Alright, gang. It is that time of the
week. It is the favorite Tuesday I've had
all weekend. It is time for the True
Wealth Radio Show. I am your host Dave
Littlejohn in studio today with me. Matt Dixon.
And our special guest,
nobody but us. Yep. Yep. So glad that
we've got each other. So thanks for hanging
out, Matt. I'm ready to go. Yeah. We
have got
an interesting question to pose today. Yeah. Right?
And here's the question, Matt,
at what point
have you put too much money
into
pre tax
or otherwise known as qualified
retirement plans?
I don't know that there's a necessary like
a actual number that we can slap on
there because it can kinda vary. Right? But
there surely is a number out there where
it's, like, maybe you've put too much in,
so I kinda wanna unpack that today. Right.
I I was waiting for him to say
it's $4. Good show. Let's that's a wrap.
Right? But no, we're not going to do
it. We're going to actually answer the question.
If you've if you're wondering,
how could you possibly think that you've got
too much money in a retirement plan? So
there's there's a funny
funny element at play here. Mhmm. Okay? So,
I mean, help our listeners for a second.
What is the what is the concern
that we as advisors have about really big
retirement plans. Maybe I'll try and oversimplify it,
right? Yes.
Say you're in a 20% tax bracket today
because you're deferring some of your income into
a retirement account.
Alright? Pretty simple.
What if
you
defer enough over a long enough period of
time, you grow that retirement account substantially,
and when you go to retire,
you have to take out
so much money that you have jumped into
a higher tax bracket.
So,
here's what, there's there's this critical
piece some people do not know
and that is
that retirement plans,
particularly these a qualified pre tax plan Like
a traditional
Traditional IRAs, 401ks,
403bs
and so forth.
The
IRS will only let you defer money for
so long before they start looking for you
to pay taxes. Right. And that age has
been changed
but it's now currently
73. 73. Mhmm. And then you start to
have what's known as a required
minimum distribution.
Right. So you have to take some portion
of that money out of the retirement account.
They force you to. Yeah. It's compulsory in
nature. And how do they force you to?
Well, if you don't do it, they tax
tax you at 50% of what you should
have taken out. It's a lot. Which is
So, just take the money out. It's Yeah.
And and so that is higher than the
highest marginal tax bracket.
So, essentially they're saying, We will make you
pay the highest tax we have if you
refuse to take money out of your retirement
plan. Right. So now you have to think
to yourself, wait a minute.
What happens if I make more money in
our current tax system?
Well, we have what's known as a progressive
tax system, which means very simply, the more
you make, the higher your tax rate goes.
Right. And it tops out around what? 30
37%
federally. Federally. Yeah. And, you know, that changes
from time to time depending on administration. Mhmm.
Right? So depending from time to time depending
on administration.
Mhmm. Right? So, depending on the makeup of
Congress and the White House, those tax rules
can change and they have.
I certainly have throughout my
few decades working around this, I guess, more
than 2 decades. A few weeks it sound
like more than 3. I haven't been doing
this for 30 years. I'm in year 25
so it's been a while. And I've seen
a lot of tax changes.
Mhmm.
So
here's the here's the rub. Right?
If
you in retirement
have a really big
retirement plan, then you're going to have a
really big
required
distribution.
Which will drive your tax bracket
higher
in
because it's a larger distribution.
Right. And here's another thing to think about.
You just mentioned it. Right? Policies
change with different administrations. Yes. What has been
a recent change
that we've seen
since Biden took office?
The Secure Act. Right? Right. And that's a
big deal because we're talking about, like, these
IRAs growing to a, you know, a sizable
amount
and then you end up in a higher
tax bracket, but we also got to think
about what are the implications
to the errors
of those retirement accounts. Can can I just
for a sec, can I just hit pause
on this one? Yeah. Because what I'd really
like to do for for everybody listening, let
me let me paint the the the scene
for a minute here.
The IRS has kind of an interesting approach
here.
They typically do not tax something twice.
There are a few scenarios where that kind
of happens in theory because,
for example, dividends. 1st a corporation pays a
tax and then distributes the dividend which is
then taxable again. Some would argue that's a
double taxation. Views it as we tax the
money once. Okay?
Views and says, we tax the money once.
Okay?
And and so now if the money gets
paid to somebody else, they get to pay
taxes on it. So it's not like the
money's not taxed over and over again in
the system. It is. Right. But I'm saying
if you earn an income, you you pay
taxes at the point that you
earn it. If you defer the tax,
then you're going to pay taxes when the
money gets undeferred.
Right. Okay. And that's a funny way of
saying when you take it out of that
that tax deferral.
Well,
if we think about the so I like
to think of it this way. The IRS
kind of gets you on the way in
or they get you on the way out.
Okay?
And
retirement plans are usually a they they get
you on the way out deal. Right. Now,
the magic of this, and we're not going
to talk a ton about this today, it
will hint about it, but would be Roth
IRAs
Because there, you pay into a Roth IRA
with money that's already been taxed. Mhmm. And
this is a unique situation where that account
is allowed to grow over time and if
it's qualified and there are just few things
and we're not going to go into great
detail here, but essentially it's been longer than
5 years that the route has been open
and you're over age 59a half, then
those monies should be qualified, meaning they're going
to be able to be removed from the
Roth IRA
and no tax is going to be owed.
But wait, Dave. Didn't you say
that they get you on the way in
or they get you on their way out?
Well, the money that you've already been taxed
on, that makes sense that you wouldn't have
to pay taxes again because they already taxed
it. What about all the gains?
