Tax Reduction Strategies

By Modern Wealth Management

October 5, 2020

Tax Reduction Strategies

Tax strategies to protect your retirement.

In this webinar, Dean Barber and JoAnn Huber, CPA, CFP®, and Partner at Modern Wealth Management, discuss tax reduction strategies and forward-looking tax planning. During this on-demand webinar, Dean and JoAnn cover the differences in Traditional and Roth accounts, charitable donations, the SECURE Act, Roth Conversions, and more tax reduction strategies. This webinar is designed to give you a better understanding of how taxes are different in retirement and how you might avoid some common pitfalls. You can also read the transcript of this video below.

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Items Mentioned in this Webinar

Podcast: IRAs vs Roth IRAs Pt. 1   Podcast: IRAs vs Roth IRAs Pt. 2 

Podcast: What Retirees Need to Know About Roth Conversions

The SECURE Act & Your Retirement

Video Transcript

Many people think that tax planning is, ‘What can I do to get the biggest refund this year?’ In my mind, that’s not the right question. It should be, ‘How do you pay the least amount of taxes over your lifetime?’

– JoAnn Huber

Dean Barber: Hello, everyone. I’m Dean Barber, founder, and CEO of Modern Wealth Management.

JoAnn Huber: Hi, I’m JoAnn Huber. I’m a CPA, CERTIFIED FINANCIAL PLANNER®, and partner at Modern Wealth Management.

Dean Barber: We are here today to talk to you about tax reduction strategies. There’s no book on tax reduction strategies that you can read and comprehend that will allow you to know what to do and what strategies you need to be doing today to reduce your taxes in the future. There’s one thing that we know for certain, JoAnn, and that is that as long as somebody lives in the United States, as long as they have money or make money, the taxes will be a fact of their life.

JoAnn Huber: Absolutely.

One-Size Does Not Fit All in When Tax Planning

Dean Barber: Okay. The tax reduction strategies that we want to talk about today will not be something that somebody will likely take from this video and apply into their everyday life because it’s far more complex than that.

JoAnn Huber: Well, I think the thing that makes it complex is that everybody’s situation is different. Everybody has different things they want to do with their life. They’ve saved different amounts of money. They want to spend different amounts of money, and then they’ve saved in different places. We have to go through and customize a plan for each individual to make it work for them.

Tax Preparation ≠ Tax Planning

Dean Barber: Let’s talk just from the perspective of reducing taxes. When most people start doing tax preparation during a typical year, they think of tax planning as they’re getting their documents together and filling out the worksheet that the CPA sends to them. Then they’re bringing it in and saying, “Okay. I’ve done all my planning work here. What do I do now, and how can you help me?”

JoAnn Huber: Right. By then, it’s too late. Pretty much all we can do at that point is report what’s already happened. That’s not the planning. We’re looking for opportunities to figure out what we can do during the year to make it so when you file your taxes the following year, you’re paying the least amount of tax possible. Maybe not necessarily for that one year, but for 10, 15, 20 years for your lifetime?

Tax Laws Will Always Be Changing

Dean Barber: Right. There’s one other thing that’s certain for everybody that lives in the United States, and that is the tax laws are going to change.

JoAnn Huber: Constantly.

Dean Barber: They always change, and how they apply to an individual’s life will change as well. 

Tax Planning as a Game

Maybe we need to change the mindset to tax planning is a game to see how you can beat the government from taking as much of your money, and then maybe it will be more enjoyable.

– JoAnn Huber

I think the biggest problem that we have when it comes to tax planning and tax reduction strategies is that most people think it’s almost as exciting to go to the dentist as it is to come to get their taxes prepared.

JoAnn Huber: Sad, but true.

Dean Barber: Not a reflection on you, JoAnn, but it is true. We don’t like to think about it. We think of it as confiscation of our money, it angers many people, and it’s like somebody tells me I don’t pay my fair share. That makes me furious because I know that I pay my fair share.

JoAnn Huber: Maybe we need to change the mindset to tax planning is a game to see how you can beat the government from taking as much of your money, and then maybe it will be more enjoyable.

Tax Reduction Strategies: The Basics

Dean Barber: No doubt. Let’s start by explaining some basics. When we talk about tax reduction strategies, we’re talking about building highly individualized strategies for each person or couple based on their life situation, as you explained a few minutes ago. However, the vast majority of CPAs don’t do that. The vast majority of CPAs are taking in the data and preparing the tax return, which they see as their job. But I don’t think that’s what the public perceives as the CPA’s job.

