Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative. Securities offered through Cambridge Investment Research Incorporated, a broker dealer, member, FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.

Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus. Brought to you each and every Wednesday morning, right here on KROS. Well, this is Nate. James joining me this morning and when we talked to James, it felt so nice to walk up the hill this morning and not be shivering, not have a completely wet grass, not snow on the ground, not 25 mile an hour wind. Just another nice pleasant morning here.

James Nelson:
Yeah, absolutely. This week looks pretty good, yesterday was great. So yeah, nice to have some decent weather finally.

Nate Kreinbrink:
And you did mention too, that this time of year also brings along some allergies and all that fun colds and everything else like that, which obviously I’m kind of battling right now. But to get these 70s, 80 degree temperatures, it is definitely well worth it, so.

James Nelson:
Yeah, suck it up Nate.

Nate Kreinbrink:
It was definitely nice, the last day or so at baseball practices, being out there and not being completely freezing cold. I’m sure soccer practices, track, all that stuff that’s going on right now, everyone else is feeling the same.

James Nelson:
Yep. I see high school [inaudible 00:01:41] I’ve had a couple good ones in this week, late last week. So-

Nate Kreinbrink:
A lot of local area teams really have-

James Nelson:
Doing well.

Nate Kreinbrink:
[Crosstalk 00:01:49]… some great athletes or whatever, and have a chance to make some noise, I think moving forward.

James Nelson:
Yeah, definitely.

Nate Kreinbrink:
So today’s program, I know last week we had Andy Ferguson with NelsonCorp Tax Solutions on. We did a little tax talk and then talked a couple of different tax topics, that he brought up. Wanted to continue the topic of RMDs. I know Andy and I kind of brought it up right at the end of last week’s program, but wanted to continue on, because I think it’s important for people to understand exactly what this topic is and how it impacts them, not only now, but throughout their retirement career, through that time period. So an RMD that we are referring to as a Required Minimum Distribution. And essentially you have to take out a certain percentage of your tax deferred accounts, once you hit the age of 72. Now this age of 72, just got bumped up to 72 at the beginning of last year, as part of the Secure Act. Previously, it was age 70 and a half.

Nate Kreinbrink:
They made it an even number now, which thankfully they did and made it 72 now. So those tax deferred accounts that we’re referring to are your traditional 401ks and your traditional IRA, simple IRA, SEP IRAs, those things that you have money in it, that’s been tax deferred. So when money went into those type of accounts, you got a tax deduction for every dollar that you put into it. That money grows tax deferred on the back end, when you take money out, that money is 100% taxable to you.

Nate Kreinbrink:
So you put a dollar in, we had some growth on it, now it’s, let’s say $2. That whole $2 is completely taxable to you on your tax return when you take that money out. So now that we reached that age of 72 and you have to start taking it out, it’s a big planning opportunity that we want to make sure that we keep in mind, because again, if people take some of that money out and they don’t necessarily need it, it really impacts their taxes and usually not in a good way. So again, we’ll kind of dive into some of this more, but I know there was one specific topic that I think was important that, James was going to bring up here?

James Nelson:
Yeah, exactly. I mean, last year we kind of had a freebie. Given COVID and the changes to the rules, one time changes I should say, where folks didn’t have to take out their Required Minimum Distribution. That was a one and done. So that took place last year. If you didn’t need the money, you didn’t necessarily have to take it out. We have a lot of people that are set up on automatic. So it comes out on either a monthly basis or an annual basis, to their bank account and they don’t really have to think about it. If those were turned off and somebody turn those distributions off once they knew they didn’t have to take a distribution last year, you need to remember to turn those back on for this year. Because the penalty for not taking a Required Minimum Distribution is 50%.

James Nelson:
So pretty stiff penalty. If you’re supposed to take 5,000 out for your distribution and you don’t do it, that’s a $2,500 bill penalty, assessed to the amount that you were supposed to take out. So very important, make sure you start those distributions up, if you turn them off temporarily for last year, that’s a big item. RMDs are something that we all have to deal with Nate and I see it all the time, where people have deferred, deferred, deferred while they’re working. They get to that 70 and a half, the old rule, now 72 and, “Hey, I don’t need the money.” And we’re saying, “Hey, you still got to take it out, there’s nothing we can do.” And I think that’s kind of been a disservice that our industry’s done in general, as far as telling everybody to, “Defer, defer, defer, and not consider some other avenues, just put the money in your 401k, put it in your 403b, put it in your traditional IRA and kind of forget about it.”

James Nelson:
And that’s fine. And everybody likes the tax deduction when that money goes in, but on the backside, the second half of that conversation never gets brought up that, “Hey, when you turn 72, you’re going to have to start taking out a good chunk of money, whether you need it or not.” And like Nate said, it’s 100% taxable, so that really can catch some people off guard. Generally retirees are taking some money out, so small distributions, generally not a problem. But if you’re being forced to take out some pretty good lump sums of money as you get older, and that number continues to go up as you age, so that percentage that you have to take out continues to climb. So the number that you take it out at 72, isn’t the same number that you’re going to take out when you’re 75. So all important stuff. And people just need to realize that, “Hey, if I’m working, maybe not saving all of those dollars in the pre-tax bucket makes sense. Maybe we should look at a Roth or an after tax account, for a little diversification there.”

