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 offered 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 again this morning. Big day today. It’s hard to believe we’re getting close to that end of June, but the end of June also means it’s a big day for NelsonCorp and then down at the ballpark, we have our the new recent naming rights deal that we had, we have our Community Night Down at the ballpark tonight. So it looks like weather’s going to cooperate, might be a little warm, but rather warm than than rain like we’ve been having. So looking forward to a big night tonight.

James Nelson:
Yeah, we should have a good turnout. We’ve got a ton of people signed up, clients of ours signed up for the event and the community, we, I think have three or 4,000 tickets have been handed out. So yeah, we’re really hoping for a good showing down there and perfect night for baseball.

Nate Kreinbrink:
Should be, hopefully we can, like you said, get a a good game going tonight and know what the Lumber King second half of the season and it always starts over with record wise, so hopefully they can get it rolling here in the second half and then look for a great time down there.

James Nelson:
Yeah, exactly. I think everybody’s been pretty excited about it and that’s nice that it’s finally here.

Nate Kreinbrink:
If you’re good for it and not doing anything tonight. Come on down and join us, get a lot of stuff going on. Should be a great night for it.

Nate Kreinbrink:
So getting into today’s program. I know James and I had a couple of different topics we were throwing around but settled on taxes and understanding how taxes affect the different accounts that people have and what they’ve saved in for retirement.

Nate Kreinbrink:
I know that’s a big thing that people always look at as to say, oh, see, I say I want to save money. Where should I save it at now? While there’s a lot of things that go into it as far as when people make that decision, taxes are a big part of that. The basics when you look at the different types of accounts, when you save money for retirement, is basically a traditional IRA, traditional 401k that people put it in. You put money into that, you get the tax deduction in the year that you put it in, you put $5,000 in, you get a $5,000 reduction on your taxes for that year. But then it grows tax deferred. When you take money out later on in retirement it’s going to be taxable income to you at that time in the amount that you take out.

Nate Kreinbrink:
On the flip side, you have a Roth account. Roth IRAs, Roth 401ks are becoming more prevalent in company plans. A lot more people taking advantage of that. That tax wise is the complete opposite. You put in after tax money up front, it continues to grow tax free. When you take it out in retirement, it comes out to you tax free. So again, there’s a some trade offs as far as when the income or when the money is taxed. Understanding what tax bracket you are in now versus what you’re going to be in later, what the tax laws are in the current year that you’re in versus the unknown of what they’re going to be so far in the future. And then again, creating options, because again, we are looking at 20, 30, 40 years down the road for a lot of people. We don’t know what the tax laws are going to be like at that point in time.

Nate Kreinbrink:
So anytime that you can give yourself more options to be able to control your income, control your taxes, you’re going to be better off.

James Nelson:
Yeah, no doubt. And I think you really hit the nail on the head with kind of what’s the best argument for Roth’s right now is the tax environment that we’re in, right? I mean, we’re at basically all time low tax rates for the next several years and that’s probably the strongest argument we see to a Roth IRA. The deduction means less now than it did a couple of years ago. It probably means less now what future rates are going to be. So why are you taking the deduction today and probably paying taxes when this money comes out at a higher rate? So, I mean the Roth’s have caught on. I think people are starting to recognize that. Companies are recognizing that and they’re offering the 401k plans that used to be pretty rare that we’d come across a 401k plan with a Roth component in it, but now that’s pretty common. And that’s a very good thing. And I think employees and people are starting to realize that.

James Nelson:
You talked about tax diversification, Nate, that’s huge. And you know this as well as anybody putting a lot of our plans together in the offices. A lot of people come in with a 401k and it’s all tax deferred money and they’re kind of at the mercy of tax rates whenever that money comes out, right? There’s no options. You take the money out, it’s taxable at ordinary income rates. When you have a Roth or have an after tax account, that really does give you options that allows you to take maybe from the Roth accounts or the after tax accounts when tax rates are pretty high. And when tax rates may be fall off a little bit or lower, like the environment we’re in right now, then maybe it’s not such a bad idea to take from the tax deferred account and pay the taxes when rates are lower.

James Nelson:
So when you have options you can kind of play those games. Unfortunately a lot of people don’t, they just put it in a traditional 401k, defer, defer, defer throughout their whole career. And then they get to retirement and they have zero options. And that’s a huge problem.

Nate Kreinbrink:
And I think coming into it and as James mentioned, seeing it in a lot of real life situations. And the argument as far as being in the tax deferred bucket is, hey, I’m, I’m working now. I have income coming in. When I retire, I’m going to be in a lower tax bracket. Are you? Because when you, we’d sit down and we look at it, we don’t work with a lot of people that made 75, a $100,000 a year and are going to live off of $15,000 in retirement. It’s just, it’s not going to happen. And when you start adding up your social security benefits for you and/or a spouse that you may have, maybe a small pension that you’re going to have and now you start taking money out of an account that’s going to be added to your taxable income. You’re going to be right next to or darn near close to where you were as far as income when you were still working. And again, not knowing what tax brackets are going to be, you may be paying more in taxes at that point in time even though you have a little bit less in income.

