Jason Parker & Erik Ramsey discuss tax planning for your retirement years. 

Below is the full transcript:


Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas and strategies, designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement.

Now, here is your host, Jason Parker.

Jason: Seattle, Tacoma, Olympia, Gig Harbor, Erik Ramsey.

Erik: Hello.

Jason: Welcome back to another round of Sound Retirement Radio.

Erik: It’s really good to be here.

Jason: Gosh, I love being here. I love this little community that we serve and the work that we do. We’ve got a great topic. I think this is episode 042.

Erik: That’s correct.

Jason: 042. We’re going to be talking about tax planning.

Erik: Yeah.

Jason: Taxes. Everybody’s favorite subject. It’s March.

Erik: Suddenly everybody woke up and was like sweet, this is the best we could talk about. Best way to start a day.

Jason: I say it’s March, and it is March, but there are some people that are going to be listening to the program in the future. All these programs exist as podcasts. Maybe it’d be April or May by the time you’re listening to this. Welcome to the past.

Erik: Did you just become Barry White there?

Jason: Yeah, did you like that?

Erik: I did actually. It was pretty cool. Your voice just dropped. You’re fighting something, aren’t you?

Jason: I feel like I’ve been fighting something for a couple of weeks. Libby, my daughter’s home with a fever again. It seems like we’ve been down that path a couple of times this year. A lot of that crud going around.

Erik: No fun. At least we have taxes.

Jason: Yes. That makes like that much more fun. It’s my favorite thing in the whole world. I just can’t wait to write the check every year to the federal government. Puts a big smile on my face.

Erik: It surely does.

Jason: It makes me happy to live in this country. You know, people all the time Erik. They say I don’t mind paying my fair share in taxes but I don’t to pay more than my fair share. Excuse me. I’ll just cough right into the microphone here. That’s what we want to do. We want to talk about what is your fair share, if there are any tax strategies you should be thinking about, what should those be?

 Before we do what is … You know, we’ve got a joke.

Erik: We need a joke.

Jason: Yes.

Erik: Don’t talk about taxes without a joke.

Jason: This is a joke I’ve shared before. It’s one of my favorites. My kids, they just think this is so funny so I just, I thought I’d share it again because we didn’t come prepared with a new joke this week, and we don’t have [Astrid 00:02:16] to give us something in her Norwegian language.

 Here we go. There’s a pirate out at sea.

Erik: Arrr.

Jason: His first mate comes running up to him and says “Captain! Captain! There’s a ship on the horizon!” The pirate looks at his first mate and he says “Bring me my red shirt.” The first mate runs and he grabs the red shirt and he brings it to the captain. They go to battle with this other ship that was on the horizon. They win.

Erik: Yeah.

Jason: Afterwards the first mate comes to the pirate and he says “Captain, why did you want a red shirt?” The pirate said “Well, if I’m in battle and I get stabbed or hurt I don’t want the enemy to know that I’m injured.” The first mate said “That really makes good sense.”

 The next day they’re out at sea and out on the horizon the first mate sees several ships. He comes running up to the pirate and says “Pirate! Pirate! Pirate Captain! There are 50 ships on the horizon!” The captain pirate looks at his first mate and says “Bring me my brown pants.” Isn’t that just great?

Erik: That’s lovely.

Jason: All right Erik, where are you going to take us?

Erik: Brilliant. We’re going to talk about taxes, because that’s just awesome. It’s just part of life in a civilized world, and possibly even in an uncivilized world. As we were looking at this and preparing for it I wanted to see what does the Bible say about taxes. As I was looking at it and thinking about it and praying about it, again I saw the Bible take a different trajectory than I thought.

 The Bible doesn’t talk much about taxes. It talks a lot about how to engage the government. What’s interesting is that during a very small portion of during the whole history of the Bible writing process was Israel a free country, like really kind of just in the place where David and the kings were there. Not much was written from a theological perspective. Mostly it was about how to engage the government when it’s not nice.

 Of course, when you think about the Bible and taxes there’s that verse. You pointed it out earlier, before we recorded. “Give unto Caesar that which is Caesar’s.” As it was written, the Jewish people, the scribes and Sadducee were going to try to trap Jesus saying “Hey, should you pay taxes?” If Jesus says no then they rally the super-nationalistic Jews to kill Jesus.

 Sorry, sorry. If Jesus said yes you have to pay taxes to Caesar they’d rally the super nationalistic Jews that say no you shouldn’t pay taxes to Caesar because he’s a foreign oppressor and it would go badly for Jesus. If he said no you should not pay taxes for Caesar these guys would rally the Romans to kill Jesus because he was being a rebel.

 Jesus’s opinion was very different. He says give me a daenerys and he looks at it and he says “Whose inscription?” Obviously it’s Caesar’s. He says, “Give to Caesar which is Caesar; Give to God what’s God’s.”

