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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 James joining me this morning. First official day of spring. We can officially say that we’ve turned the corner on the calendar at least to spring. Temperatures have slowly started to warm up, a few showers out there today, but I think looking at the extended forecast, I think hopefully we are officially able to say that that nasty stuff that we were complaining about all that time for so long can officially be behind this.
James Nelson: Yeah, finally. What a long winter, and yeah, I think everybody’s in a much better mood with these warmer temperatures. Wish it was a little nicer for these kids on spring break this past week here. But anyway, it’s nice to be into the spring season.
Nate Kreinbrink: Into the spring season. I seen it was single digits I think until opening day for Major League Baseball. So that’s coming up. We’re very, very close. I know the kids have liked just getting outside a little bit and just getting some fresh air and being able to burn some of that energy off that they had cooped up all winter long.
James Nelson: Yeah, exactly. Can’t wait until opening day. That’s going to be fun.
Nate Kreinbrink: It should be another exciting year with it. And along with the first day of spring, also another date on the calendar that’s looming right around the corner is the tax deadline. We’re less than a month away from that. I know with the accounting firm down there at our office, definitely starting to see the increase in people coming in and out for appointments, drop-offs, things along those lines. So that will be here right around the corner before we know it.
Still time though to be able to do some things if you haven’t already filed your taxes. Obviously, the big thing is if you have a Roth IRA or traditional IRA in 2018, you’re still able to make those contributions to that account for 2018 up until the tax deadline. So if you haven’t maxed those out for 2018 and you’re still looking to put a little extra money away, it probably would make sense to when you make those contributions before the tax deadline to code them as a 2018 contribution.
James Nelson: Yeah, absolutely. And we talk about taxes quite a bit up here, but pretty fitting time to be bringing it up. There’s a few things, like you said, the IRA contributions are about maybe the only thing left for last year’s taxes, but going forward for this year we always talk about doing the tax planning during the course of the year, not when you file your taxes. That’s tax preparation, that’s not tax planning. Tax planning takes place over the whole course of the year.
And the one big item that we like to focus on late in the year is taking a look at those non-IRA non-401k investment accounts and matching up the gains and losses to minimize the tax exposure. So seeing where a particular person’s situation’s at from year to year really helps us make some proactive planning decisions when we’re looking at those investment accounts. If we’ve got a gain and a loss and we can match those up and wipe out the tax liability, why not do it? Even if you still like the position, we can buy it back in a month or whatever. It makes a lot of good sense to try to minimize the tax exposure over a long period of time.
Nate Kreinbrink: Exactly. And I think that just goes right along with understanding how much you are paying in taxes and understanding why you are paying that in taxes. Because I think once people, James hit on that big point there which kind of led me to this is that tax planning versus tax preparation. Obviously tax preparation is when you look backwards and you look at, okay this is the income that we had, these are the deductions that we’re eligible for, whatever it may be, and then this was a tax that we owe above and beyond what we may have already paid them throughout the course of the year.
Tax planning is looking forward. So I think if people get their tax return back and if they have a big refund back or they have to owe in a bunch of it, understand exactly why it is that you are having that happen. And I think if you start to do that, you can understand going forward to even improve your tax situation for 12 months from now when you’re looking to file your taxes.
A big part of this goes right along with 401k, those type of contributions where a lot of times what people look to do is they look to max out those contributions and that drives their income down on their tax return. In essence, then they’ll have less money that they have to pay taxes on, which in theory is 100% true. There’s nothing that’s false about any of that.
What we try to encourage people to look at though is yes that may help you this year, but deferring all that tax liability to retirement, understanding how that is going to have an impact on you. So that first year that you’re retired, what is your tax liability going to look like at that point, the first year that you draw social security, what is your tax liability going to look like at that point. And the biggest one of all is that age 70 and a half when you have to start taking your required minimum distribution, your RMD, from those tax-deferred accounts, what is your tax liability gonna look like at that point?
Because we see it, and it’s extremely common to have people come in and they’ve done a great job saving as far as through these tax deferred buckets, their 401ks at work is predominantly the most one that we see. But what they don’t see is that big tax liability that’s staring them right down in the face at retirement, when they have maybe a pension income coming in, they have social security coming in, and all of a sudden they have to take a big chunk out of these tax deferred accounts, and all of a sudden their taxable income goes skyrocketing, their tax liability at that point goes through the roof, their amount of their social security benefit that’s taxable is increased up until the max of up to 85% of it, and oh by the way, their medicare premiums might bump them into a higher bracket for their medicare part B premiums.
