Interview with Jay Tompkins, CPA

Welcome to another edition of the what's Next Retirement Podcast with Craig Weir. Life is full of transitions that have a financial impact now and in your future. When finances are affected, there are always questions to ask and choices to make. As an independent certified financial planner for well over 30 years, Craig has helped Americans make decisions that give them their best financial futures. The experiences with so many clients has given him a unique perspective to help with what's next for you as you navigate the unknowns of your own life. What's next? Answers to the retirement issues on your mind.

Okay, cool. So welcome to the show today. This is Craig Weir. As you have heard and really excited to have you with us. More importantly, I'm excited that I've got Jay Tompkins with us. Jay's a CPA with Baker Tilly here in the Houston area and we're going to kind of, I don't know, just peel back the COVID on kind of What? What's a CPA's attitude toward Roth conversions? You know, for those of you that have followed me for a while and subscribed to our email list and maybe been a part of a few of these podcasts we've done, you know that my biggest frustration is most financial advisors and most CPAs just don't understand Roth conversions. But Jay's a different guy. J Jay marches to the tune of a little bit different drummer. So I'll welcome Jay Tompkins to the podcast. Hey Jay, what's up?

Thanks. Hey Craig, thanks for having me. This is great. And you're right, I do march to a little bit of different drum compared to a cpa. And for those that are interested, I have my own podcast of which Craig will be a guest on at some point called Maverick cpa. So take that name for what it is and maybe that's how it works. And I look at things a little differently, little different outlook.

So just to kind of get the technical stuff out of the way, tell everybody kind of what your background is just generally in the CPA world, you know, what have you been doing? Establish a little bit of credibility that you know what you're talking about on all this stuff.

Sure. Thanks. So actually here in two months I hit 20 years of being a CPA and working in the CPA industry. I all for my entire career I have been part of small mid market and large CPA firms, specifically mainly doing small business individual tax preparation and planning. So for 20 years I've solely dealt with effectively individuals, as I describe them, who have stuff that stuff either generates income that are Assets that need investment help. How does it affect me when and how do I pay my tax? That's what I've done in every single kind of industry you can think of, from restaurants to doctors to, you know, real estate developers. So it's everything in between, because ultimately the tax benefit or burden falls on the individual in most cases, comparatively to, let's say, a corporation. But then I'll also deal with a lot of times the executives who get stock options and so forth and. Or create very large retirement accounts, whether they're in small business or part of a large corporation. I deal a lot with, you know, a guy who's been at Exxon for 40 years right now. What do we do? Right. And that's a big part of the conversation today.

Yeah. And you know what, what impressed me with some of the conversations we've had in the past is that you. You take this Roth thing pretty seriously. In fact, you were even brave enough to show me this, you know, spreadsheets that you've come up with that you've used in the past. But why do you. I mean, I know this. Most financial advisors just really don't understand Roth conversions.

They.

There's a lot of people jumping in the bandwagon right now, you know, of financial advisors, and they're getting all over social media and they're putting out podcasts and they're talking about Roth conversions. But from my perspective, you know, with, I guess, going on four full decades of doing this stuff, I'm kind of reading between the lines that what their real motivations are is really more product oriented and how can we snag a client in a transition? But they don't really understand Roth conversions. They use kind of the same paradigms that you and I have probably heard in continuing education and we read about in our financial publications, all that kind of stuff. So they don't really dig deep. And I think that's mainly because most financial advisors come from a perspective of sales and they have an area that they focus in, and they just haven't taken the time to kind of look into this. But why. Why do most of the people that we talk to that come to us? Why do they tell us, what's your perspective as a cpa? Why do they tell us that their CPA tells them they shouldn't do this, they should only convert a little bit? Why do you think that is? Why is that so prevalent in the CPA world?

Well, because many CPAs define their value to their clients based on tax savings.

Yeah, that's for sure.

And so what happens is in a Roth conversion, you're going to pay tax, sometimes very large numbers, but as long as you have a background behind why, that's the real purpose. So it's looking beyond today's tax savings. And that's the problem. And there's a lot of great CPAs and tax preparers out there, but many of them define their value. They think that if they charge $500 to do a tax return, they think they should be saving their client $500. And a lot of that comes from how the clients perceive it. Also because they perceive the preparation of a return to be easy. What they're really buying is the value of what you're doing. And so where does that breakpoint happen? And that's why when you have a more simple return, let's just say an employee and they have a house. Yeah. There's not a lot of value to the return preparation because really all you're doing is inputting the numbers for you. Now, occasionally they may have some situation that comes up that needs the knowledge of a CPA or their experience, but many times they don't. And so what happens is in this environment that Craig has created with Roth conversions, there are a lot of people out there that over a long period of time have created very Large deferred assets, IRA accounts, 401k accounts, and they've had a very simple tax structure up until that point. Many of them prepared their own tax return their entire life.