JoAnn Huber: Right. Often, the CPA doesn’t have the information they need to be able to do that. They don’t know what all the assets that the client has are. What is it that they want to do? Those are crucial elements to know because we really can’t develop a tax plan without knowing what we need the money to do. Many people think that tax planning is, “What can I do to get the biggest refund this year?” In my mind, that’s not the right question. It should be, “How do you pay the least amount of taxes over your lifetime?”

Most CPAs are at a Disadvantage

That’s really what tax planning is. CPAs are at a disadvantage unless they’re working with somebody who’s giving them complete information to help them. That’s the advantage we have of working as a team because we have that financial information and look at the taxes. We can look at the estate plan. We can look at the risk that insurance needs to cover and give that comprehensive plan.

Dean Barber: What you’re saying is unless a CPA is working with an individual who has done very precise planning, long-term projections, and is willing to lay out all of their financial life and what are they going to spend and when are they going to spend it and how much do they want to leave behind and where are all their assets at, it’s virtually impossible for the CPA to do adequate long-term tax planning.

JoAnn Huber: Absolutely. It’s like if you’re planning a vacation. You’ve got to figure out where you’re going, and that’s what we’re doing with the financial plan; figuring out where they want their financial life to go. Then we can use the tax planning on top of that to make it so the money they do have, they have more to keep and can do what they want to with it.

Tax Bracket Misconceptions

Dean Barber: Right, but let’s think about how our industry, and I’m going to speak specifically of the financial services industry and to a large extent, the tax industry, has presented this to the public at large. Okay. Go to work, max out your 401(k) plan, put as much in there as you possibly can, and that’s going to be your retirement. By the way, if you max out, it’s going in pre-tax, so you’re going to save taxes this year, and- 

JoAnn Huber: Then you’re going to save taxes when you take it out. You’re going to be in the lower tax bracket.

Dean Barber: That’s right. They tell you you’re going to be in a lower tax bracket when you retire. As most people know who are familiar with Modern Wealth Management, our primary specialty is working with those getting closer to retirement or are already there. JoAnn, we don’t see people in lower tax brackets in retirement.

JoAnn Huber: Not very often, because the people who have accumulated assets will most likely be in a higher tax bracket. It’s a good problem to have, but we can work with them to do the tax planning to try to reduce the tax burden.

Laying the Foundation of Tax Reduction Strategies

Dean Barber: What we want to do here, let’s lay out the foundation of the work that we have to do first for your team of CPAs to begin to do the tax planning work. Then, we’ll share a few ideas of some things that we do, some strategies that we employ, and how those strategies can help impact the tax liability over time.

The Financial Plan

Dean Barber: Let’s start with the concept of the financial plan. The financial plan is far more than just some data entry into a computer or some software program. When we are doing financial planning for people, we will spend two to three hours with the individuals asking them so many different questions about their financial life and getting a good snapshot of where they are overall. 

We’re going to look at two years worth of tax returns, wills, trusts, insurance policies, every single statement they have from every financial institution, including 401ks, pension agreements, and stock option agreements. Anything that has to do with your financial life we’ll look into, and we’re going to have many questions.

Questions About Your Goals

We’re going to ask questions about what you want the future to look like. At what point are you going to retire, and will you live in the same state when you retire? Do you plan to move to another state? Are you going to buy a second home? What are all of the goals that you have? 

Often, people have a hard time visualizing that future. With the decades of experience that we have, we can help guide people through that process and help them understand and articulate those goals to put those into the financial plan. Once we lay it all out, we see the resources, and we know the money that’s will be spent in the future. That’s when you, as the CPA, and your team gets to go to work.

Once We Have the Financial Plan, It’s the CPA’s Turn

JoAnn Huber: Now we know what we’re working with, and we have all that information in one spot. With that done, we can look at it and say, “Okay, this is what they want to do. What can we do from a tax perspective?”

So much of that is going to be in the retirement distribution strategy. Where do you take the money? 

