Discover the Ultimate Retirement Hack: Tax-Free Income 2023 Update

user 0 Comments November 27, 2023 Retire Wealthy Retirement Planning

what's the secret to a tax-free retirement 
planning right now the reality is that if   you're in your 30s 40s 50s and 60s you better 
maneuver today the tax code actually includes   several moves you can make right now to create 
a future tax-free retirement income but the   optimal window may only last until 2026. that's 
right there's really not much time to position   yourself now most people have a financial planning 
strategy to defer paying taxes wherever they can   for as long as possible and hope for the best 
but hope is not a strategy I would recommend   the problem is that many diligent savers probably 
like you are sitting on substantial tax deferred   retirement savings that could be a future tax 
bomb that explodes in your retirement in fact   America's Ira expert Ed Slott recently 
wrote a book exactly about this problem you   were told to take advantage of your company 
retirement plan and defer taxes while you   were working until your retirement when you've 
been a lower tax bracket because your income   would be lower well guess what in many cases 
that advice turned out to be completely wrong   why did you know that many retirees have less 
earned income than during their working years   but pay more in taxes it wasn't supposed to be 
that way you know what astute financial planners   advise their clients to do we create strategies to 
maximize the after-tax growth and after tax income   for our clients because good tax planning is not 
about paying the least amount of tax this calendar   year it's about paying the least amount of tax 
over your lifetime it's not what you make it's   what you keep if you think tax rates are going to 
be lower in the decades to come then move on from   this video but if you think that we are in for a 
higher tax rates stick around Colin Exelby   here and I'm a CERTIFIED FINANCIAL PLANNER™ 
Professional with over 20 years of experience   providing financial planning for business owners 
and their families that just makes sense I own   the financial advice advisory practice Celestial 
Wealth Management and provide advice virtually   to clients all over the country in my opinion for 
many people when you get to retirement your taxes   are going to be higher than when you are working 
let me say that again your taxes will be higher   in retirement than when you're working let's 
first learn why this is a good spot to point out   important disclosures the information in this 
video is for educational purposes this is not   specific financial planning or investment advice 
in addition everyone's tax situation is different   you should discuss your tax situation with a 
qualified Tax Advisor before implementing any   planning strategy so why will taxes most likely 
be higher in retirement than when you are working   well many of the tax deductions that you have 
during your working years vanish in retirement   student loan interest deduction well that's gone 
you've paid off those debts mortgage interest   deduction that's gone you've paid off your home 
mortgage probably retirement plan contribution   deductions those are gone Health Savings Account 
deductions those are gone child tax credits well   I hope your children are grown and out of the 
home at this point adoption tax credits those are   gone the home office deduction that's gone and 
so are self-employment deductions but for many   it's likely that withdrawing retirement savings 
to live on where you have chosen to defer taxes   through traditional retirement plans will put you 
in a higher tax bracket than when you're working   that's why I call these potential ticking tax time 
bombs say that three times fast ticking tax time   bombs ticking tax time bombs ticking tax time bombs 
that is hard ticking tax time bombs look when you   defer tax payments today through a traditional 
retirement plan like a 401k 403b or an IRA you   will pay taxes in the future in fact I like to say 
a traditional retirement plan is actually a joint   account with the government not an individual 
retirement account you know what's worse in most   cases when you turn 72 you are required to take 
money out of those retirement plans whether you   want to or not and this results in required income 
on your tax return just like a paycheck whether   you need the money or not and if you forget to 
take it out you are penalized 50 percent of what   you were supposed to take out all right now that 
you know what the potential tax problem is let's   figure out how best to fix it in order to get 
to a tax-free retirement the first step is to   understand how Social Security benefits are taxed 
and then work to minimize or even eliminate their   taxation most of us will be eligible for social 
security benefits and for many retirees they're   like a nice baseline income during retirement 
how much of a benefit you receive depends upon   when you take the benefit and how much in FICA 
tax you paid in over your working career if you   haven't already no matter what your age you should 
apply for your Online Social Security account No   I didn't say apply for Social Security all I'm 
saying is apply for your Social Security account   you see years ago we used to receive a social 
security statement annually from the government   in the mail it would tell you the amount of the 
benefit that you've accrued what ages you can   apply for it and your income history and this is 
important information for your planning in order   to get this information now you have to create an 
online account so first go to socialsecurity.gov   click on the sign up button then click on my 
Social Security then click create an account and if you look right now this 
is the information that you're   going to need in order to open this account all right now that you have the account open and 
you can see what your benefits are you also want   to make sure you do analysis to determine the 
optimal time for you and your spouse to draw on   Social Security there are a number of strategies 
that can be employed to maximize the amount of   Social Security that you receive depending upon 
your unique situation but for many people no   matter what strategy they use provisional income 
makes the Social Security taxable that's right   and President Bill Clinton's first term in 1993 
the Social Security tax was expanded so that up   to 85 percent of your Social Security payment 
could be taxed well what is provisional income   you ask it's one half of your Social Security 
income any distributions from your tax deferred   retirement plans like traditional IRAs and 401ks 
any 1099 capital gain or interest that's generated   in your non-retirement investment accounts any 
employment income any rental income and interest   from municipal bonds the IRS adds it all up and 
then computes whether your Social Security will   be taxable so how much provisional income can 
you have before your Social Security is taxed   well before we get to that make sure you hit 
that little like button and of course smash   that subscribe button so you know exactly when I 
release the new financial planning video for this   series all right as of 2022 here are the tax rates 
according to the Social Security Administration if   you file a joint tax return and your combined 
provisional income is under thirty two thousand   dollars you pay zero tax on your Social Security 
if your provisional income is between thirty two   thousand and forty four thousand you may have 
to pay income tax on up to 50% of   your benefits if your provisional income is more 
than forty four thousand dollars up to 85 percent   of your benefit may be taxable the numbers are 
slightly different if you're single and you can   check them out in more detail at ssa.gov for 
a married couple in order to keep your social   security from being taxed you would need to keep 
that provisional income below thirty two thousand   dollars now I know that may sound unrealistic but 
it isn't however for some people due to a pension   or a large joint social security benefit it will 
be impossible to keep Social Security tax free   but for the vast majority of Americans the key 
is to maximize the benefits in the tax code by   planning now what assets that you own and in what 
types of accounts you own them makes a significant   difference in your future provisional income as 
well as your after-tax income all right now that   we know what provisional income is how do we keep 
it as low as possible in retirement well first   we take advantage of the tax rates today before 
they are gone many people just don't realize how   low tax rates are right now but we can look back 
through history to give us some perspective before   I actually looked up these rates I too didn't 
really realize how low current rates really are   while today's top rate is 37% many of us 
pay just 22, 12, or even 10 percent this chart shows   the top federal income tax rate by year going back 
to 1913.

