The Power of Creating a Long-Term Tax Plan with JoAnn Huber
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The Power of Creating a Long-Term Tax Plan Show Notes
No matter what time of the year it is or what the tax code says, you’re probably paying taxes on a paycheck, Social Security, dividends, and capital gains – or some combination of the above. It can be easy to feel overwhelmed and just give up trying to hang on to your hard-earned money.
JoAnn Huber does not want you to do this. She’s a CPA and CERTIFIED FINANCIAL PLANNER™, and she understands how a long-term tax plan can help you save more, no matter what’s happening in the world.
Today, JoAnn returns to the podcast for the fourth time to talk about the ways 2020 has changed how people of all ages need to look at retirement, the importance of having a solid plan in place long before you take your first RMD, and how to protect yourself, no matter how much the tax code changes.
In this podcast interview, you’ll learn:
- How tax laws changed in 2019 and 2020 – and why taxes are probably going to go up no later than 2025.
- How the SECURE Act will change how people look at retirement – and the new rules that may hugely impact people who inherit IRAs.
- Ways to lower your tax tier and save on Medicare premiums using qualified charitable distributions.
- Why the SECURE Act brings life insurance into play as a retirement vehicle for the first time in a long time – and how the life insurance industry lobbied to make this happen.
- “Whenever you have a tax law change, you have to look and say, ‘Okay, these are the new rules, what do I do to play?’” – JoAnn Huber
- “A lot of times, Congress writes legislation and they’re sloppy. Then they have to go back and correct something, and there are so many holes that we don’t really know how things are going to play.” – JoAnn Huber
[00:00:07] Dean Barber: Welcome to The Guided Retirement Show. I’m your host, Dean Barber. It doesn’t matter what time of year it is, you get your paycheck and all this money comes out for taxes. You get into retirement, your Social Security becomes taxable, you’re paying taxes on your dividends and your capital gains. You got required minimum distributions and then you throw on top of that, all of the tax code changes that have come around in the last two to three years, and it just makes you want to throw your hands in the air and say, I give up. Well, don’t do that.
Stick around as I interview JoAnn Huber, CPA, and CERTIFIED FINANCIAL PLANNER™. We’re going to talk about how the effects of creating a long-term tax plan can actually keep more money in your pocket regardless of the tax laws and keep it out of Uncle Sam’s. Enjoy this conversation with JoAnn Huber, CPA, and CERTIFIED FINANCIAL PLANNER™.
[00:01:00] Dean Barber: JoAnn Huber, welcome back to The Guided Retirement Show. This will be your fourth time on and as I understand that you are our most famous guest, you’ve been watched on YouTube more often than any of our other guests that you’ve listened to on the favorite podcast app. So, welcome back.
[00:01:15] JoAnn Huber: Well, thanks. It’s great to be here. Hopefully, we can share something today that makes it worthwhile for people to listen.
[00:01:20] Dean Barber: So, now, I want to go back and talk about before we get into what we want to talk about today, you were on episode one of The Guided Retirement Show and episode two of The Guided Retirement Show. You and I talked in-depth on those two episodes about Roth IRA versus traditional IRA or Roth 401(k) versus traditional 401(k). And I encourage anybody to go back and listen to those and we did it so that you could understand the difference between the two in your early years, coming out of college, starting your first job, and taking you all the way up through retirement.
Then, we followed up in episode 18 and we did a show about what retirees need to know about Roth conversions. Now, this is specific to the people that are nearing retirement or are in retirement and absolutely critical those Roth conversions. In many cases, we see you’re saving, people, two, three, four hundred thousand dollars in taxes over a lifetime.
[00:02:18] JoAnn Huber: Right. And I think though this year 2020 has been such an abnormal year that there might be people that are younger that should really seriously consider doing a Roth conversion this year, maybe they lost a job, their income is not as high. So, it might be an ideal year to actually do a Roth conversion.
[00:02:35] Dean Barber: Yeah. And the idea behind that, I guess, is very simple, if you’ve lost your job and your income is not as high as it once was, maybe you can do that Roth conversion and you do it in a 10% or 12% tax bracket, as opposed to maybe later doing it at 22 or 25. Who knows what tax brackets are going to be in the future?
