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 is joining me this morning, and we were talking on the way up today as far as quite the different, drastic change I guess you could say. And temperatures out there this morning, I seen mid twenties when we were driving up the hill this morning. And I said, it kind of coincides very nicely with the start of opening day for baseball season tomorrow. So cold temperatures and early baseball. Can’t get any better than that, right?
James Nelson:
Yeah, exactly especially for these teams up north. They’re going to be a little chilly tomorrow, but it looks like it’s supposed to snap back and be in the 70s next week.
Nate Kreinbrink:
That’s always quite the culture adjustment when you’re coming from spring training, whether you’re in Florida or you’re out in Arizona and then all of a sudden you come to these cooler temperatures and, “Okay. Let’s play baseball.”
James Nelson:
Yeah. Yeah, exactly. Time to get after it. So yeah, it’s fun time of year.
Nate Kreinbrink:
It is. It is and we always say every new year is a new beginning and optimism is high for every single team as they enter tomorrow and see how it plays out, obviously throughout the course of the year, but good to see it coming back and hopefully they can continue on and get fans in the stands and things kind of continue to progress that way. But again, baseball starting, which is a sign of warmer temperatures. Next week saw on there of highs in the seventies, lows in the fifties for pretty much the whole week, so we’re turning that corner and hopefully it sticks around this time and doesn’t keep teasing us and then going away for a little bit.
James Nelson:
Yeah. Exciting time of the year for sure.
Nate Kreinbrink:
This time of year, I know we had Andy Ferguson with NelsonCorp Tax Solutions on. We’ve had Mike Van Zuiden also with NelsonCorp Tax Solutions on a few times talking taxes, more focused on policies and what they’re seeing as people file their taxes for this past year and going into it. James and I thought we’d continue on with it being tax season and talked a little bit more as far as the tax planning portion of it and how taxes and what the planning actually goes into it and how it not only impacts you now, but how it impacts you throughout the years of your retirement, especially when you hit some of these age milestones throughout your retirement. And obviously, we’ve mentioned it before, but there is a difference between tax planning and tax preparation meeting with your accountant, bringing in your 1099s and everything that you have from the past year tax preparation, looking backwards and saying, “Okay, this is what I’m reporting to the IRS.” Tax planning is taking that information and looking into the future to say, “Okay, what can I do to improve my tax situation?”
Nate Kreinbrink:
And that’s where we spend a lot of time as far as with the clients we meet with, especially with the financial planning that we do as far as looking at that tax liability into the future and what it’s going to impact you and if there are any unforeseen instances where all of a sudden your tax rates rise, and again, whether you’ve already filed for your taxes for 2020, whether you’re waiting closer to the extended deadline to do it, there’s always things that we can start putting in place and that tax planning is one of the things, and looking at where you’re saving your assets. And that’s always an important thing where we start with with clients is, “Okay, yes, you’re saving money into a 401k, into a 403b, an IRA, a Roth IRA, whatever the case it may be. But do you really understand the tax implications that that savings is going to have for you later on coupled with a pension, social security, anything like that? And that’s always a good point and usually an eyeopening thing because people don’t realize that, “Oh, later on in the road, I’m going to have a big tax liability that I wasn’t necessarily planning for.”
James Nelson:
Yeah. That is eye-opening for a lot of people. I mean, they don’t necessarily know what rates or returns due to retirement plans when they’re at pretty high levels, when they’re getting close to retirement if they don’t need a whole lot of cashflow from those assets. They’re going to be able to grow. And seeing that required minimum distribution is generally… I mean, you and I have both had plans, Nate, where we go through and you zero in on a day or a year later on in retirement and that could be a substantial number that a client’s going to have to take out of that retirement account, and they may or may not need that money, but it doesn’t matter. The cash has to come out. So it is. It’s planning and trying to head off some of those issues. When there’s more money coming out of those retirement accounts like I said, that RMD amount, that required distribution that the IRS mandates. When you hit 72, you have to start taking a percentage of that retirement account.
James Nelson:
You throw on social security like you mentioned Nate, pension, you could get up there as far as income wise and now you’re on Medicare and now you’re drawing your social security. So all of these things are impacted by your income and trying to head off some of these potential issues down the line is really what we aim to do. We’re looking at a plan over maybe a 10, 20 and 30 year timeframe. We’re not looking at it just year to year. Oftentimes like people do when they file their taxes, they’re just reporting the old news. We’re trying to look forward and see what things look like down the line in retirement to not run into some of these traps.