Yeah, TurboTax, right?

That's right. Which is from a preparer standpoint, a terrible program. From a non prepared standpoint, maybe it's pretty good. If I try to use it, it just drives me nuts. But that type of situation is. So now when they're transitioning into managed assets, they really probably haven't had managed assets or maybe the last few years that they've accumulated over their lifetime, they start to have outside of their 401k assets that they're managing to get the flavor for. Just like you said, Craig, you're hiring a financial advisor. And at that point you need to, because you can't manage it yourself anymore, nor probably should you. And so the CPAs just again, they're defining their value in the wrong outlook. They're not doing what Baker Tilly calls is a value architect. Right. What is the overall value? What do you really need? Looking forward much into the future versus just today? Today is important, but you can also lose sight of today by saving tax today and deferring the tax. Well, deferral means you're gonna pay it, how much and when. That's the discussion we have to have.

Yeah, and I mean, that's a great segue, too. You know, the. What's interesting is back in, I guess, three years ago, when I wrote. When I wrote Paying the Piper, the challenge that I had in our marketing and in the book was to educate people about Roth conversions and to convince them that they needed to look into them. What's different now in the discussion is that there's just a lot of misinformation out there because of really, a sales motivation that gets people really confused about what's the right thing for them. So they carry. I talk a lot about some of the paradigms and the myths that people bring into the Roth conversion conversation, but most of the. My guess is that most of the people that are listening to the podcast and the people that plug into our webinars every month and they subscribe to our list, I know from polls that we do that half of the people that are engaged in the conversation are already doing Roth conversions. The other half are still just right on the edge trying to figure out whether they should. Whether they should do it or not. And so for the guy or the woman that's listening in today that is trying to figure out, gosh, what's this all about? I mean, let's. Let's kind of. Let's talk to them at the very beginning of this, of what's really at stake here. And so my way of overviewing the Roth conversion conversation is that, you know, you're making a choice to pay tax on the front end so that you save yourself a lot of tax on the back end. And what a lot of people don't think about is that when they reach whatever the age their required minimum distribution age is, they have now lost all control over the timing of when they have to pay tax on those distributions.

And really what comes from that is data. So, as a CPA, and most CPAs, and many of those that I've done this with need the data. And there's, of course, guesses and variables, but that's fine. Let's take the guesses and variables and show you the differences between what happens if you do nothing, what happens if you do this, what happens if the market does this, what happens if the market does that? Go through all of those variables to see the difference. And what I tell people most is they don't start early enough. So if you are in your late 50s, okay, this is when you should be starting to think about it. And if you're over 59 and a half and under 72 right now, with the way the market is, you should be doing it now. That doesn't mean you do all of it. That doesn't mean you're making a roth conversion for $3,000,000 or $300,000 each. Dependent. Each situation is dependent upon itself. But you need to be doing it now because you're going to pay less tax per dollar, and then it's going to turn around and grow. There's all of these things right now in the marketplace we're in now years ago. And I know, Craig, you remember this back when the market dipped, and you could defer when you paid your tax over a period of time, and then you could even 10 months later decide to reverse it. Some really cool stuff in the past that we used, and today that doesn't exist. But what does exist is a low market environment right now. And so now's the time. And I think that's what stops people, Craig, what stops people is the fear of paying tax and what's the market going to do. Also, truly admitting that their $3 million IRA is really only $2 million, it feels good to see it at 3 million.

Yeah, but you're talking about that kind of contingent tax liability, right? The part that they don't own, but they think they own it because it shows up on the statement, right?

That's right. So all of a sudden, if I converted $3 million of a IRA to Roth, well, now I'm only going to have two. That feels really bad because I look on my account statement, instead of three, I see two. And ultimately, that's where information and data and having conversations that are not overly technical to understand what you're giving up and to prove that if you wait, here's what happens. And ultimately, the biggest difference is simply this. You are forced into a tax rate. You're forced. And we don't know what the tax rates are going to be. Craig, you've done this a long time. I've done this a decent amount of time. In my opinion, our rates are only going to be higher for the very large foreseeable future. They just are.