Look at the rates from 1941 through 1963.   the top rates were over 80 percent and most were 
over 90 percent now you might say well that's just   not me that's only for the Mega wealthy well guess 
what the other brackets were much higher as well   right now we have the lowest rates since 1992. 
the 2017 tax cuts and jobs Act created some of   the lowest tax rates for Americans in history but 
they will not last forever to create a tax-free   income in retirement it's important to understand 
where tax rates were where we currently are and   where The Sweet Spot is so let's take a look at 
these two charts side by side the chart on the   left shows the tax rates in 2017. the chart on the 
right shows the tax rates in 2022 for the purpose   of this discussion I am going to focus on the 
married couple rates that are in the middle what   you see is that for most Americans once you exceed 
the 10 tax bracket current tax rates are lower the   former 15 tax bracket is currently 20 percent 
lower at 12 percent of taxable income the former   25 bracket is 12 percent lower at 22 percent of 
taxable income the former 28 bracket is currently   14 percent lower at 24 percent of taxable income 
and even the former 33 percent bracket is five   percent lower at 32 percent it isn't until you get 
to the 35 tax bracket that the advantage goes away   but what is really interesting is the changes 
to the income levels that allow you to be in   certain tax brackets what I want to focus on are 
the two large jumps in the tax rates from 12 up   to 22 percent and from 24 up to 32 percent these 
are the big jumps to be aware of when creating   your strategy let's take a moment to talk about 
the difference between income and taxable income   most people roughly know what their income is but 
they don't really know what their taxable income   is taxable income is the income you are taxed on 
well geez that makes sense it is the income after   all of your deductions this is an important number 
and can be much lower than your gross income also   in this country we have what is called a graduated 
tax system as you move into a higher bracket you   don't pay that higher rate on all of your income 
the only income that is taxed at that higher rate   is the income above the previous bracket you know 
what is not taxed that little like button likes   are free so make sure you hit that little like 
button and of course smash that subscribe button   hit that little bell so you know when I release 
a new financial planning video in the series all   right now we are going to look at the tax rates 
for married couples and if you're single get   married whoops just kidding but tax rates are much 
better if you are married so maybe consider it if   you're single the same principles apply but you 
move into higher brackets at lower income levels   for the married couple the first eighty three 
thousand five hundred and fifty dollars of taxable   income is only taxed at twelve percent once you 
have over eighty three thousand five hundred   fifty dollars of taxable income you don't move 
into the 24 bracket until you reach roughly $178,000   of taxable income compare that to the 2017 
brackets when the income threshold for moving   into to that 24 bracket was a much much lower 
$153,000 you know it's really wild   well wild for probably me and some CPAs who love 
this tax stuff but it is interesting let's look   at the difference between the current 24 bracket 
and the 32 percent bracket the next big jump until   you make roughly three hundred and forty thousand 
dollars of taxable income you are still in the 24   bracket compare that to 2017.

You can see that you 
jump into 33 bracket at only 233 thousand dollars   that's a hundred thousand dollar difference 
it's a huge difference and is the largest   sweet spot in the tax code but how exactly 
do you design your current retirement saving   strategy to maximize the standard deduction 
when planning for your retirement your tax   deferred retirement account balances should 
ideally be at a level where future required   mandatory distributions or rmds as they're called 
would be less than your future standard deduction   got it if you missed that and you didn't 
understand what I said just hit that rewind   button keeping your rmds below your future 
standard deduction can potentially make your   required distributions tax free while also not 
causing taxation of Social Security benefits   everyone's situation is different which is why 
custom financial planning is extremely important   so how do we do it this concept is actually 
pretty straightforward so let's look at a   hypothetical example Marsha and Don are both 55 
years old currently they are 17 years away from   mandatory IRA distributions we are going to take 
the current standard deduction at age 65 of 28 700   and inflate it by a historical rate of 3 percent 
per year for 17 years that standard deduction will   be closer to forty seven thousand dollars when 
they turn 72 and are required to distribute from   their IRAs so it's 72 if they didn't have any 
other tax deductions or provisional income they   could potentially take up to forty seven thousand 
dollars total from their IRAs without any taxes   but how much will Marsha and Don be required to 
take well the IRS has a nice table to figure that   out this table is periodically updated so you 
want to make sure you're using the current one   when working through your calculation if you're 
married but your spouse is more than 10 years   younger congratulations there's a special table 
for you but for this example Marcia and Don are   the same age at 72 their required distribution 
amount is basically 3.65 percent of their account   balance based on their divisor of 27.4 now 
that we know what they are required to take   out we can calculate the ideal total amount for 
Marsha and Don to have in their IRAs at age 72.   so how large of a 401k or IRA could they have to 
distribute their required distributions tax-free   drumroll please one million two hundred and 
eighty seven thousand eight hundred dollars   you figure that out in this calculation one 
million two hundred eighty seven thousand eight   hundred times point zero three six five equals 
forty seven thousand four or according to the 2022   IRS table one million two hundred eighty seven 
thousand eight hundred divided by twenty seven   point four equals forty seven thousand they both 
equal the same thing conceptually a married couple   both over age 65 with no other provisional income 
could have just under 1.3 million total in IRAs   and the distributions would remain tax-free based 
on 2022 numbers this is the starting point for   figuring out the ideal amount of funds to have in 
a traditional IRA at age 72.