 His point is look at what Rome has actually given us. At that point in history Rome had actually provided a lot for the Jewish people. In fact for the whole world at the time, the whole Western world. During the times in the Old Testament Israel was constantly under threat of various raiding bands coming from the north or the west or whatever. The Philistines or Egyptians or whomever coming up and attacking. If you were a farmer you’d be doing your thing and oh no, raiders again. A foreign power is coming through and they’re going to take all my crops, all my animals, and I have to start over again.

 In Jesus’s day that wasn’t happening. There was what was called the Pax Romana, the Peace of Rome. Basically foreign powers weren’t going to come into Roman territory. Rome wasn’t going out into there’s. That meant the people on the inside, they weren’t under that threat, which is pretty serious. It’s hard to establish any kind of business when somebody might come through with charging calvary and destroy it all. It’s hard to develop a business plan that takes that into account. That wasn’t happening.

 There actually was a fair amount of prosperity. There were a lot of taxes. The Roman road system was incredible. It allowed trade to happen all across the world. We are still using some of their roads. They were very well built. This allowed communication and transport and safety. The stuff that the Romans were just building. Their architecture was incredible. Their bathhouses stopped or severely decreased the plague that was going around. Once western society stopped building those things plagues shot up again because everybody was just going around kind of stinky.

 Rome was giving a lot to the Jews. They didn’t like it, they were being oppressed. Nobody would like that. If you and I were living in that time we would want Rome out. Never the less Jesus was pointing out they had received a lot from Rome. They had received protection, roads, architecture, all kinds of things. Therefore they had a debt. He said No, you pay to Rome what is Rome’s. Pay to God what is God’s. If you have a debt you pay your debt. It’s actually a very Jewish and Christian thing to say. You pay your debts.

 He’s saying we owe the government. They’ve taken care of us, we take care of them. It’s interesting because if you’ve ever thought of fair taxation, we now look at some senators and things like that and say they’re helping themselves to too much of the pie. I think it might be true. Any abuses that we presently see in this country of senators is nothing compared to the graft and corruption and tax abuse that was happening in Jesus’s day.

 Yet Jesus had this attitude of you pay your debts, and then you extend love. It’s a very different thing. It’s an interesting situation because Jesus was living in an oppressive time. Here we now have the opportunity to change our government. They really didn’t. That’s a different twist.

 What do we do? Where is our responsibility to change our government, to change our country so that our taxes are fair and stuff like that. I’m not a politician, I’m not sure I can really say what a wise tax strategy is. I think it’s smart to not spend vastly more than we’re earning. That’s just common sense. We’re kind of doing that now. I don’t have an answer today.

Jason: Kind of doing it?

Erik: I don’t know. There’s a number we’re going to talk about and it’s going to have a few zeroes behind it. My point is …

Jason: Erik, as I hear you talk it sounds like you really enjoy taxes. You really enjoy paying them.

Erik: No, not at all. Nobody ever has. If anybody had an opportunity to really hate the taxes it was Jesus or any of the New Testament writers. Yet Jesus said start with a good attitude. Start with a good attitude, go from there. In fact that extended to all of the oppression that he came across, not just taxes. Beating, oppression. Everything.

 One more thing I wanted to point out before we go. If you look in the book of Ezra they are building the temple. King Darius says … Long story very short, King Darius says I want my government to subsidize the building of the temple in Jerselem to God Almighty. Why? Ezra records this, it says so that the Jews can pray in the temple for me and my sons. What’s interesting to me is that Ezra recorded this. He didn’t have to record it, but he did. By recording it and writing it down in that Jewish book he basically committed the temple to pray for the emperor that so many people did not like. Why? Because there was kind of a debt. The government had paid for it, therefore they would pray for him.

 That struck me, that every church that I’ve been to has claimed 4013C tax exemption. Until I read that I didn’t think that our church owed the government anything. If we are receiving tax exemption I think that our church ought to pray for the government. I think that’s a debt we have.

Jason: That’s probably a good place to make a transition. We need to pray for our government.

Erik: There it is.

Jason: And be thankful for our taxes. I don’t know, Erik. This time of year when I’m cutting checks, hard to put on that happy gratitude.

Erik: So grateful.

Jason: We’ll be back. This is Jason Parker and Erik Ramsey on Sound Retirement Radio, right after this.

Announcer:  Seattle, Tacoma, Olympia, Gig Harbor. All the good people right here in Kitsap County. For those of you just tuning in from over the Internet or podcast or iTunes or however you’re joining us, thanks for being here today. Sound Retirement Radio is your place for expert advice on all kinds of different topics and issues surrounding retirement.

Jason: You’re listening to episode 042. We make these available to you online as a podcast. You can also listen straight from the website, compartmentalization.

 We transcribe everything. Maybe you don’t have time to listen but you’d like to read these show notes. Everything’s available to you right on the website. Thanks for visiting, thanks for joining.

 I want to remind our listeners. If people are out there, they’re thinking about retirement Erik, we have the Sound Retirement Planning Blueprint that we’ve created. You’ve put a lot of work into this and it’s a great little tool, kind of a video series. Step-by-step educational on if you’re thinking about retirement, some of the core critical things you should be thinking about.