Mhmm. Right? If you've grown that asset a
whole lot, did you have to pay taxes
on the profits?
No.
That's the unique thing about a Roth IRA.
And here what's another really unique feature? And
this is why I asked you to hit
pause, Matt. Okay.
Heirs do not That's why you wanted me
to hit pause. Yes. Yes. That is a
big deal. Because
heirs
basically inherit the same tax status.
Okay? And so, when it comes to retirement
plans, a Roth IRA heirs inherit tax Roth
they inherit the Roth tax free.
They still have to take the money out
of the Roth
but the current rules are within 10 years.
Right? Yeah. But They don't pay taxes on
it. I ran into this issue not with
a Roth but with the traditional,
I I was talking to someone and they're
like, yeah, I've got, you know,
it was I think over $2,000,000
in an IRA
and
their children
were both really well off making, like, 200
+1000
a year. Mhmm. And they're like, so,
what when I pass
and this money goes into a beneficiary
IRA from my kids,
now they're gonna have to take the money
out and pay taxes on it, but they're
already making 200,000 a year and it started
to make them sweat.
They're like, oh, it gets better. It's going
to come up in this show even more.
Okay. Okay?
But when we talk about taxes and errors,
the first point to remember is if you're
going to inherit the same tax issue, right,
then an IRA,
traditional IRA that you've not paid any taxes
on, you're you hit age 73, you start
having required distributions. Uh-huh. If you die and
there's money in that IRA,
your heirs like, if it goes to your
spouse,
they get it without owing taxes for receiving
it but they're going to have to make
decisions about how old are they and when
will their required distribution start.
If it's a non spouse,
then a 10 year clock starts ticking and
they have 10 years to get that money
out. Right. Think about this for a second.
If you inherit
an IRA
worth
$5,000,000
Okay. First of all, high five. Nobody's going
to feel sorry for you for inheriting
$5,000,000 Okay? High five.
But
you have 10 years to take this out.
If that account didn't earn a penny more.
Right. You just completely uninvested. You just
just put it in a savings account with
0 interest. Mhmm.
You'd have to take if you did equal
distributions, a half a $1,000,000 a year for
10 years
to get that money out of the account.
Yeah. A half a $1,000,000
added to your earnings
is very likely to put you in the
highest tax bracket possible, which is currently close
so 39%, but you'll be well over 30
percent at at the federal level. In the
state of Oregon, you'll be tacking on another
9%.
So imagine
39%
federal
and 9% state in Oregon, so you've got
48%
tax.
Right. And so And if you're watching this
show by the way and you're not in
Oregon, then apply your own state tax circumstance.
Right. But but you're saying a bunch of
taxes. You did so good. You crammed all
that money into that IRA.
Right. And then you're like, alright. I'm gonna
give this big gift and then poof. Almost
half of it's gone. Right. And so And
you never thought about it. Half of it
goes to taxes. And you, well, what was
the point of that?
If I was in a 30% tax bracket
Right. And I was deferring Take the income.
And turn it into a 50% tax bracket
in retirement. Like, oh, yeah. You kinda broke
it. You did. You could've just took the
money as income and you would've It would've
it literally been cheaper. Yeah. Because believe it
or not the math works out pretty straightforward.
It's you know you save the money on
the way in or you save the money
on the way out but that's kind of
how the tax brackets work.
So, we got to unpack this a little
bit for everybody. There are some
financial planning
approaches
to how to navigate
how much should I be saving. Right. And
here's the here's the good news. If you're
like trying to, you know, anywhere close to
that, okay? Then you don't necessarily have to
worry about it now. Let's create that problem
so we can worry about it. Okay. Let's
do that. Good problems to create too, but
But some of you out there, this is
a real concern. And so and and it
may be a concern because you are the
person that owns this IRA. It may be
a concern because you could be inheriting
something like this from your folks.
Because, you know, we got a lot of
folks that are now in their eighties nineties
and they've been deferring taxes for a long
time and there's been a lot of stock
market growth over the last few decades.
So what does this mean? Well, I wanna
know. Yeah. As do I. But first, we
have to take an obscene profit. Okay. Let's
do it. We're gonna do that. Stick around
and when we come back,
we will unpack this a little bit more.
I'm Dave Littlejohn. And Matt Dixon. And you
got True Wealth on News Radio 939 FM
and 12:40.
So
the moral of the story
is
when we went to figure out how to
do this show today, this is based on
a Dave Ramsey scenario.
And and,
I was sort of jammed up with clients.
Jammed just makes it sound bad, but, I
mean, I was I was doing a lot
of face to face time with clients. So
Matt was doing show for everybody. He comes
up. We gotta talk about this.
And it started with Dave Ramsey was struggling
with this one because this guy did. He
had his example. He's 66 years old, and
he has, like,
$7,000,000
in different tax deferred accounts. And the question
is, what do you do? And and they
said, do you just
and we're gonna talk about this on the
rest of the show. Do we just
convert everything to Roth, pay taxes,
and be done with it, kinda rip the
Band Aid off?
Do you,
he didn't really talk about the idea of
staggering conversions and spreading the, tax paying out
a little bit, but there there are some
decisions around that. And then they didn't talk
a whole lot about estate planning other than
to say, the longer you defer this, the
more it keeps growing, the more the tax
obligation grows too.
