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 Kreinbrink. Got Andy Ferguson, NelsonCorp Tax Solutions joining me today, third Wednesday of the month. Hard to believe third, Wednesday of the month in August already.
Andy Fergurson:
Oh my gosh.
Nate Kreinbrink:
That means back to school is-
Andy Fergurson:
Yeah.
Nate Kreinbrink:
For some areas things I think it’s actually today they go back or whatever.
Andy Fergurson:
Last Wednesday of freedom for the Iowa kids. And then they go back to the grind. I can’t believe it. I mean, I feel like it was just a few minutes ago there was snow on the ground.
Nate Kreinbrink:
There was snow on the ground, absolutely. And, again, that mixed bag, I think, of emotions when you talk to the kids. “Are you ready to go back?” “No. Yeah. We’ll see.”
Andy Fergurson:
They’re excited for their friends, but nervous about starting the school year.
Nate Kreinbrink:
Everything else that goes with it. So they’ll adjust. So want to wish best of luck and a great school year to obviously all the students heading back and obviously, the faculty and staff, as well as they transition to start another school year. Again, we have Andy with NelsonCorp Tax Solutions on the third Wednesday of every month. We did have Mike Van Zuiden right down the hall from you with your office as well on last week and talked a little taxes. Wanted to expand on some topics, kind of from a bigger picture, but also this time of year, you do a lot of planning.
Andy Fergurson:
Yeah.
Nate Kreinbrink:
And one of the topics that always comes up is bracket management, I guess, is a term that we use a lot of times. And that’s really understanding what you are paying on taxes on every dollar that’s taxable to you and how taking sometimes distributions add up and maybe push you to different levels of that.
Andy Fergurson:
Yeah, sure.
Nate Kreinbrink:
And really how that goes into play and what people really need to understand and what they kind of overlook a lot of times on your end when you go and prepare their taxes every year.
Andy Fergurson:
Yeah, and I think even more important than bracket management is some of those other thresholds that happen. So tax brackets are interesting because they’re not necessarily cliffs or thresholds where if you go past a bracket a lot of people think that their whole return then goes into that bracket and they pay that higher percentage. And the truth is it’s only the new money that goes into that bracket that’s charged that higher rate. And so for us, we get concerned more about some of those other thresholds that are actually cliffs, like the Social Security premiums. You go $1 into the next bracket in that Social Security premium and all your premiums change for two years, and that can be a significant amount of money, or the premium tax credit or the Obamacare issue, where if you cross over that poverty line, all that premium tax credit goes away, you cross over by $1, you may owe $15,000 in taxes.
Nate Kreinbrink:
Well, and I think that Obamacare and that insurance thing is a big thing as well because when you go on and you apply for that, you have to give them an estimated income of what you think you’re going to make, which puts you into the tier telling you what you’re going to pay. Now obviously we don’t want to understate that because like you said, you’re going to get a nice little letter from them saying, “Hey, you made this amount and you told us this. Now you owe us a lot more.”
Andy Fergurson:
Right.
Nate Kreinbrink:
So, again, things change and sometimes your income does go up unexpectedly so you want to kind of keep that stuff updated because, again, those unexpected consequences and those nice little letters from the IRS are usually not a good thing for you.
Andy Fergurson:
Yeah. And you mentioned the idea that your income changes, and it does change, but especially in retirement, most of your income is pretty well defined. I mean, it moves nominally, your Social Security moves a little bit, a couple percent each year. Your pensions will stay pretty close to the same. there’s other things though that are a little bit more volatile and those things are the things that we can control. So, your investment incomes are things that you can control, whether or not you sell those stocks in December or in January may cost you thousands of dollars depending on what that does to your tax return. Or the one that people really have control over is those IRA distributions. And I think it’s important that we start to develop a culture of retirees being able to know where those thresholds are, because what I see happen generally is somebody is taking a $1,000 or $2,000 or $5,000 at a time and any one of those amounts is never consequential. I mean, it’s usually the one amount doesn’t kick them over the top, but what happens is, cumulatively those amounts become problematic, especially when you take a large amount in the beginning of the year and you forget about it by the time you’ve taken the other lower amounts.
Andy Fergurson:
And so you take $15,000 at the beginning of the year, you’ve got a $40,000 window. You don’t think anything of it until that last $2,000 in December because it’s Christmas, you take that little bit of extra money and it pushes you over the top and now you’ve got a big tax burden that you weren’t aware of. And so I think there’s some value for individuals to have conversations with their advisors and to know where those thresholds are. What is that Medicare premium threshold?
Nate Kreinbrink:
Right.
Andy Fergurson:
Go ahead.
