Episode 143
ROTH Conversions, 401k Strategies, and Income Tax Planning
This episode of the Ditch the Suits podcast gives practical financial insights that can significantly impact your money management strategies.
Steve Campbell and Travis Maus emphasize the importance of completing a personal tax assessment, which acts as a mock tax return to identify potential opportunities and gaps in your financial planning.
They also discuss the critical need to revisit your 401(k) contribution strategy, highlighting the risks of overfunding and underfunding these accounts.
The conversation touches on the benefits of Roth conversions, particularly for those who may find themselves in higher tax brackets in the future.
Additionally, the hosts explore the evolving benefits of 529 savings accounts, stressing how they can be utilized for a broader range of educational expenses beyond just college tuition.
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About Your Co-Hosts:
Travis Maus has been in financial services for over fifteen years. He is a Senior Wealth Manager and Chief Executive Officer at S.E.E.D. Planning Group. Travis also hosts the Unleashing Leadership Podcast, where he dissects some of his favorite books on leadership and how you can apply it to your business or life.
Steve Campbell has over a decade of industry experience and is the Chief Brand Officer at S.E.E.D. Planning Group. Steve also hosts the One Big Thing Podcast, an interview-style show meant to inspire and encourage 30 and 40-year-olds going through difficult seasons of navigating marriage, raising kids, and growing personally.
Transcript
Welcome to Ditch the Suits podcast where we share insights nobody in the financial services industry wants you to know about.
Steve Campbell:We're here to help you get the most from your money in life.
Steve Campbell:So buckle up and welcome to Ditch the Suits.
Steve Campbell:Welcome to Ditch the Suits podcast.
Steve Campbell:Steve Campbell here with Travis Moss.
Steve Campbell:For those that are new to Ditch the Suits, welcome.
Steve Campbell:This is gonna be a great episode for you.
Steve Campbell:For those that don't know, I serve as the chief brand officer at Seed Planning Group.
Steve Campbell:Travis, the other guy on the screen, if you're watching on YouTube, he serves as our chief executive officer.
Steve Campbell:Seed is a fee only financial planning firm and we have a fiduciary obligation to put our clients best interest first.
Steve Campbell:So Ditch the Suits is a little bit of a flex.
Steve Campbell:It's our opportunity to share all the things that we've been learning over the years.
Steve Campbell:Working with clients, helping people get the most of their money in life.
Steve Campbell:And so we want to share our insights that can really empower you.
Steve Campbell:Super fun series episode number two, practical insights.
Steve Campbell:Travis, tee us up with kind of what this episode is going to be about today.
Travis Moss:You just made me think of something that there's book smarts and then there's street smarts.
Travis Moss:And street smarts is normally what people are actually doing and how people actually get through things.
Travis Moss:And then there's book smarts where there's people trolling the Internet and stuff, telling you the way you're supposed to do it, but yet they themselves probably aren't even doing it that way or they're not finding much success.
Travis Moss:So we're talking about street smarts here.
Travis Moss:So we started with book smarts, I think, and then learned through trial and fire, you know, how these things actually work and how to help people stay motivated and make these changes and stuff that we talk about and we started talking about this entire series was about, you know, you wake up and it's the end of the year and, you know, it's like, oh my gosh, look at all this stuff I forgot to do and look at all the stuff I have to do next year.
Travis Moss:You get overwhelmed or you get stressed out or it's like, you know, you're just stuck.
Travis Moss:Where do I even start?
Travis Moss:I'm a failure.
Travis Moss:Look, I can't believe I'm so behind, you know, or whatever.
Travis Moss:Just forget it and give up because obviously I can't do it.
Travis Moss:So we want to help people keep moving that ball forward.
Travis Moss:We've talked about that.
Travis Moss:I see one of the things we talk about all the time, you don't have to be perfect, you just have to move the ball forward.
Travis Moss:You make little incremental changes.
Travis Moss:If you could take one thing from today, if you take one thing from our last episode, those.
Travis Moss:You compound them, they start to make huge differences.
Travis Moss:That's, that's how people really get ahead.
Travis Moss:It's consistency over and over and over again.
Travis Moss:You know, finding one little thing that you can implement.
Travis Moss:And so we did, we, we, we talked about.
Travis Moss:We got 11 takeaways.
Travis Moss:Yep.
Travis Moss:In our last episode, we covered three takeaways over, you know, about how to get kind of rolling forward, things that you can be doing best practices.
Travis Moss:I think we've got four today, so we're going to do the middle four and then we wrap it up in the next episode with the final four.
Travis Moss:But today we're going to cover the importance of completing personal tax assessments.
Travis Moss:So you're going to be like, well, what the heck's a personal tax assessment?
Travis Moss:We're going to talk about it.
Travis Moss:We're going to talk about revisiting your 401 contribution strategy.
Travis Moss:Are you under or overfunding your 401?
Travis Moss:Can you believe it?
Travis Moss:That you can act.
Travis Moss:Steve, do you believe that you can actually overfund your 401?
Steve Campbell:It's crazy.
Travis Moss:I'm going to share with you how that happens and when it happens and what you should do about it.
Travis Moss:So if you're getting.
Travis Moss:That's for those people that are like, where we see that most common as like, you're, you're.
Travis Moss:Get either.
Travis Moss:Either you've.
Travis Moss:You've got major inheritances come in.
Travis Moss:You've got a significant financial event because you own a business.
Travis Moss:Yep.
Travis Moss:Or you were a high earner and you're getting into your 50s and you've been maxing out that 401k plan, that's where the chances of you potentially overfunding come into play.