[00:02:52] JoAnn Huber: Right. So, let’s make something positive out of all the negatives we’ve had this year.
[00:02:55] Dean Barber: Yep. So, back in December of 2019, JoAnn, Congress passed the SECURE Act and they tucked it into a bill and it did a lot of things to people’s planning, not only do we have the tax cuts and JOBS Act, then we had the SECURE Act come in and then because of COVID, we had the CARES act. So, there have been multiple changes to the tax code and a lot of those changes are going to affect the tax planning that people need to do, not just this year, but I think it’s going to affect us for years to come. And we don’t know what the tax code is going to do in the future except for change more.
[00:03:39] JoAnn Huber: Right. Most of the people I talk with think that the taxes will go up in the future. We know right now that at the end of 2025, the current rates sunset and we go back to the higher rates that we did have. Will it happen before then? I don’t have a crystal ball, I don’t know, but we do know, at some point, they’re probably going to go higher. We have such low rates right now, now is the time to be taking advantage of those rates and saying, what opportunities are present for me, and what do I need to do?
One of the big changes on the SECURE Act was to change the ability used to be if you inherited an IRA, you had your lifetime that you could take distributions out of, but now, for most people, they have to take that distribution out over 10 years. That’s a huge change because most of the people who inherit IRAs are at the peak earning years, so they’re already at a higher tax rate, and then, you add income on top of that.
So, for a lot of people, they’re probably going to be paying taxes at a higher rate than what the original 401(k) owner got a tax deduction for. So, we want to look and say what needs to happen now, so we can make sure we’re paying the least amount of tax on that IRA or 401(k) over the whole lifespan of that investment rather than just for one individual.
[00:04:55] Dean Barber: And I think that’s what makes what you do at Modern Wealth Management so unique. Your team of CPAs, you work alongside our Certified Financial Planners and you say, “Okay, we’re building out a financial plan that is a 15, 20, 30-year forward-looking financial plan.”
Then, you and your team of CPAs come in and you say, “All right, let’s take a look at this, not from an investment perspective, not from a how-much-income-can-I-get perspective, not from what-can-my-lifestyle-be perspective, but from the perspective of how can we help you get the money into your checking account month after month, year after year, decade after decade that you need in order to live on and how do we get it there with the very least amount of taxes possible. And so, that’s what we call long-term forward-looking tax planning.
[00:05:46] JoAnn Huber: And that’s what I love because it does make a difference for people and we need to be doing that. And it doesn’t have to be the ultra-wealthy, it can be that normal person that we deal with, most of the people we deal with, we want the 500,000 or more of investments because that’s where people really start being able to have some flexibility. It’s not that we don’t care about those less, but it’s harder to be able to control taxes because you don’t have as many options. And that’s what we want to do is look and say how can we help you? What’s your situation? And let’s look and create your future.
[00:06:18] Dean Barber: All right, so let’s dive into this SECURE Act. JoAnn. Your favorite part of the SECURE Act, what would that be?
[00:06:27] JoAnn Huber: My favorite? It’s not that they passed at the end of the year, probably that they left the qualified charitable distributions and because there was some fear that that would be changed, but they actually left it. So, if you’re over age 70 and a half, that you can go ahead and still do the qualified charitable distributions. There was some fear that they would change that and piggyback it with the change of the required minimum distribution age to age 72. And granted a year and a half is not that much, but it is nice to be able to have people have flexibility in their charitable giving.
[00:06:58] Dean Barber: So, just for the people that aren’t familiar with that, explain the qualified charitable distribution. QCD is the acronym for it.
[00:07:08] JoAnn Huber: Yeah, that’s the acronym for it. A qualified charitable distribution is when money goes from an IRA directly to a charitable organization. And the reason that I really like it is, you don’t have to include that in your income, you don’t get a charitable deduction for it, but there are advantages that come from being able to exclude it from your income.
So, it’s a great way to be able to still benefit tax wise from charitable deductions with the change under the tax cuts and JOBS act to the standard deduction amount. There’s a lot of people that aren’t benefiting from charity, they’re taking the standard deduction, so that by reducing the income, they still get a tax benefit.
