Episode 30

Year End Planning

December 1, 2022

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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.

Tax planning should be something that is looked at throughout the entire year. However, as the end of the year approaches, now is a particularly good time to review your finances and take advantage of any tax planning opportunities that may be available for you. So, in this episode, Benjamin and Steven will be sharing some tax tips to consider and answering your questions as we get closer to the end of 2021.

Listen in as Benjamin explains how to approach your Roth conversions and the importance of being intentional with your spending and saving. You will learn where to start on a multi-year tax planning strategy, what questions to ask a CPA to see if they’re a good fit for you, and when you may want to find someone to help you with your taxes.


What You’ll Learn In Today’s Episode:

  • How Benjamin approaches year-end Roth conversions.
  • The importance of planning for the unexpected.
  • What shadow taxes are.
  • How to approach a multi-year tax planning strategy.
  • How paying more taxes now may help you pay less taxes long term.
  • How to ensure a CPA is the right fit for you
Ideas Worth Sharing:

“A lot of life can happen in twelve months, especially in retirement.” – Benjamin Brandt

“It all comes back to intentionality. That’s really where we get ahead with the IRS—when we are proactively thinking about these things rather than letting them happen to us.” – Steven Jarvis

“I’m a big advocate for doing [your Roth conversions] as close to the year end as possible.” – Benjamin Brandt

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

Steven Jarvis:     Hi, everyone. Welcome back to The Retirement Tax Podcast. I am your host, Steven Jarvis, CPA. And with me as always, is Benjamin Brandt.

Benjamin Brandt:         Greetings from the geographical center of North America.

Steven Jarvis:     Is that true? Have you taken the time to figure that out?

Benjamin Brandt:         Oh yes. That is a highly contested topic. In fact, there are two small towns, 33 miles north of here, that fight over who is the actual geographical center of North America. And in fact, one of these small towns let the website expire and then this other town scooped it up. So there is some serious geographical center of North America drama happening, but it’s about 33 miles that way.

Steven Jarvis:     Now, for all of you, which is probably all of you literally, who have never taken the time to figure out where the geographical center of the country is, Ben is joining us from Bismark, North Dakota.

Benjamin Brandt:         Correct. My claim to fame is I’m the guy you know from North Dakota for many, many, many of my friends.

Steven Jarvis:     That’s true for me too. I don’t know anyone else from North Dakota.

Benjamin Brandt:         I got a lot.

Steven Jarvis:     All right. Now, that we’ve educated you on some important geography, today we’re going to talk about getting ready for year end when it comes to tax planning, we’ll go through a couple of things here at the beginning of the episode, and then we’ll get into some listener questions. Ben, I think you’re going to kick us off here talking about how you approach year-end Roth conversions.

Benjamin Brandt:         Yeah. So this question comes up a lot from listeners, from my other podcast. They want to know what is the best time of the year for Roth conversions. And so, I’ve got two answers for this. One, is if we’ve done Roth conversions years in a row, if we’ve got this systemization, we should go about it one way. But if it’s your first year of doing Roth conversions especially, I’m a big advocate for doing it as close to the end of the year as possible.

                           If you’re a financial advisor or working with one, for my clients, we set Thanksgiving, the day before Thanksgiving would be the last day we want to decide on what Roth conversion we want to do. Because then we’ve got some trading and some potentially paperwork and account transfers and then, rebalancing on the other side. We want to have that last month of the year to make sure we get everything done, all the withholdings done and reported before the calendar flips over because that’s the deadline.

                           Now, if you’ve been doing Roth conversions for years, let’s say, if I’m your advisor, we’ve been doing $25,000 conversions forever. Then we have an interesting opportunity when the market has a correction, which it occasionally decides to do.

                           For our clients that have been doing Roth conversions for a while, when the market cratered in March of 2020, we looked back and all of our clients are doing this systematic conversions and say, “Hey, you did 25,000 last year. How would you feel about doing half of that amount this year into this market correction? And then revisiting it later again in the year.” Because you always hear the saying, “Buy the dip.” Well, doing the Roth conversion into a downmarket, is essentially a way of buying the dip. I would say do it as close to the end of the year as you can, because there’s just less chance of surprises.

