Look out! Here comes the election

Read The Transcript Below:

Ben (00:07):

Welcome back to the Retirement Tax Podcast. I’m your humble co-host, as always, Benjamin Brandt. Joining me today, the illustrious Steven Jarvis. How are you doing today, Steven? ,

Steven (00:16):

Ben, I’m doing really good. It’s always good to be back doing this together.

Ben (00:20):

What’s the weather like in November in Spokane?

Steven (00:23):

I’m going to have to look into the future. We record these ahead of time, but quite often the beginning of November, we’ve already had our first snow. It kind of depends on the year. Usually, the snow doesn’t stick around quite yet. It’s usually more like after Thanksgiving that we get snow that stays the rest of the winter. So it’s probably getting cold and a little snowy.

Ben (00:41):

Yeah, late October, early November in Bismarck is interesting because ever since I was old enough to remember, so we’re talking kindergarten age, Halloween is a really big deal, but Halloween in North Dakota, you’ve got a plan your Halloween costume in a very flexible way. So you might be just in a hoodie or in a T-shirt wearing your costume, but there’s a probably 70% chance you are wearing whatever’s left on your costume that’ll fit over a winter coat and snow boots. So we’re recording this in the future. I’ve got three witches and then probably something to do with Star Wars, and then I have a full gorilla costume that I’m not allowed to wear because the kids are terrified of it, which means I only wear it occasionally. So yeah, so that’s what it’s like to have late October, early November for people that don’t live in the Midwest. Is that what was our main topic, the weather?

Steven (01:32):

Yeah, I think so. That’s always when you know that you’ve got a good conversation going is when you go right to the weather. So we should probably bring it back to taxes at least a little bit.

Ben (01:40):

Okay. I was listening to an AI podcast the other day and everybody’s worried about AI taking over their jobs. One thing apparently that AI is really good at is predicting weather patterns, which I thought was really interesting. And then the host, he immediately responded to that with it could also guess what the stock market is going to do, which I immediately threw up a mental red flag to say, okay, we have a ton of data about the weather, which AI would be great at interpreting, and then forecasting, we call it weather forecasting, but there’s no incentives based on weather. The stock market is all based on competing incentives.

(02:17):

I guess this is a retirement planning podcast. This is somewhat tangentially related. The stock market is all about guesses and bets, and it’s all about incentives. So if Bill Gates or Elon Musk decides I’m going to sell all of my shares on the open market, the supply of their stock shares will exceed demand and price will respond by going down. AI could never interpret that. So I love learning about AIAI. It’s like the internet revolution of 2024 we’re like 25 years removed from the original internet revolution. Everybody loves to talk about AI. I think we’re applying it to areas that doesn’t make sense to apply to, just like we did with the .com bubble. So what’s old is new. Again, if you’re approaching retirement and you’re worried about AI, nobody knows anything and everything is all made up. So in my mind that would be, don’t panic, but again, I’m off on a tangent here, but.

Steven (03:03):

Well, this episode is coming out right before an election and elections always spur a lot of speculation. That was our last episode. We really talked quite a bit more about that. The other thing that I’ve noticed, Ben, both with AI and these prognosticators that get on podcasts and other things like that, those kinds of silly people, if you make a…

Ben (03:20):

Not us, everyone else!

Steven (03:21):

Not us, definitely not us. If you make a general enough statement with enough confidence in your voice, you always sound really smart and in hindsight, you can always pretend that you are right. So the election’s in a couple of days, I’m sure if you ask AI what the election will do for taxes, you’ll get some kind of generic response that, Hey, elections drive volatility and tax law changes. That sounds really intelligent, but that doesn’t actually tell us anything or give us any actionable information. So good words of wisdom there from you, Ben.

Ben (03:49):

Excellent. Well, we mentioned we’re going to answer a listener question after this, but we mentioned, I think on last week or the week before, there was an article that I texted you and it was kind of going around in some different threads about a woman sued her financial advisor over Roth conversion. So I wanted to visit a little bit about that, and I don’t know if our listeners will ever be in a similar situation, but there’s a couple different levels of what happened, what went wrong and how could we avoid, nobody wants to be on either side of a lawsuit, I don’t think. So how do we talk about this? So I’ll read just a little snippet from the article to catch everybody up, but basically there was a woman who worked with a pretty large financial advisory firm. She retired in 2022 and she made quarterly estimated tax payments based on the tax planning from her financial advisor.

