Optimizing Your Retirement Income

Hey there, this is Craig Weir. So welcome back to the channel. I got some, I think, some good information for you today. I, you know, when you, when you save and you develop all these different accounts and you get to the point where you're about ready to retire, somewhere in that process you start wondering, okay, now where should I start taking money from? This video is really designed to try to give you some input on how to think about those. I'm going to kind of scale it back to real basic stuff for those that are maybe just trying to get their head around this, probably going to be a two part video where this will hit the fundamentals on the front end, give you a few tidbits, and then the second video will be a whole lot more of just application and comparing withdrawal strategies and that sort of thing. But it's important that you figure out where your money's going to come from when you no longer decide that you want to go to work to get your money coming in. Right? So most people, as you save, you develop money in different, I'll call it buckets. So you've got a bucket that is tax deferred, which is your ira. You got buckets that have taxable implications. When you buy and sell something, and that's a brokerage account or something like that, you might even throw your real estate, those kinds of investments into that bucket because anytime you do something with it, you're going to end up with a taxable event. And then there's the tax free bucket, which could be tax free bonds, but even buying and selling those, you can have some tax implications. But the biggest tax free account is going to be your Roth ira. I want to talk first of all about withdrawal strategies and implications rather on each of those buckets. And then maybe in the second part of the series, we'll talk about how to use these together, how to combine them and how to think through those. In the video. I can't tell you what's best for you. We need you. There's a zillion data points that go into that, but at least I can give you some ideas and give you some things to think about. And I hope you pick up a couple of tidbits that will help along the way. And each of these buckets has its own benefits, its own pluses, its own minuses. And the challenge is design is to design your financial life so that you optimize a couple things. One would be how much income is available into retirement. So how do I maximize the amount of income. The other is how Do I minimize the tax implications of that income? And then how long will the income be there to meet my needs and last for a lifetime? And those are, those are just kind of typical financial planning retirement issues that have to be worked through. And as I said, there's like a zillion possible things that can impact that. And there are a lot of different ways to combine it. And so if somebody gets on and says you need to do it this way versus that way, those are generalities. The way that's going to be best for you is going to be very unique to your situation. How much money you have, what your expense needs are, how aggressive your investments are, how conservative they are, the age differences between you and spouses, what's important to you to leave to your family and heirs, that kind of thing. So all that, all this stuff is there and you really, in, in my opinion, as a cfp, it's best that you have a comprehensive plan that allows you to do all that instead of so many people make siloed decisions based on a financial product. That's not financial planning. That's an implementation of a strategy that comes from a fundamental premise of how am I going to do my life and how are we going to put this stuff together? So hopefully today in this short video, you'll pick up a tidbit or two that'll help clear up some confusion about maybe some of the details on distributions and what happens when you do distributions from each of these different buckets. And then the second part I'm going to get into really helping you to figure out what are some of the things that maybe you can be thinking about when you're developing your own withdrawal strategy from the whatever buckets you have accumulated. So again, going to be handling the subject in two different parts so that you can consume it in smaller pieces and don't want to put together this huge long video to make it work. So the first bucket is the easiest one, which is just your IRA. And the easiest thing I can tell you on IRAs is kind of the title of my first book, It's Just Time to Pay the Piper. When it's time to take distributions from your ira, it is now time to pay the piper. The deal that you made was I'll put money in, I'll get a tax deduction, I'll let it grow tax deferred, and when I pull it out, then I got to pay taxes. That sounded like a whole lot better deal 30 years ago, I'm sure, than what it is when you're Faced with, oh, crud, now I got to pay taxes on it. But that's the deal. And as you probably already know, but again, to get this kind of skin it back to the basics for everybody who may be listening to this from different backgrounds, different financial understandings, you can withdraw money from your IRA in two basic different buckets, right? They can be discretionary distributions, which happen when you just decide, I'm going to get some money out. And if you're 59 and a half years old or older, you can take whatever you want, just pay the taxes for it. No, no penalties, any of that kind of stuff. You maybe have to figure out what's going to happen because of the investments inside there. But from a tax standpoint, you get to the money, right? There's also not only discretionary distributions, but forced distributions is what I call it, which are those required minimum distributions, and I may call them RMDs, and you'll know what I'm talking about. Required minimum distributions or RMDs. These apply to IRAs, 