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. This is Nate and James, joining me again today. We were just talking on the way up, the brisk to the cool fall winter is back.
James Nelson:
Yeah, no doubt. Kind of got lucky in the last week or two. And I don’t know if those temperatures are going to stick around, but anyway, we took it while it lasted, I guess.
Nate Kreinbrink:
That’s exactly right. And it was saying over the weekend, we were into November and had the windows open and outside with shorts and a t-shirt on, getting some of those last minute things that didn’t get done over the summer and spring done. And it’s quite the change to know that what we have in store for us coming up.
James Nelson:
Yeah. Well, it’s nice to see the golfers playing too. Kind of strange to see the Masters-
Nate Kreinbrink:
Masters this week, exactly.
James Nelson:
… in November. A little bit different, but that’ll be fun to watch.
Nate Kreinbrink:
With the amazing flowers and everything that they have out there, now we’re going to look at the changing color and the trees. Will look a little bit different, but excited to see that back on again.
James Nelson:
At least they’re playing, right?
Nate Kreinbrink:
Exactly. So again, going with the end of the year as we were just discussing, I mean, it comes into play for a lot of things. And I think the tax planning from now until December 31st is something that people really need to continue to think about and really take a hard look at their situation. And we always say, this is usually the best time to do that tax planning. And we talk tax preparation versus tax planning. This is that tax planning part where, okay, you have a good idea as far as where your income is going to probably come through the course of 2020. Now let’s start looking at some of those things that we can put into place, whether it’s Roth conversions, contributions to a retirement count, tax loss harvesting, things we’ve always done. This is a time that we really want to take a look at those. And some of those ideas we need to put into place.
James Nelson:
Yeah. You and I talk about it all the time, Nate, the difference between tax preparation and tax planning. And we say it time and time again, when you’re doing your taxes in February or March or April, your options are really limited. The tax planning takes place throughout the year, not after the year. So that’s a big item. And a lot of people just think, yeah, go get my taxes done from the accountant and that’s that. Well again, your options are limited at that point in time, because the year’s over. So the tax planning takes place now. A few things to kind of consider, Nate touched on them as far as the IRA contributions, you can obviously do those into next year, one of the only tools that really come into play after the end of the year. So you have up until the tax deadline. April 15th, is normally the tax deadline.
James Nelson:
We’re already hearing whispers about that getting extended this year, as it did last year with COVID, so we’ll see there. But April 15th is usually the deadline and that’s when you have to make those traditional IRA contributions or Roth IRA contributions. The thing that you’d want to consider for the rest of this year is the 401k contributions or any other retirement plan. If you’ve got a 403B, 401K, 457, whatever the case may be, those contributions have to be done at the end of the year. So looking at your contribution amount, kind of figuring out where you are tax wise. Like Nate said, most people know where they’re probably going to fall as far as from an income perspective, maybe try to ramp up those contributions the last couple of paychecks here, of the year, to plow a little bit more money into their retirement plans. Because again, that has to be done by the end of this year.
Nate Kreinbrink:
Right and I think to piggyback with that, as far as what James mentioned with the contributions, we want to make sure that that count is set up though, as far as, in this year, to be able to make those contributions up until that tax deadline, as far as for 2020. Another thing that I think people oftentimes overlook, and I think they hear the term, they kind of understand it, but they don’t necessarily really know where it actually fits into their situation, is Roth conversions. And when we talk about Roth conversions, what we’re doing is we are taking monies that are in tax deferred accounts, so IRAs, what you had in your 401Ks, 403B’s, 457 plans and what we’re doing is we are willingly going to pay taxes on that money this year, even though we may not have to and get it into a tax-free environment, which would be your Roth IRA account.
Nate Kreinbrink:
And people always say, “Well, why would I want to do that?” Well, we know that the monies that we have inside of those tax deferred accounts, we are going to pay taxes on them at some point, whether it’s now or in the future. If we are in a low tax environment, we’re getting to the end of the year, we know what tax bracket we’re going to be in and we can fill up the current bracket, whether it’s the 10%, the 12% bracket that we’re in and we still have room in there, it may make sense for us to willingly pay taxes on those tax deferred assets at that low tax rate, as opposed to being forced to pay it later on when we to take that RMD out at age 72. By that time, if you have any pensions, that’s obviously coming in, social security is probably coming in and now all of a sudden, we put that RMD, depending on how big those assets are, could be pretty sizable on top of that.
