Walter Storholt  00:13

Flying high above the metropolis. It’s the Roth guy with holistic wealth advisor Jude Wilson, Hey everybody.

 

Marc Killian  00:24

Welcome into the podcast. Thanks for hanging out with Jude and I, as we talk investing, finance and retirement and Jude, we’re going to kind of do a follow up now. So we had David Walker join us, which was awesome for a couple of episodes, highlighted some things. So let’s now break it down a little bit more and talk more about that tax time bomb that’s out there, and look at some tax efficiency funnels. Maybe do a little sample study here as well for folks. So maybe get a little bit more meat and potatoes into this one for folks. How you doing this week?

 

Jude Wilson  00:53

Man, I am doing great. I am so excited, because it’s like we highlighted the problem, and now we’re going to talk about some action steps and solutions. So we’re not just making people scared,

 

Marc Killian  01:05

worried. Yeah, exactly. There’s enough of that right this minute, that’s for sure, exactly. So we’re actually so we’re taping this here a little bit in early in October, not early later in October. This will come out right around the beginning of November, so we’ll also have a whole new set of tax things that could be changing, because we don’t know who the President is going to be at this time. So that could totally change some of these things we’re going to talk about. But I think fundamentally, this stuff’s still going to apply. So whether you’re catching this in November, or you’re catching this two months, you know, or sometime in 2025 there’s still some stuff in here that’s certainly going to apply to folks. So let’s dive in and talk about it. You know, what is that tax bomb? Quick rehash, so we don’t have to be today too much and why folks should be concerned. I know we’ve got some kind of bullet point breakdowns for folks to make it. Make this easy. Well,

 

Jude Wilson  01:49

as you said in the beginning, if you haven’t had a chance to listen to the previous episode with David Walker, former Comptroller of the United States, worked under both Republican and Democrats, I highly recommend you listen to it, because he sets up the problem really well, yeah, but for our listeners today, want to just quickly give a quick summary. You know, as well as I do, the national debt is out of control, and with that, we have one of the lowest tax environments that we’ve been in in over a generation. So the math just doesn’t work out. If you’re accumulating a bunch of debt, but you’re not taking in a bunch of revenue, the man is going to be calling at some point, and what we believe is that’s going to lead to the what we’re calling the ticking tax time bomb. Taxes are going to have to go up in the future, and that could significantly affect people, right, when they’re getting ready to retire, especially

 

Marc Killian  02:45

if you’ve got everything in a traditional 401, K or an IRA, where many people do absolutely, yeah, yep. So that’s one piece of it, uh, let’s another piece, like, right? So the RMDs, that’s the other factor of that. So pulling that money out, because, again, you’ve been deferring it, the government says, Yeah, I want mine. You know, gimme, gimme, gimme, you know,

 

Jude Wilson  03:04

well, the analogy I like to use, and many times we face this with our clients, most of our clients are really good savers. They’ve put away a ton of money throughout their career, and they have a huge 401 K balance or huge IRA, and when they get to retirement, they may not need, necessarily need to pull that money to support their income. But as you said, there’s that little thing hiding the required minimum distribution where you’re going to be forced to take money out. And if you think about it, at that time, if taxes are higher and you’re forced to take money out that’s going to significantly impact your balance. The analogy that I like to use is, would you rather pay taxes on on the plant or the harvest the you know, you’re planting with a very few seeds, but those seeds can turn into a huge harvest, and that’s kind of what we’ve seen with our clients, is over time that tax deferred account has grown significantly, yeah,

 

Marc Killian  04:04

for sure. Well, and so that walks us really into our next piece then. So let’s just get into the tax efficiency side. Because a lot of people, because we have been taught this, we have been groomed to, you know, punt down into the future, right? Just put it in a 401, K, and just punt to the future. So let’s get efficient with the tax funnels. And that’s why so many people have been on the conversion train the last couple of years, dude, because they want to get out of some of that tax defer. They want to get this money into tax free accounts, right? Well, part

 