Even if you had some   provisional income like say half of your Social 
Security benefits you can create a strategy where   distributions are not taxed or are minimally taxed 
just incorporate that provisional income into your   calculations and if you live in a state where 
distributions aren't taxed even better as of 2022   there are 12 states that you could live in that 
don't tax retirement account distributions take   that into consideration when you're considering 
where to live so this example figured out the   ideal number with forward-looking planning you may 
be thinking okay well having little or no assets   in traditional IRAs and 401ks is also a good move 
potentially putting all your assets in and other   account types and limiting your rmd amounts that 
way well let's take a look at why this is not a   good idea let's say Marcia and Don only had one 
hundred thousand dollars in tax deferred IRAs and   401ks at age 72.

Their required distribution 
based on the tables would be 3649 dollars   they would have 43 351 in unused deductions that 
would be very poor planning in my opinion to get   the maximum after tax retirement income you want 
to make sure you optimize the full amount of your   standard deduction unfortunately many retirees 
do not because my industry promotes the delay   in prey strategy so much many people don't 
plan properly in the earlier years you figure   that optimal number out for your own situation 
through these calculations First Take today's   current standard deduction and inflate that by 
the number of years until you reach age 72 with   a future value calculator like one from this site 
or Good Financial Planning software like this one   from right Capital that I use that will give 
you your forecasted future standard deduction   when your rmds start that will be the ideal 
amount that you would want to withdraw from   a tax deferred Ira or 401k to minimize or even 
eliminate taxation of required distributions   in order to figure out the optimal amount to 
have in your tax deferred retirement account   you would take that ideal distribution amount 
and multiply it by the retirement Factor at age   72 which in 2022 is 27.4 that will give you your 
ideal tax deferred retirement balance at age 72.   now investment returns rmd assumptions and tax 
rates do change over time so this is the living   breathing strategy that you would continue to 
monitor it is not set in stone rather than delay   and pray plan optimally for your future this is 
a video series about creating a zero percent tax   bracket in retirement but you may have other 
provisional income that makes that impossible   don't worry the goal of financial planning in many 
cases is to maximize your after-tax income and   wealth to reach your personal goals even if a zero 
percent bracket isn't achievable in your situation   the upcoming strategies can still be used to 
drastically reduce your taxes in retirement and   maximize your after-tax wealth when you do that 
you reduce the risk of running out of money in   retirement and you maximize the Legacy you leave 
behind don't spend years accumulating assets just   for Uncle Sam all right now that we know how to 
calculate the ideal amount to have in tax deferred   retirement accounts let's talk Roth everyone loves 
Roth except maybe the government that created them   more on that in a minute so why does everyone love 
a Roth IRA Roth IRAs have become so successful for   some that the current government is looking at 
ways to cap access to them for certain people and   to force distributions for others so it's really 
important to be taking advantage of this strategy   if it makes sense for you why does everyone love 
a Roth IRA in 1997 the Roth IRA was created to   allow people to put away money and forego a tax 
deduction in exchange you get tax-free growth   and tax-free distributions and if anything is left 
over after you pass away your heirs can withdraw   those funds tax-free as well the government 
thought this was a great way to incentivize   saving for retirement as many pension plans were 
going away at the time it also allowed them to   collect some taxes right away but many people 
who qualified still didn't contribute people   believe that they will be in a lower tax bracket 
in retirement but that's a myth many people are   in a higher tax bracket in retirement given the 
common Nation retirement income those increasing   rmds and Social Security but not everyone can have 
these accounts when these accounts were created in   the late 90s they were limited to Americans 
making less than a hundred and ten thousand   dollars or a hundred and sixty thousand dollars 
jointly in annual contributions were limited to   only two thousand dollars we'll fast forward to 
today and now if you make less than a hundred and   forty four thousand in 2022 or 214 000 jointly 
you can contribute up to six thousand dollars   if you're under fifty and seven thousand dollars 
if over fifty and if you do qualify in order to   have those tax-free and penalty free distributions 
all you have to do is have the account a minimum   of five years and avoid taking earnings 
distributions until after age 59 and a half   all of your Roth IRA contributions can generally 
be accessed without penalty so they can also act   as an additional supercharged emergency fund 
forego the current income tax deductions of a   traditional IRA or 401K deduction in favor of all 
the future tax-free growth of a Roth IRA or Roth   401k when traditional 401ks and IRAs were created 
back in the 1970s tax rates were much higher in   fact here are the married filing jointly tax rates 
back in 1978.