Yeah, I see. You know, for the. For the folks that are in the demographic that you laid out really nicely, I think this market environment and this tax environment creates a very narrow window of opportunity that they will never have again in their lifetime. And to wait and to keep kicking tires on it is only going to mean that you're just going to continue to pay More tax. So the data that you're talking about is the part where most people come short on because all they see is or all they hear is you. Or I come to them and say, gee, the optimal strategy for you, once we've scrubbed it through all of our tools, the optimal strategy for you is to convert $300,000 a year for the next seven years, or whatever, whatever the, whatever the optimal game plan comes to be and seen our deliverables and you know how that all plays out. Before we developed the technology, the challenge that, that I had was being able to communicate to the client why it was good for them, because all they saw was, holy smokes, I'm going to pay $85,000 a year in taxes for the next seven years. I'm going to run out of money. I'll never have enough money. And they need to, they need to be shown that the projections are that you can do a Roth conversion over the right number of years at the optimal tax bracket. And if you put those two things together the right way, your net worth actually goes up over time instead of goes down.

And the fact that it's not a set it and forget it thing, like you just don't do it once and then, oh, I've got this plan and I'm going to do $300,000 a year for 10 years. Well, maybe not, maybe next year. Let's say the market goes way up and, or, and, or depending on how you earn income in any given year, that may change how much or tax rates change, could accelerate or decelerate how much we're taking out. So it's really almost an annual thing, in my opinion, to review the accounts, review the plan, and go, do we adjust it? But you have to start with the basis of only what we know. We only know what the taxes are probably going to be for the next three years. I would doubt that no matter what happens in the midterm elections, anything changes from a tax perspective for about the next three years, because you'd have to get probably a change in administration or change in Congress substantially to make any substantial tax changes over a period of time. So also, that's what's unique. This is, again, my opinion is, I think between now and the midterms, this is why the market is low. The market has adjusted for inflation, political unrest, all the things that's happening in the world today. Post election, it will start to go back again and depending on the elections, will determine how it comes back again. So being the fact that it's low now it's going to waver, Tom, for a little bit until we get to November, and then it's going to turn towards the end of the year. That's just my opinion. So I think you have only a few months right now to potentially take some advantage of the lower market. I had one client who did this who actually, per my recommendation, ended up doing more. Because once I showed it to him and he, and he saw that the future. He believed that tax rates were only going to go up in the future. And this guy had like $10 million in an IRA. Okay. So big numbers. And so he saw. He's like, well, why wouldn't I do more now? I said, look, I'm not saying you shouldn't, but that's just what you feel and believe and what the future is. That's the part that's emotional about this. And there's no data that's necessarily going to help. But it starts with a basic level of data to understand the variation and what the future really would be if you do nothing. And some people will say, here's the other thing. Some people will say, well, I don't care. That's my kids are just going to inherit it. Okay, you can have that attitude. That's great. And maybe you don't care. They're getting enough anyway. Well, would you rather more go to the US Government or not? And if you say yes, great. It's your money, you can do whatever you want with it. But that's ultimately all that's happening. More assets you've created goes to the government unless you step in and change something.

Yeah. And, you know, there we talk to a lot of people that. That is their attitude. They don't really care they're leaving the kids or the kids are going to get what they want to get. But I think you made, you make a good point. It's not about what the kids are getting. It's the choice that you're making to give it to the IRS instead of to people that you care about or causes that you care about. And you know, that's everybody gets to. It's their money to get to choose what they want to do for sure. You know, one of the things that. For kind of the folks that are a little bit newer to the whole Roth conversion conversation, I don't, I don't want to go too deep on it, but you know, it. There are a lot of people out there that have this opinion that, well, it doesn't really matter. I'm either paying taxes now or I'm paying taxes later. And you and I know that that doesn't hold up mathematically. If you do the entire, if you do the, if you do all the math on it, it doesn't work. But the RMDs, if tax rates never change and they're always. And they stay where they are today for people that are, I call them IRA millionaires, they're going to save a lot of taxes just by getting the required minimum distributions off of their tax return. So talk, talk. And I don't you and I haven't really teed this up, but do you know what I'm kind of getting out of all the other areas that are impacted when the RMD come onto their tax return? There's just a tax on the rmd.

Correct. There's social tax on your Social Security. So you're paying tax on tax. That's fun, right?

Yeah.

