Can You Overcontribute to a Retirement Account?

Using a tax deferred retirement account can be a great idea, but have you considered taxes when you go to retire? Could your required minimum distributions actually drive you into a higher tax bracket? This is the show you can’t afford to miss.

 

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(00:07) all right gang it is that time of the week it is the favorite Tuesday You’ had all weekend it is time for the true wealth radio show I am your host Dave Littlejohn in studio today with me Matt Dickson and our special guest nobody but us y yep so glad that we’ve got each other so thanks for hanging out mat I’m ready to go yeah we have got an interesting question to post today yeah right and here’s the question Matt mhm at what point have you put too much money into pre-tax or otherwise known as
(00:43) qualified retirement plans I don’t know that there’s a necessary like a actual number that we can slap on there because it can kind of vary right but there surely is a number out there where it’s like maybe you’ve put too much in so I kind of want to unpack that today right I I was waiting for him to say it’s $4 good show let’s that’s a wrap right nope we’re not going to do it we’re going to actually answer the question if you’ve if you’re wondering how could you
(01:12) possibly think that you’ve got too much money in a retirement plan so there’s there’s a funny funny element at play here okay so I mean help our listeners for a second what is the what is the concern that we as advisers have about about really big retirement plans maybe I’ll try and oversimplify it right yes say you’re in a 20% tax bracket today because you’re deferring some of your income into a retirement account all right pretty simple what if you defer enough over a long enough period of time
(01:50) you grow that retirement account substantially and when you go to retire you have to take out so much money that you have jumped into a higher tax bracket so here’s what there’s there’s this critical piece some people do not know and that is that retirement plans particularly these a qualified pre-tax plan like a traditional IRA traditional IAS 401ks 403bs and so forth the IRS will only let you defer money for so long before they start looking for you to pay taxes right right and that age has been changed but it’s now
(02:34) currently 73 73 and then you start to have what’s known as a required minimum distribution right so you have to take some portion of that money out of the retirement account they force you to yeah it’s compulsory in nature and how do they force you to well if you don’t do it they tax you at 50% of what you should have taken out it’s a lot which is so just take the money out it’s yeah and and so that is higher than the highest marginal tax bracket mhm so they’re essentially they’re saying we
(03:04) will make you pay the highest tax we have if you refuse to take money out of your retirement plan right so now you have to think to yourself wait a minute what happens if I make more money in our current tax system well we have what’s known as a progressive tax system which means very simply the more you make the higher your tax rate goes right and it tops out around what 30 37% feral and you know that changes from time to time depending on Administration MH right so depending on the makeup of Congress and the White
(03:40) House that the those tax rules can change and they have certainly have throughout my few decades working around this I guess more than two decades few makes it sound like more than three I haven’t been doing this for 30 years I’m in the year 25 so it’s been a while and I’ve seen a lot of tax changes mhm so here’s the here’s the rub right if you in retirement have a really big retirement plan then you’re going to have a really big required distribution right which will drive your tax bracket
(04:16) higher in because it’s a larger distribution right and here’s another thing to think about you just mentioned it right policies change with different administrations yes what has been a recent change that we’ve seen since Biden took office the secure act right right and that’s a big deal because we’re talking about like these Ira growing to a you know a sizable amount and then you end up in a higher tax bracket but we also got to think about what are the implications to the heirs of those retirement accounts can I just
(04:53) for a sec can I just hit pause on this one yeah because what I’d really like to do for for everybody listening let me let me paint this the the scene for a minute here the IRS has kind of a an interesting approach here they typically do not tax something twice uh there are a few scenarios where that kind of happens in theory because uh for example dividends first a corporation pays a tax and then distributes the dividend which is in taxable again some would argue that’s a double taxation but um I’m I’m
(05:25) talking about for you as an an income earner or if you have a capital gain or something like that the IRS typically views this as we tax the money once okay and and so now if the money gets paid to somebody else they get to pay taxes on it so it’s not like the money’s not taxed over and over again in the system it is but I’m saying if you earn an income you pay taxes at the point that you earn it if you defer the tax then you’re going to pay taxes when the money gets deferred right okay and that’s a
(05:57) funny way of saying when you take it out of that that tax defer ref well if we think about they so I like to think of it this way the IRS kind of gets you on the way in or they gets you on the way out mhm okay and retirement plans are usually a they get you on the way out deal right now the magic of this and we’re not going to talk a ton about this today it will hint about it but would be Roth IRAs because there you pay into a Roth IRA with money that’s already been taxed mhm and this is a unique situation