So again, it’s all these things that are going into place, but again, understanding what the decisions you make today, how it’s going to impact you throughout those years of retirement.
James Nelson: And if all of those reasons weren’t enough, how about the tax rates right now?
Nate Kreinbrink: Exactly.
James Nelson: Tax rates are probably at least at all-time lows for the foreseeable future. We’ve got another seven years, I guess, with these low rates. Does it really make sense to take that deduction today in a low bracket? Probably, assuming that rates are probably going to be higher when this tax tax code expires here, the reductions expire. So that’s a big item too. Everybody wants to know is it deductible. Well that deduction probably means a little bit less these days than a did a couple of years ago. And if we think that tax rates are going to be moving up, then maybe it makes sense to just pay the tax today, get it in a Roth IRA or Roth 401k, tax-free world now and have all that growth and have the money come out in retirement tax-free when rates are probably gonna be higher.
So there are a lot of items to consider, but those are a couple of big points. And I don’t think anybody believes that rates are gonna go lower than where they’re at right now. Most people believe the exact opposite. They’ve got to go up. And if that’s the case, why are people taking the deduction today when they’re going to be taking the money out paying at a higher rate.
Nate Kreinbrink: Right. And I think that’s a very big point as far as what James just hit on as far as understanding those tax brackets now. So again, going back to review that, part of the tax cut and jobs act that went into effect as part of the beginning of 2018, most of the people early January, early February, sometime last year probably saw a little increase on your take home pay at that point in time. That’s because the tax brackets were dropped. So the 15% bracket became the 12%, the 25% bracket became the 22%, and so on and so on. In essence, there was less tax that was being taken out of your paycheck each time that you were paid. So more money that you were able to take home.
So again, if we have two buckets of money and you can either pay more taxes on it or you can pay less taxes on it, obviously most people, or I wouldn’t say most, everybody that we talk to, is gonna say, “Well obviously I’m going to pay less taxes on it.”
But when we break down these decisions and what they’re actually doing with their money at this point in time, they’re doing the complete opposite. So again, understanding some of these things, and again, we don’t know what the tax rates are going to be in the future. There’s no way to know that. But if you look at everything considered with our national debt and some of these other things that go into it, again, I just don’t see a way that they are going to continue to push taxes even lower than what they already are at this point in time.
So if taxes are going to be either the same or higher, then I guess it makes even more importance and more of a valued point to what we’re saying as far as a Roth account in some point makes a lot of sense. And again, is this going to be right for everybody? Absolutely not. But I will challenge you that the vast majority of you, there’s probably a good case where this could make some sense and will actually benefit you in the long run having these multiple buckets of money in retirement that you can pull from and try to control your tax liability at that point in time.
James Nelson: Well, and that’s just it. Multiple buckets of money, having options in retirement, everybody’s got the tax deferred account. Some people have taxable money, very few people have Roth dollars. So at least having those buckets of money to draw on when you’re in a bind or up against the next tax bracket to be able to pull some money out of a Roth IRA, Roth 401k at that point in time is huge because it does keep you in that lower income tax bracket, it does help you pay less social security tax, and it helps you as far as your medicare premium.
So having those options, like you just mentioned, Nate, those buckets of money, is huge, and a lot of people I think overlook that.
Nate Kreinbrink: Right. And I guess we could go on and on and on I think with this topic. Taxes are I think one of the most overlooked portions of retirement planning, right up there with medical costs that people are gonna pay. People are always focused on the rate of return, which again is important. But again, taxes are right there as well. Understanding if we can make decisions that keep more money in your pocket versus having to pay it into taxes, I think most people would be in agreement that that’s the route they want to go to.
James Nelson: Absolutely.
Nate Kreinbrink: Tax is an important thing. If you have questions on it, obviously we’re not CPAs, but understand some of the decisions with your investments in those accounts, how they do impact it, give us a call, we’d be happy to sit down with you and try to guide you a little bit and help you make some of these decisions.
But did want to mention before we run out of time that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of March will be donated to the Glow Walk Anti-Bullying and Suicide Prevention event.
James, I appreciate you joining me today.
James Nelson: Absolutely.
Nate Kreinbrink: March Madness this weekend. It’s going to kickoff.
James Nelson: Yeah, it’s coming.
Nate Kreinbrink: Thanks again for joining us on 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 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.
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