Right. Medicare premiums can increase. Right. So there are certain things that even though your IRA balance may not be very large. Right. It can have effect later on and then ultimately you will pay more tax on it. Because here's what happens. And this is where a lot of people don't realize about RMDs required minimum distributions for those that, you know, we use acronyms all the time. Required minimum distributions start when you're 72. Okay. And in the first five years or so, just this is based on my experience, most people probably would have taken about that much out anyway, just in their living expenses, just how they normally would. But when you start getting into your upper 70s and into your mid-80s, the way the calculation works is now it's double and triple the amount. So if you were Normally taking out $50,000 and now it's $150,000 five years later, the way tax brackets work now, you're paying significantly more tax on those same dollars. So if you layer in inflation right now, if you layer in the fact that you may start taking your distributions at, let's say, 65 or 70, right. 20 years ago from today. So in 2002, what did a car cost, what a gas cost, what did all those things cost? So if you think about your retirement, just in a 20 year window, some are more, some are less, right? You think about that 20 year window, what does it cost? And so now, because you're relying on the RMD is, well, all it's doing is eating in the actual net amount that you're going to get post tax. Whereas if you convert to a Roth or at least a minimum, get it out of the IRA and pay tax on it. Now you have control of the dollars as opposed to forced distributions, forced tax rates, forced less Social Security, forced more costly Medicare. All of those things happen. And they don't know because they've never dealt with it right there. They're 60 years old and they've never dealt with the required minimum distributions. We're just now seeing second generation, in my opinion, second generation required minimum distributions, which means that someone inherited someone else's IRA that was getting RMDs. That's really just starting to happen. People haven't dealt with it yet.

Well, you know, if you're the guy that's been, you know, carrying the lunch bucket every day, going to work, putting in the 401k and maximizing that and having a company match and you retire with. The numbers that come to mind that I've looked at are, let's say you retire with a million and a half dollars sitting in collectively you and your spouse's ira. What a lot of people don't realize, and this kind of speaks to the point that you, that you just made, is that that million and a half is actually going to generate about 3.2 to $3.5 million of required distributions over your lifetime. And that's using some assumptions of a really low rate of return. If you, you know, if you knock the ball out of the park all the time, it's going to be more than that. So a million and a half $401k or Iraq is going to generate $3.2 million of taxable income before we even have the conversation about the things you mentioned of Medicare premiums that are going to be high the rest of your life and so added tax on your Social Security benefits. So converting sooner rather than later is the objective because you get so much of that taxable income taken care of on the front end and in our planning and in what we do. And I know that you see it this way also. The objective of a strategic game plan to develop a Roth conversion strategy is to dramatically lower or totally eliminate your required minimum distributions, doing it at a tax rate and a time frame that does not lower your tax adjusted net worth. So you've got to, you can't just guess at this. I've actually ran proposals and illustrations and some of our reports where people followed what is common advice and they just kind of went to the top of their current tax bracket and let's say they're in the 22% tax bracket, which is what, between like 80 and 180,000 or something like that of taxable income. I actually can show you analyses we've done where they will pay more tax over their lifetime by just converting to the top of their current tax bracket than if they'd have gone up one or two tax brackets in time. So the real savings happens by getting to the higher brackets. I don't know what those are. Those are different for everybody. But the. But the name of the game is to get those RMDs out of your life at the right rate and the right time frame that you possibly can.

And it's a very common myth. So there's a common myth out there where I don't want to go into the next tax bracket because the myth is they think then they're paying that tax bracket on all of their income.

Yeah, right.

No, they're not. If anything, you could say sort of the next dollar, let's say the tax brackets at 120,000. Well, at 121,000, now, I'm paying that percentage of that dollar. That's true. But if you truly consider the average tax rate, it's actually still less than that. Everybody pays all the lower brackets as you move up. That's the way it works. So your effective or average tax rate is your real tax rate. And that's what you have to consider that moving through the brackets is not as relevant as more projecting what my RMDs are going to be, what my account balances are going to be, what am I going to be forced into, and then modifying it as needed based on information that you have or risk tolerance. I'm only invested in X and I see a return of 3% a year. Okay, well, that's how we can project it. And then what happens is all of a sudden you get 7% because you think it's 3, because you're a conservative person. But the market did really well. We've seen that in the many years post this year or pre. This year. And so, well, now all of a sudden your account balance has ballooned up. And let's say this happened for a lot of people in 2021.

Yeah.

Okay. A lot of people had capital gains, all this stuff. I saw tons and tons of clients paying way extra tax. And then all of a sudden in 2022, they're like, well, it all went away. And it did. And now they paid tax on it before for dividends and. Or now if you had a high balance at the end of 20, your 22 required minimum distribution is based on that high balance. Even though now the balance might be much lower. So there's a lot of traps, as you know, Craig. And what happens is the reason people get into them is they are taught at a young age, working for a company, put into your 401k defer, save the tax. We're going to do a match. And there's nothing wrong with that. But what happens is they're ingrained and taught that for so long, specifically at the large corporations that have significant benefits even beyond just a normal match, that they're just trained. Defer, defer, defer, defer, defer.