Travis Moss:And we have to look at what you're doing there.
Travis Moss:We've got Roth conversions.
Travis Moss:And then because that's everybody's favorite this time of year, especially with potential changes in tax law coming up.
Travis Moss:And then we had our precursor last time where we talked a little bit about it, but we're going to talk a little bit more about funding 529 accounts.
Travis Moss:Yeah.
Steve Campbell:And just kind of a word of caution.
Steve Campbell:Right.
Steve Campbell:We're getting into the holiday season.
Steve Campbell:It's getting darker out a little bit earlier.
Steve Campbell:It's really easy to fall into a lull this time of year where you kind of coast through Thanksgiving into the holidays.
Steve Campbell:If we're going to give you 11 practical insights.
Steve Campbell:We'd love for you to apply all 11 if they work, but just don't fall asleep towards the end of the year.
Steve Campbell:We know that maybe there's been a lot on your plate and it's easy just to kind of get through.
Steve Campbell:But if you feel like you're a little bit behind, use this time if you're in the car, if you're into traveling to implement these ideas.
Steve Campbell:But also, hey, we didn't talk about this, partner, but I'm going to say it anyway.
Steve Campbell: As we close out to the end of: Steve Campbell:If there are topics that are of interest to you, please get in touch with Travis and I.
Steve Campbell:You can leave a comment below in this video on NQR Media, which is our YouTube ch, or reach out to us through ditchthesuits.com we love hearing from you guys and we want to give you insights that can help you, but this episode is all about practical insights.
Steve Campbell:So why don't you talk to us then about completing a personal tax assessment?
Steve Campbell:What in the world does that mean and why is it important?
Steve Campbell:Let's take a quick break to hear from our sponsor.
Steve Campbell:This episode is brought to you by Not Quite Right Media.
Steve Campbell:If you love podcasts and enjoy hearing from creators that aren't afraid to tell you what you need to hear, then check out NQR Media.
Steve Campbell:Their podcasts unapologetically broadcast genuine truth to whoever wants to listen, and their shows cross a wide spectrum of topics, from leadership development to personal improvement, as well as getting the most from your money in life.
Steve Campbell:Who doesn't love that?
Steve Campbell:So start following their shows today at ww nqr media.com that's nqr media.com.
Travis Moss:This is the time of year where this is very, very important.
Travis Moss:And it also piggybacks on what you were just saying.
Travis Moss:You know, don't, don't take, you know, don't just coast through the end of the year.
Travis Moss:This is the reason why you hire financial professionals, right?
Travis Moss:And, and a real professional planner, somebody who really does this and takes this serious.
Travis Moss:Not somebody who's always on vacation when you call or takes the month of December off with you, but somebody.
Travis Moss:This is their passion.
Travis Moss:This is what they do.
Travis Moss:And they get into like all aspects of this, right?
Travis Moss:Not somebody who's just trying to what product do you need to sell and I'll call you when you need, there's new life insurance or something like that, but somebody who really focuses on trying to get the most out of your money and life for you.
Travis Moss:And a personal tax assessment is, it's kind of like a mock tax return.
Travis Moss:So this type of year, October, November, extremely busy for us.
Travis Moss:This is, this is probably for our financial planners, this is not probably.
Travis Moss:This is definitely more busy than tax time during the course of the year because we're, we're looking at everything that's happened during the course of the year and, and what we thought was going to happen and what actually happened.
Travis Moss:We're adding up all the different things that have happened for a client tax wise this year and we basically start to make a mock tax return and we say okay, this is where we see things going.
Travis Moss:We also have the forward looking projections.
Travis Moss:So we, we kind of, we have an idea where they're going.
Travis Moss:So maybe they're in a low tax situation now.
Travis Moss:We know going to a high tax situation, let's say in six years or maybe they're in a low tax situation now.
Travis Moss:But we know RMDs kick in next year or maybe they're in a high tax situation but they're going to be dropping.
Travis Moss:So we have an idea of where they're going and how this year is turning out.
Travis Moss:But then we look for the gaps, we look for the issue like the opportunities.
Travis Moss:So I think, I think one of our tools that we use, they've called it the opportunity tracker.
Travis Moss:But basically it's.
Travis Moss:Did you know that you could take this much money out without triggering a step up in irmaa, which is your Medicare taxes, without triggering a threshold there and having to pay more Medicare premiums and you could still be under certain tax bracket type of thing or we have room to take capital gains and pay $0 in taxes or things like that.
Travis Moss:Like there's a lot of those types of things that once you go past December 31st, you can't do them anymore.
Travis Moss:And from a planning perspective, the reason why October, November are so busy, most financial planning for or most not financial planning, but investment firms, in order to process all the year end stuff, you got to get it in that first week of January or first week of December.
Travis Moss:Yeah, they'll tell you we can't guarantee processing.
Travis Moss:So if you're trying to process something that makes a profound difference tax wise, you've got to get that in on time to let the firms actually process.
Travis Moss:You got to realize everybody else is trying to do it type of thing, right.
Travis Moss:You're trying to get in all these year end things, gifts, that kind of stuff and you got to get the submissions and you can't wait to the week before Christmas and try to get it in there and work around the holidays and hope it gets processed.
Travis Moss:It's a coin flip whether or not it's going to happen.
Travis Moss:So you do a personal assessment, which is basically you're doing the mock tax return, you're looking at the projections and then you're looking for these opportunities and you're saying, ah, opportunity.
Travis Moss:We can sell a bunch of stock and up a capital gains opportunity.
Travis Moss:We could do some Roth conversions and still only pay, you know, 24% taxes and not increase your Medicare premiums or something like that.