It’s essential to develop that strategy, but since we’re working with people before they retire, we also have to figure out where they should be saving now because that will create flexibility down the road. As you were saying, people often have been told to put everything into that 401(k). And then they come in, and everything’s there, and they have no options because, if that’s the only place you have saved, well that’s the place you’re taking it out of. It’s critical to work with a CPA as you’re leading up to retirement to make sure you’re saving in the right location.

You Can Control Your Taxes More in Retirement Than Ever Before

Dean Barber: Right. I have a saying, “People think that taxes are a matter of fact. The fact of the matter is that people have the largest ability to control their tax bill in retirement than they ever have at any other time during their life.”

Some people believe that, well, I can’t talk to the folks at Modern Wealth Management about tax planning until after I retire, but nothing could be further from the truth. It’s that magical ten years leading up to retirement that is critical in crafting the plan that will allow you to pay far fewer taxes in retirement. If you wait until the last minute to come in and talk to us or six months before you retire, there are years you have missed a ton of stuff.

Know the Tax Implications of Taking Money Out Before Putting it In

JoAnn Huber: Right. I always tell people that you need to know the tax implications of getting that money out of the account when you’re putting it in. That’s going to help you determine where you should be saving. That goes with what you were saying. If we were waiting until six months before you retire, there’s not a whole lot of savings left. Whereas that ten years beforehand, we have some time that we can figure out where we need to put it, and it might be we’ll save in one location, such as a traditional 401(k) one year, and then the next year, maybe we will go into a Roth 401(k) or a taxable account. We’re looking at your situation year by year and determining, “Where do I save this year?”

Traditional Versus Roth

Dean Barber: You and I did, we did two episodes on our podcast, which you can find on your favorite podcast app. Just look for The Guided Retirement Show out there on the favorite podcast app. It’s also on YouTube. In episodes one and two, JoAnn and I go into considerable detail on Roth versus traditional IRA and 401(k). Depending upon the time of life that you’re in, and depending upon the wages that you’re making at that time and the length of time you have until retirement, one is going to be better than the other. But you can’t make a blanket statement that a Roth is always better.

Roth Example

An example, let’s say that somebody is 55 years old, they’re in their peak earning years, they plan on retiring at age 60. At age 60, they’ve saved some other money. Let’s say they’ve got some Roth IRA money. Let’s say they’ve got a reasonably large 401(k), and let’s say that they saved some money in a taxable account. 

Well, in my opinion, that individual is going to be better off putting money into the traditional 401k because they’re in their peak earning years. And they’re going to get that deduction at that higher tax rate. Once they retire, now we can start to do some magical things. 

Now we can begin to do some Roth conversions methodically, slowly overtime to get that money out of the 401k where they may have deferred it, say in an average tax rate of 30% or something like that. Now we might be able to get it out and over to the Roth at 12%.

JoAnn Huber: Right. It comes back to, “When can I pay the least amount of tax possible?” In that situation, of course, we would want to take advantage of the tax deferral and get the deduction while working with the high-income, and then when they retire in the lower, we can move it over to the cheaper place. If we had that same scenario, but we had someone who would have a sizeable pension, we might have a different answer.

Dean Barber: Absolutely.

It’s About Your Situation

JoAnn Huber: That’s where it goes back to looking at your individual situation and saying, “What will be your facts, and what do we need to do?”

Dean Barber: Let’s use some of our young children as an example who are now out of college, working, but they’re not yet in their peak earning years. I believe that the Roth 401(k) for young individuals is far better than the traditional 401(k). Because when they’re deferring and in a low tax bracket, they’re not saving anything. All they’re going to do is to create this bubble of money that’s going to be taxable in the future when tax rates are likely going to be higher, and they’re going to be in a higher tax bracket because they’ve accumulated more money.

JoAnn Huber: Yeah, I agree. That’s the advice I’ve given my kids and what I would give to anybody. You have to look at where you’re at today. Where have historically low tax rates? How long are those going to last? Who knows.

Dean Barber: We don’t know.

JoAnn Huber: We do know that if they have the Roth 401(k) option, that’s probably something they should seriously consider.

Tax Diversification

Dean Barber: Let’s talk a little bit about tax diversification, JoAnn. People typically think about the term diversification in the term of investments. When we talk tax diversification, there are three different buckets that people can put their money in from a tax perspective; taxable, tax-deferred, or tax-free. If you ask me, Dean, where would you like to have all of your money? I’d say, well, all in tax-free. The problem is getting it into the tax-free bucket.