Erik: Yeah. If I’m building something I need to have an idea of what it will look like when it’s finished. What the blueprint does is it gives everybody a chance to say this is what a plan looks like. Before they start they have an idea of what it should look like when it’s done. It’s a pretty brilliant tool I think.

Jason: I think so. As we talk about tax planning some people have the luxury of being able to do a little bit more tax planning than other people. Ultimately the bottom line is people’s biggest fear is running out of money in retirement. We don’t want to do tax planning at the expense of potentially jeopardizing somebody’s financial future. That’s crazy.

Erik: Right.

Jason: We do have to take into consideration the reality of the time and the world that we live in right now today. I have a couple of interesting little statistics I’d like to share with our listeners.

 First of all our national debt right now, Erik.

Erik: It’s not a small number.

Jason: 18 trillion dollars. Over 18 trillion dollars. That’s T with a T. Trillion with a T. You can tell I quit drinking coffee this morning. My brain’s just not firing on all cylinders.

Erik: That’s 18 million million.

Jason: That’s a lot of money.

Erik: That is a lot of money.

Jason: To put this in perspective we’re in 2015. If we just roll back the clock to 2008 our national debt in 2008 was 9.8 trillion dollars.

Erik: Almost half.

Jason: Almost doubled in nine years, or geeze not nine years. Six years.

Erik: Yeah.

Jason: Oh my goodness. Wait, we rolled it back to 2008 so we’re 7 years back.

Erik: Coffee.

Jason: What year are we in here? Let’s roll back all the way to 1980 here. I’d just be kind of curious to see what this looks like, if we can pull this up. National debt in 1980. We weren’t even at a trillion dollars. 867 billion.

Erik: We would scoff at that much money now. Let’s take out a loan.

Jason: That’s our … That is incredible. That’s the first time I’ve ever looked up that going back to 19, all the way back to 1980. That’s incredible.

 18 trillion dollars of national debt. We’re spending 477 billion more right now. That’s our country’s deficit. 477 billion more than we bring in in revenue.

Erik: Can you just explain to me again the difference between deficit and debt? Those get thrown around as though they’re interchangeable, but they’re not.

Jason: Yeah, that’s a great point. Our debt is the amount of money that we currently owe and we’re paying interest on it. The deficit is the difference between how much we spend and how much we bring in in revenue. If we’re bringing in $100 of revenue and we’re spending $150, then our deficit would be the $50. It’s the difference between what we bring in and what we spend.

Erik: If somebody said …

Jason: We’re over budget, bottom line here.

Erik: If somebody says we’ve slashed the deficit that is a very different thing than saying we have slashed the debt.

Jason: It is, because in today’s environment, and we hear that phraseology, terminology being thrown around. We have seen the deficit reduced, but our national debt is still increasing at the tune of almost half a billion dollars every year.

 It’s important and it’s relevant, especially to the people that want to retire today, because a lot of the social programs that we’ve created: Medicare, Social Security, everything that retirees depend on, the two biggest benefits, are also two of our biggest expenses.

 Medicare is the largest budgeted item, and social security is second. Defense is third on the list. Interest, I find that interesting, interest that we’re currently paying on the debt is the fifth largest item on our budget.

 One of the big concerns a lot of people has as interest rates start to rise, and all of the sudden that obligation goes up, boy that’s really going to put the squeeze on. We’re going to have to figure it out.

Erik: Yeah, yeah.

Jason: The piper’s going to come calling. He’s going to be playing his flute.

Erik: You’ve got to pay him. Don’t you pay the piper first, and then you get to choose the song? Sorry, my folk wisdom is not that good.

Jason: What I remember is they didn’t pay the piper and then he played his tune and marched all the children off into the … Wasn’t that how it went?

Erik: That was the Pied Piper.

Jason: Oh yeah. I don’t remember. We’ve got 18 trillion dollars of debt, 400 billion dollars, almost 500 billion dollars more than we’re spending every year. We’ve got 10,000 baby boomers retiring every single day.

Erik: They’ve been paying into social security. They want their cut.

Jason: Social security right now is saying that by the year 2032 they’re not going to have enough money to make good on all of the promises. They’re saying they’re only going to be able to pay out 77 cents for every dollar promised. If you were promised $1000 you would only receive $777, according to the social security trustees report.

 We’ve got some headwinds. The question becomes … Here’s another interesting statistic. We’ve got this massive national debt, massive number of people heading into retirement. They’re going to put more of a strain on these resources. I found this interesting. Top marginal income tax rate in 1964. Any idea what it was back in 1964?

Erik: 1964?

Jason: The top marginal income tax rate in 1964.

Erik: I’m going to guess around 50%?

Jason: 77%. By 1980 the top marginal income tax rate was 70%. We saw the top rate drop from 77%, go all the way down to 70% by 1980. As we continue to look at this though, Erik, let’s take into more relevant history here. If we look back into 1986, top marginal income tax rate in 1986 was …

Erik: I thought it was dropping so I’m going to say 50%.