Travis Moss:You don't want to give up these opportunities.
Travis Moss:You can always go back and amend your tax return, but you can't go back and take money out of an account or transfer money from one account to another or sell stocks once the year is over, it's too late.
Travis Moss:It's already gone.
Travis Moss:So how do you get it?
Travis Moss:Well, nine and a half out of 10 financial professionals that you sit with are going to say, I don't do taxes.
Travis Moss:We don't give tax advice.
Travis Moss:In fact, they're going to put it on just about everything.
Travis Moss:They tell you, I don't do taxes.
Travis Moss:So find yourself somebody who understands taxes.
Travis Moss:Yeah, and this is the hard part.
Travis Moss:This is why it's work.
Travis Moss:You can get half ass, right?
Travis Moss:You can go out and you can, you can hire somebody.
Travis Moss:You want to do work on your house.
Travis Moss:You have a beautiful house, you want to do work on your house, you hire somebody.
Travis Moss:You don't check the references.
Travis Moss:They say that, they say what they're supposed to say, they show up and they wreck your house.
Travis Moss:You know, hey, you got what you paid for, or you spend a lot of time, you interview a bunch of people, you check references and you figure out, okay, these guys really understand not only general contracting, but they understand.
Travis Moss:They've got an electrician that works with them, they've got a plumber that works with them, they've got a roofer that works with them.
Travis Moss:So they have specialty people who come in and work in things that, you know, need a specialty person to work on and you get a much better, you know, end result.
Steve Campbell:Yep.
Travis Moss:So you, you might actually have to go out there and shop.
Travis Moss:And it's not a cpa.
Travis Moss:That's the problem.
Travis Moss:The cpa, when you go to your cpa, your tax person, normally they're just responding to what's in the tax return and how to make the most benefit.
Travis Moss:This year there are some that are really good at tax planning.
Travis Moss:But I'm going to tell you they're going to be really expensive because they're few and far between and they're going to work with normally much more complicated clients, like people with lots of business entities and stuff like that.
Travis Moss:Then you have financial planners.
Travis Moss:And like I said, most financial planners, like, we don't touch the taxes.
Travis Moss:So you have to find planners out there who say, I understand the taxes and I can, you know, navigate these thresholds for you and help you kind of progress.
Travis Moss:And my insurance covers that type of advice.
Travis Moss:So as much as it's like, hey, go out and get a planner, it's.
Travis Moss:I know that this, this is one of those ones where we're kind of dropping you off halfway to the bus stop.
Travis Moss:Right.
Travis Moss:But it's super important to do tax planning.
Travis Moss:And I really do think, I mean, it takes years of experience to really understand how to do the tax planning.
Travis Moss:You need to find yourself professionals that can do it.
Steve Campbell:Yeah.
Steve Campbell:And a little antidote.
Steve Campbell:You definitely see seasons of life where people, you know, be in the first point of contact.
Steve Campbell:It's funny with all the call ins from listeners that ditch the suits or wherever that call in and want help from seed, I try to tell them this time of year, like, hey, we're booking out almost into the new year.
Steve Campbell:And they're like, why do I have to wait so long?
Steve Campbell:And it's because I try to explain our planners are right in the thick of helping with tax planning.
Steve Campbell:And they're like, what are they doing?
Steve Campbell:And you start to explain, we're looking at Roth conversions and capital gains and like, wait, you, you look at all of that.
Steve Campbell:So it, it's, it's pretty illuminating as to how many people have actually never really gone through financial complaining.
Steve Campbell:Married with, you know, tax planning.
Steve Campbell:Through this time of year and June through August, everyone's on vacation, so it's not top of mind.
Steve Campbell:You get into the fall and everyone's like, shoot, we got to do something.
Steve Campbell:Start preparing maybe in the springtime.
Steve Campbell:So that if you are working with somebody like Travis described, there should be a lot of proactivity happening right now with your money to take advantage of any year end changes.
Travis Moss:And kind of where, you know you're in trouble, you might be on the right track.
Travis Moss:Because a planner says, hey, you should do a Roth conversion.
Travis Moss:And when you say, you know, how much should I do?
Travis Moss:If they say, you know, what do you think?
Travis Moss:About 50 or 100,000.
Travis Moss:Right.
Travis Moss:It's not a round number.
Travis Moss:It is a, I looked at your taxes and we've got room.
Travis Moss:You know, you're at 71,000 and we can go to 90,000.
Travis Moss:We have room for $19,000 worth of Roth conversion.
Travis Moss:It's not like, what, what check do you feel like writing this year?
Travis Moss:It's what would benefit me the most.
Travis Moss:Should I go?
Travis Moss:Should I do $300,000?
Travis Moss:And how does that benefit me long term?
Travis Moss:How does that affect my future?
Travis Moss:RMDs, those types of things.
Travis Moss:When we first started doing tax planning, we were aware, okay, somebody should do a Roth conversion.
Travis Moss:But the initial version of that was, how much do you want to do this year?
Travis Moss:Here's the tax bill.
Travis Moss:And that's turned into, this is really how much you ought to do given your situation.
Travis Moss:And this is the long term impact of that.
Steve Campbell:Yeah, I think you referred to it earlier as half ass.
Steve Campbell:And I don't want to say it again or we'll have to mark this episode explicit, but that's the difference.
Steve Campbell:Don't want to have a lazy planner who's not quite taking the whole picture into mind.
Steve Campbell:So you've talked about doing a personal tax assessment.
Steve Campbell:Maybe sometimes that's shocking for a listener to go, I didn't know that was a thing.