[00:07:45] Dean Barber: All right, so let’s talk about how that benefit might come. What might it affect? So, let me just give an example. Let’s say that I’ve got a married couple, they’re over the age of 72. So, they’re having to take required minimum distributions. They’re over the age of 70 and a half for the QCD. And they’ve got Social Security Income combined, let’s call it 55,000.
They’ve got some interest and dividends, coming off of some investments, say maybe another 30,000 there. So, now they’re at $85,000 of income and they’ve got to take an RMD out of their IRA. They don’t really need the money, but let’s say they got a million dollars in their IRA. So, they’re going to have to take out close to $40,000, but they’re charitable. So, what you’re saying is, let’s use the required minimum distribution out of the IRA, give that to charity or a portion of that charity, how might that benefit the situation that I just explained?
[00:08:43] JoAnn Huber: So, with that income level, if we give enough to charity, we might be able to reduce the provisional income. And that is a fancy way that they go through and calculate how much of the Social Security is subject to tax. So, what we’re doing is if we can reduce the amount of income that’s reported on the tax return, we can then pay less tax on the Social Security. So, Social Security is one of those things that everybody says, “Well, isn’t all income tax the same?” And Social Security is not because you can have none of your Social Security tax or you can go up to 85% of it being subject to tax.
[00:09:19] Dean Barber: And the other part of that, too, is if they got $30,000 in interest and dividends.
[00:09:23] JoAnn Huber: Do we have any that’s qualified dividends?
[00:09:25] Dean Barber: Right. So, its qualified dividends could be tax free, but if you get too much of an income level, then they become taxable.
[00:09:31] JoAnn Huber: Right. And so, we have two different things that we’re looking at by giving the qualified charitable distribution. And we’re able to reduce the taxation, possibly on some of the qualified dividends and also on Social Security. So, even though all we’ve done is changed the method of giving, we’re able to have tax savings.
[00:09:51] Dean Barber: And you would agree, JoAnn, that after the tax cuts and JOBS Act, the qualified charitable distributions or QCDs were actually far more beneficial and you gave the reason for that earlier, but I want to make sure people caught it, it’s because the standard deduction has increased to such a large level that a lot of people aren’t itemizing and so, they’re not getting to take advantage of that charitable contribution. And so, the QCD is a way that they can get the money to charity, never show up on the tax return, won’t cause more Social Security become taxable, won’t cause qualified dividends to become taxable that, otherwise, may not have been. And so, there is a big benefit.
[00:10:28] JoAnn Huber: And that’s kind of a lower income level, but we also get to the point where, let’s say, we have more income and you’re going to have to pay a Medicare surtax and that’s a 3.8% net investment income tax on your investment income. So, we might be able to save that.
[00:10:49] Dean Barber: And don’t forget the increased Medicare premiums.
[00:10:51] JoAnn Huber: And that’s where I was going to go next is we can also possibly save on Medicare premiums because most people aren’t aware that the amount you pay for Medicare depends on the amount of income you have. So, if we can keep you in a lower tier by doing qualified charitable distributions, even though it’s not a tax savings, per se, it still results in more money being in your pocket.
[00:11:11] Dean Barber: What it sounds to me like is that we have an insidious tax system when people hit retirement. And my point is that taxes come out of nowhere, one thing that you do that’s wrong can cause another piece of income that wasn’t necessarily taxable before to become taxable, therefore, causing almost a double taxation on those required minimum distributions. And the goal is to avoid that.
Now, if somebody is already at that age, where they’re doing the RMDs and stuff, there’s some things you can do, but I think the ideal scenario is somebody starts working with a Certified Financial Planner and your team of CPAs years before they retire, so that they can create the right tax diversification that they need in order to take advantage of the laws as they’re written to, again, reduce those taxes and get that plan in place well before those required minimum distributions start.
[00:12:03] JoAnn Huber: So, when we talk about tax diversification, what we mean is you have to have money saved in different types of tax buckets. So, we have the taxable account, which is money, like in a savings account or a checking account or a brokerage account that you’ve already paid tax on and then you do have to pay tax on the interest and dividends and capital gains, but we have that bucket.
Then, the next bucket we have is the tax deferred bucket, which we’ve been talking about the IRA, the 401(k), you got a deduction when the money went in, but when the money comes out, you have to pay tax on it. And then, that third bucket is our tax-free account which would be something such as a Roth IRA, but you don’t get a deduction when it goes in, but you don’t pay tax when it goes out either.