                           Now, capital gains is one of those surprises that can happen after that time. But if we did the Roth conversion in January let’s say, just because we felt like doing it or because the market had a dip, a lot of life can happen in 12 months, especially in retirement. The water heater blows up. You’ve got to replace your washing machine, like we have to do at our house. One of the kids needs some money. You get an opportunity to go on a once-in-a-lifetime vacation. We can’t recharacterize Roth IRA conversions anymore, like we used to in the past.

                           Just for lack of just less surprises at the end of the year, that’s when I want to do it. As close to the end of the year as logistically I can. Unless there’s a big correction and we’ve done lots of Roth conversions in the past, we’ve got it pretty well dialed in. Do half into the correction and save the other half, for when the market goes down even more or the end of the year. That’s my year-end Roth conversion tips and my rationale and why to wait so long to do it.

Steven Jarvis:     Yeah, I really like that. It’s a good way to describe that there. Unless you have one of those one-off things, there’s not an advantage from a tax standpoint to do it early in the year, just from a purely doing the math. And so, making sure that you allow enough time to logistically get it done. Because especially if you’re new to Roth conversions, we’ve already talked about it on the podcast. We’re four episodes in, and we’ve already talked about Roth.

                           It’s an easy headline for people to put out there if they’re trying to talk about finances. And so, it can feel like, “Hey, this is a simple thing. I check a box, I did a Roth conversion and let’s all move on.” But there are some logistics to it, especially if we want to do it correctly. And of course, we do want to, in fact, do it correctly. Yeah, wait until late in the year. I like that your rule of thumb is, let’s decide on it before Thanksgiving and then give ourselves some time to logistically get them done.

Benjamin Brandt:         Yeah, do the numbers at Thanksgiving and then do the paperwork in December, give yourself a leisurely time. I’ve run into some deadlines at the end of the year and it’s just never fun. I’m sure our listeners have had end of the year deadlines where you’re in the office well past when you should be on New Year’s Eve and give yourself that month, especially if you got households, like we do. Paperwork accumulates and give yourself lots of time to process that.

                           Always do remember to add that last month of retirement distribution. If you’re doing that in Thanksgiving, don’t forget the plus one for your December distribution, because that’ll really mess up your math.

Steven Jarvis:     Now, Ben, for a lot of people that the conventional thought process around Roth conversions is, “Okay, what tax bracket am I in and how much can I convert to fill up that tax bracket?” Which is a good starting point for thinking about this. But there are other things you have to consider, but beyond just your marginal tax rate in those income tax brackets that we’re all more familiar with.

                           And we lump this into a category that I like to refer to as shadow taxes. I definitely stole that term from someone else, but I really like it. It’s these things outside of our marginal tax rate that still might influence our decision. And there’s quite a few things that fall in there, but IRMAA is really the most common one. So Ben, how do you talk to your clients about this?

Benjamin Brandt:         Yeah. IRMAA is so sneaky because I don’t really even think it’s technically a tax. Right. It’s an enhanced premium, which I think is a very clever politician I think invented that and then was able to raise more revenue without raising taxes. And probably broke his arm patting himself on the back, or herself. But so what IRMAA is if your income is too high and you’ve got to pay more for your part B and part D premiums.

                           And so, that usually starts about 170,000, 175,000 married filing jointly. It changes every year. So I don’t know when you’re listening to this, but Google it or ask your financial advisor or your accountant, what that exact number is. Or if you’re a single filer. But what I think we run into sometimes is we try to avoid this IRMAA. We’re going to call it a tax for this show, but we try to avoid this IRMAA tax entirely.

                           But there are some instances where we just can’t avoid it. Maybe we get a bonus at work or we sell an asset that’s going to use a one-time thing that drives up our income. Or we were in deferral mode for too long. And now we’re beyond age 72 and our IRAs forcing out some of these distributions. And now we’re in this higher bracket for IRMAA.