Steve Campbell:One of the other things is another practical standpoint.
Steve Campbell:If I'm keeping track, this would be.
Steve Campbell:Number 5 out of 11 is talking about revisiting your 401k strategy.
Steve Campbell:So you kind of talked about overfunding, Underfunding.
Steve Campbell:People like Travis.
Steve Campbell:I don't know.
Steve Campbell:I got a 401k.
Steve Campbell:What do you mean?
Steve Campbell:What.
Steve Campbell:What do we want to look at when we're revisiting our 401k?
Travis Moss:Well, first of all, I'd like to invite you to Unleashing Leadership, now that you are dropping swear words in public, because that's a safe place where all of our guests are allowed to swear.
Travis Moss:But second of all, on a serious note, we're going to turn.
Travis Moss:Wait, hold on a little bit here.
Steve Campbell:You got to tell people what Unleashing Leadership is, folks.
Steve Campbell:You got to tell them.
Steve Campbell:Travis Moss also hosts another podcast where he and Dave Nurchi, who is the chief operating up at seed.
Travis Moss:We're wrong.
Travis Moss:We tell you like it is.
Steve Campbell:They take business books and they break them down.
Steve Campbell:So if you're somebody in business or in leadership, check out Unleashing Leadership.
Steve Campbell:But you can't tell somebody to go somewhere and then not tell them that.
Steve Campbell:It's just a safe pace.
Travis Moss:I was trying to be mysterious.
Steve Campbell:Yeah, it's a really good show.
Travis Moss:Go check it out.
Steve Campbell:But continue as you.
Travis Moss:Well, thank you, Steve.
Travis Moss:That was a good shout out there.
Travis Moss:We know now we don't have to do as many ads in this episode.
Travis Moss:So anyhow.
Travis Moss:Okay, so we're gonna, we're gonna turn back the clock a lot.
Travis Moss:We.
Travis Moss:Years ago, we did a.
Travis Moss:An episode on tax bombs, and we were talking about charitable gifting.
Travis Moss:Really, I think is what we were getting at.
Travis Moss:But, yep, if you are overfunding your 401k, what could happen is you could create a tax bomb.
Travis Moss:So there's two types of bombs here.
Travis Moss:There's a tax bomb and a poverty bomb.
Travis Moss:We're going to start with tax bomb.
Travis Moss:The tax bomb is this idea that great, you're getting tax deductions, you're max funding that retirement account, you're writing off, you're getting all these deductions.
Travis Moss:It's wonderful.
Travis Moss:You're saving ten grand a year in income taxes.
Travis Moss:Good for you.
Travis Moss:But when you retire, you get all these stock options, all this other money you don't need, your retirement accounts, that thing is going to sit there and bake.
Travis Moss:And then when you get to RMD age or a little bit later, you're going to start taking money out of that.
Travis Moss:The problem is, is the amount of money that's going to come out of that plan for some people is actually going to increase their tax situation.
Travis Moss:It's going to take them to a higher tax bracket.
Travis Moss:And even there may not even be enough Roth conversions that can be done given kind of their tax projections to change that fact.
Travis Moss:So the tax bomb is this fact that I got these great tax deductions today, which made me feel good today, but they cost me more in the future.
Travis Moss:And how that works, let's say that I'm in the 24% bracket today, so I'm saving 24% for putting my money away.
Travis Moss:Then when I retire and I eventually take my money out, I'm in the 32% bracket or something like that.
Travis Moss:What did I do there?
Travis Moss:I trapped money into an account that only creates more taxes.
Travis Moss:And all those taxes are going to come out at a higher rate.
Travis Moss:And if I don't get them out of there, my kids are going to have to take them out.
Travis Moss:In 10 years, they're going to pay an even higher tax rate.
Travis Moss:They're going to get up to that 37 or 39.6 or whatever the rate's going to be in the future.
Travis Moss:Right.
Travis Moss:Much, much higher tax rate.
Travis Moss:So I don't want to create a tax bomb.
Travis Moss:And this is where we were saying you really do need to look ahead.
Travis Moss:And parents, you need to talk to your Kids.
Travis Moss:If you're going to leave your kids $1 million in IRAs, they need to know that because they probably should be contributing to a Roth 401K.
Steve Campbell:Yeah.
Travis Moss:Not the traditional kind.
Travis Moss:Or if you get a business and you're going to sell your business and chances are you're going to make millions of dollars in that and have lots and lots of tax bills for a long time, you know, because of the structure of the deal or something like that, you may not want to be doing a 401k, because that might trap that money in there, force you to defer it as long as possible.
Travis Moss:But then, so think about it like this.
Travis Moss:If I take out, you know, 5, 6% of my million dollars every year, it's not going to grow as fast.
Travis Moss:And if I don't take out anything and I let it grow for an extra 20 years, it's going to grow to a much, much bigger number.
Travis Moss:And then when I start taking money out, it's a much larger amount of money, more in the higher tax brackets.
Travis Moss:So what you want to be thinking about is, and this is where planning comes in, you want to be doing these projections, where am I going to be likely in the future?
Travis Moss:And yes, we don't know exactly what the rates are going to be or what the tax brackets are going to be because it changes.
Travis Moss:Congress can change it.
Travis Moss:But we know the ranges, we know the general idea.
Travis Moss:I can tell you, look, you make 200,000 a year now you're going to make 450 when you're 78, whether you want to or not, because your projected R.
Travis Moss:And, and you might say, I can't imagine that idea.
Travis Moss:I'll never see that much money.
Travis Moss:Well, if you've been saving and you just got to your first million and it took you 20 years to get there, what do they say the first million is the hardest?