So
I think what we're gonna try to unpack
today and the rest of the show
is, unpack today and the rest of the
show
is
how do you recognize that this is a
potential problem
as an investor? Because I think that's really
the key here is if you've got
retirement plans, then they're great. They exist for
for reasons. It's a it's a good way
to save,
but at the same time
you reach this threshold of like it may
be diminishing marginal return and it's time to
start looking at other areas of the balance
sheet that may be more tax advantageous. Right?
And we'll see how far we get on
the show. Right?
We're gonna have to recap the first part.
I've got a client listening and they want
they want a They want a recap? A
slight recap because this one can be interesting
for them. Yeah. Yeah.
We we have a client And we have
somebody who also said how much money?
$42. That's how much if if you have
$42 in a retirement account Okay. You're you're
in trouble. That's Yeah. Classic.
A brief recap to catch everyone up to
speed that missed the first part of the
show. Hey. You're in charge. No. Oh, come
on. You're you're mister speed. I'm giving you
turn this on and I'll I'll enter it.
Right. Hey, gang. Welcome back to the True
Wealth Radio Show. I'm your host Dave Little
Johnny. It's a new one with me today.
Matt Dixon. Dave, catch up the listeners who
are just tuning in. What are we talking
about today? And by the way, you can
get the whole show by going to the
podcast. It'll be available tomorrow. Go to littlejohnfs.com
and you can grab that. Be sure to
subscribe
and then, at some point, we get these
up on YouTube as well. News flash as
well. We are planning on adding a live
stream soon. So, we're working through that but
that that'll be fun. For those of you
just joining, here's the key.
The question of the day, At what point
have you put too much money into retirement
plans? Okay? And it's a it's a funny
thing like, wait, I can put too much
in. It's not that you put too much
in. The question is like at what point
is it diminishing marginal term? Or at what
point is it actually harming your financial picture?
Well, at what point does it generate more
tax than saves? That's really the better way
to save it. That's a better way to
save it. Yeah. Because if you if you
find yourself saying, hey, I am in a
lower tax bracket today, but I'm saving myself
into a retirement that puts me in a
higher tax bracket than today, then you're making
it less efficient, not more. Might be act
like, actually
easier to do than you think. It might
not be as much money as you think
either. Yeah. So we
did
we did do a little bit of swag
math. It was swag math.
So
do we just give them the number and
then tell them why or do we tell
them what we did? Tell them start with
kind of like how we even got to
this point. Like, what brought it up? How
did we start running the numbers and where
did we end up? Yeah. It started with,
we saw a clip from Dave Ramsey. We
did. And so this this guy is calling
in and he says, hey, I've got kind
of a weird problem. I have all of
these retirement plans that are tax deferred and
I've got over $7,000,000
in retirement plans.
I'm 66 years old and I see the
writing on the wall. I'm gonna head toward
age 73,
have required distributions and the required distributions are
gonna be so large that it's gonna put
me in the highest tax bracket and it's
gonna sort of blow stuff up. Yeah. And
then he's like, what do I do? I've
got some time, right? And Right. Dave's over
there like, maybe not as much time as
you actually need to take this time. And
and and it was it was
kind of fun to watch because there's a
little bit of tap dancing. There was. They
did like, well, here's some of the math.
I'm like, well, it's a problem. And then
it was this head scratcher.
I'll tell you how we would sort of
approach solving the problem Mhmm. And then I'm
gonna talk a little bit about how you
guys can reverse engineer this number so you
get a sense of am I on course
to run into that problem or not? Okay.
Perfect.
So, you know, first thing first is
are you going to run into the problem?
Okay. Well,
the the number as we we looked at
this is like, well, what's future tax rate
versus present tax rate? Mhmm. And we actually
looked at the the tax table and said,
you know, at what point are you jumping
up into that higher echelon in the thirties?
Yeah. And so we started with, if you're
married right now and you have more than
a 191
$1,950
in tax year 2024,
right? Of taxable income. Taxable income. Yeah. And
keep in mind that's adjusted gross income. So
that's after other deductions and so forth. But
if you have that much income, then every
dollar above that threshold is going to be
taxed federally at 32%.
Mhmm. Okay? So, if you make more money
than that, well,
do some math here.
The the
way that the IRS looks at this is
they have what they would call their uniform
distribution table. Okay?
It's published It's a fancy word of saying
at what rate are they going to require
you to take RMDs. Yeah. Essentially,
when you're 73,
what they're gonna tell you to do is,
hey, take the account value at the end
of the last tax year
and then you're going to you're going to
divide it by a factor.
Okay? And so, like the factor at age
73 is presently
26.5.
Right? So that's so let's say I have
$1,000,000 divide $1,000,000
by
26.5
and the number that results
is the required amount that you have to
pull out of your retirement plan for the
year. For the year. Yep. Okay? And you
can take it out over, you know, spread
it out over a little bit each month.
You can take it all at once, whatever
you want but but that's the money that's
going to be required to come out. Mhmm.
Okay? And then the following year,
that
distribution number isn't gonna be 26.5. It's gonna
be slightly smaller. Yeah. It drops
but what happens is you're dividing by a
smaller number which means the
distribution gets bigger.
I think it's 25.5
in the next year and and but these
are all tables that you can look up
and these tables occasionally change. Right. Depending on,
like we said earlier in the show, legislative
change. Yep. Right. So
what you can see is every year, you're
going to be required to take a larger
portion of the account balance out.
Right. And free.
To sit say it easy,
if you have a bunch of money in
that retirement account and they keep telling you
take more out,
you could end up in a really, really
high tax bracket. Yeah. So the the Dave
Ramsey guy. Right? I mean, if we say,
well, hey, you have $7,000,000.
