This Is The PERFECT Retirement Plan

An episode of the The Josh Scandlen Podcast podcast, hosted by Josh Scandlen, titled "This Is The PERFECT Retirement Plan" was published on January 30, 2019 and runs 8 minutes.

January 30, 2019 ·8m · The Josh Scandlen Podcast

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Summary

With a Roth you determine when you want to pay the taxes for what you put into the account. This is a benefit of the Roth that way too often gets overlooked.  Remember, anything contributed to a Roth is with after-tax money. If you choose the Roth, you pay tax now. If you choose the Traditional you pay tax later.  It’s up to you when you want to pay the tax. You can also convert all or a portion of your Traditional IRA/401k/403B/TSP to a Roth. A conversion is simply moving money from a tax-deferred account to a Roth.  For instance, if you were to convert $50,000 from your Traditional IRA to a Roth, that $50,000 will be taxable as ordinary income (OI) in the year in which you did it.  There is no escaping that. You will pay tax on that converted amount.  But again, you choose when.  Let’s play out a scenario to see how this may work for you. Sarah and Dan just retired.  As a marketing executive Sarah was making good money, $150,000 a year with a $50,000 annual bonus.  Dan was also making a decent income as a sales consultant, $75,000 a year.  Between them they had $275,000 a year in gross income.  Because their kids were no longer at home and the mortgage was paid off the only deductions they had were deferring as much income as possible to their 401k plans.  Last year they were both able to defer the maximum of $22,000. Those deferrals, plus their two standard deductions, reduced their gross income by $68,000 (see table below). Their taxable income then was $207,000, putting them right in the middle of the 24% bracket.    there is a HUGE difference between deferring income, 401k contributions, and negating taxable income, standard deductions. Deferring income simply means you don’t pay tax on that income now but you will at some point.    Ages 62-70 are the Golden Years of Tax Planning Fast forward a few years and we see that both Sarah and Dan have just retired. Sarah is 62 and Dan 66. They are not taking Social Security yet just living off the savings they were able to squirrel away.  They have no mortgage and they figure they spend about $50,000 a year total, on everything, vacations, bills, helping the kids out occasionally, etc.  Should They Take Social Security Now? They have accumulated $300k in their 401ks and rolled those accounts to IRAs.  They also have $150k in savings accounts.  They wonder if they should start taking Social Security.  NO!  Absolutely not! Given they have no income other than minimal interest they’re making on their bank account they are paying NO TAX. They will continue to pay NO TAX until they reach 70.5 when RMDs kick in. They should take advantage of their $0 tax and start moving money over to a Roth, now!  Any income they receive up to $25,300 is TAX FREE!  ($12,000 is the Standard Deduction in 2018 for Sarah and $13,300 for Dan). When Your Tax Rates are Low, Convert to Roths! Let’s say I am able to convince them to convert $50,000 this year. That $50,000 will be taxable as ordinary income. But with their $25,300 of standard deductions kicking in and the fact they have no other income their taxable income will be all of $24,700.  They’ll pay only $2,583 in taxes this year. $2,583 in tax today is a tiny price to pay for all the benefits of the Roth IRA. Heck, I’d even advocate they convert a full $100,000.  With a $100,000 conversion their total tax will be $8,655. But that $100,000 plus any growth will NEVER SUBJECT TO TAXATION AGAIN!

Episode Description

With a Roth you determine when you want to pay the taxes for what you put into the account. This is a benefit of the Roth that way too often gets overlooked.

Remember, anything contributed to a Roth is with after-tax money. If you choose the Roth, you pay tax now. If you choose the Traditional you pay tax later. It’s up to you when you want to pay the tax.

You can also convert all or a portion of your Traditional IRA/401k/403B/TSP to a Roth. A conversion is simply moving money from a tax-deferred account to a Roth. For instance, if you were to convert $50,000 from your Traditional IRA to a Roth, that $50,000 will be taxable as ordinary income (OI) in the year in which you did it. There is no escaping that. You will pay tax on that converted amount. But again, you choose when.

Let’s play out a scenario to see how this may work for you. Sarah and Dan just retired. As a marketing executive Sarah was making good money, $150,000 a year with a $50,000 annual bonus. Dan was also making a decent income as a sales consultant, $75,000 a year. Between them they had $275,000 a year in gross income.

Because their kids were no longer at home and the mortgage was paid off the only deductions they had were deferring as much income as possible to their 401k plans. Last year they were both able to defer the maximum of $22,000.

Those deferrals, plus their two standard deductions, reduced their gross income by $68,000 (see table below). Their taxable income then was $207,000, putting them right in the middle of the 24% bracket.

there is a HUGE difference between deferring income, 401k contributions, and negating taxable income, standard deductions. Deferring income simply means you don’t pay tax on that income now but you will at some point.

Ages 62-70 are the Golden Years of Tax Planning

Fast forward a few years and we see that both Sarah and Dan have just retired. Sarah is 62 and Dan 66. They are not taking Social Security yet just living off the savings they were able to squirrel away.

They have no mortgage and they figure they spend about $50,000 a year total, on everything, vacations, bills, helping the kids out occasionally, etc.

Should They Take Social Security Now?

They have accumulated $300k in their 401ks and rolled those accounts to IRAs. They also have $150k in savings accounts. They wonder if they should start taking Social Security.

NO! Absolutely not!

Given they have no income other than minimal interest they’re making on their bank account they are paying NO TAX. They will continue to pay NO TAX until they reach 70.5 when RMDs kick in. They should take advantage of their $0 tax and start moving money over to a Roth, now! Any income they receive up to $25,300 is TAX FREE! ($12,000 is the Standard Deduction in 2018 for Sarah and $13,300 for Dan).

When Your Tax Rates are Low, Convert to Roths!

Let’s say I am able to convince them to convert $50,000 this year. That $50,000 will be taxable as ordinary income. But with their $25,300 of standard deductions kicking in and the fact they have no other income their taxable income will be all of $24,700. They’ll pay only $2,583 in taxes this year.

$2,583 in tax today is a tiny price to pay for all the benefits of the Roth IRA. Heck, I’d even advocate they convert a full $100,000. With a $100,000 conversion their total tax will be $8,655. But that $100,000 plus any growth will NEVER SUBJECT TO TAXATION AGAIN!