The Truth About Capital Gains and Roth Conversions – A CPA’s Take

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 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.

Hey, welcome back. Another episode of Clear Direction for Retirement. I've got some great information for you today. Got a special guest on that is really going to be able to get us into the weeds of answering some really specific questions, questions that our advisors get day in and day out from the people who call us, who want to come on board. And then we get clients involved, they want to get into the weeds of how's this going to work. And so today I've asked Glenn Block to join me. Glenn is a CPA and a founder of Block Aldinger out in Pennsylvania. So, Glenn, are we ready to roll up our sleeves and kind of get granular with folks? We ready to go now?

We're ready to go, Craig. Roll away.

Awesome. Well, I appreciate you joining me again. And for those of you that maybe this is your first podcast, Glenn and I did another podcast that you can reference that talks a lot about some of the bigger picture things of why not every CPA sees this the same way and why they what's maybe limiting their ability to kind of help you see the big picture, doing much more effective Roth conversions than just a top new tax break. So you may check out that in the library, but today is really going to be kind of more of just real specific tax tips from Glenn. I know some of this stuff, but I know this stuff because I've had guys like Glenn teach me this stuff when we worked with our clients. Right. So, Glenn, you know, a lot of people that we work with, some people have to pay the taxes out of their ira. And as we've said in the other episode, that's okay, that works out fine. But specifically, we get people who really balk at doing conversions because they've got to sell stocks that have long term capital gains in them. And so their thought is, well, gee, I don't want to sell that Apple stock I have because I've got such a gain, it's going to cost me so much to get it sold. We're already going to add this big distribution for the conversion and now I've got to go sell all this to go pay for the $70,000 of income taxes so they stop. What are your thoughts about that thought process and maybe help people to understand how the whole cap gains circuit situation works for people.

Well, Craig, generally speaking, the type of client that would be looking to do this type of conversion generally has some sort of income already, be it passive income because they're already in the retirement stage or they're actually still working and earning have earnings. So the fallacy is that having to sell those equity stocks or whatever positions that are going to create this capital gain come into play. They think that this is going to add to their tax bracket in terms of creating more of a problem to do a Roth IRA conversion in the year that they're looking at doing this. And one thing about the way United States taxes work is there's two separate buckets of income for purposes of this calculation. Capital gains are treated in their own bucket, and ordinary income, such as converting traditional IRAs into Roth IRAs or W2 income or dividend and interest would be in the second sort of bucket. And the two don't mix with each other as far as the way the brackets work. So what I'm saying is that for purposes of capital gains, most individuals may very well be in a 20% capital gain tax bracket at this point when they're selling those items. But they're other that would not affect pushing them into a higher bracket as far as doing a Roth IRA conversion, because that would be treated as ordinary income. So one should not be discouraged by having to sell the capital gains that they're going to incur on an equity sale to pay for the tax on a conversion. Because generally speaking, and I'm saying generally, there could be some small nuances where it might be impacted in other aspects of taxes, but insignificantly so in the sense that doing that conversion or doing paying the capital gain tax is really not going to impact their tax bracket for purposes of Roth IRA conversion. And furthermore, if they're going to sell something that produces a capital gain, they should most definitely check with their investment advisor to see if there's any other equity positions that they have to be able to sell off to offset some of those capital gains and possibly talk to their tax advisor to see if there's any capital loss carryforwards from the prior years that have been unused that could also go to offset the capital gain that they think they may have to pay.

Yeah, if they do have, let's say they got $80,000 of carry loss, how much of that every year can they use? How much can they use to offset, say, an $80,000 tax bill?

Well, that depends, right? Because the $80,000 capital loss carryforward can only be utilized against capital gain income. So if they incur an $80,000, let's say they have $100,000 capital gain, so they would be able to take the 80,000 in lost carryforwards and offset that against the $100,000 gain and therefore only have a $20,000 tax capital gain tax to pay. And so, and by the way, additionally, another $3,000 could be offset against ordinary incomes. As soon as you use up your capital losses against your capital gains, you're always allowed an extra 3,000 to offset. So you're going to get your 3,000 either way. But properly planned, you can utilize the loss carryforwards to offset any capital gain. So if you have losers in your portfolio, that would be the time to sell them. And if you're not sure about it, sell them at the end of the year before December 31st. And then if you still think they might be winners, so buy them back in after 31 days so that you don't have a wash sale situation. So you don't necessarily have to be forced to sell off loser stocks if you think they're going to come back, you can rebuy them back after 31 days.