401ks, that kind of thing. So required minimum distributions from these retirement accounts must begin by April 1st of the year in which you turn for most people now age 73. If you wait till April, you have to take two distributions that year because each year you have to do one. So the laws have changed recently with the latest tax act. And, and so at age, the age 73 requirement is if you reach age 73 on or after January 1st of 2024, then you have to begin RMDs by April 1st of the year after you turn 73, you still got to make sure you get RMDs for the year which you turn 73. There's still, some people are still the place where they started taking RMDs at age 72, right? So if you reach stage 72 before January 1st of 24, then you had to begin RMDs April 1st of the year in which you turn 72. And then in subsequent years after that first RMD, you have to get those, those RMDs done by December 31st of that year. And it's kind of important to follow the rules because the penalties are enormous. You don't want to end up there at all. Remember the tax implications when you take money out of the Iraq is that you pay taxes, that it gets included in your regular taxable income for that year on your tax return. And that's just kind of like I said, the deal that you made. So the advantage of using the IRAs is you've had all these years to get this tax deferred growth. A lot of people believe what that does is that means that I can get a lot more income. And it is. But you also pay a lot more taxes. So they kind of have to offset each other in the way that you think about those. But your IRA is certainly a place that you can get money from. And a lot of people use that as their primary withdrawal strategy. And there's nothing wrong with that. But we're talking about how do we optimize your retirement income. And so I'll get to that in the second part of how do we think about these things and put them together in kind of a unified strategy. And any time you take money out of your ira, it does have an impact on your taxable income. All right, so let's kind of talk about the other bucket real quick. And that would be brokerage accounts that you may have or other investments that are not inside of iras or Roth iras. So a brokerage account would be if you have an account at one of the big custodians, Vanguard, Broke, Schwab, Fidelity, you know, those kinds of things. And most people have funds and they have, you have any kind of investment inside the brokerage account that you want to, and then you maybe have other accounts that are outside of kind of traditional investments. Maybe you have some real estate properties that you have, or you've got some limited partnership syndications in oil and gas or all, all those kinds of things. And anytime you get income off of those investments, it is either taxable or partially taxed. So like dividends from a municipal bond fund or bond are not taxable, but dividends from your stocks are partially taxable, depending on the nature of those dividends. And anytime you sell something from within the account, you're going to have some sort of a taxable implication. So if you want to pull money out of that brokerage account, then you have to consider, am I just pulling money out of the money market or am I actually selling something to pull something out? And as many of you know, if you make that sale of that stock within 12 months, that then you have a short term capital gain. And that's just, you pay tax on that at your ordinary income tax rate. So when you, it just gets added into the rest of your taxable income and you pay tax on it. If you hold it for 12 months and a day now, it's a long term capital gain. And this is a part that a lot of people don't really Understand is that the rate that you pay on those long term capital gain transactions is dependent on what your other income is. And so you can pay as little as a 10% capital gains tax on those sales if your other income is really low, or 15% or if you have a higher income, 20%. And I'm not going to bore you with those details here, you can easily do a quick Internet search to know where those levels are. But that long term those gains from selling those stocks can be relatively inexpensive compared to paying an ordinary tax on withdrawing those. So a lot of people use that as part of their strategy of just selling something that's longer term. And so they just keep paying tax at a lower rate. So if you sell something and you need $80,000 of income for the year and you sell a stock at 80,000, if it's a long term capital gain, that could be a 20% tax break. I mean tax rate that you pay on it instead of adding just taking ordinary income, say out of your IRA and paying ordinary income tax on it, which is what a lot of people do, they, they choose to take money from the brokerage account instead of the ira. In the second video, I'm going to show you a better strategy than that that'll actually work to your benefit and lower your overall lifetime taxes pretty significantly. The other bucket that you can have is a Roth ira, right? So the Roth IRA is an account that you put money into, you paid the taxes already and now it grows tax deferred. And anytime you need money out, as long as you meet a couple of rules, anytime you need money out, it's totally tax free. So it'd be great if all of our money was tax free, wouldn't it? And the way that you can get from one from the IRA bucket to the Roth bucket is something I talk a lot about and have written books about. And it's what our whole business model is about is Roth conversions. So converting that, which is really simply taking money from your 401k or your traditional IRA or your rollover IRAs and converting them by way of paying taxes now over to a Roth ira. So the reason that people do that and what the benefits we see with our clients is that all that tax free growth really accumulates really does a lot