(06:30) where that account is allowed to grow over time and if it’s qualified and there are just few things and we’re not going to go into great detail here but essentially it’s been longer than 5 years that the Wrath has been open and you’re overage 59 a half then those monies should be qualified meaning they’re going to be able to be removed from the Roth IRA and no taxes going to be owed but wait Dave didn’t you say that they get you on the way in or they get you on the way out well the money that you’ve already been taxed on
(07:01) that makes sense that you wouldn’t have to pay taxes again because they already taxed it what about all the gains mhm right if  you grown that asset a whole lot did you have to pay taxes on the profits no that’s the unique thing about a Roth IRA and what’s another really unique feature and this is why I asked you to hit pause Matt okay heirs do not have to that’s why you wanted me to hit po yes that is a big deal because heirs in basically inherit the same tax status okay and so when it comes to
(07:33) retirement plans a Roth IRA airs inherit tax Roth they they inherit the Roth tax free they still have to take the money out of the Roth and the current rules are within 10 years right but they don’t pay taxes on it well I ran into this issue not with a Roth but with the traditional um I I was talking with someone and they’re like yeah I’ve Got You Know M it was I think over $2 million in an IRA and their children were both really well off making like $200 plus, a year and they’re like so
(08:08) what when I pass and this money goes into a beneficiary Ira for my kids now they’re going to have to take the money out and pay taxes on it but they’re already making 200,000 a year and it started to make them sweat they’re like oh it gets better it’s going to come up in this show even more okay okay but when we talk about taxes and heirs the first point to remember is if you’re going to inherit the same tax issue right then an IRA traditional IRA that you’ve not paid any taxes on you’re you
(08:41) hit age 73 you start having required distributions uh if you die and there’s money in that Ira your heirs like if it goes to your spouse they get it without o owing taxes for receiving it but they’re going to have to make decisions about how old are they and when will their required distribution start mhm if if it’s a non-spouse then a 10year clock starts ticking and they have 10 years to get that money out right think about this for second if you inherit an IRA worth $5 million first of all high five
(09:16) nobody’s going to feel sorry for you for inheriting $5 million okay high five but you have 10 years to take this out if that account didn’t earn a penny more right you just completely uninvested you just just just put it in savings account with zero interest M you’d have to take if you did equal distributions a half a million dollars a year for 10 years to get that money out of the account a half a million dollars added to your earnings is very likely to put you in the highest tax bracket possible which is currently
(09:48) close so 39% but you’ll be well over 30% at at the federal level in the state of Oregon you’ll be tacking on another 9% so imagine 39% Federal and 9% % stayed in Oregon so you’ve got 48% tax right and so and if you’re watching this show by the way and you’re not in Oregon then apply your own state tax circumstance right but that’s a bunch of taxes you did so good you crammed all that money into that IR right and then you’re like all right I’m going to give this big gift and then poof almost half of it’s
(10:21) gone right and so you never thought about it half of it goes to taxes and you well what was the point of that if I was in a 30% tax bracket right and I was deferring and I turned it into a 50% tax bracket in retirement like oh yeah you kind of broke it you did you could have just took the money as income and you would have it would have it literally been cheaper because believe it or not the math works out pretty straightforward it’s you know you save the money on the way in or you save the money on the way out but that’s kind of
(10:49) how the tax brackets work so we got to unpack this a little bit for everybody there are some some financial planning approaches to how to navigate how much should I be saving and and here’s the here’s the good news if you’re like I don’t know anywhere close to that okay then you don’t necessarily have to worry about it now let’s create that problem so we can worry about it okay let’s do that good problems to create too but some of you out there this is a real concern and so and and it may be a
(11:17) concern because you are the person that owns this Ira it may be a concern because you could be inheriting something like this from your folks uh because you know we got a lot of folks that are now in their 80s and 990s and they’ve been deferring taxes for other long time and there’s been a lot of stock market growth over the last few decades so what does this mean well I want to know yeah as do I but first we have to take an obscene profit so we’re going to do that stick around and when we come back we will unpack this a
(11:46) little bit more uh I’m Dave Little John and Matt Dixon and you got true well on news radio 939 FM and 1240 kqen. [Music] so the moral of the story is when we went to figure out how to do this show today this is based on a Dave Ramsey scenario and and u i was sort of jammed up with clients jammed just makes it sound bad but I mean I was I was doing a lot of face to face time with clients so Matt was doing show prep he comes we got to talk about this and it started with
(12:34) Dave Ramsey was struggling with this one because this guy did he had is example 66 years old and he has like $7 million in different tax deferred accounts and the question is what do you do and and it’s said do you just and we’re going to talk about this on the rest of the show do we just like convert everything to Roth pay taxes and be done with it kind of rip the Band-Aid off um do you uh he didn’t really talk about the idea of Staggering conversions and spreading the uh tax pain out a little bit but there
