Episode 57

Tax Potpourri

January 15, 2024

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Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.

 In this episode your Least Boring Tax Podcast hosts cover a variety of tax topics including unusual ways to use the IRS’s 60-day rollover rules on IRAs. As always Ben and Steven pull from real experiences serving real clients to share ways you can better understand your own tax situation and proactively plan for the future to sand the rough edges off your Retirement Tax bill.


What You’ll Learn In Today’s Episode:

  • How the 60-day rollover rules can be used to avoid underpayment penalties in certain situations
  • How to think about tax rates in context of where rates have been in the past and how your situation might change in the future
  • How your tax situation instantly changes when you eventually go from married filing jointly to filing single again.
Ideas Worth Sharing:

“It was difficult as an advisor to relay how cheap this money is right now.” – Benjamin Brandt

“If we want to have long-term results, we have to keep this long-term perspective.” – Steven Jarvis

“We don’t know where our investment account balances are going to be. We don’t know where taxes are going to be.” – Benjamin Brandt

Resources In Today’s Episode:
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Read The Transcript Below:

Ben (00:07):

Welcome back to the Retirement Tax Podcast. I’m your humble co-host. As always, Benjamin Brandt, welcome to AKA the least boring tax podcast. Can’t forget our favorite tag, but joined as always by Steven Jarvis. Steven, how are you doing?

Steven (00:20):

Ben, I’m doing great. It’s 2024. Well, not when we’re recording this, but I’m already excited looking ahead to it being 2024. Here we go. What a great year.

Ben (00:28):

I’ve already shot holes in all of my New Year’s resolutions. I know we talked about.

Steven (00:30):

That last week.

Ben (00:32):

I’m already out. I’m already out. So one thing that we want to talk about, I guess several things we want to talk about today is a lot of our advisors, myself included, we have a dedicated meeting with all clients in the fall, usually from let’s say October to Thanksgiving. And the entirety of that meeting is all about year-end tax planning. Like we talked about in the last episode, a lot of the things that we can do tax-wise, we have a deadline of December 31st, and now in the last episode we talked about what does end in December 31st and what we still can do January 1st and moving forward, what I wanted to share is lessons that my lead advisor and I learned from our year-end. So we just had 71 meetings with retirees all about income taxes. I wanted to share with you and share with the audience what are our three big takeaways from that. And Bret and I’ll do an episode of this on our show, but you bring a unique perspective as a CPA and you can tell us if we’re totally crazy and doing the wrong thing. So how does that sound?

Steven (01:26):

Yeah, that’s always my favorite game to play, especially after it’s already over. So hopefully your clients that are listening to this episode, I’ve got their fingers crossed tightly that you did it right, but I’m very confident in you, Ben, and I do just want to throw out before we dive into this that there might be some people who listening who are thinking, well, hold on a second. It’s January 15th. This would’ve been good information a few months ago. And I totally agree to some extent, but this is part of the value of what Ben our conversations have is that we’re sharing real world experience. And guess what? The IRS is going to come back every single year and ask you to pay taxes. And so we want to help you get ahead of this for next year and be planning for the future.

Ben (02:02):

And I guess in a perfect situation, we would bring this information to you sooner, but just some insight as to why we do it. At the end of the year, we meet with, so we have 71 clients we want to meet with. Ideally, in a perfect world, if time was no constraint, we’d meet with every single client on December 30th. We’d have 71 meetings on that exact day because we’d be as close to the end of the year as humanly possible while having some time to actually take action. But since we can’t have 71 meetings in a day, what we do is we give ourselves the month of December to do all the transfers and rebalancing and paperwork. So we end that on Thanksgiving the day before Thanksgiving. So we’re meeting with every client as close to the end of the year as we can, one, because that gives us the most accurate information, and two, it gives us some time as advisors to still take action.