Jason: 50%. Now we’re at 50%. 77, 70, 50%. Today our top marginal income tax rate is 39.6%.

Erik: That’s a lot lower than 77%. This is at very historically low numbers.

Jason: It is. We have the lowest marginal income tax rates historically, that our country has enjoyed in the last 75, 80, maybe 100 years. The question becomes while we have these all-time low marginal income tax rates that we enjoy today, but we’re spending 400, 500 billion more than we bring in in revenue every year. Our national debt’s quickly approaching almost 20 trillion dollars. We have to be asking what’s going to be the breaking point?

Erik: Something’s got to give.

Jason: Something’s got to give. What’s it going to be? Are we going to reduce social security benefits to retirees? Are we going to …

Erik: For that voting block? I think that’s unlikely.

Jason: Are we going to tell them sorry but your medicare benefits are going to get worse in the future? You’re going to have to pay a lot more money for your medicare?

Erik: For that voting block? I think that’s unlikely.

Jason: Yeah. They’ve already started some means testing. We’ve seen this happen in medicare, where if you have too much income in one year you actually will pay more money for your medicare premiums than the average person. It’s certainly possible that we could see some means testing come into play, where they look at somebody and they say Erik, you’ve done a really good job saving your money over the years. You’ve saved to much money. As a result we don’t think you should get as much social security. I imagine that’s one way that they could try to means test this. Just look at the assets that you have and say sorry, we need to take care of the people at the lowest end of the spectrum.

 One more interesting statistic that I think we have to address. This last statistic about the historical tax rates, marginal income tax rates was brought to us by the Tax Foundation. I’ll put some links on the post for our listeners if they want to go look this stuff up. The Tax Policy Center said that in 2013 43.3% of households pay no federal income tax.

Erik: Wow.

Jason: 43% of Americans don’t pay any federal income tax. Is that sustainable?

Erik: It doesn’t seem like it. If we see our debt increasing, and even if we say our deficit is decreasing …

Jason: Our deficit decreasing is kind of smoke and mirrors, really.

Erik: It really is. I think a big thing that we’re seeing also is around the country a lot of our infrastructure is having some deferred maintenance put on it. I was reading about bridges, that are probably at places where they need more maintenance being done on them. The bridges are getting old, they need to be maintained. That maintenance is being pushed back. If you delay maintenance on your car the oil still needs to be changed, and stuff still needs to be done, and it tends to just be more expensive later.

Jason: If you put this perspective of your own personal finances, how long … Let’s say the average American family out there is making $50,000 a year. I don’t know what the number is, but just to make this easy. Say they’re making $50,000 a year but they’re spending $75,000 a year. How long can that game and that party continue until all of a sudden what’s going to happen? If they’re spending the extra $25,000 because they’re using credit cards or they’re taking cash out of their house and refinancing their home all the time, the party’s going to come to an end.

Erik: The repo guy’s going to come around.

Jason: Yeah. As we are considering this, we’re considering the reality of the world that we live in today. We need to be thinking about tax planning. Unfortunately one of the tools that was created, it’s very tax-hostile. It’s people’s retirement accounts. Their IRAs, their 401Ks, their 403b. That’s what I call tax-hostile money. When we come back from break we’re going to be talking some more about that. Right now we’re at this point where we need to take our first commercial break. We’ll be right back.

Announcer: Are you 50 years or older and have at least $500,000 of investible assets? If so this message may be beneficial for you. Are you confident that you will be able to retire and not run out of money? Are you concerned about higher inflation, higher taxes, and what market volatility will do to your portfolio? If you answered yes to any of these questions then I encourage you to take advantage of this offer. Jason Parker, the author of Sound Retirement Planning and President of Parker Financial is offering a free report titled “Ten Things to Know about Planning your retirement income” that may provide you answers to the above questions and much more. Call his office at 1-800-514-5046 to receive your report free of charge. Again, call now at 1-800-514-5046.

Jason: Alrighty folks. Jason Parker here. We’ve got Erik Grahams in the studio.

Erik: Good morning.

Jason: If you’re just tuning in I’m off coffee as of today. This will probably last about …

Erik: Should we take a nap break?

Jason: Ten more hours.

Erik: Curl up and have some easy listening music.

Jason: You know what? I just remembered we have a speaking engagement tonight.

Erik: We do.

Jason: Usually I like to have a cup of coffee right before I talk, just to give my brain a little jolt.

Erik: Kick it into gear.

Jason: You’re going to be speaking tonight.

Erik: I will. I will. I got you.

Jason: That takes the pressure off of me. For our listeners, a lot of people may not know this. We do live events just about every month. You can go to Parker Financial, my investment advisory firm. Go to Parker Financial, look under the events tab. If people are out there and they’d like to come to one of our live events, by all means. That would be a great opportunity. Really dive in, get more into the nuts and bolts of the type of work that we do when it comes to retirement planning. If you’re out there, you’re driving down the road, you probably won’t be coming tonight. Be sure to check out the events tab looking for future opportunities, future speaking opportunities.