Right.
And his factor was about
3%,
right? Well, that's $60,000
per million and he has $7,000,000 right?
So, that's
$420,000 distribution.
Right. Okay? Remember, if you have more than
191,900
and $50 and you're married, then you're in
the 32%
federal tax bracket and climbing.
Well, at that income level and if he
had any social security or pension income which
he did. Right. Right? Then, you're pushed even
higher. So, he's in somewhere like 37 to
39% tax bracket. He maxed it out. Yes.
Mhmm. And well, or or at least close
to I mean, the number is pretty high.
You can make up to over
$600,000 before you actually hit the the top
tax bracket right now, which
is very high. Right. Right?
But but nevertheless,
he saved his way into a tax conundrum.
And there wasn't an easy way to reduce
his tax load. Right. Because
the the taxes are going to be paid.
Okay? There there's kind of 2 pathways that
you tend to solve this. It is either
just sort of suck it up and pay
when it finally gets here
or
try to convert
some of the traditional
IRA money into Roth IRA money. Right. That
comes with a whole another host of issues.
We talked about it on the show before,
but when you do a conversion,
remember, one of the qualifying
features of a Roth IRA is it has
to live for 5 years. Right. And a
conversion
is treated like a standalone Roth. Mhmm. So
even though you may already have another Roth
IRA Every every time you convert. Every time
you convert, that money gets a new 5
year clock separate from your other Roth IRAs
if you have And then you're paying income
on the conversion. That's correct. The it is
a taxable event to convert.
The benefit may be and and here's where
we differ from Dave Ramsey a little bit.
His suggestion was, you know, just maybe bite
the bullet and just pay the taxes all
right now, one and done, and then move
forward.
We think there's some actuarial risk, right? If
you're 66, while you're likely to live into
your 80s, if something were to happen immediately
after that, you would have overpaid on taxes
relative to the time span that your heirs
would have had. So Mhmm. So that was
not necessarily a great idea.
Plus you would have the 5 year clock,
for everything all at once. Right. So then
we started thinking we may be more inclined
to spread it out over several years and
just try to maintain a lower
average tax bracket and get money out
of traditional IRAs to lower that required distribution.
And so this is a process that advisors
would we would mostly call it like Roth
Conversion Optimization.
Yeah. K? And
it's not a super sexy
topic.
No. Right? It's like, wait, you mean to
tell me I have to pay taxes to
not pay as many taxes? The unfortunate
part for that guy though was if he
had been
doing a little bit more planning or getting
some help along the way, he might have
been able to have avoided putting it all
in one basket. Right? Like,
he might have been like, well, I have
Right.
And
so this is something that
we do sort of struggle with in the
advisory world that,
you don't know what the future tax rates
are going to be. Right. We have to
make reasonable assumptions or even assume that they're
not going to change.
Right? Like, it's it's actually possible, I know
this is gonna sound crazy, right? It's possible
based on sort of the the political trendings
right now, Donald Trump gets elected
and reinstitutes
different tax policy that's lower at least at
a corporate rate. Right? And so, there are
possible changes on the horizon.
There's always possible changes on the horizon. And
I don't know if it's even or how
possible it is but if the Secure Act
did go away and then
beneficiaries didn't have to take that money out
in 10 years.
Yeah, that would be a significant change too.
Even just extending it to 15 or 20
years would really impact planning. It would. People.
Yeah. Because my my concern would be, you
know, if you inherit a big IRA and
you only have 10 years to get it
out, you're going to be forcing people into
higher tax brackets. And that's what's happening. It
it does make sense from the IRS perspective.
Mhmm. Right? They're like, we're hungry. Give us
more. Right? It's just frustrating from planning perspective
because
my position is that we already,
pay we well, you know, I would say
I'm thankful we don't get all the government
we pay for, but man do we pay
a lot for a government.
Yep. Right? I mean there's just a lot
of money that goes into the kitty and,
you know,
I'm not trying to pick on the people
that work in that room. I think there
are a lot of people that are genuine,
like, they're really trying hard to make it
right.
I just think the system is it's hard
to make a really big system not be
bureaucratic and bloaty and slow and cost inefficient
over time and and there's not really incentives
to lean government.
Right. There's no internal incentives for government to
prune itself. So why would it? Mhmm. And
that's kind of tricky. Right? I mean, the
private sector has lots of incentive. You know,
margins
are profit.
So it it it looks to prune when
it can,
but government doesn't have to think the same
way a lot of the time. David, let
me ask you a question. So going back
to what we were talking about Mhmm. We
kind of started to mention what are some
of the other things that this guy could
have done in order to have,
you know, if it's not gonna be that
IRA, where else could he have gone? Right?
And so,
do we wanna talk about that at all?
Like, what are some of the other options
that this guy could have
taken advantage of? I know. I was smiling
and laughing, when she,
mostly smiling. Our listeners don't get to see
that as much.
I know what you're doing, Matt. What am
I doing, David? Go ahead and just expose
it. No. He's so
when we're prepping for the show, I look
at him and go, you know, there's kind
of an exotic way that you can sort
of reposition things and, you know, shift your
investment focus elsewhere and and sort of change
the characteristic of your taxes and it would
be way more efficient. And he looks at
me and goes, go on. Because I also
want to know that part. I think everyone
does. Right? Like
okay.
So I mean, you know as well as
I I'm not a huge fan of life
insurance as a whole, right?
Like, term policies,
sure, I get it.
Those have a time and place for sure,
but could this guy have used life insurance?