So ideally we’d bring this to you sooner, but we didn’t know the lessons until we had all 71 meetings. So the first idea that kept coming up time and time again in these 71 meetings is as taxpayers, we can logically that we are in very historically low tax times, but without context, that’s a really difficult thing to process. If your income is $150,000 a year, historically, you’re paying the least amount of taxes. 150,000 has ever paid. You’re paying, I don’t want to put an exact number, but you’re in the 10 to 15% effective tax rate on a six-figure income, which is remarkable. But during our working years, that money was withheld from our paycheck and during our retired years, we probably worked that into the withholding of our monthly amount or the withholding on our Roth conversions or things like that. So we don’t have a lot of context to what $150,000 is or whatever your income is, 200,000, 50,000, whatever. It’s historically low is good, but it was difficult as an advisor to relay how cheap this money is right now. Historical taxes is something that came up time and time again, and we really want to impress upon people that it’s very, very low right now, meaning that we should take advantage of the low taxes now, but also recognizing there’s a really strong likelihood that this is going in the wrong direction for us in the future.

Steven (04:04):

You’re nice enough to share some snippets with me of some stuff that Bret’s been working on to help illustrate this for us, and we’ll be excited to share that with our audiences. That kind of comes together. I think you’re exactly right that it is hard for us to have that perspective. And I know for me, and I would imagine for a lot of people, part of it is just that when I look at how much I pay to the IRS when I’m looking at that number for this year, it feels a little bit white noise for you to say anything else about how much I might’ve paid. It still feels like I’m a lot of money and we’re not discounting it at all. How much of your hard-earned money the IRS is keeping? But Ben, I think you’re spot on that having that perspective is so important because we talk about it on the show all the time that how we get ahead with the IRS is by making small changes over time, those small hinges that swing big doors. And so when we want to have a long-term plan, we have to keep a long-term perspective and make sure we know where we’re at.

Ben (04:51):

Right? We’re still in the idea phase, but we’re looking at doing a webinar in the spring and giving some historical context to what an average client for us income looks like, I think could be pretty interesting. Kind of a historical walk through the tax code might be kind of fun. So the second idea is we do a lot of Roth conversions. Not every single client, but the majority of clients we’re doing Roth conversions. We’re filling up maybe that 22% bracket where we’re being very cautious, very cognizant of where those IRMAA brackets are and making sure that we are right up next to the next one, or if we find ourselves over, we’re filling up right up into the next one. And so sharing with clients why we do that. But one thing that we changed this year because we dedicated a webinar to this, what happens when the first spouse dies in our office, we also dedicated our whole spring meeting to estate planning.


And one thing that we’re thinking about is when we’re looking at a client’s income and we’re looking at Roth conversions, we are also trying to be more cognizant of we start retirement as a team, we end retirement as an individual. So looking at historically low brackets and saying, what if we go back to a single file or at $150,000 of income or whatever their income is, and it was 1997 and those tax rates. And so taking the historical context of what today’s income is and looking out, it’s not uncommon. We don’t know where our investment account balances are going to be. We don’t know where taxes are going to be. There’s some guesses here, but it’s not uncommon to say a $10,000 Roth conversion now married filing jointly in 2023 versus a $10,000 distribution when you’re filing single in the future, you could save a significant significant amount of money.


So mentally switching from married filing jointly to single filer down the road when two of our IRAs become one IRA and your RMDs reflect a bigger balance. I think that was really helpful for us and for clients to look at that and say, we’re not just solving for the Roth conversion today. We’re solving for when we lose one of our taxpayers in our filing status. So that was the second thing that really rose to the top in a lot of our conversations is we’ve got to be thinking about taxes for today, but then also taxes when we’re single filers.

Steven (06:59):

And the last episode we joked about our New Year’s resolutions and kind of how we felt about that. And I think really you’re giving a good illustration of how if we want to have long-term results, we have to keep this long-term perspective. And I am all for someone using the New Year, even as a motivation to do more on tax planning. But we’ve got to remember that the most impactful changes in our life, whether that’s with taxes or our health, the fun things that we do, it’s all about that commitment over time. There is nothing you can do all at once today just because you’re feeling super motivated that’s going to completely change your tax situation forever. We’ve got to keep this perspective. We’ve got to keep coming back to these things and keep making those incremental changes.

Ben (07:36):

Yeah, love it. The third idea that came up, and this actually came from our lead advisor, Bret, this isn’t something that I thought of on my own, but it’s a kind of an unusual animal in that it wouldn’t really probably be worth the squeeze, the juice worth the squeeze two years ago. But with the way that interest rates have moved up so rapidly and money markets are paying 5% plus in some instances, CDs are paying really well. Don’t take that as any kind of a quote or guaranteed value. We’re just looking at what our customers have in their local credit unions and things like that. We’re able to do some year-end tax calculations and some year-end tax withholdings that are really pretty impressive. So one example was a client that bought a house probably mid-year, and they needed to take, let’s say $500,000 out of their retirement account and at like a 20 or 25% tax rate, they needed to take out another six-figure amount to cover the taxes for that.