So, we want to have money in all three of those buckets because that allows us to create a distribution strategy and say, you know what, where do we want to take it, because if we have that flexibility, we’re able to control the taxes on the social security. We can time when we have the interest or dividends or capital gains. So, it gives you a lot more control which allows you to control the tax on the Social Security, the capital gains, the qualified dividends, and your Medicare, there’s so many, it’s just this domino effect.
[00:13:10] Dean Barber: And the reality is, you have far more buckets than just those three. You also have your Social Security bucket, maybe there’s a pension bucket, maybe there’s a rental income bucket, a farm income bucket. So, you have to look at all of the different potential sources of income, then your job is to say, all right, how much do you need to spend? Let’s figure out where to take it from and what amounts and what combination normally in order to get the money into your checking account with the least amount of tax as possible.
[00:13:38] JoAnn Huber: And that’s what it is. It’s looking at everything you have, what are your fixed income sources? And then, how do we supplement that to get it up to where you need for your spending?
[00:13:47] Dean Barber: All right, so you said that was one thing you liked about the SECURE Act is that they didn’t take away the QCD, but that’s not something that they did. What did they do inside the SECURE Act that you thought was really good?
[00:14:00] JoAnn Huber: What did they do?
[00:14:02] Dean Barber: That was really good.
[00:14:04] JoAnn Huber: I don’t know if I can really think of anything that I thought was really good because even some of the things that the press said, “Oh, this is really great, you can continue to make contributions to your IRA after age 70 and a half.” Well, there’s a huge negative to that because if you do the qualified charitable distribution, then you have to do a recapture for any amount that you contributed after age 70 and a half. And so, if you’re going to do the qualified charitable distribution, I would never make a contribution to a traditional IRA. You can continue doing the Roth IRA, which was in place beforehand. So, you kind of have me stumped, I’m not sure if I can think of anything really positive.
[00:14:41] Dean Barber: I don’t get it because they named the SECURE Act and what it stands for, the acronym there is Setting Every Community Up for Retirement Enhancement. So, if it was supposed to do that, where did congress miss it?
[00:14:53] JoAnn Huber: I think it’s just trying to make things look positive. It’s all the spin you put on it.
[00:14:57] Dean Barber: Do you think maybe it stands for Setting Every Congressperson Up for Retirement Enhancement, as opposed to Every Community?
[00:15:03] JoAnn Huber: It might help. And I’ve also heard Ed Slott saying that Setting Every CPA Up for Revenue Enhancement. So, there are different things that it stands for, but I think the important thing is, whenever you have a tax law change, you have to look and say, “Okay, these are the new rules, what do I do to play?” Because they tell us the rules, and then we have to say, “Okay, this is the opportunity that’s now present, we’re going to play by the rules, we’re not going to do anything that’s against the rules, but we’re going to take the opportunities that they give us and use them to our advantage.”
[00:15:37] Dean Barber: So, you talked about the one opportunity there for the QCD. The one thing that they touted in the media more than anything else was giving people an extra year and a half before they had to start taking the required minimum distributions or the ability to continue to contribute to your IRA past the age of 70 and a half. To me, those are like both big yawners, they don’t really mean anything or do anything meaningful for anybody.
[00:16:04] JoAnn Huber: No, I guess it does simplify things because it’s confusing for people to know when they turned 70 and a half and so, now, it’s 72. So, it makes that a little bit easier, but that year and a half doesn’t make that much of a difference. For most people, if they were able to wait until age 72, that’s great, but that year and a half isn’t going to really give us that much of a difference when it comes to the tax situation.
[00:16:28] Dean Barber: I totally agree with you and you go from what, 3.649% to 3.672% or something like that. So, that’s the distribution amount that has to take place.
[00:16:40] JoAnn Huber: But then you’ve had more growth in the account, hopefully, because you’ve left it in there for that year and a half and so, maybe that distribution, you got a little bit more growth.
[00:16:50] Dean Barber: What was your least favorite thing about the SECURE Act?
[00:16:55] JoAnn Huber: I think the money grab that comes from having things distributed out over 10 years from IRAs.