Could he have, like,
gone into real estate? I just kinda wanna
pick your brain on where could he have
gone, how could he have done it, and
Alright. Yeah. I'll do this.
I
I'll let you drive some of this. I
know you've got some ideas and questions
that we want that for our admin. You
know, Matt's Matt knows a lot of this
stuff. Just don't don't let him fool you.
He is,
he's doing this on purpose. It's like, no.
No. I just wanna interview you. And so
he's sort of setting you up and that's
why I'm chuckling about this because I'm like,
you're gonna do this, aren't you? And he's
like, oh, it's happening. Turning it back around
on me? No. I'm not gonna do that.
I am gonna say, I'm just I'm looking
at the clock. Why don't we do this?
We're running long already. We'll we'll grab we'll
grab our next break. Okay. When we come
back,
this again, if if you're trying to figure
out, hey, if I'm starting to reach the
threshold where maybe it's enough in retirement,
what else? Yeah. And so we'll unpack some
ideas. It's not advice but some concepts and
it'll be enough that at least will stoke
the fires of interest for you. So stick
around. We'll be right back. I'm Dave Littlejohn.
And Matt Dixon. Get True Wealth on Newsradio
9029 FM and 12:40 KQED.
Bingo.
We've got a problem.
We need a solution.
Yes. Yeah. So alcohol is a solution. Drink.
Drink.
Drink your tax problems away. Oh, we were
talking about different things, you know.
Water is a solution also.
So,
hydro cleaner or whatever it's called yourself.
So
the electric vehicle maker I guess
I am
I'm I'm I'm
making sure that I'm reading the
your your cues here.
You wanna talk a little bit about,
real estate
and then how
and then
the life insurance thing has come up somewhere.
What's driving the life insurance question? It's on
the list.
I was like, because it has Roth conversions,
setting up a trust, using life insurance. I'm
like, could he have used a whole life
policy even though we don't love whole life
policies?
Well, could he now? Probably not as easily,
but could he have? That's what I'm saying.
And the Yeah.
Yeah.
He could. And And I hate even mentioning
it because I don't like whole life policies,
but I'm like, if we're on the topic
So we can talk a little bit about
some specialty
life insurance concepts and then it's what's gonna
happen is it's gonna be, okay. So you
either have to see us after class. Yeah.
Right? Let's go that route. Or you have
to
find somebody who's qualified to help you navigate
this because we're gonna get into advanced market
concepts.
But,
honestly, life insurance is like
the last hope against the IRS. Mhmm. Life
insurance
I would basically gets to walk and talk
like retirement plans. Wouldn't you rather just
take it as income and just put it
in a brokerage account?
It depends
on how you take it.
That's what
oh, gosh. Someone put a filter on me.
I'm about to get canceled.
Yeah.
Can't say that on the radio.
I mean, you can,
but people will question.
We get 17 clients tomorrow. We like those
guys.
I was reading off the teleprompter. That's what
we were thinking.
I know. Exactly.
I had a Ron Burgundy moment.
If you put it on there go read
it.
I will, I literally will.
Did Justin ever tell you all the time
him and I are doing a radio show?
And
we were at break, and he's like, okay,
I know where this show is going, there's
one thing we cannot talk about. You cannot
ask me about this, and it was something
to do with, I don't even remember.
I'm like, okay, I got you. And we
opened the radio show, and this was like
when I was newer,
and I got nervous or something, and I'm
like, so just and I just blurted it
out. And he's like, he sits up for
me. He's just kinda mundane. He's like
he just wanted to murder me, like, jump
over the computers and just
knives.
After that segment was over, we cut to
the break, and he's, like, how? It was
the one thing you were supposed to talk
about. You had one shot.
Yeah. Alright. Alright. Welcome back to the Choo
Well Show,
where we're
we're having fun in studio today. Everyone's Dave
Littlejohn with me. Yeah. Okay.
Reminder if you're just joining us, today's topic,
is is there such a thing as putting
too much money into a retirement plan? Yes.
And the our position is that, yeah, there
can be if it
it creates tax inefficiency.
Right? If you drag yourself into a higher
tax bracket in the future than you are
now, then Why? Your retirement plan is not
the right solution. Yep. K? And then you
kind of asked me, Matt,
what else might there be? Yeah. And so
you you've got a couple
set the table for our listeners like what
are some ideas that you've kind of read
about and let's talk about them. Well, we
already talked about the big one. Right? We
talked about the Roth conversion.
K. So that's Just just a reminder to
everybody. You know, Roth's IRAs Yeah.
They are you fund them with after tax
money and then they grow tax free. And
once they're qualified, they the distributions are tax
free.
Also tax free to heirs.
So if you have a traditional
IRA,
you can turn it into a Roth IRA
through a process known as conversion.
But, you have to pay the taxes when
you do it
and you have to the tax is it
becomes income, right? Oh, I have a $100,000
in a Roth account. If I take a
$100,000 and convert it, I have to pay
income tax on $100,000
when I convert.
Okay? So, let's say I'm in a 30%
tax bracket,
then $70,000
is left in my investment account but it's
no longer a traditional IRA, it's a now
Roth IRA and it will grow tax deferred
and once it's qualified after 5 years and
retained age and all that, then you
can take that money tax free or your
heirs get it tax free.
Right? So, that's the conversion thing that we
keep talking about. Right. Okay? But what else?
That's the question. So, if we're talk Yeah.
So, if we're talking about mitigating some inheritance
issues, the other thing I mean, this is
simple, right? But, and I know I've already
mentioned
And So invest outside
and So invest outside of a retirement plan.