And what we did is we did not withhold taxes when they did that. Let’s say it was in April of 2023 because we knew one we didn’t in April, we didn’t know exactly what their total income would be for the year because they’re taking out money, they’re building a house or they’re buying a house. There could be other withdrawals that come out of the IRA. So we want to wait until the end of the year, we have a better picture, a better idea of what their income is, and we can make the proper withholding. And what that is is we take a distribution from the retirement account, we withhold as much as the custodian will let us, so it’s like 98 or 99% withholding, and we send that directly to Uncle Sam. The benefit of that now that interest rates are paying more is we could keep that in their IRA in cash and in a money market, and they’re earning 5% on multiple six figures.


So it’s an easy thing to forget that cash is paying so well right now in money markets, but just by doing that one small deviation from the plan that we’re not withholding it in April when they bought the house, we’re withholding it in December, then clients can make several thousand dollars by just doing that one little step. And of course, because we’re doing it as withholding, there’s no risk of underpayment penalties or interest because withholdings are sort of preferentially viewed by the IRS. So I’d like to hear your thoughts on that. And then I had another thought about how we could take that to the next level that I wanted to run by you, but I’m half joking, but I’ll run it by you after I get your thoughts.

Steven (09:45):

Yeah, a couple of thoughts that come in there. I love the big picture that you’re taking in that approach of remembering that none of this happens in a silo and we want to consider everything else going on because you touched on it briefly, but let’s just make sure that everyone’s on the same page with, normally the IRS is going to expect you to pay taxes at the same time you’re generating income. If we were to have income regardless of the source of if we had income in April of a half million dollars, the IRS is going to say, oh, you need to go ahead and start making payments on that, or we’re going to charge you underpayment penalties. We’re going to charge you interest. And so the beauty of withholdings over making estimated payments is that even if our withholdings on December 31st, the IRS is going to say, oh, we will treat that as if it had been contributed evenly throughout the year.


The other thing in our favor, especially in a situation like this where we will just assume that the client’s other income was fairly steady and then this was the one exception of pushing their income up. The safe hardware provisions also work in our favor. This is an extra backstop to make sure that we know we’re not going to be getting hit with penalties, which typically where this is most to our advantage is in years where our income is going up because that safe harbor provision says that, Hey, if we get to 110% of last year’s tax amounts, even if we didn’t pay the full taxes during the year, we’re still going to be okay from an underpayment standpoint. There’s a couple of things that stand out to me in there. You’re still moving it to cash. So we’re taking some of the risk of what that investment might have otherwise done during the year because the last thing we want to do is set aside, I think we set aside a hundred thousand dollars, have the market go crazy on us and realize we only have $90,000.


And yeah, interest rates are doing a lot better right now. Every year this strategy could change, but it reinforces why it’s important to come back to taxes every single year and say, okay, what does this actually look like? And then the last thing I’ll say, and then we’ll see, the curve ball you’re going to throw at me is that I like that you talked about the custodian specifically because as far as the IRS is concerned, a hundred percent could be withholdings. But we got to make sure we check with our individual custodian and know what they’re going to allow us to do. Because there are some instances where they just won’t let you elect a hundred percent, you got to stop at 99 or 98%. We just want to know what mechanically is possible for us.

Ben (11:55):

I’ve never gotten to the bottom of why that is, why we can’t do a hundred percent withholding. It’s always either 98 or 99, and then we have to remind the client, you’re going to get a deposit in your checking account for $78. You’re not going to know what it is. That’s what that is. And we’re going to probably wait until the second week in December to do it. The idea that I had, and I don’t know if this is a good idea or not, but it’s along the same idea, is if a client’s taking a big distribution, we need to give the IRS. Let’s say it’s a hundred thousand dollars. We wait until December so that money can earn a little bit of interest. All of our clients are living off of their savings or they’re in that transition and they’re all taking money out monthly. Should we just not withhold on the monthly at all because then the money’s going to stay in their account and hopefully appreciate if it’s still invested or it’s going to stay in their account and earn more interest in the money market. Would it be worth it to do no withholding for January’s distribution February all the way through the year, and then just using our tax software, run a plan for everybody like we do for all clients, and then just do one big distribution in December? Would that be getting a little bit too cute?