                           And a mistake I see a lot of people make when they’re in that bracket is they pump the brakes and say, “I’m in an IRMAA. I need to stop spending. I need to stop taking withdrawals right away.” But what they don’t realize is, we have our marginal income tax bracket. There’s also brackets for IRMAA as well. And unlike our marginal brackets, if we’re $1 into the next bracket, we just pay a higher tax on that last dollar.

                           But IRMAA is not that way. If you’re $1 into your IRMAA brackets, you’re in the entire bracket. Why stop there? We’ve still got meat on the bone. Your premium is not going to change again until you’ve reached the next bracket. And oftentimes with IRMAA, if we find ourselves in IRMAA one year, is really likely we’re going to continue to find ourselves in IRMAA because our retirement income tends to be somewhat linear. Right.

                           If we’re in trouble with IRMAA this year, fairly likely next year and the year after that. If we’re $1 into that next IRMAA bracket, why not fill up that entire IRMAA bracket, like we would fill up on marginal income tax bracket? Don’t be a dollar or $100 into IRMAA, figure out what that next bracket is. It’s probably 225,000 if we’re just newly into IRMAA.

                           Again, Google what that is because it changes every year. But don’t leave meat on the bone. Fill up the rest of that bracket. Do a Roth conversion, accelerate spending in some way, maybe you’re accelerating gifting. But there’s a number of different ways that we could utilize that. But if we’re able to fill up that next IRMAA bracket, that makes it a little bit less likely that the following year and year and year after that, that we’ll find ourselves in the same situation, meaning paying significantly more for our health insurance and retirement.

Steven Jarvis:     Yeah. And you mentioned there briefly, and we’ll have to do a whole episode on charitable giving and some of the different options available to us, but your alternative to accelerate an income is trying to either defer income or accelerate deductions, because if we’ve just barely crossed a threshold one year, maybe there’s something we can do to accelerate some deductions through charitable giving. There’s some different options available to us if we’re already charitably inclined.

                           And we’ll definitely do an episode on some of those things so that we get into some more detail on that. But like we talk about so often, it comes back to intentionality. And that’s really where we get ahead with the IRS, is when we’re proactively thinking about these things and not just letting it happen to us.

Benjamin Brandt:         Right. And actually, we’ve already actually answered question number one. But every year on my show, Retirement Starts Today Radio, we do a listener survey and we want to make sure we know who we’re talking to and what they’re interested in. And make sure that we’re making our show always the best show that we can.

                           And part of that is asking questions in a listener survey. And I snuck an Easter egg, knowing that Steven and I were going to watch this podcast. I snuck a bit of an Easter egg in this last summer’s listener survey. It says, “Hey, keep this secret, but we’re going to launch this retirement tax podcast. What tax questions do you have?” In order to fulfill that promise, we’re going to go through some of those questions today from our annual listener survey.

                           And the first question is, could we get a how-to on multi-year tax planning? And with IRMAA, we answered that a little bit already. But when let’s say, we’re year one of retirement. Our earning years are behind us and we’ve got 20 or 30, or God bless you, 40 years of retirement planning, we’re going to pay taxes over that entire time. We’ve dubbed that the retirement tax. How do we handle? We know the IRS is going to look at it one year at a time, which gives us a significant advantage to look multi-year. How do we start to approach that multi-year tax plan strategy?

Steven Jarvis:     Well, I’d first just like to say welcome to all of the listeners that have been following Ben for the last few years. A lot of great stuff coming out of there, and it’s so much fun to see all these questions come through. And that’s something we’ll regularly do. We want to make sure that this is engaging and beneficial for all of our listeners.

Benjamin Brandt:         I think we got almost 200 questions. So it’ll probably take us through the year, maybe next year to answer all of them.

Steven Jarvis:     Yeah. And we’ll make sure we get a way out there for our new listeners to ask questions as well and keep working through these. But how to on multi-year tax planning? Yeah. Ben, you’re exactly right. It’s really, as we work more than one year at a time, that we can get ahead on the IRS.

                           And so for me, the starting place is, well, let’s look at the big rocks that we can feel confident in as we start looking at multiple years. Especially as we get into our retirement years, if we’re RMD age, there’s required minimum distributions. There’s some pieces that we can start plugging in and saying, “Okay, I know here’s how much I’m getting in social security, or here’s how much my pension is,” or whatever it might be.