Nate Kreinbrink:
And I think too, I mean, when you said as far as those distributions being taxable to you, again, if we have a client that we’re working with or whatever and they have all their money in an IRA, the tax-deferred account, and they say, “Hey, we need $2,000 a month to send to us to live off of to help do it, we’re not just taking out 2000, we’re taking off a little bit more than that as far as to withhold taxes on it. So again, that’s just a little bit more that’s added to that tax return and as you said, I mean the monthly ones or one-off here isn’t necessarily a big issue, but again, as you go through 12 months and you take out a little bit, you take out a little bit more, a little bit more, a little bit more, well, those little bits add up to a little bit of an issue then on the tax return, when they go to file it, and that’s kind of where issues come up in hitting some of those surprise taxes that they may not be aware of, but they do have a pretty drastic negative impact on what people pay.
Andy Fergurson:
Right. And the taking the taxes out, that tax is designed to cover that income. And so if it throws you into a threshold that kicks your Medicare premiums up or heaven forbid crosses you over the threshold for the premium tax credit, that’s not expected, that’s not in that withholding. And so I think it’s very important for clients to be aware of that number and have that conversation with their advisor and their accountant before they get into that situation. This is the time to do that. It’s important for them to know where that number is, because especially financial advisors, you guys want to give them their money. You want to let them use their money. And you don’t want to tell somebody, “No, you can’t buy these things.” They’ve worked hard their whole life. They have this retirement saved up. So your tendency is going to be to help them and to give them that money when they need it and to do the best you can to watch for those things.
Andy Fergurson:
But it’s important for the client to know. It’s important for the client to know that “Hey, based on last year’s tax return, I’ve got $25,000. I can take it all or I can take some of it.” And then when that client gets close to $25,000 they need to know. They need to know that they’re getting close so that in October when they’re at 21, somebody’s telling them, “Hey, look, you’re right there on that threshold. You need to be aware that this is what you got left for the year before we have some consequences.” You can take the money if you want, it’s your money.
Nate Kreinbrink:
Right.
Andy Fergurson:
But you need to know the consequences of what happens because I can’t tell you how many times I run into people who come in and they’ve had a tax event that they weren’t expecting. And they’ll give me a 1099 and it says, “Oh, yep. You took $32,000 out of your IRA.” And they’ll say, “Well, I didn’t take that much money out. I don’t even know what they’re talking about. I didn’t take.” And what happened was in January, February, March, they took some big number, which was even bigger than what they took because they withheld taxes. And so they’re like, “Oh yeah, I forgot about that.” And 10, 12, $15,000, it doesn’t take very many of those and you got yourself in some hot water.
Nate Kreinbrink:
Right. And I think you hit a point there as far as understanding where you fall in the current bracket that you’re in. And again, you may be to a point where you have more than enough of what you’re going to take out to still comfortably be in there. The topic that we brought up too as far as Roth conversions does play a key part maybe in that as well, where you say, “Okay, yes, you have this amount of room above and beyond your normal distributions that you take out. What if we would convert money from that tax-deferred portion over to a tax-free portion?” Now, all of a sudden you need money later on down the road. Now you have options as far as where to take it out from, where again, you need a big chunk to come out. We don’t have to take it all out of that tax-deferred bucket and be taxed on it. We now have a bucket of money that we could pull out tax-free potentially, and do that. But we knew what we paid in taxes on it rather than being forced to possibly pay higher taxes later on.
Andy Fergurson:
Right, yeah, so that’s a great point. We sit here and we talk about, “Hey, don’t go over the threshold,” but then what about those people, like you said, that are way under the threshold? Let’s use that space that’s there at the end of the year and make that conversion and pay taxes in the known tax bracket and do those things and be ready so that when you need the money in December, you don’t have to wait or you don’t have to pay the consequence of doing something without an understanding. And so I think that’s a great point. Filling up those thresholds, knowing where they are, gives you all kinds of power. It can prevent undue tax, and it can allow you to pay some tax at a known rate so that you can take advantage of the tax situation and optimally use your retirement.
Nate Kreinbrink:
Right. All good stuff. And again, we get rolling here, Andy, and time just does fly by when we start talking these exciting topics. But again, all equally important with, with where people are. If you have questions on anything we covered on your taxes, your investments, on how they coordinate together, give us a call. We’d be happy to sit down with you. Did want to mention before we do run out of time, is that every Friday NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of August will be donated to the MS Fest, which is sponsored by the Clinton MS Support Group.
Nate Kreinbrink:
Andy, as always I appreciate you joining me. Andy Ferguson, NelsonCorp Tax Solutions, Nate Kreinbrink, NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of 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.