Steven (12:54):

So in classic CPA fashion, I’m going to start with, it depends, and for most clients, I’m going to err on the side of it’s probably not worth the juice. Probably isn’t worth the squeeze in that situation. It feels more exciting right now because interest rates are higher. But some of this for me is just the behavioral and the, okay, what is going to work in reality? What is setting ourselves up for success? Because the longer we wait to pay those taxes, the more manual steps we have to have. If we have withholding every month, this is automated, it’s going to happen. We know we’re all set. And then if in December we suddenly have other income that we weren’t expecting, we decided to sell our house abruptly and move out of state, now we might overcomplicate our situation and not bring all these pieces together the way we were expecting.


And so I like to have a baseline where we know some things are taken care of. This is why I like to recommend that people have taxes withheld from their social security using the FORM W4V. Yes, we could absolutely wait until the end of the year and just have it all withheld from an IRA distribution and we probably would have a little bit more interest, but the peace of mind, the consistent habits, just setting the system up for success, we’re going to miss out on some of those things. So from a tax standpoint, you’re absolutely right. That is totally possible. And I’ll share an extra curve ball with you in just a second related to this, but this can come down to setting expectations of the individual taxpayer and what is going to set them up for success the best.

Ben (14:16):

Alright, give me your curve ball.

Steven (14:18):

Yeah, so this is what I recently was talking to an advisor about is going to apply more to people who have IRA balances but maybe aren’t yet into retirement. And it’s the idea of combining using IRA distributions and the withholding for taxes with the IRS’s 60-day rollover rules. And so just as a quick refresher, the IRS basically has an undo button for making distributions from an IRA. We can only use this once in a 12 month period, but if I make a distribution from my IRA and then within 60 days say, know what, I actually want to put that money back into my IRA, as long as I do it within that 60 days, I can put it all back and it’ll be as if it never happened. And so where this can come in from a tax withholding standpoint is that whether by intention or by accident, if I get to the end of the year and I have a very large amount of taxes due to the point where I might have penalties that I’m going to have to pay, then making an estimated payment isn’t going to remove those underpayment penalties.


At that point, I have to have a withholding of some kind to be able to have the IRS say, okay, this happened evenly throughout the year. And so an option for that would be to take a large distribution from my IRA. If I’m not to retirement yet, and I’m not to the point where I want to be drawing down my IRA, that could be a very bad choice from a long-term planning standpoint unless I have a way to get that money back in there. So let’s say I owe a hundred thousand dollars in taxes and I’ve got the funds outside of a tax advantage account to pay that, instead of just taking the money out of my savings account and sending it to the IRS, which I’m going to owe underpayment penalties because I wasn’t paying throughout the year. I can make a distribution from my IRA have 99 or 100% of it withheld for taxes, and then take the money from my savings account to put back into my IRA as a rollover so that it’s as if I had never distributed from my IRA. And then if for married couples, even though there’s this 12-month limit of I only can do this once every 12 months, that is an individual requirement. So my wife and I could swap years doing that, and we could essentially take that approach every single year indefinitely where I am using my IRA to enact a withholding, so I avoid underpayment penalties, and then I’m just putting the money back in so that I don’t reduce the balance of my IRA over time.

Ben (16:32):

I like it. That’s some savvy planning. You’ll find yourself being like me with my HSA contributions and saying, now wait was last year’s contribution for last year was for the year before. I make a contribution every year, but I never remember what year I do it. But yeah, that’s a great strategy, just using the assets, using the accounts that you have in the most preferential way to not get killed in taxes. I mean, that’s what the show’s all about. 

Steven (16:54):

Absolutely. It’s all about being intentional, taking the time to review what your options are.

Ben (16:58):

Excellent. Well, that’s all I’ve got prepared for you this week. Any parting thoughts, Steven?

Steven (17:02):

Ben, let’s have a great 2024. We’re excited to keep bringing amazing tax playing strategies to our audience so that we all can look back on this year and know with confidence that we didn’t let the tax man hit us where the good Lord split us.

Steven (Disclaimer) (17:17):

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.

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