Exactly. Because here's why.
If you put that money, say in a
brokerage account, and you invest in x y
z stock,
maybe you hold it for a year or
longer,
What happens when you go to sell it
and there's a gain?
Now we're being taxed at long term capital
gains, which is approximately 10 to 12%
depending on Depends on your total income level.
Right. Those as high as 20%. Sure. That's
still cheap. Like, if you're paying 20%, it's
because your income tax rate's like
39. Mhmm. So wouldn't you rather pay that
than 30
plus percent? I would. Right. Yeah. So it
it does change
things for errors also.
Yeah. Because errors receive a step up in
basis. That's a big one. You wanna talk
about that? Yeah. It's just a really fancy
way of saying heirs receive the thing as
if they bought it
the day that they inherited it. Right. Not
for the price that you paid for it
when you bought it but the value on
the day that they inherit it. That's a
really big deal. And that's why we start
to talk about gifting stuff. People always have
that question. Should I gift it now? And
it's like, well, if they never plan to
sell the thing that you're gifting, maybe. If
it's real estate and it's a family heirloom
of some sort where it's like Yeah. This
is the family farm. I have a real
life example. We have a family farm. Yeah.
The brother is like 7th generation
and so it's something where it's and and
he wants to raise his family there. It's
actually sensible for that farm to be gifted
to him
now because it's probably going to stay in
the family and his kids are going to
take it. Right. So,
if that's the case
then
there's no need to wait for
parents to die for that to happen. They
can gift it now
and it still,
you know, makes sense because because if he's
not going to sell it, it doesn't matter
what his
cost basis is, right? Right. But let's say
that there's no attachment to a home
and it's just gonna go into the, you
know, community pot and it's gonna get sold
someday. Mhmm. Gifting it, but while you're still
alive, is gifting the price you bought it
for. Right, and if they bought the family
farm 7 generations ago for
Well, whatever the case, let's say it was
a house in California that was purchased 40
years ago, right? Oh, yeah. So it's like
great. You know, we bought a house for
a $100,000 and today it's worth 2,000,000.
Mhmm. And okay, well, that's $1,900,000
of capital gains,
but if you didn't
gift it when you die, the heirs receive
it as if it was fair market value
of $2,000,000.
Right. So it's a big question
depending on
what is the heir actually going to do.
Yeah. And incidentally,
this falls under the category of estate planning.
If you've ever wondered, like, what what the
heck is estate planning? It's the idea of
well, estate is all the stuff you own
and it's how do I transfer the stuff
that I own to the next generation when
I'm gone
and do so in a clear,
clean, and efficient manner. Mhmm. Right? With minimal
cost for transfer and minimal tax impact. That's
what estate planning is all about. Sure.
And I guess we're kind of working our
way down the totem pole, aren't we? So
we've talked about some different strategies. Let's see
some of the Roth conversions. Yeah. And I
hit Hitting at gifting has really very little
to do with
our original question of No. But we did
talk about the probate account. Yeah. We talked
about the Roth conversions. We talked about the
brokerage accounts.
I guess we got it. That's like just
don't invest in retirement plans. That's really what
you're saying.
Yeah. And then
even for me lower on the totem pole,
maybe we talk about life insurance a little
bit. Yeah. This is what the most dangerous.
It exists. So I feel like we have
to mention it. Otherwise, you know, we're not
kind of covering all the the options here
for this guy. Yeah. Life insurance
generally has two purposes.
Generally.
Okay? The two purposes that I see are
Take your money and make the insurance company
rich.
No.
No. No. No. Kinda.
So, the life insurance
is supposed to be to replace
income.
Yeah. Like somebody was counting on your income
and it's not there because you're dead. Right.
So it's to replace what you would have
earned
to take care of somebody. That's number 1.
Number 2
is estate liquidity.
Because if you die and you have a
bunch of property and you don't wanna have
it sold,
but you have to pay taxes on it,
life insurance can pay the tax bill.
Okay? So it's useful for estate planning in
that respect. Okay.
There's a third use for it which is
sort of a
getting creative and leveraging whereby
you
can
put
money
into an insurance contract,
whereby you can put money into an insurance
contract
and it can grow tax deferred.
Because it's an insurance product. Because it's an
insurance product.
Now, annuities are also insurance products but let's
talk specifically about life insurance because this is
something that is possible and I'm gonna be
very clear when I say this. This is
not a recommendation. Yeah. This is not a
recommendation. It's not advice. This is advanced market
stuff and this is definitely
Right? Not just a salesperson, Right? Not just
a salesperson. Someone who has access to piece.
Yeah. Or the access to, like, advanced markets
and case design for this kind of stuff.
Yeah. But
life insurance
there's you can get
life insurance that can be overfunded,
meaning you're going to buy
more
you're going to put more premium in than
the insurance that you're paying for
and you can store up cash value in
the life insurance
example, husband and wife. So you
can get a second to die life
For example, husband and wife. So you can
get a second to die life insurance policy
which has lower actuarial cost than an individual.
Mhmm. And it spreads the risk out. So
if you happen to have like a less
desirable insurance profile, you're hard to insure,
well, you might still be able to get
insurance with a second to die policy.
Overfunded,
it will grow
a bunch,
theoretically,
and that money can be accessed
in the form of policy loans.
