How to Keep More of Your Money: Tax-Smart Retirement Planning

2.21.25: Audio automatically transcribed by Sonix

2.21.25: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Any examples used are for illustrative purposes only, and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment, and is not a solicitation or recommendation of any investment strategy.

Speaker2:
Welcome to Money Matters with Mike, with your host, Mike Zeno. Mike works hard each day to educate Americans like you on how to reach the financial freedom they've worked so hard for. And he can help you too. So now let's start the show. Here's Mike Zeno.

Speaker3:
What's up people? Welcome to the show where we dive into the strategies, insights, and tools you need in order to secure a confident and stress free financial future. I'm Mike Zeno, and my mission is to help you protect your nest egg, outsmart retirement risks, and live the life you've worked so hard to achieve, whether you're nearing retirement or already enjoying it. We're here to guide you every step of the way. And boy do we have a ton of great information. Today we are going to show you how exactly taxes work in retirement, and we'll find out whether you have something ticking inside of your plan. As always, I have the distinct honor and privilege of being joined by the one and only my co-host and producer extraordinaire, Mr. Matt McClure. Matt to you. How are you doing today, buddy?

Speaker1:
I'm doing great, Mike. I'm glad to. I'm glad to be. I know that you recently went. Did you go skiing recently?

Speaker3:
Um, yeah. I mean, the past several weeks have been pretty busy. I went to the Waste Management Open in Phoenix. Uh, a little bit of business on that trip, uh, as well as some pleasure. And then the following week, I went to Vail, uh, actually, Beaver Creek, Colorado, which is a mountain next to Vail. And somewhere in all that traffic, we've had a little bit of that devil's dandruff falling from the sky. Here in Carolina. And it's taken my voice. So today you are going to have the smooth, the velvety R&B voice of Mike Zeno.

Speaker1:
The dulcet tones of one Mike Zeno. Well. Very good. Well, I'm glad that you are. You're here. You're in one piece from all your travels, but it's, uh, you know, we'll we'll help you. Help you get through, uh, voice wise, here on this edition of the show this week. But, hey, yeah, a lot of great stuff to talk about. You know, taxes, not necessarily people's favorite topic to sort of tackle, but it's so important. And the thing is, if you tackle this subject now, then you don't have to worry about it nearly as much during your retirement years. Right?

Speaker3:
That's absolutely true. We talk about proper prior planning, preventing pitifully poor performance. And buddy, let me tell you, if there's one place you want to plan for, it's taxes in retirement.

Speaker1:
Absolutely right. And also want to say at the beginning of the show here. Thank you to each and every one of our listeners joining us here in the Carolinas. Whether you are listening to us on the radio in the Carolinas, or if you're listening to us via the podcast worldwide, yes, we are global here, just wherever you get your podcasts. Subscribe to Money Matters with Mike. We'd love it if you would do that. Leave us a great rating there. Subscribe to the podcast as well. We would love it, love it, love it if you would do that. The YouTube channel is just just brimming with content from the show as well. We got shorts, we got long form videos, we got all the things. Just search for Money Matters with Mike there on YouTube. You can do the same thing on Facebook and interact with Mr. Mike Zeno as well. And don't hesitate to contact him really via any means you can because he just really loves answering your questions. That's that's what you do, Mike. You just want to help folks. And that really is what the show is all about.

Speaker3:
It is absolutely what the show is all about. And whether you have questions, you have comments, you have concerns, or you just want a second set of eyes, I'd love to actually meet with you and discuss how we can help you reach your financial goals, and we can help you with any aspect of retirement planning, whether it's risk management or estate planning, as well as a whole lot more, right? Building sound financial plans is what we do best, and all you have to do is pick up a phone and call (700) 456-0157 three or visit us at the web. Money matters with Mike comm.