Travis Moss:It probably will take you eight years to get to 2 million.
Travis Moss:Right.
Travis Moss:You'll be shocked.
Travis Moss:You'll say, I never thought I could be a multimillionaire.
Travis Moss:But you will be, you know, or you have an opportunity to be, depending on how you set things up.
Travis Moss:So we want to be very careful about paying attention to where we're going, not just to where we are, because, and this is one of the challenges we go in, like I said earlier, to just a CPA to do this.
Travis Moss:CPA is going to say, save the tax dollars.
Travis Moss:They're not looking 30 years down the road and saying, geez, if you max this thing out and then you don't take Any money out and then let's say 75, you got to start taking it out.
Travis Moss:You're going to get absolutely annihilated.
Travis Moss:They're just going, yeah, man, look, if you put that in there, we'll save you $10,000.
Travis Moss:We're really good at what we do.
Travis Moss:Typical financial planner, I'll say that too.
Travis Moss:That's not technically tax advice saying, yeah, put more money in your retirement account.
Travis Moss:You'll save money out of that savings by life insurance.
Travis Moss:It's like, not really, you know that anytime you get a tax, you kick a tax bill down the road.
Travis Moss:That tax bill is alive and well and will try to find a place to pop its head back out.
Travis Moss:But that also gets you to, you know, you're funding an account and maybe, maybe you're underfunding it, right?
Travis Moss:This is the poverty bomb.
Travis Moss:So you're rolling along and you're putting, you know, your 6% in to get your match and everything like that.
Travis Moss:And maybe you got your money, maybe you don't like the stock market because you don't like the risk.
Travis Moss:So you got it in the stable value or the money market and you just roll along your accumulation money.
Travis Moss:You got 3, $400,000 and your paychecks, you know, you make 120 grand a year.
Travis Moss:Okay, so, and when you, if you were to look into crystal ball, based on what you're doing, you might have about $800,000 when you retire again.
Travis Moss:I'm just making stuff up right now.
Travis Moss:Well, 800,000 is going to produce about 40 grand in income, not the 120 that you're making.
Travis Moss:And yes, you don't have payroll taxes and stuff like that.
Travis Moss:But it's not close.
Travis Moss:It's not even close.
Travis Moss:Yeah, you need to know.
Travis Moss:So then you say, well, okay, I'm going to increase how much I put in there.
Travis Moss:I'm going to put more money in the Roth.
Travis Moss:You're going to be dropping tax brackets.
Travis Moss:Your income is going down in retirement.
Travis Moss:You're going the other way.
Travis Moss:So you don't need the tax deduction, the tax free money in the future.
Travis Moss:You need a tax deduction now so you can put more away.
Travis Moss:So at the worst case, maybe you'll be status quo, maybe your tax situation will stay the same.
Travis Moss:But if you forego so, and think about it, this is how the math works.
Travis Moss:I'm in the 22% bracket right now and when I retire, I'm going to be in the 12% bracket.
Travis Moss:You don't need a, you don't need that Tax deduction, because you could be.
Travis Moss:So you're going to get a 22% deduction when you would have only been paying 12% anyway.
Travis Moss:So it's.
Travis Moss:We just want to be smart about how we're doing this and we want to avoid creating these situations where we go completely broke in retirement or, you know, we create these enormous tax bills and a lot of times we do it on accident because we don't know.
Travis Moss:We see people come in and they've accumulated lots and lots of money and it's all in 401 accounts and it's all traditional.
Travis Moss:And it's like we can't get at the money without creating enormous tax problems.
Travis Moss:And the thing with retirement accounts, you can't borrow against them.
Travis Moss:Yes, you could do a 401k loan, but I mean, you can't pledge your assets.
Travis Moss:So you can't go, you know, like with an after tax account, if you had a million dollars, you can go and you can get a loan against it.
Travis Moss:You can't do that with a 401k account.
Travis Moss:You can't go get a $600,000 loan against it or something if you don't want to trigger a tax bill.
Travis Moss:So you're just much, much more restricted.
Travis Moss:So you do have to.
Travis Moss:Not only that, but consider the Roth.
Travis Moss:I see people who say, well, I put enough in the 401, I'm done saving.
Travis Moss:And they're saving up money in checking and savings or an after tax investment account.
Travis Moss:And most employers allow this now.
Travis Moss:So if your employer doesn't ask them to, but switch from the traditional 401k where you're getting the tax deduction to the Roth 401, you don't get the tax deduction, but it's better than putting money in savings because every single dollar would be tax free and you can max it out like you can the regular 401k.
Travis Moss:So if you could normally put, you know, seven grand in a Roth, you can now max out that plus catch ups.
Travis Moss:I mean, you can do many times that in a 401k plan.
Travis Moss:And it's every dollar is tax free in there.
Travis Moss:So understanding what these options are, I think is really, really important.
Travis Moss:But make sure you pay attention to not just where you are today, but where you're likely to be in the future.
Steve Campbell:Yeah, a Little Financial Literacy 101, right?
Steve Campbell:A Roth is just a tax wrap vehicle to put money in.
Steve Campbell:It is not the investment itself.
Steve Campbell:You actually get to choose the investments in there.
Steve Campbell:So sometimes you say like, oh, I got to get me One of those Roths.
Steve Campbell:Okay, well if that's appropriate for you, should still invest it.
Steve Campbell:But one of the things that you kind of, as I'm listening to you, you just laid out so many planning opportunities where someone should really understand your taxes in your tax bracket.
Steve Campbell:Most people experience isn't they don't even know what.
Steve Campbell:The professional doesn't know it.