Nate Kreinbrink:
Right? And I think it just goes back to that, for so many years, as James mentioned, either the traditional 401k was the only route that they were able to save through their employer, or they were getting advice from individuals as far as, “Hey, put it in there and get the tax deduction, it’ll benefit you on the taxes in that current year. We’ll just kick that tax liability down the road.” So again, we see it a lot of times where people enter into retirement and one of the largest assets that they have is all in these tax deferred accounts. So any money that they put, any employer match, automatically goes into this tax deferred portion. We also see it where, we see certain companies here around town that still have pensions, where you have a lump sum option that you can choose at retirement for your pension.

Nate Kreinbrink:
This money from the lump sum account of that gets rolled over to an IRA. So again, those also qualify for these tax deferred accounts, again, meaning that they apply to RMD. So taking all this into consideration, it’s extremely important that we start looking at what the tax liability looks like again in the current year that you’re doing it, and also 10 years, 20 years, 30 years down the road, especially when you start hitting some of these magical numbers. And as far as the retirement game, 72 being the most key one for the RMD one, what is this going to look like at taxes? We start adding our social security, we start adding maybe any pension that we have on top of it, if you’re working part-time or whatever. Now we add this RMD on top of everything, it really puts people up into a tax bracket that they may not have expected, that they would even reach throughout retirement.

Nate Kreinbrink:
And they end up paying a lot of money on taxes, we could have did some planning leading up to it, to be able to do that. Where this also comes into play and again, people don’t oftentimes think about this, is your Medicare premiums and what you’re paying for those Medicare premiums, once you start hitting that 72 age. Your Medicare premiums is broken down into five different tiers. And the tier that you fall into is determined by your income that you are currently paying or the income that you made essentially two years ago, as far as to determine what bracket you are in. Now, all of a sudden we get to that age 72, we start adding this income on top of it, we see it a lot of times where it may potentially push somebody up into a higher tier of Medicare.

Nate Kreinbrink:
And again, they’re not getting any more coverage for being in those upper tiers, they’re just paying more for it. And another really big aspect, and again, we always say let’s plan for the worst and hope for the best, but what happens when one of those spouses passes away and we have a surviving spouse that is now paying taxes, not as married filing jointly anymore, but as a single tax filer. She or he, or whatever, the surviving spouse inherits those tax deferred assets, the larger social security benefit continues on. When now all of a sudden we look at, where they’re bumped up into even maybe the second, the third, or even the fourth, sometimes brackets because of all this income that’s coming into. And again, the assets that they thought they had, they don’t necessarily have that much anymore because they’re paying a lot more in taxes than what they thought they were going to.

James Nelson:
Yeah. And those are all really good points and all point to reasons why we should have more than just the pre-tax bucket of money. The final, maybe reason to consider maybe not putting all of those dollars in the traditional 401k and considering a Roth 401k or Roth IRA, is just where we’re at with tax rates. Tax rates are probably at a low period right now, they are. They’re at almost a historic low, and with the expectation that rates are probably going to go up at some point. Maybe not in this year, maybe not next year, but at some point rates are going to continue to tick up most likely. And if that’s the case, why not pay a few dollars in tax today while rates are lower and take that money out in a tax-free world later on when rates are potentially much higher. So another reason to just considered to have a few buckets of money, not all of the money should probably be in a traditional 401k or traditional IRA. Having that tax diversification makes a lot of sense.

Nate Kreinbrink:
Right. And I think we always talk planning, planning, planning. And again, the earlier we tackle this issue, the more options we may have in order to kind of alleviate that huge RMD, once you get to those ages. If you’re already 72, there’s a lot less that we can essentially do. However, there are a few options that we can look at and we won’t get into all those today as we are running out of time. But if you are 72, you have to take an RMD, you’re giving money to charity, there’s definitely some things that we want to look at. Where essentially you’re still giving the same amount to charity, it just may cost you a little bit less as far as from a tax standpoint, if we take it from the right bucket.

Nate Kreinbrink:
So there are some things to do, you just need to know where to look, how to do them, and again, make it work to you. So before we do run out of time, I did want to mention that every Friday NelsonCorp Wealth Management is wearing jeans for charity, money raised in the month of April will be donated to the Make-A-Wish of Clinton County. James, as always time flies when we get talking, so thanks again for joining us.

James Nelson:
No problem.

Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks again for tuning in and have a great rest of your week.

Announcer:
Financial Focus is a production NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives. Securities offered through Cambridge Investment Research Incorporated, a broker dealer, member, FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp wealth management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.