K? You take the loan out and just
like if you took an equity loan out
it's not income. So it's not taxable anywhere
according to the IRS as we understand it
and if you then die
the loan is paid back by the death
benefit
and whatever is left if there's additional death
benefit that exceeds the loan it will still
go to Ayers tax free. So you're kind
of giving yourself almost a line of credit
in a way, yeah? Yeah. Now
there are
lots of gotchas in there.
Yeah. And we don't have time to get
into this. And that's not the point of
this. The point is to say there are
some very clever things that you can do.
Same story if you have an illiquid estate
like you can use
borrowed money
to buy life insurance. Now you're getting into
really sophisticated cases. BOLI. Okay? It it
it's
it's all
of the stuff requires, you know, it BOLI.
K? It it it's it's all of the
stuff requires
specific
legal navigation.
That's why it's not advice. I'm just telling
you
a good financial planner
and you know good legal counsel can help
structure something if you are in a high
net worth and highly illiquid situations. Those things
kinda work out. Right. Now, back to home
base.
There are other things that you could do.
I'm so dizzy after that, David. I don't
even remember where home base is. We were
asking what could you do if you're if
you're starting to kind of tap at the
door of maybe
maxing out the value of your retirement plan.
There it is. And so we we were
saying, well, instead of investing
brokerage. Yep.
Insurance. The other big one and I'll just
I'll say what it is and we'll take
a break in one packet
is real estate.
Real estate is a very
interesting asset because the characteristics
can they can have both it's basically it's
like a business, right? It can have income,
it can have expenses,
it can have
depreciation,
and it can in certain circumstances
change some types
of cash flows
if it has other businesses to partner with
and you're the owner.
So
Now it's getting interesting, David. It's getting interesting
but
look at the time. We have to take
our last one. Alright. Let's do it and
let's get back. Okay. We'll do that when
we come back. We'll talk about some big
picture ideas for real estate. I'm gonna tell
you this,
we're not gonna be able to make you
an expert in 10 minutes, but we'll help
you get dangerous. Stick around. We'll be right
back. I'm Dave Littlejohn. And Matt Dixon. You
got TRUEL on Newsradio 9029 FM at 12:40
KQEN.
I like it.
Well, there isn't.
Tell me something. Your
weekend Whatever he live.
How awesome they are.
Who's texting you?
That one. Oh, clients have given up. They're
like, this show is taking way too long.
You you put Dave off in the weeds
about their insurance and I don't think we've
actually gotten in the weeds on this show.
No. I think we've tried to stay on
home base, but I think we've got machetes
in each hand, and we're just fighting our
way through the jungle. Yeah.
It's amazing
how much is in the topic when you
start to unpack it. Yeah. You know, it's
like and you think, am I going down
a rabbit trail?
Not
really. I mean, it's relevant. It's just It's
comp it's complex.
Layers. Yeah. Yeah.
You know, it this is the thing. Right?
In the simplest terms, like, at the end
of the day, if you were to boil
the showdown, the question is,
showdown, the question is,
you know, at what point
is trying to defer taxes to do
something, but it actually makes it worse and
not better, then stop
to do something but it actually makes it
worse and not better, then stop doing that.
And then the question is, well, where do
you go from there? So we've talked about
insurance is kind of a weird avenue. In
certain circumstances, it works, not always. Right? I
I don't like the insurance guy that, like,
the old joke if everything's that if all
you have is a hammer, everything becomes a
nail. It's like, I sell insurance, which means
insurance can solve every problem. Like, I'm not
that guy.
Insurance has its place. Like, I'm not gonna
demonize it. I'm just gonna say
be aware. Right?
But
after tax investing.
Right? So once you just pay the taxes
and what's left, you try to be a
good steward with it. Do good good with
that.
And there are pros and cons to it.
Right? And then and then the last one
and this is what we're gonna talk about.
I think a lot of people really wanna
know this and financial advisors tend not to
go there
is the concept of real estate and what
that means. And I think specifically rental real
estate,
although they're, you know, they're people that will
just buy land, there's people that develop, and
so forth. So real estate's,
you know, a huge topic in and of
itself but we're talking about that now.
We're gonna have a lot of good content
out of this show. Right.
Hey, gang. Welcome back to the home stretch
of the True Wealth Show. I'm your host
Dave Littlejohn with me today in studio. Some
guy that's just spouting stuff off. Thanks, Matt.
Yep.
So
today's
primary topic is
what happens if you find yourself in a
circumstance where you've put so much money in
retirement plans that the future tax benefit starts
to diminish or even go backwards. So, like,
you're you're gonna be in worse shape tax
wise in the future because your retirement plan
has grown to a point that your future
required distributions are going to drive your income
into a higher tax bracket than it is
today.
So,
you need to pivot.
Right? And so, if that's the case, where
do we pivot to? We we kind of
scratched the surface of insurance. We scratched the
surface
of after tax investing in things like brokerage
accounts using stocks and bonds and, you know,
fairly mainstream financial instruments.
But, you know, we haven't talked about yet.
What is that?
Real estate.
Ah. Right. This is one that everyone loves
because most people
kind of understand it. Yeah, I mean, we
we I think generically we all see a
lot of this. I mean there's there's a
handful types of real estate, say you know
you've got residential real estate it's like you
know if whether it's your home or it's
a rental property for somebody else to live
in you've got
bare land
and and or
the opportunity is not developable
property
and then,
commercial property, property, right, and largely they I
mean they walk and talk similarly in many
cases but some the strategies could be a
little different sometimes the regulations are different with
what you're dealing with, you know, and even
residential, like, then you get into kind of
specialty, like, hotel space or the short term
rental space. You know, that's all kind of
a
timber on it or mineral rights or something
like that. So there's layers to this stuff,
right? Sure.