That's the year I was born just look   at how much higher tax rates were back then it 
made a lot more sense to take the tax deduction   then and just hope for lower rates it's exactly 
the opposite now and is another reason allocating   to Roth IRAs makes sense what about when it's 
time to withdraw the funds are there the same   requirements as traditional IRAs and 401ks 
no Roth IRAs are not subject to a required   beginning date or require minimum distribution 
you never are required to take the money out if   you don't want to in fact you can actually keep 
making contributions past age 72 if you qualify   and still have earned income but for many an ideal 
strategy is to withdraw Roth Assets in retirement   you know why well of course they're tax-free you 
know why else they don't count as provisional   income and do not make Social Security taxable 
this is one of the key points to a 100 percent   tax-free retirement income if you take away one 
thing from this video it should be that Roth IRA   distributions are tax-free and do not count 
toward the provisional income that can make   up to 85 percent of your Social Security taxable 
they are much more optimal to use in coordination   with your tradition IRA distributions to keep your 
taxable and provisional income as low as possible   all right the second part of the raw strategy 
is to take advantage of the Roth 401k wait Roth   401k did you know that most employers offer both 
traditional pre-tax 401ks and Roth after tax 401ks   while they are available to over 86 percent 
of retirement plans according to the psca's   most recent survey only 26 percent of 
participants actually make deferrals   are you a solo entrepreneur if you're making use 
of the solo 401K you can also have a Roth 401k   many solo entrepreneurs or Partnerships still 
use the old SEP IRA where the only option is   pre-tax deferrals I would think twice about that 
in fact I created this video that explains the   differences between a solo 401k and a sap Ira in 
more detail check it out the biggest difference   between a Roth 401k and Roth IRA is that the Roth 
401k doesn't have any income constraints attached   to it you can make a million dollars of income 
and still contribute up to twenty thousand five   hundred dollars in 2022 if you're under 50 and 27 
000 if you're over 50 into a Roth 401k that is a   quick way to accelerate your tax-free retirement 
savings since you can contribute much more than   the Roth IRA the best part is almost anyone can 
do it Roth 401k contributions can also generally   be accessed without penalty so they too can act 
as an additional emergency fund a potential much   better way to have an emergency fund than sitting 
in a low yielding savings account if you qualify   are married over 50 and love this idea here 
is how you and your spouse could get up to 68   000 in total contributions to this raw strategy 
in one year 2022 Roth 401k contributions you put   in twenty thousand five hundred dollars plus six 
thousand five hundred dollars as a catch-up and   you get twenty seven thousand dollars for you 
and your spouse 2022 Roth IRA contributions six   thousand dollars in plus a thousand dollars in 
the ketchup equals seven thousand dollars each   total that's 34 000 for each of you or 68 000 
for both all in one tax year mind blown but   Colin I'll be paying more in taxes now and those 
funds will not get to grow for retirement they are   permanently lost wouldn't I do better to take the 
deduction now and have those funds grow pre-tax   this is an extremely common question and I want to 
put to rest this concern right now the number one   factor here by a mile is taxes the difference 
between the rates you pay now and the rate you   will pay later if tax rates remain the same or 
increase in retirement using the raw strategy   will be better it's not about inflation earnings 
or the opportunity cost it is all about tax rates   if tax rates are the same at contribution and 
later in retirement the end result would be   exactly the same let's do the math here are 
the assumptions we're going to start with a   ten thousand dollar contribution lifetime 
investment earnings of 200 percent and an   assumed tax rate of 30 percent as with any 
financial planning we've always got to start   with these assumptions so that's why they're 
here all right here are the calculations   traditional 401K contributions you take a 
ten thousand dollar contribution after two   hundred percent lifetime earnings equals thirty 
thousand dollars thirty thousand dollars times a   thirty percent tax rate as you distribute the 
funds is nine thousand dollars in taxes paid   so the net after tax Ira balance from that initial 
ten thousand dollars is twenty one thousand   now let's look at a Roth contribution you're 
going to pay three thousand dollars in taxes up   front right because you have a ten thousand 
dollar contribution going in times thirty   percent so you pay the three thousand dollars 
in taxes now you have seven thousand dollars   to invest seven thousand dollars after two 
hundred percent lifetime earnings grows to   twenty one thousand dollars the exact same amount 
that is because it's all about the taxes and the   taxes you pay in the beginning versus the taxes 
you pay at the end Joel Dixon Vanguard groups head   of Enterprise advice methodology told the Wall 
Street Journal in 2019 that the only factor to   consider is current tax rates versus future 
tax rates with Roth IRAs and Roth 401ks you   will never have to worry about the uncertainty 
of what future tax rate increases could do to   your retirement savings and because distributions 
are tax-free they also can lower your retirement   income to a level where there is less of a chance 
of hitting the Medicare premium surcharge known   as Irma and it can keep your Social Security tax 
free for most Americans but especially those who   are in lower income brackets say 24 and below 
I think this is a significantly underutilized   benefit if future tax rates rise creating 
a balance between tax deferred balances and   tax-free balances gives you flexibility as 
you approach retirement I love flexibility   I would strongly consider an approach where you 
take advantage of both the pre-tax traditional   401k and the post-tax Roth 401k contributions 
you can actually figure out the ideal amount   to contribute to your pre-tax 401k and your 
post-tax Roth 401k with some basic calculations   to create your optimal tax deferred retirement 
account use a future value calculator like one   from this site or Good Financial Planning software 
like this one from right Capital that I use   you would input your current balance the amount of 
years until you reach age 72 your annual rate of   return and then try different annual contribution 
amounts plus employer matches until you reach   your optimal tax deferred retirement balance 
then you can subtract that annual amount your   portion of it not the match from your annual 
contribution limit to determine the amount   that should go into the Roth 401k side once 
you've maximized this strategy if you qualify   you would want to make your annual Roth IRA 
contributions this can help you create your   very own zero percent tax bracket in retirement 
by taking advantage of today's low tax rates   wow that is a lot of information that I just 
covered but the raw strategy is so powerful I want   you to understand it in order to maximize this raw 
strategy currently you can convert an unlimited   amount of assets from traditional IRAs to Roth 
IRAs if you pay the taxes now now there used to   be an income cap but that tax law was changed 
back in 2010 to allow anyone the opportunity to   convert that huge Advantage may be slipping away 
while we are still in these lower tax brackets   and while conversions are unlimited it may make a 
lot of sense to convert assets and pay taxes now   are you in an artificially low income tax bracket 
because you sold your business you semi-retired or   are in between jobs are you under 40 building your 
career and still in a low income bracket are you   higher but not yet claiming Social Security are 