Steve Campbell:So how do you identify these things?
Steve Campbell:And as you talked about, how many people are cash poor because most of their money's been in pre tax dollars?
Steve Campbell: u've never experienced it, in: Steve Campbell:Now they only have a 10 year window.
Steve Campbell:So if you've been trying to do the right thing, you've been working as an engineer, the other's a teacher, you have over a million and a half dollars, you feel good, your two or three kids are named as your beneficiaries and you both get hit in a car or get sick or something happens and that money passes on.
Steve Campbell:Your heirs, if it's all pre tax, will only have 10 years to withdraw those down to zero, which could create an enormous tax bomb.
Steve Campbell:And that's what we had talked about a few years ago.
Steve Campbell:If you have young person making $60,000 and they now have to start taking $200,000 worth of RMDs a year, that's going to cripple them.
Steve Campbell:And so again, you're not just going to run out and tell your kids what you have money, but this is, this is a long term conversation and plan about how you want to communicate these things.
Travis Moss:So one of the things that we've done too, because it is hard for families to communicate that without giving too much information out because they don't want to disincentivize the kids.
Travis Moss:So one of the other things that I would encourage is, and this is again a reason why parents, you know, or anybody, there's value to what you know, like look for value, what you're paying.
Travis Moss:For instance, when we work with a family, we have parents and kids, we'll put the kids with different planners.
Travis Moss:So first and foremost, everybody who works with anybody I see is getting the same stuff, right?
Travis Moss:It's, it's, it's, there's planning packages.
Travis Moss:So it's like, it's not like Steve, because you worked with me, you get a certain price and certain types of planning.
Travis Moss:And if you worked with Jess, you get a different price and a different planning and a different portfolio.
Travis Moss:Right.
Travis Moss:It's much more structured than that as far as how we operate, because we operate as a team.
Travis Moss:We're not a bunch of individuals.
Travis Moss:But when you come and work with us and we're working with the family, basically what we're doing is we're getting each of the family members to start to develop the same financial acuity that maybe you have based on where their level is and working with their own financial planner.
Travis Moss:And the reason why we separate them with the financial planner is because the last thing your kid needs is for your financial planner to be lecturing them on what they need to be doing.
Travis Moss:What they really need is that confidant, that person who they can build trust with, who will spend time understanding their situation, but then will communicate with the parents financial planner and say, here's what we're seeing down there.
Travis Moss:Well, here's what we're seeing up here.
Travis Moss:Okay, maybe this is the best way to structure that, or maybe this is the best way to encourage, you know, gifting strategy or something based on what we're seeing are the capabilities of both parties.
Travis Moss:So.
Travis Moss:Which is very, very different than, you go get your guy, I'll go get my guy.
Travis Moss:And nobody's talking to each other, because I've had clients that were really misunderstanding their kid financial situations, and they're thinking that they need to do xyz and the kids like, stop, no, stop.
Travis Moss:Or they're helping the kids, but they're helping them in the wrong way.
Travis Moss:They think that the kids are in a lower tax bracket than they are or something.
Travis Moss:So the way that they're gifting to them, they're causing more taxes.
Travis Moss:And it's like, okay, as much as we can know about the entire family unit, the better your planners are going to be.
Travis Moss:And I do think it is important to separate the relationships and have people that specifically work with each family, you know, and I know it's one family, but each unit within the family, let's say, and then can coordinate for the best interest of the overall family's wealth, you know, the larger group's wealth.
Travis Moss:How do you get the most out of this?
Travis Moss:And that gets us, I think, down to the next couple.
Travis Moss:You want me to just keep going, or did you want to take a.
Steve Campbell:Yeah, I was just going to say, basically what I've been hearing is that there's a balance between not doing too much and not doing too little.
Steve Campbell:But for you finding that happy balance, whether it's taxes or financial planning or coordinating like you, you gotta figure out where that sweet spot is for you and your family and these decisions.
Steve Campbell:And I think this does kind of segue into kind of this conversation around Roth conversions.
Steve Campbell:Big question around financial planning.
Steve Campbell:People want to pick our brain.
Steve Campbell:Hey, should I do a Roth conversion?
Steve Campbell:And I think that's a question.
Steve Campbell:How much?
Steve Campbell:What does it look like?
Steve Campbell:So, so Travis, how do we know?
Steve Campbell:Or when do we make sense of when Roth conversions may be appropriate?
Steve Campbell:Hey guys, Steve Campbell with Digital Suits.
Steve Campbell:Want to take one quick moment to make a big ask.
Steve Campbell:If you haven't already, Travis and I would love for you to subscribe to this podcast, but if you haven't, also, we would love for you to leave a five star rating and review.
Steve Campbell:Your rating and review will let other podcasters know that this show is worth their time.
Steve Campbell:So let's get right back to the episode and thanks for listening to Ditch the Suits podcast.
Travis Moss:Yeah, so your, your Roth conversions make sense when your low tax bracket going to high tax bracket.
Travis Moss:So when we do a projection, we say, look, we're in that 12% bracket right now, but we know we're going to be 24% or above in the future.
Travis Moss:Let's get as much as we possibly can out.
Travis Moss:Like, people love to not pay taxes.
Travis Moss:They love to go to the accountant and have the accountant tell them, oh, you don't owe any taxes this year.
Travis Moss:Your local I move things around.
Travis Moss:You can get some money back.
Travis Moss:That's a horrible thing.
Travis Moss:If you have assets, it's a horrible thing to pay zero taxes.
Travis Moss:Let me put a caveat to that.
Travis Moss:There's different types of real estate investing and other stuff you can do that can eliminate taxes.