Speaker1:
Yeah, it's as easy as that, folks. Once again, the website Money Matters with mike.com and you can find there as well all the past episodes of the show going back here multiple years at this point. Just go to Money Matters with mike.com. All right. So on today's show as as we've been talking about here, we're going to talk a lot about taxes. We'll help you discover how your retirement income is taxed. I mean there are a lot of different ways it could possibly be taxed. So we're going to run down that list and tell you how to build a tax efficient plan for the future. Also going to talk about Social Security and your taxes. How much of your Social Security is actually subject to federal income tax? Well, we'll tell you. And then do you have a retirement tax bomb? That's that ticking thing that Mike was talking about a minute ago here. Is it ticking? Is it waiting to just go off when you get to retirement? Well, your retirement nest egg might not be quite what you think. So we'll give you some strategies to help diffuse that tax bomb before we get to retirement. We'll also talk about a thing called Roth conversions in the show. And so that is jam packed full of great information here for this next half hour. First though, let's get some inspiration for our conversations. And we'll do that with our quote of the week.

Speaker4:
And now for some financial wisdom. It's time for the quote of the week.

Speaker1:
And this week's quote comes from FDR. Yeah, Franklin Delano Roosevelt, former president of the United States. Of course, the only president elected to four terms in office. And he said this taxes, after all, are the dues that we pay for the privileges of membership in an organized society. I think very a very sort of idealistic sort of view of taxes. As long as the money gets spent, you know, where it needs to be spent. I think that's probably a very true thing, Mike.

Speaker3:
And I think you hit the nail on the head there. If it if it gets spent where it needs to be spent. And that may have been true in his day. Um, it's been far from the truth as of the last few presidential terms. But, you know, I want to talk about the different ways that a single dollar in the United States is taxed, and we're talking about as it moves through the economy, how many times it is taxed depending on how it's earned, how it's spent, how it's invested, how it's transferred. There are many, many ways that your dollars are taxed.

Speaker2:
Hungry for something to chew on? Here's some meat on the bone.

Speaker3:
The first way, obviously, is when you earn it. You have this thing called income tax. If you earn a dollar as either wages or salary, it is subject to federal and possibly state and local income taxes. And then there are those extra taxes that come out of and they're called payroll taxes. You'll see things like Social Security and Medicare, which is listed as FICA, um, taxes. They take an additional bite, typically around 7.65% for employees and then 15.3% for the self-employed. So, you know, obviously when you earn it, you're taxed well, then you get taxed when you spend it. Things like sales tax if you spend a dollar on taxable goods or services, you're going to have state as well as local sales taxes that apply to that spent expenditure. Well, then when you own the property that you just bought with money that was taxed, when you bought it, after it had already been taxed when you earned it, guess what? They hit you with property taxes. If you own own a home or any other taxable property, you still owe an annual property tax each and every single year that you own that property. And then let's not forget about excise taxes, because certain purchases, things like gasoline, alcohol, if you're a smoker or cigarettes, those types of things have extra taxes built into their price. Okay. That's just a couple of ways.

Speaker3:
Well then what happens when you invest money? Well, there's this thing called capital gains tax. If you invest that dollar and it appreciates you're going to pay tax a capital gains tax when you sell that asset, and then you can't forget about dividend and interest tax because the money that earns dividends or earns interest. Well guess what folks? Those earnings are then taxed. And then when you die, what happens when that money transfers to somebody else. Well, there's this thing called estate tax and inheritance tax. And if you leave that single dollar to your heirs, it could be subject to estate tax, whether it's federal or state, depending on the size of what you leave them. And then if you give away a large amount of money, it may count against your lifetime exemption and eventually be taxed. Okay. And you have businesses, okay. Businesses pay corporate tax if they earn a dollar, and it may be taxed at the corporate level before being paid out as wages or dividends. So that's before. Right. You ever get it? It's already been taxed. And then the business is then subject to payroll and employment taxes before employees actually receive their net pay. So the bottom line folks is that tax the same dollar okay can be taxed many, many, many times and in many, many, many different ways depending on how it circulates.