JoAnn Huber: Right. You have to look. Is that going to be the best place for you if you paid tax at 37% to get it in that tax-free, or would you have been better off to taken it and put it into the tax-deferred because you’re going to be in a lower rate in the future? That’s why, once again, we go back to that plan. I feel like it’s a broken record, but that plan is so essential as the foundation to know where you should be saving and then how to take that money out.

Roth Conversions

Dean Barber: We talked a little bit about putting money in, doing methodical Roth conversions over time. In episode 18 of The Guided Retirement Show, you and I went into detail about Roth conversions for retirees and what you need to know. Get out and listen to that episode. It’s everything you need to know about Roth conversions. The whole tax-free story. The Roth was signed into law in 1997, written by Senator Roth, and perhaps, I think, the best piece of legislation that’s ever written. I believe it’s the best tax code ever written, but it’s one that’s not widely understood. It’s one where people make a lot of mistakes, in many cases.

Roth Opportunites & Mistakes

One of the first mistakes that they made, in 1997, this law comes out, and they said, “Okay, if you have money in an IRA, you can convert that money from the IRA over to the Roth, and you get five years to pay the tax on that.” That was incredible. I had so many clients do that who are now in a total tax-free state because all their money’s in a Roth IRA. They’ve got Roth IRA money coming in, and then they’ve got Social Security coming in. What’s the tax on Social Security if your only other income is Roth IRA?

JoAnn Huber: Nothing.

Dean Barber: Zero. We had a little bit of paying some taxes over five years, but now all the growth since then has been tax-free, and now all the income is tax-free.

JoAnn Huber: They’re looking really sweet, and there’s a lot of people that wish they could have done that, but not everybody was in a situation in their life where that made sense to do that at that point.

Dean Barber: Also, I don’t think a lot of people trusted it.

Skeptical of Tax Opportunities?

JoAnn Huber: No. I still get that question so often with people that I’m talking with; they’re like, “But what if they change the roles and we have to start paying tax on the Roth earnings down the road or something?” Well, we don’t know. Whenever we do tax planning, the way I look at it is we have to plan based on what we know today. Right now, it’s going to be tax-free. That’s what we’re going on, and if it makes sense, let’s do it, but if we always wait because we’re fearful of what may be, we’re going to do nothing. Then our plan has been to just default to whatever the government gives us.

Social Security and Tax Reduction Strategies

Dean Barber: That’s right. There’s nothing worse than just saying, okay, I’ll do nothing, and then you wind up paying far more taxes. When we do good solid tax planning for people, the difference in the amount of taxes that we project over a lifetime can be two, $300,000 fewer taxes if you do the right planning and go forward. A perfect example that I think we should give our viewers today is Social Security’s taxation because many tax planning opportunities go around understanding Social Security’s taxation. If you don’t understand that as a foundation for a massive amount of tax planning, you’re going to miss a ton of opportunities.

JoAnn Huber: Right. As you mentioned in the example with the people who were converted over five years, and now they don’t have to pay tax on Social Security, that’s a considerable saving. Social Security can be a tax-free income stream unless you disqualify it. The way it’s disqualified is by having other streams of income. Suppose we have a significant IRA distribution or a pension income or something. In that case, that will cause his Social Security to become taxable, and you get to the point where up to 85% of the Social Security is subject to tax.

85% of Social Security Could be Subject to Taxes?!

Dean Barber: Right. We should explain precisely how that works. If you’ve got a modified adjusted gross income, which is not that complicated of a formula. You take 50% of your Social Security benefits, and you add in all other sources of tax taxable income, plus all of your tax-free income from municipal bonds. If that total for a married couple exceeds $32,000, then up to 50% of your Social Security becomes taxable. If that total as a married couple exceeds $44,000, then up to 85% becomes taxable. The question becomes, how do you get the income that you need in retirement without breaching those thresholds of that modified adjusted gross income? That’s where I say that tax planning ten years before retirement is essential.

JoAnn Huber: Right. We can get to a situation where maybe we are only paying tax on 50% of the Social Security, or maybe less. We have to look and say, what can we do to avoid tax because you have somebody getting 40, $50,000 of Social Security income. If we’re not paying tax on that, that’s a massive saving right there, but it’s not something you’re going to probably just luck into. It’s going to take planning and work before you hit retirement.