Travis Moss:But the typical financial planning client who's got, you know, a million plus in retirement accounts, you want to be really careful about punting on paying income taxes any particular year.
Travis Moss:And the reason being, like I said, if you punt a tax bill, chances are it's going to pop its head up someplace else.
Travis Moss:And when it pops its head up someplace else, if it's not planned for, it can be much more destructive.
Travis Moss:And, and so when we think about Roth, we, we think about, okay, where's this thing going to pop its head up?
Travis Moss:We want to take it out at the most advantageous opportunity.
Travis Moss:So when we look at the Roth and we look at all this money that you're going to pay taxes on in the future, what we're really thinking about is if I let it pop its head up right now and I chopped it off.
Travis Moss:Would that be better than waiting to chop it off in the future?
Travis Moss:And not based on how you feel, Right?
Travis Moss:Because everybody's like, yeah, man, just pay the taxes now.
Travis Moss:Get over it.
Travis Moss:We hate the government taking our money.
Travis Moss:Whatever.
Travis Moss:No, it's what makes the most sense based on how the system actually works.
Travis Moss:And so if I look at it and go, look, we can get this much money out and we can pay this much tax bill, which is less than the future tax bill.
Travis Moss:And because you pay less taxes, look at the projected difference in returns.
Travis Moss:And some people do this wrong.
Travis Moss:They go, wow, look, I put money in a Roth, or I converted money to Roth, and they had the Roth as more aggressive.
Travis Moss:So they were going to make 9% a year in the Roth and only 7% in the IRA.
Travis Moss:Well, no matter what you do, if you show money going from a 7% account to 9% account, it's going to look better.
Travis Moss:Right?
Travis Moss:So you have to equalize these things.
Travis Moss:And you have to.
Travis Moss:There's some nuance to this, but basically you look at it and go, look, I can pay way less taxes now.
Travis Moss:I can invest the difference, but the difference will be making tax money tax free forever.
Steve Campbell:Yeah.
Travis Moss:And that one change could be $80,000.
Travis Moss:It could be a half a million dollars.
Travis Moss:Whatever it is, however big your Roth conversion is, that's what you're looking for.
Travis Moss:And if you don't see that, you know, if you do that, that change and you look forward and you go, oh, wow, actually went backwards.
Travis Moss:Right.
Travis Moss:Then, you know, that tells you, okay, you're in the wrong situation.
Travis Moss:And where you'd be in the wrong situation is you're in a really high tax bracket now because you're really working.
Travis Moss:Or maybe you sold a business, you got a bunch of income, and you're going to be in a much lower tax bracket for, let's say, the next 10 years.
Travis Moss:And then you jump back up when the RMDs kick in and your Social Security is being maxed out.
Travis Moss:We have this, you know, donut hole basically for tax planning, where you can be maxing out these Roth conversions and leveling that tax bill.
Travis Moss:So.
Travis Moss:And you have a unique thing.
Travis Moss: going to sunset at the end of: Travis Moss:So unless they change that this year, next year are your biggest years right now, as far as looking forward to do some of this type of planning.
Steve Campbell:And can we just for a second, for those.
Steve Campbell:Maybe you hear a term, Roth conversion.
Steve Campbell:And you're like, I kind of know what that is.
Steve Campbell:What we're talking about is if you've been saving your money in pre tax 401ks IRAs your entire care career, a Roth conversion is where you're going to purposely take an amount of money out of that traditional side, pay income taxes on it, because you've never paid taxes.
Steve Campbell:And then once after that money has netted the taxes, you're going to put it back into a Roth, so you're converting it completely and then you have the opportunity to reinvest it.
Steve Campbell:So usually this is done in certain chunks per year.
Steve Campbell:And as we've been alluding to, there's some value in tax planning.
Steve Campbell:So if you didn't quite know what a Roth conversion is, I think it's kind of helpful to understand the semantics.
Steve Campbell:And this is where kind of the question that people come in, how do I do it?
Steve Campbell:But maybe there's also some pitfalls that you wanted to talk about with individuals.
Travis Moss:Well, I did because I think sometimes people say, you know, just pay the tax and get it over with.
Travis Moss:But there's situations where you don't necessarily want to go that route.
Travis Moss:Aside from the tax bracket stuff.
Travis Moss:One of, one of them being is if you're going to do QCDs.
Travis Moss:QCDs are qualified charitable distributions.
Travis Moss:When you're over 70 and a half, you're allowed to take money up to 105,000 this year and give it straight to a charity or multiple charities.
Travis Moss:But that goes on top of your standard deduction.
Travis Moss:So you won't pay any income taxes on that.
Travis Moss:You get to take it out of your IRA and it only can be an IRA.
Travis Moss:It can't come out of a 401, so it comes out of an IRA, but you still get your full standard deduction.
Travis Moss:So you get pure deduction on that gift and it doesn't affect anything else.
Travis Moss:In fact, it comes out and it reduces your modified adjusted gross income.
Travis Moss:So it also goes under the threshold otherwise that your Medicare premiums are calculated off of.
Travis Moss:So if you give to charity, if you tithe, if you do those things and you have an IRA and you say, look, I'm going to be gifting for the rest of my life because that's what I do.
Travis Moss:And you convert your entire IRA over to a Roth.
Travis Moss:That's silly.
Travis Moss:Because when you gift that qcd, when you gift money from that Iraq to the charity, you don't pay income taxes on it.
Travis Moss:They don't pay income taxes on it.
Travis Moss:When you give the charity Cash and we've covered this in other episodes.