Speaker1:
I mean, it's so complicated when you get I mean, this is why, you know, the tax folks make a good bit of money and stay in business, you know, all year round, not just leading up to April 15th every year. Um, the, you know, the tax system can be very, very complicated depending on your particular situation in life. Again, you said, you know, mentioned the differences between how your income is taxed if you are self-employed versus you work for, you know, a company that gives you a W-2 or, you know, if you are a business, how you're taxed on the payroll, and then you're taxed on the purchases and the imports and the exports and all that. Like, it's it's a lot. And so, you know, it really is I think people sort of know in, in sort of the abstract that it's complicated, but actually hearing it all spoken out like that, you're like, oh my gosh. Yeah.

Speaker3:
And what this means is that the government, no matter if it's local, state or federal, is taking a piece of every single dollar that you earn at nearly every single stage in its entire lifestyle and their life cycle, rather. And when it comes to your retirement income, guess what, folks? More bad news. You're that same dollar can be taxed multiple times, depending on where it comes from, how it's used, and the types of retirement accounts involved. And so that's what the meat of this show is going to talk about today.

Speaker1:
Yeah. Absolutely. Right. I mean, we're going to discuss here how your retirement income is taxed. I mean, it doesn't mean that when you retire, you stop paying taxes. I think some some people may have that sort of lofty idea in their brains, but it's only I know. Right? It's it's far from it. Um, your tax situation actually could become more complex as different sources of income are taxed in different ways. And so, as Mike's been saying here, understanding that understanding the tax treatment of each income stream really is crucial for managing your retirement budget and maximizing what you keep. So let's let's break down some of the common sources of retirement income here, Mike, and their tax implications. Let's start off with Social Security benefits.

Speaker3:
Yeah a lot of people depend on Social Security, not my clients. We try to help them not depend on Social Security and just count it as the cherry on top. But depending on your income level, up to 85% of your actual Social Security benefit might be taxable. And if Social Security, God forbid, is your only income, then you may not know any taxes, but any additional earnings, whether they're from pensions, from investments or working part time, that could push you into taxable territory.

Speaker1:
Yeah, absolutely. And we're actually going to go in depth more on exactly how your Social Security benefits are taxed, like those different levels that throw you into taxable territory and then increase it up to that 85% mark that you mentioned. We'll do that in just a little bit. But now let's continue on running down these different types of retirement income and their tax implications with traditional IRAs and 401 KS. And then also, you know, things like like Tsp's, if you're a federal employee as well, that sort of gets the same tax treatment as, as like a 401 K.

Speaker3:
Correct. And unfortunately, the majority of most people's wealth is tied up in traditional IRAs or their workplace. 401 K, 403 B or like you said, TSB for federal. This means that when you go to draw that money out in retirement, folks, guess what? It is taxed as ordinary income. And then because you haven't paid the taxes, even if you don't need the money, let's not forget about that thing called a required minimum distribution that currently start when you turn 73 years of age, meaning you must withdraw and pay taxes on a minimum amount of your savings every single year so that Uncle Sam can collect his tax base. Isn't that nice?

Speaker1:
That's. That's so nice of your uncle. Um. He is, you know, he said, look, I've given you this tax break all these years. You haven't paid the taxes yet. It's been growing. Um, so now, after all these years, at age 73, now it'll go up eventually to 75. He says I want my cut.

Speaker3:
Absolutely. But think about it. They do give you the option to pay the tax on the seed. That's called a Roth. And we'll get into that a little bit later, but what they'd rather you do is go down. And so all that seed take care of that. Throughout the entire working career, keep all the weeds out, irrigate it, fertilize it, and then grow the biggest harvest you can so that when it's retirement time, harvest time, they're now taxing the entire farm, not just the seed. Yeah.

Speaker1:
Absolutely right. And while we're on the subject, hey, let's talk about those those Roth IRA withdrawals, you know, because if you have a Roth account, it's a really good thing in retirement because, you know, I always say the best kind of money in the world is free money. The next best kind of money is tax free money. And that's what we're talking about with Roth.

