Announcer:
It is time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly.
Registered representative, securities offered through Cambridge Investment Research, Inc., a broker-dealer member of FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus, brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink, Andy Ferguson with NelsonCorp Tax Solutions joining me today. It is the third Wednesday of September. It is flying by.
Andy Fergurson:
Third Wednesday of September already. That’s bananas.
Nate Kreinbrink:
And it’s going to be 90s.
Andy Fergurson:
It’s going to be in the 90s. Awesome. Feels like fall.
Nate Kreinbrink:
It feels like fall. We are starting to see some leaves and things dry out a little bit. I don’t think any rain, maybe weekend, but it is definitely moving along. Football games this weekend we’re rather warm. I think we’re going to have that again this week.
Andy Fergurson:
It’s definitely fall. I took my daughter out to college. Football games are in full swing. Soon we’ll be able to wear sweatshirts to those football games-
Nate Kreinbrink:
Yes.
Andy Fergurson:
… and not tank tops. But for right now, we’ll enjoy the last of the sunshine and the warm weather, and then it kind of gets into the perfect time of year. That cold, or not cold, but crisp, crisp weather I like is, that’s my favorite.
Nate Kreinbrink:
Well, and I think too, it’s that time of the year, you’re starting to see homecomings in the local schools getting close, whether it’s this coming week or in the weeks ahead. So, again, I think you want it to feel a little cooler for those games. I think it’s just…
Andy Fergurson:
Yeah. Yeah, it’s better when it’s cooler.
Nate Kreinbrink:
Leaves falling.
Andy Fergurson:
Yeah, it’s the best time of year. You can leave the windows open at night. You don’t have to run the air conditioner. That’s the best.
Nate Kreinbrink:
It is. We’re too picky though.
Andy Fergurson:
We’re spoiled.
Nate Kreinbrink:
So, with Andy being here, third week, we are going to talk taxes. And again, we were kind of going over what we were going to do and he rattled off a list of 73 different topics he wanted to talk about. So, we’re going to try to hit a few of the top ones here. And when we talked taxes and we talk planning, and we talked kind of of that planning rather than preparation. But I think another part of that is kind of understanding your tax return.
Andy Fergurson:
Sure.
Nate Kreinbrink:
The basics. And just having an idea of what tax you are paying, and is there a better tax to maybe pay?
Andy Fergurson:
Yeah.
Nate Kreinbrink:
And when that comes into play, I think we look at ordinary income versus long-term capital gains. And there’s some planning and some strategies-
Andy Fergurson:
Strategies.
Nate Kreinbrink:
… that you want to look at to maybe make it in your benefit.
Andy Fergurson:
Yeah, strategy is a huge part of tax planning from my perspective. A lot of people don’t understand, really, how taxes work. I mean, they understand maybe a very basic view of, tax is a necessary evil. But different sources of income are taxed differently, and some income is taxed more favorably than others, and that’s where we talk about the difference between ordinary income and income from long-term gains. So, ordinary income is going to be regular, ordinary income. It’s your income from wages, it’s the income that you get from a pension, it’s the income that you get from interest that comes in the bank. All of those are taxed as ordinary income. That means that they fall into the standard ordinary income tax brackets, the 10, 12, 22, 24, 32 percent brackets.
But other types of income are not treated as ordinary income. An example of that is long-term capital gains. Long-term dividends or qualified dividends are treated as long-term capital gains. And so, the difference is that the long-term capital gains bracket is more favorable. So, the long-term capital gains bracket starts with, the first bracket is 0%, the next bracket is 15%, and then the top bracket there is 20%. So, what that means is, the same amount of income that’s classified as ordinary income versus long-term capital gains may be taxed significantly different, especially if we’re talking about 12% ordinary income and 0% capital gains.
Nate Kreinbrink:
Which would you prefer?
Andy Fergurson:
Zero’s pretty hard to beat. I mean, we talk about that all the time. Getting your money back at 0% is pretty good.
Nate Kreinbrink:
Pretty good.
Andy Fergurson:
You’re hard-pressed to beat that one. So, understanding that, if you are investing your money, investing your money into a CD or a money market account that returns interest, that interest is coming back to you as ordinary income, maybe taxed at 12 to 22%. Whereas, if you took that same money and put it into an investment that returned capital gains, long-term capital gains, those long-term capital gains would come to you at 0 or 15%. Well, that’s significant. 15% to 22% is a significant change. 12% to 0% is even better.
So, it just depends on where you are in the brackets and knowing that that income has a different impact. We help a lot of people convert that ordinary income that comes from interest to long-term capital gain income just because it’s a significant tax advantage. And understanding that that even exists changes things. Because now, if you’re looking at a CD that has a return rate of, say, 5% versus an investment account that maybe has a return rate at 4%, they’re actually pretty equal if you consider that that 5% return is going to have more tax on it than the 4% return from an investment account.
