Announcer:
It’s 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 representatives, securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member 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. James joined to me this morning. Like we were talking, hard to believe we are nearing the middle of December already. Although you look at the temperatures, I think where they have for the highest today and even tomorrow, fifties, but then I think back to normal.
James Nelson:
Yeah, we’ll take it, right? No snow on the ground, almost halfway through the month here before long. We’ll take it. In some ways it feels like it’s been a really long year with everything going on, but again, it’s kind of hard to believe that Christmas is right around the corner here.
Nate Kreinbrink:
Right you see in the papers and news and in everything. I mean, obviously high school basketball is in full swing, and I know there’s been plenty of games that we’ve been traveling to in December where weather has definitely played a factor as far as either getting there or when you’re there, you walk out and the ground’s covered with that fun white stuff that we get this time of year, but luckily, knock on wood, we’ve been fortunate to kind of escape a lot of that so far.
James Nelson:
Well, and that’s a good thing because I think that they’re going to have a hard enough time getting the season in with COVID and having to miss some games here and there because teams or teammates have had it. Those cancellations are going to be hard enough to make up. Let’s hope it stays this way and they can get through the season.
Nate Kreinbrink:
I think everybody can be in an agreement, we get a little snow for Christmas and then we can have a pretty mild winter with everything. It’s so long.
James Nelson:
No kidding.
Nate Kreinbrink:
As we enter the end of the year, obviously there’s a lot of different topics that we could address. And James and I were talking yesterday late afternoon when we were talking about the show, and the topic of Roth conversions continued to come up and it has been a prevalent point of a lot of meetings that him and I have been in with clients and potential clients over the last week, two weeks or so, more so doing what the end of the year and what can we look at doing.
Nate Kreinbrink:
We’ve talked a little bit Roth conversions on previous shows and the basic concept, but wanted to dive a little bit deeper into that and why at the end of the year, there’s such an important factor of the planning portion of what we look at and how they really can improve an individual situation and why the majority of people that have retirement accounts and those tax deferred assets that maybe have a lower income, definitely need to look at it and the benefit that they have on it.
Nate Kreinbrink:
For those who aren’t aware, we’re talking about Roth conversions. So what we’re doing here is we’re taking assets that are in those tax deferred accounts. So your traditional IRAs, your traditional 401ks, most commonly what people have when they enter retirement, they’ve put money into a 401k. Their company has matched or put money into a retirement account for them. They’re in that tax deferred world where they got that deduction up front, it grows tax deferred, but that money on the back end, whenever you take it out is going to be treated as taxable income from you in whatever year that you take that out.
Nate Kreinbrink:
And a lot of times, people, they’re so excited and they’ve done a great job as far as putting money away, but they don’t necessarily understand the consequences of on that backside, they’ve kicked that tax can down the road for so many years by getting that annual deduction, by putting money into it. But again, that impact that it’s going to have, not only on your income, but possibly your Medicare, having social security tax, when you add that income to your social security, to your pensions, if you have one, and then you add that RMD at age 72, on top of it, it usually has a not a very positive effect on people’s outcomes.
James Nelson:
Yeah. The other reason to potentially consider it is an individual’s outlook on tax rates, right? I mean, we’re probably at or close to historical low tax rates at this point in time with the expectation, at least from our end, that rates are probably going to go up at some point. Yeah, you pile all this stuff together. They all of a sudden become a lot more attractive.
James Nelson:
Now, it’s sometimes difficult to get people to consider this because they’re prepaying taxes a little bit. You have to pay taxes today on a conversion that you don’t necessarily have to take out, but at some point you are going to have to pay taxes. And that’s what we try to get through to people and try to explain is, is at some point this money is going to be taxed. And if we can pay at a lower tax rate, the lower taxed environment that we’re in probably right now versus waiting until rates potentially go up and we’ve got more in those retirement accounts, doesn’t make sense to prepay some things right now. And a lot of times it does.
James Nelson:
You could also make the argument that if somebody retired and they’re not drawing social security right away, and maybe just have pension, income or they’re living off maybe money that they saved in a checking account or savings account for a short period of time, you could make a strong argument that their taxable income is going to be very low and getting money out in that scenario could pay next to nothing in tax. That could be very attractive too, if an individual or a couple are not drawing social security, at least both of them are not drawing social security and they’re not taking huge withdrawals out of those retirement plans already to live off of those conversions can make a lot of sense. And again, we find that people are paying at a lower rate than they may think.