you over the age of 59 and a half but younger   than 72 then you my friend are in The Sweet 
Spot for Roth conversions you pay some tax now   but then have tax-free growth and distribution 
in retirement while building a tax-free Legacy   for your heirs in my opinion there is not a better 
time than now to explore how a Roth conversion can   help your financial situation well actually there 
could be a better time as I release this video the   stock market is trading just off its record highs 
but if markets were to fall more significantly it   makes the strategy even better you know why you 
can convert assets while markets are down pay   the tax then and then get the growth tax-free 
on the way back up for those who converted in   2020 during the covid pandemic they look like 
Geniuses right about now from February to March   of 2020 the S P 500 fell roughly 35 percent what 
if at that time you had your IRA you converted   the assets while the markets were down and then 
as the market has rallied back and even Beyond   where it was all of those gains are tax-free 
all into the future I mean if you did do that   kudos to you but that's the type of strategy I'm 
talking about and that could be the optimal time   to do it it's always tough to pay tax now I get it 
trust me I want to pay as little as possible but   if the trade-off is pay a little bit now to not 
pay tax in the future I will write that check all   day long but the real kicker here is that Roth 
IRA distributions don't count as provisional   income so they can't make your Social Security 
taxable I'll say that again Roth distributions   in retirement do not make your Social Security 
taxable now most of us will have social security   income assuming that it's around in retirement 
the delay and praise strategy employed by many   allowed us to build up large pre-tax 401k and 
Ira balances if you do nothing when you retire   and take distributions those distributions will 
most likely make your Social Security taxable the   key to a 100 percent tax-free income in retirement 
is to begin positioning yourself now by converting   assets systematically over time you can create 
a Roth IRA balance that can be withdrawn on   your terms not the governments without taxes 
and without making Social Security taxable   so how do you pay the tax on a conversion in 
most cases Roth conversion tax will need to be   to pay the tax that's generally why it's best 
to split up conversions over multiple years and   this is also the big biggest reason why more 
people don't do conversions it's nearsighted   if you don't pay the tax bill now while you're in 
these low tax brackets you and your beneficiaries   will most likely pay even more tax later on all 
the future growth and withdrawals as they push   you into higher tax brackets another point to 
remember is the five-year rule if you are under   age 59 and a half and convert assets to a Roth 
IRA the assets that are converted must be held   for five years before any withdrawals can occur 
otherwise you are subject to a 10 penalty now   if you remember from Roth IRAs in the other videos 
contributions can be taken out without penalty and   without taxes these on these conversions must be 
held in that Roth IRA for at least five years so   when can you pay the tax from retirement assets 
well if you're over 59 and a half you see at 59   and a half you can withdraw Ira assets without 
the 10 early withdrawal penalty so you could do   a conversion and then withdraw more assets to 
pay the tax you have to be careful not to push   yourself into a higher tax bracket though with 
the extra withdrawals to pay the tax that's why   in my opinion the best way to convert is to pay 
the tax with non-retirement funds in my opinion   now is the time to consider converting your IRA 
assets but conversions aren't for everyone when   doesn't it make sense here's a quick rundown of 
when a Roth conversion does not make sense first   anyone that can't pay the tax on the conversion 
because once you convert you commit to pay the   tax now the second reason anyone who believes that 
their future tax rates will be lower than their   current tax rates the third reason not to convert 
is if you have a low tolerance for volatile   and want the assets to be in safe low yielding 
Investments generally it doesn't make sense to   convert assets pay the tax and then not invest 
them in growth oriented assets the fourth reason   is something that I like to call stealth taxes 
these are taxes because a conversion increases   your adjusted gross income and you could raise 
your income to a level where you don't qualify for   certain things like medical deductions or the Irma 
surcharge on medicare premiums kicks in or you   lose child tax credits and education credits or 
the taxation of social security or even the loss   of the twenty percent qbi deduction for business 
owners these are all what I call stealth taxes   and you want to be aware of them but if these are 
triggered it's often a one-time short-term expense   to gain a much bigger benefit in retirement the 
next reason you may not want to do a conversion   if you you are applying for financial aid The 
increased income from a conversion could impact it   Ira assets are generally excluded from financial 
aid assets but the income from a conversion is not   so you may want to wait until financial aid isn't 
needed another reason you wouldn't want to convert   is if you need the funds soon if you pay tax 
now and don't allow the funds time to grow then   this strategy will backfire conversions are not 
for the short term and the last reason that you   may not want to convert is that generally if you 
are over 72 and subject to rmds your conversion   window may be over the only funds eligible for 
conversion would be those above the rmd rmds   cannot be converted remember rmds are required 
minimum distributions notice that as I said this   I said generally because in certain situations 
conversions above the rmd can make sense ideally   if you have a younger spouse or beneficiaries 
that you plan to leave the assets to then   converting now paying the tax and allowing that 
tax-free growth for them may make a lot of sense   every situation is different so work with your tax 
and financial advisors to create your Roth Plan   before it's too late HSA or health savings account 
health savings accounts are triple tax-free saving   and investing accounts that are part of a high 
deductible health care plan these plans allow   you to save and invest for the future by getting 
a tax deduction now on your contributions tax-free   growth if you invest the funds and tax-free 
distributions if the funds are used for medical   expenses huge benefits there with hsas and a 
key part of the 100 percent tax-free retirement   income strategy you know why not just because HSA 
distributions are tax-free but because just like   the Roth IRA distributions HSA distributions do 
not count as provisional income and do not make   your Social Security taxable in 2022 a family can 
contribute up to seventy three hundred dollars   into an HSA and eighty three hundred dollars 
if you're older than 55.

If you're single you   can contribute up to three thousand six hundred 
and fifty dollars with an extra thousand dollars   if you're over fifty five and there aren't any 
income limitations the higher your current tax   bracket the larger the deduction that you get 
if you have the receipt for the medical expense   you can withdraw funds whenever you like without 
taxes and penalties no matter your age even later   on that day make a contribution in the morning 
pull it out later in the day now once you reach   age 65 you can withdraw funds for any reason 
without penalties but you still would owe taxes   like any other pre-tax retirement plan if you 
didn't use the funds for medical expenses stick   around and I'll fill you in on a little-known 
secret that can allow you to withdraw funds for   any purpose without taxes or penalties all right 
check this example out let's say your name Ross   Geller you all know Ross from friends he's 30 
and now he has a family you have 35 years until   he reaches 65.