[00:17:00] Dean Barber: Let’s talk about that a little bit. Now, we did a video, you, myself, one of our estate planning attorneys, an insurance expert, and talked about the ins and outs of what that particular piece is, but to me, what they’re saying is, all right, let’s say I passed away and my wife passes away. What we have in retirement accounts, whether they be Roth IRAs, whether they be 401(k)’s, traditional IRAs, 457s, 403(b)’s, whichever one of those 401(a) rules are out there that they did that money is in, all of that money that my children would inherit has to be out of those accounts by the end of the 10th year following my year of death. And if it doesn’t, what’s the ramification?
[00:17:54] JoAnn Huber: Well, then, I guess you’re going to get a bad penalty, which is a 50% penalty for not taking the distribution that you’re required to take.
[00:18:01] Dean Barber: So, in year one, my kids wouldn’t have to take anything?
[00:18:04] JoAnn Huber: No, they can wait until that 10th year to take things.
[00:18:06] Dean Barber: And for a Roth IRA, that’s probably the right decision because they can get that tax-free accumulation for 10 years and then, that distribution is going to come out in 10 years, it’s totally tax-free.
[00:18:16] JoAnn Huber: Yeah, and that would be my thought for most people let that grow as long as you can and then take it at the last moment.
[00:18:22] Dean Barber: But for the traditional IRA, that could be a nightmare.
[00:18:25] JoAnn Huber: Yeah, you’re going to have to do planning on that because maybe you inherit it and you know, you’re going to retire in three years. So, maybe it is better to not take the distribution in the first few years when you have that higher income and then take it out for the remaining seven. So, it’s going to take planning to say, what do I need to do? And a lot of times, there’s more than one beneficiary.
So, you want to make sure that the beneficiary forms are set upright to give that flexibility that it doesn’t have to be based on what’s best for one individual. Each person can look at their own situation and make the decisions that they want. And so, I think it also shows how important that the beneficiary form is to make sure that whatever it is you want to have happen with your IRA, it’s what’s on the beneficiary form.
[00:19:07] Dean Barber: And so, speaking of the beneficiary, there are a lot of people that have done extensive estate planning work. And there are a lot of people whose major asset is their IRA and they had a trust that was written before the SECURE Act was put in place that allowed money, even the IRA money kind of flow through that trust to still keep some protection measures in place, but those trusts that were written prior to the SECURE Act, if you want to try to keep that protection, that’s gone
[00:19:45] JoAnn Huber: Yeah, because most of those trusts were written with the conduit language, which means it has to go through to the beneficiary. And so, it’s important to review your estate plan and make sure that what’s written in there is what you still want to have happened because like you said, if you lose the ability to control it, it’s subject to the creditors, divorce, something bad might happen. So, you need to make sure that it has the proper language to allow it to accumulate in the trust rather than passing it out.
[00:20:13] Dean Barber: So, maybe it was an attorney’s full employment active as opposed to just the CPAs full employment active.
[00:20:17] JoAnn Huber: I think there’s a lot of people that are busy trying to help people through that because like you said, most people’s largest asset they have are their retirement accounts. And when they were saving, they had the understanding that they were going to be able to use it for their lifetime and then it would be an asset they could leave to their beneficiaries and they would be able to spread it out over their lifetime. Well, the rules changed. And now, to have to take it out over 10 years, we know that that’s going to result in a higher tax burden on that. And so, what can we do today to work around that?
[00:20:48] Dean Barber: So, just something that pops into my head and it was there in January of 2020 right after the SECURE Act passed, I said, “Okay, maybe, for the first time in a couple of decades, life insurance may be a solution for this wealth transfer.” So, let me give you a couple of scenarios here and as a CPA, I want to get your opinion on this. So, let’s say that I’ve got a husband and wife, they both got half a million dollars in their IRAs.
And we run the projections of what they want to spend and do all this and we run up to normal life expectancy, we calculate the required minimum distributions, etc. And let’s just say that we go to the life expectancy tables and say, man’s going to die at 81, woman’s going to die at 83. Okay, we can look in there and say, based on historical averages, what do we think those IRAs are going to be worth? And let’s just say that they’re worth three quarters of a million dollars apiece at life expectancy.