Travis Moss:It goes through a process to figure out if you even get the tax deduction on it.
Travis Moss:And most people actually don't unless they're giving substantial, substantial amounts.
Travis Moss:So if you want to get those like it's like if you're going to be giving anyway, why prepay the taxes on it if nobody's going to pay the tax on it?
Travis Moss:Leave the tax money making more money and then give that extra tax money over to the charity.
Travis Moss:So probably could do a whole episode just on that.
Travis Moss:But there's a couple of other ones we talked about high to low tax brackets.
Travis Moss:And then if you're going to be in a, in a principal, spend down.
Travis Moss:So in most cases when once, if you've overspent on your accounts or maybe your IR was just smaller and it's, there's just not a lot out there.
Travis Moss:And so you're going to be able to spend that down over five or six years or something like that.
Travis Moss:Most of the time when you're in a principal spend down phase, your tax brackets are coming down and most of the time you don't have enough money to pay extra taxes on it.
Travis Moss:Because the way that you really get the advantage of a Roth conversion is time.
Travis Moss:You get compounding interest year after year after year after year, tax free.
Travis Moss:That's really how you get ahead.
Travis Moss:That's how you make up the tax dollars that you pay early.
Travis Moss:So you need time normally with a Roth conversion and you're not going to get time if you're going to spend your money in the next three years anyway.
Travis Moss:So not in all scenarios because you could have an anomalistic like high income tax year and a spend down situation, you know, type of thing or a very low.
Travis Moss:Yeah.
Travis Moss:So you could, you could have potentially a situation.
Travis Moss:I'm sorry I'm botching this year, but there are situations where I think that you could maybe do a little bit of Roth conversion one year, but it'd be like a one off scenario.
Steve Campbell:Well, and again we come back to the value of planning.
Steve Campbell:A planner should be able to tell you, Travis, how much given the things you're trying to do.
Steve Campbell:So folks, that was number six out of 11 and we got one more in this episode.
Steve Campbell:Number seven.
Steve Campbell:Travis, why you should consider a 529 savings.
Steve Campbell:Savings account.
Travis Moss:We always say the fun ones for last.
Travis Moss:Last time it was fun to 529.
Travis Moss:This time it's you should consider 529.
Travis Moss:Here's what people don't understand about 529s.
Travis Moss:The 529 that used to be is different than the 529 that currently is.
Travis Moss:So when it used.
Travis Moss:When you think of 529 you're like, college, only college only.
Travis Moss:If I didn't go to college, what do I do with this?
Travis Moss:They've changed the rules.
Travis Moss:You can use it for.
Travis Moss:I have somebody who's paid for kids to take take flying lessons.
Travis Moss:I've had somebody pay for kids to.
Travis Moss:One of the kids was having some challenges keeping up in school, so they were able to pay for a really great summer school to get them caught up.
Travis Moss:There's a lot of opportunities with a 529 to use it for things other than college.
Travis Moss:So first and foremost understand how broad it is.
Travis Moss:And there's a lot of websites.
Travis Moss:Any state plan, you can go to that website and see all the different features.
Travis Moss:They love to talk about them and the benefits of them.
Travis Moss:But the other, the reason why you should buy them too is tax free growth.
Travis Moss:You put the money in.
Travis Moss:It basically is like a Roth, except for you do get a type of tax deduction normally for your state.
Travis Moss:But more importantly, aside from.
Travis Moss:Some people are like, how much can I do for the tax deduction?
Travis Moss:Well, we're from New York.
Travis Moss:In New York.
Travis Moss:Yeah, maybe you'll save $600 on your taxes.
Travis Moss:Not a good enough reason to do it.
Travis Moss:The real reason why you do it is because if you put 10 grand in and it turns into 100, it's all tax free as long as it goes to college expenses.
Travis Moss:And you might say, well what if they don't need it for college?
Travis Moss:This is why you need to pay attention to how you open your 529 accounts.
Travis Moss:A lot of times grandparents would be like, I'm going to put in the kid's name or I'm going to put in the grandkids name.
Travis Moss:No, you put it in your name and you put the kids as the beneficiary.
Travis Moss:The grandkids as a beneficiary.
Travis Moss:Right.
Travis Moss:So the reason why you do that is because you could change that beneficiary.
Steve Campbell:Yep.
Travis Moss:Steve, if I make one your kids the owner of a 529, when they come to the age of majority, when they become an adult, it's their account.
Travis Moss:Account I can't change.
Travis Moss:I can't about effectively giving them a gift.
Travis Moss:I can't change it.
Travis Moss:If it's my account and I'm putting your kid as a beneficiary, I can change the beneficiary.
Travis Moss:I want which is important because if one of your kids gets scholarships and doesn't need it, maybe I cut them a check for 10 grand, but then I change the beneficiary on the 529 to one of the other kids.
Travis Moss:So I think 529 wide array of uses.
Travis Moss:You can change the beneficiaries if you set it up right and you get tax free growth.
Steve Campbell:And again, I love this series because again, these are things you can actually go out and control.
Steve Campbell:And even just how you describe the difference of the 529 and the naming of it could be a huge factor over time for people if you can just pay attention to it.
Steve Campbell:So we have gone through seven, but we got 11 total.
Steve Campbell:So we got one more episode in this series.
Steve Campbell:Again, Travis and I love bringing you information that can help you get more from your money in Life, but we'd also love to hear hear from you.
Steve Campbell:So shout a comment below if any of these are resonating with you.
Steve Campbell:Give us a number of which one you're going to be working on.
Steve Campbell:And again, we got four more in our last episode here and we appreciate you being a guest on Ditch the Suits.