He decides to max out the annual 
contribution of seventy three hundred dollars and   the government never raises it let's also assume 
that he never puts in that extra one thousand   dollars when he reaches age 55. so you just put 
in the seventy three hundred dollars every year   for 35 years let's also assume you invest the 
money in a diversified portfolio and net seven   percent a year this is what that looks like your 
total contributions are 255 500 your total gains   our 824 277 your total balance at age 65 is one 
million seventy nine thousand seven hundred and   seventy eight dollars and if you use that money 
for medical expenses all of those distributions   could be tax-free and penalty free if you use 
them for other expenses you know taxes but not   penalties because you're older than age 65. now 
I promise that secret strategy is coming you   know what makes me sad or really just a little 
frustrated for many people who have hsas there   isn't any growth you might say Colin well how 
can that be well many people contribute to hsas   but they miss the most important step actually 
investing the money according to a 2021 report   by the employee benefits research institution 
50 of people employ would have opted for a high   deductible health care plan with an HSA but 
only four percent of HSA accounts open for   at least a year are investing their money and 
after being open for 15 years only 20 percent   of those accounts are invested what that tells 
me is that a number of people are aware of the   tax deduction for contributing to it but they 
aren't aware of the huge growth potential or   just weren't told that investing those funds was 
even possible it seems the vast majority of people   contribute to the HSA get the tax deduction and 
then pull it right back out oh man if they knew   proper planning can help you target a certain 
amount of growth in the HSA plan so that you   cover your assumed Health expenses in retirement 
once you reach age 65 you can withdraw the funds   for any reason without penalty but you don't want 
too much in there because if it isn't used for   health care you pay tax on the withdrawals like 
regular income all right are you ready for that   secret strategy to completely tax-free withdrawals 
without penalty here it is there is no time limit   on when you can claim the reimbursement from your 
health savings account really well currently at   least I can track my medical expenses right now 
on a spreadsheet keep the receipts and then claim   them in a huge lump sum later on in life for 
whatever reason because these expenses never   expire what type of expenses can you track the 
list is literally endless here is a list that's   compiled by Health Equity I'll provide a link to 
it in the notes below look at this as we scroll   through here AAA meetings antacids Botox condoms 
crutches eye drops fiber supplements gambling   treatment infertility a midwife and many many more 
seriously it's almost anything you can think of   that's medical related and you know what when 
I make that distribution it would be tax-free   and would not count toward my provisional income 
you remember provisional income right provisional   income is all of that income the IRS adds up 
to compute whether your social security income   is taxable now I would never tell someone to spend 
all their time tracking all their medical expenses   and logging receipts through their entire life but 
hypothetically if you tracked every bill that was   over a hundred dollars that might be a very good 
way to help your future self all you would need to   do is create a spreadsheet an Excel or Google 
Docs somewhere in the cloud that's backed up   list out the date of the expense what it was what 
the cost was and confirm that it was HSA approved   and like we said almost anything is then upload 
an image of the receipt to the file and move on   well that is an amazing way to maximize your 
future tax-free retirement income and a secret   strategy that many people don't know about the key 
is to make sure that you track those expenses and   don't include anything other than those medical 
expenses when you pay for things most people think   of life insurance for the death benefit but there 
are many benefits while you are alive look there   is a lot about permanent life insurance I didn't 
know when I got started in the advice business   it's taken me years to learn the ins and the outs 
so I can easily understand how so many people run   the other way when permanent insurance is brought 
up will the stock market implode like in the year   2000 I have no idea it could triple from here it 
could fall by 50 percent no one knows and if they   say that they know run the other way after taking 
into account expenses for a permanent life policy   in my opinion it could be a very attractive 
addition in this low interest rate environment   will it outperform the stock market over time in 
a Roth IRA probably not I mean I really really   doubt it that's why I've got a Roth IRA but will 
it do better than having money and checking and   savings accounts CDs or low yielding bonds it 
very well may especially because it isn't taxed   if you earn four percent just four percent in one 
of these policies tax-free and we're in the 22   percent tax bracket you would have to earn 5.128 
percent before tax to do better what bank account   CD or bond is paying that and many of us follow 
widely held truths without actually doing a little   digging now I am skeptical of almost everything 
so the whole buy term and invest the different   strategy deserved a little more digging first 
when you buy a Term Policy it is typically a level   death benefit like 500 000 a million two million 
which means due to inflation eroding its value   each year a Term Policy purchased decades ago 
is worth far less an inflation-adjusted dollars   second according to a Penn State University 
study 99 of term policies never pay out a claim   now thankfully most people don't need them and 
they let the policy lapse but the dollars that   are spent are gone forever third how many people 
actually seriously invest the difference between   what they would pay for a Term Policy versus a 
permanent one well according to David Babel a   professor at the Wharton School of Pennsylvania 
quote people don't buy term insurance and invest   the difference they most likely rent the term 
lapse it and spend the difference now that is   American for those that actually do invest the 
difference what happens to the funds well they   typically go into an account where interest income 
is taxed and capital gains are taxed over time   since 2000 the typical stock investor lost 49 
or more of their savings not once but twice   according to the famous annual dalbar study the 
typical stock mutual fund investor earned 4.25   annually over the past 20 years ending December 
31st 2019.