A Story About a CPA

Dean Barber: Yeah. That’s where the tax diversification comes in. I’ll never forget the point at which I sat down with a retired CPA, and he was asking me about investments and needing to create a certain amount of income. My comment to him was, “You don’t have an investment problem. You have a tax problem.” He said, “I’m a retired CPA, Dean. What are you talking about?” I explained to him, “You have a situation where you could basically be in a 0% tax bracket for the next eight years.” He’s like, “I’m a CPA. If that were possible, I’d know it.”

Well, he wasn’t thinking outside the box. He wasn’t thinking of all of the different buckets and the order in which he spent them. He was just taking interest off of all of his accounts plus distributions from his IRA. Everything that was coming out was taxable, and that was causing his Social Security to become taxable. 

We did the unthinkable. We spent some principal, and we deferred some other, and we reduced the withdrawal rate that this guy needed from what was a 7% withdrawal because of the market crash of 2008, down to about a 4.5% withdrawal. Using tax reduction strategies, we solved the problem, not using magical investment strategies.

JoAnn Huber: We did it using the distribution strategy and figuring out how to take that money out, which is essential when we look at it. I want to caution that this situation will not be right for everybody because we knew what his long-term rate was going to be. We knew that it was okay for him to pay tax at zero for a few years because he wouldn’t go to a high tax rate once he started these required minimum distributions.

RMDs and Tax Reduction Strategies

JoAnn Huber: If you have somebody who’s going to be in the highest tax bracket when they do start the required minimum distribution, we probably don’t want to go to a 0% tax rate because we want to take advantage of those years when they’re in the low tax brackets and get money out of the 12% or whatever tax bracket; 12% 15, depending on what the rules are, because we don’t want to lose that. We’re looking at how we can smooth the income to keep a consistent tax rate, rather than having a really low rate for a couple of years and then skyrocket for so many years after that.

The Purpose of Tax Planning and Tax Reduction Strategies

Dean Barber: The entire purpose and goal is: How can we construct a plan that allows you to know you’ll get money into your checking account month after month, year after year after you retire with the very least amount of taxes possible? That is the entire goal of having a team of CPAs working alongside our financial planners. We want to create that nirvana, or as close to that nirvana as we can get by having that distribution strategy, and we want to do it well in advance of retirement because it’s how we save up to retirement that’s going to dictate the rules of what we’re going to set up after retirement.

JoAnn Huber: Right. That plan will change year to year, but here’s our framework where we think we’re going. Then we can fine-tune it each year to get it precise, but it’s so important to have that general idea when we’re starting and then go from there to make changes to make it the most efficient we can from a tax standpoint.

Dean Barber: Yeah. There’s no question that tax efficiency is key. 

Taxes on Investments, Capital Gains, and Dividends

Let’s switch gears here just a little bit, JoAnn. Let’s go to the taxes on investments, capital gains, and dividends. There is a lot of tax planning that needs to go around the qualified dividends and capital gains because you can get some favorable tax treatment on those qualified dividends and capital gains unless you mess it up.

JoAnn Huber: Right. You can be in a situation where the tax rate is zero for federal taxes on qualified dividends and long-term capital gains, which is hard to beat.

Dean Barber: Right.

JoAnn Huber: We have to look and say, “What is your situation going to be, and if you’re going to be in that 0%, do we look at maybe investing where we’re going to be getting more qualified dividends, or do we want to realize some gains on some investments so we can sell them at the 0%?” Then, maybe we turn around and buy a similar stock so we can reset the basis.

Dean Barber: Yeah. That gets technical, and that’s something that should be reviewed every year. We can try to plan that out a few years, but it isn’t easy, and it’s one of those things that is very powerful.

Capital Gains Distributions

JoAnn Huber: Right. We have to look at that. We have to look at the capital gain distributions because even though those get a favorable tax rate, it might kind of wreak some havoc on your portfolio.

Dean Barber: That’s one thing that we need to talk about because, in retirement, you have more than one tax rate. Your tax code becomes more complicated because your Social Security has different rules. Your qualified dividends and capital gains have different rules than your IRA distributions or your muni bond interest. Too much of one can cause another to become taxable when it would have otherwise been tax-free right.

Capital Gains and Dividends Impacting Social Security Too?

