You Filed Your Tax Return, Now What?

Benjamin Brandt:       Welcome back to the Retirement Tax Podcast. I’m your humble co-host as always, Benjamin Brandt. I’m joined today by the illustrious, Steven Jarvis — joined today and every day: Steven, how you doing?

Steven Jarvis:   Doing really well. How are you, Ben?

Benjamin Brandt:       I’m doing great. I’m doing great. It’s April 1st as you’re listening to this. And if I had to guess, our audience is hyper-motivated people that are interested in taxes and retirement.

So, I’m guessing before the ink was even dry on their last 1099, they filed their income taxes. And so, now, we need to think about, we filed our tax return, what do we do with that brand new shiny information? And how can we use that to get some better retirement outcomes?

Steven Jarvis:   Yeah. Always excited to talk about taxes. And I can honestly say that even though we’re not recording this on the April 1st, one of the things I love about how we work with taxpayers is that we do take this tax planning focus. And so, my life doesn’t look like your typical CPA and that I’m drowning all the way through the 15th, and then I disappear for months. And so, really excited to have this conversation.

I do really quick want to throw out for our listeners who are thinking, “I’m not done yet, this doesn’t apply to me.” It does, I promise. And just maybe just one word of wisdom really quick on April 1st, if you haven’t filed yet: just remember that accuracy is more important than speed.

It really isn’t that hard to file an extension. If you’re worried about being done by April 18th, is the deadline this year at the federal level, file the extension and come back and finish it. If you take that route, don’t wait until October 15th, get this done. Don’t let it bog down your summer.

But please still listen in, this is still going to be a lot of great information for you as we talk through, okay, our taxes are filed, now what?

Benjamin Brandt:       Right. So, now, we have brand new information that we can apply to our retirement plan for this year. So, what are some last action items should we do? We’ve got this return — if you’re a client of mine, what I’d like you to do is securely upload it to our website because we’re going to review that in our May, what we call surge meetings.

Hopefully, we’ve had a conversation before you filed your return. If we’re doing it through Retirement Tax Services, we’ve looked at kind of a dummy copy before you submitted it. And now, after everything is official with the IRS, we’ve paid the bill. Now, we’re going to come back and look at the return and say, hopefully, there weren’t any surprises and what can we learn with that information?

So, hopefully, you’ve submitted that to your financial advisor as well. And now, you’ve got an appointment to talk about how could we improve this? What have we learned? What can we do with this new information?

Steven Jarvis:   Yeah. And whether you work with a financial advisor or you are just through and through the DIY type, we want to talk about some questions that you should be asking or someone on your financial team should be asking so that we don’t look at filing the 1040 as the finish line, because we’ve talked about it before on this podcast.

That if we only look at taxes one year at a time, and especially if we’re looking backwards at taxes, you’re going to get the patriotism award every year for overpaying the IRS (sorry, but there’s no real award for that).

But you’re not going to sand off those rough edges on your retirement tax, which is what we’re all about.

Benjamin Brandt:       So, what kind of questions should we be asking ourselves? I think I would start with, am I happy with the refund or the payment that I made at tax time? You know, we’ve gotta settle up the bar tab, so to speak, at the end of the year.

For me personally, paying in a little bit, I’m okay with. I don’t want to pay interest in penalties, but paying in a little bit — when I’m working with clients, everybody’s different. But what I’m trying to encourage them to think about is a big refund isn’t as good as we think it might be.

When you’re accumulating your wealth, when you’re in your last few years of a career, you’re earning as much money as you probably ever made, a refund kind of feels nice.

But a $6,000 refund in retirement, just by doing a little bit of paperwork, we can actually raise our retirement income by $500 a month. And really that should be … I feel that should be our focus. I don’t want to tell you individual client what your goals are, but I’m not as excited about a refund in retirement as I might have been when I’m accumulating.

So, that’s kind of one of the first questions that I’m thinking about, is how do I feel about the money that I paid in or the money that I receive back.

Steven Jarvis:   Yeah, it’s a great question and a great reminder that there’s something we can do about that. A lot of people feel that there’s just, well, taxes are what happens. And so, it’s a great reminder that we can adjust our withholdings. If we’re still working, that’s going to be through W-4. If we have social security, that’s W-4V.

As we’re making IRA distributions, we can make those elections and change those withholdings or change our estimated payments to make sure that we’re happy with that situation come tax time.

Benjamin Brandt:       That’s an interesting point because I think working versus retired, if I’m working and I got a refund and I don’t like it, I want to change that; my mind immediately goes to, I got to contact the HR, I’ve got to change fill some paperwork, got to change the withholding.