Nate Kreinbrink:
Right and I think where this obviously oftentimes comes into play is people were under the assumption that the pre-tax portion of their 401k was the only place that they could save money in, so they would get their taxes done, their accountants say, “Hey, put a little bit more into your 401k in the pre-tax portion or your 403b. It’s going to reduce your tax liability this year and it’s going to be better for you,” which is all true. We’re not saying that that’s not true, but all it’s doing is you’re taking that quick immediate benefit as far as from a tax standpoint and you’re just kicking your tax liability down the road to an unforeseen environment where we don’t know what taxes are going to be at that time.
Nate Kreinbrink:
So what we’re trying to do is look at people to say, “Okay, yes, you are having a little bit of a tax benefit by putting it in the pre-tax portion all this time. But what does that looking at down the road,” and that’s where sometimes the eyeopening experience happens and when we look at some of these things, it happens to show that to people. And actually when we get into some of these discussions, especially with a married couple to say, “Okay, what happens if the unfortunate circumstance happens and one of the spouses pass away,” all those assets now go to the surviving spouse who is now not just paying taxes as a married filing jointly like they were when they were both alive, but now that surviving spouse is filing as a single tax filer. They have roughly the same income coming in, but they’re up into those higher tax brackets with that coming in.
Nate Kreinbrink:
So again, it’s unfortunate circumstances that we had planned for and we always plan for the worst and hope for the best, but again, we have to take those things into consideration. And the argument that we get a lot of times is that, “Well, I’m going to be in a lower tax bracket when I retire,” and when people start backing into the numbers, are you actually really going to be that drastically different? Because we don’t meet with a lot of people that make X amount and then live in retirement off of a quarter of that. They have a standard of living that they look at and they’re pretty comfortable with living that continued lifestyle throughout the retirement. That’s what they’ve worked so hard for. So again, if that is the case” and again, when you start throwing in pensions, you start throwing in social security, you start throwing in RMDs, you start throwing in, “Hey, I need to take a little bit out to fix the house or a vehicle or whatever,” you’re right back up to roughly that same tax bracket that you were.
Nate Kreinbrink:
So again, having options throughout retirement and this goes to again, the Roth 401k, putting a little bit. Are we saying put it all in there? No. In most cases, we usually kind of ease into that, but again, having those options, having those different buckets of money that we can pull from throughout retirement that are taxed differently are going to help you maintain your tax environment when you get your taxes done, rather than being forced to be into a higher tax bracket.
James Nelson:
I think you brought up a good point as far as current tax rates versus future tax rates. That’s the big unknown, but I don’t think there’s a lot of people that think rates are probably going to go down. So if that’s the case and we kind of have the expectation, I have the expectation that rates are going to go up, maybe it does make sense to prepay some of those tax dollars now versus deferring that like Nate said into the future at an unknown tax rate. We’re probably at historical [inaudible 00:09:10] tax rates for the foreseeable future. I mean, I had a new segment this week and we talked about the money spent on the stimulus since COVID came around and it exceeds $6 trillion of COVID relief in this country in the last year or so and it’s just a huge, huge number. At some point, a lot of these things that we’ve deferred kind of as a country are going to have to be addressed and that’s probably only through more revenue. So pre-paying some taxes today at a lower rate may look like a very, very good strategy down the line here.
Nate Kreinbrink:
Right. And I think we talk about this discussion and we focus on taxes, but another aspect that always comes up is just your healthcare. We always say the two highest expenses probably throughout your retirement is going to be healthcare and it’s going to be taxes. Healthcare, you can’t really dictate too much as far as what you’re going to pay in it. They set their Medicare premiums, their drug plan, their supplement things and if you want that package, you pay what they’re going to charge you. But what happens with that and people don’t see is that what you pay for those from a Medicare standpoint is tied to your income.
Nate Kreinbrink:
So there’s five tiers of Medicare. The more you make, the more you’re going to pay. You don’t necessarily get any more coverage, but because you make a dollar above into the next threshold, whether it’s one, two, three, four, or five, you’re going to pay more for that. So again, we get out to 72, we start having to take money out of these tax deferred accounts that we may not necessarily need. Oh, by the way, that’s going to bump you up in Medicare and you, and if you’re married, a spouse, are going to pay more for your Medicare premiums. Whereas if we could have did some planning leading up to that point, maybe we could try to avoid getting bumped into those next brackets. So again, there’s a lot that goes into it. And again, it’s not just the investment planning, the tax planning portion is a big part where we sit down with people and spend a lot of time on it just to say, “Hey, this is some things that we need to look at. These are some things that maybe you should implement now to benefit you later on.”
James Nelson:
Yeah, no doubt. So please give us a call. If there’s questions, we’d be happy to sit down with you.
Nate Kreinbrink:
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 March will be donated to the Arch here in Clinton. As always James, thanks for joining me.
James Nelson:
Absolutely.
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 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 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. For more information, visit our website at www.nelsoncorp.com.