Yeah, yeah. And we, you know, I'm glad that you brought up the 3,000 limitation because that's the part that people I think get confused about, not understand. They can use that carry forward in other places. But we have people who actually tell us, I don't want to pay capital gains, I'd rather just use the money out of my IRA to pay taxes, which just we are so conditioned to not pay tax. And at the most, the most you can pay in a capital gains tax is 20%. So I tell people frequently, would you rather pay a 20% tax and recognize the capital gain, or would you rather take it out of the IRA, have ordinary income, and now maybe it's at 35% and so, and people just don't tend to think in the big picture, but it makes a lot of sense. The other reason it makes sense is by the time you get down the end of the conversion, you've got all your money over in the Roth, or most of it in the Roth, and you got a small amount sitting out there in the brokerage account beforehand you had this large amount of brokerage account that's going to continue to create gain. It's going to continue to create dividends, capital gains. By using those resources down in favor of loading up the Roth, you've really doubled your benefit by doing the Roth conversion. Does that make sense to you, Glenn?

It does. And in full transparency, we may have to do another podcast on this. We may have to wait until after the election to determine where this is going to go, because there is talk of a higher capital gains tax, and we would have to reassess that at that time, if necessary.

Yeah, good point. Good point. So the other. I guess just a comment that I'll make just so people understand. Glenn and I have a business relationship, developing a friendship. We do not. He does not earn anything off of our clients. I don't earn anything referring people to him. We simply are two guys that own businesses that really, genuinely want to get the best people working on the problems that our clients have. And so Glenn is part of kind of a very small network of other professionals that we work with that when we have clients that need some tax help, then we shuttle them over to him, and they do their own deal, they have their own relationship. And if this works, when it works like it's supposed to work, our client not only gets a CFP to help them with the overall strategy, but they get a CPA to help them with the implementation. And then, of course, our offer to our clients is we do free annual reviews where now we bring all the heads back in, make sure that everybody's doing the best that we can. So to that point, Glenn, one of the big.

I'm sorry. Go ahead. That's perfect. Yes. I want to echo what Craig said, that we have a completely independent relationship. Our firm is always maintained and independent with any of the firms we deal with. Our clients love that because they know they're getting a true, unbiased opinion from our firm when they ask for advice, and we choose to keep it that way. I've been practicing 43 years, and the reason I'm teaming up with Craig is because we share that similar thought. And it's such an important thought in terms of gaining the confidence of our clients so that our clients know that there's no ulterior motive for either of us to do this. We're just doing it to earn compensation the way we normally earn compensation, but not between us. And so, yeah, I think that as far as clients thinking about converting Roths in the first year especially, there are things that can be done from a tax planning strategy as far as having to figure out a plan to pay those taxes. And I want to add that, and we can get into this a little bit, that the first year is definitely going to, in most cases, it's going to be different than that of the following years. And so I think there's another reason why you want to actually consult with a CPA that understands the timing of when taxes has to be paid and reaching the strategic best time to pay those taxes.

Yeah, absolutely. And as you've shared in the other podcasts, in other podcasts that we've done, there are some tips and some tricks of delaying that and still not having to endure penalties and all those kinds of things. I want to shift our thought process to a little bit, just a little bit granular to a particular group of people that we work with. And those are folks that every year have a charitable intent and that they're in the habit of giving money to some sort of a 501c3 organization, whether it's an educational institution or church or any. Anybody that qualifies as a 501C3. You know, many people are aware that you can, once you reach the age where you have required minimum distributions, you can use something called a qualified charitable donation, which is a mechanism from which you could have money sent directly from your IRA to the 501C3. And you got very special tax treatment that happens because you made them, you made the distribution. But one of the things, Glenn, that we do with people, if we see that their tax returns or we see that their mindset, is that they're in the habit of giving not massive amounts, but tens of thousands of dollars a year that go out to a charity. Then we talk to them about something called a donor advised fund. And in that donor advised fund, you're able to make a large one year contribution to a special account at your current custodian. And let's say you're in the habit of giving $20,000 a year away to your favorite charities. Well, you can actually kind of marry a large charitable contribution with a large Roth conversion. Primarily we do it in year one. And now you end up getting a very large tax deduction for that donation that you made. And all you've really done is you've accelerated many years of conversion, I mean, of charitable donations into one year and that you get a checkbook and you can continue to dole that out to whomever you want whenever you want, but you accelerate that tax deduction in year one of your conversion. So, Glenn, what, what kind of specificity or warning or encouragement can you give to that whole transaction?

Yeah, so again, it, it has to be generally with somebody who's over age 70 and a half to be able to set up a QCD to begin with. That's what makes the most sense. And it allows you to do a $105,000 annual contribution for each person. So if you're married, filing joint, you can actually do a $210,000, set up a $210,000 QCT. You can also set up on a one time basis, 53, up to $53,000 into a charitable remainder trust. And so that's another thing. And all this was done under the Secure Act 2.0 legislation and the dollar amounts have gone up. Like last year, it was $100,000 for the QCD. For year 2024, it's now going up to $105,000. So it makes a lot of sense. As far as a donor advisory fund. The nice thing about that is that it enables you to receive the immediate deduction for, for contributions. It gives you the ability as the donor to really choose who your favorite charities are and to have some control on that. And remember that the funds that you put in that ad account will grow tax free. So you're growing your own fund, if you will, that you have sort of control over within the parameters of the trust that it's in, of course, to be able to really gain the benefit, if you will, in the cloud of being able to give to the charitable organizations of your choice.