Now that's less if you're in the 22   bracket than what we talked about earlier over the 
same time period the S P 500 earns 6.06 percent   now you only got that return if you were invested 
100 in stocks at all times and never Panic during   those huge drops and those gains are taxed along 
the way and whatever the government says that they   should be taxed now it's true that permanent 
life insurance policies can be more complex   and they can be more costly because of all the 
benefits that come with them also not everyone   is insurable they're generally long-term planning 
vehicles and have policy premiums that need to be   paid to keep the policies in force whether through 
deposits or dividends and if you would draw cash   borrow or use cash value to pay premiums you do 
reduce the death benefit it's also true that they   are more inefficient in the early years as the 
policy gets going but the longer they are held   the more efficient they become it's kind of 
like an airplane flying from New York to LA   as the plane takes off from New York it's full of 
jet fuel and takes a while to get up to cruising   altitude but once there as jet fuel Burns off 
the plane gets more efficient and flies faster   it's the same with many permanent Life policies 
the longer they are in effect the longer tax-free   compounding of interest and dividends can occur 
and if you structure these policies correctly   with an agent that is looking out for your best 
interests you can have a growing death benefit   instead of a static one that benefits your heirs 
and you can access the funds tax-free later on in   life for that tax-free retirement income how do 
you do that you borrow against the policy value   ah well you must have to pay really high borrowing 
rates right no borrowing rates are stated in the   contract and typically four to five percent in 
this current rate environment hey quick little   plug here if you're enjoying this video make 
sure you give it like and of course smash that   subscribe button hit that little bell so you know 
whenever I release a new financial planning video   all right have you heard the saying buy borrow 
die that means buy assets borrow against them to   provide cash flow and then die many wealthy 
clients implement this strategy to minimize   taxes when do you pay tax well if you save 
in a non-ira you pay taxes typically at 15   to 25 percent of gains and potentially more 
if rates are increased in retirement account   distributions from IRAs and 401ks you pay taxes if 
it was income right typically double digit rates   unless you're properly structuring your assets 
for a zero percent tax bracket so is borrowing   at four to five percent interest better than 
paying 15 20 or 25 percent in capital gains tax   I think so permanent Insurance structured 
correctly can be an excellent strategy for   a tax-free retirement and we just learned about 
all the benefits while we are alive but what about   passing on what we don't use if you're diligent 
in your planning you most likely will have assets   that you would like to pass along to the Next 
Generation ideally you want to do that tax-free   and pass on as much after tax as possible well 
when Congress unleashed the secure act in 2019   it eliminated the stretch Ira man stretch Ira 
that was previously around since the 1970s and   it made possible for those inheriting an IRA to 
take out proceeds over their lifetime potentially   lowering taxes I've got a number of clients that 
are utilizing that well with the secure act it   says that you must withdraw all inherited IRA 
assets within 10 years unless you are a spouse   or eligible designated beneficiary or EBD as it's 
called so Congress just made traditional IRAs much   less attractive to leave for beneficiaries that's 
moved permanent life insurance to the top of the   list for efficient estate planning now do you have 
a spouse who will inherit your IRA at some point   and then owe taxes in the single tax bracket once 
you pass on many couples forget that the odds are   one of you will live longer than the other and 
will pay what is referred to as the widows tax   the fact that you have the same income and assets 
but are now taxed as a single individual rather   than married couple at much higher rates and the 
government is counting on it wouldn't it be great   to have an insurance payout that could help him or 
her convert those funds to a Roth IRA and pay the   tax for them I know I would love that Roth IRA HSA 
and permanent Life cash value for the tax-free win   you know what else is a win reverse mortgage 
is what are they why are they important to a   financial plan who do they make sense for and what 
to look out for first what is a reverse mortgage a   reverse mortgage is a type of loan that's designed 
to give people age 62 or over access to the equity   that they've built up in their primary residence 
without having to sell it to be clear you can only   get a reverse mortgage on the home you are 
living in unlike a regular mortgage in which   the homeowner makes payments to the lender with 
a reverse mortgage the lender pays the homeowner   now you have the option to receive a lump sum 
a line of credit or a series of payments over   time but you don't have to pay the loan back 
you can if you choose to do so it's nice to   have that flexibility you'll hear that word 
a lot the loan balance accumulates interest   over time similar to any other mortgage at the 
stated rate on the loan and we will talk about   how that impacts a financial plan in a little bit 
the key part to understand is that the loan must   be repaid when the borrower dies moves out or 
sells the home and that's just like any other   mortgage reverse mortgages are often called home 
equity conversion mortgages or hecm for short and   they're administered and regulated by the U.S 
Department of Housing and Urban Development or   HUD as many people know it it's a great great 
way to provide flexibility to a retirement plan   since the distributions are alone of your own home 
equity guess what they are not included in your   adjusted gross income reported on your tax return 
you know what that means that means they don't   count as provisional income they don't trigger 
High income Medicare premiums or the taxation of   Social Security benefits huge government insurance 
is required and is provided through the federal   housing Administration or FHA they're also a part 
of Hud this backstop provides critical assurances   to both the borrower and the lender Insurance 
foreign HECM reverse mortgage guarantees the   borrower funds if the lender goes out of business 
and it ensures the borrower will never owe more   than the value of the home when sold let me say 
that again since that is really important if the   housing market declines the borrower will never 
owe more than the home is worth when it is sold   the borrower gets what is in effect a tax-free 
Advance on their equity in the form of a line of   credit fixed monthly payments or a lump sum but 
the borrower must also continue to pay the real   estate taxes homeowners insurance and the cost to 
maintain the home just like any other mortgage all   right so why reverse mortgage is important to 
a financial plan one word flexibility When You   Reach what I call the retirement Red Zone the five 
years before retirement and the five years after   retirement you're in a very important zone for the 
success of your retirement plan the ability to tap   different assets to pay for retirement living 
expenses in a tax efficient manner increases   the success rate of your financial plan for many 
retirees a good portion of the retirement assets   are socked away in tax deferred retirement 
accounts like traditional 401ks and IRAs I   just talked with someone today about this over 90 
percent of their assets are in these traditional   401ks and IRAs guess what these assets have likely 
never been taxed so what happens when you go to   withdraw them well when they're withdrawn they're 
taxed at income rates and they contribute to   provisional income that can make Social Security 
taxable and increase your Medicare premiums as   retirees get close to and start drawing on these 
assets the last thing that you want to see is a   significant market downturn like what happened 
in 2000 to 2003 or 2007 to 2009 you probably   remember those periods well or at least saw your 
parents deal with them of course there is no   way to predict if or when a major stock market 
decline will occur why is this so important to   avoid in your retirement Red Zone well if stocks 
decline significantly and you're forced to sell   them low because you need funds to live you lose 
the ability to wait out their eventual rebound   for that reason having an ability to access other 
assets like a reverse mortgage can help reduce the   chance of running out of retirement funds early in 
essence if markets were down and you had access to   a reverse mortgage you could potentially use those 