Nate Kreinbrink:
It sometimes forces up into a higher tax bracket and it also may push us up to a higher bracket when it comes to our Medicare premiums. So again, that’s where it may come into play to say, okay yes, I know I’m going to pay taxes on it and would I rather pay taxes at a lower rate, or would I rather be forced to pay it at a higher rate? Obviously, we all know the answer to that. So that’s when that planning really comes into play. And especially for those individuals that have not yet taken their social security benefit and they’ve retired maybe in this year, so their income is a little bit down based off of months of no earned income from retirement or whatever the case may be. This is a prime example and a timeframe when we need to take advantage of that.
James Nelson:
Well, and those Roth conversions really can mean a lot from an investment standpoint too. I mean, take an individual that retires at 60, or in their early 60’s, and they’re not drawing social security yet. They don’t have a, maybe a pension that’s kicked in and their income’s down. The tax is one side of it, but you also have maybe another 10 or 12 years until you have to start taking the money out of those traditional accounts, the required minimum distribution. So you could have 10 years of growth in a tax-free world versus a taxable world. So that can really add up too, when you’ve got a little bit longer time horizon or an individual doesn’t plan on touching the money, that growth in the tax-free world is always better than the taxable world. So that’s a good point.
James Nelson:
The other thing that we like to do this time of year, is look at the non retirement accounts. So somebody who’s got an investment account that’s not a retirement account. And generally this time of year, we have a pretty good feel of what the markets are going to do, although this year, maybe not.
Nate Kreinbrink:
Maybe not so much this year.
James Nelson:
Yeah. But usually, we’ve got a pretty good idea where things are at and we go through the account and we do what’s called tax loss and tax gain harvesting. So that’s looking at positions that are up and that are down, potentially, and kind of matching those up. We can sell this position with a little bit of a loss, with this position that’s got a little bit of a gain. Offset those two transactions and have a net zero tax effect essentially is what we’re looking at. So again, it’s not perfect in every situation, but if there’s some holdings we want to move around or sell or buy, we always need to be aware of the tax consequences. And this is the perfect time to be going through and matching those gains up with the losses in those non-retirement accounts.
Nate Kreinbrink:
Right and I think it all just goes down to, again, that continued planning and that continued understanding of knowing what it is that you own, knowing what it is that the tax liabilities are for each one of those accounts and coordinating that together and saying that, okay, yes, I may have a lower income this year, but let’s use it to our advantage. And I know there’s been a lot of people and throughout the whole course of 2020, that maybe have had their hours cut, or maybe have been laid off for a little bit of time or unfortunately, lost their job. Well, if they’re in a lower income environment, what is the best thing for me to look at as far as taking advantage of that lower income from a tax perspective and using it to my benefit to be able to pay less taxes than what I would be forced to pay then later on?
James Nelson:
Yeah, that’s a really good point. The last thing I’ll just touch on, those non-retirement accounts, some of the mutual funds, specifically on the bond side, pay dividends and capital gains. And usually those are kicked out at the end of the year, November, December. This would also be a time to look at those type of accounts and maybe look at, not so much mutual funds, but more of an ETF type route. And that stands for Exchange Traded Fund. They’re much more tax efficient than the normal mutual fund. And if this is a year where you can make some trades and not incur a lot in the way of tax, maybe you can realign the portfolio a little bit to take advantage of the more tax advantaged investments going forward. So something to consider, probably want to talk to somebody beforehand, but something to consider by the end of the year.
Nate Kreinbrink:
All great things. Questions on any of this that we mentioned today if it does apply to you, where to even start, give us a call, we’d be happy to kind of review your situation and try to kind of get you on that right path. I did want to mention though real quick, before we run out of time, that every Friday, NelsonCorp Wealth Management is wear jeans for charity. Money raised in the month of November will be donated to the health program sponsored by RSVP here in Clinton. Again James, thanks again 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 Nelson Corp 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.