                           And we start with those big rocks because where we get the most advantage in our tax planning is when we understand what our relatively high income years are compared to our relatively low income years. Especially as we approach retirement and get into retirement, there’s going to be differences. We’re not going to have the exact same income each and every year.

                           And then we can start being strategic about when we do things like our charitable giving or how we structure that. Or years where we say, “Okay, we’re already into these different thresholds or ranges. So let’s go ahead and fill them up.” But we’ve got to have some context of where we’re starting to know that if the changes we’re making are really going to have an impact,

Benjamin Brandt:         I would say the biggest clue that I’m looking for when we’re doing multi-year tax planning, is are there any spikes in income? Are there any spikes or dips down in income. And especially the spikes, we want to figure out how to iron those out if we can. Because spikes in income, especially in retirement, often mean that that is income tax that we could have otherwise avoided, which makes it extra painful to pay.

                           I’m specifically thinking of required minimum distributions, and that happens at 72. And if we’re just doing napkin math, they’re going to make you take out about 4% of your year end account values from all of your IRS combined. Individual retirement accounts for a married couple. We’re not talking about your household of accounts. We’re just talking about that individual that turns 72, and it’s an increasing percent every year and you paid it every year.

                           And so, if we’re 65 today and we look up to 72. And we say, “Okay, we’re taking out $50,000 out of our IRA every year to fund our lifestyle expenses. But based on the trajectory of how this account is growing, it looks like our first required minimum distribution is going to be 75,000 at our 72nd year on earth.” We’re taking out 50 now, but actually, it looks like we’d have to take out 75 later.

                           That would be a spike in income that we should try to avoid if we can. Now, we’ve got a few years to get there. We can do something like Roth conversions, accelerated spending, gifting, a number of different things that we could do in order to iron out some of those peaks in income, and probably pay a lot less taxes by just being proactive in doing so. It sounds strange to say out loud, I will admit. But what we’re attempting to do is voluntarily pay more taxes now in order to pay significantly less taxes later. When I hear multi-year tax planning, that’s where my mind goes.

Steven Jarvis:     Yeah. That’s a really great framework. I’m assuming you’re going to expect me to answer this next question, Ben. The next question we got was, what are good questions to ask a CPA to determine if they are a good fit for the long-term tax strategy needed in retirement?

Benjamin Brandt:         Do you know any good accountants?

Steven Jarvis:     Do I know any good accounts? I do know a few good accountants. They are out there, I promise. There’s even some with social skills.

Benjamin Brandt:         Goodness.

Steven Jarvis:     Thank you for that, Ben. Yeah. There are a lot of great tax preparers out there, but before I get more specifically to the questions you should ask them. I just want to give you a framework of what you should expect. Because anytime we’re working with a professional, we’ve got to make sure that we have clear expectations. And a lot of tax preparers are very focused on compliance, on filing your tax return this year. And that’s what they’re asked to do.

                           And so really, if you’re looking for a tax preparer who is also going to help you with anything long-term, that’s really the starting point on what you’re asking them of, you want to ask questions about, “Hey, what does this relationship look like outside of tax time? What kind of tax projections do you do for your clients? What are the channels of communication that are open to me after the return is filed?”

                           And some of these types of things to start gauging, is this something they want to proactively do outside of tax season? Or are you going to be the complete exception to all the rest of their clients who just drop off all their documents and ask for a 1040?

Benjamin Brandt:         Would there be examples of a question that you could ask to test the waters to see if you’re not a good fit? I’m thinking of instances where financial advisors that I am friendly with, have had bad experiences with CPAs.

                           Roth conversions come up so often, sometimes I feel like the job of a CPA and the job of a financial advisor can, at some points, be competing almost, where the CPA obviously wants to get that tax bill as low as possible. But like we talked earlier, sometimes it advantages us to voluntarily pay more taxes. Are there questions that you could ask to test the waters a little bit, to see if they’re a good fit? And your financial planner fits in with their interpretation of the right and wrong way to pay taxes?