Erik: You give good food. I think it’s worth coming just for the food. I’ll be honest. When I went the first time I thought man, this is all right.

Jason: Yeah, hey we want to take good care of people, all the good people here in Kitsap county. Some people only come out for the food.

Erik: It’s true.

Jason: Actually, they don’t enjoy my jokes. The food’s usually pretty good.

Erik: All right, I’ll hang on, I’ll wait. The food. It’s good. Obviously we talk to the people afterwards. So often they think some of these basics that were told in some of the more in depth stuff that we covered is of very high value. It can change your life. Just some of these facts, they can change the trajectory of your 30 or 40 year retirement to such a degree if you find them out early.

Jason: One of the things that I learned years ago is that a small hinge swings a big door. Sometimes it’s just these little adjustments to somebody’s financial life, or can share with them, teach them about that can make a really big difference.

 You know Erik, you and I we’re always talking about ways to maximize your social security retirement income.

Erik: Right.

Jason: Which is great. If we can show somebody how to have an extra, a married couple how to have an extra $100,000 of lifetime benefits over their retirement, that’s significant.

Erik: Yeah.

Jason: For some people that’s the difference between whether or not they run out of money or they have enough.

Erik: Right.

Jason: This is a good point to point to the social security calculator that we have right on Sound Retirement Planning. One of the things people don’t really understand is the taxation of social security.

Erik: Right.

Jason: That’s what we’re talking about today. We’re talking about taxes. On a high level, taxes, your social security income is tax efficient …

Erik: Hang on coffee deprived man. You were talking about IRA’s.

Jason: Oh yeah.

Erik: Should we do that? Let’s do that.

Jason: You want to talk about IRA’s first?

Erik: I think so, I think so. We’re going that direction and I was all excited about it. Okay, I love this discussion.

Jason: Okay.

Erik: IRA’s, they’re tax-hostile.

Jason: Tax-hostile money. We give an example in the presentations we do about a hypothetical couple Joe and Carol. Joe and Carol are like a lot of the people that we run into today where they have good income coming in, they have good cash flow coming from their pensions and social security. Joe has about $500,000 in his IRA. He’s 65 years old. He doesn’t need any money out of that account.

Erik: We see this quite often.

Jason: Yeah, all the time. One of the questions I love to ask people, and this is a hard question to answer, I ask Joe, “Joe, what’s the purpose of this money? Why do you have that $500,000 in your retirement account?” You know the answer here, Erik.

Erik: I know this. A good example, and he just said this is just … I don’t need it to live on, but I want to make sure that my wife has enough. If I pass away the pension might change. I’m not sure if it did for this …

Jason: It was yeah, the wife was only going to get 55% of the pension.

Erik: One of the paychecks from social security, not really paycheck but benefit checks stops. The wife would step up to the higher of the two earnings but there’s still a loss to the household income if somebody dies.

Jason: Ultimately bottom line for Joe when I asked him the question, I said “What’s the purpose of the money?” He said, “I just want to make sure that my wife’s going to be able to maintain her standard of living.”

 The other question I asked Joe, “Joe, when was the last time you pulled money out of this retirement account?” He said “I’ve never taken money out of that thing.” I said, “When do you plan on it? What do you have it earmarked for? What are you going to be pulling money out for?” He goes, “If I have my way I will never take money out of that account.”

 In order for us to do tax planning we need to understand what the purpose is, what the plans are, are there things that we’re thinking about cash flow items we need to be preparing for. In their case it was more of an emergency fund, and make sure that his wife was going to have plenty of income if anything happens to him.

Erik: Benificiaries afterwards.

Jason: The other thing I would say about Joe and Carol which makes them very similar to a lot of the people that we service. They say “At this point in my life I’m not really trying to hit any home runs with my investments; with the accumulation. I’m not in accumulation mode anymore with my accounts. If I can just earn a fair rate of return on my money, outpace inflation, with as little volatility as possible that’s really what I’d like to do.”

 I hear that from a lot of people. What a lot of people say is if we could just earn, if inflation’s 3% and we could earn 4, 5, 6% that’s what we’d be happy with. A lot of people aren’t swinging for the fences by the time they’re heading into retirement. They don’t want to be in a position where they’re taking maximum risk and potentially being wiped out as a result of that risk.

Erik: That’s a wise strategy, to just moderate that risk, bring it down, doubles and singles.

Jason: Doubles and singles. A lot of people don’t even know what rate of return they have to earn in order to make the numbers for them. That’s where a good retirement plan comes in. I’ll never forget, I met with a guy a couple of years ago, and he had several million dollars. We were able to say if you can just earn 1% on your money for the rest of your life you’re never going to run out.

 You know how good that made him feel? He’s like why in the world am I taking all this risk and losing sleep and being stressed out when I don’t need to do that? Maybe you still want to, but you don’t need to.