Yeah, there's, there are a lot of reasons to bring a CPA into this. I mean, our CFPs are able to give tax planning information, they give you strategy ideas. But the actual tax advice, we have to like to make sure that we get in the hands of somebody like Glenn who understands what goes on each of the lines and they understand how all rest tax law kind of comes into it when it comes to your charitable contributions. And if you have an interest in really front loading your donations in order to get a tax benefit this year rather than future years to offset that big Roth conversion, you need to be aware of limitations annually and some of the things that Glenn has mentioned, other things that we haven't talked about yet. So if the whole charitable thing is important to you and interesting to you, then I strongly suggest that you get with Glenn and his folks before you actually run off and do something with that. Glenn has a firm in Pennsylvania, but Glenn, as you told us before, you can serve anybody, anywhere in the U.S. is that correct? Yes.

We've been in practice for 43 years. I've been certified for that long. And our firm, I've actually been a member of the firm for just about that much time. So I'm a. I bought out the predecessors, and we're pretty much in the same firm. My partner Karen and myself manage a nice group of clients, and they're spread all out throughout the United States. Our tax software that we have, which is what the big three accounting software firms use, we really have sophisticated software, and because of that, we're able to handle any state in the United States, and we have many states throughout other than Pennsylvania that we do.

Nice. Well, if. If you're out there listening or watching into this and you're just kind of getting involved with the Roth conversion conversation and the thought of paying big numbers in taxes scares the boots off of you, then hopefully we're able to help you with the strategy. And we can refer you over to Glenn. If you already got your game plan and you just need some good tax help. We'll put Glenn's contact information, how to reach him, show notes, podcast, and you can reach out directly with him. As we've already said, we're separate entities, separate businesses. Our only objective is to help you get the best advice that you possibly can. Glenn, I think you and I could probably do a dozen of these podcasts on a variety of different subjects. I so appreciate the knowledge that you have, obviously the experiences you've gleaned in 43 years of doing this. And I am happy that we have somebody of your caliber that we refer clients to and feel real good that you're going to. You're going to encourage them to do the best thing for them instead of just shut them down because of just false paradigms that so many CPAs have. Hey, Craig, thank you again for being a part of the podcast.

It's also a great pleasure to work with you and your firm with Q3 Advisors. We enjoy the relationship because I know that you have the background and knowledge necessary, and that's why it's a pleasure to work with you, because I know you're a credible firm without any conflicts. You're not selling any products. That's huge to me. I would not be involved with you if you were selling product. And so your independence is a. Is critical to my. My team. And I'm confident that because of the knowledge that you possess in Roth IRA conversions and the software that your firm has developed, that my firm can rely on that data to Give your clients and our clients the best tax information that we can give them in helping them with a strategic plan for Roth IRA conversions. And I want to thank you for having me as your guest.

Yeah, yeah. Well said. And I appreciate it. And we'll figure out when we can get our schedules together and do some more of this. I'm sure people really are able to. They really enjoy getting the details, especially from somebody other than just Craig all the time. But especially you, because you're the cpa. Craig's not. So if you're brand new to the show, this is your first time. Welcome. I encourage you to subscribe to the podcast so when we have something that we just feel like is interesting or valuable to you from an informational standpoint, you'll be among the first to know. Share it with your friends. Check out our YouTube channel as well. We spent a lot of time developing the YouTube channel. Lot of people helping us on that so that we can just continue to pump out a lot of knowledge, a lot of education, so that whether you use us or Glenn, you get more info and you're better informed so that you can have the best outcome for you and your family. I wanted to tell you what a big deal this is. If you're an IRA millionaire and you're not currently doing huge distributions from your IRA for living expenses, this is such a big deal to you that there's literally millions of dollars of taxes that you're going to avoid by getting this right. Our average client is like you, and they're going to. They're going to avoid $3.2 million of taxes on average, and they're going to save 80 to 100,000 or more in Medicare premiums over their lifetime. And you end up toward the end of your life with not only a whole lot less tax burden every year, but a much more simple financial life where you're not having to deal with all the dividends and capital gains things and you're not subject to what happens next in the tax code, which would be a great subject for a podcast. Glenn, is the future of taxes. Maybe. We'll know more in January. Right? Hey, thank you guys for tuning in. God bless. Have a great rest of your day and come see us again.

Investment advisory services offered through Q3 Advisors. This presentation. This presentation is for educational and informational purposes only and is not intended to be individualized financial tax or investment advice.