It gets a lot easier when you’re retired and you’re living off of your IRA or your 401(k), just log into your custodian and a couple clicks, you can change the withholding. So, if you think this is a big chore, it really isn’t. This can be fixed with an email to your advisory, but it could even be less of a hassle than that.

It’s not like when you’re working, you got to set an appointment with your HR person. This is much, much simpler now that you’re in control of your own retirement destiny.

Steven Jarvis:   Definitely. And while we started with how much was the refund I got or the payment I made, because that’s something easy we can do — also, want to make sure that’s not where we’re stopping.

What I find quite often working with taxpayers is that they can tell me sometimes off the top of their head, how much their refund was, or how much of a payment they made, but they can’t tell me how much of their hard-earned money the IRS kept.

And so, that’s another question you need to know the answer to, of how much taxes did I actually pay to the IRS. And it’s important so that we have better context for what opportunities might be available to us and the motivation to do something about it.

If all I’m thinking is, well, I made a $500 payment when I filed my taxes, it’s no big deal. I’m not going to think about any of this tax filing stuff. That’s a lot different than looking a little bit higher up on your tax return and saying, “Oh, wait, the IRS kept $25,000 of my hard-earned money last year, maybe we should do something about that.”

Benjamin Brandt:       Right, exactly. I think marginal taxes get a lot of attention, but really, it’s just your effective tax or your average tax rate that I think should get a lot more of our attention in retirement.

And I think we’ll dedicate a future episode to this. We’re talking about this a little bit in the pre-show, but your effective tax rate: take your total tax paid versus the biggest number on your tax return — your gross, gross, gross, gross, gross income.

And I think you’ll find that historically, we’re not paying a lot. You can have a six-figure income and pay a low double digit tax bill; 10, 11, 12%, comparing your total tax paid into your total income.

So, that’s useful information in retirement, because one, if we look at the total tax, we multiply that times how many years we’re going to live; 10 years, 20 years, 30, 40 years — we’re talking a significant amount of money that we’re going to pay.

And then if we look at, let’s say your effective tax rate was 15%, 15,000 per hundred thousand, you can say, boy, that feels low historically. My feeling (you can ask yourself): “My feeling, are taxes going to get higher than 15,000 per hundred thousand or lower in the future?”

And I think that might give you some context to make some of these bigger decisions like Roth conversions, like funding future charitable events, things like that. So, you can arm yourself with just new context and new information now that our tax return is done or nearly done.

Steven Jarvis:   Yeah, and Ben, you’re going to the exact right place up of great, now, we have context. We looked at what are kind of some of the easy things we can do as far as refund or payment at the end of the year. But really, what we want to spend our time on is what can we do different in the future?

And so, then I like to take a step further and say, “Okay, what did I do as far as maxing out tax advantaged opportunities?” Whether that’s retirement plan contributions or health savings accounts or whatever it might be. If I go down my list and say, “Was I happy with the outcome last year?”

This is an area where we want to make sure that we’re being cognizant of the emotion connected to it, and not just what the calculator says. Because we can run the numbers all day but if the number I give you for what the best quantitative outcome is, is not something you’re going to write the check for, it’s a waste of time.

And so, we’ve got to … again, kind of to your question of how did I feel about my refund or payment? How did I feel about my IRA contributions or my Roth conversions, these different things I can do. And then what do I do different this next year? And we should be thinking about these things now in April, not in December when the year’s basically over.

Benjamin Brandt:       Absolutely.

Steven Jarvis:   So, to go along with that, we can look at some of these contributions that we can make and what we’ve made in the past and how we want to adjust that. We also need to be thinking about what other changes might be happening in our life this next year.

It can be easy especially if we’re a couple years into retirement or we’re still in the workforce. If we feel like our income situation has been stable over the last couple of years, it can be easy to say, “Oh, I don’t need to worry about this. It’s going to be relatively the same.”

But I want to make sure that we’re thinking about things like, do I expect changes in my income this year, one time income of sale of a property, sale from investments? Am I thinking about moving anytime we get state taxes going on? I’m in Washington state, we don’t have a state income tax, at least not currently. But that’s very high on my mind anytime someone’s talking about moving out of Washington state.

Not that that should be the reason you do or don’t move. We don’t want the taxes to be the driver of our decisions, but we want to be thinking about them, so we’re not surprised and so we can plan ahead.

Benjamin Brandt:       Yeah. Along those same lines, we can think about any significant birthdays that are coming up. You know, maybe your spouse is turning 65 this year, and you were able to deduct the full amount of your HSA contributions last year. And you’re going to have some sort of a hybrid contribution year this year.