of great things. It also gives you a lot of freedom, a lot of just a psychological ease that when I need income later, I don't have to worry about what, what's going to happen to tax rates or any of those kinds of things. You can use the same kind of investments that you had in your IRA to begin with. You can use them inside of a Roth, but it is a bucket and it's a way to strategically manage your tax burden over your lifetime. These withdrawals that you would make from Roth IRAs are going to be totally free of taxes if you meet the conditions of the five year rules. And so if you're under age 59 and a half and you do conversions, you have to wait. That money has to kind of mature for five years and then you can, then you can have access to it. However, one of the things that people aren't really up on is that if you're age 59 and a half and do conversions after age 59 and a half, now the only thing that has a five year kind of hand lock on it is the earnings from those conversions. If you're age 59 and a half and you do conversions, you're, you can immediately access 100% of the amount that you converted. You only have to wait five years to pull the earnings also out of it. And the IRS give us a good deal in that they assume that the amount that you withdraw is conversion amount first and earnings second. So it creates a really good planning opportunity that we'll talk about probably in the next video. So one of the things that, and there is, by the way, there is another video that we have that talks about the five, the two different five year rules that apply. And so if you're not really up on that, then you can kind of look for it in the list of our offerings. And if it's not there, it will be there soon, because I've just recently done that. But there are, there are a lot of videos out there that talk about the five year rules. But what is seldom talked about is this exception that exists within the IRS code that says if you're already 59 and a half, you can pull 100% of the converted amount out without the five year hand lock on it, and there's no penalties or taxes go along with it. So when should you consider doing these Roth conversions? Gosh, there are lots of videos and I've, you know, I've written two books about it, so it's a big subject. But in general, the biggest reason that you do the Roth conversions soon and in a much faster way than just a little bit each year, is to get ahead of those large required minimum distributions that are going to be forced out to you from your IRAs later on once you turn 73 years old. But the reason is Those large required minimum distributions make now all of a sudden start making your Medicare Part B and D much higher. It can cause you to also start having to pay a lot higher rate of tax on your Social Security benefits than if you'd have done this sooner rather than later. There are reasons to leave it for your kids that your kids don't end up having to pay a lot of tax from your estate to take care of it. There are a lot of other videos in this channel that'll talk a lot about the benefits of doing that kind of stuff. But in general, if you've got a million or more in an Iraq, in the combination of all your IRAs as a couple, it's probably a really good idea to get with somebody that actually can run the math that knows what they're talking about, that can demonstrate why you should and why you shouldn't. Don't go with just a superficial answer of oh, you're going to be in too high of a tax bracket, because that's irrelevant. They need to be able to run the numbers and compare your net worth over a long period of time. And of course, that's what our team specializes in. But what I'm not saying is if you have less than a million, you should not do Roth conversions. What I am saying is that if you've got a million or more in IRAs, it's pretty much a lay down, no brainer that you should do conversions and you should do them a lot faster than what you probably think you should. And there is really no optimal time. It's just as soon as the math makes sense. And probably it's a lot younger than you think, and probably it's converting a lot more than you think at a lot higher tax bracket than you think. But I'll also tell you that the benefits are probably much bigger than you think. Now. That's why it has to be somebody that specializes in this. Your CPA probably knows a lot about how to pay taxes and how to account for them, but most of them don't really specialize in this area of coming to a client saying you should pay more tax and we're going to put you in a better position. Most financial advisors and investment people, this is just not their bailiwick. They don't, they don't study it. It's not their specialty. Our advisors are kind of specialists in this area. And so that's why I can talk so confidently is we do, we do hundreds and hundreds of these every single year. And so we've seen a lot and we've talked to a lot of people. So when you're developing your strategy for pulling income out, you need to look down the road at what are my buckets going to look like. If you're already in retirement, then you have the buckets and they're set. And now it's a matter of how do I look at the strategy of combining income from these different buckets in the most strategic. And again, that's multifaceted and I'm not going to try to pull your leg that a video is going to give you the answer to that. All I can do is try to give you some of the things that have worked for us with helping clients for a long, long time now. So that's all for this video, part two. We'll get into some more practical how to how do you optimize all those kinds of things? So thanks for walking watching. If you like this kind of stuff, give us a thumbs up and subscribe the channel and you'll be sure to get new stuff as it comes out. And look for some of these other titles that I told you about as well. Take care of.