When one or the two, the first one passes away, the surviving spouse can inherit that IRA. So, what if we were to go out and say, let’s go out and get a life insurance policy on each spouse in an amount that would pay the taxes on that entire IRA when the first spouse passes away, so that they can pay the tax on that and convert it to a Roth IRA immediately? That way, you’re going to pay a little bit of money to an insurance company over time and then that insurance company is going to pay the taxes to get the money out of the IRA over into a Roth.
Now, we’ve done a couple of things. We’ve allowed that surviving spouse to have income coming out of that IRA as they need it, but it’s a Roth IRA now. So, the income coming out of that is tax free, that then lowers the tax bracket for the surviving spouse, but also then eliminates this burden of this huge tax liability that could come for the ultimate beneficiaries which would be the children or the grandchildren. What do you think about that concept?
[00:22:50] JoAnn Huber: I think for some people, that would make sense, but if we have that situation with the three quarters of million IRA that’s being converted, we’re still going to be paying tax at 37%. So, in my mind, if there’s a way that we can do some conversions beforehand, we still want to look at when we can pay the least amount of tax, but that’s a great way to leverage life insurance to help pay for it and it does create some flexibility for the surviving spouse. However, if you have a child that inherits it, they can’t do a Roth conversion on that amount, but the insurance can be used to pay the tax on that. And so, life insurance is definitely much more in play.
Unfortunately, the life insurance industry was one of the biggest lobbyists behind the SECURE Act. And so, they got what they wanted. Insurance is one of those things, it’s going to help a lot of people and I think it all comes down to, you have to know your plan. Does it make sense to do the conversion at death? Do you do it during life? Or do you do it in combination? And everybody’s going to be different. That’s why it always goes back to my favorite answer, it depends because it depends on your situation.
[00:23:58] Dean Barber: Go back to episode 18, ladies and gentlemen, and listen to JoAnn and I’s conversation right here on The Guided Retirement Show about Roth conversions in retirement, what you need to know. And we go into a lot of detail there because I think you’re right, JoAnn, it’s not just about a plan that takes place at the death of one or both of the spouses, it is a plan that’s going to take place in the years leading up to that as well. And that Roth conversion could be a huge part of that, but those Roth conversions, I don’t think a lot of people think about the Roth conversion as something that you do after retirement.
[00:24:35] JoAnn Huber: And you can and that’s something I deal with all the time. People said, “Well, I’m that required minimum distribution age, I can’t do a Roth conversion anymore.” I was like, “Sure you can.” It’s just the first thing that happens, the first money that comes out of that account has to be the required minimum distribution and then you can do the Roth conversion. There’s no limit on the amount you can do, but we want to be smart about the amount we’re doing it.
[00:24:56] Dean Barber: But if you are charitable, that RMD could be the QCD, which we talked about earlier and therefore, then you can do the Roth conversion on top of that and still have a very favorable tax outcome.
[00:25:07] JoAnn Huber: Right. And another thing, I want to go back to the situation that you just shared about the two spouses that both had the IRAs. Another option is the surviving spouse could disclaim some of the IRA that they inherited and send it, if they have enough money to live off, say they have the pension, the Social Security and the IRA and they’re not going to need that, they can disclaim and let it go directly to the children at that point and then we get two 10-year periods, so effectively, 20 years for that to be paid out to the ultimate beneficiaries.
[00:25:34] Dean Barber: Another thing that we did way, way, way back in my younger years, whenever estate taxes were a problem was we use life insurance to pay the estate taxes and at that point in time, we would use something called a second-to-die policy. And I think that those come back into play again, too. So, the second-to-die policy, for those of you listening who don’t know what it is, is a life insurance policy that insures both husband and wife and doesn’t pay the death benefit until both have passed, the death benefit comes to the estate tax free to the beneficiaries, tax free, and could also be estate tax free depending upon the size of your estate.
And the deal there is, then what you’re doing is you’re insuring two lives, so the premiums are lower. You’re getting the money at the end of that period to go ahead and pay the tax on that IRA money. And so, again, I call it you’re using the bad guy, which is the insurance company to take out the terrible guy, which is Uncle Sam. So, you’re going to pay less money and insurance premiums, then will come out tax free to the beneficiary. So, you’re paying those taxes with discounted dollars.