Or maybe you’re turning 70 and a half or you’re turning 72: looking at your income and your taxes in the context of what might change this year: am I going to go on Medicare? Am I 63? Are they now looking at my income for an in income-based Medicare payment?

I don’t know about you, Steven, but I tend to get a year older every year that I’m on the planet, every year is a new birthday. And so, especially in retirement, there are a half a dozen years if you’re married that something about your tax life is going to change after retirement.

So, we just submitted our tax returns, this would be a good time to kind of revisit that and say, “Oh, you know what, I guess I am two years from 65. I need to start thinking about some of these things.”

So, just a good time to review changes, tax changes, but our birthdays can sometimes dictate those. So, just reflect on that, I think is a good time to do that.

Steven Jarvis:   Yeah. And we want to think about a lot of these things, both from is there something I can do to plan ahead and sand off the rough edges of my tax bill? But also, just setting ourselves up with good expectations. And we’re limiting our surprises and stress and frustration.

For some of you, you might think, well, it’s not saving me money, why spend the time on it? But having worked with lots and lots of taxpayers and having personal experiences with getting love letters from the IRS, or when things come across as a surprise, it’s worth the time upfront.

It’s worth spending a little bit of extra time in April or May to say, “What’s this next year going to look like?” Even taking the time to maybe estimate what you expect your taxes to be this next year.

And there’s softwares and calculators you can use if you’re like me and get nerdy and want to dive into the numbers. But even just from a high level, we can say, “Okay, what was my total tax this last year? Not how much of a refund I got: what was the total amount of my hard-earned money the IRS kept?”

And then go through these changes and say, “Do I expect any big changes this next year?” And that’ll at least give us a ballpark of here’s how much I’ll probably pay in taxes this next year, so that we’re just setting clear expectations for ourselves.

Benjamin Brandt:       Yeah. And you could also use that tax information, your effective tax rate. You could look and say, “Am I over or under withholding from any specific sources?” You know, maybe you’re not withholding anything from your social security, but you’re withholding everything from your IRA withdrawals, just for simplicity. That’s what a lot of retirees that we have contact with, do.

But if the market’s having a particularly difficult year, maybe we could change that and take less out of our portfolio by balancing it out. So, learning about your effective tax rate could be a great way to say, you know what, maybe I should spread out this tax bill across my accounts more evenly (if you’re taking pension, social security, early withdrawals) — rather than have all out of one, maybe this is a good time to ask yourself if that’s a good idea or not.

Steven Jarvis:   Yeah, that’s great. Another thing I want to highlight because I’ll get push back from people at times of, “Well, I don’t want to put all this time into planning ahead when Congress might just change it all on us.”

And for all you and I know between when we record this and when it airs, maybe they will have changed something, I don’t know. But my response to that and the reason I still take the time for it, is that in fact, if tax laws are going to change, you’re even better off having spent the time planning.

Because when tax laws change, we don’t just start over from scratch and have to rebuild the whole building. The better we understand where we’re currently at, the easier it’s going to be to say, “Okay, here’s what changed and here’s how my situation is going to change relative to that.”

So, it’s going to be still completely worth your time, even if in June, Congress changes all of it.

Benjamin Brandt:       Yeah, the more in tuned you are with your retirement income and your retirement taxes, you’ll have context to know if you should be freaking out when a new law comes or some new legislation comes across. Because most of the time, a big legislation, there’s a tiny corner of the legislation that applies to you.

Of course, by listening to this podcast or working with an advisor that focuses on taxes, even less likely that you’ll freak out. So, it’s the biggest bill you’ll ever pay in your retirement, and that’s the whole focus of this show. But I think it makes sense to dedicate some time, even if it’s only 20 minutes, twice a month on the 1st and 15th. But this is something you should be thinking about.

Steven Jarvis:   Definitely. I’ve got one more thing I want to throw in real quick, and then we’ll get to a listener question.

Answering this question of you filed your tax return, now what? Just one quick shout out to our DIYers out there, because a lot of especially self-preparation tax softwares have a tendency to really encourage estimated payments.

And so, I just like to throw this reminder out there, that when you filed your taxes and you get your summary reports and they say okay, great. And you need to file $2,000 a quarter in quarterly estimated payments, make sure you’re thinking about that in context of what we’ve been talking about today, of saying, “Okay, where did I end this year as far as a payment or refund. And does that make sense for where I expect to be next year?”

You use TurboTax and they say, “Hey, we recommend you pay $2,000 a quarter,” they’re not giving that to the IRS and then making you legally required to make those estimated payments.