(13:04) there are some decisions around that and then they didn’t talk a whole lot about estate planning other than to say the longer you defer this the more it keeps growing the more the tax obligation grows too so I think what we’re going to try to unpack today in the rest of the show is how do you recognize that this is a potential problem as an investor because I think that’s really the key here is if you’ve got retirement plans me they’re great they exist for for reasons it’s a it’s a good way to save uh but at the
(13:36) same time you reach this threshold of like it may be diminishing marginal return and it’s time to start looking at other areas of the balance sheet that may be more tax advantageous right and we’ll see how far we get on the show right we’re going to have to recap the first part I got a client listening and they want they want a recap a slight recap because this one can be interesting for them yeah yeah we we have a client and we have somebody who also said how much money $42 that’s how much if if you have $42
(14:07) in a retirement to C okay you’re in trouble that’s classic a brief recap to catch everyone up to speed that missed the first part of the show okay you’re in charge no oh come on you’re you’re Mr Speed I’m giving you turn this on and I’ll I’ll enter it right hey gang welcome back to the true wealth radio show I’m your host Dave Little John in studio with be today Matt Dixon Dave catch up the listeners who are just tuning in what are we talking about today you’re and by the way you can get
(14:33) the whole show by going to the podcast it’ll be available tomorrow go to little jfs.com and you can grab that uh be sure to subscribe and then uh at some point we get these up on YouTube as well uh news flash as well we are planning on adding a live stream soon so we’re working through that but that that’ll be fun uh for those of you just joining here’s the key uh the question of the day at what point have you put too much money into retirement plans okay and it’s a it’s a funny thing like wait I
(15:00) can put too much in it’s not that you put too much in the question is like at what point is it diminishing marginal return or at what point is it actually harming your financial picture well at what point does it generate more tax than it saves that’s really a better way to save it that’s a better way to save yeah because if you if you find yourself saying hey I am in a lower tax bracket today but I’m saving myself into a retirement that puts me in a higher tax bracket than today then you’re making it
(15:24) less efficient not more it might be act like actually easier to do than You’ think it might not be as much money as you think either yeah so we did we did do a little bit of Swag math it was swag math um so do we just give them the number and then tell them why or do we tell them what we did tell them start with kind of like how we even got to this point like what brought it up how did we start running the numbers and where did we end up yeah it started with uh we saw a clip from Dave Ramsey we did and so this this guy is calling in and
(15:58) he says Hey I’ve got kind of a weird problem I have all of these retirement plans that are tax deferred and I’ve got over $7 million in retirement plans I’m 66 years old and I see the writing on the wall I’m going to head toward age 73 have required distributions and the required distributions are going to be so large that it’s going to put me in the highest tax bracket and it’s going to sort of blow stuff up yeah and then he’s like what do I do I’ve got some time right and right Dave’s over there
(16:24) like uh maybe not as much time as you actually need to fix this and it was it was kind of fun to watch cuz there’s a little bit of tap dancing did like well here’s some of the math and wor it’s a problem and then it was this heads scratcher um I’ll tell you how we would sort of approach solving the problem and then I’m going to talk a little bit about how you guys can reverse engineer this number so you get a sense of am I on course to run into that problem or not okay okay perfect so you know first
(16:53) thing first is are you going to run into the problem okay well the the number as we we looked at this as like well what’s future tax rate versus present tax rate and we actually looked at the the tax tables and said you know at what point are you jumping up into that higher Echelon in the 30s yeah and so we started with if you’re married right now and you have more than $11,950 in tax year 2024 right of taxable income taxable income and keep in mind that’s adjusted gross income so that’s after other deductions and so
(17:25) forth but if you have that much income then every dollar of o that threshold is going to be taxed federally at 32% mhm okay so if you make more money than that well do some math here uh the the way that the IRS looks at this is they have what they would call their uniform distribution table okay um it’s published it’s a fancy word of saying at what rate are they going to require you to take rmds yeah essentially when you’re 73 what they’re going to tell you to do is hey take the account value at
(17:59) the end of the last tax year and then you’re going to you’re going to divide it by a factor okay and so like the factor at age 73 is presently 26.5 right so that’s so let’s say I have a million dollar divide a million dollar by 26.5 and the number that results is the required amount that you have to pull out of your retirement plan for the year for the year y okay and you can take it out over you know spread it out over a little bit each month you can take it all at once whatever you want but but
(18:28) that’s the money that it’s going to be required to come out mhm okay and then the following year that distribution number isn’t going to be 26.5 it’s going to be slightly smaller yeah it drops but what happens is you’re dividing by a smaller number which means the distribution gets bigger and I think it’s 25.