Jude Wilson  04:33

of the purpose of creating the Roth guy, hence the name, was to help people understand that there is another option, moving money into this vehicle called the Roth right now, we’ve spoken many times the Roth guy is also about tax efficient financial planning, looking at all areas, but for this specific purpose, the Roth conversion is a huge potential tool. So to help prevent from that ticking time bomb, yeah, to affect you greatly. Well,

 

Marc Killian  05:05

we have three funnels. We have three places we can go, right? We got taxable, tax deferred and tax free, right? Yeah. So, I mean, you got three avenues you can take. And we’ll pull this up here for folks to look at as well, you know. So looking at, you know, how do we, how do we maximize? How do we what do we do here? So break this down for us to we’ll have this on the screen for folks. Yeah,

 

Jude Wilson  05:25

most people from a big picture sense understand that their money is not all taxed the same, right? But what I find is a lot of people have never seen this in a visual format, so understanding this is very powerful. In the first funnel, the pre tax funnel, money comes into the funnel, pre tax, meaning you haven’t paid federal income taxes on it, right? It goes into the funnel, and it’s tax sheltered while it’s in the funnel, and that growth can happen without paying any taxes on that growth or the money you contributed. But well, in addition to that, you get, you usually are getting a tax deduction because you, you didn’t pay federal taxes on that money. So, right? That’s a

 

Marc Killian  06:09

very powerful piece. Yeah, that’s their traditional things. That’s the 401 K, and it’s the alphabet soup of the 401 k2, right, right. It’s all the other ones a tsp. Yeah, the

 

Jude Wilson  06:19

whole alphabet soup. You’re right, yeah, and so. So the the benefit of this funnel is the the tax deduction, but the potential problem with this funnel is, as we stated before, what if tax rates are significantly higher when you need to pull money out, or forced to pull money out, in the case of the RMD, and so at the bottom of that funnel, when money comes out, you have to pay taxes at whatever the current tax rate is. And in addition, if a noun, if a non spouse, your children inherit those dollars, then they will be forced to take money out of out of that account over 10 years, regardless, that money has to come out and will also be taxed at whatever the current tax rates are. Okay?

 

Marc Killian  07:05

So that’s that first funnel you guys can see on the left here, on the graphic, on the pretax then we go to post tax. Now

 

Jude Wilson  07:10

the post tax people are also very familiar with, you’ve paid federal income taxes, you got a paycheck, you made some money, you took that money, and you put it into the funnel, regardless if you put it in your savings account or bought real estate or individual investments every year, if you’ve made money, you’re gonna get that friendly 1099, at the end of the year, right? And if you, if you’ve made money and sold that investment, you’re gonna pay capital gains. Now the trick here is to understand, usually, capital gains are far less expensive than income tax rates. So income tax rates could go up to your 37% federal income tax rates. Yeah. Typically,

 

Marc Killian  07:54

if you’re counting, yeah, like a lot of people, are 2225 24 whatever you might be at Capital Gains tends to be there’s actually three, right? There’s three capital gains. And people don’t realize that there’s a zero and there’s 15, and then I think there’s 20, if I’m not mistaken, but most people tend to fall at the 15, correct? Most

 

Jude Wilson  08:13

people tend to fall at the 15. So this could be favorable and more efficient than income tax, but you know, one of the things that I often tell clients is a lot of investment advisors talk about investment diversification. They don’t necessarily talk about tax diversification, and that’s what we’re getting at here. So this post tax funnel is something most people have. Now moving on to my favorite, the tax advantage funnel. The tax advantage funnel. Usually you’ve paid federal income tax with one exception, that money comes into the funnel. It’s tax sheltered. And then the magic here, as you know, the money comes out tax free. And regardless of what what the tax current tax rates are at the time, you’re not paying federal income tax on those dollars. Yeah,

 

Marc Killian  09:01

and everybody likes this one, which is why it’s so popular recently. Now, we always know the rules can change, but these are the current rules, you know, this is the chessboard that they’ve given us to play with. So, you know, that’s why you start having these conversations about, you know, converting to Roth and so I know we’ve got this other kind of an example strategy, Jude. I’m going to flip to that and let you kind of break that down a little bit, just to kind of high kind of highlight and show some of the stuff for folks, we kind of have a real world example, right? So

 

Jude Wilson  09:28

here’s an example. We’ll just call him John sample to keep things simple. Very regular client. They’ve they have a million dollars in an IRA, but they don’t necessarily need to pull that money out to live off of so that money continues to grow. And let’s just say, just for argument’s sake, that money continues to grow at a 5% rate of return, and that by the time that they’re forced to take RMDs, you’re paying about 30% on taxes.