(04:38):

The plan was to convert 130,000 from her Roth IRA, and they did do that this year in 2022. Then in 2023, she was thinking, and it was communicated to her that they were going to do another $150,000 Roth conversion, and so she started making these quarterly payments. Something happened, the advisor decided not to do Roth conversions or whatever it was. Maybe there was a legitimate reason not to do it, but that was not communicated to the client, and so she discovered this after, we can’t go back to 2023 once we’re in 2024 to do these conversions. So it was forgotten, it was missed, whatever happened, and she had withheld the taxes. So we’ve kind of two things that went wrong. One, we can’t go back and do that Roth conversion, and I’m assuming there was a good reason to do it. That was suggested originally. We know there’s a lot of tax savings that can be done from that. Then also she probably liquidated investments, so she missed out on gains or interest to pay that quarterly taxes. So those are kind of the two things that jumped out to me at the article is that there’s lessons to be taken from here or if we find ourselves in a similar situation, we paid a bunch of money into the IRS that we didn’t need to. What happens next?

Steven (05:40):

Yeah, so Ben, when you texted that to me in the middle of a recording, I did have this moment of panic of what did I miss about Roth conversions is suddenly people are getting sued about it. Did a rule change? What am I liable for? All these kinds of things. But yeah, that’s a great summary of what went on at the end of the day, this was a lot less about Roth conversions specifically and more about setting expectations and follow through. It is really what it came down to. And so we’ve talked on episodes before about questions we should be asking professionals that we work with, how do we set good expectations? How do we develop good relationships? How do we make sure that tax planning is executed and follow through on? And so really my takeaways from this situation had more to do with some of those high level concepts, but I like that you’re drawn out there that we will talk about some reminders on taxes in general, especially if we’ve paid in too much, whether you are the person in your life that’s responsible for this or you work with a third party, we’ve got to make sure we talk about all the time that this is being consistently executed over time.

(06:38):

Coming up with a plan is a great first step, but it’s only the first step. And it sounds like even in the situation, they started the plan as they should have and then they didn’t follow up and they didn’t follow through. And so when we look at our tax planning, if you’re a fan of our podcast that we’re all about the long-term about taking this one year at a time and making sure we’re coming back to it. So if nothing else, this is a good reminder. We’ve got to come back every year making sure we’re dotting our I’s and crossing our T’s and that the plan we made last year or the year before, whenever it was still makes sense in the current environment.

Ben (07:10):

We get really excited about retirement planning software and tax projection software. So I’ll see a lot of plans where it says, well, I visited with an advisor and they did this tax projection and it goes out 25 or 30 years and it says, if I follow this plan that’s written in this binder, I’m going to save a gajillion dollars in taxes. And I don’t love that because that sort of is decided on day one of retirement what the next 30 years of tax planning are going to be or a direction or some general guidance, and I don’t agree with that. I think that every year we need to have a dedicated meeting with every single client about taxes because my goals change week to week and month to month. Yes, the overarching goals stay the same, but adjustments are made all the time. And depending on your charitable goals or if you’re going to do some gifting to your kids or maybe you had some stock that appreciated more than you thought it would or went down more than you thought it would or you’ve received an inheritance, there’s probably a dozen things, maybe two dozen things we could think of that would change in any given year that wouldn’t be reflected in that 30 year projection.

(08:11):

So we got to visit with every single client every year and have one meeting. Well, we do two meetings, but one meeting specifically dedicated to taxes in the fall, usually between Halloween and Thanksgiving, and doing that is going to avoid something like this where you make a 30 year projection, then you forget one year or decide not to do it for some other reason. I don’t love that. So that could have been what happened here is that they made a big projection, they executed on the first year and then the presumption was every single year they’re going to do something similar. But no, we want to talk about that every year just in case things change. We know there’s going to be some tax laws that are very likely to change, but that’s how I would step one to not being in this similar situation is don’t let a software make your decisions for the next 30 years. You can use software, that’s great, but every year is a decision standing alone.

Steven (08:54):

Yeah, Ben, such great reminders there. I want to circle back because I made a note of it as you said it, so we can talk about the lawsuits there. We may never know what actually happens with it, but this woman’s in this situation now where she made all these estimated payments for a Roth conversion that didn’t happen. So let’s talk about what that means for her because there are lots of ways that a person could end up in this situation where they’ve paid in a lot more than they need to, which even as I phrase it just slightly different in that way, there’s listeners who are probably already latching onto, oh, well, she’s just created a giant refund for herself, which when we tie it to a complex situation like a lawsuit, it sounds like it could be a lot more involved in it. It would be nice to think that there’s a way that we can go backwards and say, Hey, nevermind IRS, I didn’t really need to pay you that.

(09:38):

I wanted to have invested that. I wanted to have earned interest on that. And unfortunately, the IRS is not that generous. They’re going to give you back your money if you paid too much to them, which is why we want to be proactive, which is why we want to review these things and make adjustments where we need to. The extra money is definitely all going to come back to her, but she is going to miss out on a year’s worth of interest or investment returns, those types of things. And so this is why it pays to not only revisit your plan every year, but throughout the year as well. If we make shifts in, whether it’s how much we’re going to convert to Roth or if we have new sources of income, we’ve lost sources of income. We’re actually going to talk about a listener question here in a second that we’ll address this as well as far as changes in our expected income. But at the end of the day, the IRS is going to keep that money safe for us. They’re not going to pay us interest for it.