Right.

Thinking that my tax rate is going to be lower when I retire. Well, guess what? Total myth. It's a total myth. It just is. When you layer in Social Security dividends, maybe they started a small consulting business or their own business after they retired and. Or when you start hitting required minimum distributions or just taking distributions off to live off of that's income. So your income didn't change when you retired. It's a huge myth that that word needs to go away. Yeah.

And for those where their income is going to change, their income may drop, but most of the time their tax bracket didn't change. They maybe went from 120 down to 80, but they're still in the same tax bracket. So that rate that they're going to have to pay to do the conversions isn't going to be that at all. You know, let's kind of put a tail on this so that we don't drag it out too long for folks that are listening in. But you know, Jay is, he's, he's one of the guys that we introduce our clients to. Once we have a game plan put together and it's time to actually execute. A lot of we recommend people get with their tax preparer, their cpa if they don't have a tax preparer, we recommend that at least during the period that they're doing the conversions, things can get a little dicey and you got to figure out about when you're making your estimated and all this other stuff. But you know, it's refreshing that we're able to, we have guys like Jay that we can refer folks to that can help them with the taxes and help to understand it. I do know that just kind of to put some bullet points on the end of this, you cannot be in too high of a tax bracket to avoid conversion. Making sense for you? Number one. In fact, some of the biggest tax savings we've calculated for people are from people who are at the highest tax brackets and the greatest sums of money. The second point I'll make is that like Jay has said, you can't stop at the top of your current tax bracket most of the time. Now, if you have maybe a more modest account size and you got two or three hundred thousand dollars in your IRA and that's what you've got from your life savings, then probably some of this stuff doesn't really relate to you as much where maybe you can stop at the top of the 12% bracket, but that's because your RMDs are not going to cause a problem for you like we've talking about. The other point that I'll say is that for most people that are what I call the IRA millionaires, don't shy away from conversions that take you above the IRMAA thresholds. Right now. You, you have to get up there and do that for a few years in order to get the real savings. And the other thing I'll say is waiting and continuing to kick tires is not a game plan to win today. As Jay has mentioned, because of the market dynamics and because of incredibly historically low tax, Brack waiting is only going to subject you to more taxes and a greater expense later down the road whether you convert or whether you don't convert. You know, I've done, I did a podcast on conditions where Roth conversion does not make sense. And for those of y' all that listen to this in podcast form, you can find it out there on the podcast channel and listen to that. That maybe will help you guys to kind of see whether you really should be thinking about this or not. So my recommendation, as I like to leave each of these podcasts is some point of action for you. There'll be a link in the podcast notes that you can schedule a call with one of our CFPs and just begin a conversation, determine whether you're really a good candidate to do conversions in the first place. You know, our we don't sell any financial products. We don't want to manage your money. We just are there to offer really good, solid advice. We put 100% refund offer into our financial planning engagement contracts. So our guys that are on the front line are highly motivated not to talk you into something that's not going to be in your best interest. So I appreciate you kind of joining in with us today, Jay. Thank you for taking the time out of your busy day. It's obvious to me that you really get this stuff, so I appreciate you sharing some of your thoughts and your comments with listeners. You know Hearing from a different voice and a different perspective and a different professional designation never hurts at all. So thanks a bunch for what you're doing out there for your folks, too.

Oh, you're welcome. And appreciate guys like you because like you said, you're unbiased. And that's the key. You're looking at this from truly professional advice, and that's what people need. You're not trying to sell them something else. You're not trying to manage their money and make some sort of tail on this. You're not trying to sell them some sort of insurance. And there's a lot of great financial advisors out there and many of them who do understand this, but there are a lot that don't. So as someone listening, just consider that. Right? Or just because your brother, your sister, your cousin is a financial advisor doesn't mean that's the right person for you. You have to consider it for yourself. And the same applies for CPAs. Just because your brother, sister, cousin, that doesn't mean that's the right person for you in your environment. I can appreciate you want to support them, but that's where you go and potentially hire others to help you in the areas they're not familiar with. I don't claim to be an expert on everything. Not even close. And so just consider that when you really think about it. Yeah.

Good words. All right, well, that's another episode. We'll call it a wrap. And Jay, looking forward to having you back again with me real soon. Thanks again for your time.

Thank you.

Investment Advisory services offered through Q3 advisors this presentation is for educational and informational purposes only and is not intended to be individualized financial, tax or investment advice.