 Anyhow, Joe’s situation. What we did, once we understood what the purpose was and the path that he was headed down we said let’s take that $500,000. I created just a real simple spreadsheet for him. I said let’s see what’s going to happen over the rest of your life. For somebody 65, Erik, do you think it’s reasonable to assume that they could end up living to age 90?

Erik: Yeah.

Jason: Yeah. In fact I just heard that the National Association of Insurance Comissioners is revamping their mortality tables. Insurance companies currently use the year 2000 mortality tables. They’re going to have to start using 2012 mortality tables. In those 12 years people have gained life expectancy of 4 years. People are living longer. If you’re 65 making it to 90, that doesn’t seem like a stretch I don’t think.

Erik: No.

Jason: The other assumption that I made was he was just going to earn 6% return on his money.

Erik: That’s fair.

Jason: Yeah. We’re not saying you’re invested in stocks and we’re going to earn 10% a year. Let’s just be real conservative with our assumptions and just assume a 6% return on your money. This is all hypothetical of course. We’re not pointing to any specific investment or insurance product. We’re just trying to make some projects about what could happen in the future, to understand how this retirement account’s going to work.

 The other thing that Joe didn’t realize. I said to him, I said Joe do you realize that when you turn 70 and a half you have to take money out of this account?

Erik: If you’re unaware of that, that is an unpleasant discovery.

Jason: Very unpleasant.

Erik: America’s all about freedom, and being told you have to do something with your money, it grates against us.

Jason: Yeah. It really does. The reality is you’ve had this opportunity to contribute to this account and get a tax break as you’re contributing. Your money’s growing tax-deferred all of these years. The government’s saying they want their money at some point. They say when you turn 70 and a half you have to begin taking required minimum distributions out of that account.

 The divisor’s 27.4, which that means nothing to people. The percentage is about 3.6% that they have to take out the first year, and then that percentage increases every year that they get older.

 What we did is we said Joe has $500,000 today. He’s not going to take any money out of this account. We’re just going to let it sit there, compound and grow. We’re assuming a 6% growth rate. At 70 and a half we’re going to start showing him pulling money out, because now he has to pull money out and he has to pay taxes on that money. Oh, by the way, you can’t take that distribution and go stick it back in a Roth IRA. We get that question a lot too. They say I’m taking the money out, I don’t really need it, can I just fund a Roth IRA? No, it doesn’t work like that.

Erik: Bummer.

Jason: In Joe’s situation, when we ran the numbers, $500,000 earning 6% the first year means he would have earned $30,000. At the end of the year he now has $530,000. We take that $530,000 we bring it forward to the next year, he earns 6% which is $31,800. Just a very simple spreadsheet. Again, this is in my book, this is in chapter 9 when we’re talking about tax planning. If people want a more in depth overview of what we’re talking about here.

 We get down to age 70 and 27.4’s the divisor he has to take out. Assuming now that his IRA has grown to $669,000 he’s going to have to pull out $24,420.

Erik: He didn’t feel like.

Jason: He doesn’t even want to take money out of this account. He doesn’t want to take anything out, but he’s forced to take $24,000.

Erik: What if he doesn’t? What if he doesn’t? I love the answer to this. This is happy. What if he says no, I’m just going to leave it in to grow.

Jason: One of the biggest penalties you will find in the IRS tax code. A 50% tax penalty if you don’t take that required minimum distribution. In his case, or let’s say you’re required minimum’s $40,000.

Erik: Easier number.

Jason: That means if you don’t take it you have a $20,000 tax penalty.

Erik: If I forget.

Jason: That’s painful.

Erik: $20,000 goes straight to the IRS.

Jason: Put it on the calendar now.

Erik: Will they send me a card? Will they say thank you? Send me a box of chocolates? That is some expensive chocolate.

Jason: You know what? That would be kind of nice if we got a thank you letter, for the 56% of us that actually pay taxes. It’d be kind of nice if we got a little thank you note from the government every year. Thank you for paying your taxes.

Erik: Don’t get me wrong. I don’t like paying taxes, but I don’t want to start with that angry, hostile, viscous attitude. I don’t want to do anything with that attitude to start with. It tends to come along.

Jason: How does it make you feel when 43% of Americans aren’t any federal income tax? What do you think about that? Is that right?

Erik: Not as thrilled with it. I’ve seen poverty, Jason. I grew up in South Africa. I have seen people in unbelievable poverty. I don’t see that here. I don’t see it.

Jason: What do you see?

Erik: I see a lot of entitlement.

Jason: Uh-huh.

Erik: I want to be cautious with that. There are people that are just, they’re stuck. They’re stuck. I think over time a sense of entitlement makes them more stuck. I think they need friends. Honestly, I think friends and people to come along side them, to either kick them in the butt or help them up, would be huge.

 This is where I believe the church really comes in. The heart extended to other people. I don’t think government programs can ever substitute a human heart reaching out and pulling people up.

Jason: It doesn’t seem to be working very well right now. Yeah, that sense of entitlement. That’s something that I hear from a lot of the people that we serve, a lot of the retirees. They’ve done a really good job providing for their kids and their grand kids. When there’s a sense of expectation, like they have to do that. That rubs people the wrong way.