[00:26:47] JoAnn Huber: So, you hopefully get a really good return on that insurance policy and then, turn around, pay the taxes and then you’re through with paying the premiums, you’re through with paying taxes, and you just focus on enjoying what’s left of your life.
[00:26:59] Dean Barber: So, I think that you got to sit back and say, “All right, what’s my situation? How am I positioned today? How has the SECURE Act affected my long-term plan?” And like I said, beginning of the program today, it’s not just a one-year deal, it didn’t just affect us now, it’s going to be into the future. If there’s anything we know, is that Congress never stops, they always are trying to come up with new legislation. Most of the legislation that’s written is written to figure out how they can fill the government coffers with more money, especially now with the massive amounts of debt that we have.
[00:27:36] JoAnn Huber: I agree. And the thing is, a lot of times, they write legislation and they’re sloppy, and then, they have to go back and correct something and there’s so many holes that we don’t really know how things are going to play. And so, I mean, you look, a big thing that happened with the tax cuts and JOBS Act is they made a little mistake on qualified improvement property. Well, we get in March of 2020 and they correct that. And so, it creates havoc because they’re changing the rules as we go along, which makes it hard to plan. So, we have to just say, “Okay, these are the rules we know today and we’re going to take advantage of them and use it to our advantage and figure out what we need to do right now.”
[00:28:15] Dean Barber: The important thing, JoAnn, is that you’re saying that you’re going to take those rules and then use them today, but you’re not using them just for a given year, you’re using those rules to make a multi-year tax plan. And then, you’ll adjust that plan as necessary.
[00:28:26] JoAnn Huber: Right, because for most people, if we’re only looking at a year or two, we’re not doing tax planning, we’re looking to say how can I pay the least amount of tax this year and that might cause you to pay a lot more tax down the road. And so, we have to really be forward looking and have that multi-year look to make sure that it’s going to be for your lifetime, not just for one individual year, because I mean, nobody likes paying taxes, but most people understand, we talked about the Roth conversion, yeah, it might cause you to pay more tax today, but how much is it going to save you down the road? And that’s what you have to look at is for those 10, 15, 20 years to make sure that you’re being comprehensive and long term.
[00:29:03] Dean Barber: Some people can’t see past that, though, JoAnn. Some people, look at what happened this year and it’s all about now. So, I think one of the beautiful things when you’re doing long-term tax planning, in order to do long-term tax planning, you have to first create a comprehensive financial plan. And there’s a lot of work that goes into that. Once you have that, then you can say, all right, let’s go into the comprehensive financial plan, and let’s make some assumptions.
Let’s assume that we implement these, what we call the long-term tax reduction strategies, and let’s see how it impacts the success of your overall plan. And see how it impacts the amount of money that’s leftover at the end or the amount of money that you’re able to spend. Don’t only look at one piece, which would be what’s the total tax bill because we have to understand not just what the total tax bill is, but how did it affect the overall net worth and the overall transfer amount?
[00:30:00] JoAnn Huber: And that’s what we have to do. And that’s the key is having that financial plan and being able to look at it and knowing that regardless of what stage in life you’re at, there are always things that can be changed. And we can look at and occasionally, we’ll have people that are going to say, you know what, you’re doing everything that you need to be doing, things are great, but we want to make sure that we’re looking and saying, “What do you need to be doing today to help yourself down the road?”
[00:30:26] Dean Barber: It’s interesting, normally, so let’s just say a normal year and I’m going to use an analogy of going to your doctor for your annual checkup. So, most of us, if we’re concerned about our health at all and we want to make sure that we stay healthy, we have at least an annual visit with our physicians. And what we hope is that that annual physical is just going to be just a checkup. Let’s just make sure that everything is still okay, I don’t feel bad, nothing’s bothering me. Let’s just make sure that there’s not something going on inside that I don’t know about. And that’s what we hope for.
Well, when we’re doing our reviews of a person’s financial plan and a person’s tax plan, that’s what we hope for, too, but what happens is, in our health, sometimes things change. Well, now we’re saying we’re going into the doctor, but it’s not just for this routine physical, there’s something else going on, something that might need a far deeper diagnosis, it might require a change of lifestyle, there’s something there.