Speaker3:
Yeah. As long as you have had any type of Roth account, whether it's an IRA or 401 K or TSP, a Roth account for at least five years, and you're over the age of 59.5. Guess what? You can pull that money out tax free. Even the growth, anything that it has gained is never taxable again in its entire lifetime. And as an added benefit, there's no such thing as required minimum distributions because you were smart and you did pay the tax on the seed and not the harvest. And that makes them an excellent tax free income source and a great way to pass assets along to your beneficiaries once you become room temperature. Yeah.

Speaker1:
Absolutely. Right. I mean, that is a great, um, great option there to actually pass along that tax free, uh, inheritance tax free income really to those beneficiaries. And then, you know, we're talking about pensions. Um, you know, we mentioned pensions on the show every now and then, and we talk about them and the fact that, you know, not a lot of people have them anymore, at least not to the degree that they used to, because it used to be the majority. Now it's definitely the minority. A slim minority of workers who have a pension. But how are those taxed?

Speaker3:
Well, pensions are generally taxed as ordinary income, which means you're going to pay the tax that whatever bracket you fall into, except for any portion that was funded with after tax dollars.

Speaker1:
Yeah, absolutely. And then so investment income, you mentioned this kind of briefly earlier, but talk again about how your investment income is taxed.

Speaker3:
Yeah. So you have, you know, things like capital gains and qualified dividends. And those can be taxed at preferential rates. But they're still taxed. While non-qualified dividends or in interest bearing accounts, those are taxed as ordinary income. They don't get any preferential treatment. So if I had to pay a tax, I would much rather pay a capital gains or qualified dividend tax than ordinary income tax. But, you know, again I'd prefer to not pay any tax.

Speaker1:
Yeah, it's exactly that. That's the the whole thing. And of course we'll go into much more on Roths and all of that a little bit later on in the show. And the question though, now, you know, is, are you as a listener to the show, maximizing those tax free income sources that we've been talking about? And, you know, Roths are one of them. Life insurance can be another one as well, Mike. I mean, that's one that people don't often think of. There are ways to turn that into an income stream.

Speaker3:
Yeah. There are. I mean, it's an advanced planning and an advanced type of design. And if you're young enough, meaning that you're in your 20s to late 40s, maybe even early 50s, okay. Um, you can actually get a advanced design life insurance case that will allow you to grow tax free income in retirement and then take that as a loan against your death benefit. So, I mean, if that's something that you're interested in, generally speaking, again, that is for higher net worth people, people that have some extra disposable income. Um, it is an excellent source of generating yet another tax free retirement income bucket.

Speaker1:
Yeah, absolutely. And so, you know, folks, if that interests you, if anything we've been talking about so far like a Roth has is of interest to you. Or, you know, if you want to just find out in general how to minimize your taxes when you get to your retirement years because, as we say, proper prior planning prevents pitifully poor performance. So plan properly and you can do that by getting in touch with Mike Zeno. Give him a call. The number there is (704) 560-1573. 704560 1573. You can also give him a visit at the website. It's Money Matters with mike.com. That's Money Matters with mike.com. And you can just reach out there via the contact page. Schedule a no obligation consultation. That's right. It's free of any cost and it's free of any obligation to continue on if you are not comfortable with it. But that's just what it is. All right. We'll talk more about that later too, and what that whole process is like. But now let's get into more of a deep dive on that Social Security piece that we were talking about earlier. Mike, you know, a lot of retirees may actually be surprised to learn that their Social Security payments are subject to income tax, or at least may be subject to income tax. Right.