funds tax-free remember until the stock market   recovers and then tap the retirement accounts you 
could even elect to tap those accounts and pay   back the home equity you took out if you wanted 
to there's nothing in reverse mortgage that says   you can't a second reason reverse mortgages can be 
so important to a retirement plan has to do with   the taxes and surcharges these are what I like 
to call stealth taxes because they creep up on   you without realizing it currently there are two 
significant jumps in the tax bracket at certain   income levels from 12 up to 22 percent and from 24 
up to 32 percent if your Social Security pension   or other income each year comes to the middle of 
a tax bracket and retirement account withdrawals   would push you into a higher tax bracket it 
can be beneficial to use assets like a Roth   IRA and a Roth 401k or home equity through a 
reverse mortgage to keep your income out of   those higher brackets paying loan interest can be 
a lot less than paying significantly higher taxes   from creeping into a higher tax bracket this is 
where sophisticated retirement income planning can   potentially save you taxes is at 22 percent thirty 
two percent or even more who do reverse mortgages   make sense for all right now that we know many of 
the advantages of reverse mortgages let's discuss   who they are most appropriate for actually the 
better way to answer this question is to outline   who they are not for if this is not your primary 
residence you cannot get a reverse mortgage second   if you are not yet 62 years old you cannot apply 
for a reverse mortgage and third if you believe   you're going to sell your home in the near 
future to move somewhere or downsize I think   a reverse mortgage on your current home may not 
be the best option because of the costs involved   so who do they make sense for ideally they make 
sense for someone who plans to stay in their   home for the rest of their life and is looking 
for flexible ways to access tax-free cash in   retirement first if you're single as I said you 
must be over the age of 62 to qualify if you're   married only one of you must be over the age of 
62 but all borrowing qualifications will be based   on the younger spouse's age that's important if 
you have a wide age difference between the two   of you if you're married it is mandatory that 
both of you are listed on the loan but that's   also good for financial planning purposes now many 
times people think that using home equity is the   last place you should go for retirement funds I 
am here to challenge that thinking I talk a lot   about flexibility in my financial planning videos 
and that's because we don't know what financial   markets will do in the future what unexpected 
Health scares we will have what tax rates will   be or what the world will have in store for us 
who thought we would have a pandemic not many   people so proactively creating access to various 
assets allows us to customize where we get funds   in retirement and when this can potentially lower 
taxes significantly in retirement and can allow   you to avoid having to sell stocks to live on 
during a downturn even CNBC personality and   PBSO Susie Orman recently said on her show that 
accessing a reverse mortgage is often a better   option than selling stocks when they've declined 
or paying capital gains taxes well duh that seems   to make a lot of sense to me all right now that 
we know who a reverse mortgage candidate is let's   fast forward a minute what happens when a reverse 
mortgage borrower does pass away after a borrower   passes away The Heirs take over the responsibility 
of repaying the reverse mortgage balance typically   airs simply sell the house and use the pro 
proceeds to repay it proceeds from the sale of   the home will always cover the entire repayment 
amount even if the loan balance is higher than   the sale price of the home as a non-recourse loan 
no other assets of Errors can be taken by lenders   to repay the reverse mortgage that is huge and 
an often overlooked part of financial planning   now while most heirs plan to sell their parents 
homes if the heirs prefer to keep the home as an   inheritance they only have to repay 95 percent 
of the loan that's a nice Advantage all right   so what to look out for number one watch out for 
pushy sales people recommending a reverse mortgage   Without Really knowing your financial situation if 
it sounds like they're selling a reverse mortgage   to anyone with a pulse run as fast as you can 
the other direction work with a knowledgeable   financial planner who knows your situation number 
two scrutinize the cost of the loan so you know   what they are but don't dwell on them I've seen 
a number of misinformed people talk about the   high borrowing costs of a reverse mortgage as a 
reason not to pursue them well as with any loan   there is an underwriting process to determine if 
the borrower has the financial means to pay for   the loan traditional mortgage loans are known to 
have mandatory closing costs and fees and reverse   mortgages are no different both loans require 
expenses and closing costs and sends reverse and   traditional mortgage closing costs include many 
of the same types of fees the overall expenses are   often very comparable what is the major difference 
the major difference is that reverse mortgage   borrowers will often need to pay insurance on 
the loan to the FHA this is what backs the loan   if housing prices don't keep up with the loan 
value in my opinion it's a small price to pay   for the Peace of Mind of not owing more than the 
home is worth when it's sold that was a lot of   content I love helping people achieve their goals 
even more I love how real financial planning can   give people like you confidence reduced anxiety 
and a more fulfilling life without worrying about   your finances now when I say financial planning I 
am not talking about some 125 page book that some   investment firms sell you for a couple thousand 
dollars that tell you some huge number that you're   going to need for a successful retirement and 
all it does is sit on a shelf in your basement   Gathering dust I am talking about true financial 
planning optimizing your cash flow protecting you   and your family from an untimely accident or an 
illness that can derail your finances minimizing   the taxes that you pay now and during retirement 
by efficiently building assets and efficiently   Distributing Assets in retirement keeping stealth 
taxes like those on Social Security and Irma   surcharges as low as possible and determining the 
optimal way to build a legacy for your family this   is true financial planning if you're watching this 
video you're probably interested in working your   way toward a 100 percent tax-free retirement is it 
even achievable for many people the answer is yes   for others while the answer is no there are many 
ways to drastically reduce the amount of taxes   you pay to the state and federal government now if 
you watched all the videos you may say to yourself   this is amazing stuff I'm gonna start implementing 
these strategies right now but you may not know   where to start you may not be confident that 
you're doing things correctly you may not have   the time to do it all yourself or most importantly 
you may just want to coach with another set of   eyes to help you along the way well that is what 
I do I've been helping people build their path   toward prosperity for over 20 years through two of 
the biggest recessions in American history as well   as a global pandemic if you think you're ready to 
supercharge your financial life and are looking   for a coach to guide you I would encourage 
you to visit my website at celestialwm.com   click the button that says start here and book an 
initial 30 minute phone call if on that call it   looks like that you may be a good candidate I will 
provide you with a link to create your very own   free asset map and asset map is a one-page visual 
representation of your financial situation we will   then schedule a second call to see if or how we 
can work together still not convinced check out   these case studies in the resource section on my 
website three examples of financial planning cases   that are pretty typical of my work if one of them 
feels like your situation we should talk again I   hope you enjoyed this mini-series how to create 
a 100 percent tax-free retirement income taxes   are often the number one expense many people have 
let's craft a way to minimize your taxes through   efficient financial planning right now they say 
the best time to plant a tree was 20 years ago   and the second best time is today same thing with 
planning for your financial future the comment I   hear most often is Colin I really wish I put these 
plans in motion 10 years ago don't let that be you   current tax laws are expiring in 2025. 
so the window for optimal planning is   closing just click the link down in the 
notes to get started get clear be clear

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