to use the taxable bond?

[00:30:26] Martin James: Again, that’s a tax brackets strategy where you’re looking at an equivalent yield calculation.

[00:30:26] Dean Barber: But don’t you also have to factor in what that taxable interest is going to do to Social Security. What’s that taxable interest going to do IRMAA?

[00:30:34] Martin James: Exactly. It’s taxable versus municipal. The municipal bond interest, they’re both taxed the same as far as your IRMAA and your …

[00:30:45] Dean Barber: Social Security.

[00:30:46] Martin James: Yeah, Social Security.

[00:30:48] Dean Barber: But it’s typically a lower amount of interest on a muni than it is on a traditional bond.

[00:30:52] Martin James: Exactly.

[00:30:53] Dean Barber: So, you can’t just do the arbitrage.

[00:30:55] Martin James: It’s possible you could reallocate that. You would need to factor those things in when you’re figuring the tax rate that you’re using.

[00:31:01] Dean Barber: Right. You might say you’re in a 22% bracket, but if you’re in the 22% bracket and all that taxable interest is so much more that it’s causing more Social Security to become taxable and the IRMAA tax to go up, it could be a higher tax than that 22%.

The Obamacare Tax

[00:31:18] Martin James: Yeah. And, on top of that, let’s throw the net on there. That’s the net investment income tax, the extra 3.8%.

[00:31:23] Dean Barber: We call that the Obamacare tax.

[00:31:26] Martin James: Yep.

[00:31:27] Dean Barber: We need to pay for that somehow. That’s where the subsidies come from.

[00:31:33] Martin James: That’s right.

Keeping Lines of Communication Open with Your CPA and Financial Planner

[00:31:33] Dean Barber: With the tax codes changing the way that they are, how critical is it that an individual sit down with their CPA and their financial planner on at least an annual basis to discuss their overall tax planning strategies? Twice per year is better, if possible.

[00:31:52] Martin James: Yeah. That’s very important, especially if you’ve got a transaction getting ready to happen or whatever. That should be an automatic. But definitely at least once a year.

It Doesn’t Hurt to Do Some Pre-Planning

In our office, as the return is being finished for the prior year, I’m asking them what they have going on this year. Anything different? So, I’m kind of doing a little bit of pre-planning early in the year as opposed to waiting to the end of the year.

[00:32:20] Martin James: So, what we might have already done is made our Roth conversion amount calculation—what we’re going to do—even though we may not do it until later in the year. But if we get an opportunity mid-year to do it, we may do part of it. But not all of it just because we don’t know.

The Prize Patrol may show up at the end of the year. They have a scratch-off lottery ticket or something like that. We would wish we hadn’t have done it that year.

[00:32:46] Dean Barber: One mistake that I often see is when people come in with a tax return or all their information. They want to buy a new car and didn’t want to take out a loan. So, they took $75,000 out of their traditional IRA to go buy that car. I’m like, “Why didn’t you call me and ask me where the best place was to get this money?” Because they don’t think about it. It’s just money and they’re going to go buy whatever I want.

A Little Bit of Interest Can Be Well Worth the Tax Savings

[00:33:30] Martin James: Exactly. In that situation, we could do some bracket bumping. Let’s go ahead and finance part of it across two years. Let’s say the person is in a 22% bracket and this would push them up to 24%. If we blend this out, you’re paying a little bit of interest, but the tax savings is going to offset that by far.

[00:33:59] Dean Barber: If you’re going to buy a second home, buy a vehicle, or anything that’s a major purchase that’s outside the norm, especially in retirement, call your financial advisor. Get them in the same room with your CPA and talk about what you’re trying to do. And then, let them come up with the best way to get the money that you need so that you’ll pay as little tax as possible on it.

Withholding Can Get Missed A Lot

[00:34:27] Martin James: Right. You also need to do that tax projection at that time you’re getting ready to do it. What kind of withholding should you have on this?

We have a market that’s down right now and I think it’s going to recover. So, maybe you just take out what you need now, and then later take a distribution out to pay for the taxes. Or if you’re on a safe basis for penalty purposes, you can take the distribution out to pay the taxes in the following year.

Those are some of the things to do before taking the money out. The withholding part of it gets missed a lot. The person says, “Hey, I need $75,000.” There goes a $75,000 check and there was no withholding.

[00:35:17] Dean Barber: That’s one of the most critical things. Before you make that major purchase, give some money to your kids or grandkids, etc., let’s not only look at where you’re going to get the money, but the tax impact. And it’s not only the tax impact that year, but the next five to 10 years. How’s that going to play out in your overall plan?

[00:35:45] Martin James: Exactly.

Your CPA and Financial Advisor Are Here to Help You

[00:35:47] Dean Barber: It’s all about keeping those lines of communication open with your financial advisor and CPA. They’re there to help you. When people come to us for the first time and we start working for them, most people are overpaying their taxes. And they don’t even know they’re overpaying their taxes. It’s not because their tax return has been prepared improperly either. It’s because they missed opportunities in those years. Think about the story I told a few minutes ago.

[00:36:18] Martin James: Right. I hate that when a person comes in and I see that they’ve been wasting $60,000 or $70,000 a year of their tax bracket. Then, you show them what’s going to happen in the future.

[00:36:37] Dean Barber: Let’s go back to what we talked about at the very beginning. Tax planning strategies are not just for the ultra-wealthy. Tax planning strategies are for everybody. The people that have less money have a smaller margin of error. It’s critical that people engage with a financial planner and a CPA to make sure that they’re getting it all done right.

[00:36:58] Martin James: Exactly.

[00:36:59] Dean Barber: Well, Marty, I appreciate you taking time. We’re after tax season and you look like you’re well recovered. It’s great to see you.

[00:37:12] Martin James: Yep. Same here. Thanks for having me.

[00:37:15] Dean Barber: I hope you enjoyed my conversation with Marty James. Don’t forget, we’re offering you access to the same financial planning tool that we use for our own clients. Just click the “Start Planning” button and begin your retirement plan from the comfort of your own home.


There’s so much to learn when it comes to creating a proper tax plan. One of our CERTIFIED FINANCIAL PLANNER™ Professionals can also talk with you about how to develop that proper tax plan during a schedule a 20-minute “ask anything” session or complimentary consultation. So, please don’t hesitate to reach out to us with questions. And as Marty said, to have the tax plan done, you need to have the financial plan done first.


Learn More About Modern Wealth Management

Sign up for our weekly newsletter which includes educational articles, videos, and more. It arrives in your inbox every Tuesday morning to keep you up-to-date.

Investment advisory services offered through Modern Wealth Management, Inc., an SEC Registered Investment Adviser.

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.