 

Marc Killian  09:57

So you can see, we’ve got that there are. The screen for folks, right? Yeah. So

 

Jude Wilson  10:01

what’s the what’s the potential consequence of this, without doing anything else, here’s the potential consequences when you look at it just based on RMDs alone, if that, if John lives to age 90, he’ll have to pay over $729,000 in taxes on just that RMD, whoo. And that’s, yeah, and that’s significant, right? That’s significant. And when you take those RMDs, you’re going to do something with the money. Let’s just say he takes the money because he doesn’t need it to live off of and just reinvest those dollars in a post tax account, and he’s still earning 5% Well, as we stated before, you still have to pay taxes on those dollars. The taxes on those reinvested dollars could add up to about 198,000 and then, you know, yeah, and then John passes away, age 90 those dollars have to be inherited. Their inherited dollars would have to could potentially pay up to another 707 $104,000 on those inherited dollars. So when you add it all up, that $1 million account could pay over $1.6 million in taxes over his lifetime in the inheritance. Wow,

 

Marc Killian  11:23

that’s a massive number, right? So it’s pretty wild. And so what you’ve shown here is that if you’re now converting, I’m guessing right, you’re moving this over, then this is what we’re looking like on the right hand side, absolutely.

 

Jude Wilson  11:34

So one potential strategy is converting those dollars from the always taxable that that that pre tax funnel that we talked about to never taxable. Now, to do that, you’re gonna have to pay a little bit of a price. You gotta take a little bit of a medicine, sure, but the math works out if you if, if John were to convert that million dollars, he’d have to pay about $300,000

 

Marc Killian  12:05

in taxes, because he’s in the 30% bracket, right? Because

 

Jude Wilson  12:09

he’s in the 30% bracket, okay, but look at the effect over this, over time, compared to the taxes he would have to pay by just doing nothing, yeah, $300,000 versus one over $1.6 million in total tax. Yeah.

 

Marc Killian  12:27

I mean, it’s pretty massive, right? And so therefore you got to sit there and think about, am I being as efficient? Now, look, we need to do our diligence here. Jude and say, Look, if you converted all this at one time, you’re gonna have an initial tax bill that’s not gonna be pleasant, like to the $300,000 but you’ve also maybe bumped yourself up a tax bracket. And, you know, so there’s some things. So you could even be not in that 30% it may maybe you kicked yourself, depending on your income, up to the next bracket. So just bear that in mind. But it still seems like to me, that makes more sense if you’ve got the funds to get it handled. Yeah, we

 

Jude Wilson  13:02

wanted to show this as a simple example. But there’s so much more to it. There’s so much more strategy. I wouldn’t say anyone just go ahead and convert all of your free tax dollars,

 

Marc Killian  13:14

right? Don’t do it all once, cascading.

 

Walter Storholt  13:16

People

 

Marc Killian  13:17

call it rothing Over time, right? So that’s, a strategy A lot of times advisors will talk about, let’s do a little bit here and there. But the window Jude could be closing to this conversation. Back to the political piece, right? So the window for rothing over time is now pretty narrow. If the Congress and whomever is president do nothing, taxes are going up.

 

Jude Wilson  13:36

Yeah, it we’ve talked about this in previous episodes the tax cut and Jobs Act, which brought the rates to where they’re at now, will sunset in december 2025 now we don’t know what’s going to happen after that one or three things, either they vote the Act into law and these rates stay the Same, they could come up with totally new brackets, or the third option, which I think is most probable, whoever the politicians are at the time are going to argue with each other, call each other names and do nothing’s happened exactly, and therefore the rates will revert back to where they were prior, right to the tax cut and job tax, which is more expensive than they are now.

