Episode 13: Taxes in Retirement- The Power of Zero

Here are just a handful of the things that you’ll learn:

Episode 13: Taxes in Retirement & The Power of Zero

“The hardest thing to understand in the world is the income tax” Albert Einstein

I think you might be surprised at the person who is credited with that quote. Any guesses?

Well, it’s someone who is arguably considered to be one of the smartest people to ever have walked the planet with an IQ of over 160 points…………………that’s right Albert Einstein!

In our latest series we are going to tackle the subject: Taxes in Retirement……………….and we are going to explore the possibilities of achieving a zero percent tax bracket!


What do you think? Do you think its possible to achieve or get close to a zero percent tax bracket?


If you have some time to prepare and plan properly……. be intentional and proactive prior to the age when the government makes you take money out of your tax deferred accounts ………….age 70 ½, it could be possible!


Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So unless you’re a client I can’t give you advice because I don’t know you. So think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.


Practical planning segment: I’m joined today by our co-host Joani Gursky. How excited are you to talk about taxes today?


Seriously though, I think that the subject of taxes in retirement and being proactive in your tax planning……….before you are forced to make some tough choices (like RMDs), is a financial planning topic largely ignored in the industry.


And at the same time it may be one of the most important planning topics for those in their 50’s and 60’s to consider prior to that magic age of 70 ½ when distributions are required to be withdrawn from your tax deferred accounts………..even if you don’t need the money!


Joani and how often do we have a client that doesn’t not need their full RMD, wishes they didn’t have to take, but is forced to take or be threatened with a 50% penalty?


Now you might ask “ well Jeff, shouldn’t my CPA do my tax planning?” My response to that is of course they should! And most CPAs are really good at short term tax planning. Meaning that they look at what just occurred in the past year and record all your income and deductions, compare it to your standard deduction and maybe, just maybe, tell you some ideas to lower your tax bill for the following year.


Joani: my guess is there are very few that do proactive tax planning for 5 or 10 years into the future.


Some really good CPAs will mention it but very few actually do it with their clients. I think that this is where you need a financial advisor to explore some ideas that you can then take back to your CPA for confirmation as to whether they think it makes sense to initiate a pro-active tax plan for retirement.


How can you create a proactive tax plan that far into the future when you have no idea what the tax rates will be 5 or 10 years into the future? Let’s look at some facts regarding some SIMPLE MATH!


Starting with Social Security: When SS was signed into law in 1935, there were 42 workers to every 1 retiree. The earliest age at that time you could start collecting benefits was age 65. The average life expectancy at that time was 62 years. So, the average time to collect back then was roughly 2 years.


Fast forward to today… the picture is quite different. The workers to retiree’s ratio is now only 2.8 to 1. The earliest filing age is 62 not 65 as it was back in the 30’s. The reality is if you start at 62, on average, you’ll keep collecting until age 85. In fact, octogenarians are the fastest growing segment of our population. The average time to collect benefits today is 23 years!


Some other interesting facts to consider when thinking about future tax rates!


  • In 2018, Social Security broke the 1 trillion mark for the 1st time in history!
  • Medicare, Medicaid, — together cost another $1 trillion.
  • 62 cents of every tax dollar is spent on 3 things; SS, Medicare, Medicaid, and
  • interest on the National Debt costs us another 363 billion
  • The rest of the budget is all discretionary spending


The total budget was 4.4 trillion……guess how much we bring in through taxes? Do you think its more or less?


So you can see we have a simple MATH problem!  We spend far more than we take in and the budget deficit grows each and every year. Eventually something must give right?  Either more taxes or less spending… or both!


Now let’s take a look at the tax side of the equation. Under the 2018 tax cut and jobs act the current top marginal tax rate is 37%.  Its one of the lowest top marginal tax rates in our countries history since the beginning of the tax code.


Now let’s look at where we have been in the past: In the 1940’s, the top marginal tax rate was 94% and $200k and above was the highest tax bracket. Ronald Reagan made $100K per movie so, he only did two movies per year because anything over that he would only made 6 cents on the dollar. He never worked more than 6 months per year. Mathematically it didn’t make sense.


By the 70’s; things hadn’t improved that much and 70% was the top marginal tax rate

By the 80’s, we got down to 50%. How bad are taxes today? Usually I get an Answer of “as bad as they have ever been!”  In reality, they are close to as good as theyve ever been!


Joani: the point is there is a lot of room to go higher just based on where we have been in the past!


That’s correct. We are already seeing politicians (not naming and names) touting all sorts of taxes: 70% income tax rates, wealth tax on all wealth, 77% death tax rates. When we are thinking about being intentional in our decision making and planning appropriately, we simply have to look at the math and come to the conclusion taxes will most likely be much higher in the future!  When? Nobody knows… but it could be sooner rather than later.


So we have this planning window, right now! To take advantage of some of the lowest tax rates in history get as close to a zero percent tax bracket as possible!


IF, let’s say, TAX RATES DOUBLE! If certain politicians get their wish and the top rate goes to 70% what do you think happens to all the other tax rates below the top?


Joani; they go up as well……………


Of course they do! So if tax rates double in let’s say 5 yrs, 10 yrs, 20 yrs………..if you are in the 0% tax bracket in retirement then two times zero is still zero!


Joani: So what’s the first step in starting the planning process?


The 1st step is getting a basic understanding of how your money is taxed in retirement. We do this with THE 3 TAX BUCKETS.


  1. Bucket 1 is money/accounts that is taxed NOW. Money that you get a 1099 on each year because you have to pay taxes on interest and dividends and capital gains in the year you earned them. Ex: savings accounts, personal brokerage accounts
  2. Bucket 2 is the “taxed later” bucket. This is your tax deferred accounts. IRA , 401k, 403b, 457b, etc
  3. Bucket 3 is the tax-free bucket. This would be Roth IRA, Roth 401k, and uniquely designed CV life insurance plans.



Coachable Segment: It’s pretty simple! I want you to grab a piece of paper and at the top draw a picture of 3 buckets. Label bucket 1 the taxed now bucket, 2 the tax later bucket, and 3 the tax-free bucket.


I then want you to start adding up all your accounts one by one an allocate them to the correct bucket. Example, savings account or personal brokerage account is in the taxed now bucket. IRA’s are in the tax later bucket. Roth IRA’s are in the tax-free bucket.


Once that’s completed, put it on your desk and wait for next week’s show……….


We will go into much more depth on how these buckets can help and hurt you later in retirement!


Final Disclaimer:

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