(18:51) 5 in the next year and and but these are all tables that you can look up and these tables occasionally change right depending on we like we said earlier in the show legislative change yep right so what you can see is every year you’re going to be required to take a larger portion of the account balance out right and for to say say it easy if you have a bunch of money in that retirement account and they keep telling you take more out you could end up in a really really high tax bracket yeah so the Dave Ramsey guy right I mean if we say well hey you have $7 million right
(19:26) and his Factor was about 3% right well that’s $60,000 per million and he has 7 million right so that’s $420,000 distribution right okay remember if you have more than $11,950 and you’re married then you’re in the 32% federal tax bracket and climbing well at that income level and if he had any Social Security or pension income which he did right right then you’re pushed even higher so he’s in somewhere like 37 to 39% tax bracket he maxed it out yes mhm and well or at least close to I mean the number is
(20:06) pretty high you can make up to over $600,000 before you actually hit the the top tax bracket right now which is very high right right uh but but nevertheless he saved his way into a tax conundrum and there wasn’t an easy way to reduce his tax load right because the the taxes are going to be paid okay there there’s kind of two Pathways that you tend to solve this it is either just sort of suck it up and pay when it finally gets here or try to convert some of the traditional IRA money into Roth IRA money right that comes with a whole
(20:47) another host of issues we talked about it on the show before but when you do a conversion remember one of the qualifying features of a Roth IRA is it has to live for 5 years right and a conversion is treated like a standalone Roth MH so even though you may already have another Roth IRA every every time you convert every time you convert that money gets a new 5-year clock separate from your other Roth IRAs if you have them and then you’re paying income on the conversion and that’s correct the T it is a taxable event to convert the
(21:20) benefit may be and and here’s where we differed from Dave Ramsey a little bit he his suggestion was you know just maybe bite the bullet and just pay the taxes all right now one and done and then move forward we think there’s some Actuarial risk right if you’re 66 while you’re likely to live into your 80s if something were to happen immediately after that you would have overpaid on taxes relative to the time span that your heirs would have had so so that was not necessarily a great idea plus you
(21:49) would have the five-year clock uh for everything all at once right so then we started thinking we may be more inclined to spread it out over several years and just try to maintain a lower average tax bracket and get money out of traditional IRAs to lower that required distribution and so this is a process that advisers would we would mostly call it like Roth conversion optimization yeah okay and um it’s not a super sex sexy topic no right it’s like wait you mean to tell me I have to pay taxes to not pay as many taxes the unfortunate
(22:26) part for that guy though was if he had been doing a little bit more planning or getting some help along the way he might have been able to have avoided putting it all in one basket right like he might have been like well I have enough in there at this point let’s just take the income or let’s put the money somewhere else and then he wouldn’t be in the the pickle that he’s in right and so this is something that we do sort of struggle with in The Advisory world that um you don’t know what the future tax rates are
(23:00) going to be right we have to make reasonable assumptions or even assume that they’re not going to change right like it’s it’s actually possible I know this going to sound crazy right it’s possible based on sort of the the political trendings right now Donald Trump gets elected and reinstituted a corporate rate right and so there are possible changes on the horizon there’s always possible changes on the horizon and I don’t know if it’s even or how possible it is but if the secure act did go away and then
(23:33) beneficiaries didn’t have to take that money out in 10 years yeah that would be a significant change too even just extending it to 15 or 20 years would really impact planning it would people cuz my my concern would be that you know if you inherit a big IRA and you only have 10 years to get it out you’re going to be forcing people into higher tax brackets and that’s what’s happening it it does make sense from the IRS perspective perspective right they’re like we’re hungry give us more right
(24:02) it’s just frustrating from a planning perspective because my position is that we already uh pay we well you know I would say I’m thankful we don’t get all the government we pay for but man do we pay a lot for a government yep right I mean there’s just a lot of money that goes into the kitty and um you know I’m not trying to pick on the people that work in government I think we have a lot of people that are genuine like they’re really trying hard hard to make it right um I just think the system is it’s hard
(24:32) to make a really big system not be bureaucratic and bloaty and slow and cost inefficient over time and there’s not really incentives to lean government right there’s no internal incentives for government to prune itself so why would it mhm and that’s kind of tricky right I mean the private sector has lots of incentive you know margins are profit so it it it looks to prune when it can but government doesn’t have to think the same way a lot of the time David let me ask you a question so going back to what