JoAnn Huber: Right. In that example, when we had the 0% tax rate on the long-term capital gains and the qualified dividends well, it might cause some of the Social Security to become taxable if we have too much. It’s finding that balance between the different sources of income and what tax rate we’re comfortable paying to keep it at that amount.

Dean Barber: It’s almost like every single person, or every single couple’s situation is like a giant jigsaw puzzle that we have to sit down and figure out how to put together. Once we’ve designed the financial plan, which is two to three hours of conversations with people, probably another five to six hours of prepping that plan behind the scenes, then you’ve got time after that with your CPAs to try to figure out the best tax strategy. The reality of it is this is a 10 to 12-hour project for each family that we do.

JoAnn Huber: It is very time-intensive.

Dean Barber: It is.

JoAnn Huber: I think the important thing is if we look at that puzzle, they’re the ones painting the picture. The important thing is, all of this is to make your life better, not to be the most tax-efficient. You paint the picture on what you want it to be like, and then we take all of those pieces and arrange them, so the picture turns out like they want, if possible.

The Art of Financial Planning (and Tax Planning)

Dean Barber: That’s where I think that you’ve got two sides of financial planning and tax planning. There’s the art of it, and then there’s the science. I believe the art of financial planning and the art of tax planning are far more important than the science. Because the science, the numbers, the laws, the rules, anybody can learn that and understand it. However, it’s the art of putting that together for each family; that is what makes it magical.

JoAnn Huber: Yeah. That’s where you can dream a little bit.

Dean Barber: It’s nice that once we have done the financial plan, and we say, based on your current scenario, here’s what your tax liability is going to be looking like over your retirement timeframe, with these adjustments and with these long-term planning strategies, we can set those two things side by side so that you can see the value of what’s there. 

As I stated earlier, JoAnn, many times, we see that value in excess of two to $300,000 over a lifetime. That’s enormous amounts of money that you’re not shipping off to Uncle Sam. You’re keeping it for yourself, doing things with your family, giving it to your kids, giving it to your favorite charities, or you’re just taking more trips or living a better life.

Tax Planning Isn’t Just About Planning for the Couple

JoAnn Huber: Right. A lot of times, when we’re looking at tax planning, so often we focus on couples, and a lot of times, couples assume they’re going to stay married forever. Well, chances are one of them is going to leave, pass away, and leave somebody as a widow.

Dean Barber: Or a widower.

JoAnn Huber: It’s essential to do the tax planning and look and say, “What can we do now while we have the married filing joint rates, which are twice the single in most situations, so that single taxpayer isn’t left paying such a high amount of taxes on basically the same amount of income?”

The SECURE Act and Tax Reduction Strategies

Dean Barber: That leads me to the SECURE Act, and that stands for Setting Every Congressperson Up for Retirement Enhancement. No, it’s “Every Community.”

JoAnn Huber: Really, it was for the Congresspeople.

Dean Barber: I think indeed it was.

JoAnn Huber: Or the government, the money grab.

Passing on and IRA Just Got More Challenging

Dean Barber: The SECURE Act destroyed people’s ability to pass their IRAs on to the next generation and have that next generation be able to stretch that IRA over their lifetime and just continue to take out small distributions. Now they’re forcing everything out over a ten year period, which is a huge deal right now. There’s going to be a larger erosion of wealth as that happens.

JoAnn Huber: Right. Because all of a sudden people typically inherit in their high earning years and you add that IRA money on that’s tax-deferred, so you got to pay taxes. Now you’re paying at a high rate, and in most situations when we’re running the projections, that tax rate is much higher than the tax rate that was deducted when the money went into the account.

Learn More About The SECURE Act

Dean Barber: I’d like to encourage everybody reading this to watch the video that we did on The SECURE Act. It’s about 45 minutes to an hour-long. We bring in an estate planning attorney and an insurance expert, and we talk about the effects of the SECURE Act and some things you can do. 

Utilizing Insurance for Tax Planning

Still, one of the things that I was going to mention, JoAnn, is that many people don’t think about utilizing insurance in a tax planning arena. I want to give an example of what we’ve done in the past. One of the things that none of us ever want to have happen to us is to go into a long-term care facility. You don’t want to do it.

JoAnn Huber: It’s not on somebody’s list.

Dean Barber: Never a life goal, and yet there is long-term care insurance out there, and there’s also life insurance that has a long-term care rider on it, where if you need to use part of that death benefit to pay for long-term care, you can, and it comes out tax-free. 