 Anyway, when we’re talking about this required minimum distribution. Assuming Joe’s scenario, using the spreadsheet we created for him. He started with $500,000. If all he does is take out his required minimum distribution over his lifetime, we’re looking at $908,000 of taxable distributions.

Erik: That’s money that’s come out.

Jason: That’s money that’s come out. He started with $500,000 and he has to take out $908,000 of taxable distributions in an environment where tax rates look like they’re going to have to go up at some point. National debt 18 trillion, 400 billion dollar deficit. 10,000 baby boomers retiring every day. Either you cut benefits or you raise taxes. Somethings going to have to give.

Erik: Is there some solution, Jason?

Jason: There is a solution. We’re going to get into that right after this break. We are at that point where we need to take our next break again Erik. We’ll be right back after this. We’re talking about tax planning. This is episode 042. If you’re running out of time be sure to visit Sound Retirement Planning and listen online. We’ll be right back.

 Alrighty folks. Jason Parker here. President of Parker Financial. Author of Sound Retirement Planning.

Erik: Erik Ramsey, generally nice guy. I have to have some credentials here.

Jason: Erik Ramsey is our featured speaker for this evening’s event. Co-host of Sound Retirement Radio. That makes you sound, yeah. We’ve got a lot of resources out there. Our focus is on educating people. We’re on episode 042. We’re talking about tax planning. This is a big deal for a lot of the people that we serve, Erik. Getting back to this idea. People say Jason, I don’t mind paying my fair share in taxes. We live in the greatest country in the world. I don’t want to pay more than my fair share in taxes.

Erik: Right.

Jason: What happens when you live in a place like, for example California. California has an incredibly high income tax rates. People tend to move away from California when they retire. We see a lot of that up here in Washington because we don’t have an income tax in the state of Washington. We get a lot of people moving here just because it’s a lower cost of living. Same with Florida. A lot of people move to Florida because of lower cost of living.

 Taxes, we see this in our country. Businesses, corporations, they’ll headquarter in a different country that has a lower corporate tax rate. Taxes are a funny thing. You start raising taxes and what happens is people start looking for ways around them. You’ve created this account. In Joe and Carol’s case they have $500,000.

 The other thing about that. Not only are they going to take $908,000 of taxable distributions, but if Joe dies at age 90 he still has a balance in that account. Remember we’ve just been assuming a 6% rate of return. Still has a balance of $716,000. Let’s say he dies now, all the money transfers to the next generation. The next generation isn’t savvy, they don’t know that they should stretch those distributions, so they take a lump sum distribution all at once. Bumps them up into the absolute highest income tax bracket. 39.6% of Joe’s money goes away in terms of taxes the day that he dies.

Erik: Hang on. You said 39%?

Jason: 39.6%

Erik: That’s today’s …

Jason: Today’s current income tax rate, that’s right.

Erik: It’s probably going to go up. The next generation could see very little of that $700,000.

Jason: That’s right.

Erik: Solution time. Come on.

Jason: The point of the exercise is is there a better way? Is there a better way for Joe and Carol to help reduce their income tax liability? If we just pretend that tax rates aren’t going to go up at all what if we could help Joe and Carol significantly reduce the taxable distributions on that account, do it over a shorter period of time? What a lot of people don’t realize, a lot of people think that there’s still limitations on who can use the Roth IRA. The reality is in 2010 everyone became eligible for conversions.

 Now, today, right now if for Joe and Carol they have $500,000 in this IRA. One of the things we could look at is strategically, over a number of years, starting to roll money out of the traditional IRA and into the Roth IRA.

Erik: Why is it important to do it over time?

Jason: Two things I want to say there. Number one, a Roth IRA is tax-free money, Erik. As soon as you get the money out of the IRA and into the Roth IRA it’s now tax free. It’s tax free for the rest of your life, and it’s tax free for the next generation, and you no longer have to take required minimum distributions out of it during your lifetime. You’re no longer forced to take money out of your account when you turn 70 and a half. Those are some big benefits.

 What we find, it really depends on people’s tax situation. You have to have an adviser that’s willing to look at the tax code, their tax return, and make some assumptions. What we don’t usually want to do is bump somebody into the highest income tax bracket, convert all of the money in one year, and then they’re paying a ton of money in taxes. What we find usually makes sense is if we can convert the IRA, the 401k, the 403b over a number of years into a Roth IRA usually no more than five years on a conversion strategy. We can not bump them up into too high of a marginal income tax bracket. Most of our listeners know that the marginal income tax rates are progressive. The more money you earn the higher your tax rate on those higher dollar amounts.

 The idea is if you’re in a 15% tax bracket now maybe you’d be comfortable moving on up into a 20%, have more like an effective tax rate of 20% on some of that money. You probably wouldn’t be real happy about 39% income tax on that money.

Erik: There’s a very intelligent way. It’s not just simply saying I’m going to roll it over into a Roth. There’s a strategy that makes a lot more sense.