Nate Kreinbrink:
Right. And I think it just goes back to making sure all of those moving parts are moving forward together and making sure that the decision when you take social security, and all of that going into it, has a plan with it. And we always said, when you retire, and when you take social security, need to be two separate decisions, and these Roth conversions play a big part on answering both of those questions.
Nate Kreinbrink:
And as James said, I mean, an individual retires, their income obviously drops because they don’t have that earned income, maybe a pension starts, but by delaying that social security possibly a couple of years, it allows us a few years of leeway to be able to get those assets out of those tax deferred accounts in an environment when they have less income. So basically they are choosing what they are paying on taxes rather than being forced to pay an unknown amount in taxes later on down the road.
Nate Kreinbrink:
And I think when you can start seeing the power of that, and knowing that, I’m controlling my situation here. And it’s also giving you options for later on down the road, as far as where to take any additional income from. If you have all your assets in that tax defer world in a traditional IRA, you need additional money for a new car or vacation, put a roof on the house, whatever the case it may be, you know whatever you’re taking out is going to be taxable to you. So if you need 10 grand, you need to take more than 10 grand out to, as far as to settle up the taxes in order to pay that.
Nate Kreinbrink:
So if you have a bucket of money in the Roth world where, hey, we can look at your tax rate and maybe keep you under a certain tax bracket, if we can look at where you’re falling into the Medicare tiers, and if we don’t need to take it all out of the IRA, if we need to maybe take some out of the Roth later on down the road to keep us in a certain tax bracket, that’s only going to help your situation.
Nate Kreinbrink:
And this is the planning, as you alluded to James, the current tax environment that we’re in, as part of the current tax code as it stands right now, those rates are scheduled to go up at the end of 2025. So we know that there’s probably going to at least be a 3% tax increase on those tax brackets, just at the transition from December 31st of 2025 to January one of 2026. And obviously there’s things that could change in between then, but as it stands right now, that’s what we’re looking at.
Nate Kreinbrink:
So again, the 3% tax savings now is a 3% that’s more in your pocket versus paying to the IRS. And I haven’t met anybody that doesn’t agree with that, that they sign me up for that. And that’s where the planning comes into play as far as like you said, we are willingly paying taxes today. Maybe we don’t have to, but in the long run it’s saving us on that total tax bill, as far as what we have to pay.
James Nelson:
Yeah. The other thing that we haven’t touched on, and some people fall under the fortunate situation where they’re not going to need all of their retirement money to live off of. It used to be age 70 and a half where you had to start taking that set dollar amount out of those retirement plans. Well, now it’s been bumped to age 72, but regardless of when that comes out, there’s a lot of people that may not need all of that, or they don’t want to take that money out, they want to leave it invested.
James Nelson:
The benefit of converting some of that money is the Roth IRAs do not play by those same rules. You’re not forced to take any money out of those accounts. So moving some of that money from the taxable world into the tax-free world, especially if you don’t see yourself needing that, that required minimum distribution, or you want to defer that as long as possible, or minimize that number as much as possible, doing some Roth conversions can make a lot of sense for those people that aren’t going to spend all those retirement dollars.
Nate Kreinbrink:
Right. And I think it’s just a coordination that we talked about. We’ve had Andy Ferguson with NelsonCorp tax solutions on a number of times. And again, working with the tax professional. And him and I have done a lot of meetings over the last two weeks, as far as just sitting down with clients, putting their numbers into the tax system and saying, okay, I’m currently in the 12% bracket, how much more room do I have in the 12% bracket to fill this thing up?
Nate Kreinbrink:
Let’s take advantage of that whole tax bracket at that lower rate, and let’s convert that dollar amount. And let’s just start chipping away at this thing and doing this thing systematically. Let’s not lead any money on the table in these lower tax bracket years while we have them. And that coordination is something that if you’re not doing it, you really need to, because you’re leaving money, I would assume probably on the table, as far as what you could be keeping in your pocket versus what you’ll be paying in taxes later on down the road.
James Nelson:
Yeah. Absolutely. Coordinating the tax side of thing with the financial professionals is absolutely key and that’s what we really attempt to do in the office. And you can see how it can create a much better outcome for clients.
Nate Kreinbrink:
So again, you have questions on those Roth conversions, how it applies to you. If it’s available to you, give us a call. We’d be happy to sit down, no obligations, just to kind of take a look at things and see where things may fall. But did want to mention real quick before we do run out of time, that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of December will be donated to the ShareOur Sandwiches program, which is sponsored by the Sisters of St. Francis. James, as always appreciate you joining me this morning.
James Nelson:
Absolutely.
Nate Kreinbrink:
Again, Nate and James with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks again 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 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 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.