A Tax Planning Opportunity

We think of this as a planning opportunity. If we believe that there is a chance that one of the other spouses is going to spend some time in a long-term care facility, which the chances are over 50%, it will make sense to insure. In most cases, my feeling is that the life insurance that has the long-term care rider on it is the best. I’ll explain to you how that works real quick.

You get a life insurance policy, and let’s say it’s a million dollars and that million dollars, first of all, you buy it with a guaranteed premium, so the premium never increases. On most policies, you can utilize anywhere from 60 to 80% of that death benefit to pay for long-term care. If you don’t use any of it for long-term care, the million dollars passes to your spouse or beneficiaries tax-free. 

If you use, say half of it, $500,000, the other $500,000 goes to your beneficiaries tax-free when you die. It truly is the only policy that I’ve ever seen with insurance where you or your beneficiaries are guaranteed to get out more than what you put into it. What does it have to do with taxes? Well, what happens if somebody is in long-term care, JoAnn?

JoAnn Huber: A lot of times, they’ll have high medical expenses.

Dean Barber: What does that do?

JoAnn Huber: It gives them a huge tax deduction, which we can then use, maybe do a Roth conversion or something to generate some income to offset that income and get it moved over to a tax-free account at a pretty low rate.

Long-Term Care Expenses and Tax-Free Income

Dean Barber: Right. Paint the picture. We have long-term care expenses; we’ve got tax-free income coming in from the insurance policy to pay for those long-term care expenses. Those long-term care expenses, in most cases, are mostly tax-deductible. We can move money out of an IRA to a Roth with zero taxes so that the surviving spouse or the ultimate beneficiaries, the next generation, that whole Secure Act deal, guess what? We’ve reduced the paying on that significantly because what are we doing? We’re playing by the rules that the IRS wrote.

JoAnn Huber: Yeah. All tax planning is about is, “What are the rules, and what can we do to use them to our advantage?”

The Rules Are Complex, That’s Why it Takes a Team

Dean Barber: The rules are so complex that I don’t think it’s possible that anybody comprehends the tax code’s complexity and truly understands how to take advantage of it.

JoAnn Huber: Well, and once you think you start to understand it, they changed the rules to keep you on your toes.

Dean Barber: Right. That’s what our jobs are is to help people identify and look at that big picture through the financial planning process so that we can help them apply the dozens and dozens of tax reduction strategies that you and I know are available. 

Still, we can’t put out a video, write a white paper or anything that says, “If you do these things, then this is what’s going to happen.” Because whatever it is may not fit your situation. That’s why the financial plan must come before the tax reduction strategies. Why so many CPAs don’t do tax planning is because they don’t have the data. They don’t have the construct of the overall financial plan first.

Consult with Our Financial Planning Team

JoAnn Huber: That’s why I encourage you to come in and talk with us. Let us put that plan together, and then we can look and say, what do we need to be doing from a tax perspective? Where can I save money? What do I need to start doing today? Look, 2020 is a great year to be looking and saying, what tax opportunities do I have? It’s been so crazy for so many people. What options are out there because of what happened in your year that was different? Are there things you could do this year that you might not be able to do next year?

Dean Barber: There are. I want to kind of finish up here, JoAnn, with a final point. Many people, I would say well above 90% of the people who visit with us for the first time, get that complimentary consultation, decide they want to go through our planning process. We discover that the vast majority of people are overpaying their taxes. 

Don’t Miss Tax Planning Opportunities

Again, it’s not because their CPA or their program prepared the tax return wrong in most cases. In most cases, they’re overpaying their taxes because they missed opportunities, big opportunities.

JoAnn Huber: It’s not the math that’s causing problems. It’s what should I have done that I didn’t do?

Dean Barber: Right. They’re missing opportunities because they don’t have that relationship, and the CPA doesn’t know what they’re doing if they’re going out and doing these things every year. Then they’re bringing that information and reporting history.

JoAnn Huber: There’s no way anybody can be expected to know all about the tax law and take care of things independently. By not using professionals where that’s what they do, it’s tough to take advantage of all the opportunities.

Dean Barber: Let us help you find out what opportunities are available for you. We want to encourage you to come in and get a Complimentary Consultation. Let us help you figure out what tax planning strategies can help reduce your tax liabilities over the long term. 


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

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. 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.