Speaker3:
You're absolutely correct, Matt. The IRS uses a formula based on your combined income, which does include half of your Social Security benefits plus all other taxable income in order to determine whether or not you owe taxes. So when we're talking about how much of your Social Security is taxable, if you are a single filer, okay, you're not married, you're a single filer up to 50% or half. Um, if the combined income is between $25,000 a year and $34,000 a year, which means you're basically broke. Okay. Up to 85%, though, is taxed if your income as a single filer exceeds $34,000 a year, which again, is a very, very low threshold. Okay. Married couples get a little bit of a of a break because there's two people. So up to half of your Social Security income is taxed. If the combined income between the spouses is between 32,000 and $44,000, and then if it exceeds $44,000 combined, then up to 85% of the combined Social Security would be taxed. And that's if you're filing jointly. If you decide to file separately, it's almost always subject to taxes on up to 85% of your benefits.

Speaker1:
Yeah. That's right. And those are thresholds that have been in place for quite a few years, you know, but there are some proposals around that would increase them in the future. It's sort of a wait and see mode right now as to what's going to happen, because these days you kind of don't know exactly what's going to happen ever in Washington. But, you know, that proposal could raise the thresholds to $50,000 for single filers, $100,000 for joint filers starting in 2026. But of course, those have not been enacted into law. And we're hoping they do.

Speaker3:
Right? I mean, because, I mean, those are pretty low thresholds, which means that I mean, by raising the threshold, it should give a lot of folks a little bit of a break.

Speaker1:
Yeah, it absolutely should. I mean, those the fact that they, you know, have not been updated in so many years now just really kind of it's about time or it's a, it's a past time for those to be updated and maybe, you know, just throwing this out there that could be on some sort of scale that increases with cost of living or something like that, where, you know, it automatically adjusts so that they don't have to go and pass a bill every time they want to do it. But hey, that's just me throwing it out there.

Speaker3:
And wouldn't that make sense? Right. Because it is. Sounds like common sense to me, but I think the government needs a department of common sense. But, you know, it's one of those things when Social Security was first introduced in 1935, guess what? It was entirely tax free. Okay. And it stayed that way all the way up until 1983, when Congress passed legislation to begin taxing those benefits. And it was supposed to be for higher income retirees just to help sustain the program. But guess what? It's filtered down to everybody now.

Speaker1:
Yeah, it really has, because, you know, incomes and cost of living have gone up, but those thresholds have not really gone up in a in a long, long time. And here's the thing though, if you have if you're surprised by this, if you didn't know any of this that we just talked about, and if you've got questions about Social Security, you're actually likely asking yourself some big questions about it. And you need some, some help, you know, sort of navigating it very likely. So, Mike, just give me a little bit of a peek behind the curtain here. What are some of the most common questions that people will have about their Social Security when they reach out and contact you.

Speaker3:
Yeah. I think the biggest question that I get when we're going over individuals, you know, retirement situations, because they're all different. The biggest single question is, hey, Mike, when should I take my Social Security based on what you see here? And the answer is it's individually dictated, right? Another big one is can I count on Social Security to be there throughout my 30 plus year retirement? Um, and then why would I wait to take Social Security when I can jump on it at 62, especially if we're not thinking it's going to be there in the same format? And then, oh my gosh, if I'm married, what happens to our benefits when one of the spouses passes away? Right. So if you have any of those questions kind of running around your brain and you need concrete answers and tailored solutions, then pick up a phone and give me a call (704) 560-1573 or visit us on the web at. Money matters with mike.com.

Speaker1:
Absolutely. An easy thing to do. Um, a few minutes to go here on the show. Mike, we want to get to this. The retirement tax bomb is something that could be waiting for folks when they get to their retirement years, and it really could be waiting for a lot of folks because as you mentioned earlier, most people have these, like either traditional IRAs or their 401 K or TSP from work, that kind of thing. Um, and that could mean that you've got this big retirement bomb just ticking, waiting to go off.