(25:02) we were talking about mhm we kind of started to mention what are some of the other things that this guy could have done in order to have you know if it’s not going to be that Ira where else could he have gone right and so do we want to talk about that at all like what are some of the other options that this guy could have taken advantage of I know I was smiling and laughing uh which you U mostly smiling our listeners don’t get to see that as much know what you’re doing Matt what am I doing David go ahead and just expose
(25:37) it he’s so when we’re prepping for the show I look at him and go you know there’s kind of an exotic way that you can sort of reposition things and you know shift your investment focus elsewhere and sort of change the characteristic of your taxes and it would be way more efficient and he looks at me and goes go on I always want to know that part I think everyone does right like uh okay so I mean you know as well as I I’m not a huge fan of life insurance as a whole right like I term policies sure I get it um those have a
(26:12) time and place for sure but could this guy have used life insurance could he have like gone into real estate I just kind of want to pick your brain on where could he have gone how could he have done it and all right I’ll do this I I’ll let you drive some of this I know you’ve got some ideas and questions that we want for I mean you know Matt’s Matt knows a lot of the stuff just don’t don’t let him fool you he is uh he’s doing this on purpose he’s like no no I just want to interview you and so he’s
(26:45) sort of setting me up and that’s why I’m chuckling about this because I’m like you’re going to do this aren’t you and he’s like oh it’s happen are you turning it back around on me no I’m not going to do that I am going to say I’m I’m looking at the clock why don’t we do this we running long well we’ll grab we’ll grab our next break okay when we come back this for again if if you’re trying to figure out hey if I’m starting to reach the threshold where maybe it’s
(27:09) enough in retirement what else and so we’ll unpack some ideas it’s not advice but some Concepts and it’ll be enough that at least we will stroke the fires of interest for you so stick around we’ll be right back I’m Dave Little John and Matt Dixon got true well on news radio 939 FM 1240 kqen bingo we’ve got a problem we need a solution yes yeah so alcohol is a solution all kinds of drink your tax problems away oh we were talking about different things now uh water’s a solution also so um hydro PL or
(27:46) whatever it’s called yourself so I guess I am I’m I’m I’m making sure that I’m reading the your your cues here you want to talk a little bit about um real estate and then how not and then the life insurance thing has come up somewhere what’s driving the life insurance question was on the list I was like because it has Roth conversions setting up a trust using life insurance I’m like could he have used a whole life policy even though we don’t love Whole Life policies well could he now probably not
(28:32) as easily but could he have that’s what I’m saying in the yeah yeah he could and and I hate even mentioning it because I don’t like Whole Life policies but I’m like if we’re on the topic so we can talk a little bit about some specialty life insurance Concepts and then it’s what’s going to happen is it’s going to be okay so you either have to see us after class yeah right let’s go that rout or you have to find somebody who’s qualified to help you navigate this because we’re going to get it into
(29:02) advanced Market Concepts but honestly life insurance is like the last hope against the IRS mhm life insurance basically gets to walk and talk like retirement plans wouldn’t you rather just take it as income and just put it in a brokerage account it depends on how you take it that’s what oh gosh someone put a filter on me I’m about to get cancelled yeah can’t say that on the radio I mean you can but people will question we get 17 clients tomorrow we like those guys that is I was reading off the teleprompter that’s not what we were
(29:50) thinking do I know exactly um it had a Ron Burgundy moment if you put it on there go read it I will I literally will did Justin ever tell you all the time him and I were doing a radio show and we were at break and he’s like okay I know where this Show’s going there’s one thing we cannot talk about you cannot ask me about this and it was something to do with I don’t even remember I’m like okay I got you we opened the radio show and this was like when I was newer and got nervous or something and I’m like so just and I
(30:30) just blurted it out and he’s like he sits up he’s just kind of mundane he’s like he just wanted to murder me like jump over the computers and just knifes after that segment was over we cut to the break and he’s like how it was the one thing you weren’t supposed to talk about you had one jot all right all welcome back to the true well show um where we’re we’re having fun in studio today I’m Dave Little John with Y okay uh reminder if you’re just joining us today’s topic U
(31:04) is is there such a thing as putting too much money into a retirement plan yes and the our position is that yeah there can be if it it creates tax inefficiency right if you drive yourself into a higher tax bracket in the future than you are now then the retirement pl’s not the right solution yep okay and then you kind of ask me Matt what else might there be yeah and so so you you’ve got a couple set the table for our listeners like what are some ideas that you’ve kind of read about and let’s talk about