Ben (10:26):

I had two thoughts and you could tell me if I’m sort of on the right path or I’m totally full of it, but one thing we could do, let’s say in January they made a big estimated payment and then something happened. They got an inheritance, so we’re not going to do a Roth conversion. Could we then go to our IRA withdrawals or our social security, could we turn off all the withholdings for the rest of the year and try to get halfway back that way? That’s question number one. Could we say, okay, we’ve got $20,000 worth of credit with the IRS. Basically, can I turn off everything else and hope I get close to try to recreate this thing maybe to a positive? And then two, let’s say we’re going to go back to the Roth conversions next year. Is there benefits or the opposite of benefits to just saying, okay, can I apply that then to next year’s payments because then the money I would’ve taken out of investments or would’ve taken out of savings could stay there, of course a year removed, so I’m missing out on that compounding, but would that be kind of an, okay, if this client was mine tomorrow and I’m looking for ways to maybe fix this, would those be two kind of possible things we could look at?

Steven (11:30):

Ben, I love the way you’re asking those questions. It reinforces that tax planning has to be specific to the individual situation because as I described that my answer initially, I’m thinking about this specific woman in her situation, which she got to the end of the year and then realized, oh, she had paid too much in. So if we take that first one of, let’s say in January I make a giant estimated payment for the year, and then in February the new source of income, I inherit an IRA that I’m going to distribute whatever it is, I realize I’m not going to make that Roth conversion. I’m not going to have that additional income, and so maybe I’m in a situation where I’ve already really paid my whole tax bill for the year. Now what are my options? And so one thing to clarify is that you cannot go back to the IRS partway through the year and say, nevermind, I want my estimated payment back.

(12:11):

The only way you’re going to get that back is at tax time when you file your final return and you request a refund. But you’re absolutely right, Ben, if we were planning on making estimated payments for the rest of the year, we can just stop making the estimated payments. The estimated payments are not contractual, and if we have withholdings, whether from social security or IRAs, 40Ks, whatever it might be, we can shut those off for the year. I would strongly encourage that if we do that, we’re setting reminders for ourselves, whatever works best for us and our calendar and our phone for the end of the calendar year to turn those back on for the next year. Because I’ve definitely seen taxpayers forget to turn those withholdings back on and then get another year removed and have a giant tax bill that they weren’t expecting because their withholdings had come down.

(12:51):

So that’s the first situation and the second situation you’re asking, okay, so let’s go back to this woman. She realizes after the end of the year she paid way too much in for last year, so she’s eligible for this giant refund. If she’s now working with the new advisor and decides she’s still wants to do Roth conversions, could we just roll that forward and apply it to the next year? And the answer is we absolutely can. Mechanically that will work. What we want to look at then is, is it worth the additional steps to request the refund and then wait until later in the year to pay this next Roth conversion, or do we just roll it over? And sometimes this does come down to what kind of interest could I earn in the meantime, if we go back a couple of years when interest rates were basically zero, I would probably just say, Hey, let’s just roll it forward and not have to worry about it.

(13:36):

We got to keep in mind what our timeframe is. Ben, I know you work with clients on investing all the time and things like that, and so we got to make sure that we don’t get carried away in our head of, well, I have to take the refund. I can go earn 12% of the stock market and why wouldn’t I do that? You could also take the refund and go put it all on red. Those are certainly options, but we got to make sure that we’re balancing what we do with those funds with the timeline in which we need them.

Ben (13:58):

Okay, so a couple good options, a couple good options. I think one thing that I didn’t know and I had never considered is if I make a quarterly estimate in January, there’s no chance I’m getting it back until the following January or February, March, April. There’s no mulligans then with your estimates. They’re keeping it for a year.

Steven (14:14):

Yes. The IRS is not going to let you just go back on an estimated payment. You can’t request a refund midyear,

Ben (14:22):

What if I just cancel the check? Will they come and arrest me Once they’ve cashed it? I guess you’re out of luck. Yeah.

Steven (14:24):

You could try going the route of reporting as fraud to your bank and that could probably land you in a lot of trouble.

Ben (14:30):

That sounds like play with fire.

Steven (14:31):

That sounds like a really bad idea. So let’s not go that route. Yeah, if you’ve paid the IRS, we’re we’re waiting until our next tax return to request that refund.

Ben (14:40):

I’ve never come across it. That’s pretty interesting.

Steven (14:42):

Yeah.

