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 representative securities offered through Cambridge Investment Research Incorporated. A broker-dealer, member of FINRA, SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, 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. This is Nate Kreinbrink bringing you today’s show. Hard to believe we are into November, first show of November here this week. Normally the first show on first week of Wednesday is live due to some scheduling. David was on, I think two weeks ago there, bringing you the 30-minute live session. But again, hard to believe we are into officially November, and I guess you can say fall is here. We’ve had many more leaves falling, kind of pleasant temperatures this week, but you look ahead to Sunday into Monday, looks like we got another hard freeze coming. So, again, I think temperatures are definitely falling, clocks were pushed back over this past weekend, so into that time period, getting darker a little bit earlier there in the evening. So, we are in that time period, hopefully everybody had a safe and happy Halloween, hard to believe that we are onto the next month.
Thanksgiving will be here before we know it, the winter sports season, I guess you could say is in full swing. If you watch TV, basketball is definitely taking over the airways with their seasons getting underway. Middle school seasons for girls I think on this side of the river are already underway, high school seasons will get started here coming up. Wrestling seasons will be here again before we know it. So, again, we are transitioning, and as we get closer to the end of the year, I know there’s a lot of stuff that we usually talk about as far as looking at as we get to the end of the year, and I think today we’re just going to hit some of those things and what you should be maybe looking at, if you haven’t already, or maybe bring attention to some things that you may not be aware of.
So, we had Mike VanZuiden on last week, and we talked a little Medicare, obviously with us being in the open enrollment period right now, extends from October 15th to December 7th every year, if you are on a Medicare plan, more specifically a drug plan, you will probably want to take the time to look at your current plan that you are on, and run it with any changes in prescriptions or even just run your same prescriptions you’re on, if there are no changes. Because we’ve seen so far this year that there have been some definite changes in what these drug plans are covering, maybe we’re covering this year, not covering next year, weren’t covering this year, are covering next year… Drugs going from a tier one to a tier two, premiums, maybe you had a no premium plan last year, but this year there is, with a little higher deductible.
So, again, it does nothing, and not out anything as far as to run those scenarios just to see that, giving you that peace of mind that the plan that you do have is still the correct one for you moving forward. And if you are on a drug plan, I would get in the habit of every year during this time period, put it on your calendar and take a look, because again, more and more we’re seeing whether it’s not just the drug plans, but Advantage plans with networks, and what they’re doing, and again, sometimes you get that notice in the mail that your Advantage plan may be dropping. So, you’re going to have to look for something new, as far as to go into effect January 1st. So, again, Medicare open enrollment period, look at your plan, see what you may do. The other part of that with the end of the year, which we’re getting into a little heavy now, is end of the year tax planning.
And when we have either Andy on, talking taxes the third Wednesday, or Mike VanZuiden with our tax department as well, talking taxes, we always talk to big terms, and that’s tax preparation and tax planning. What you do in February, March, April up before the deadline is tax preparation, you’re basically preparing what already happened. So, you’re looking back and just essentially reporting the numbers that you made, what you withheld from the prior year, there’s not a lot you can do once you get to that point in time as far as changing what those outcomes will be. Tax planning is where we’re looking at it year round, but more specifically now as we’re getting closer to the end of the year, this is when we can make the changes so that it does reflect when we do get our taxes done here after the first of the year, the changes that we make now will have that impact on what that bottom line is going to be, and sometimes a little bit of planning now, a little bit of forward-thinking does really change that outcome on that tax return.
And then, obviously, hopefully in your favor, or if it’s not going to be looking so good, maybe we can minimize the liability that you may owe when you file taxes for this year. So, again, as we’re looking at it, it’s important to have a good understanding of what your overall income is, and where that falls on the tax bracket. So, if you think about our taxes, it’s in a progressive tax system, so you have a 10% bracket, you have a 12% bracket, you have a 22% bracket, you have a 24% bracket. And one misconception that people have is that if they go over into that next bracket by a dollar, that everything that they have now is off of that top bracket, and that’s not true.