(31:36) it well we already talked about the big one right we talked about the Roth conversion okay so just just a reminder to everybody you know Roth IRAs they are you fund them with after tax money and then they grow tax free and once they’re qualified they the distributions are tax-free also tax free to airs so if you have a traditional IRA you can turn it into a Roth Ira through a process known as conversion but you have to pay the taxes when you do it and you have the taxes it becomes income right oh I have $100,000 in a Roth account if I take
(32:10) $100,000 and convert it I have to pay income tax on $100,000 when I convert okay so let’s say I’m in a 30% tax bracket then $70,000 is left in my investment account but it’s no longer a traditional IRA it’s a now a Roth IRA and it will grow tax deferred and once it’s qualified after 5 years and attained age and all that then you can take that money tax free or your heirs get it tax free right so that’s the conversion thing that we keep talking about right okay but what else that’s the question so if we’re talking yeah so
(32:44) if we’re talking about mitigating some inheritance issues the other thing I mean this is simple right but and I know I’ve already mentioned it you could just take the income and put that money into like a brokerage account or a savings account and so invest outside of a retirement exactly because here’s why if you put that money say in a brokerage account and you invest in XYZ stock maybe you hold it for a year or longer what happens when you go to sell it and there’s a gain now we’re being taxed at
(33:19) long-term capital gains which is approximately 10 to 12% depending on depends on your total income level go as high as 20% sure that’s still cheap like if you’re paying 20% it’s because your income tax rate’s like 39 you know mhm so wouldn’t you rather pay that than 30 plus per I would right yeah so it it does change things for airs also yeah because airs receive a step up in basis that’s a big one you want to talk about that yeah it’s just a really fancy way of saying airs receive the thing as if
(33:55) they bought it the day that they inherited it right not for the price that you paid for it when you bought it but the value on the day that they inherited that’s a really big deal and that’s why we start to talk about gifting stuff people always have that question should I gift it now and it’s like well if they never plan to sell the thing that you’re gifting maybe if it’s real estate and it’s a family heirloom of some sort where it’s like this is the family a real life example we have a
(34:23) family farm my brother is like Seventh Generation and so it’s something where it’s and and he wants to raise his family there it’s actually sensible for that farm to be gifted to him now because it’s probably going to stay in the family and his kids are going to take it right so if if that’s the case then there’s no need to wait for parents to die for that to happen they can gift it now and it still you know makes sense because if he’s not going to sell it it doesn’t matter what his cost basis is
(34:57) right right but let’s say that there’s no attachment to a home and it’s just going to go into the you know Community pot and it’s going to get sold someday gifting it but while you’re still alive is gifting the price you bought it for right and if they bought the Family Farm Seven Generations ago for well whatever the case let’s say it was a house in California that was purchased 40 years ago right so it’s like great you know we bought a house for $100,000 and today it’s worth 2 million mhm and okay well
(35:25) that’s $1.9 million of capital gain but if you didn’t gift it when you die The Heirs receive it as if it was fair market value of $2 million right so it’s a big question depending on what is the air actually going to do yeah and incidentally This falls under the category of estate planning if you’ve ever wondered like what what the heck is estate planning it’s the idea of well estate is all the stuff you own and it’s how do I transfer the stuff that I own to the Next Generation when I’m gone and
(35:59) do so in a clear and clean and efficient manner right with minimal cost for transfer and minimal tax impact that’s what estate planning is all about sure and I guess we’re kind of working our way down the totem pole aren’t we so we’ve talked about some different strategies some of the Roth conversion hting at gifting has really very little to do with our original question of no but we did talk about the brokerage account yeah we talked about the Roth conversions we talked about the accounts guess we got that’s like just don’t
(36:30) invest in retirement plans that’s really what you’re saying right yeah and then even for me lower on the totem pole maybe we talk about life insurance a little bit yeah this is one of the most dangerous it exists so I feel like we have to mention it otherwise you know we’re not kind of covering all the the options here for this guy yeah life insurance generally has two purposes generally okay the two purposes that I see are take your money and make the insurance company rich no no kind of so the life insurance is supposed to