We have those same types of discussions in the financial planning and tax planning process and a lot of times on your side, JoAnn, it’s when something has happened in a person’s life that’s changed their financial situation or it’s when the tax code has changed that is going to require that deeper dive and a further diagnosis and it’s what we were doing still right or what changes do we need to make in order to optimize.
[00:31:56] JoAnn Huber: I mean, you look at some of the big life events that happen when somebody retires, when a spouse dies, those are both situations where we need to go back in and really look at that plan and say, now what? Because we had this great plan and we were going along and retirement might come unexpected, might come expected, but we know that there’s going to be some changes. And we’ve talked about it, but it still is a little overwhelming because it is a change. So, we want to look at that.
And then, when the spouse dies, the tax code changes completely on the brackets and different things on what you’re taking. We need to go through and say, what are we doing now? But when we’re doing that forward-looking tax planning, we’re not assuming that you’re going to stay married, filing joint for the rest of your life because we know that chances are that one of you is going to be the surviving spouse for a number of years.
And that’s why we want to work with the financial advisor because we also know that, I mean, who would have ever predicted 2020? And it looks a whole lot, it’s different than we ever would have expected, but we have to be agile and make changes as we go along and say…
[00:33:01] Dean Barber: I can’t wait until we can see 2020 is hindsight, it’s behind.
[00:33:06] JoAnn Huber: And we hope it doesn’t continue, but it’s so important, though, to make sure that you have that base plan. It’s like when you go to the doctor, they’re going to take your bloodwork to get your base levels and then, they monitor it each year to make sure that they’re comparing to where you were and what are the normal ranges. And that’s a lot of what we’re doing with the tax planning and the financial planning is we know where you want to be, but where are you there? What tweaks do we need to make to help get to the optimal position?
[00:33:34] Dean Barber: I think the bottom line here is that if you’re doing any kind of forward-looking planning, it goes far deeper than just taking a look at your asset allocation and investment strategy, which is why we have the team of CPAs here that’s continually growing because that’s such an integral part. And I truly believe that if you looked at your largest expense over your lifetime, it’s taxes. So, how can I reduce that largest expense? You can’t eliminate it, that’s impossible because as long as we live in the United States and have money or make money, we’re going to pay taxes. But how do we follow the laws as they’re written and as they change in order to use them to our advantage so that we’re paying as little tax as possible over a lifetime, and that’s really your specialty and what your team does.
[00:34:22] JoAnn Huber: And that’s what we love to do because it’s fun to be able to tell somebody, if we do this, you can save some taxes because we haven’t met anybody that really enjoys paying taxes. And so, if we can say, “Hey, here’s a way you can reduce it.” It’s a win-win.
[00:34:37] Dean Barber: They don’t say, Oh, no. I’m not going to do that because I know the government really needs the money.
[00:34:41] JoAnn Huber: Well, if anybody does that, you can always make a charitable donation to them.
[00:34:45] Dean Barber: Well, sometimes it feels like it’s our biggest charity, the way they wasted.
[00:34:50] JoAnn Huber: There’s a lot of people that feel that way.
[00:34:52] Dean Barber: Well, JoAnn, thanks so much for taking time to join us again here on The Guided Retirement Show. And as always, I know that this will be one of the most listened to episodes that we have. Thanks.
[00:35:02] JoAnn Huber: You’re welcome. Thank you.
[00:35:05] Dean Barber: Well, I know that I always enjoy visiting with JoAnn and there’s so much around that, I know that I also do not like paying $1 more in taxes than I have to, and I know you don’t either. I want you to go to the show notes, pick up a copy of JoAnn’s latest article Beyond Tax-Efficient Investing. There’s also a link to a video that we do on the SECURE Act and much, much more, also a way where you can request a complimentary consultation so that we can get started helping you pay as little tax as possible over your lifetime.
Thanks for joining us here on The Guided Retirement Show. Make sure you subscribe on your favorite podcast app and as always, I encourage you to share this with your friends. If you’re listening to the Apple podcasts, please give us a review and rate us.
Investment advisory service is offered through Modern Wealth Management, an SEC-registered investment advisor.
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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.