Here's the thing,
personally,
well, I'm not advising everybody to do this.
I think real estate is an,
an, like, fairly important part of a financial
strategy
because
it tends to be a good diversifier against
the stock market, right? They're they're not
super highly correlated especially
real real estate, like, physical tangible, like, you
own either dirt or houses or something like
that. You're not owning a derivative instrument of
real
estate.
Here's stuff that people don't think about.
If you're a business owner, for example,
you can own real estate
and then have a separate entity
a separate business. So if you may have
an entity that owns real estate and you
may have a business that you run and
the business can rent the real estate from
you,
right? We forget that you can wear both
hats as,
you can own 2 different entities and those
entities are allowed to rent from each other.
Right? And
the benefit of that is that it can
change the cash flow,
right? A business that pays rent expenses the
rent
and then the entity So it can have
a real estate. Receives rent, but rental income
is a form of passive income. It's receives
rent, but rental income is a form of
passive income instead of active. It has a
different type of tax treatment,
and so you you're sort of converting cash
flow by moving it from one organization to
another and you own both.
So clever financial planners and clever CPAs
can find ways to leverage the tax code
to help you
move money efficiently through the ecosystems. It's legal.
Right? I'm not talking about doing things that
are shady here. It it if you're doing
this properly, it's a 100% above board. It's
a known strategy.
It's not a loophole,
you really do have an entity renting from
another entity
and paying, you know, fair market rates, but
it it's a way to manage the way
cash moves through all of the organizations for
business owners. And
if you think about real estate as a
business, right, like, if you own rental properties
and you have people living in your properties,
you're receiving
income in the form of rent, you have
expenses in the form of maintenance and potentially
mortgages,
and then you have the tax management of
depreciation and so forth.
Pair that with if you have a day
job and w two income or even in
a separate business and
these are financial moving parts,
But when properly coordinated, they can become
more efficient. Right. I think that's worth mentioning.
Yeah. That's kind of the the trick
because I told Matt like
you know if somebody's clever you rent one
entity to get started and you start bringing
in cash flow from tenants and
you start accelerating depreciation
in that building in order to offset some
of the income
so that you
can then buy another building to increase the
total income of your real estate portfolio and
then get a new package of depreciation assets
to work with to offset income and then
buy and you start And buying more way
us to yeah. Yeah. It's it's more or
less developing a portfolio of real estate by
getting real estate to help you buy more
real estate
with tax savings accelerating the process. Mhmm.
K?
Does it require,
like, intentional strategy? Yeah. It does.
It really does. But if you're willing to
put in the work and get to understand
it a little bit or you get a
CPA to help you out along the way.
Yeah. I think qualified professionals around you and
then doing this,
intentionally.
Mhmm. Right? It's like you develop a business
plan for it. Okay? And the people that
are successful in real estate that I know,
they generally have a plan and they generally
stick to the things that they
know. Some people they just buy a lot
of single family homes and they they own
lots of homes and they rent them to
people.
And you know I I know people like
their goal is to buy a home every
year. Mhmm. Right? And just get it rented
and get it going. Here's the trick. When
you have one home it's either rented or
it's not. When you have 2 homes,
they're not very often that both of them
aren't rented. If you have a 100 homes,
the probability that a 100 homes are not
rented, very low. So it almost gets easier
the more that you have. Yeah. Well, it
gets more predictable. Right? That's I guess that's
a better word. Yeah. You definitely get more
headaches because you have more moving parts. Mhmm.
But you also have more revenue and you
can sort of get people to help you
because you're really running a business now. Yeah.
You're running a business
of rental properties. Mhmm. Okay. But businesses get
to do different things than,
being just an employee. Right.
Right? And look, if you're just really highly
compensated employee and you can get, you know,
1,000,000 of dollars into a retirement plan, great.
But, you know, if you're making 1,000,000 of
dollars at some point, you're gonna we're probably
still gonna tell you, you may wanna, you
know, lay off on the retirement plan and
look at other assets to invest in because
it's just not in your best long term
strategic interest to keep piling money into a
tax deferred environment.
Alright. So, David, what I want you to
do with these last minutes
that we've got, kinda sum this up and
give people a takeaway.
We've we've thrown a lot of numbers around,
so
what do you got for them? The big
takeaway from today.
For me, it's you actually can put too
much money in
a traditional IRA. Yeah. I think
you can over invest in IRA to the
point that it you diminish or you water
down the benefit. Right. And if someone needs
a second opinion on that, reach out, get
some qualified help. Or if you feel like
you're getting too close to that threshold
Yeah. You can call us and we can
kind of help you, you know, do some
of the the math around it and help
you figure it out.
Yeah. How do they call us, Matt? Well,
give us a ring at 541-375-0898,
or you can just chat us on the
website. The website is littlejohnfs.com.
Yeah. And I think that's the key takeaway.
Sometimes this stuff it gets complicated
and it you know if you have the
problem of
high account balances in your retirement plans then
you know we're happy to help you how
we can. Or, you know, reach out to
your advisor. Make sure that they know what
the heck that's going on too because they
should know this stuff. Right? It's part of
their job. Anyway,
well, look.
I'm listening to music. We're out of time,
so we better run. Until next time. Thanks
everybody for tuning in.
Call us 541-375-0898.
I'm Dave Littlejohn. And Matt Dixon. You got
TrueWell. Are these ready in 93 9 FM
and 12 40 KQEN?