(37:07) be to replace income yeah like somebody was counting on your income and it’s not there cuz you’re dead right so it’s to replace what you would have earned to take care of somebody that’s number one MH number two is estate liquidity cuz if you die and you have a bunch of property and you don’t want to have it is sold but you have to pay taxes on it life insurance can pay the tax bill okay so it’s useful for Estate Planning in that respect okay there’s a third use for it which is sort of a getting creative and
(37:44) leveraging tax law ooh I like it when we can pull levers right so life insurance plays by a unique set of rules whereby you can put money into an insurance contract and it can grow tax defer because it’s an insurance product because it’s an insurance now annuities are also Insurance products but let’s talk specifically about life insurance because this is something that is possible and I’m going to be very clear when I say this this is not a recommendation this is not a recommendation it’s not advice this is
(38:18) Advanced Market stuff and this is definitely a see me after class for your specific use cases and if it’s not me then please see a qualified life insurance Prof professional right not just a salesperson somebody has access to access advanced markets and case design for this kind of stuff yeah but life insurance there’s you can get life insurance that can be overfunded meaning you’re going to buy more you’re going to put more premium in than the insurance that you’re paying for and you can store up cash value in the life
(38:54) insurance and it can grow tax deferred just like we’re retirement plans there are ways to suppress the cost of insurance on you mainly you can Ure more than one life so it can be a joint life policy for example husband and wife so you can get a second to die life insurance policy which has lower Actuarial costs than an individual MH and it spreads the risk out so if you happen to have like a less desirable Insurance profile you’re hard to insure well you might still be able to get insurance with a second to die policy
(39:28) overfunded it will grow a bunch theoretically and that money can be accessed in the form of policy loans okay you take the loan out and just like if you took an equity loan out it’s not income so it’s not taxable anywhere according to the IRS as we understand it and if you then die the loan is paid back by the death benefit and whatever is left if there’s additional death benefit that exceeds the loan will still go to SS tax free so you’re kind of giving yourself almost a line of credit in a way yeah yeah now
(40:05) there are lots of gotchas in there right yeah and we don’t have time to get into those and that’s not the point of this the point is to say there are some very clever things that you can do same story if you have an El liquid estate like you can use borrowed money to buy life insurance now you’re getting into really sophisticated case design but for the scenarios where it works works really well okay so things like bank-owned life insurance they call it bowly okay it’s all of this stuff
(40:38) requires specific legal navigation that’s why it’s not advice I’m just telling you a good financial planner and you know good legal counsel can help structure something if you are in a high net worth and highly IL liquid situations those things kind of work out right now back to home base there are other things that you can do I’m so dizzy after that David I don’t even remember where home base is we were asking what could you do if you’re if you’re starting to kind of tap at the door of maybe maxing out the value of
(41:11) your retirement plan ah there it is and so we we were saying well instead of investing in more in a retirement plan you could look at things like non retirement type ofets brokerage y Insurance the other big one I’ll just I’ll say what it is and we’ll take a break and we’ll unpack it is real estate like real estate is a a very interesting asset because the characteristics uh can they can have both it’s it’s basically it’s like a business right it can have income it can have expenses it can have depreciation and it
(41:51) can in certain circumstances change some types of cash flows if it has other businesses to partner with and you’re the owner so now it’s getting interesting D it’s getting interesting but look at the time we have to take our last all right let’s do it and let’s get back okay we’ll do that when we come back we’ll talk about some big picture ideas for Real Estate I’m going to tell you this we’re not going to be able to make you an expert in 10 minutes but we’ll help you get dangerous stick
(42:20) around we’ll be right back I’m Dave Littlejohn and Matt Dickson you got true wealth on news radio 939 FM at 1240 kqen [Music] it well there is tell me something how awesome we are who’s texting you no one oh clients have given up they’re like this show is taking way too long you you put Dave off in the Weeds about insurance and I don’t think we’ve actually gotten in the Weeds on this show no I think we tried to stay on home base I think we’ve got machetes in each hand and we’re just fighting our
(43:02) way through the jungle yeah it’s amazing professional Bush how much is in the topic when you start to unpack it yeah you know it’s like and you think am I going down a rabbit Trail not really I mean it’s relevant it’s just it’s so many layers you know this is the thing right in the simplest terms like at the end of the day if you were to boil The Showdown the question is you know what point is trying to defer taxes today not going to create a superior benefit tomorrow that’s it right like like if I try to do