Steven Jarvis:     Yeah. Especially, if you already have things in mind. If you’ve been listening to this show and you’re excited about some of the ideas we’ve talked about, or you’ve already been implementing them on your own, I would start with the things that are applicable to you and say, “How do you approach Roth conversions? How do you approach donor advise funds? What do you do to make sure that form 8606 is filed every year?” Things like that, that are applicable to your situation.

                           And this can be a little bit intimidating. Let’s just pause for a second and acknowledge that. That as you go into another professional’s office and you’re going to ask them all these questions, that the most intimidating thing is, okay, well, what if they ask me follow up questions? What am I supposed to say?

                           But honestly, part of that is going to help if this is a good fit or not. If you say, “Hey I’m interested in continuing to do Roth conversions. Help me understand how you approach that.” And their response to you feels intimidating and overwhelming, regardless of what they’ve said to you, you have a good answer on whether or not this is going to be a good fit for you to work with.

                           Because especially if you want something more than just, “Hey, let’s check the box and file my return each year,” you’ve got to make sure that that relationship is going to be positive and you’re going to be excited to call them. Because if you’re intimidated every time you ask a question, then that’s not going to be a good fit for you. You’re not going to ask questions.

Benjamin Brandt:         That sounds fantastic to me. And Steven, I think we have time for one more question, a question from one of our listeners. I’ll be retiring in the next year or so, and have an S corp. How does an S corp or an LLC close and notify the IRS that it’s shutting down?

                           My clients tend to be not business owners, so I’m not well-versed in this area. If I was posed to this question, I would give the answer that this would be a great opportunity for us to find a CPA that is well-versed in this area, rather than me Googling it on the fly or, God forbid, just guessing. But what are your thoughts, Steven?

Steven Jarvis:     Yeah, especially for our DIY listeners. I mean, first of all, congratulations for preparing your own taxes. I mean, that’s definitely something to be proud of. But whatever topic we’re talking about for DIY, there usually comes a point where we should consider, even if it’s only for one year, maybe getting somebody else involved.

                           And this would be a great example. Because in the final year that you’re closing a business, you’re still going to file the same form you would have anyways, whether that’s schedule C for a sole proprietor or you’re filing an 1120S for your S corp, you’re still going to file that form. And there’s a box to check to say, “Hey, this is the final form.” For S corps and C corps, there is another form you have to file to notify the IRS that the businesses closing.

                           And so, there definitely are some hoops to jump through and some boxes you want to make sure get checked so that you’re not raising huge red flags with the IRS. And so, even you’ve prepared your taxes yourself, your whole life, this might be the year to say, Hey, let’s pay a few hundred bucks, several hundred dollars,” whatever it might be. Maybe you even still take the first pass yourself and then take it to a professional. But this is going to be an important step to make sure that someone else has taken a look at it and made sure that those I’s are dotted and those T’s are crossed, because there definitely are some things you need to do different in that final year.

Benjamin Brandt:         Right. I think this is when calling in an expert could be very valuable. You want to close the book on this the right way, because you want to spend the next several years focused on living your awesome retirement and making great memories, not staying awake at night and worried about paperwork and wondering if the second shoe is going to drop.

Steven Jarvis:     Yeah, because the IRS has a few years where they can go back and look at things. And so, it’s better to just get these things closed down the right way. Find somebody who this is what they do all the time. There are definitely tax preparers who focus on and specialize in, not just business returns, but even in particular types of business returns.

                           It’s likely you can find someone in your area who most of what they do as S corps or most of what they do is LLCs. If you’re just going to use them, especially for that one year when you close things up, go out and find that person. It’s going to be worth the investment to do it.

Benjamin Brandt:         Yeah. There are accounts that do dozens of these a year. They’re going to know exactly what to do, how to do it. And what might cost you money is going to save you time and effort and aggravation. So that’s the route I would take.

Steven Jarvis:     Definitely. Well, Ben, we’ll save the rest of these questions for a later episode, because we’ve got plenty more from listeners who are interested in learning how they can do more with tax planning. But thanks for getting on here with me. The next one we do, I think we’re going to be in person. Really looking forward to that. And for everyone listening, until next time, good luck out there.

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