Take those as recommendations at best, but make sure you’re thinking about that in context of your overall situation.

Benjamin Brandt:       Yes, estimated payments are optional. I mean, we could recreate those in a different way. Some people like to do them. I would say personally, if I was retired, I’d want to do anything, but have a little ding on my phone that says, hey, it’s time to send the IRS a couple thousand dollars.

We can create that through withholding. There’s different ways we could do that. So, it’s not optional to pay the money, you definitely have to pay the money. But it’s optional to set it up quarterly. That’s just kind of the default option, I think.

Steven Jarvis:   Yeah. Alright, listener question. It says, “How do I determine the right contribution in employee 401(k)s? Balancing pre-tax benefit on the traditional side combined with utilizing the Roth element? Is there a happy medium or should it be all one or the other?”

Benjamin Brandt:       I think I’m going to be in the camp, all one or the other. This is in the context of retirement planning. All of my clients are either actively living off their savings or they’re just right on the, what we say, immediate proximity to retirement.

They’re in their peak earning years, and they’ve probably started to think about retirement planning a few years from actual retirement. And they’ve got a couple raises since then. So, in many, many cases, their income goes down after they retire.

And so, if they’re in their peak earning years, we want to compress that big income as much as we possibly can. And if it’s possible, max out those 401(k)s. Get as many deductions as we can, max out the HSAs, maybe even fund a future charitable giving because we want to get that income as low as we possibly can because that’s their highest income earning years.

Then in retirement, we can simply, when the income goes down, we can simply reverse any of those that we want to reverse through Roth conversions or through more spending out of the 401(k)s and IRAs.

So, if you’re in the immediate proximity to retirement and you’re earning a lot of income and your retirement budget is less than your current gross income, I think you want to be in full blown deduction mode, and then we can just do Roth things later.

I think sometimes people, they’re five years from retirement, they’re like, “I need to start learning about retirement.” They’re downloading podcasts, they’re watching YouTube videos, they’re buying books and they’re thinking “I don’t have anything in a Roth IRA right now. I’ve got to get one started, I’ve got to do something.” Because the Roth IRA is an extremely powerful machine for your retirement, people look and say, “I’ve got to have one now.”

I don’t really think you do. We can make one, we can maybe fund it with a little bit of money, but just to get that clock rolling, but dialing down your deductions and dialing up your Roth contributions, just because you don’t have a Roth, the last year of your career is probably not a good move for most people.

Steven Jarvis:   Yeah, I really like that you’re specific in there of people who are in that close proximity to retirement, because that traditional versus Roth is all about relative income. Are we in our high earning years or are we in low earning years?

If you’re just really ahead of the game and you’re listening to this podcast and you’re just years and years away from retirement, you might be in a place where putting it all in Roth makes a lot of sense that you think that some of your highest earning years are still ahead of you.

I tend to be on the side of all one or the other in part, from a simplicity standpoint and what we’re actually going to follow through on, rather than spending hours and hours and hours finding this perfect ratio of 30%, 70% or whatever it might be.

Let’s look at it from a high level and just be able to answer the question of do I think I have years between now and when I need this money, that my income is going to be higher than it is now or lower than it is now, and maybe make this high-level decision.

If we’ve got actuaries listening who just love the numbers, I mean, by all means, run them for days, let me know what your ratio is. But I think what you described Ben really from a high level, is how this should be considered.

Benjamin Brandt:       And I think we could flip the absolute around in the other direction too. You know, if you’re under 30 and you’re confident about your income earning potential and you still fall below the income threshold where you can contribute, yeah, I would max out your Roth 401(k) and your Roth IRA until you hit 30.

Ans then you’ve got another 30 years after that, hopefully, you have the risk tolerance where you can heavily allocate to stocks. So, you front end load the tax-free portion of your retirement. And then as your income jumps over … in a Roth 401(k), there’s no income limitations, but just hypothetically speaking, Roth IRA does.

Front end load the Roth portion. Then when your income gets high, then we can go into deduction mode. We’ve already got those Roth dollars cooking for us, and they’ve got a nice long timeline of 20, 30 years. So, if you’re acting soon — if you’re under 30 and you’re listening to this podcast, I’ve got other questions for you: either what are you doing with your life in all reality? No, I’m just kidding.

But yeah, if you’re young, Roth, if you’re older and you’re in your peak earning years, we want to be in full deduction mode. So, that’s my story, I’m sticking to it.

Steven Jarvis:   It’s a good story, I like it.

Benjamin Brandt:       Alright. Well, that’s all we’ve got prepared for you this week. Until next time, don’t let the tax man hit you where the good Lord split you.