(43:38) something but it actually makes it worse and not better then stop doing that and then the question is well where do you go from there so we talked about insurance is kind of a weird Avenue in certain circumstances it works not always right I I don’t like the insurance guy that like the old joke after everything’s a if all you have is a hammer everything becomes an ale it’s like I sell insurance which insurance can solve every problem like I’m not that guy um insurance has its place like I’m not going to demonize it I’m just
(44:05) going to say be aware right but after tax investing right some you just pay the taxes and what’s left you try to be a good Steward with it do good good with that and there are pros and cons to it right and then and then the last one this what we’re going to talk about I think a lot of people really want to know this and financial advisors tend not to go there is the concept of real estate and what that means and I think specifically rental real estate um although there you know there are people that will just buy land there’s people
(44:34) that develop and and so forth so real estate’s you know a huge Topic in and of itself but we’re going talk about that now we’re going to have a lot of good content out of the show right hey gang welcome back to the home stretch the true well show uh I’m your host Dave Little John with me today in studio some guy that’s just spouting stuff off thanks man y uh so today’s primary topic is what happens if you find yourself in a circumstance where you’ve put so much money in retirement plans that the
(45:07) future tax benefit starts to diminish or even go backwards so like you’re you’re going to be in worse shape tax-wise in the future because your retirement plan has grown to a point that your future required distributions are going to drive your income into a higher tax bracket than it is today so you need to Pivot mhm right and so that’s the case where do we pivot to we kind of scratch the surface of insurance we scratch the surface of after tax investing in things like brokerage accounts using stocks and
(45:40) bonds and you know fairly mainstream financial instruments but you know we haven’t talked about yet what is that real estate ah right this is one that everyone loves because most people kind of understand it yeah I mean we we I think generically we all see a lot of this I mean there’s there’s a handful of types of real estate that I’ll say you know you’ve got residential real estate it’s like you know if whether it’s your home or it’s a rental property for somebody else to live in you’ve got um
(46:11) bare land and and and or not developable property and then um commercial property right and largely they I mean they walk and talk similarly in many cases but some the strategies can be a little different sometimes the regulations are different with what you’re dealing with you know and even residential like then you get into kind of specialty like Hotel space or the short-term rental space you know that’s all kind of a a different flavor of real estate right um commodity stuff like we don’t talk a lot about we think oh bare
(46:44) land but what about land with Timber on it or mineral rights or something like that so there’s layers to this stuff right sure here’s the thing um personally well I’m not advising everybody to do this I think real estate is an an fairly important part of a financial strategy because it tends to be a good diversifier against the stock market right they’re they’re not super highly correlated especially real real estate like physical tangible like you own either dirt or houses or something like that you’re not owning a derivative
(47:17) instrument of real estate uh here’s stuff that people don’t think about um if you’re a business owner for example you can own real estate and then have a separate entity the separate business like so you may have a an entity that owns real estate then you may have a business that you run and the business can rent the real estate from you right we forget that you can wear both hats as uh you can own two different entities and those entities are allowed to rent from each other right and the benefit of that is that it
(47:49) can change the cash flow right a business that pays rent expenses the rent and then the entity has real estate receives rent but rental income is a form of passive income instead of active it has a different type of tax treatment and So you you’re sort of converting Cash Flow by moving it from one organization to another and you own both so clever financial planners and clever CPAs can find ways to leverage the tax code to help you move money efficiently through the ecosystems it’s legal right I’m not talking about doing things that
(48:26) are Shady here it if you’re doing this properly it’s 100% above board it’s a known strategy uh it’s not a loophole you you really do have an entity renting from another entity and paying you know fair market rates but it it’s a way to manage the way cash moves through all of the organizations for business owners and if you think about real estate as a business right like if you own a rental properties and you have people living in your properties you’re receiving income in the form of rent you
(48:57) have expenses in the form of Maintenance and potentially mortgages and then you have the tax management of depreciation and so forth compare that with if you have a day job and W2 income or even a separate business these are Financial moving Parts but when properly coordinated they can become more efficient right I think that’s worth mentioning yeah that’s kind of