Jason: How you do it, yeah it’s like anything. You have to understand what the purpose of the money is, make some projections. The other thing I would say too is that when you’re talking about taxes, that’s a fluid marketplace. We could see the government come in and change the tax rules. We make projections, we make assumptions, we do planning based on today’s tax environment, and then the federal government comes along and says sorry, we’re going to change the rules on you. I guess you’re back in planning mode.

 In Joe and Carol’s situation what we were able to do is show them strategically, over a number of years, how we were able to reduce their taxable distributions from their retirement account by almost a million dollars. We’ll just call it a million dollars to keep the math easy. Assuming Joe and Carol are in a 25% tax bracket, Erik what’s 25% of a million dollars?

Erik: That’s a quarter of a million dollars.

Jason: $250,000. They had, before we talked to them, they had a CPA, they had a financial adviser. Nobody was talking to them about the future tax implications of these retirement accounts. That’s assuming tax rates stay the same, and they stay in that 25% tax bracket. If our assumptions are right and the taxes are going to have to go up because of our spending problem in our country, and because of entitlements, things like medicare and social security. Some people say those aren’t entitlements because you’ve paid for them, you’ve paid into them. The reality is if we don’t have the money to make good on the promise it’s got to come from somewhere. Either we’re going to cut benefits or we’re going to raise taxes. That’s the only thing that can happen.

Erik: Yeah.

Jason: If we can reduce taxable distributions by a million dollars, save you potentially $250,000 in taxes you didn’t even realize you were going to pay. The question we always ask when we’re doing our events is can you think of anything you would rather do with $250,000 than give the money to Uncle Sam?

Erik: I can’t.

Jason: No?

Erik: I can think of probably two, three things right off the top of my head. Make little paper airplanes.

Jason: You know, there are big hearted people out there that want to pay more money in taxes. I think that’s wonderful. I found there’s actually, on treasurydirect.gov there’s a place where you can make a gift to the national debt.

Erik: Do they send you chocolates?

Jason: They probably don’t even send you a thank you card for that. I don’t know.

Erik: Man.

Jason: Rather than requesting that everybody’s tax rates go up, if you’re just one of those big hearted people that want to do good in the world, just make an extra payment. Go and make a gift to the national debt every year and help us get this thing under control.

Erik: Okay. Maybe a million dollars a day. We did the calculations, a million dollars a day would pay off a trillion dollars in about 2700 years.

Jason: Yeah, isn’t that disturbing? Without any interest accumulating on it.

Erik: That’s depressing.

Jason: That is. That’s shocking, really.

Erik: Even so I love this country. I really do.

Jason: It’s the greatest country in the world, no doubt about it. Only because we’ve been responsible in the past. If we choose to be irresponsible and spend more than we have coming in, and make promises we can’t fulfill, you won’t stay at the top forever if you don’t have good leadership that’s willing to take the bull by the horns and say we’ve got a problem, it needs to be addressed, it needs to be fixed.

 Fortunately we’ve got the next elections coming up here. If people are disassitsfied with the fact that we’ve doubled our national debt in the last 7 years, or they’re dissatisfied with the fact that we’re still spending half a trillion, $500 billion more, than we need leadership that’s going to do something about that. The solution, if you’re in credit card debt you don’t go get more credit cards to pay off your credit cards. That’s crazy, that’s insanity. As much as I don’t want to be a political talk show we put a lot of stewardship responsibility in the hands of our elected officials. If they can’t be responsible with our money, Erik, and our kids’ future. This really gets me cranked up. It really makes me angry. It’s our kids that are going to have less opportunity and a harder life in America because of the choices we’re making right now, today. I don’t think that’s right.

Erik: I think this is where we start praying. I think this is where Christians can say we have a debt.

Jason: Paul said it, Jesus said it.

Erik: You’ve got to be praying.

Jason: Yeah, that’s a good place to go I guess.

Erik: Let’s not start off with rage and anger. I don’t think that really helps. Man, you’re right. We’ve got to do something responsible here. It would make a refreshing change.

Jason: Refreshing change. Unfortunately you know what that means, somebody’s not going to be happy. If you are the guy that comes in and says the party’s over that’s not going to be a very popular political statement.

Erik: No.

Jason: Oh well. I wanted to touch on social security taxation. I know we’re running out of time on the program here. Just to remind our listeners social security’s tax-efficient income. If we can show people how to make more social security income and have less taxes as a result of structuring your retirement portfolio the best way, that’s a really good thing to do.

 Folks, Jason Parker. We are out of time. I’ve got Erik Ramsey in the studio. This is episode 042. We’ve been talking about tax planning. I’d love to hear your comments. Visit the website, Sound Retirement Radio, and let us know what you think. Until next week.

Erik: See yeah.


Announcer: Information and opinions expressed here are believed to be accurate and complete, for general information only and should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program.

 Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance-related discussions are subject to the claims-paying ability of the company. Investing involves risk.

 Jason Parker is the president of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington.
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