 

Marc Killian  14:19

And it doesn’t mean you can’t still continue to Roth over time. It just means understanding that the historic low rates that we are in will expire if they do that right? So therefore you could be paying more on that, which again, is why it’s very important to have a strategy with your financial professional on doing converting $1,000,000.04 Oh, 1k, or whatever you might have.

 

Jude Wilson  14:40

Yeah, and we haven’t even touched on the fact that it could converting too much, could cause an effect on your Medicare, could could cost you even more in current taxations if it bumps you into a higher tax bracket. Yeah. I say all this to say you. You should definitely talk to a financial professional, whether that’s a financial advisor who is educated on taxes or a tax professional. This isn’t something that I would say, you know, just do it willy nilly. It’s a smart strategy, but it needs to be enacted correctly,

 

Marc Killian  15:17

yeah, for sure. Okay, so we kind of explain what the funnels are. We explained a little bit kind of a real world sample there with John. So what steps can listeners take to kind of assess their own situation? What some things we can do? A lot of

 

Jude Wilson  15:31

the information that we talked about today happens to be on our website, thetaxbomb.com and so people can go there, they can see some of the information. But more importantly, they can take the tax bomb calculator and see what the potential tax liability is in their own accounts. And so I would highly suggest that to just start the process and understand what’s the potential in your financial life.

 

Marc Killian  15:59

Yeah, for sure. And if, and you can check the show notes, folks, we’ll have the links into there this week, as we always do, and we’ve had it pop up on the screen as we’ve been going along as well. But it’s the tax bomb.com and it’s, it’s a it kind of helps estimate future tax liabilities and potential savings with different strategies. So there’s some, certainly some good tools there. So Jude, as we wrap wrap things up, any final advice, any thoughts. I mean, you’ve been doing this for years. You’ve been helping people get to and through retirement, and I think people are beginning to wake up, I guess, hopefully and good that they’re doing so that taxation really not we look, we know it’s a problem in our everyday life, but I don’t think we’ve really put the forethought sometimes into what it does to our retirement. And maybe even though income is probably still the king conversation, making sure that you have income coming in in retirement is important. Taxation is right there, man, because it could totally make or break that whole thing for

 

Jude Wilson  16:56

sure. And you know, as you said, we’re winding up. I want people to walk away understanding, you know, we’re not one of these conspiracy theorists that say there’s somewhere in the Constitution that tells you you don’t have to pay taxes. It’s a fact of life. But how we approach this, using every tool available to us, really makes a difference over time. Yeah, and so I implore everybody that’s listening really take a look at the tax bond calculator. It’s a great place to get started, but talk to a financial professional, because every dollar you spend, unknowingly and unnecessarily is less money that can accumulate for you, compound and leave a greater legacy to your kids and grandkids? Yeah,

 

Marc Killian  17:43

for sure. And there’s so many facets you mentioned earlier, what taxation can do, what income levels can do, where you’re pulling from, when you’re pulling from, so on and so forth. It can affect the Irma, all kinds of things. So there’s just all these little ripple effects that can happen. And, you know, building wealth, and we talk about this often, is a little easier than, you know, distribute, you know, than doing the preservation of it and the distribution of it, which is retirement. So if you need some help, reach out to Jude and his team, get onto the calendar. All the information is in the show descriptions for this week’s show, and you can find all that stuff there. Hit the subscribe button and the like button to catch new notifications, or the notifications Bell, so you catch new episodes when they come out, and all that good stuff, and go check out the David Walker episode. If you did not, it does set this one up nicely, and maybe kind of helps you kind of see what’s going on there. But Jude, I think he did a great job breaking that down for folks, making it very simple and concise that they can kind of understand, you know, just what they could potentially be looking at. So get your tax efficiency Game On. Reach out to Jude and his team, and we’ll see you next time on the podcast. Thanks buddy for

 

Jude Wilson  18:44

hanging out. Hey, thank you. This has been great. Always appreciate

 

Marc Killian  18:47

your time, my friend. We’ll see you next time here on the Roth guy and hit that button. We’ll see you next time so you can catch new notifications and new episodes.

 

Walter Storholt  18:59

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