If you have a little bit of income that spills over into the 22% bracket, whatever that little bit is that spills over into the 22% tax bracket is all that you pay 22% on, anything that falls into 12% bracket, you pay 12% on, 10%, and then as it goes down. So, again, you’re really not penalized a whole lot if you do push up to the top of that bracket that you are currently in, and even if you spill over a little bit, you ensure that you use 100% of those lower tax brackets, and only are on the hook for that and maybe a little higher tax for whatever you go into it. And we look at that a lot of times as far as, again, sometimes paying tax in a year that you may not necessarily have had to have paid tax in, and usually that is through the form of Roth conversions. And that’s taking money from a tax deferred IRA, and willingly putting it on your tax return in the form of taxable income, and then getting it over to a Roth IRA.
Now, when we look at that, sometimes people look and say, well, why would I want to pay tax on that now versus later? And that’s because we want to control our tax, okay? We know what tax brackets are right now, we don’t necessarily know for sure what they’re going to be 10 years, 20 years, and in some cases, 30+ years down the road. So, if I can know what I’m going to put in tax, and understand that this is probably the lowest that this money would ever come out as far as tax rate, then it has a lot of positive backing to maybe do that and fill up your 12% bracket. So, if you’re a married couple and your income is roughly 70,000, you still have a little bit of room in the 12% bracket to move money from a traditional IRA over to a Roth account.
Now, we get it over to a Roth account, and now when we look at it, the tax differences as far as how that money is taxed, or not taxed in the case of a Roth, becomes very powerful, and especially now any gains that you would make on that money over in the Roth going forward, if you’re over 59 and a half will more than likely be tax-free to you. Whereas, if that money still remains in the IRA account, yes, you’re making roughly the same rate of return, but that money that you made on that account is subject to tax whenever you take a distribution from that account. So, you may make a decent percent, but you don’t get to keep it all because you have to pay taxes on that when you take it out.
So, again, when you start breaking it down and looking at some of these, just these additional reasons as to long-term planning with what you’re going to do with your money, that adage that we always come back to is, it’s not what you have, it’s what you keep. And if we can do a little more tax this year to keep more in our pocket for the years going forward, there’s a lot of pros to doing that, and we want to make sure that we are utilizing those lower tax brackets. Now, again, on the flip side of that, there’s always kind of pros and cons to everything. We want to make sure though, if we are looking at doing a Roth conversion, that it’s not raising our income up above a certain threshold that we may not be aware of. I.e. Going into the next bracket for Medicare premiums, for example, is a popular one.
So, anything that we move from that traditional IRA over to the Roth is going to be added to our income. If we have a decent income, two spouses with Social Security, two spouses with pension, maybe we took a little bit out and now we’re going to do a sizable conversion, this may push us up over that Medicare premium. So, again, we want to, before we do anything, we want to make sure that there’s no negative impact down the road that it’s going to push us into. So, that’s the planning that we’re going to do, just because we did it last year isn’t necessarily a telltale sign that we’re 100% going to do it again this year. So, again, when we look at these, it’s a year by year, and more specifically, it’s an individual situation. And we say that all the time, but it cannot be more true when it comes down to this.
Again, with the new tax laws that went into effect July 4th, you may be eligible for a little bit more deduction, which may add it to the amount that we would be able to do if everything stayed closely the same compared to last year. So, again, when we do those sit down meetings, when we do that tax planning, this is the time that you have to do it, because any Roth conversion that you do to show up on that year’s tax return has to be done by December 31st. So, we can’t wait until the tax deadline like you could maybe if you want to make a contribution into an IRA for the prior year. That you have up until the tax deadline, a Roth conversion has to be done by December 31st.
So, if you’re not meeting with your tax preparer or your accountant prior to the end of the year, you may miss out on some of these deadlines to do it, and again, if we can fill up a year and not waste any of those lower tax brackets, that is the time that we want to do it, and we want to take advantage of any of that while we can. So, again, as it comes down to the end of the year, still a lot to go on above and beyond what the markets are doing, but now is the time to sit down, readjust maybe what investments you may have, look at where things are falling, where your actual income, we have a pretty good idea as far as any big distributions that would maybe come out of retirement accounts, any income that you have, you’ve got a pretty good idea as far as what this is going to be going into the end of the year, so we can start dialing in some of those, again, tax planning tactics that we want to look at.
So, any questions on that, give us a call, we’d be happy to sit down and start going through some of those things with you. Did want to mention here real quick before we run out of time, that every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of November will be donated to the Dolly Parton Imaginary Library of Clinton County. Again, this is 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 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 Incorporated. A broker-dealer, member FINRA, SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors Incorporated, 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.