Ben (14:42):

I’m sure it’s come up where someone has tried to do it, but yeah, I guess you can’t.

Steven (14:45):

So Ben, kind of related to this topic, or at least how we’ve gone with this topic, there was a listener question that came in that should you pay an extra amount on your estimated quarterly taxes if you have a surprise inherited annuity so as to not underpay and have a penalty?

Ben (15:00):

A short answer is yes. The IRS wants their money, right when you get that income, right, so if you get an inherited IRA in January, you might think, well, I don’t really have to do anything with this till April of the following year and the IRS is going to say, no, no, we’re a silent partner in that inheritance. You got to pay us. So that’s the short answer. The longer answer would be, depending on how much a client wants to really deal with this, we can do our fail-safe catch-all, and we do our year-end tax planning meeting. We’re going to dummy up in our tax software. We’re going to dummy up the income from that whole year including that inheritance and whatever other income and capital gains we have, and then we’re going to say, okay, we think our tax bill based on this information is 20,000. Why don’t we do a $20,000 distribution from your IRA? We’re going to basically withhold all of it, and that’s going to be our catchall because the IRS sort of looks at with holdings in a favorable way versus quarterly estimate. So we’re going to let our kind of failsafe catch it. But what say you?

Steven (15:53):

Yeah, from getting the taxes paid standpoint, I think you’re spot on, Ben, for people who didn’t listen to an episode we did at the beginning of October about getting ready for year-end, that’s a good one to go back and listen to about the IRS Safe Harbor rules on how much has to get paid in during the year. Because if you inherit a bunch of money on top of your other sources of income, it might be that you’re okay to wait until later in the year. You have to understand your specific situation. I’ll also say that when we’re getting to inheritances and things like that, this might be one of those times where you think about even if it’s just temporarily working with a financial advisor or an expert in these areas, because the tax situation on inheritances can be all across the board. It really depends on what you’re inheriting.

(16:33):

The specific question was around inherited annuities. Ben, you mentioned inherited IRAs. What if we’re I inheriting property? What if we’re inheriting investments? What if we’re I inheriting cash? There are a lot of different types of inheritances that aren’t taxable at all to the recipient, but again, it depends on the type of account. And I know I’m giving a lot more questions here than answers, but so much of it depends on how those assets, how that money actually comes to you, because it’s very possible you don’t even make an estimated payment because what you inherited isn’t taxable at all. It depends on what’s coming through.

Ben (17:03):

That’s a good point. Yeah, you could be inheriting a whole bunch of Microsoft stock from your uncle and it might not be taxable at all depending on the situation. We might’ve gotten a step up in gain or step up in basis, I should say, and the gains are taxable to you. So I think you’re spot on. If you’re a do it yourself investor, and this seems complicated or there’s big numbers at play that you don’t want to mess up, there are financial advisors that specialize in hourly or fee for service planning. So a resource that I love to turn people onto is Garrett Planning Network. If you just Google Garrett Planning Network, there are hundreds of advisors that offer hourly and fee for service planning. So if you’re do yourself investor and you like to do the investment management portion of yourself, you can essentially lease a financial advisor for an hour or for a project, and this would be a great opportunity to do that.

(17:49):

Whatever penalty you may owe and may avoid is probably going to cover the engagement that you’re going to pay for a financial advisory engagement. Now, the way that we work with clients and the way that a lot of I think Steven’s clients work with their clients is we’re ongoing planning, so we’re kind of a forever relationship or as long as we’re earning our keep forever. So we wouldn’t be a good example of an advisor that does that or ongoing relationship, but Garrett planning out, there are a lot of advisors that can do hourly stuff, so definitely check them out. If you ever find yourself in this situation, good situation to be in, that means you got some money that you weren’t expecting, but we’ve got a silent partner and we’ve got to make sure they get their share.

Steven (18:26):

That’s right. We want to pay every dollar and not leave a tip. That’s what it’s all about.

Ben (18:31):

Any parting wisdom for us, Steven?

Steven (18:33):

Well, again, I mean, since this is coming out on November 1st, let’s all just remember that we’re in the same great country together, grab the popcorn, and make sure we’re committed to still being good people after the next couple of days.

Ben (18:43):

That’s right. That’s a great reminder. We can’t take our ball and go home just because the wrong or the right person won the election. Your job is to make your retirement even better, and that’s hopefully something that Steven and I can have a little bit of input on in teaching you some of these things and talking about mindset. And actually it’s November, so my book is going to come out very soon. So distract yourself with that. And don’t think about the election, and there’s going to be three or four presidents over your retirement, so we can’t get too worked up about just one. So that’s our parting wisdom. The election shouldn’t play a big role in your retirement, so let’s not give it any more attention than it deserves. So until next time, don’t let the tax man hit you or the good Lord split you.

Steven (19:21):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.