Nate Kreinbrink:
So when when I put together plans, it’s not uncommon for people to bring all their stuff in. I’d start going through it, start entering it into our programs and they have half a million dollars, $1 million between them and maybe a spouse and tax deferred assets and traditional 401ks, old IRAs that they had. We’d combine them, simplify things for them. When it’s all said and done, they have that amount of money, but it’s all in tax deferred. So they get to that magical age of 70 and a half and they get to their required minimum distribution where you have to start taking a little bit out of those accounts every single year, whether you need that money or not, you have to start taking that money out. So again, you start adding up the social security benefits for you and or a spouse, a pension benefit. Now we adding this on top of it. Their income all of a sudden goes from comfortable to in a higher tax bracket in a lot of cases. That impacts them obviously with paying more taxes, having more money in higher tax brackets, but it also has an impact on them for the amount of social security benefits that are taxed to them. They get above a certain threshold, more of their social security benefit, up to 85% is going to be taxable to them.

Nate Kreinbrink:
It could potentially put them in a higher Medicare premium bracket. There’s five tiers of Medicare premiums that people pay based off of your income. So again, we start getting into some of these situations and yes, it was that great sugar high as we say, that they’ve got that tax deduction through all those years that they put it into it, but they’re paying for in retirement. In the case of higher taxes, higher Medicare premiums. It really becomes a factor when we have the unfortunate circumstance when one of the spouses passes away. That really kind of accelerates those taxes because now all of a sudden the widowed spouse is filing taxes as a single tax payer instead of married filing jointly, which means they have roughly about the same amount of income. That lower social security benefit goes away. The higher social security benefit continues on. They still have to take out the RMD, any pension if it continues on to a surviving spouse so their income is roughly about the same, but now they have a abundance of assets of income that are in higher tax brackets really negatively impacting them and really having a high tax liability.

James Nelson:
Yeah, and you touched on two things that people overlook all the time and that’s the social security tax. Not very many people know where the thresholds are at and then the Medicare premium. Nobody talks about that. So it is here and both of those are based off your taxable income, whether or not you’re going to be able to keep more of your social security benefit and whether or not you’re going to be paying in the lower tier Medicare bracket or maybe one of the the top four Medicare brackets. So those are huge items. We tend to trivialize that in our conversations, but a lot of people are not aware of that and that’s something we spend a ton of time on when we’re sitting down planning with people.

James Nelson:
The other point that I wanted to make is this tax cut here for the next several years is temporary, right? A lot of people think that this is just going to kind of be the norm and going forward things are going to be status quo, but this is set to expire down the road here in not too awful long. And for people to have a window of opportunity here the next several years to maybe pay a little bit of tax now, giving that trade off to having some tax free money down the road when rates probably revert back to at least where they were, if not higher, is probably something worth considering. So these tax breaks are temporary and it would be worth considering maybe paying a little extra tax today for some future tax free dollars.

Nate Kreinbrink:
Right. And having options allows you to be able to dictate the amount of taxes that you are paying. And again, the tax changes that went into effect at the beginning of 2018, again, tax changes to the laws that they have are nothing new and they’re going to continue to change year after year after year. So again, if we have options, the tax brackets skyrocket up, well if we have a bucket of money that we can pull out tax free, we’re going to be able to reduce our tax liability by doing that. We have laws that come in and tax brackets continue to come down. Well then, we have a bucket of money that, hey, we’ve got to pay taxes on it at some point. Tax laws, the way they were currently written, had the tax brackets lower. We’re going to take it out of that one.

Nate Kreinbrink:
So again, being able to coordinate having options is the key. When you’re stuck with one account and you’re going to pay taxes no matter what, you’re stuck at whatever tax laws they have in. And then a big misconception is that people come in and they have all their money in tax deferred accounts. They say, yeah, we’ve got about a half a million, we’ve got $1 million saved up. That should be able to last us. Well, you don’t necessarily have that amount. You have half a million dollars minus whatever the tax laws is at that point in time that you take it out of. You have $1 million minus the 22% tax law that you’re going to be in when you take that money out.

Nate Kreinbrink:
So again, understanding how that’s going to hit you, how it’s going to affect, again, not only your income, your social security income, your Medicare premiums that you’re gonna pay for you and or a spouse that you may have, again, is key to understanding how to make your money that you have, that you’ve worked so hard to get saved and to make it last as long as you can.

Nate Kreinbrink:
And lastly, people also forget that any company match that goes into your plan has to go in the tax deferred account so you’re automatically getting any match that a company is putting in a tax deferred account. So you put in another 5%, that’s just magnifying the problem when it goes into that.

James Nelson:
Yeah, absolutely. All things are worth considering and please feel free to reach out if you have questions.

Nate Kreinbrink:
Did want to mention real quick that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of June will be donated to Mobile Meals.

Nate Kreinbrink:
James, appreciate you joining me today.

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 the 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.

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