So, there’s just some things to consider there as you’re looking at strategy and how you want to control your incomes, and control what happens to you on your tax return.
Nate Kreinbrink:
Right, and I think you hit it on the head and just the understanding and knowing that there are options out there, that we don’t have to be locked into a certain tax, that there’s things that we can do to benefit our situation, strategies to kind of utilize that. When we talk understanding too, one of the common, I think, misconceptions that we hear from the people that we sit down with or we work with or that come in is, again, the 401(k) max contribution versus the 401(k) matching contribution.
Andy Fergurson:
Yeah.
Nate Kreinbrink:
And I think where they look at it is, they think that if the company matches 6%, that’s the max that they can put in, where that’s just the most that they will get matched from their company. But they can put up to the individual max on a given year.
Andy Fergurson:
Absolutely. I have people all the time tell me that they’re putting in the max contribution at work, and I’m looking at their W-2, and this year in 2024, the maximum contribution for somebody over 50 is $31,500. Well, I’m looking at their W-2 and it says they’re putting in $6,000 and they’re telling me that that’s the max. And what that means is they’re maxing out their employer contribution, which really is the minimum that you should be putting into your 401(k). That is maxing out the free money that your employer is putting towards your retirement.
And so, really, you should never put less than what your employer’s going to match into your 401(k). But once you’ve hit the maximum match, you should consider, now, do we put more money in and try to get to that maximum contribution? Because if you can get to the maximum contribution and stay there for a couple of years of your earning career, what ends up happening is first, we’re going to reduce our taxable income by putting money into a traditional 401(k). If you’re younger and you’re putting it into a Roth 401(k), that’s good as well. But we’re also going to get that bigger number.
So, say six or $7,000 versus $31,000, we’re going to get that growth that comes with that bigger contribution over a longer period of time. And so, definitely something to consider to make sure that you understand what your limitations are. If you’re under 50, you got to come back off that $31,000, but I think it’s still 16 or $17,000. I don’t remember what the number is. So, you can still make a pretty significant contribution above the employer match. And that’s just something to make sure you know the difference between the match versus the max.
Nate Kreinbrink:
Right. And I think you mentioned too, understanding the differences between, again, a traditional 401(k) contribution and a Roth 401(k) contribution, and there’s benefits again now versus later, which are we trying to give up? But again, having that mix. And again, coordinating that with your accountant, with your advisor is important because, again, we’ve talked in the weeks prior as far as strategies, putting it in, converting it on the outside or however we want to do it, saving that state tax. But again, continuously just putting it into the pre-tax, the traditional 401(k), we may want to look at Roth’s. Again, if you make over the limit to contribute to a Roth on the outside of your 401(k), it’s a great way to get tax-free money. But then, again, looking at the differences and how that’s going to benefit you.
Andy Fergurson:
Yeah, I always want people to consider when they’re choosing between Roth and traditional, now that most companies offer both options, what tax rate are you going to pay, right? So, if you are putting money into a traditional account, effectively you’re saving your federal and state tax rate on the money that you’re putting in. You’re saving that right now, but you’re going to pay that federal rate later. And so, if you’re saving the federal rate and you’re in the 12 or 10% bracket, that’s not really overly wise because you’re going to pay, even if you get out of that 401(k) at 12 or 15%, you’re still going to be paying on the growth that comes during that time.
And so, for me, usually younger people, I’m encouraging them to go into the Roth unless they’re in the top tax bracket. And the top tax bracket, sometimes it’s better to save the money now because you’ll get it out a little bit cheaper, more than likely in retirement. So, just some things to consider and understand how that exactly works for you and what your tax rate is going to be on that money that you’re saving. But that’s what strategy is, right? I mean, it’s looking at what your options are and then picking the option that you think is going to be most favorable for you right now and in the long run.
So, it’s important to consider those options. And sometimes, we can’t see everything. You need a professional to help you understand what the difference is between now versus later. If you’re 60 years old, now and retirement are not that far apart. If you’re 25 years old, it’s significant, right? And so, what happens when you’re in the middle there? Well, you might need somebody run the numbers for you.
Nate Kreinbrink:
All great stuff. We didn’t quite get through all 73 bullet points today.
Andy Fergurson:
We got two.
Nate Kreinbrink:
We got two, but you’re going to add five by next week. But I did want to mention real quick that every Friday, NelsonCorp Wealth Management and NelsonCorp Tax Solutions are wearing jeans for charity. Money raised in the month of September will be donated to the food pantry at the information referral and assistance. As always, Andy, appreciate you joining me today. Andy Ferguson, Nate Kreinbrink, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly.
Registered representative, securities offered through Cambridge Investment Research, Inc., a broker-dealer member of FINRA SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.NelsonCorp.com.