Take-Home Pay is the Net Effect of Retirement Income

Coordinating Taxes with Qualified Plans and RMDs

Here are some highlighted excerpts from the interview with chartered financial consultant, investment advisor representative and author Mark Roberts:

Steve: How big a role do taxes play in retirement?

Mark: I think they play the biggest role, it's the number one thing that eats away our money more than anything else. We don't always have high medical bills, but we typically a few more medical bills as we get older. What's constant every year, healthy or unhealthy, is taxes.

Steve: You just said when the first person dies in a marriage, you lose an exemption. If they were on the standard deduction that gets cut in half, then all of a sudden I might be in a new bracket. I might even have a Medicare premium increase because of it.

Mark: I think it boils down to client education. The course for my practice has been centered on something called our three tax buckets. If you can get clients educated on how the three tax buckets work, then they're going to understand the rules to their money. If you understand the rules to your money, then it's easier to understand the strategies and how to reduce your taxes overall. Here's a perfect example of what three tax buckets look like. This is not about products. This is just strictly about understanding the rules to our money. You have tax-deferred, taxable, tax-free. Our money over here is going to grow tax-deferred where later down the road I get taxed. Here I get taxed every year. If my money makes money I get taxed. Over here it's tax-free. It'll never get taxed again.

Every bucket has pros and cons. In this example over here 401(k)s and IRAs, and annuities and so on, the advantage to this bucket is, I put money in and I get a tax deduction. When it grows, I don't pay tax and my employer a lot of times matches. I have some advantages. The disadvantages, that bucket has rules. It's got the 59½ rule and the 70½ rule. The other disadvantage, every time I take a withdrawal, I have to pay tax. The bulk of America has the bulk of their money in that left tax bucket.

It is extremely heavy compared to the other buckets. This bucket here is taxable every year. Bank accounts, money markets, CDs, stocks, bonds and mutual funds. The advantage: no rules. I've got no 59½ rule, no 70½ rule. The disadvantage, it's taxed all the time. If my money makes money I get a 1099, I have to pay tax on a yearly basis. Tax-free means to potentially never get taxed again. Like a Roth IRA is a perfect example. This bucket does have a 59½ rule on a Roth IRA, but the advantage is, no 70½ rule. You've got two buckets without the RMD 70½ rule. The biggest advantage to this bucket is the fact that when it grows I don't pay tax. When I withdraw it, I don't pay tax. When I pass it on to my kids they don't have to pay tax and no 70½ rule. The disadvantage of this particular bucket is, they don't know how to get their money in that bucket. By far that is the biggest bucket everybody has. This is the medium-sized bucket, and this is the smallest bucket. When you look at it and walk people through, this is where they want their money but they have never been taught how to get their money in there.

Steve: I think you educate your clients in such a way they actually are a little bit better at understanding the rules of engagement on each bucket and they are starting to understand almost like a game, as if you were learning a brand-new game during retirement.

Mark: Absolutely, and the biggest fear I think people have with this is they think we're trying to get them out of their current products to put them in other products. That's not the case. Let's just pick an example, let's say I want to have a stock. I can own stock in that bucket, that bucket or that bucket. If that stock is good that mutual fund is good and we'll say it makes me 10 percent, I'm going to make 10 percent, make 10 percent, make 10 percent. It's just that 10 percent will be taxed later. This 10 percent will be taxed this year, this 10 percent will never get taxed. Can I take a little bit of that stock or can I take that entire stock, or that entire mutual fund from that bucket and move it to this bucket? Yes, I can. It's basically check a box, sign a form.

If I take it out of there I have to pay tax, so we try to figure out a method. A strategy of how much do we withdraw from the left bucket, pay a little bit of tax, reinvest it over here, back if you want to change products or keep the same products. Just move it from bucket to bucket. Then next year do it again, next year do it again, next year do it again. Can we take all your money out of the left bucket and move it to the right bucket in one fail swoop? Yeah, for the most part, yeah we can, but typically not in your best interest. We don't want to generate a huge tax bill today. We just want to generate a tiny tax bill today and then generate a little next year and over time it's going to magnify until we have less and less taxes over time, because we have more money growing tax free without the 70½ rule.

Steve: Well, you just brought up a great point that I think most consumers sometimes are confused by which is, I want to move this out of here because I do like the tax-free bucket and I'm in balance right now in my tax situation with the same investment.

Mark: You can absolutely keep your investments, if you want to add a performance element to the tax strategy. We could also sell a little bit of that winner and come over here and buy one of your other investments that you already have that's performing a little bit less right now. You could sell and buy low, what you want to do in a portfolio anyway for performance, but do it while we're doing tax strategies at the same time. If a client's not wanting to do that, they really want to keep that investment, then yes, we can move that investment from over there to over here without ever getting rid of it.

Steve: Now, a lot of the things we talked about in the prior segments were really unique, but this is your cornerstone of your practice, taxable management issues. To me, and you're educating your clients so they're going to become a little bit of a gamer of the system here. They know the rules of engagement. This is a major cornerstone of your practice and really this frees up more money in the long haul for the client's spendable income.

Mark: Tax savings has two simple benefits. If you save on taxes you either have more money to spend or you have more money to grow. Either one's a win-win. At the end of the day, if we can teach them the rules, they will feel more empowered. When I get done walking somebody through this process I would say by far the number one question I get, "Mark, if it's that easy, why didn't I hear this before?" It's the genesis of the book. Probably the most common, number-one compliment or comment I get from people, "Gosh, I wish I would have met you five years ago, I wish I would have known you 10 years ago." Because, I'm not talking rocket science, I'm talking about something they understand but they quickly recognize, they're not doing this for themselves, or their financial advisor has never brought this to their attention, or their accountant has never brought this to their attention.

Steve: When you're looking at taxes, what are you looking at in duration, time duration?

Mark: We always need to have some kind of a baseline from where they are today and we don't know how long either the husband or wife would live, so we always like to go to the youngest person's age 90. We just want to make sure that, number one, they don't run out of money. Some people say, "Well, I'm not going to live that long." Some people say, "We'll I'm going to live longer than that." We can always adjust the age, but we need to have a stopping point so that we can measure, if you do things your way with what you and your CPA and your financial advisor are doing, what do you look like. We'll call that like a base plan. What are you doing? What do you look like doing it your way? Now, let's do it our way. Let's incorporate some of these tax strategies. Don't change the product. Don't change performance. Don't change anything. Just incorporate tax strategies. When you lay that down side by side you see the difference in numbers. "We saved that much on taxes?" It's a huge advantage to you, you have more income to spend or you have more money to grow. Either way it's a win-win.

Watch the video interview with chartered financial consultant, investment advisor representative and author Mark Roberts

http://rightonthemoneyshow.com/take-home-pay-is-the-net-effect-of-retirement-income-mark-roberts/