Speaker3:
Yeah. You got to think about how much tax you're paying into your 401 K, your 403 B, your thrift savings plan. And the answer for most people, unfortunately, is zero. Which means when you go to bring that money into your account as retirement income, every single dollar withdrawn, whether it's from your 401 K or IRA. Right. It's taxed as ordinary income, which could potentially push you into a higher tax bracket. And then that let's not forget required minimum distributions which force you to withdraw money whether or not you need it, which triggers additional taxes. And again, folks, the increased income from this withdrawals may cause more of your Social Security benefits to become taxable.

Speaker1:
Yeah. Absolutely. Right. And that's something that you want to avoid obviously. So let's run through. We've got four strategies here to avoid tax burdens. And I think maybe four plus a little bonus tip here at the at the end. But run us through those four strategies to avoid the tax burdens in retirement.

Speaker3:
Yeah. So the first one would be doing something called a Roth conversion. If you do have a traditional 401 K or a traditional IRA or any other type of traditional workplace, uh, you know, account. You can convert some of those savings into a Roth account, which will help you secure tax free income for the future, as well as estate planning benefits for your loved ones. And the way that takes place is you would just, you know, convert the amount left that you know, in your income tax bracket that wouldn't push you into a higher tax bracket. That way you're paying the tax at the rate that you're paying tax on the rest of your income. So that's number one.

Speaker1:
Yeah. And then number two is something called qcds. Those are qualified charitable distributions.

Speaker3:
Yeah I mean just allows you to donate directly from an IRA to a charity to reduce your overall taxable income.

Speaker1:
Yeah. And then tax efficient withdrawal sequencing is number three. Our number three tip here.

Speaker3:
So systematically withdrawing from different accounts in order to minimize taxable income come each and every single year. Just. And it might make sense for you and your individual situation.

Speaker1:
Right. And that's what it all depends on is your individual situation. And number four, Laddering Roth conversions. We talked about Roth. What does laddering them mean?

Speaker3:
So instead of doing a full conversion at one time, spreading out conversions over multiple years, going into retirement can help you avoid those tax or unexpected spikes in your taxes. Right?

Speaker1:
And then, of course, our little bonus strategy here to avoid tax burdens, Mike, that sort of establishing a Roth account in the first place. So then you don't have to do a conversion.

Speaker3:
If you have a Roth account to begin with. Guess what? That avoids everything we've just talked about, because you got to have a tax free bucket to pull from in retirement, folks. It just makes sense.

Speaker1:
And you can go to Money Matters with mike.com to get the ball started rolling. All right Mike well that's going to do it for this edition of the show. It has really flown by. But I appreciate you, of course, and all of the wisdom that you bring to the table each and every week, and we'll do it again next time.

Speaker3:
Matt, thank you for everything you bring to the table. But most of all, thank you to each and every single one of our listeners. Without you folks, we don't have a show. I sincerely hope you picked something up from today's show, and if you did, feel free to share it. If you're on listening to the podcast or on YouTube, share that across your social media. Help us get the word about taxes and retirement out to as many people as we possibly can. Whatever you're doing this weekend, I hope you enjoy it to its fullest extent and as always, make it a great day.

Speaker2:
Thanks for listening to Money Matters with Mike. You deserve to work with a licensed financial and insurance professional who can offer strategies for protecting and growing your hard earned money. To schedule your free, no obligation consultation, visit Money Matters with mike.com or pick up the phone and call 704 560 1573. That's 704 5601573. Not affiliated with the United States government. Mike Zeno does not offer tax, legal or investment advice. Consult with your tax advisor or attorney regarding specific situations. Opinions expressed are subject to change without notice. These opinions are not intended as investment advice, nor do they predict future performance of any product. All information provided is believed to be from reliable sources. However, we make no representation or warranty as to the accuracy of any statement. This information is intended to be educational in nature and does not provide a guarantee or a specific result. All copyrights and trademarks are the property of their respective owners. Amara Life assumes no responsibility or liability for the content of this message. The information contained herein is provided on an as is basis with no guarantees of completeness, accuracy, usefulness, timeliness, or the results obtained from the use of this information.

Speaker1:
Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.

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